-----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, NtPf3pf9Bp/GJ3NKyNDNuF0WpdH1TOIQoOqzezMa6F2oiTL9YDyMYLy5/MOT9LGM c/fu9qN0Po97YmgcFXvzFA== 0000950133-99-001025.txt : 19990331 0000950133-99-001025.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950133-99-001025 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUILFORD PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000918066 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521841960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23736 FILM NUMBER: 99578282 BUSINESS ADDRESS: STREET 1: 6611 TRIBUTARY ST CITY: BALTIMORE STATE: MD ZIP: 21224 BUSINESS PHONE: 4106316300 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 0-23736
------------------------ GUILFORD PHARMACEUTICALS INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1841960 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
6611 TRIBUTARY STREET BALTIMORE, MARYLAND 21224 (410) 631-6300 (Address and telephone number of principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE 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 and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of 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. [ ] As of March 16, 1999, the aggregate value of the approximately 19,415,293 shares of common stock of the Registrant issued and outstanding on such date, excluding approximately 2,236,389 shares held by all affiliates of the Registrant, was approximately $182,525,855. This figure is based on the closing sales price of $10.625 per share of the Registrant's common stock as reported on the Nasdaq(R) National Market on March 16, 1999. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Portions of the 1998 Annual Report to Stockholders are incorporated by reference into Part II. Portions of the Notice of Annual Meeting and Proxy Statement to be filed no later than 120 days following December 31, 1998 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS OVERVIEW Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford" or the "Company") is a biopharmaceutical company engaged in the development and commercialization of novel products in two principal areas: (i) targeted and controlled drug delivery systems using proprietary biodegradable polymers for the treatment of cancer and other diseases; and (ii) therapeutic and diagnostic products for neurological diseases and conditions. DRUG DELIVERY BUSINESS The Company's first product in its drug delivery business is GLIADEL(R) wafer ("GLIADEL"), a novel treatment for glioblastoma multiforme, the most common and rapidly fatal form of brain cancer. GLIADEL was cleared for marketing by the U.S. Food and Drug Administration ("FDA") in September 1996 for use as an adjunct to surgery to prolong survival in patients with recurrent glioblastoma multiforme for whom surgical resection is indicated. GLIADEL was commercially launched in the United States in February 1997 by the Company's worldwide marketing partner (except for Scandinavia and Japan), Rhone-Poulenc Rorer Pharmaceuticals, Inc. (together with its parent company, Rhone-Poulenc Rorer, Inc., "RPR"). In 1998, RPR obtained regulatory approval (i.e., health authority approval) for GLIADEL in France, Canada, Argentina, Brazil, South Korea, Israel, Singapore and Uruguay. In certain of these countries, including Canada and France, regulatory approval for GLIADEL is the first of several steps, including regulatory review and approval of RPR's intended pricing, needed to market and sell GLIADEL in those countries. RPR has informed the Company that it has applied for regulatory clearance for GLIADEL in several other countries, including Chile, Ecuador, Hong Kong, Indonesia, Malaysia, New Zealand, Peru, the Philippines, South Africa, Taiwan, and Thailand, and is preparing to make filings in other countries. Regulatory approval for GLIADEL in France has provided the basis for a European-wide filing for GLIADEL under a mutual recognition procedure. Under this procedure, other European regulatory agencies are reviewing the GLIADEL dossier. RPR has informed the Company that it has filed in Germany, the United Kingdom, Italy, Spain, Austria, Luxembourg, Greece, Portugal, Ireland, and Belgium under this mutual recognition procedure. RPR has also filed for regulatory approval in Australia. Furthermore, the regulatory approval for GLIADEL in Canada covers use in both initial and recurrent surgeries for glioblastoma multiforme, the first such expanded approval for GLIADEL in any country. Pursuant to the terms of the Company's sales, marketing and distribution rights agreement with RPR, the Company is eligible for certain non-recurring milestone payments from RPR if and when 1 3 RPR obtains all the required approvals in certain foreign countries needed to sell GLIADEL for the recurrent indication in those countries, as follows:
MILESTONE FOR COUNTRY RECURRENT INDICATION ------- -------------------- France...................................................... $2.5 million Canada...................................................... $2.0 million Germany..................................................... $2.0 million Italy....................................................... $1.5 million Spain....................................................... $1.0 million United Kingdom.............................................. $1.0 million Australia................................................... $1.0 million
Except with respect to Canada, a second milestone payment equal in amount to that set forth above is payable for each of these countries if and when RPR obtains all the required approvals needed to sell GLIADEL for the first surgery indication in that particular country. The Company and RPR are also working together to expand the label used with GLIADEL in other countries, including the United States, to cover use of GLIADEL for malignant glioma, a broader category of brain cancer which includes glioblastoma multiforme, at the time of initial surgery. In this regard the Company and RPR commenced patient enrollment in December 1997 in a multi-center, placebo-controlled, Phase III clinical trial for GLIADEL at 42 clinical sites in Europe, the United States and Israel in patients undergoing initial surgery for malignant glioma. RPR has informed the Company that as of March 1, 1999, patient enrollment in this study exceeded 70% of the anticipated total participation. The Company's collaboration with RPR also contemplates further development of a high-dose formulation of GLIADEL. In this regard the Company and RPR commenced a Phase I dose-escalation clinical trial in October 1996 for a high-dose formulation of GLIADEL using varying concentrations of BCNU, the anti-cancer agent in GLIADEL. These levels have ranged from 6.5% up to 28% in contrast to the 3.85% BCNU concentration contained in the currently marketed formulation of GLIADEL. Under its sales, marketing and distribution rights agreement with RPR, the Company is eligible to receive up to an aggregate of $35 million in milestone and equity payments from RPR in the event that RPR is able to achieve certain specified international marketing clearances and to expand the label used to market GLIADEL in the United States to first surgery patients. The Company is also working to broaden its line of polymer-based oncology products through the use of other chemotherapeutic agents, different polymer systems and various formulations. The Company's first potential product candidate in this program is a controlled release formulation of the chemotherapeutic agent, paclitaxel (Taxol(R)), for peritoneal administration to patients with ovarian cancer. In this formulation, the paclitaxel is delivered via a proprietary biodegradable polyphosphoester ("PPE") polymer exclusively developed in collaboration with scientists at The Johns Hopkins University ("Johns Hopkins"). While the Company is initially targeting this product candidate for the treatment of ovarian cancer, other cancers that may be suitable for this type of local targeted therapeutic approach include tumors of the prostate, head and neck, breast, liver or lung. NEUROLOGICAL PRODUCTS PROGRAM In Guilford's neurological programs, the Company is developing neurotrophic (i.e., nerve regenerative) and neuroprotectant small molecules as potential treatments for a range of 2 4 neurodegenerative diseases and conditions such as Parkinson's disease, Alzheimer's disease, stroke, ALS, multiple sclerosis, spinal cord injury and peripheral neuropathies. The Company is also continuing its efforts to seek a way to continue to develop its DOPASCAN(R) Injection ("DOPASCAN") imaging agent for the diagnosis and monitoring of Parkinson's disease. In addition, the Company is researching small molecule therapeutics for cocaine and possibly other addictive behaviors. Neurotrophic Program The Company's neurotrophic program originated from observations first made in the laboratory of Dr. Solomon Snyder, Director of the Department of Neuroscience at Johns Hopkins, that certain intracellular proteins, known as "immunophilins", which are targets of immunosuppressant drugs such as FK 506, are enriched 10-40 fold in certain areas of the central nervous system. The Johns Hopkins scientists went on to discover that commonly used immunosuppressive drugs can promote nerve growth. The Company has exclusively licensed rights to U.S. patent applications relating to the neurotrophic effects of certain immunosuppressant drugs and other immunophilin ligands from Johns Hopkins. Guilford scientists, together with their academic collaborators, further demonstrated that the pathway leading to nerve regeneration could be separated from the immunosuppressant pathway. Guilford scientists have synthesized a large number of proprietary small molecules, called "neuroimmunophilin ligands", a number of which in vitro and in vivo data show are neurotrophic without being immunosuppressive, orally-bioavailable and able to cross the blood-brain barrier. In August 1997, the Company entered into a collaboration with Amgen Inc. to research, develop and commercialize a broad class of neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin ligands, as well as any other compounds that may result from the collaboration, for all human therapeutic and diagnostic applications. Amgen initially paid the Company a one time, non-refundable signing fee of $15 million in 1997 and invested an additional $20 million in the Company in exchange for 640,095 shares of the Company's common stock and five-year warrants to purchase up to an additional 700,000 shares of the Company's common stock at an exercise price of $35.15 per share. As part of this collaboration, Amgen agreed to fund up to a total of $13.5 million to support research at the Company relating to the FKBP neuroimmunophilin ligand technology. This research funding began on October 1, 1997 and is payable quarterly over three years. Amgen also has the option to fund a fourth year of research, or under certain conditions, to terminate the research program after two years. If Amgen achieves certain specified development objectives in each of ten different clinical indications, Amgen has agreed to pay to the Company up to a total of $392 million in milestone payments. The Company will receive royalties on any future sales of products resulting from the collaboration. Drug development is a risky endeavor, however, and Amgen may not succeed in developing any FKBP neuroimmunophilin compound into a safe and effective drug that will be cleared by the FDA or foreign health regulatory authorities for neurological or other uses. Consequently, Guilford may not earn any of the milestone payments related to such development activities or any royalties. During 1998, Guilford and Amgen worked to optimize their second-generation lead FKBP neuroimmunohpilin compound, called "NIL-A", which the companies are initially developing for the treatment of Parkinson's disease. In 1998, Amgen completed a one-month Good Laboratory Practice (GLP) study of NIL-A, the initiation of which triggered a one-time, non-refundable milestone payment to Guilford of $1 million under the collaboration agreement. 3 5 In September 1998, Amgen presented data at a conference sponsored by the Cambridge Healthcare Institute on acute neuronal injury, which supports the potential use of FKBP neuroimmunophilin ligands as disease-modifying agents of Parkinson's disease. Amgen also reported enhanced oral bioavailability and potency of NIL-A as compared to GPI-1046, Guilford's first generation, prototype FKBP neuroimmunophilin ligand. In addition at the 28th Annual Society for Neuroscience meeting held in October 1998, the Company presented data on GPI-1046 suggesting that it can protect the optic nerve in an animal model of optic nerve damage. Neuroprotectant Program In Guilford's neuroprotectant program, Guilford scientists are developing novel compounds to protect brain cells from ischemia (that is, the lack of oxygen delivery from reduced blood flow) and other disorders caused by massive release of excitatory amino acid neurotransmitters such as glutamate. The Company is exploring three distinct intervention points in a biochemical pathway that can lead to neuronal damage: (i) pre-synaptic inhibition of glutamate release by inhibiting the enzyme, N-acetylated alpha-linked acidic dipeptidase ("NAALADase"); (ii) post-synaptic inhibition of the enzyme, poly(ADP-ribose) polymerase ("PARP"); and (iii) post-synaptic inhibition of nitric oxide via inhibition of the enzyme, nitric oxide synthase ("NOS"). Guilford's researchers have shown that Guilford's NAALADase inhibitors can protect against neurodegeneration in several in vitro and in vivo pre-clinical models. Guilford scientists have shown that several of Guilford's prototype NAALADase inhibitors can be neuroprotective in rat models of stroke involving transient focal ischemia, when administered both before and after the ischemia. Guilford's NAALADase inhibitors provided significant neuroprotective effects when administered up to 6 hours following initiation of the transient ischemic damage in this rat model of stroke. In addition to Guilford's work in models of stroke, Guilford scientists are studying the use of these NAALADase inhibitors in other potential therapeutic areas, including models of spinal cord injury, Parkinson's disease, peripheral neuropathies, pain and prostate cancer. Data gathered on the Company's prototype PARP inhibitor, have shown that this compound can reduce the volume of brain damage in a pre-clinical model of stroke. In addition to Guilford's work in models of stroke, Guilford scientists are studying the use of PARP inhibitors in other potential therapeutic areas, including models of myocardial ischemia, traumatic head and spinal cord injuries, Alzheimer's disease, septic shock and arthritis. 4 6 * * * * * Readers should note that any statements made by the Company in this annual report that are forward looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition to historical information, this annual report contains forward-looking statements which reflect the Company's current expectations regarding future results of operations, economic performance, and financial condition as well as other matters that may affect the Company's business. In general, such forward-looking statements are introduced by words such as "anticipates", "believes", "estimates", "expects" and similar expressions. While these statements reflect the Company's current plans and expectations and are based on information currently available to the Company, Guilford may nevertheless not be able to successfully implement these plans and the Company's expectations may not be realized in whole or in part in the future. The forward-looking statements contained in this annual report may cover, but are not necessarily limited to, the following topics: (i) Company efforts in conjunction with RPR to obtain international regulatory clearances to market and sell GLIADEL and to increase end-user sales of the product; (ii) Company efforts in conjunction with RPR to expand the labeled uses for GLIADEL; (iii) Company efforts to develop polymer product line extensions and new polymer products; (iv) the conduct and completion of research programs related to the Company's FKBP neuroimmunophilin ligand, NAALADase inhibition and PARP inhibition and other technologies; (v) clinical development activities, including commencing and conducting clinical trials related to the Company's polymer-based drug delivery products and product candidates (including GLIADEL), and pharmaceutical product candidates (including NIL-A and any other lead compounds in the FKBP neuroimmunophilin ligand program, and any lead compounds in the NAALADase and PARP programs, and DOPASCAN); (vi) Company strategic plans; (vii) anticipated expenditures and the potential need for additional funds; and (viii) implementation of solutions to the Year 2000 issue, all of which involve significant risks and uncertainties. The Company wishes to caution readers that the Company's actual results may differ significantly from the results discussed in the forward-looking statements, and readers should not unduly rely on them. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of this annual report and elsewhere in this annual report. In addition, any forward-looking statement the Company makes is intended to speak only as of the date on which it is made, and the Company will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made. * * * * * GLIADEL(R) and DOPASCAN(R) are registered trademarks of the Company. Taxol(R) is a registered trademark of Bristol-Myers Squibb Company. 5 7 PRODUCT AND DEVELOPMENT PROGRAMS The following table summarizes the current status of the Company's product, product candidates and research programs:
PROGRAM/ PRODUCT CANDIDATES DISEASE INDICATIONS/ CONDITIONS STATUS (1) CORPORATE PARTNER DRUG DELIVERY BUSINESS GLIADEL (3.85% BCNU) Recurrent glioblastoma Market RPR (2); Orion Corporation multiforme Pharma (3) Malignant glioma at time of Phase III RPR (2); Orion Corporation initial surgery Pharma (3) GLIADEL High-Dose (up to 28% Malignant glioma Phase I/II RPR (2); Orion Corporation BCNU) Pharma (3)(4) PACLIMER(TM) (paclitaxel in Ovarian, prostate, head & neck, Pre-clinical -- PPE microspheres) lung, and breast cancers NEUROLOGICAL PRODUCTS PROGRAM NEUROTROPHIC DRUGS Neuroimmunophilin ligands Parkinson's disease Pre-clinical Amgen Other nerve growth and repair Pre-clinical Amgen indications (Alzheimer's disease, traumatic brain injury, traumatic spinal cord injury, multiple sclerosis, neuropathy, stroke and others) NEUROPROTECTIVE DRUGS NAALADase inhibitors Stroke, head trauma, ALS, Pre-clinical -- Parkinson's disease, and peripheral neuropathies PARP inhibitors Stroke, cardiac ischemia, Research -- septic shock NOS inhibitors Stroke, head trauma Research -- DIAGNOSTIC IMAGING AGENT DOPASCAN Imaging agent to diagnose and Phase II Daiichi Radioisotope monitor Parkinson's disease Laboratories, Ltd. (5) ADDICTION THERAPEUTICS Dopamine transporter ligand Cocaine addiction Research --
- --------------- (1) "Research" includes initial research related to specific molecular targets, synthesis of new chemical entities, and assay development for the identification of lead compounds. "Pre-clinical" includes testing of lead compounds in vitro and in animal models, pharmacology and toxicology testing, product formulation and process development prior to the commencement of clinical trials. (2) RPR is the Company's corporate partner for GLIADEL throughout the world, excluding Scandinavia and Japan. (3) Orion Corporation Pharma (formerly Orion Corporation Farmos) is the Company's corporate partner for GLIADEL in Scandinavia. (4) Orion Corporation Pharma has certain rights of first refusal for a high-dose GLIADEL product in Scandinavia. (5) Daiichi Radioisotope Laboratories, Ltd. is the Company's corporate partner for DOPASCAN in Japan, Korea and Taiwan. 6 8 The Company's effort to develop and commercialize GLIADEL and its product candidates are subject to numerous risks and uncertainties. Certain of these risks are set forth under the section herein captioned "Risk Factors" and elsewhere in this annual report. DRUG DELIVERY BUSINESS The Company's drug delivery business involves the use of biodegradable polymers for targeted and controlled drug delivery of chemotherapeutic drugs to treat cancer. Delivering high drug concentrations locally for a sustained period of time may increase the efficacy of chemotherapy in slowing tumor growth and/or reducing tumor mass and may decrease the side effects associated with systemic drug administration. Guilford has developed expertise in the discovery, clinical development and manufacturing of polymer-based drug delivery products. GLIADEL(R) Wafer The Company's first product in its drug delivery business is GLIADEL, a novel treatment for glioblastoma multiforme, the most common and rapidly fatal form of primary brain cancer. GLIADEL is a proprietary biodegradable polymer which contains the cancer chemotherapeutic drug BCNU (carmustine). Up to eight GLIADEL wafers are implanted in the cavity created when a neurosurgeon removes a brain tumor. The wafers gradually erode from the surface and deliver BCNU directly to the tumor site in high concentrations for an extended period of time without exposing the rest of the body to the toxic side effects of BCNU. GLIADEL is used to complement surgery, radiation therapy and systemic intravenous chemotherapy in patients with recurrent glioblastoma multiforme. The availability of GLIADEL gives physicians an additional treatment option for this rapidly fatal disease. The Company entered into a series of agreements with RPR in June 1996. These agreements currently grant RPR worldwide rights (excluding Scandinavia and Japan) to market, sell and distribute GLIADEL. During 1996, RPR paid Guilford $27.5 million in milestone payments, purchased $7.5 million of the Company's common stock, and extended to the Company a line of credit for up to $7.5 million to support future expansion of the Company's GLIADEL and other polymer manufacturing capacity. Under these agreements, RPR pays to Guilford a combined transfer price and royalty of between 35% and 40% on RPR's net sales of GLIADEL to end-users. For 1998, the Company's revenues related to the sales and distribution of GLIADEL were $6.5 million. Of this amount, $3.9 million was paid as a transfer price on units sold to RPR and to Orion Corporation Pharma (the Company's marketing partner in Scandinavia) and $2.6 million was paid as royalties on RPR sales to hospitals and other end-users. In addition, under its agreements with RPR, the Company is eligible for additional milestone payments totaling up to $35 million (including $7.5 million in the form of an equity investment) if Guilford and RPR achieve certain regulatory objectives. These objectives include expanding the labeling in the United States to include the use of GLIADEL at the time of initial surgery as well as obtaining specified international regulatory approvals to market and sell GLIADEL. Guilford does not control the timing and extent of any future regulatory approvals for GLIADEL, and thus the Company may not receive any or all of these payments. Whether any or all of such regulatory objectives will be attained remains uncertain. The Company pays a royalty to Massachusetts Institute of Technology on sales of GLIADEL pursuant to the license agreement under which the Company acquired the underlying technology for this product. On September 23, 1996 the FDA cleared the New Drug Application ("NDA") for GLIADEL for use as an adjunct to surgery to prolong survival in patients with recurrent glioblastoma multiforme for whom surgery is indicated. RPR commercially launched GLIADEL in the United States in 7 9 February 1997. In 1998, RPR obtained regulatory approval for GLIADEL in France, Canada, Argentina, Brazil, South Korea, Israel, Singapore and Uruguay. In certain of these countries, including Canada and France, regulatory approval for GLIADEL is the first of several steps, including regulatory review and approval of RPR's intended pricing, needed to market and sell GLIADEL in those countries. RPR has informed the Company that it has applied for regulatory clearance for GLIADEL in several other countries, including Chile, Ecuador, Hong Kong, Indonesia, Malaysia, New Zealand, Peru, the Philippines, South Africa, Taiwan, and Thailand, and is preparing to make filings in other countries. Regulatory approval for GLIADEL in France has provided the basis for a European-wide filing for GLIADEL under a mutual recognition procedure. Under this procedure other European regulatory agencies are reviewing the GLIADEL dossier. RPR has informed the Company that it has filed in Germany, the United Kingdom, Italy, Spain, Austria, Luxembourg, Greece, Portugal, Ireland, and Belgium under this mutual recognition procedure. RPR has also filed for regulatory approval in Australia. Furthermore, the regulatory approval for GLIADEL in Canada covers use in both initial and recurrent surgeries for glioblastoma multiforme, the first such expanded approval for GLIADEL in any country. Pursuant to the terms of the Company's sales, marketing and distribution rights agreement with RPR, the Company is eligible for certain non-recurring milestone payments from RPR if and when RPR obtains all the required approvals in certain foreign countries needed to sell GLIADEL for the recurrent indication in those countries, as follows:
MILESTONE FOR COUNTRY RECURRENT INDICATION ------- -------------------- France...................................................... $2.5 million Canada...................................................... $2.0 million Germany..................................................... $2.0 million Italy....................................................... $1.5 million Spain....................................................... $1.0 million United Kingdom.............................................. $1.0 million Australia................................................... $1.0 million
Except with respect to Canada, a second milestone payment equal in amount to that set forth above is payable for each of these countries if and when RPR obtains all the required approvals needed to sell GLIADEL for the first surgery indication in that particular country. The Company and RPR are also working together to expand the labeling for GLIADEL in other countries, including the United States, to cover use of GLIADEL for malignant glioma, a broader category of brain cancer which includes glioblastoma multiforme, at the time of initial surgery. In this regard the Company and RPR commenced patient enrollment in December 1997 in a multi-center, Phase III clinical trial for GLIADEL at 42 clinical sites in Europe, the United States and Israel in patients undergoing initial surgery for malignant glioma. RPR has informed the Company that as of March 1, 1999, patient enrollment in this study exceeded 70% of the anticipated total participation. The Company's collaboration with RPR also contemplates further development of a high-dose formulation of GLIADEL. In this regard the Company and RPR commenced a Phase I dose-escalation clinical trial in October 1996 for a high-dose formulation of GLIADEL using varying concentrations of BCNU, the anti-cancer agent in GLIADEL. These levels have ranged from 6.5% up to 28% in contrast to the 3.85% BCNU concentration contained in the currently marketed formulation of GLIADEL. 8 10 Under its sales, marketing and distribution rights agreement with RPR, the Company is eligible to receive up to an aggregate of $35 million in milestone and equity payments from RPR in the event that RPR is able to achieve certain specified international marketing clearances and to expand the label used to market GLIADEL in the United States to first surgery patients. The Company entered into its agreement with Orion Corporation Pharma, a major Scandinavian health care company, for the sales, marketing and distribution of GLIADEL in Scandinavia in October 1995. Under this agreement, Orion Corporation Pharma purchases GLIADEL from Guilford on an exclusive basis for sale in Scandinavia. Orion Corporation Pharma commenced sales of GLIADEL in Scandinavia in 1997 on a named hospital basis. Future sales of GLIADEL are subject to certain risks and uncertainties. A number of these risks are discussed in detail in the section of this Annual Report entitled "Risks Factors" below. These risks include the following, among others. RPR is not obligated to purchase any minimum amounts of GLIADEL from the Company, and so the Company's revenues from GLIADEL are entirely dependent on the level of RPR's sales to end-users. RPR may not be successful in its efforts to market and sell GLIADEL. Neurosurgeons and their patients may not accept GLIADEL for a number of reasons, including the fact that GLIADEL represents a new and unfamiliar approach to the treatment of brain cancer and their assessment that benefits of this therapy do not outweigh its costs. RPR may not be successful in its attempts to obtain any additional regulatory and marketing approvals to market GLIADEL, including approvals in France and/or Canada to sell GLIADEL at acceptable prices. BCNU, the chemotherapeutic agent used in GLIADEL, is currently only available from two suppliers, and thus this material may not be available for GLIADEL manufacture. The Company's current manufacturing plant for GLIADEL and a recently completed second facility are both located in the same building at the Company's headquarters in Baltimore, Maryland, and thus are subject to the risk that natural disasters or other factors may adversely affect their operation and interrupt GLIADEL manufacture. Other Polymer-Based Drug Delivery Products. The Company is working to broaden its line of polymer-based products to include drug delivery products for the treatment of tumors outside the central nervous system. Other cancers that may be suitable for this type of targeted therapeutic approach include tumors of the prostate, ovaries, head and neck, breast, esophagus, liver, pancreas, lung and colon. The Company's first product candidate in this program is a controlled release formulation of the chemotherapeutic agent, paclitaxel (Taxol(R)), for peritoneal administration in patients with ovarian cancer. In this formulation paclitaxel is delivered via a PPE polymer. In July 1996, the Company entered into a license agreement with Johns Hopkins relating to two U.S. patents covering PPE polymers and has licensed additional PPE patent applications from Johns Hopkins. NEUROLOGICAL PRODUCTS PROGRAM Neurotrophic Drugs Guilford, together with its corporate partner, Amgen, is developing small molecule, orally-bioavailable compounds to promote nerve growth and repair (neurotrophic agents) for the treatment of neurological disorders. The degeneration or damage of nerve cells in the brain and peripheral neurons resulting from certain diseases and conditions causes a loss of either central nervous system function (e.g., Alzheimer's disease, Parkinson's disease, multiple sclerosis, spinal cord injury and stroke) or peripheral nerve function (e.g., diabetic neuropathy and other peripheral neuropathies). Under normal circumstances, damaged nerves have limited ability to regrow or otherwise recover, which poses a major obstacle for the treatment of these conditions. 9 11 In 1990, scientists at Johns Hopkins led by Dr. Solomon H. Snyder discovered that an intracellular binding protein for commonly used immunosuppressive agents such as tacrolimus (FK 506), was concentrated 10 to 40 fold higher in certain areas of the brain than in the immune system. The Johns Hopkins scientists went on to discover that commonly used immunosuppressive drugs can promote nerve growth. Guilford has exclusively licensed from Johns Hopkins U.S. patent applications relating to these discoveries. Guilford scientists, together with their academic collaborators, further discovered that the mechanism of nerve growth promotion is independent of the mechanism responsible for immunosuppression, and this mechanism for the promotion of nerve growth is mediated by binding to the major neuroimmunophilin in the brain. Based on these discoveries, the Company has synthesized a large number of proprietary small molecule neuroimmunophilin ligands in several distinct chemical series that promote nerve growth and/or repair without being immunosuppressive. The Company has filed a number of patent applications in the United States and internationally relating to both novel compositions and methods of treating neurological disorders utilizing these compounds. These compounds induce nerve growth directly, as well as potentiate nerve growth in the presence of nerve growth factors. Company data indicate that a number of the Company's neuroimmunophilin ligands can produce nerve regeneration following multiple routes of administration, including in certain cases oral administration. Further, Company scientists have shown that certain of these neuroimmunophilin ligands are able to cross the blood-brain barrier, while many naturally-occurring nerve growth factors, proteins and peptides are not orally-bioavailable and do not cross the blood-brain barrier. Several of the Company's neuroimmunophilin ligand compounds have shown neurotrophic effects in a range of different types of neurons such as dopaminergic, cholinergic, serotonergic and sensory neurons, and therefore could be useful in a range of disorders, potentially including certain neurological disorders such as Parkinson's disease and Alzheimer's disease. In addition, certain of the Company's neuroimmunophilin ligand compounds may have application in certain non-neurological diseases and conditions. In August 1997, the Company entered into a collaboration with Amgen to research, develop and commercialize a broad class of neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin ligands, as well as any other compounds that may result from the collaboration, for all human therapeutic and diagnostic applications. Amgen initially paid the Company a one time, non-refundable signing fee of $15 million in 1997 and invested an additional $20 million in the Company in exchange for 640,095 shares of the Company's common stock and five-year warrants to purchase up to an additional 700,000 shares of Company common stock at an exercise price of $35.15 per share. In connection with the sale of these securities, the Company granted Amgen certain demand and "piggyback" registration rights under applicable securities laws. As part of this collaboration, Amgen agreed to fund up to a total of $13.5 million to support research at the Company relating to the FKBP neuroimmunophilin ligand technology. This research funding began on October 1, 1997 and is payable quarterly over three years. Amgen also has the option to fund a fourth year of research, or under certain conditions, to terminate the research program after two years. If Amgen achieves certain specified development objectives in each of ten different clinical indications, seven of which are neurological (i.e., Parkinson's disease, Alzheimer's disease, traumatic brain injury, traumatic spinal cord injury, multiple sclerosis, neuropathy and stroke) and three of which are non-neurological, Amgen has agreed to pay to the Company up to a total of $392 million in milestone payments. Readers should be cautioned, however, that it is unlikely that Amgen will be able to successfully develop FKBP neuroimmunophilin ligand products for all ten of these indications. 10 12 The Company will receive royalties on any future sales of products resulting from the collaboration. Amgen has agreed to fund, develop and commercialize the FKBP neuroimmunophilin ligand technology. Under limited circumstances, Guilford has the option to conduct certain Phase I and Phase II clinical trials on one product candidate and has the right to co-promote in the United States one product resulting from the collaboration. Subject to its obligation to fund two years of research at Guilford, Amgen has the right to discontinue all of its development and commercialization activities under the collaboration at any time. During 1998, Guilford and Amgen worked to optimize their second-generation, lead FKBP neuroimmunohpilin compound, called "NIL-A", which the companies are initially developing for the treatment of Parkinson's disease. In 1998, Amgen completed a one-month Good Laboratory Practice (GLP) study of NIL-A, the initiation of which triggered a one-time, non-refundable milestone payment to Guilford of $1 million. In September 1998, Amgen presented data at a conference sponsored by the Cambridge Healthcare Institute on acute neuronal injury which supports the potential use of FKBP neuroimmunophilin ligands as disease modifying agents of Parkinson's disease. Amgen also reported enhanced oral bioavailability and potency of NIL-A as compared to GPI-1046, Guilford's first generation, prototype FKBP neuroimmunophilin ligand. Amgen also noted that pharmacokinetic studies of NIL-A in small animals and primates evidenced a longer half life and increased absorption compared to GPI-1046. These new data provided additional support for Amgen's selection of NIL-A as the lead FKBP neuroimmunophilin clinical compound. In addition, at the 28th Annual Society for Neuroscience meeting held in October 1998, the Company presented data on GPI-1046 suggesting that it can protect the optic nerve in an animal model of optic nerve damage. In this study, researchers completely severed the optic nerves of adult rats and gave the animals either GPI-1046 or a placebo for 28 days. Three months after injury researchers measured the extent of protection in the retina and severed optic nerve. Results demonstrated that treatment with GPI-1046 provided significant protection for a select population of ganglion cells in the retina. Researchers also observed pronounced preservation of axons and myelin in the optic nerve. Of particular interest was the significant decrease in axonal degeneration observed in the segment between the eye and the site of injury on the nerve. Under a license agreement pursuant to which the Company acquired rights to certain patent applications relating to the FKBP neuroimmunophilin ligand technology, the Company is obligated to pay to Johns Hopkins a portion of all milestone payments paid by Amgen as well as a royalty on any and all net sales of any FKBP neuroimmunophilin ligand product Amgen markets and sells in the future. As noted in the section herein captioned "Risk Factors" and elsewhere in this annual report, readers should be cautioned that the preclinical results discussed above and elsewhere in this annual report are based on a limited number of animal studies and animal models of disease, and there is no guarantee that the Company or Amgen will be able to successfully develop any FKBP neuroimmunophilin compounds or other product candidates into safe and effective drug(s) for neurological or other uses. Consequently, Guilford may never earn any of the milestone payments related to Amgen's development activities or revenues related to product sales. In particular, the research, development and commercialization of early-stage technology like the FKBP neuroimmunophilin ligand technology is subject to significant risks and uncertainty. These risks involve those relating to, among other things: (1) selection of an appropriate lead compound, (2) successful completion of the pre-clinical and clinical development activities, (3) regulatory clearances, (4) formulation of final product dosage forms, (5) scale-up from bench quantities to 11 13 commercial quantities, (5) manufacture of products, and (6) commercialization of such products as well as (7) the successful prosecution and enforcement of patent and other intellectual property rights and/or the defense of patent or other intellectual property claims. For discussion of these and other risks, see the section herein captioned "Risk Factors". Furthermore, as used in this annual report, a "prototype" compound is one which the Company uses to establish scientific proof-of-principle respecting the relevant biomedical mechanism of action. In general, the Company does not intend to develop such prototype compounds into products because of sub-optimal drug metabolism or pharmacokinetic characteristics, the Company's proprietary position with respect to such compound, or for other reasons. Upon in vitro and in vivo proof of principal of intervention in a what is thought to be a medically relevant biochemical mechanism of action, the Company seeks to develop proprietary lead compounds through medicinal chemistry both around the prototype compounds and other promising chemical structures generated by molecular modeling, combinatorial or computational chemistry, and/or high throughput screening. Neuroprotective Drugs Guilford is developing novel compounds to protect brain cells against damage from ischemia (the lack of oxygen delivery from reduced blood flow) and other insults and disorders which cause damage due to massive release of excitatory amino acid neurotransmitters such as glutamate. The Company's approach is to identify and clinically test compounds that have the ability to intervene at three distinct steps in a biochemical pathway that can lead to neuronal damage: (i) inhibition of glutamate release by inhibiting the enzyme, NAALADase; (ii) inhibition of the enzyme, PARP; and (iii) inhibition of nitric oxide production via inhibition of the enzyme, NOS. It has been hypothesized that the release of the neurotransmitter glutamate may be mediated in part by the enzyme NAALADase, which cleaves glutamate from the abundant neuro-peptide, N-acetyl-aspartyl-glutamate (NAAG), and results in stimulation of post-synaptic glutamate receptors (including n-methyl-D-aspartate (NMDA) receptors). This release plays a critical role in many central neuronal functions. However, in conditions such as ischemia and epilepsy, there is a massive increase in synaptic glutamate concentrations, which results in excessive activation of glutamate receptors. Dr. Solomon Snyder and his colleagues at Johns Hopkins have shown that this activation, in turn, causes excess production of the neurotransmitter nitric oxide, mediated by the enzyme NOS, which results in damage to cellular DNA. DNA damage activates PARP, a nuclear repair enzyme, which can deplete cellular energy stores and lead to cell death. NAALADase Inhibitors Glutamate is a neurotransmitter which is required for normal brain functioning. However, excess amounts of glutamate can be toxic and can kill brain cells. Excess glutamate neurotransmission has been implicated in a number of neurological disorders, such as stroke, pain, head trauma, ALS, Alzheimer's disease, schizophrenia, Huntington's disease and Parkinson's disease. Because of the large range of potential applications, blocking excess glutamate has been an intense area of research in the pharmaceutical industry. However, to date much of the research and development activity has focused on blocking post-synaptic glutamate receptors, with compounds such as NMDA antagonists, glycine antagonists, and other post-synaptic excitatory amino acid (EAA) receptor blockers. Unfortunately, these agents have generally been associated with severe toxicities, both in preclinical and clinical studies, which have greatly limited their clinical potential. Scientists at Guilford have been investigating a novel means of blocking excess glutamate release. This mechanism is mediated by inhibition of the enzyme NAALADase (N-Acetylated- 12 14 Alpha-Linked-Acidic-Dipeptidase). Guilford has synthesized several series of novel NAALADase inhibitors. By inhibiting NAALADase activity, these compounds inhibit the pre-synaptic release of glutamate which occurs during certain types of neurodegeneration. In several in vitro and in vivo pre-clinical models, Guilford's researchers have shown that Guilford's NAALADase inhibitors can protect against neurodegeneration Guilford scientists have shown that several of Guilford's prototype NAALADase inhibitors can be neuroprotective in models of stroke involving transient focal ischemia, both when administered before and after the ischemia. In addition to Guilford's work with the NAALADase inhibitors in models of stroke, Company researchers are also studying other areas of potential use, such as spinal cord injury, Parkinson's disease and pain. Guilford scientists are currently expanding the work being done around several novel classes of NAALADase inhibitors to optimize the in vivo potency, efficacy, and bioavailability of these compounds for various uses. In the Company's NAALADase program, Guilford scientists are exploring potential utility and endeavoring to develop compounds for a wide range of neurological disorders in which excess glutamate is believed to play a central role, including: stroke, head trauma, Amyotrophic Lateral Sclerosis (ALS), Alzheimer's disease, Parkinson's disease, schizophrenia, and chronic pain. Importantly, Guilford scientists believe that Guilford's NAALADase inhibitors do not interact with post-synaptic glutamate receptors. Consequently, these compounds appear to be devoid of the behavioral toxicities associated with post-synaptic glutamate antagonists. Neuropathology studies in rats dosed with a NAALADase inhibitor have also shown no evidence of the neuronal degeneration seen with post-synaptic glutamate inhibitors. Guilford scientists have identified several chemical structural series of novel NAALADase inhibitors which have nanomolar potency in inhibiting NAALADase activity and protect against neurodegeneration both in in vitro and in vivo models. The Company has identified a preliminary lead compound, and continues to work to identify additional lead compounds, to take into human clinical trials. Several of these compounds are currently being evaluated in rat models of stroke, ALS, spinal cord injury and peripheral nerve injury. PARP Inhibitors As discussed above, during conditions of nerve degeneration, the cascade of events that is believed to result in cell death is initiated by an increase in synaptic glutamate levels, which results in an over-stimulation of post-synaptic glutamate receptors. This stimulation results in a dramatic increase in intracellular calcium, which leads to the formation of free radicals, such as nitric oxide. Nitric oxide is a neurotransmitter which is involved in normal brain functioning. However, too much nitric oxide can be toxic and can cause DNA damage. This damage in turn leads to over-activation of the enzyme, poly(ADP-ribose) polymerase (PARP), which is involved in the repair of damaged DNA. This repair process is very energy intensive, and excessive activation of PARP rapidly leads to a drop in the cellular energy level, resulting in cell death. The inhibition of PARP may represent a common intervention point for neurodegeneration resulting from several different pathways of damage, including the generation of nitric oxide and other oxygen species, all of which trigger PARP activation. Thus the inhibition of PARP offers a unique approach to the development of neuroprotective agents for several different neurological conditions, including stroke. 13 15 In addition, there is accumulating evidence that in addition to stroke, PARP activation may also mediate other types of ischemia and reperfusion injury, for example, during myocardial ischemia. Guilford's PARP research and development program is exploring the potential utility of PARP inhibitors for treating a broad spectrum of diseases in which the over-stimulation of PARP has been implicated. These include: stroke and other ischemic cerebrovascular disorders, myocardial ischemia, traumatic head and spinal cord injuries, neurodegenerative disorders such as Alzheimer's disease, Parkinson's, disease, Huntington's disease, septic or hemorrhagic shock, arthritis, type I diabetes and inflammatory bowel disease. Recent studies by several academic laboratories in PARP "knock-out" mice, that is, genetically altered mice lacking all PARP activity, have generally corroborated Guilford's view that inhibiting PARP may be a viable target for treating stroke and heart attacks. Experimental strokes induced in these animals show them to have about 85-90% less brain damage than normal mice. The PARP knock-out mice are about 40% more resistant to myocardial damage than normal mice during experimental heart attack. Small molecule PARP inhibitors tested by Guilford have achieved similar levels of protection. NOS Inhibitors In the nervous system, nitric oxide can be both a neurotransmitter and a neurotoxin. Under pathologic conditions such as during stroke, calcium overload causes prolonged activation of the enzyme, nitric oxide synthase ("NOS"). This results in an excess amount of nitric oxide release, which causes neural damage. Selective inhibition of a certain type of NOS known as neuronal NOS (or nNOS) is crucial for maximizing neural protection and minimizing side effects. Small molecules which disrupt certain nNOS associations with its regulatory proteins may be effective nNOS inhibitors and yet may have a completely different pharmacological profile and fewer side effects than NOS inhibitors which indiscriminately affect all three forms of NOS at their catalytic sites. Guilford has developed a high-throughput screening system for large-scale screening of compounds for nNOS inhibition activity. Guilford is exploring the potential utility of nNOS inhibitors for a range of neurological disorders in which nitric oxide and other neurotoxins play a significant part in eliciting neuronal death, including stroke and other ischemic cerebrovascular disorders, traumatic head and spinal cord injuries, and neurodegenerative disorders such as Alzheimer's disease, Parkinson's disease and Huntington's disease. Imaging Agent Program -- DOPASCAN(R) Injection The Company's product candidate for the diagnosis and monitoring of Parkinson's disease, DOPASCAN, is administered intravenously in trace quantities and allows physicians to obtain images and measure the degeneration of dopamine neurons in the brain. Dopamine neurons are highly concentrated in a specialized area of the brain that degenerates in Parkinson's disease. Parkinson's disease is a common neurodegenerative disorder affecting more than 750,000 patients in the United States. In Parkinson's disease, there is a decrease in the dopaminergic nerve terminals and thus dopamine release. In its early stages, Parkinson's disease can be very difficult to distinguish clinically from other diseases with similar symptoms but which do not respond well or at all to specific therapy for Parkinson's disease. Unfortunately, there are no diagnostic tests currently available that can reliably detect the neuronal degeneration in Parkinson's disease, and the typical delay between the onset of symptoms and clinical diagnosis is more than two years. The primary way to establish the diagnosis at 14 16 present is through repeated physician visits and the use of therapeutic trials of drugs such as L-Dopa, which carry with them the risk of unnecessary, sometimes severe side effects. Following intravenous injections with DOPASCAN, images of a subject's brain are obtained with a SPECT camera and can identify the loss of dopamine neurons in the brain. To date, over 2,000 patients have been imaged in the United States and Europe using DOPASCAN. In a multi-center Phase IIb clinical trial conducted by the Parkinson's Study Group in the United States and completed in 1997, DOPASCAN accurately differentiated patients clinically diagnosed with a Parkinsonian disorder (i.e., Parkinson's disease and progressive supranuclear palsy) from subjects without a Parkinsonian disorder (e.g., essential tremor and healthy controls) with a high sensitivity (98%) and specificity (97%). In addition, no serious adverse events were attributed to DOPASCAN in this study. In addition, in late 1997 the Company completed a multi-center Phase IIb trial in Europe, closed its database for the trial in 1998, and is analyzing the data. There can be no assurance, however, that similar results will be seen in any other clinical trials for DOPASCAN that may be conducted in the future or that DOPASCAN will be approved as a safe and effective FDA-cleared diagnostic. The Company has entered into an agreement with Daiichi Radioisotope Laboratories, Ltd., a leading Japanese radiopharmaceutical company, to develop and commercialize DOPASCAN in Japan, Korea and Taiwan. Daiichi Radioisotope Laboratories, Ltd. has informed the Company that it plans to commence Phase III clinical trials in 1999. The Company intends to seek partners for the manufacture and/or distribution of this product in other territories, including the United States and Europe. During 1998, the Company terminated its relationship with MDS Nordion Inc. for the development and clinical supply of DOPASCAN. The Company took this step for a number of reasons, including the Company's determination that Nordion would not be able to supply DOPASCAN for commercial use at an acceptable price. The Company is continuing its efforts to find a suitable manufacturer for DOPASCAN. In addition, the Company is continuing to look for corporate partners for the manufacture, sales, marketing and distribution of DOPASCAN. Only a limited number of companies worldwide are capable of manufacturing a radiopharmaceutical such as DOPASCAN, and the Company may not be able to enter into an arrangement with a third-party manufacturer for the supply of DOPASCAN for Phase III clinical trials or commercial supply on acceptable terms. Inability to come to agreement with a suitable manufacturer for the clinical and commercial supply of DOPASCAN on acceptable terms would prevent the Company from developing this product candidate further. Addiction Therapeutics The Company is also developing therapeutics for cocaine addiction and other addictive behaviors. Researchers have shown that cocaine binds to structures in the brain known as dopamine transporters. The Company's cocaine addiction therapeutics program focuses on the research and development of drugs which will prevent cocaine from binding to dopamine transporters, thus potentially limiting the effects of cocaine, and at the same time will minimally affect normal dopamine transporter function. Guilford scientists have identified and synthesized novel compounds with specificity for the cocaine recognition site in the brain and the Company has filed patent applications covering several classes of compounds. In addition to cocaine addiction, other forms of addiction, including alcohol and heroin addiction, may result from facilitation of dopaminergic neurotransmission in certain areas of the brain. As a result, Guilford scientists are currently investigating whether its prototype 15 17 compound in the cocaine addiction area, GPI-2138, and related compounds may block the addictive properties of alcohol and heroin in laboratory animals. MANUFACTURING AND RAW MATERIALS The Company currently manufactures GLIADEL using a proprietary process at its 18,000 square foot manufacturing facility in Baltimore, Maryland, which includes areas designated for packaging, quality control, laboratory, and warehousing. The manufacturing facility has been in operation since April 1995, was initially inspected by the FDA in October 1995, and was recently re-inspected by the FDA in February 1999. The Company's current facilities are designed to enable the Company to produce up to 8,000 GLIADEL treatments (each consisting of eight GLIADEL wafers) annually. In January 1998, the Company completed construction of an expansion of its manufacturing facilities to allow for the additional synthesis of the polyanhydride co-polymer used in the manufacture of GLIADEL. The Company also will be able to use this facility to produce its newest proprietary biodegradable polymers, the PPEs, in connection with the development of other polymer-based products. In addition, the Company completed construction of a second clean room facility in 1998, which the Company expects could increase its GLIADEL manufacturing capacity to 20,000-30,000 treatments annually. Furthermore, the Company expects that this second clean room facility will also provide sufficient capacity to produce any clinical supply of PPE polymer-based product candidates needed in the future, including its paclitaxel/PPE polymer product candidate currently under development for ovarian cancer. The Company believes that the various materials used in GLIADEL are readily available and will continue to be available at reasonable prices. Nevertheless, while the Company believes that it has an adequate supply of BCNU, the active chemotherapeutic ingredient in GLIADEL, to meet current demand, any interruption in the ability of the two current suppliers to deliver this ingredient could prevent the Company from delivering the product on a timely basis. The Company depends upon the availability of certain single-source raw materials in its formulations, but is seeking alternate suppliers for most of these raw materials. The Company cannot be sure that such sources can be secured successfully on terms acceptable to the Company, or at all. Failure of any supplier to provide sufficient quantities of raw material in accordance with the FDA's current Good Manufacturing Practice regulations could cause delays in clinical trials and commercialization of products, including GLIADEL. GOVERNMENT REGULATION AND PRODUCT TESTING All domestic prescription pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally the FDA and, to a lesser extent, by state and local governments as well as foreign governments if products are marketed abroad. Biologics and controlled drug products, such as vaccines and narcotics, and radiolabeled drugs, are often regulated more stringently than are other drugs. The Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the development, testing, manufacture, labeling, storage, approval, advertising, promotion, sale and distribution of prescription pharmaceutical products. Pharmaceutical manufacturers are also subject to certain recordkeeping and reporting requirements. Noncompliance with applicable requirements can result in warning letters, fines, recall or seizure of products, total or partial suspension of production and/or distribution, refusal of the government to enter into supply contracts or to approve marketing applications and criminal prosecution. Upon FDA approval, a drug may only be marketed in the United States for the approved indications in the approved dosage forms and at the approved dosage levels. The FDA also may require post-marketing testing and surveillance to monitor the record of the approved product. 16 18 Manufacturers of approved drug products are subject to ongoing compliance with FDA regulations. For example, the FDA mandates that drugs be manufactured in conformity with the FDA's applicable current Good Manufacturing Practice ("cGMP") regulations. In complying with the cGMP regulations, manufacturers must continue to expend time, money and effort in production, recordkeeping and quality control to ensure that the product meets applicable specifications and other requirements. The FDA periodically inspects drug manufacturing facilities to ensure compliance with its cGMP regulations. Failure to comply subjects the manufacturer to possible FDA action, such as suspension of manufacturing, seizure of the product or voluntary recall of a product. Adverse experiences with the commercialized product must be reported to the FDA. The FDA also may require the submission of any lot of the product for inspection and may restrict the release of any lot that does not comply with FDA regulations, or may otherwise order the suspension of manufacture, voluntary recall or seizure. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval. Full Clinical Testing Requirements The steps required before a newly marketed drug may be commercially distributed in the United States include: (i) conducting appropriate preclinical laboratory and animal tests; (ii) submitting to the FDA an application for an Investigational New Drug ("IND"), which must become effective before clinical trials may commence; (iii) conducting well-controlled human clinical trials that establish the safety and efficacy of the drug product; (iv) filing with the FDA a New Drug Application ("NDA") for non-biological drugs; and (v) obtaining FDA approval of the NDA prior to any commercial sale or shipment of the non-biological drug. In addition to obtaining FDA approval for each indication to be treated with each product, each domestic drug manufacturing establishment must register with the FDA, list its drug products with the FDA, comply with the FDA's cGMP requirements and be subject to inspection by the FDA. Foreign manufacturing establishments distributing drugs in the United States also must comply with cGMP requirements, register and list their products, and are subject to periodic inspection by FDA or by local authorities under agreement with FDA. With respect to a drug product with an active ingredient not previously approved by the FDA, the manufacturer must usually submit a full NDA, including complete reports of preclinical, clinical and laboratory studies, to prove that the product is safe and effective. A full NDA may also need to be submitted for a drug product with a previously approved active ingredient if studies are required to demonstrate safety and efficacy, such as when the drug will be used to treat an indication for which the drug was not previously approved, or where the method of drug delivery is changed. In addition, the manufacturer of an approved drug may be required to submit for the FDA's review and approval a supplemental NDA, including reports of appropriate clinical testing, prior to marketing the drug with additional indications or making other significant changes to the product or its manufacture. A manufacturer intending to conduct clinical trials ordinarily will be required first to submit an IND to the FDA containing information relating to previously conducted preclinical studies. Pre-clinical testing includes formulation development, laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product formulation. Preclinical tests to support an FDA application must be conducted in accordance with the FDA regulations concerning Good Laboratory Practices (GLPs). The results of the preclinical tests are submitted to the FDA as part of the IND and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical trials in human subjects. Unless the FDA issues a clinical hold on an IND, the IND will become effective 30 days following its receipt by the FDA. There is no certainty that submission of an IND will result in the commencement of clinical trials or that the commencement of one phase 17 19 of a clinical trial will result in commencement of other phases or that the performance of any clinical trials will result in FDA approval. Clinical trials for new drugs typically are conducted in three phases, are subject to detailed protocols and must be conducted in accordance with the FDA's regulations concerning good clinical practices (GCPs). Clinical trials involve the administration of the investigational drug product to human subjects. Each protocol indicating how the clinical trial will be conducted in the United States must be submitted for review to the FDA as part of the IND. The FDA's review of a study protocol does not necessarily mean that, if the study is successful, it will constitute proof of efficacy or safety. Further, each clinical study must be conducted under the auspices of an independent institutional review board ("IRB") established pursuant to FDA regulations. The IRB considers, among other factors, ethical concerns and informed consent requirements. The FDA or the IRB may require changes in a protocol both prior to and after the commencement of a trial. There is no assurance that the IRB or the FDA will permit a study to go forward or, once started, to be completed. Clinical trials may be placed on hold at any time for a variety of reasons, particularly if safety concerns arise, or regulatory requirements are not met. The three phases of clinical trials are generally conducted sequentially, but they may overlap. In Phase I, the initial introduction of the drug into humans, the drug is tested for safety, side effects, dosage tolerance, metabolism and clinical pharmacology. Phase II involves controlled tests in a larger but still limited patient population to determine the efficacy of the drug for specific indications, to determine optimal dosage and to identify possible side effects and safety risks. Phase II testing for an indication typically takes at least from one and one-half to two and one-half years to complete. If preliminary evidence suggesting effectiveness has been obtained during Phase II evaluations, expanded Phase III trials are undertaken to gather additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase III studies for a specific indication generally take at least from two and one-half to five years to complete. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of the Company's product candidates. Reports of results of the preclinical studies and clinical trials for non-biological drugs are submitted to the FDA in the form of an NDA for approval of marketing and commercial shipment. User fee legislation now requires the submission in fiscal year 1999 of $272,282 to cover the costs of FDA review of a full NDA. Annual fees also exist for certain approved prescription drugs and the establishments that make them. The NDA typically includes information pertaining to the preparation of drug substances, analytical methods, drug product formulation, details on the manufacture of finished product as well as proposed product packaging and labeling. Submission of an NDA does not assure FDA approval for marketing. In May 1998 the FDA published proposed regulations describing criteria that the FDA will use to evaluate the safety and efficacy of diagnostic radiopharmaceuticals like DOPASCAN. FDA is required to finalize these regulations by May 1999. It is unclear how these provisions may affect the potential for approval of DOPASCAN. The median FDA approval time is currently about 12 months, although clinical development, reviews, or approvals of treatments for cancer and other serious or life-threatening diseases may be accelerated, expedited or fast-tracked. In addition, approval times can vary widely among the various reviewing branches of the FDA. The approval process may take substantially longer if, among other things, the FDA has questions or concerns about the safety and/or efficacy of a product. In general, the FDA requires at least two properly conducted, adequate and well-controlled clinical studies demonstrating safety and efficacy with sufficient levels of statistical assurance. In certain cases the FDA may consider one clinical study sufficient. The FDA also may request long-term toxicity studies or other studies relating to product safety or efficacy. For example, the FDA may require additional 18 20 clinical tests following NDA approval to confirm product safety and efficacy (Phase IV clinical tests) or require other conditions for approval. Notwithstanding the submission of such data, the FDA ultimately may decide that the application does not satisfy its regulatory criteria for approval. Confirmatory studies similar to Phase III clinical studies may be conducted after, rather than before, FDA approval under certain circumstances. The FDA may determine under its expedited, accelerated, or fast-track provisions that previous limited studies establish an adequate basis for drug product approval, provided that the sponsor agrees to conduct additional studies after approval to verify safety and effectiveness. Treatment of patients not in clinical trials with an experimental drug may also be allowed under a Treatment IND before general marketing begins and pending FDA approval. Charging for an investigational drug also may be allowed under a Treatment IND to recover certain costs of development if various requirements are met. These cost-recovery, treatment IND, and expedited, accelerated or fast-track approval provisions are limited, for example, to drug products (i) intended to treat AIDS or other serious or life-threatening diseases and that provide meaningful therapeutic benefit to patients over existing treatments, (ii) that are for diseases for which no satisfactory alternative therapy exists, or (iii) that address an unmet medical need. No assurances exist that the Company's product candidates will qualify for cost-recovery, expedited, accelerated, or fast-track approvals or for treatment use under the FDA's regulations or the current statutory provisions. The full NDA process for newly marketed non-biological drugs, such as those being developed by the Company, including FKBP neuroimmunophilin ligand products and inhibitors of NAALADase and PARP, can take a number of years and involves the expenditure of substantial resources. There can be no assurance that any approval will be granted on a timely basis, or at all or that the Company will have sufficient resources to carry such potential products through the regulatory approval process. Abbreviated Testing Requirements The Drug Price Competition and Patent Term Restoration Act of 1984 ("DPC-PTR Act") established abbreviated procedures for obtaining FDA approval for many non-biological drugs which are off-patent and whose marketing exclusivity has expired. Applicability of the DPC-PTR Act means that a full NDA is not required for approval of a competitive product. Abbreviated requirements are applicable to drugs which are, for example, either bioequivalent to brand-name drugs, or otherwise similar to brand-name drugs, such that all the safety and efficacy studies previously done on the innovator product need not be repeated for approval. Changes in approved drug products, such as in the delivery system, dosage form, or strength, can be the subject of abbreviated application requirements. There can be no assurance that abbreviated applications will be available or suitable for the Company's non-biological drug products, including the Company's efforts to develop a controlled-release formulation of the chemotherapeutic agent, paclitaxel (Taxol(R)) using the Company's PPE polymers, or that FDA approval of such applications can be obtained. A five-year period of market exclusivity is provided for newly marketed active ingredients of drug products not previously approved and a three-year period for certain changes in approved drug products that require for approval the submission of safety and efficacy information (other than bioequivalence studies). A period of five years is available for new chemical entities not previously approved by FDA. A period of three years is available for changes in approved products, such as in delivery systems of previously approved products. Both periods of marketing exclusivity mean that abbreviated applications, which generally rely to some degree on approvals or on some data submitted by previous applicants for comparable innovator drug products, cannot be marketed during the period of exclusivity. The market exclusivity provisions of the DPC-PTR Act bar only the marketing of 19 21 competitive products that are the subject of abbreviated applications, not products that are the subject of full NDAs. The DPC-PTR Act also may provide a maximum time of five years to be restored to the life of any one patent for the period it takes to obtain FDA approval of a drug product, including biological drugs. No assurances exist that the exclusivity or patent restoration benefits of the DPC-PTR Act will apply to any product candidates of the Company. Other Regulation Products marketed outside the United States which are manufactured in the United States are subject to certain FDA regulations, as well as regulation by the country in which the products are to be sold. The Company also would be subject to foreign regulatory requirements governing clinical trials and pharmaceutical sales, if products are marketed abroad. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must usually be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval. In addition to the requirements for product approval, before a pharmaceutical product may be marketed and sold in certain foreign countries the proposed pricing for the product must be approved as well. Products may be subject to price controls or limits on reimbursement. The requirements governing product pricing and reimbursement vary widely from country to country and can be implemented disparately at the national level. As to reimbursement, the European Union generally provides options for its fifteen Member States to restrict the range of medicinal products that are covered by their national health insurance systems. Member States in the European Union can opt to have a "positive" or a "negative" list. A positive list is a listing of all medicinal products covered under the national health insurance system, whereas a negative list designates which medicinal products are excluded from coverage. In the European Union, the United Kingdom and Spain use a negative list approach, while France uses a positive list approach. In Canada, each province decides on reimbursement measures. The European Union also generally provides options for its Member States to control the prices of medicinal products for human use. A Member State may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. For example, the regulation of prices of pharmaceuticals in the United Kingdom (U.K.) is generally designed to provide controls on the overall profits pharmaceutical companies may derive from their sales to the U.K. National Health Service. The U.K. system is generally based on profitability targets or limits for individual companies which are normally assessed as a return on capital employed by the company in servicing the National Health Service market, comparing capital employed and profits. In comparison, Italy generally establishes prices for pharmaceuticals based on a price monitoring system. The reference price is the European average price calculated on the basis of the prices in four reference markets: France, Spain, Germany and the United Kingdom. Italy typically levels the price of medicines belonging to the same therapeutic class on the lowest price for a medicine belonging to that category (i.e., same active principle, same pharmaceutical form, same route of administration). Spain generally establishes the selling price for new pharmaceuticals based on the prime cost, plus a profit margin within a range established each year by the Spanish Commission for Economic Affairs. Promotional and advertising costs are limited. In Canada, prices for most new drugs are generally limited such that the cost of therapy for the new drug is in the range of the cost of therapy for existing drugs used to treat the same disease in Canada. Prices of breakthrough drugs and those which bring a substantial improvement are generally 20 22 limited to the median of the prices charged for those drugs in other industrialized countries, such as France, Germany, Italy, Sweden, Switzerland, the United Kingdom and the United States. There can be no assurance that any country which has price controls or reimbursement limitations for pharmaceuticals will allow favorable reimbursement and pricing arrangements with respect to the Company or its corporate partners, including RPR and its applications for GLIADEL in France, Canada and elsewhere outside of the United States. The Company also is governed by other federal, state and local laws of general applicability. These laws include, but are not limited to, those regulating working conditions enforced by the Occupational Safety and Health Administration and regulating environmental hazards under such statutes as the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other environmental laws enforced by the United States Environmental Protection Agency ("USEPA"). The DEA regulates controlled substances, such as narcotics. A precursor compound to DOPASCAN is a tropane-derivative similar to cocaine and thus is subject to DEA regulations. Establishments handling controlled substances must, for example, be licensed and inspected by the DEA, and may be subject to export, import, security and production quota requirements. Radiolabeled products, including drugs, are also subject to regulation by the Department of Transportation and to state and federal licensing requirements. Various states often have comparable health and environmental laws, such as those governing the use and disposal of controlled and radiolabeled products. While the Company is not actively involved in product areas involving biotechnology and has no current plans to develop products utilizing modern biotechnology, if the Company were to move in that direction, it would potentially be subject to extensive regulation. The USEPA, the FDA and other federal and state regulatory bodies have developed or are in the process of developing specific requirements concerning products of biotechnology that may affect research and development programs and product lines. The Company is unable to predict whether any governmental agency will adopt requirements, including regulations, which would have a material and adverse effect on any future product applications involving biotechnology. PATENTS AND PROPRIETARY TECHNOLOGY Guilford believes that patent and trade secret protection is crucial to its business and that its future will depend in part on its ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. As of December 31, 1998, the Company owned or had licensed rights to more than 180 U.S. patents and patent applications and more than 450 foreign patents and patent applications with claims relating to its biodegradable polymer, imaging, neurotrophic, neuroprotective, addiction therapeutics and other programs. The role, validity and value of patents, licenses and proprietary technology in the business of the Company are subject to various uncertainties and contingencies. The Company's success will depend in part on its ability to obtain, maintain and enforce patent protection for its products and processes or license rights to patents, maintain trade secret protection and operate without infringing upon the proprietary rights of others. The degree of patent protection afforded to pharmaceutical and biotechnological inventions is uncertain, and a number of Guilford's product candidates are subject to this uncertainty. The Company is aware of a company which has asserted publicly that it has submitted patent applications (one of which is under Notice of Allowance) claiming the use of certain of its immunosuppressive compounds and multidrug resistance compounds for nerve growth applications. That company has also stated that it has nine issued U.S. patents and three U.S. patent applications 21 23 pending (one of which is under a Notice of Allowance) that it states claim compounds that are useful in nerve growth applications. While the Company does not believe that its neurotrophic compounds infringe on such company's patent, no assurance can be given as to the ability of the Company's patents and patent applications to adequately protect the Company's neurotrophic product candidates or that the Company's neurotrophic product candidates will not infringe or be dominated by patents that have issued or may issue in the future to third parties. There can be no assurance that any patent applications filed by, or assigned or licensed to, the Company will be granted, that the Company will develop additional products or processes that are patentable, or that any patents issued to, or licensed by, the Company will provide the Company with any competitive advantages or adequate protection for its products. In addition, there can be no assurance that any existing or future patents or intellectual property issued to, or licensed by, the Company will not subsequently be challenged, invalidated or circumvented by others. It is Guilford's policy to control the disclosure and use of Guilford's know-how and trade secrets under confidentiality agreements with employees, consultants and other parties. There can be no assurance, however, that its confidentiality agreements will be honored, that others will not independently develop equivalent or competing technology, that disputes will not arise concerning the ownership of intellectual property or the applicability of confidentiality obligations, or that disclosure of Guilford's trade secrets will not occur. To the extent that consultants or other research collaborators use intellectual property owned by others in their work with the Company, disputes may also arise as to the rights to related or resulting intellectual property. Guilford supports and collaborates in research conducted in universities and in governmental research organizations. There can be no assurance that the Company will have or be able to acquire exclusive rights to the inventions or technical information derived from such collaborations or that disputes will not arise as to rights in derivative or related research programs conducted by the Company. In addition, in the event of a contractual breach by the Company, certain of the Company's collaborative research contracts provide for transfer of technology (including any patents or patent applications) to the relevant governmental research organization. In addition, such a breach may cause the Company to lose its rights to use technology (including any patents or patent applications) licenced from the relevant university or governmental research organization resulting from the Company sponsored research program. If the Company is required to defend against charges of infringement of patent or proprietary rights of third parties or to protect its own patent or proprietary rights against third parties, the Company may incur substantial costs and could lose rights to develop or market certain products or be required to pay monetary damages or royalties to license proprietary rights from third parties. In response to actual or threatened litigation, the Company may seek licenses from third parties or attempt to redesign its products or processes to avoid infringement; however, there can be no assurance that the Company will be able to obtain licenses on acceptable terms or at all or redesign its products or processes. In addition to being a party to patent infringement litigation, the Company could be required to participate in patent interference proceedings declared by the U.S. Patent and Trademark Office (or its foreign counterparts), which would be expensive and time-consuming, even if the Company were to prevail in such a proceeding. The Company may also be forced to initiate legal proceedings to protect its patent position or other proprietary rights. These proceedings typically are costly, protracted, and offer no assurance of success. In order to protect its proprietary position with respect to its neuroimmunophilin ligands, Guilford filed an opposition in 1998 in an effort to prevent the final issuance of a European patent to a competing company. In the opposition, Guilford submitted approximately 80 anticipatory references to the European Patent Office. While Guilford does not believe the claims of this European patent 22 24 would be valid, any final issuance could result in future litigation if this company were to allege that Guilford or Amgen infringed the claims of this patent in Europe. TECHNOLOGY LICENSING AGREEMENTS In March 1994, the Company entered into an agreement (the "GLIADEL Agreement") with Scios Inc. pursuant to which the Company licensed from Scios exclusive worldwide rights to numerous U.S. patents and patent applications and corresponding international patents and patent applications for polyanhydride biodegradable polymer technology for use in the field of tumors of the central nervous system and cerebral edema. GLIADEL is covered by two of the U.S. patents under this license which expire in 2005 and certain related international patents and patent applications. In April 1994, Scios assigned all of its rights and obligations under the GLIADEL Agreement to the Massachusetts Institute of Technology. Under this agreement, Guilford is obligated to pay a royalty on all net sales of products incorporating such technology as well as a percentage of all royalties received by Guilford from sublicensees and certain advance and minimum annual royalty payments. In 1998, Guilford paid $259,729 in royalty payments to the Massachusetts Institute of Technology related to payments made to the Company from RPR and Orion Corporation Pharma related to GLIADEL. Guilford has exclusive worldwide rights to the technology for brain cancer therapeutics, subject to certain conditions, including a requirement to perform appropriate preclinical tests and file an IND with the FDA within 24 months of the identification of a drug-polymer product having greater efficacy than GLIADEL. In addition, Guilford is obligated to meet certain development milestones. Although the Company believes that it can comply with such obligations, the failure of the Company to perform these obligations could result in the Company losing its right to new polymer-based product(s). In June 1996, the Company entered into a license agreement with the Massachusetts Institute of Technology and Johns Hopkins respecting a patent application covering certain biodegradable polymers for use in connection with the controlled local delivery of certain chemotherapeutic agents (including paclitaxel (Taxol(R)) and camptothecin) for treating solid tumors. Under this agreement, the Company is obligated to make certain annual and milestone payments to the Massachusetts Institute of Technology and to pay royalties based on any sales of products incorporating the technology licensed to Guilford. Furthermore, under the terms of the agreement, the Company has committed to spend minimum amounts to develop the technology and to meet certain development milestones. Although the Company believes that it can comply with such obligations, failure of the Company to perform these obligations could result in the Company losing its rights to such technology. In July 1996, the Company entered into a license agreement with Johns Hopkins which currently covers several U.S. patents respecting certain PPE polymers developed at Johns Hopkins and additional PPE patent applications. This agreement, among other things, requires Guilford to pay certain processing, maintenance and/or up-front fees, milestone payments and royalties, a portion of proceeds from sublicenses, and fees and costs related to patent prosecution and maintenance and to spend minimum amounts for, and meet deadlines regarding, development of this technology. In the event of termination of these licenses, the Company could lose its rights to use of the licensed technology. Guilford and Johns Hopkins are parties to exclusive license agreements covering the neurotrophic use of neuroimmunophilin ligands, which was jointly discovered by scientists at, and is jointly owned by, Johns Hopkins and Guilford, and inhibition of NOS and PARP for neuroprotective uses and 23 25 certain other technologies. These agreements, among other things, require Guilford to pay certain processing, maintenance, and/or up-front fees, milestone payments and royalties, a portion of proceeds from sublicenses, and fees and costs related to patent prosecution and maintenance and to spend minimum amounts for, and meet deadlines regarding, development of the technologies. In the event of termination of these licenses, the Company could lose its rights to use of the licensed technology (or in the case of joint inventions, exclusive use of such technology). In the case of Guilford's license with Johns Hopkins relating to neuroimmunophilin ligands, Johns Hopkins is entitled to a portion of all milestone payments paid to the Company, including payments under the Company's collaboration with Amgen, and a royalty on net sales of neuroimmunophilin ligand products, again including sale of products under the Company's collaboration with Amgen. The Company obtained exclusive worldwide rights to DOPASCAN pursuant to a March 1994 license agreement (the "RTI Agreement") with Research Triangle Institute ("RTI"), which grants Guilford rights to various U.S. and international patents and patent applications relating to binding ligands for certain receptors in the brain which are or may be useful as dopamine neuron imaging agents. DOPASCAN and certain related precursors and analogues are covered by U.S. patents which start expiring in 2009, as well as certain related international patents and patent applications. Under the RTI Agreement, the Company reimbursed RTI for certain past patent-related expenses and agreed to make annual payments to RTI to support mutually agreed-upon research to be conducted at RTI through March 1999. In addition, the Company is obligated to pay RTI a royalty on gross revenues to Guilford from products derived from the licensed technology and from sublicensee proceeds and to make certain minimum royalty payments following the first commercial sale of such products. Guilford must use commercially reasonable efforts to develop products related to the licensed technology and to meet certain performance milestones. Failure of the Company to perform its obligations under the RTI Agreement in the future could result in termination of the license. United States Government Rights Aspects of the technology licensed under the Company's license agreements may be subject to certain government rights. These rights include a non-exclusive, royalty-free worldwide license to practice or have practiced such inventions for any governmental purpose. In addition, the U.S. government has the right to grant licenses which may be exclusive under any of such inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize such inventions; (ii) such action is necessary to meet public health or safety needs; or (iii) such action is necessary to meet requirements for public use under federal regulations. The U.S. government also has the right to take title to a subject invention if there is a failure to disclose the invention and elect title within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits. Federal law requires any licensor of an invention that was partially funded by the federal government to obtain a covenant from any exclusive licensee to manufacture products using the invention substantially in the United States. Further, the government rights include the right to use and disclose without limitation technical data relating to licensed technology that was developed in whole or in part at government expense. Provisions recognizing these government rights are contained in the Company's principal technology license agreements. SALES, MARKETING AND DISTRIBUTION In general, the Company's strategy is to establish strategic alliances with larger pharmaceutical companies where possible to develop and promote products that require extensive development, sales 24 26 and marketing resources. Within the United States, the Company may seek to retain co-promotion rights with respect to some or all compounds or indications in any such strategic alliances, or the Company may elect to market and distribute its products directly where the commercial prospects so warrant. RPR Agreement In June 1996, the Company entered into a marketing, sales and distribution rights agreement and other related agreements with RPR. Under these agreements RPR has worldwide (excluding Scandinavia and Japan) marketing, sales, promotion and distribution rights for GLIADEL. Upon execution of these agreements, the Company received $7.5 million for 281,531 shares of its common stock. Furthermore, in addition to an aggregate of $27.5 million in rights payments made by RPR upon execution of the agreements in June 1996 and FDA clearance of the GLIADEL NDA in September 1996, the agreements with RPR provide for up to an additional $35 million in payments ($7.5 million in the form of an equity investment) in the event that certain regulatory and other milestones are achieved, although there can be no assurance that any or all of such milestones will be attained and certain of these payments are contingent on international regulatory filings and clearances, the timing and extent of which are largely within the control of RPR. RPR may, under certain circumstances, fund up to approximately $17 million for the development of higher dose forms of GLIADEL being developed by the Company and for certain additional clinical studies related to GLIADEL. The Company has the right under certain circumstances to borrow up to an aggregate of $7.5 million to expand the Company's GLIADEL manufacturing and related facilities. In addition to the payments outlined above, the Company acts as the exclusive manufacturer of GLIADEL and receives transfer price payments and royalties based on any "net sales" (as defined in the agreements with RPR) of GLIADEL. RPR's exclusive rights terminate in a particular country upon the later of the expiration of the last to expire of certain patents applicable in that country or the last commercial sale of GLIADEL in that country. RPR also has an exclusive 90-day period following development by the Company of new polymer technology for brain cancer to make an offer to license such technology. Amgen Collaboration In August 1997, the Company entered into a collaboration with Amgen to research, develop and commercialize a broad class of neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin ligands, as well as any other compounds that may result from the collaboration, for all human therapeutic and diagnostic applications. Amgen initially paid the Company a one time, non-refundable signing fee of $15 million in 1997 and also invested an additional $20 million in the Company in exchange for 640,095 shares of the Company's common stock and five-year warrants to purchase up to an additional 700,000 shares of Company common stock at an exercise price of $35.15 per share. In connection with the sale of these securities, the Company granted Amgen certain demand and "piggyback" registration rights under applicable securities laws. As part of this collaboration, Amgen agreed to fund up to a total of $13.5 million to support research at the Company relating to the FKBP neuroimmunophilin ligand technology. This research funding began on October 1, 1997 and is payable quarterly over three years. Amgen also has the option to fund a fourth year of research or, under certain conditions, to terminate the research program after two years. 25 27 If Amgen achieves certain specified development objectives in each of ten different clinical indications, seven of which are neurological (i.e., Parkinson's disease, Alzheimer's disease, traumatic brain injury, traumatic spinal cord injury, multiple sclerosis, neuropathy and stroke) and three of which are non-neurological, Amgen has agreed to pay to the Company up to a total of $392 million in milestone payments. The Company will receive royalties on any future sales of products resulting from the collaboration. Amgen has agreed to fund, develop and commercialize the FKBP neuroimmunophilin ligand technology. Under limited circumstances, Guilford has the option to conduct certain Phase I and Phase II clinical trials on one product candidate and has the right to co-promote in the United States one product resulting from the collaboration. Subject to its obligation to fund two years of research at Guilford, Amgen has the right to discontinue all its development and commercialization activities under the collaboration at any time. Other Agreements In October 1995, the Company entered into an agreement appointing Orion Corporation Pharma distributor for GLIADEL in Scandinavia, and in December 1995 the Company entered into an agreement with Daiichi Radioisotope Laboratories, Ltd. for the marketing, sale and distribution of DOPASCAN in Japan, Korea and Taiwan. COMPETITION The Company is involved in evolving technological fields in which developments are expected to continue at a rapid pace. Guilford's success depends upon its ability to compete effectively in the research, development and commercialization of products and technologies in its areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutes is intense and expected to increase. Many of these competitors have substantially greater research and development capabilities, experience and manufacturing, marketing, financial and managerial resources than the Company and represent significant competition for the Company. Acquisitions of competing companies by large pharmaceutical or other companies could enhance the financial, marketing and other resources available to these competitors. These competitors may develop products which are superior to those under development by the Company. The Company is aware of several competing approaches under development for the treatment of malignant glioma including using radioactive seeds for interstitial radiotherapy, increasing the permeability of the blood-brain barrier to chemotherapeutic agents, sensitizing cancer cells to chemotherapeutic agents using gene therapy and developing chemotherapeutics directed to specific receptors in brain tumors. A number of companies have shown interest in trying to develop neurotrophic agents to promote nerve growth and repair in neurodegenerative disorders and traumatic central nervous system injuries. However, much of this activity has focused on naturally occurring growth factors. Such large molecules generally cannot cross the blood-brain barrier and thus present problems in administration and delivery. One company has announced that certain of its neuroimmunophilin ligands showed positive results in stimulating nerve growth in an animal model of nerve crush, and has disclosed that it has made patent filings covering compounds and uses in connection with nerve growth promotion. This company has also announced that it is planning to begin a phase II clinical trial for peripheral neuropathy using a neuroimmunophilin compound it originally was developing for multiple drug resistance in cancer patients. In addition, another company announced that IGF-1 showed positive results in clinical trials of a peripheral neurodegenerative disorder. 26 28 There is intense competition to develop an effective and safe neuroprotective drug or biological agent. Calcium channel antagonists, calpain inhibitors, adenosine receptor antagonists, free radical scavengers, superoxide dismutase inducers, proteoloytic enzyme inhibitors, phospholipase inhibitors and a variety of other agents are under active development by others. Glutamate or NMDA receptor antagonists are under development by several other companies. The Company believes that two other companies are clinically evaluating imaging agents for dopamine neurons. In addition, a variety of radiolabeled compounds for use with Positron Emission Tomography ("PET") scanners have been used to image dopamine neurons successfully in patients with Parkinson's disease. PET scanning is currently only available in a limited number of hospitals in the United States and Europe. In the field of cocaine addiction, most of the investigated compounds to date have been studied by academic and government groups. Further, much of this work has been with known agents, such as carbamazepine, that are commercially available for other indications. Guilford is aware of another company that is investigating the use of butylcholinesterase as a treatment for acute cocaine overdose. The Company is aware of one company that is investigating an immunological approach in an attempt to develop a cocaine vaccine. The Company is not aware of other commercial research programs targeting specific cocaine antagonists, which do not interfere with normal dopamine neuron function. Any product candidate that the Company develops and for which it gains regulatory approval, including GLIADEL, must then compete for market acceptance and market share. For certain of the Company's product candidates, an important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market is expected to be an important determinant of market success. Other competitive factors include the capabilities of the Company's collaborators, product efficacy and safety, timing and scope of regulatory approval, product availability, marketing and sales capabilities, reimbursement coverage, the amount of clinical benefit of the Company's product candidates relative to their cost, method of administration, price and patent protection. There can be no assurance that the Company's competitors will not develop more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than the Company. The achievement of any of these goals by the Company's competitors could have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY AND INSURANCE Product liability risk is inherent in the testing, manufacture, marketing and sale of the Company's product candidates, and there can be no assurance that the Company will be able to avoid significant product liability exposure. While the Company currently maintains $15 million of product liability insurance covering clinical trials and product sales, there can be no assurance that such or any future insurance coverage obtained by the Company will be adequate or that claims will be covered by the Company's insurance. The Company's insurance policies provide coverage on a claims-made basis and are subject to annual renewal. Product liability insurance varies in cost, can be difficult to obtain and may not be available to the Company in the future on acceptable terms, or at all. 27 29 EMPLOYEES At December 31, 1998, the Company employed 218 individuals. Of these 218 employees, 185 were employed in the areas of research and product development and in manufacturing and quality control of GLIADEL. The remaining 33 employees performed general and administrative functions, including executive, finance and administration, legal and business development. None of the Company's employees are currently represented by a labor union. To date, the Company has experienced no work stoppages related to labor issues and believes its relations with its employees are good. All employees are required to enter into a confidentiality agreement with the Company. Hiring and retaining qualified personnel are important factors for the Company's future success. The Company is likely to continue to add personnel particularly in the areas of research, clinical research and operations, including manufacturing. Intense competition exists for these qualified personnel from other biotechnology and biopharmaceutical companies as well as academic, research and governmental organizations. There can be no assurance that the Company will be able to continue to hire qualified personnel and, if hired, that the Company will be able to retain these individuals. ITEM 1A. EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF REGISTRANT CRAIG R. SMITH, M.D., age 53, joined the Company as a Director at the Company's inception in July 1993. Dr. Smith was elected President and Chief Executive Officer in August 1993 and was elected Chairman of the Board in January 1994. Prior to joining the Company, Dr. Smith was Senior Vice President for Business and Market Development at Centocor, Inc., a biotechnology corporation. Dr. Smith joined Centocor in 1988 as Vice President of Clinical Research after serving on the Faculty of the Department of Medicine at Johns Hopkins Medical School for 13 years. Dr. Smith received his M.D. from the State University of New York at Buffalo in 1972 and received training in Internal Medicine at Johns Hopkins Hospital from 1972 to 1975. JOHN P. BRENNAN, age 56, joined the Company as Vice President, Operations in January 1994 and became Senior Vice President, Operations in January 1997. In February 1999, Mr. Brennan was promoted to Senior Vice President, Technical Operations and General Manager, Drug Delivery Business. From 1980 to 1993, he was Vice President, Technical Operations and Manufacturing for G.D. Searle and Co., a pharmaceutical company, and was responsible for the operation of manufacturing plants in North America, Latin America and Europe and the worldwide pharmaceutical and process technology from 1980 to 1993. From 1977 to 1980, Mr. Brennan was General Manager of the E.R. Squibb & Sons, Inc. manufacturing facility in Humacao, Puerto Rico. Mr. Brennan held various technical positions at SmithKline Corporation from 1960 to 1977. Mr. Brennan has over 38 years of experience in the pharmaceutical industry. Mr. Brennan received his B.S. in Chemistry from the Philadelphia College of Pharmacy and Science in 1968 and attended the Wharton Graduate Management Program in 1976. ANDREW R. JORDAN, age 51, joined the Company as Vice President, Secretary, Treasurer and Chief Financial Officer in September 1993 and became Senior Vice President, Treasurer and Chief Financial Officer in January 1997. Prior to joining the Company, Mr. Jordan held various positions with KPMG LLP, a public accounting firm, beginning in 1973, including partner since 1983. Mr. Jordan's experience at KPMG LLP included advising early-stage and emerging technology companies and initial and secondary public equity and debt offerings. He received his B.A. from Rutgers College in 1969 and his MBA from Rutgers Graduate School of Business in 1973 and is a Certified Public Accountant. 28 30 PETER D. SUZDAK, PH.D., age 40, joined the Company in March 1995 as Vice President, Research. In February 1999, Dr. Suzdak was promoted to Senior Vice President, Research & Development. Prior to joining the Company, Dr. Suzdak was Director of Neurobiology at Novo Nordisk A/S and was responsible for all neurobiology research from 1993 to 1995, and Department Head for Receptor Neurochemistry from 1988 to 1992 as well as a member of the drug discovery management group from 1989 to 1995. Prior thereto, Dr. Suzdak was a Pharmacology Research Associate in the Clinical Neuroscience Branch of the National Institute of Mental Health in Bethesda, Maryland from 1985 to 1988. Dr. Suzdak received his Ph.D. in Neuroscience from the University of Connecticut and a B.S. in Pharmacy from St. Johns University. NICHOLAS LANDEKIC, age 40, joined the Company in March 1995 as Vice President, Business Development. From January 1992 to February 1995, Mr. Landekic was Senior Director of Business Development at Cephalon, Inc. and was responsible for licensing and other corporate collaborations. From 1989 to 1992, he was a Senior Manager of Product Planning at Bristol-Myers Squibb Company and was responsible for worldwide commercial development and strategic planning for currently marketed and new central nervous system products. From 1985 to 1989, Mr. Landekic held various positions at the McNeil Pharmaceutical division of the Johnson and Johnson Company, and from 1982 to 1983 worked in research at the Mt. Sinai Medical Center. Mr. Landekic received his M.B.A. in Finance/Marketing from the State University of New York at Albany, an M.A. in Biology from Indiana University and a B.S. in Biology from Marist College. THOMAS C. SEOH, age 41, joined the Company in April 1995 as Vice President, General Counsel and Secretary. From 1992 to 1995, Mr. Seoh was affiliated with the ICN Pharmaceuticals, Inc. ("ICN") group, as Vice President and Associate General Counsel of ICN from 1994 to 1995, Vice President, General Counsel and Secretary of Viratek, Inc. from 1993 to 1994 and Deputy General Counsel of SPI Pharmaceuticals, Inc. from 1992 to 1994, providing legal function support for pharmaceutical operations, research and development and corporate development. From 1990 to 1992, Mr. Seoh was General Counsel and Secretary of Consolidated Press U.S., Inc., the North American holding corporation of the Sydney, Australia-based Consolidated Press group. Prior thereto, Mr. Seoh was associated with the New York and London law offices of Lord, Day & Lord, Barrett Smith. Mr. Seoh received his J.D. and A.B. from Harvard University. WILLIAM C. VINCEK, PH.D., age 51, joined the Company as Vice President, Corporate Quality in August 1997. From November 1993 until Dr. Vincek joined the Company, he was Group Director, CMC & Preclinical Regulatory Affairs and Global Research and Development GMP Quality Assurance at Glaxo Wellcome, Inc. Prior thereto from 1984 until October 1993, Dr. Vincek held various positions at SmithKline Beecham Pharmaceuticals and related entities, most recently from July 1992 until October 1993 as Director, Pharmaceutical Analysis Department. Dr. Vincek received his Ph.D. in Medicinal Chemistry from the University of Kansas, where he also received an M.S. in Medicinal Chemistry. Dr. Vincek received a B.S. in Chemistry from Colorado State University. DAVID H. BERGSTROM, PH.D., age 44, joined the Company as Vice President, Pharmaceutical & Chemical Development in July 1998. Prior to joining the Company, Dr. Bergstrom was employed by Hoechst Marion Roussel, Inc. as the Director of Pharmaceutical and Analytical Sciences from 1996 to 1998, responsible for managing research and development efforts to facilitate optimal lead candidate selection for commercial development. Dr. Bergstrom served as Director of Pharmaceutical and Analytical Development for the predecessor company, Hoechst-Roussel Pharmaceuticals Inc., from 1991 to 1996, and Group Manager, Formulations, Pharmaceutical Research from 1990 to 1991. Prior thereto, Dr. Bergstrom held various positions at Ciba-Geigy Corporation. Dr. Bergstrom received his B.S. in Pharmacy from Ferris State College, an M.S. in Pharmaceutical Chemistry from the University of Michigan, and a Ph.D. in Pharmaceutics from the University of Utah. 29 31 DANA C. HILT, M.D., age 46, joined the Company as Vice President, Clinical Research in May 1998. As part of a Company reorganization in February 1999, Dr. Hilt's title was changed to Vice President, Clinical Research and Drug Metabolism. Prior to joining the Company, Dr. Hilt was employed by Amgen, most recently as Director, Neuroscience from 1996 to 1998, earlier as Associate Director, Neuroscience from 1993 to 1996. While at Amgen, Dr. Hilt's duties included overseeing aspects of basic research, clinical trials, regulatory strategy and manufacturing for certain of Amgen's neurological product programs. Prior to joining Amgen, Dr. Hilt held a variety of positions at the University of Maryland School of Medicine and the National Institutes of Health. Dr. Hilt received his B.S. degree in Chemistry from the University of Maine, his M.D. from Tufts University School of Medicine, and received training in Internal Medicine at Harvard Medical School and Neurology at Johns Hopkins Hospital. GREGORY M. HOCKEL, PH.D., age 48, joined the Company as Vice President, Regulatory Affairs in April 1998. Prior to joining the Company, Dr. Hockel was employed by British Biotech, Inc., as Vice President, Regulatory Affairs from 1994 until 1998, responsible for interactions with U.S. and Canadian regulatory authorities, drug safety reporting, and Good Clinical Practice compliance in North America. Dr. Hockel also served on British Biotech's board of directors from 1995 to 1998. Prior to his employment with British Biotech, Dr. Hockel worked in the regulatory affairs department of G. H. Besselaar Associates from 1989 to 1994, ultimately as the Executive Director, Regulatory Affairs in 1994. Prior thereto, Dr. Hockel held various positions at Pfizer Central Research. Dr. Hockel received his B.A. in Biology from the California State University at Long Beach, his Ph.D. in Physiology from Indiana University School of Medicine, and an M.B.A. from Rensselaer Polytechnic Institute. NANCY J. LINCK, PH.D., J.D., age 57, joined the Company as Vice President, Intellectual Property in November 1998. From 1994 to 1998, Dr. Linck was Solicitor for the U.S. Patent and Trademark Office, where she acted as general counsel for the Commissioner of Patents and Trademarks. From 1987 to 1994, Dr. Linck worked as a patent and trademark litigator at the intellectual property law firm of Cushman, Darby & Cushman, first as an Associate from 1987 to 1990, and later as a Partner from 1991 to 1994. Since 1995, Dr. Linck has been engaged as an Adjunct Professor of Law, first at George Washington University School of Law and presently at Georgetown University Law Center. Dr. Linck received her B.S. in Chemistry from the University of California, Berkeley, her M.S. and Ph.D. in Inorganic Chemistry from the University of California, San Diego, and her J.D. from Western New England College School of Law. ITEM 2. PROPERTIES. In August 1994, the Company entered into a master lease for an approximately 83,000 square foot building in Baltimore, Maryland. The Company currently occupies 23,000 square feet for office space, 18,000 square feet for manufacturing space for GLIADEL and potentially other polymer-based products, and 42,000 square feet of research and development laboratories. The Company added approximately 5,000 square feet to its animal handling facilities in 1998. The master lease expires in July 2005. Two five-year renewal options are available to the Company or the Company may exercise a purchase option any time after the ninth year of the lease for the then-current fair market value. The Company has entered into a lease with an affiliate of Scios for approximately 32,700 square feet of laboratory and office space. This lease expires on July 31, 1999. In February 1998, the Company entered into an operating lease with a trust affiliated with First Union National Bank respecting the construction and occupancy of a new laboratory and office facility, consisting of approximately 73,000 square feet and scheduled to be completed in the second quarter of 1999. The lease expires in February 2005, at which time the Company has an option (i) to 30 32 purchase the property or (ii) to sell the property on behalf of the trust (subject to certain limitations and related obligations). In addition, the Company may, with the consent of First Union, enter into a new lease arrangement. See "Management's Discussion of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a more complete description of the Company's arrangements with First Union. The Company expects to consolidate all its operations into its current headquarters and this new facility in 1999. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. RISK FACTORS An investment in the shares of common stock of the Company is speculative in nature and involves a high degree of risk. In addition to the other information contained in this annual report, investors should consider the following important factors carefully in evaluating Guilford and its business before purchasing shares of the common stock. We have written this "Risk Factors" section in the first person and thus references to "we" and "us" shall mean Guilford Pharmaceuticals Inc. and its subsidiaries. In addition to historical information, this annual report contains forward-looking statements which reflect our current expectations regarding future results of our operations, economic performance, and financial condition as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as: - "anticipate," - "believe," - "estimate," - "expect" and similar expressions. While these statements reflect our current plans and expectations and we base the statements on information currently available to us, we cannot be sure that we will be able to implement these plans successfully. We may not realize our expectations in whole or in part in the future. The forward-looking statements contained in this annual report may cover, but are not necessarily limited to, the following topics: - our efforts in conjunction with RPR to obtain international regulatory clearances to market and sell GLIADEL and to increase end-user sales of the product, - our efforts in conjunction with RPR to expand the labeled uses for GLIADEL, - our efforts to develop polymer product line extensions and new polymer products, - the conduct and completion of the research programs relating to our FKBP neuroimmunophilin ligand technology and other technologies, 31 33 - clinical development activities, including commencement and conduct of clinical trials related to our polymer based drug delivery candidates, including GLIADEL, and our pharmaceutical product candidates including: -- drug candidates falling under the FKBP neuroimmunophilin ligand technology, such as NIL-A, -- NAALADase inhibitors, -- PARP inhibitors and -- DOPASCAN. - our strategic plans, - our anticipated expenditures and the potential need for additional funds, and - our plans to implement solutions to the Year 2000 issue, all of which involve significant risks and uncertainties. We caution you that our actual results may differ significantly from the results discussed in the forward-looking statements, and you should not unduly rely on them. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed elsewhere in this annual report. In addition, any forward-looking statement we make is intended to speak only as of the date on which we made that statement. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made. HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY Guilford was founded in July 1993 and, with the sole exception of 1996, has not earned an operating profit in any year since inception. Our operating losses stem mainly from the significant amount of money that we have spent on research and development. As of December 31, 1998, we had an accumulated deficit of $56 million. We expect to have significant additional operating losses over the next several years. Most of our product candidates are in research or early stages of pre-clinical and clinical development. Except for GLIADEL, none of our product candidates has been marketed and sold to the public. At this time, nearly all of our revenues come from: - payments from RPR from the sale and distribution of GLIADEL, - one-time signing fees from our corporate partners under our collaboration agreements supporting the research, development and commercialization of our product candidates, - one-time payments from our corporate partners upon the achievement of certain regulatory or development milestones, for example RPR's payment to us upon FDA approval in September 1996 to market and sell GLIADEL in the United States, and - periodic research funding under our collaboration with Amgen. We do not expect current and anticipated revenues from GLIADEL to be sufficient to support all our anticipated future activities. Whether GLIADEL sales will ever generate any significant revenues continues to remain uncertain. In addition, we do not anticipate generating revenues from the sale of our product candidates for the next several years, if ever. We will require payments from 32 34 our current corporate partners, principally RPR and Amgen, and future corporate partners, to fund our ongoing activities. Whether we will ever recognize significant revenues from Amgen in the form of milestone payments or royalties paid on product sales is also subject to significant risk and uncertainty. These risks occur at each of the following stages, among others: - new product development, - the conduct of pre-clinical animal studies and human clinical trials, - applying for and obtaining regulatory approval to market and sell product candidates, - scale-up of the process for making product candidates in quantity and quality needed for research and development purposes to commercial scale manufacture needed to support marketing and sales of new products, and - commercialization of new products. We discuss these and other risks in greater detail below in this "Risk Factors" section. Our revenues have fluctuated significantly in the past because of the nature of their sources. This fluctuation has in turn caused our results of operations to vary significantly from quarter to quarter and year to year. We expect the fluctuations in our revenue to continue and thus our results of operations should also continue to vary significantly. These fluctuations are due to a variety of factors, including: - the timing and amount of sales of GLIADEL to RPR and RPR's sales to others, - the timing and realization of milestone and other payments from our corporate partners, including RPR and Amgen, - the timing and amount of expenses relating to our research and development, product development, and manufacturing activities, and - the extent and timing of costs related to our activities to obtain patents on our inventions and to extend, enforce and/or defend our patent and other rights to our intellectual property. Whether we will ever be able to achieve sustained profitability in the future will depend on numerous factors, including: - the successful marketing of GLIADEL by RPR, - receipt of regulatory clearance to market and sell GLIADEL in Europe, - receipt of regulatory clearance to market and sell GLIADEL for patients undergoing initial surgery for malignant glioma in the United States as well as Europe and other countries, - the successful development and commercialization of product candidates that result from our collaboration with Amgen, and - our ability to enter into additional collaborative arrangements and license agreements with other corporate partners for our product candidates and earlier stage technologies as they are developed. We will need to conduct substantial additional research, development and clinical trials. We will also need to receive necessary regulatory clearances. We expect that these research, development and 33 35 clinical trial activities, and regulatory clearances, together with future general and administrative activities, will result in significant expenses for the foreseeable future. We cannot be sure that we will be able to achieve significant and sustained revenues or realize sustained profitable operating results in the future. DEPENDENCE ON GLIADEL AND RPR Our near term prospects depend to a large extent on sales by RPR of GLIADEL, our first commercial product, which was commercially launched in the United States in February 1997. We currently do not know whether the product will ever gain broad market acceptance or the extent of the marketing efforts necessary to achieve broad market acceptance. If GLIADEL fails to gain market acceptance, the failure would have a material adverse effect on our business, financial condition and results of operations. To date, we have received clearance from the FDA to market GLIADEL in the United States for a limited subset of patients suffering from brain cancer. This clearance extends to those patients for whom surgical tumor removal, commonly referred to as "resection", is indicated and who have recurrent forms of the brain cancer glioblastoma multiforme. A recurrent form of glioblastoma multiforme is one in which the cancer has returned after initial surgery to remove a brain tumor. The number of patients undergoing recurrent surgery for glioblastoma multiforme is very limited, and we believe the total annual incidence of glioblastoma multiforme in the United States is less than 10,000. In order to expand the medical uses, commonly referred to as "indications", for which RPR may market GLIADEL, we and RPR must successfully complete additional lengthy clinical trials. Thereafter, we and RPR will have to apply to the FDA for clearance to market GLIADEL for patients undergoing surgery for the first time for glioblastoma multiforme and potentially other brain cancers. We cannot be sure that we and RPR will be able to successfully complete these clinical trials or receive the desired regulatory clearance. If GLIADEL fails to receive regulatory clearance, the failure would limit RPR's ability to market GLIADEL for use in patients beyond the current narrow indication. The failure would also have a material adverse effect on our business prospects, financial condition and results of operations. In addition, RPR has filed for marketing clearance for the current indication for GLIADEL in a number of foreign countries, and as of February 28,1999, RPR has received international regulatory approvals to market and sell GLIADEL in only six foreign countries. RPR may not be able to obtain any other international regulatory approvals for GLIADEL, including all approvals needed in France and Canada to market and sell GLIADEL in those countries. If RPR fails to obtain those approvals, the failure would have a material adverse effect on our business prospects, financial condition and results of operations. We have granted RPR exclusive worldwide (excluding Scandinavia and Japan) marketing, sales and distribution rights for GLIADEL. However, our agreements with RPR do not impose any minimum requirements on RPR for the purchase of GLIADEL from us or for the sale of GLIADEL to end-users. Therefore, we have no control over the revenues we receive from the sale and distribution of GLIADEL, which depend completely on RPR's marketing efforts. In addition, prior to the February 1997 commercial launch of GLIADEL in the United States, RPR's oncology sales force had no previous experience in marketing a product to neurosurgeons. We cannot be sure that RPR will elect to continue or increase its marketing and promotional activities for GLIADEL or that its efforts in that regard will be successful. The inability or unwillingness of RPR to aggressively market and promote GLIADEL would have a material adverse effect on our business, financial condition and results of operations. 34 36 GLIADEL is also a very fragile product and can easily break into many pieces if not handled with great care. Product recalls due to excessive breakage of the GLIADEL wafers or for other reasons could also have a material adverse effect on our business, financial condition and results of operations. RPR must make certain one-time milestone payments to us upon achieving certain designated domestic and international regulatory approvals. Subject to certain restrictions, RPR is responsible for the timing and content of the applications necessary for international regulatory clearances to market and sell GLIADEL. Thus, whether GLIADEL will receive these clearances depends heavily on the efforts of RPR. We cannot be sure all or certain of these milestones will be satisfied in a manner so as to entitle us to receive the corresponding milestone payments from RPR. The potential milestone payments are significant, and failure to achieve the designated regulatory objectives could have a material adverse effect on our business, financial condition and result of operations. THE AMGEN COLLABORATION Certain of the amounts payable to us under our collaboration with Amgen, which include payments upon the achievement of certain potential future regulatory and development milestones as well as royalty payments on product sales, depend on a number of factors. Many of these factors are not within our control, including: - the selection of one or more appropriate lead compounds, - successful completion of pre-clinical and clinical development activities, - application for and obtaining regulatory clearances to market potential products, - commercialization of products, and - the successful preservation and extension of the patent and other intellectual property rights licensed to Amgen. All of these activities are subject to significant risks and uncertainties. For a description of these and other material risks related to the research, development and commercialization of the FKBP neuroimmunophilin ligand technology, you should read the following other sections contained in this Risk Factors discussion: - "Technological Uncertainties," - "Uncertainty Regarding Patent and Proprietary Technology," - "Dependence on Licenses of Intellectual Property," - "Uncertainty of Preclinical and Clinical Trial Results," - "Government Regulation and Product Approvals," - "Novel Alternative Technologies and Therapeutic Approaches," and - "Competition and Technological Change" Moreover, under the terms of our collaboration with Amgen, we have no control over the development activities regarding the FKBP neuroimmunophilin ligand technology, which have been left to the sole discretion of Amgen. Our agreement with Amgen also does not specify a timetable for achieving development and commercialization goals with respect to the FKBP neuroimmunophilin ligand technology. If Amgen does determine to conduct clinical trials on a product candidate resulting 35 37 from our collaboration, Amgen still may not be able successfully to complete those clinical trials and then receive clearance from the FDA or foreign regulatory authorities to market and sell any such products. The FKBP neuroimmunophilin ligand technology we have licensed to Amgen represents a new approach to the treatment of certain types of neurological and other diseases and conditions. We and Amgen have very limited experience in taking the kinds of compounds likely to result from our work with FKBP neuroimmunophilin ligand technology and formulating them into final drug products appropriate for sale to the public. In addition, both of us have limited experience with the scale-up of such compounds from the quantity and quality needed to support research and development efforts to quantities needed to support commercial scale distribution. Also, both we and Amgen have limited experience with the manufacture of compounds of this type for commercial sale. There is a risk that Amgen will not be successful in scaling-up and manufacturing any such compounds needed for commercial sale. For a more complete description of the kinds of risks associated with product manufacture, you should read the second paragraph under the section entitled "Limited Manufacturing Capabilities" below. If Amgen is able to obtain all regulatory approvals necessary to market a product resulting from our collaboration, our agreement does not specify any minimum sales requirements for Amgen. Thus, any royalty amounts payable to us in the future will depend entirely on the sales and marketing efforts of Amgen, an activity over which we will have no control. In addition, our agreement with Amgen does not prevent Amgen from pursuing technologies for product candidates competitive with the FKBP neuroimmunophilin ligand technology in the future. LIMITED MANUFACTURING CAPABILITIES To commercialize GLIADEL, we must be able to manufacture this product in sufficient quantities in compliance with regulatory requirements and at acceptable costs. We manufacture GLIADEL at our manufacturing facility in Baltimore, Maryland, which consists of production laboratories and a cleanroom occupying approximately 12,500 square feet. We estimate that the facility currently has the capacity to manufacture approximately 8,000 GLIADEL treatments per year. Although we believe this GLIADEL manufacturing facility meets the FDA's current requirements for good manufacturing practices (which are commonly referred to as "cGMP") and the FDA has inspected the facility in the past, we have manufactured only limited quantities of GLIADEL in the facility. We cannot be sure that we will be able to continue to satisfy applicable regulatory standards, including cGMP requirements, and other requirements relating to the manufacture of GLIADEL in the facility. We also face risks inherent in the operation of a single facility for manufacture of GLIADEL. These risks include: - unforeseen plant shutdowns due to personnel, equipment or other factors, and - the possible inability of the facility to produce GLIADEL in quantities sufficient to meet demand. Any delay in the manufacture of GLIADEL could result in delays in product shipment. Delays in product shipment would have a material adverse effect on our business, financial condition and results of operations. 36 38 Currently, we have no manufacturing capabilities for our product candidates, including DOPASCAN. Consequently, in order to complete the commercialization process of any of our product candidates, we must either acquire, build or expand our internal manufacturing capabilities or rely on third parties to manufacture these product candidates. We cannot be sure that we or our corporate partners, including Amgen, will be able to (1) acquire, build or expand facilities that will meet quality, quantity and timing requirements or (2) enter into manufacturing contracts with others on acceptable terms, or at all. Our inability, or that of our corporate partners, to accomplish these tasks could have a material adverse effect on our business, financial condition and results of operations. Third-party manufacturers must also comply with FDA, Drug Enforcement Administration (DEA), and other regulatory requirements for their facilities, including the FDA's cGMP regulations. In addition, manufacture of product candidates on a limited basis for investigational use in animal studies or human clinical trials does not guarantee that large-scale, commercial production is viable. Small changes in methods of manufacture can affect the safety, efficacy, controlled release or other characteristics of a product. Changes in methods of manufacture, including commercial scale-up, can, among other things, require the performance of new clinical studies. Moreover, if we decide to manufacture one or more of our product candidates ourselves, we would incur substantial start-up expenses and need to expand our facilities and hire additional personnel. TECHNOLOGICAL UNCERTAINTIES RELATED TO RESEARCH, DEVELOPMENT AND COMMERCIALIZATION The research, development and commercialization of pharmaceutical drugs inherently involve significant risk. Except for GLIADEL, we do not expect to generate revenues from product sales, including any products that may result from our collaboration with Amgen, for at least the next several years, if ever. To date we have dedicated substantially all of our resources to the discovery, development and commercialization of proprietary products for (1) the diagnosis, treatment and prevention of neurological diseases and conditions and (2) targeted, controlled drug delivery using biodegradable polymers for the treatment of cancer and other diseases. We expect to continue to dedicate substantially all of our resources to these two areas for the foreseeable future. Before we or our corporate partners can be in a position to commercialize a new product (i.e., to market, distribute and sell the product), each of us will have to: - expend substantial capital and effort to develop our product candidates further, which includes conducting extensive and expensive pre-clinical animal studies and human clinical trials, - apply for and obtain regulatory approval to market and sell such product candidates, and - conduct other costly activities related to preparation for product launch, among many other activities. In certain cases, we are using compounds that we consider to be "prototype" compounds in the research phase of our work. These compounds include GPI-6150 and GPI-2138. By prototype compounds we mean compounds that we are using primarily to establish that a relevant scientific mechanism of biological or chemical action could have commercial application in diagnosing, treating or preventing disease. These activities are sometimes referred to as establishing the "proof of principle" of a certain approach to drug research and development. We generally do not consider our prototype compounds to be lead compounds acceptable for further development into a product because of factors that render them unsuitable as drug candidates. Such factors include sub-optimal metabolic or pharmacokinetic characteristics or unfavorable patent coverage. In order to develop commercial products, we will need to conduct research using other compounds that share the key 37 39 aspects of the prototype compounds but do not have the unsuitable factors. We cannot be sure that this will always be possible. In addition, our product candidates are subject to the risks of failure inherent in the development of products based on new and unproved technologies. These risks include the possibility that: - our new approaches will not result in any products that gain market acceptance; - a product candidate will prove to be unsafe or ineffective, or will otherwise fail to receive and maintain regulatory clearances necessary for marketing, '- a product, even if found to be safe and effective, could still be difficult to manufacture on the large scale necessary for commercialization or be otherwise uneconomical to market, - a product will unfavorably interact with other types of commonly used medications, thus restricting the circumstances in which our drugs may be used, - proprietary rights of third parties will preclude us from manufacturing or marketing a new product, or - third parties will market superior or more cost-effective products. As a result, our activities, either directly or through corporate partners, may not result in any commercially viable products. NEED FOR ADDITIONAL PARTNERS TO DEVELOP AND COMMERCIALIZE OUR PRODUCT CANDIDATES Our resources are limited, particularly because we are developing our technologies for a variety of different diseases. Our business strategy requires that we enter into various arrangements with: - corporate partners, such as RPR and Amgen, - academic investigators at universities, such as Johns Hopkins and others, - licensors of technologies, such as Johns Hopkins, Massachusetts Institute of Technology (MIT) and Research Triangle Institute (RTI), - licensees of our technologies, such as Daiichi Radioisotope Laboratories, Ltd. (DRL) and others. Our success depends in large part upon the efforts of these parties. Like many small biopharmaceutical companies, our business strategy includes finding larger pharmaceutical companies to collaborate with us to support the research, development and commercialization of our product candidates. In trying to attract corporate partners to collaborate with us in the research, development and commercialization process, we face serious competition from other small biopharmaceutical companies and even the in-house research and development staffs of the larger pharmaceutical companies themselves. If we fail to enter into such arrangements with corporate partners, this failure may severely limit our ability to proceed with the research, development, manufacture or sale of product candidates. For example, we are actively seeking corporate partners to assist in the development of DOPASCAN as well as our NAALADase and PARP inhibitor neuroprotective drug programs, but we may not find suitable corporate partners for these programs. It is common in many corporate partnerships in our industry for the larger partner to have responsibility for conducting pre-clinical studies and human clinical trials and/or preparing and 38 40 submitting applications for regulatory approval of potential pharmaceutical or other products. That is the case with some of our current corporate partnerships, including our collaboration with Amgen. It is likely that it will also be the case with any future similar arrangements into which we enter. If one of our collaborative partners fails to develop or commercialize successfully any of our product candidates, this failure could materially and adversely affect our business, financial condition and results of operations. Furthermore, larger pharmaceutical companies often explore multiple technologies and products for the same medical conditions. Therefore they are likely to enter into collaborations with our competitors for products addressing the same medical conditions targeted by our technologies. Thus our collaborators, including Amgen, may pursue alternative technologies or product candidates either on their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases or disorders targeted by our collaborative arrangements. Depending on how other product candidates advance, a corporate partner may slow down or abandon its work on our product candidates or terminate its collaborative arrangement with us in order to focus on these other prospects. We also depend to a large extent on technology license agreements with third parties, including our agreements with Johns Hopkins relating to the neuroimmunophilin ligand technology. This license agreement and others we have require that we meet a specified schedule for achieving certain research, development and regulatory milestones and that we spend minimum amounts of money to develop the technology. If we are unable to meet these requirements under a license, our licensor could terminate the license and thus deprive us of access to key technology. A deprivation of this type could have a material adverse effect on our business, financial condition and results of operations. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING We are not profitable and do not expect to be profitable for the next several years, if ever. Consequently, we will require substantial funds in order to continue our research and development programs and pre-clinical and clinical testing and to manufacture and, where applicable, market our products. Under our operating lease with a trust affiliated with First Union National Bank related to our new research and development facility, we are required to hold in the aggregate unrestricted cash, cash equivalents and investments of $40 million at all times during the term of the lease. In addition, we are required to maintain certain amounts of cash collateral at First Union related to this operating lease and certain other indebtedness with First Union. These requirements may limit our ability to access our capital in the future. Our capital requirements depend on numerous factors, including: - the progress of our research and development programs, - the progress of pre-clinical and clinical testing, - the time and costs involved in obtaining regulatory approvals, - the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, - competing technological and market developments, - changes in our existing research relationships with universities and others, 39 41 - our ability to establish collaborative arrangements with large pharmaceutical companies and others, - the requirements and timing of entering into technology licensing agreements and other similar arrangements, and - the progress of efforts to scale-up manufacturing processes. We believe that our existing resources will be sufficient to fund our activities at least for the next twelve months. Nevertheless, we may use these existing resources before that time because of changes in our research and development and commercialization plans or other factors affecting our operating expenses or capital expenditures, including potential acquisitions of other businesses, assets or technologies. We anticipate that we will fund future capital requirements through a combination of: - revenues generated under our agreements with RPR relating to GLIADEL, - revenues generated under our agreement with Amgen related to the FKBP neuroimmunophilin ligand technology, - public or private financings (as necessary), - new agreements with corporate partners for the research, development and commercialization of our technologies, and/or - other potential sources. Our ability to raise future capital on acceptable terms depends on conditions in the public and private equity markets and our performance, as well as the overall performance of other companies in the biopharmaceutical and biotechnology sectors. We cannot be sure that we will be able to obtain any future financing that we may require on acceptable terms, or at all. LIKELY VOLATILITY OF OUR STOCK PRICE The market price of our common stock has been and is likely to continue to be highly volatile, and an investment in our shares involves substantial risks. The market prices for shares of smaller biotechnology companies like ours have a history of being highly volatile. Furthermore, the stock market generally and the market for stocks of companies with lower market capitalizations, like us, have from time to time experienced and likely will again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company. From time to time stock market professionals publish research reports covering us and our future prospects. A number of factors may limit our ability to meet the expectations of securities analysts or investors and thus may adversely affect our stock price. Such factors include: - announcements by us or our competitors of clinical results, technological innovations, product sales, new products or product candidates, - developments or disputes concerning patent or proprietary rights, - regulatory developments affecting our products, - period-to-period fluctuations in the results of our operations, and - market conditions for emerging growth companies and biopharmaceutical companies. 40 42 UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY Our success will depend in large part on our ability to: - obtain, maintain and enforce patent protection for our products and processes, - license rights to patents from third parties, - maintain trade secret protection, and - operate without infringing upon the proprietary rights of others. Patent protection for our technologies and products will be a crucial factor in our ability to develop and commercialize our products. Large pharmaceutical companies consider a strong patent estate critical when they evaluate whether to enter into a collaborative arrangement to support the research, development and commercialization of a technology. Without the prospect of reasonable patent protection, it would be difficult for a corporate partner, or our company for that matter, to justify the time and money that is necessary to complete the development of a product. The rules and criteria for receiving and enforcing a patent for pharmaceutical and biotechnological inventions are still developing and are unclear in many respects. The ultimate scope of patent protection afforded these types of patents remains uncertain, and a number of our product candidates are subject to this uncertainty. Many others, including companies, universities and other research organizations, work in the areas of our business, and we cannot be sure that the claims contained in our issued patents will be interpreted as broadly as we would like in light of the inventions of these other parties. In addition, we cannot be sure that the claims set forth in our pending patent applications will issue in the form submitted. These claims may be narrowed or stricken, and the applications may not even ultimately result in valid and enforceable patents. We are aware of a company which has asserted publicly that it has submitted five U.S. patent applications (one of which is under Notice of Allowance) claiming the use of certain of its immunosuppressive compounds and certain multidrug resistance compounds for nerve growth applications. This company has also publicly stated that it holds nine issued U.S. patents and three U.S. patent applications pending (one of which is under a Notice of Allowance) that it states claim compounds that are useful in nerve growth applications. We do not believe that our neurotrophic compounds, including those under the FKBP neuroimmunophilin ligand technology licensed to Amgen, infringe on this company's patents. Nevertheless, we cannot be sure that our patents and patent applications will adequately protect our neurotrophic product candidates. Thus our neurotrophic product candidates may infringe or be dominated by this company's current patents or patents that may issue in the future, or those of any other company. In order to protect our proprietary position with respect to our neuroimmunophilin ligands, we filed an opposition in 1998 in an effort to prevent the final issuance of a European patent to the company we reference in the immediately preceding paragraph. While we do not believe the claims of this European patent would be valid, any final issuance could result in future litigation if this company were to allege that we infringed the claims of this patent in Europe. Furthermore, we cannot be sure that any or all of the patent applications assigned or licensed to us from third parties will be granted. We cannot offer assurances that we will develop additional products or processes that are patentable, or that any patents issued to us, or licensed by us, will provide us with any competitive advantages or adequate protection for our products. We also cannot 41 43 be sure that others will not successfully challenge, circumvent or invalidate any or our existing or future patents or intellectual property. Our policy is to control the disclosure and use of our know-how and trade secrets by entering into confidentiality agreements with our employees, consultants and third parties. There is a risk, however, that: - these parties will not honor our confidentiality agreements, - others will independently develop equivalent or competing technology, - disputes will arise concerning the ownership of intellectual property or the applicability of confidentiality obligations, or - disclosure of our trade secrets will occur regardless of these contractual protections. In our business, we often work with consultants and research collaborators at universities and other research organizations. To the extent that any of these consultants or research collaborators use intellectual property owned by others as part of their work with us, disputes may arise between us and these other parties as to which one of us has the rights to intellectual property related to or resulting from the work done. We support and collaborate in research conducted in universities, such as Johns Hopkins, and in governmental research organizations, such as the National Institutes of Health. We cannot be sure that we will have or be able to acquire exclusive rights to the inventions or technical information that result from work performed by university personnel or at these organizations. Also, disputes may arise as to which party should have rights in research programs that we conduct on our own or in collaboration with others that are derived from or related to the work performed at the university or governmental research organization. In addition, in the event of a contractual breach by us, certain of our collaborative research contracts provide that we must return the technology rights (including any patents or patent applications) to the contracting university or governmental research organization. Questions of infringement of intellectual property rights, including patent rights, may involve highly technical and subjective analyses. Some or all of our existing or future products or technologies may now or in the future infringe the rights of other parties. These other parties might initiate legal action against us to enforce their claims, and our defense of the claims might not be successful. We may incur substantial costs if we must defend against charges of infringement of patent or proprietary rights of third parties. We may also incur substantial costs if we find it necessary to protect our own patent or proprietary rights by bringing suit against third parties, including suits involving our neurotrophic product candidates. We could also lose rights to develop or market certain products or be required to pay monetary damages or royalties to license proprietary rights from third parties. In response to actual or threatened litigation, we may seek licenses from third parties or attempt to redesign our products or processes to avoid infringement. We cannot be sure that we will be able to obtain licenses on acceptable terms, or at all, or successfully redesign our products or processes. In addition to the risk that we could be a party to patent infringement litigation, the U.S. Patent and Trademark Office (or its foreign counterparts) could require us to participate in patent interference proceedings that it declares. These proceedings are often expensive and time-consuming, even if we were to prevail in such a proceeding. We may also be forced to initiate legal proceedings to protect our patent position or other proprietary rights. These proceedings typically are costly, protracted, and offer no assurance of success. 42 44 Under our collaboration with Amgen, Amgen is responsible for preparing, filing, prosecuting, maintaining and defending patent applications and patents relating to the FKBP neuroimmunophilin ligand technology. We cannot be sure that Amgen will pursue these activities in the same manner or as vigorously as we would if we had that responsibility. Furthermore, Amgen has the option to take the lead in bringing actions to enforce patent rights relating to the FKBP neuroimmunophilin ligand technology and to defend against third party infringement suits regarding that technology. While Amgen and Guilford have agreed to consult with each other on such matters, in the event of disagreement, Amgen's decisions will control. DEPENDENCE ON LICENSES OF INTELLECTUAL PROPERTY We have licensed intellectual property, including patents, patent applications and know-how, from universities and others, including certain intellectual property underlying GLIADEL, DOPASCAN and the neuroimmunophilin ligand technology. Some of our product development programs depend on our ability to maintain rights under these licenses. Under the terms of our license agreements, we are generally obligated to: - exercise diligence in the research and development of these technologies, - achieve certain development and regulatory milestones, - expend minimum amounts of resources in bringing potential products to market, - make certain royalty and milestone payments to the party from which we have licensed the technology, and - reimburse certain patent cost to these parties. In addition, these license agreements obligate us to abide by certain record-keeping and periodic reporting obligations. Each licensor has the power to terminate its agreement if we fail to meet our obligations under that license. We may not be able to meet our contractual obligations under these license agreements. Furthermore, these obligations may conflict with our obligations under other agreements that we have. If we default under any of these license agreements, we may lose our right to market and sell any products based on the licensed technology. Losing our marketing and sales rights would have a material and adverse effect on our business, financial condition and results of operations. Our license agreements require that we pay a royalty on sales of GLIADEL to the university that licensed us the technology underlying that product. In addition, we will have to pay milestone and/or royalty payments in connection with the successful development and commercialization of DOPASCAN and any compounds that come from the neuroimmunophilin ligand technology. In the future, to support our product development efforts we may need research materials or scientific information that researchers at universities or other organizations generate. We cannot be sure that we will be able to obtain this scientific information or research materials in a timely manner or at all. REIMBURSEMENT UNCERTAINTY Sales of our product candidates will depend in part on the availability of reimbursement from third-party health care payors, such as government insurance plans, including Medicare and Medicaid in the United States, and private insurance plans. Reimbursement policies for GLIADEL remain uncertain, both domestically and internationally. We cannot be sure that any reimbursement will be 43 45 available for GLIADEL or any of our product candidates under development. Furthermore, even if reimbursement is available, we cannot be sure that it will be available at price levels sufficient to realize an appropriate return on our investment in GLIADEL or other products in development. RELIANCE ON SOLE-SOURCE SUPPLIERS Currently we are able to purchase certain key components for GLIADEL and our product candidates only from single source suppliers. These suppliers are subject to many strict regulatory requirements regarding the supply of these components. We cannot be sure that these suppliers will comply, or have complied, with applicable regulatory requirements or that they will otherwise continue to supply us with the key components we require. If suppliers are unable or refuse to supply us, or will supply us only at a prohibitive cost, we may not be able to access additional sources at acceptable prices, on a timely basis, if ever. The current formulation of GLIADEL utilizes the chemotherapeutic agent, BCNU, which is also known as "carmustine". Currently we can procure BCNU only from two sources in the United States, and we are not aware of any supplier outside of the United States. We currently obtain BCNU from one of these two U.S. suppliers on a purchase order basis and not through any long-term supply agreement. If we fail to receive key supplies necessary for the manufacture of GLIADEL on a timely basis at a reasonable cost, delays in product shipment could result. Delays of this type would have a material adverse effect on our business, financial condition and results of operations. The manufacture of DOPASCAN requires that a precursor compound be labeled with a radioactive isotope of iodine, known as Iodine-123, to form the final product. Only a limited number of companies worldwide are capable of performing the necessary "radioiodination" of the precursor and distribution of the final product. Currently, we do not have any arrangement for the manufacture and supply of DOPASCAN nor do we have the internal capability to manufacture DOPASCAN ourselves. Consequently, we will not be in a position to commence Phase III or other clinical trials for DOPASCAN until we locate a qualified supplier. We have assessed the companies that we believe are currently capable of manufacturing a product like DOPASCAN. Based on this assessment, we believe a significant risk exists that we may not be able to find a manufacturer who can meet the quality and cost requirements required to conduct the Phase III clinical trials that will be necessary to support application to the FDA for regulatory approval. Inability to come to agreement with a suitable manufacturer for the clinical and commercial supply of DOPASCAN on acceptable terms would prevent us from developing this product candidate further. GOVERNMENT RIGHTS TO GOVERNMENT SUPPORTED RESEARCH The U.S. government holds certain rights that govern aspects of the technology licensed to us. These rights include a non-exclusive, royalty-free, worldwide license for the government to practice or have practiced resulting inventions for any governmental purpose. In addition, the U.S. government has the right to grant to others licenses which may be exclusive under any of these inventions if the government determines that: - adequate steps have not been taken to commercialize such inventions, - the grant is necessary to meet public health or safety needs, or - the grant is necessary to meet requirements for public use under federal regulations. 44 46 The U.S. government also has the right to take title to a subject invention if we fail to disclose the invention, and may elect to take title within specified time limits. The U.S. government may acquire title in any country in which we do not file a patent application within specified time limits. Federal law requires any licensor of an invention partially funded by the federal government to obtain a commitment from any exclusive licensee, such as us, to manufacture products using the invention substantially in the United States. Further, these rights include the right of the government to use and disclose technical data relating to licensed technology that was developed in whole or in part at government expense. Our principal technology license agreements contain provisions recognizing these rights. We have entered into a contract with the U.S. Army, funded by the Office of National Drug Control Policy (commonly referred to as the "Drug Czar"), to provide certain financial support for research being conducted by us on a potential cocaine inhibitor. That contract permits the U.S. government to obtain unlimited rights in data developed in the course of our performance if we do not use the data within five years after termination of the contract to conduct further laboratory investigation and/or clinical trials aimed at developing a commercial product to combat drug abuse. UNCERTAINTY OF PRE-CLINICAL AND CLINICAL TRIAL RESULTS In order to obtain regulatory approval for the commercial sale of any of our product candidates, we must conduct both pre-clinical studies and human clinical trials. These studies and trials must demonstrate that the product is safe and effective for the clinical use for which we are seeking approval. Together with RPR, we commenced a Phase III clinical trial for GLIADEL in December 1997 in patients undergoing initial surgery for the brain cancer malignant glioma. We cannot be sure that the results of this or other clinical trials we may conduct in the future will be successful. Adverse results from this or any future trial would have a material adverse effect on our business, financial condition and results of operations. We also face the risk that we will not be permitted to undertake or continue clinical trials for any of our product candidates in the future. Even if we are able to conduct such trials, we may not be able to demonstrate satisfactorily that the products are safe and effective and thus qualify for the regulatory approvals needed to market and sell the products. Results from pre-clinical studies and early clinical trials are often not accurate indicators of results of later-stage clinical trials that involve larger human populations. GOVERNMENT REGULATION AND PRODUCT APPROVALS Our research, pre-clinical development and clinical trials and the manufacturing and marketing of our product candidates are subject to extensive regulation by numerous governmental authorities in the United States and other countries, including the FDA and the DEA. Except for GLIADEL, none of our product candidates has received marketing clearance from the FDA. In addition, none of our product candidates has received clearance from any foreign regulatory authority for commercial sale, except with respect to GLIADEL, which has received marketing clearance in a very limited number of foreign countries. As a condition to approval of our product candidates under development, the FDA could require additional pre-clinical, clinical or other studies. Any requirement that we perform additional pre- 45 47 clinical, clinical or other studies, or purchase clinical or other data from other companies could have a material adverse effect on our business, financial condition and results of operations. In order to obtain FDA approval of a new drug product for a specific clinical use, we must demonstrate to the satisfaction of the FDA that the product is safe and effective for its intended use. We must also demonstrate that the product is capable of being manufactured in accordance with applicable regulatory standards. Significant risks exist that: - we will not be able to satisfy the FDA's requirements with respect to any of our drug product candidates or with respect to the proposed expanded labeling for GLIADEL for patients undergoing initial surgery for malignant glioma, or - even if the FDA does approve our product candidates or expanded labeling, the FDA will approve less than the full scope of uses or labeling that we seek. Failure to obtain regulatory drug approvals on a timely basis could have a material adverse effect on our business, financial condition and results of operations. Even if we are able to obtain necessary FDA approval, the FDA may nevertheless require post-marketing testing and surveillance to monitor the approved product and continued compliance with regulatory requirements. The FDA may withdraw product approvals if we or our corporate partners, such as RPR in the case of GLIADEL, do not maintain compliance with regulatory requirements. The FDA may also withdraw product approvals if problems concerning safety or efficacy of the product occur following approval. The process of obtaining FDA and other required approvals or licenses and of meeting other regulatory requirements to test and market drugs, including controlled substances and radiolabeled drugs, is rigorous and lengthy. It has required, and will continue to require, that we expend substantial resources. We will need to conduct clinical trials and other studies on all of our product candidates before we are in a position to file a new drug application for marketing and sales approval. Unsatisfactory clinical trial results and other delays in obtaining regulatory approvals or licenses would prevent the marketing of the products we are developing. Until we receive the necessary approvals or licenses and meet other regulatory requirements, we will not receive revenues or royalties related to product sales. In addition to the requirements for product approval, before a pharmaceutical product may be marketed and sold in certain foreign countries the proposed pricing for the product must be approved as well. Products may be subject to price controls or limits on reimbursement. The requirements governing product pricing and reimbursement vary widely from country to country and can be implemented disparately at the national level. As to reimbursement, the European Union generally provides options for its fifteen Member States to restrict the range of medicinal products covered by their national health insurance systems. The European Union also generally provides options for its Member States to control the prices of medicinal products for human use. A Member State may approve a specific price for the medicinal product or it may, instead, adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. We cannot guarantee that any country which has price controls or reimbursement limitations for pharmaceuticals will allow favorable reimbursement and pricing arrangements for our products or those of our corporate partners, including RPR and its applications for GLIADEL in France, Canada and elsewhere outside the United States. We hope to capitalize on current FDA regulations and the new provisions of the FDA Modernization Act of 1997. These regulations and provisions permit "fast track" approval or more 46 48 limited "treatment use" of, and cost recovery for, certain experimental drugs under certain circumstances. The FDA's fast track accelerated or expedited regulations apply only to: - drug products intended to treat seriously debilitating or life-threatening diseases and that provide meaningful therapeutic benefit to patients over existing treatments, or - drug products that are for diseases for which no satisfactory or alternative therapy exists. The FDA's Modernization Act contains certain provisions patterned after the accelerated approval regulations and other provisions pertaining to expanded access, i.e., treatment uses. Since some of the new statutory provisions and current FDA regulations are different from one another, it is unclear how they will apply, if at all, to our drug candidates. We cannot be sure that our drug candidates will qualify for fast-track approvals or for treatment use and cost recovery. Controlled drug products and radiolabeled drugs are subject to special regulations in addition to those applicable to other drugs. Certain of our products and product candidates (including DOPASCAN) are or may be subject to regulation by the DEA as controlled substances and other federal agencies as radiolabeled drugs. If we are unable to continue to obtain exceptions from the DEA for shipment abroad or other activities, as we have in the past, this situation could have a material adverse effect on us. We have obtained registrations for our facilities from the DEA. We have also obtained exceptions from the DEA with respect to various of our activities involving DOPASCAN, including the shipment of certain quantities of a precursor of this product candidate to an overseas collaborative partner. However, we cannot be sure that these exceptions will be sufficient to cover our future activities or that the DEA will not revoke the exceptions. We also cannot be sure that we will be able to meet the other requirements to test, manufacture and market controlled substances or radiolabeled drugs, or that we will be able to obtain additional necessary approvals or licenses to meet state, federal and international regulatory requirements to manufacture and distribute these products. The Modernization Act requires the FDA to issue and finalize within one and one-half years regulations governing the approval of radiolabeled drugs. We do not know and cannot predict how these and other provisions may affect the potential for approval of DOPASCAN. NOVEL ALTERNATIVE TECHNOLOGIES AND THERAPEUTIC APPROACHES Many of our product development efforts focus on novel alternative therapeutic approaches and new technologies that have not been widely studied. Applications for these approaches and technologies include, among other things, the treatment of brain cancer, the diagnosis and monitoring of Parkinson's disease, the promotion of nerve growth and the prevention of neuronal damage. These approaches and technologies may not be successful. We are applying these approaches and technologies in our attempt to discover new treatments for conditions that are also the subject of research and development efforts of many other companies. Our competitors may succeed in developing technologies or products that are more effective or economical than those we are developing. Rapid technological change or developments by others may result in our technology or product candidates becoming obsolete or noncompetitive. COMPETITION AND TECHNOLOGICAL CHANGE The technological areas in which we work continue to evolve at a rapid pace. Our future success depends upon maintaining our ability to compete in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and expected to increase. 47 49 Many of these competitors have substantially greater research and development capabilities and experience and manufacturing, marketing, financial and managerial resources than we do, and represent significant competition for us. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance financial, marketing and other resources available to these competitors. These competitors may develop products which are superior to those we are developing. We are aware of the development by other companies and research scientists of alternative approaches to: - the treatment of malignant glioma, - the diagnosis of Parkinson's disease, - the promotion of nerve growth and repair, - the treatment and prevention of neuronal damage, and - the treatment of cocaine addiction. Our competitors may develop products that render our products or technologies noncompetitive or obsolete. In addition, we may not be able to keep pace with technological developments. Any product candidate that we develop and for which we gain regulatory approval, including GLIADEL, must then compete for market acceptance and market share. For certain of our product candidates, an important factor will be the timing of market introduction of competitive products. Accordingly, we expect that the relative speed with which we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success. Significant competitive factors include: - capabilities of our collaborators, - product efficacy and safety, - timing and scope of regulatory approval, - product availability, - marketing and sale capabilities, - reimbursement coverage from insurance companies and others, - the amount of clinical benefit of our product candidates relative to their cost, - the method of administering a product, - price, and - patent protection. Our competitors may very well develop more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than we do. Our competitors' achievement of any of these goals could have a material adverse effect on our business, financial conditions and results of operations. 48 50 LIMITED CLINICAL AND REGULATORY COMPLIANCE CAPABILITIES We have limited resources in the areas of product testing and regulatory compliance. Consequently, in order to carry our products through the necessary regulatory approvals and prepare our product candidates for commercialization and marketing, we will have to: - expend capital to acquire and expand such capabilities, - reach collaborative arrangements with third parties to provide these capabilities, or - contract with third parties to provide these capabilities. RISK OF PRODUCTS LIABILITY We may potentially become subject to large liability claims and significant defense costs as a result of the design, manufacture or marketing of our products, including GLIADEL, or the conduct of clinical trials involving these products. A products liability-related claim or recall could have a material adverse effect on us. We currently maintain only $15 million of product liability insurance covering clinical trials and product sales. We cannot be sure that this existing coverage or any future insurance coverage we obtain will be adequate. Furthermore, we cannot be sure that our insurance will even cover any claims made against us. Product liability insurance varies in cost. It can be difficult to obtain, and we may not be able to purchase it in the future on terms acceptable to us, or at all. We also may not be able to otherwise protect against potential product liability claims. If this occurs, it could prevent or inhibit the clinical development and/or commercialization of any products we are developing. DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS We depend heavily on the principal members of our management and scientific staff, including our Chief Executive Officer, Craig R. Smith, M.D., and member of our Board of Directors and consultant to our company, Solomon H. Snyder, M.D. The loss of the services of either of these individuals or other members of our senior management team could have a material adverse effect on our business, financial condition and results of operations. We have entered into a consulting agreement with Dr. Snyder and an employment agreement with Dr. Smith, each of which provides protection for our proprietary rights. Nevertheless, either Dr. Snyder or Dr. Smith may terminate his relationship with us at any time. Accordingly, we cannot be sure that either of these individuals or any of our other employees or consultants will remain with us. In the future they may take jobs or consulting positions with our competitors. These employees or consultants may also choose to organize competing companies or ventures. Our planned activities will require individuals with expertise in many areas including: - medicinal chemistry and other research specialties, - pre-clinical testing, - clinical trial management, - regulatory affairs, - manufacturing, and - business development. 49 51 These planned activities will require additional personnel, including management personnel, and will also require existing management personnel to develop added expertise. Recruiting and retaining qualified personnel, collaborators, advisors and consultants will be critical to our activities. We cannot be sure that we will be able to attract and retain the personnel necessary for the development of our business. Furthermore, the many pharmaceutical, biotechnology and health care companies and academic and other research institutions compete intensely for experienced scientists. If we are not able to hire the necessary experienced scientists or develop the necessary expertise, this inability could have a material adverse effect on our operations. In addition, we also depend on the support of our collaborators at research institutions and our consultants. LACK OF SALES AND MARKETING EXPERIENCE We currently do not have a sales force, and we have no experience in marketing or selling a product in a commercial setting. If we decide to establish an in-house sales force, our efforts may not be successful in this regard. In addition, if we succeed in bringing additional products to market, our sales force will have to compete with many other companies that currently have extensive and well-funded marketing and sales operations. We cannot be sure that our marketing and sales efforts would compete successfully against these other companies. HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS; ANIMAL TESTING Our research and development processes involve the controlled use of hazardous and radioactive materials. We and our collaborative partners are subject to international, federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous and radioactive materials. We believe that the safety procedures relating to our in-house research and development and manufacturing efforts comply in all material respects with the standards prescribed by such laws and regulations. However, we cannot completely eliminate the risk of accidental contamination or injury from these materials. Moreover, we cannot be sure that our collaborative partners are currently complying with the governing standards. We also cannot be sure that we and our collaborative partners will be in compliance with such standards in the future. If a regulatory authority determines that we or our collaborative partners are not complying with the governing laws and regulations, the determination could have a material adverse effect on our business, operations or finances. In addition, we and/or our collaborative partners could be held liable for damages, fines or other liability, which could exceed our resources. We believe that we are and will continue to be in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material capital expenditures for environmental control facilities in the near term. However we may still have to incur significant costs to comply with environmental laws and regulations in the future. In addition, future environmental laws or regulations may have a material adverse effect on our operations, business or assets. Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us or our collaborators by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts. 50 52 SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION AND EXCHANGE RIGHTS As of March 15, 1999, we had approximately 19.4 million shares of common stock outstanding. As of that date, we had issued options to purchase approximately an aggregate of 3.7 million shares of our common stock and warrants to purchase approximately 1.0 million additional shares of our common stock. A significant portion of our outstanding common stock is and shares issuable upon exercise of outstanding options and warrants would be freely tradable in the public markets. Holders of approximately 1.4 million shares of our common stock and warrants to purchase an additional 1.0 million shares, including Amgen, have certain rights to register the shares of common stock underlying these options and warrants with the SEC for sale in the public market. Holders of these registration rights may exercise them at any time. The exercise of these registration rights would permit the resale of some or all of such shares in the public market. If we were to initiate a public offering of our shares in the future in order to raise additional capital, the holders of these warrants and shares of our common stock could require us to include their shares in the registration. If the holders of these warrants and shares request inclusion in the registration, the sale of their shares could limit our ability to raise the desired additional capital. We cannot predict what effect, if any, sales of shares of our common stock by these other parties or the availability for sale such shares will have on the market prices of our common stock prevailing from time to time. The possibility that substantial amounts of our common stock may be sold in the public market could create a downward force on the prevailing market prices for our common stock. This possibility could also impair our ability to raise capital through the sale of our stock. During the term of the outstanding warrants and options, the holders can take advantage of a rise in the market price of our common stock by purchasing the shares underlying their warrants and options from us and then reselling those shares on the public market. The holders can profit from the difference between the price they have to pay to us to issue the shares to them and the higher price for which they can sell the shares on the public market. Accordingly, holders of options and warrants will most likely exercise them at times when the market price of our common stock is high relative to the exercise prices of the options and warrants with the intention of promptly reselling the shares in the public market. This practice could negatively affect our other stockholders in certain ways, including the following: - placing downward pressure on the market price for our common stock by adding to the volume of our shares available for sale at a given time; - diluting the interests of other stockholder by issuing shares at below-market prices upon the exercise of options and warrants; and - limiting our ability to sell shares our self to the public market since we might want to raise capital at times that our stock price is relatively higher. ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK Our certificate of incorporation and the Delaware General Corporation Law contain certain provisions, including the requirements of Section 203 of the Delaware General Corporation Law, that may delay or prevent an attempt by a third party to acquire control of us. In general, Section 203 51 53 prohibits certain business combinations (including mergers) for a period of three years between us and any third party who owns 15% or more of our common stock. This provision does not apply if: - our Board of Directors approves of the transaction before the third party acquires 15% of our stock, - the third party acquires at least 85% of our stock at the time its ownership goes past the 15% level, or - our Board of Directors and two-thirds of the shares of our common stock not held by the third party vote in favor of the transaction. We have also adopted a stockholder rights plan intended to deter hostile or coercive attempts to acquire us. Under the plan, if any person or group acquires more than 20% of our common stock without approval of the Board of Directors under certain circumstances, our other stockholders have the right to purchase shares of our common stock, or shares of the acquiring company, at a substantial discount to the public market price. The plan thus makes an acquisition much more costly to a potential acquirer. Our certificate of incorporation also authorizes us to issue up to 4,700,000 shares of preferred stock in one or more different series with terms fixed by the Board of Directors. We do not have to obtain stockholder approval to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult for a person or group to acquire control of us. No shares of our preferred stock are currently outstanding. While our Board of Directors has no current intentions or plans to issue any preferred stock, issuance of these shares could also be used as an anti-takeover device. ABSENCE OF DIVIDENDS We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. In addition, the terms of our current loan and lease agreements prohibit us from paying any cash dividends. YEAR 2000 COMPLIANCE We are conducting a review of our internal computer systems to determine whether these systems will experience a so-called "Year 2000 problem". We have also begun to make inquiries of third parties with which we do business with respect to their computer systems, to determine whether their systems will experience a Year 2000 problem. A Year 2000 problem would result from a computer system (which includes embedded software in computer chips) recognizing the first two digits of a year after the year 1999 as "19" instead of "20", thereby reading the wrong year. We expect to have identified and replaced or corrected all internal computer systems which would cause a Year 2000 problem prior to the end of the second quarter of 1999. We cannot be sure, however, that we will be able complete this project successfully. If we fail to identify and remedy Year 2000 problems, this failure could disrupt important operations which could affect the manufacture of GLIADEL as well as research, development and commercialization of our potential products. We would then be at a competitive disadvantage relative to companies that have corrected Year 2000 problems. In addition, the third parties with which we do business may not identify and replace in a timely manner those of their computer systems that will fail or not properly function because of a Year 2000 problem. These third parties include our corporate partners such as RPR and Amgen, our banks and 52 54 the financial institutions which hold our financial assets, and our significant vendors. Other than making inquiries of these third parties and assessing their responses, we are not in a position to verify independently the Year 2000 compliance status of these third parties. In most cases we have limited or no ability to directly influence the Year 2000 compliance activities of these third parties. Failure of any or all of these third parties to achieve substantial Year 2000 compliance could have a material adverse effect on our business, financial condition and results of operations. 53 55 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Stock Description and Form 10-K" on the inside back cover of the Company's 1998 Annual Report to Stockholders is included herein as Exhibit 13.01, and that portion is incorporated by reference into Part II of this report. The Company has never declared or paid any cash dividends and does not intend to do so for the foreseeable future. Under the Company's various loan and lease agreements with certain financial institutions, the Company may not declare, during the term of these agreements, any cash dividends on its common stock without the prior written consent of these financial institutions and, in certain cases, the Maryland Industrial Development Financing Authority. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" set forth in the 1998 Annual Report to Stockholders is included herein as Exhibit 13.01, and that portion is incorporated by reference into Part II of this report. Such information should be read in conjunction with the Consolidated Financial Statements of the Company and notes thereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" set forth in the 1998 Annual Report to Stockholders is included herein as Exhibit 13.01, and that portion is incorporated by reference into Part II of this report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's 1998 Consolidated Financial Statements and Independent Auditors' Report by KPMG LLP set forth in the Company's 1998 Annual Report to Stockholders, is included herein as Exhibit 13.01, and those portions are incorporated by reference into Part II of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 54 56 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's executive officers is contained in Item 1A of Part I. The information concerning the Company's directors and with regard to Item 405 of Regulation S-K is to be contained under the caption "Board of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1999 Proxy Statement, which will be filed no later than 120 days following December 31, 1998, and such information is hereby incorporated herein by reference. The directors and executive officers of the Company as of March 15, 1999 are as follows:
NAME AGE POSITION ---- --- -------- DIRECTORS: Craig R. Smith, M.D. 53 Chairman of the Board, President, and Chief Executive Officer George L. Bunting, Jr. 58 Director Richard L. Casey 52 Director Elizabeth M. Greetham 49 Director Joseph Klein, III 38 Director Solomon H, Snyder, M.D. 60 Director W. Leigh Thompson, M.D., Ph.D. 60 Director EXECUTIVE OFFICERS: John P. Brennan 56 Senior Vice President, Technical Operations and General Manager, Drug Delivery Business Andrew R. Jordan 51 Senior Vice President, Chief Financial Officer and Treasurer Peter D. Suzdak, Ph.D. 40 Senior Vice President, Research & Development Nicholas Landekic 40 Vice President, Business Development Thomas C. Seoh 41 Vice President, General Counsel and Secretary William C. Vincek, Ph.D. 51 Vice President, Corporate Quality David H. Bergstrom, Ph.D. 44 Vice President, Pharmaceutical and Chemical Development Dana C. Hilt, M.D. 46 Vice President, Clinical Research and Drug Metabolism Gregory M. Hockel, Ph.D. 48 Vice President, Regulatory Affairs Nancy J. Linck, Ph.D., J.D. 57 Vice President, Intellectual Property
ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from the information to be contained under the caption "Executive Compensation" in the Company's 1999 Proxy Statement, which will be filed no later than 120 days following December 31, 1998. 55 57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference from the information to be contained under the caption "Beneficial Ownership of Common Stock" in the Company's 1999 Proxy Statement, which will be filed no later than 120 days following December 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference from the information to be contained under the caption "Beneficial Ownership of Common Stock" and "Certain Relationships and Related Party Transactions" in the Company's 1999 Proxy Statement, which will be filed no later than 120 days following December 31, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following Consolidated Financial Statements of the Company and Independent Auditors' Report set forth on the pages indicated in the Company's 1998 Annual Report to Stockholders are included in Exhibit 13.01 to this report and are incorporated into Item 8 of this report: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Financial Statements (a)(2) Financial Statement Schedules 56 58 Schedule II--Valuation and Qualifying Accounts GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II (IN THOUSANDS)
BALANCE CHARGED TO BALANCE CLASSIFICATION @ 12/31/95 COSTS AND EXPENSES DEDUCTIONS @ 12/31/96 -------------- ---------- ------------------ ---------- ---------- Inventory Reserve $ -- -- -- $ --
BALANCE CHARGED TO BALANCE CLASSIFICATION @ 12/31/96 COSTS AND EXPENSES DEDUCTIONS @ 12/31/97 -------------- ---------- ------------------ ---------- ---------- Inventory Reserve $ -- $257 -- $257
BALANCE CHARGED TO BALANCE CLASSIFICATION @ 12/31/97 COSTS AND EXPENSES DEDUCTIONS @ 12/31/98 -------------- ---------- ------------------ ---------- ---------- Inventory Reserve $257 $ -- $ -- $257
All other schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below:
EXHIBIT NUMBER* DESCRIPTION - ------- ----------- 3.01A Amended and Restated Certificate of Incorporation of the Company. 3.01B Certificate of Amendment to Amended and Restated Certificate of Incorporation. 3.02A Amended and Restated By-laws of the Company. 3.02B Amendments to Amended and Restated By-laws of the Company (certain of which filed herewith and incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 4.01 Specimen Stock Certificate. 4.02A Stockholder Rights Agreement dated September 26, 1995. 4.02B Form of Amendment No. 1 to Stockholder Rights Agreement (incorporated by reference to Form 8-K, filed October 20, 1998) 10.01A 1993 Employee Share Option and Restricted Share Plan ("1993 Option Plan"). 10.01B Amendments to 1993 Option Plan. 10.01C 1998 Employee Share Option and Restricted Share Plan ("1998 Option Plan") (incorporated by reference to Form S-8, filed on February 12, 1999). 10.01D Amendment to 1998 Option Plan (filed herewith). 10.02A Series A Preferred Stock Purchase Agreement, dated September 30, 1993, as amended between the Company and holders of its Series A Preferred Stock ("Series A Agreement"). 10.02B Amendment, dated August 25, 1994, to Series A Agreement. 10.02C Amendment, dated February 15, 1995, to Series A Agreement.
57 59
EXHIBIT NUMBER* DESCRIPTION - ------- ----------- 10.03A+ License Agreement, effective March 18, 1994, between the Company and Research Triangle Institute, a not-for-profit corporation existing under the laws of North Carolina. 10.03B Appendix A to Exhibit 10.04. 10.04+ License Agreement, dated March 15, 1994, between the Company and Scios Nova. 10.05 Employment Agreement between the Company and Craig R. Smith, M.D. 10.06 Employment Agreement between the Company and Andrew R. Jordan. 10.07 Employment Agreement between the Company and John P. Brennan. 10.08 (Intentionally Omitted) 10.09 Employment Agreement between the Company and William C. Vincek, Ph.D. 10.10 Employment Agreement between the Company and Peter D. Suzdak. 10.11 Employment Agreement between the Company and Nicholas Landekic. 10.12 Employment Agreement between the Company and Thomas C. Seoh. 10.13A Amendments to certain executive officer employment letter agreements. 10.13B Form of Change in Control Severance Agreement (incorporated be reference to the Form 10-Q for the quarter ended September 30, 1998). 10.13C Severance Provisions from Employment Letter Agreement, effective September 21, 1998, with Nancy J. Linck (incorporated be reference to the Form 10-Q for the quarter ended September 30, 1998). 10.14 (Intentionally Omitted)
58 60
EXHIBIT NUMBER* DESCRIPTION - ------- ----------- 10.15A Consulting Agreement, dated August 1, 1993, as amended on February 28, 1994, between the Company and Solomon H. Snyder, M.D (the "Snyder Consulting Agreement"). 10.15B September 1, 1995 amendment to Snyder Consulting Agreement. 10.15C November 19, 1997 amendment to Snyder Consulting Agreement. 10.15D September 1, 1998 and January 1, 1999 amendments to Snyder Consulting Agreement (filed herewith). 10.16A+ License Agreement, dated December 20, 1993, between the Company and The Johns Hopkins University ("JHU Agreement"). 10.16B Appendix B to JHU Agreement. 10.16C+ Amended and Restated License Agreement, effective November 25, 1998, between the Company and Johns Hopkins (filed herewith). 10.17 Form of Director and Officer Indemnification Agreement. 10.18 Form of Tax Indemnity Agreement. 10.19A Guilford Pharmaceuticals Inc. Directors' Stock Option Plan. 10.19B Amendments to Directors' Stock Option Plan (certain of which filed herewith). 10.19C Amendment to Form of Directors' Stock Option Agreement (filed herewith). 10.20 Lease Agreement, dated August 30, 1994, between Crown Royal, L.P. and the Company. 10.21A Lease Agreement, dated June 9, 1997 between SN Properties, Inc. and the Company ("Freeport Lease"). 10.21B Amendment, dated February 10, 1998, to Freeport Lease. 10.22(1) Employment Letter Agreement, effective March 8, 1998, between the Company and Gregory M. Hockel, Ph.D. 10.23(1) Employment Letter Agreement, effective January 27, 1998, between the Company and Dana C. Hilt, M.D. 10.24 Exchange and Registration Rights Agreement, dated February 17, 1995, among the Company and the Abell Foundation, Inc., and the several holders named in Appendix I. 10.25A Loan and Financing Agreement between the Maryland Economic Development Corporation ("MEDCO"), the Company and Signet Bank/Maryland ("Signet") ("L&F Agreement"). 10.25B Amendment No. 1, dated June 30, 1998, to L&F Agreement (incorporated be reference to the Form 10-Q for the quarter ended June, 1998) 10.26 Leasehold Deed of Trust by and between the Company and Janice E. Godwin and Ross Chaffin (as trustees) for the benefit of MEDCO and Signet. 10.27A Insurance Agreement between the Maryland Industrial Development Financing Authority and Signet ("Insurance Agreement"). 10.27B Letter, dated April 2, 1996, amending Insurance Agreement. 10.27C Amendment No. 2, dated June 29, 1998, to Insurance Agreement (incorporated by reference to the Form 10-Q for the quarter ended June 30, 1998). 10.28+ License Agreement, dated December 9, 1995, by and between the Company and Daiichi Radioisotope Laboratories, Ltd. 10.29+ License and Distribution Agreement, dated October 13, 1995, by and between the Company and Orion Corporation Farmos. 10.30 Employment Letter Agreement, effective June 10, 1998, between the Company and David H. Bergstrom, Ph.D. 10.31 Master Lease Agreement, dated March 19, 1998, by and between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc., and the Company (incorporated by reference to Form 10-Q for the quarter ended March 31, 1998).
58 61
EXHIBIT NUMBER* DESCRIPTION - ------- ----------- 10.32+ Bulk Pharmaceutical Sales Contract, dated September 23, 1994, between the Company and Aerojet-General Corporation. 10.33 Equipment Lease, dated September 18, 1996, between the Company and General Electric Capital Corporation. 10.34 Term Loan, dated April 30, 1996, as amended on December 6, 1996, by and between the Company and Signet Bank. 10.35A Marketing, Sales and Distribution Rights Agreement between Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPR"), the Company and GPI Holdings, Inc., dated June 13, 1996 ("MSDA"). 10.35B+ Amendment No. 1 to MDSA, dated September 25, 1998 (incorporated by reference to Form 8-K, filed October 2, 1998). 10.36 Manufacturing and Supply Agreement between RPR and the Company, dated June 13, 1996. 10.37A Stock Purchase Agreement between the Company and Rhone-Poulenc Rorer Inc. ("RPR Inc."), dated June 13, 1996 ("RPR Stock Purchase Agreement"). 10.37B Amendment No. 1 to RPR Stock Purchase Agreement, dated September 25, 1998 (incorporated by reference to Form 8-K, filed October 2, 1998). 10.38 Loan Agreement between the Company and RPR Inc., dated June 13, 1996. 10.39 (Intentionally Omitted) 10.40+ Collaboration and License Agreement, dated December 15, 1997 and effective as of August 20, 1997, between Amgen Inc. ("Amgen"), GPI NIL Holdings, Inc. and the Company. 10.41 Stock and Warrant Purchase Agreement, dated October 1, 1997, between Amgen and the Company. 10.42 Registration Rights Agreement, dated October 1, 1997, between Amgen and the Company. 10.43 Warrant, dated October 1, 1997 issued to Amgen. 10.44 Security Agreement, dated as of February 5, 1998, between First Security Bank, National Association ("First Security"), not individually, but solely as the Owner Trustee under the Guilford Real Estate Trust 1998-1 (the "Trust") and First Union. 10.45 Amended and Restated Trust Agreement, dated as of February 5, 1998 between the Several Holders from time to time parties thereto and the Trust. 10.46 Agency Agreement, dated as of February 5, 1998, between the Company and the Trust. 10.47 Credit Agreement, dated as of February 5, 1998, among the Trust, the Several Holders from time to time parties thereto and First Union. 10.48 Participation Agreement, dated as of February 5, 1998, among the Company, the Trust, the various and other lending institutions which are parties hereto from time to time, as Holders, the various and other lending institutions which are parties hereto from time to time, as Lenders, and First Union. 10.49 Lease Agreement, dated as of February 5, 1998, between the Trust and the Company. 10.50 MIDFA Agreement, dated June 29, 1998, by and between MIDFA, First Security, the Company and First Union (incorporated by reference to Form 10-Q for the quarter ended June 30, 1998). 10.51 Insurance Agreement, dated June 29, 1998, by and between MIDFA and First Union (incorporated by reference to Form 10-Q for the quarter ended June 30, 1998). 11.01 Statement re: Computation of Per Share Earnings (See Notes to Consolidated Financial Statements). 13.01 Portions of the Company's 1998 Annual Report to Stockholders (filed herewith).
59 62
EXHIBIT NUMBER* DESCRIPTION - ------- ----------- 21.01 Subsidiaries of Registrant (filed herewith). 23.01 Consent of KPMG LLP (filed herewith). 24.01 Power of Attorney (contained in signature page). 27.01 Financial Data Schedule (filed herewith).
- --------------- * Unless otherwise noted above, all exhibits referenced above are incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. + Confidential treatment of certain portions of these agreements has been granted by the Securities and Exchange Commission. (b) Reports on 8-K: (1) On October 2, 1998, the Company filed a Current Report on Form 8-K, the purpose of which was to summarize the material terms of amendments to certain of the Company's agreements with RPR and to file those amendments as exhibits. (2) On October 20, 1998, the Company filed a Current Report on Form 8-K, the purpose of which was to file the form of the First Amendment to the Company's Shareholder Rights Agreement, dated September 26, 1995. 60 63 SIGNATURES AND POWER OF ATTORNEY 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. March 30, 1999 GUILFORD PHARMACEUTICALS INC. By: /s/ CRAIG R. SMITH, M.D. ------------------------------------ Craig R. Smith, M.D. President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints, Craig R. Smith, M.D., Andrew R. Jordan, Thomas C. Seoh, Jordan P. Karp and Michael J. Silver, and each of them, his or her true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution, from such person and in each person's name, place and stead, in any and all capacities, to sign the report and any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CRAIG R. SMITH, M.D. Chief Executive Officer, President March 30, 1999 - ----------------------------------------------------- and Director (Principal Craig R. Smith, M.D. Executive Officer) /s/ ANDREW R. JORDAN Sr. Vice President, Chief March 30, 1999 - ----------------------------------------------------- Financial Officer, and Treasurer Andrew R. Jordan (Principal Financial Officer and Principal Accounting Officer) /s/ SOLOMON H. SNYDER, M.D. Director March 30, 1999 - ----------------------------------------------------- Solomon H. Snyder, M.D. /s/ RICHARD L. CASEY Director March 30, 1999 - ----------------------------------------------------- Richard L. Casey /s/ GEORGE L. BUNTING, JR. Director March 30, 1999 - ----------------------------------------------------- George L. Bunting, Jr. /s/ W. LEIGH THOMPSON, M.D., PH.D. Director March 30, 1999 - ----------------------------------------------------- W. Leigh Thompson, M.D., Ph.D. /s/ ELIZABETH M. GREETHAM Director March 30, 1999 - ----------------------------------------------------- Elizabeth M. Greetham /s/ JOSEPH KLEIN, III Director March 30, 1999 - ----------------------------------------------------- Joseph Klein, III
61 EX-3.02B 2 AMENDMENT TO AMENDED AND RESTATED BY-LAWS 1 EXHIBIT 3.02B THE FOLLOWING AMENDMENTS TO THE REGISTRANT'S AMENDED AND RESTATED BYLAWS WERE ADOPTED BY THE BOARD OF DIRECTORS AT A MEETING HELD ON NOVEMBER 17, 1998: Section 2.11 of the Registrant's Amended and Restated Bylaws is amended to read in its entirety: "2.11. Nominating Committee. Only persons who are nominated in accordance with the procedures set forth in this Section 2.11 shall be eligible for election as directors. Nominations of persons for election to the Board of directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.11. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation at least 45 days before the date on which the Corporation mailed its notice of the annual meeting of stockholder and proxy materials for the previous year's annual meeting of stockholders; provided, however, that if the Corporation did not hold an annual meeting of stockholders the previous year, or if the date of the current year's meeting has changed more than 30 days from the prior year, the stockholder's notice must be received not later than the close of business on the 10th day following the day on which notice of the date of the meeting is mailed or public disclosure of the date of the meeting is made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No later than the tenth day following the date of receipt of a stockholder nomination submitted pursuant to this Section 2.11, the Chairman of the Board of Directors of the Corporation shall, if the facts warrant, determine and notify in writing the stockholder making such nomination that such nomination was not made in accordance with the time limits and/or other procedures prescribed by the Bylaws. If no such notification is mailed to such stockholder within such ten-day period, such nomination shall be deemed to have been made in accordance with the provisions of this Section 2.11. No person shall be eligible for election as a 2 director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.11." Section 2.12 of the Registrant's Amended and Restated Bylaws is amended to read in its entirety: "2.12. Business at Annual Meeting. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation at least 45 days before the date on which the Corporation mailed its notice of the annual meeting of stockholder and proxy materials for the previous year's annual meeting of stockholders; provided, however, that if the Corporation did not hold an annual meeting of stockholders the previous year, or if the date of the current year's meeting has changed more than 30 days from the prior year, the stockholder's notice must be received not later than the close of business on the 10th day following the day on which notice of the date of the meeting is mailed or public disclosure of the date of the meeting is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. No later than the tenth day following the date of receipt of a shareholder notice pursuant to this Section 2.12, the Chairman of the Board of Directors of the Corporation shall, if the facts warrant, determine and notify in writing the stockholder submitting such notice that such notice was not made in accordance with the time limits and/or other procedures prescribed by the Bylaws. If no such notification is mailed to such shareholder within such ten-day period, such stockholder notice containing a matter of business shall be deemed to have been made in accordance with the provisions of this Section 2.12. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.12." Effective, March 30, 1999, Section 2.3 of the Registrant's Amended and Restated Bylaws is amended to read in its entirety: "2.3 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may only be called by a majority of the Board of Directors or by the Chairman of the Board of Directors." Section 3.7 of the Registrant's Amended and Restated Bylaws is amended to read in its entirety: 3 "3.7 Special Meetings. Special meetings of the board may be called by the Chairman on one day's notice to each director, personally, or by telephone, mail, facsimile, electronic mail, or telegram; special meetings shall be called by the Chairman or Secretary in like manner on like notice on the written request of one-half of the total number of directors." The last sentence of Section 4.1 of the Registrant's Amended and Restated Bylaws is amended to read in its entirety: "Notice to directors may also be given by facsimile, electronic mail, telegram, or telephone." EX-10.01D 3 AMENDMENT TO 1998 OPTION PLAN 1 EXHIBIT 10.01D AMENDMENT TO 1998 EMPLOYEE SHARE OPTION AND RESTRICTED SHARE PLAN ADOPTED BY THE BOARD OF DIRECTORS ON FEBRUARY 23, 1999 As of February 23, 1999, the number of shares of Guilford common stock covered by the 1998 Employee Share Option and Restricted Share Plan, as set forth in Section 4 of said plan, is increased from 600,000 shares to 1,100,000 shares. EX-10.15D 4 AMENDMENTS TO SNYDER CONSULTING AGREEMENT 1 EXHIBIT 10.15D AMENDMENT NO. 1 TO CONSULTING AGREEMENT THIS AMENDMENT NO. 1 ("Amendment") is effective as of September 1, 1998 ("Effective Date"), by and between Guilford Pharmaceuticals Inc., a Delaware corporation (the "Company"), and Solomon H. Snyder, M.D., an individual residing in the State of Maryland (the "Consultant"). WHEREAS, the Company and the Consultant are parties to a Consulting Agreement dated September 1, 1995 ("Consulting Agreement"), pursuant to which the Consultant has provided consulting services to the Company; and WHEREAS, the parties desire to extend such consulting relationship on the terms and conditions contained herein; NOW THEREFORE, in consideration of the foregoing, the mutual promises of the parties hereunder, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Consultant and the Company hereby agree as follows: 1. The term of the Consulting Agreement is hereby extended for the period commencing September 1, 1998 through December 31, 1998 (the "First Extension"). 2. In consideration of the performance of the Services by the Consultant during the First Extension, the Company agrees to pay the Consultant at a rate of $14,166.67 per month, payable in arrears. 3. Except as explicitly set forth in paragraph 2 above and in the Consulting Agreement, Consultant shall receive no other compensation (whether in cash, stock options or otherwise) for his Services during the First Extension. 4. The Consultant represents and warrants to the Company that the Consultant is, as of the Effective Date, under no contractual or other restriction or obligation, including agreements or understandings with third parties, which conflicts with the Consulting Agreement as amended hereby, the performance of his duties under the Consulting Agreement as amended hereby, or the other obligations of the Consultant to the Company. Attached hereto as Exhibit A is a current list of Consultant's board of directors, scientific advisory board and/or other consulting arrangements and affiliations. 5. The parties acknowledge that they may enter into a further amendment of the Consulting Agreement or a new superseding consulting agreement in the future, the 2 effect of which may be to make retroactive modifications to the terms (including those regarding compensation) of the Consulting Agreement and/or this Amendment. The foregoing notwithstanding, the parties agree that this Amendment and the Consulting Agreement shall not be amended or supplemented except by a written document executed and delivered by both parties hereto. The failure on the part of either party to enforce, or any delay in enforcing, any right, power or remedy that such party may have under this Amendment or the Consulting Agreement shall not constitute a waiver of any such right, power or remedy, or release the other party from any obligations under this Amendment or the Consulting Agreement, except by a written document signed by the party against whom such waiver or release is sought to be enforced. 6. Except as specifically set forth above in this Amendment, the terms of the Consulting Agreement remain unchanged and in full force and effect as set forth therein. 7. Capitalized terms used in this Amendment that have not been defined herein shall have the meanings ascribed in the Consulting Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment No. 1 as of the Effective Date. GUILFORD PHARMACEUTICALS INC. By: /s/ Craig R. Smith, M.D. ----------------------------------------- Name: Craig R. Smith, M.D. Title: President and Chief Executive Officer CONSULTANT /s/ Solomon H. Snyder, M.D. - -------------------------------------------- Solomon H. Snyder, M.D. Address: 3801 Canterbury Road, No. 1001 Baltimore, Maryland 21218 2 3 AMENDMENT NO. 2 TO CONSULTING AGREEMENT THIS AMENDMENT NO. 2 ("Amendment") is effective as of January 1, 1999 ("Effective Date"), by and between Guilford Pharmaceuticals Inc., a Delaware corporation (the "Company"), and Solomon H. Snyder, M.D., an individual residing in the State of Maryland (the "Consultant"). WHEREAS, the Company and the Consultant are parties to a Consulting Agreement dated September 1, 1995, as amended June 7, 1996 and September 1, 1998 ("Consulting Agreement"), pursuant to which the Consultant has provided consulting services to the Company; and WHEREAS, the parties desire to extend such consulting relationship on the terms and conditions contained herein; NOW THEREFORE, in consideration of the foregoing, the mutual promises of the parties hereunder, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Consultant and the Company hereby agree as follows: 8. The term of the Consulting Agreement is hereby extended for the period commencing January 1, 1999 through March 31, 1999 (the "Second Extension"). 9. In consideration of the performance of the Services by the Consultant during the First Extension, the Company agrees to pay the Consultant at a rate of $14,166.67 per month, payable in arrears. 10. Except as explicitly set forth in paragraph 2 above and in the Consulting Agreement, Consultant shall receive no other compensation (whether in cash, stock options or otherwise) for his Services during the First Extension. 11. The Consultant represents and warrants to the Company that the Consultant is, as of the Effective Date, under no contractual or other restriction or obligation, including agreements or understandings with third parties, which conflicts with the Consulting Agreement as amended hereby, the performance of his duties under the Consulting Agreement as amended hereby, or the other obligations of the Consultant to the Company. 12. The parties acknowledge that they may enter into a further amendment of the Consulting Agreement or a new superseding consulting agreement in the future, the effect of which may be to make retroactive modifications to the terms (including 3 4 those regarding compensation) of the Consulting Agreement and/or this Amendment. The foregoing notwithstanding, the parties agree that this Amendment and the Consulting Agreement shall not be amended or supplemented except by a written document executed and delivered by both parties hereto. The failure on the part of either party to enforce, or any delay in enforcing, any right, power or remedy that such party may have under this Amendment or the Consulting Agreement shall not constitute a waiver of any such right, power or remedy, or release the other party from any obligations under this Amendment or the Consulting Agreement, except by a written document signed by the party against whom such waiver or release is sought to be enforced. 13. Except as specifically set forth above in this Amendment, the terms of the Consulting Agreement remain unchanged and in full force and effect as set forth therein. 14. Capitalized terms used in this Amendment that have not been defined herein shall have the meanings ascribed in the Consulting Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment No. 2 as of the Effective Date. GUILFORD PHARMACEUTICALS INC. By: /s/ Craig R. Smith, M.D. ----------------------------------------- Name: Craig R. Smith, M.D. Title: President and Chief Executive Officer CONSULTANT /s/ Solomon H. Snyder, M.D. - -------------------------------------------- Solomon H. Snyder, M.D. Address: 3801 Canterbury Road, No. 1001 Baltimore, Maryland 21218 4 EX-10.16C 5 AMENDED AND RESTATED LICENSE AGREEMENT 1 EXHIBIT 10.16C AMENDED AND RESTATED LICENSE AGREEMENT This Amended and Restated License Agreement, is made and entered into as of the date of the last signature on the signature page below (the "EFFECTIVE DATE"), between The Johns Hopkins University, a Maryland corporation, having a principal place of business at 720 Rutland Avenue, Baltimore, Maryland 21205 ("JHU"), and Guilford Pharmaceuticals Inc., a Delaware corporation ("GPI"), having an address at 6611 Tributary Street, Baltimore, Maryland 21224, and its indirect, wholly-owned subsidiary, GPI NIL Holdings, Inc., a Delaware corporation ("HOLDINGS," and together with GPI, the "COMPANY"), having an address at 222 Delaware Avenue, Wilmington, Delaware, 19899. WITNESSETH: WHEREAS, GPI and JHU entered into a License Agreement dated January 2, 1996 (the "1996 AGREEMENT") relating to (a) * and the invention disclosed and claimed therein; (b) * and the invention disclosed and claimed therein; (c) all continuations, divisions, and reissues based on the above-cited applications and any corresponding foreign patent applications; and (d) any patents, patents of addition, or other U.S. or equivalent foreign patent rights issuing, granted or registered thereon (collectively, the "1996 NIL PATENT RIGHTS"); WHEREAS, GPI and JHU entered into an Amended and Restated License Agreement dated June 26, 1997 (the "1997 AGREEMENT") relating to certain patents and patent rights including, among others, (a) *; (b) all continuations, divisions, and reissues based on the above-cited applications and any corresponding foreign patent applications; and (c) any patents, patents of addition, or other U.S. or equivalent foreign patent rights issuing, granted or registered thereon (collectively, the "1997 NIL PATENT RIGHTS"); WHEREAS, JHU has filed the following patent applications: (a) *; (b) *; and (c) * (collectively, the "1997 JHU NIL PATENT FILINGS"). WHEREAS, pursuant to assignment agreements dated August 1, 1997, GPI assigned its rights to the 1996 NIL PATENT RIGHTS and the 1997 NIL PATENT RIGHTS under the 1996 AGREEMENT and the 1997 AGREEMENT, respectively, to its AFFILIATED COMPANY, HOLDINGS; WHEREAS, as a center for research and education, JHU is interested in licensing patent rights in a manner that will benefit the public by facilitating the distribution of useful products and the utilization of new methods, but is itself -1- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 2 without capacity to commercially develop, manufacture and distribute any such products or methods; WHEREAS, the COMPANY desires to commercially develop, manufacture, use and distribute such products and methods based on such inventions throughout the world; and WHEREAS, the COMPANY and JHU desire to amend and restate the 1996 AGREEMENT in its entirety, and to amend the 1997 AGREEMENT to the extent it relates to the 1997 NIL PATENT RIGHTS, and to effect the exclusive worldwide license from JHU to HOLDINGS of the 1997 JHU NIL PATENT FILINGS; NOW THEREFORE, in consideration of the foregoing premises and the following mutual covenants, and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: ARTICLE 1 - DEFINITIONS 1.1 "AFFILIATED COMPANY" or AFFILIATED COMPANIES" shall mean any corporation, company, partnership, joint venture or other entity which controls, is controlled by, or is under common control with, the COMPANY. For purpose of this Paragraph 1.1, control shall mean the direct or indirect ownership of at least fifty percent (50%) of the outstanding voting securities or partnership interests, as applicable, of such corporation, company, partnership, joint venture or other entity. 1.2 "CONTROL" or "CONTROLLED" shall mean possession of the right to grant a license or sublicense without violating the terms of any agreement or other arrangements with a third party. 1.3 "EXCLUSIVE LICENSE" shall mean an exclusive, worldwide grant by JHU to the COMPANY of JHU's entire right and interest in the JHU NEUROIMMUNOPHILIN PATENT RIGHTS, subject to rights, if any, retained by the United States government under applicable law, and subject to the retained right of JHU to make, have made, provide and use for its and the Johns Hopkins Health Service's non-profit internal research purposes LICENSED PRODUCT(S) and LICENSED SERVICE(S). 1.4 "FIELD" shall mean indications involving the use of NEUROIMMUNOPHILIN TECHNOLOGY to the extent such technology relates to inducing neurite extension or other neuronal effects. By way of illustration, but not -2- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 3 limitation, the FIELD includes all Category One Indications and all Category Two Indications, but does not include Category Three and Category Four Indications (as such categories are defined as of December 15, 1997 in the Amgen Agreement) unless the therapeutic activity of such compounds for such Category Three or Category Four Indication relates to inducing neurite extension or other neuronal effects. 1.5 "FDA" shall mean the United States Food and Drug Administration or successor agency having responsibility for regulation of pharmaceutical products. 1.6 "IND" shall mean an Investigational New Drug Application or its equivalent. 1.7 "LICENSED PRODUCT(S)" shall mean any material, composition, drug, or other product, the manufacture, use, sale or importation of which would constitute, but for HOLDINGS' joint ownership interest therein or the license granted to HOLDINGS pursuant to this Agreement, an infringement of a valid, issued claim of JHU NEUROIMMUNOPHILIN PATENT RIGHTS owned by JHU (infringement shall include, but is not limited to, direct, contributory, or inducement to infringe). 1.8 "LICENSED SERVICE(S)" shall mean the performance on behalf of a third party of any service which would constitute, but for HOLDINGS' joint ownership interest therein or the license granted to HOLDINGS pursuant to this Agreement, an infringement of a valid, issued claim of JHU NEUROIMMUNOPHILIN PATENT RIGHTS owned by JHU (infringement shall include, but not be limited to, direct, contributory or inducement to infringe). 1.9 "NDA" shall mean a New Drug Application, a Product License Application or its equivalent. 1.10 "NET SALES", subject to Paragraph 4.5 below, shall mean gross sales revenues and fees (but not royalty payments) received by the COMPANY, AFFILIATED COMPANIES or SUBLICENSEES, as the case may be, from the sale of ROYALTY PRODUCT(S) to third parties in arms length transactions, less trade discounts allowed, refunds, returns and recalls, transportation charges, and sales, use, value added, withholding and other taxes. In the event that the COMPANY, an AFFILIATED COMPANY or SUBLICENSE sells a ROYALTY PRODUCT(S) in combination with other active ingredients or substances, the NET SALES for purposes of royalty payments shall be based on the sales revenues and fees received with respect to the sales price of the components consisting of ROYALTY -3- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 4 PRODUCT(S), and if such active components are not priced separately, based on such sales price as the COMPANY, AFFILIATED COMPANY or SUBLICENSEE may reasonably allocate to the ROYALTY PRODUCT(S) included in such combination, subject to the reasonable approval of JHU. 1.11 "NET SERVICE REVENUES", subject to Paragraph 4.5 below, shall mean actual billings by the COMPANY, AFFILIATED COMPANIES or SUBLICENSEES, as the case may be, for the performance of ROYALTY SERVICE(S) less sales, use, value added, withholding or other taxes imposed upon and with specific reference to the ROYALTY SERVICE(S) (excluding tax measured and assessed solely on the net income of the COMPANY). 1.12 "JHU NEUROIMMUNOPHILIN PATENT RIGHTS" shall mean (i) the 1996 NIL PATENT RIGHTS; (ii) the 1997 NIL PATENT RIGHTS; (iii) the 1997 JHU NIL PATENT FILINGS; and (iv) all claims of parent, continuing, continuation-in-part (if and to the extent the new matter in the CIP supports claims originally filed in the parent application or the claims in the CIP are supported by the original disclosure in the parent application), reissue and reexamination applications and patents, foreign and domestic, which are directed to the subject matter specifically described in the patent applications set forth in clauses (i) through and including (iii) above and all resulting patents. 1.13 "NEUROIMMUNOPHILIN TECHNOLOGY" shall mean technology relating to compounds that bind to immunophilins and/or modify rotamase activity of an immunophilin (including but not limited to FK506 binding proteins and cyclophilins) or any downstream signalling pathways, including, without limitation, the COLLABORATION TECHNOLOGY as that term is defined as of December 15, 1997 in the Collaboration and License Agreement of same date among GPI, HOLDINGS, and Amgen Inc. (the "Amgen Agreement"). 1.14 "PARTNERSHIP PROCEEDS" shall mean all signing and licensing fees and rights, milestones and other payments received by the COMPANY or any AFFILIATED COMPANY pursuant to any agreement with any SUBLICENSEE related to the research, development and/or commercialization of NEUROIMMUNOPHILIN TECHNOLOGY, but excluding any amounts received by the COMPANY or any AFFILIATED COMPANY (i) in consideration for issuance of any SECURITIES except to the extent that the amount paid for such SECURITIES exceeds 150% of the fair market value of any such SECURITY; (ii) which are dedicated, pursuant to express written agreement between the COMPANY or any AFFILIATED COMPANY and a SUBLICENSEE, to support or pay for research, development and/or commercialization of NEUROIMMUNOPHILIN TECHNOLOGY at, or under the direction of, the COMPANY or an AFFILIATED -4- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 5 COMPANY; (iii) specifically directed to reimburse or prepay the COMPANY or any AFFILIATED COMPANY for expenses or expenditures made or to be incurred as part of the research, development and/or commercialization of NEUROIMMUNOPHILIN TECHNOLOGY; (iv) if the COMPANY retains or assumes responsibility or pays for manufacture of a supply of product or product candidate, any transfer price for supply of such product or product candidate; or (v) as NET SALES or NET SERVICES or running royalties paid thereon. The foregoing exceptions to PARTNERSHIP PROCEEDS contained in clauses (ii) and (iii) extend only to payments from SUBLICENSEES to the COMPANY or any AFFILIATED COMPANY which, consistent with industry custom and practice, are to be applied to, or are to reimburse, costs incurred in commercializing NEUROIMMUNOPHILIN TECHNOLOGY, and in clause (iv) above in order to exclude bona fide consideration, within a range consistent with industry custom and practice, that a SUBLICENSEE may agree to pay the COMPANY or an AFFILIATED COMPANY for the supply of product or product candidates. Such exceptions shall not be construed to afford the COMPANY an opportunity to minimize the amount of PARTNERSHIP PROCEEDS payable by the COMPANY to JHU under this Agreement by unfairly recharacterizing the nature of such payments. In the event any dispute arises among the parties as to whether proceeds received by the COMPANY or any AFFILIATED COMPANY from a SUBLICENSEE qualify for the exceptions set forth in any of clauses (ii) through (iv) above, the parties agree that such dispute shall be resolved in such a manner as to give effect to the illustrative characterization agreed by the parties in SCHEDULE 4.9 attached to this Agreement, industry custom and practice, and the mutual intention of the parties expressed in the preceding two sentences. 1.15 "PATENTED ROYALTY PRODUCT" shall mean any material, composition, drug, or other product (including without limitation any LICENSED PRODUCT), the manufacture, use, sale or importation of which would constitute infringement of a claim of a valid, issued patent in the TERRITORY included within the NEUROIMMUNOPHILIN TECHNOLOGY that is owned by or under the CONTROL of JHU (to the extent such patent has been licensed by JHU to the COMPANY under this Agreement), the COMPANY, an AFFILIATED COMPANY or a SUBLICENSEE (provided in the latter case that the COMPANY or an AFFILIATED COMPANY has a right to receive consideration from such SUBLICENSEE in respect of such patent) were it not for such ownership or CONTROL of said patent. 1.16 "PATENTED ROYALTY SERVICE" shall mean the performance of any service or the manufacture of any product or the use of any product (including any LICENSED SERVICE), on behalf of a third party which would -5- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 6 constitute infringement of a claim of a valid, issued patent in the TERRITORY included within the NEUROIMMUNOPHILIN TECHNOLOGY that is owned by or under the CONTROL of JHU (to the extent such patent has been licensed by JHU to the COMPANY under this Agreement), the COMPANY, an AFFILIATED COMPANY or a SUBLICENSEE (provided in the latter case that the COMPANY or an AFFILIATED COMPANY has a right to receive consideration from such SUBLICENSEE in respect of such patent) were it not for such ownership or CONTROL of said patent. 1.17 "ROYALTY PRODUCT(S)" shall mean PATENTED ROYALTY PRODUCT(S) and UNPATENTED ROYALTY PRODUCT(S). 1.18 "ROYALTY SERVICE(S)" shall mean PATENTED ROYALTY SERVICE(S) and UNPATENTED ROYALTY SERVICE(S). For the avoidance of doubt, for purposes of this Agreement, ROYALTY SERVICES shall not include services rendered by third party vendors engaged by the COMPANY, an AFFILIATED COMPANY and/or a SUBLICENSEE to the extent such vendors are merely performing services or supplying product in support of the research, pre-clinical or clinical development and/or manufacture or supply of ROYALTY PRODUCTS or ROYALTY SERVICES. 1.19 "SECURITIES" shall mean any equity, debt or other securities (including, without limitation, any option, warrant, convertible equity or debt, or other derivative security) issued by the COMPANY. 1.20 "SUBLICENSEE" shall mean any and all entities (other than the COMPANY) that are authorized by the COMPANY to make, have made, use, sell, import, export, or provide any ROYALTY PRODUCT or ROYALTY SERVICE. 1.21 "TERRITORY" shall mean each country or other distinct national jurisdiction, taken separately, around the world. 1.22 "UNPATENTED ROYALTY PRODUCT" shall mean a product in the FIELD encompassing ligands that bind to immunophilins which is not a PATENTED ROYALTY PRODUCT in respect of which the COMPANY or any AFFILIATED COMPANY receives NET SALES or receives a royalty from a SUBLICENSEE. 1.23 "UNPATENTED ROYALTY SERVICE" shall mean the performance on behalf of a third party of any service that includes the making, use or sale of an UNPATENTED ROYALTY PRODUCT and in respect of which the COMPANY or any AFFILIATED COMPANY receives NET SERVICE REVENUES or receives a royalty from a SUBLICENSEE. -6- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 7 ARTICLE 2 - GRANTS 2.1 Subject to the terms and conditions of this Agreement, JHU hereby grants to HOLDINGS an EXCLUSIVE LICENSE to make, have made, use, lease, sell and import in all cases for any purpose the LICENSED PRODUCT(S) and to provide the LICENSED SERVICE(S) in the TERRITORY under the JHU NEUROIMMUNOPHILIN PATENT RIGHTS. 2.2 HOLDINGS may sublicense others under this Agreement and shall provide a copy of each such sublicense agreement to JHU promptly after it is executed. Each sublicense shall be consistent with the terms of this Agreement. JHU acknowledges prior receipt of the Amgen Agreement and the sublicenses granted thereunder respecting certain of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS. ARTICLE 3 - PATENT INFRINGEMENT 3.1 In the event JHU or the COMPANY shall learn of the substantial infringement of any patent included within JHU NEUROIMMUNOPHILIN PATENT RIGHTS, the party who learns of the infringement shall promptly notify the other party in writing and shall provide the other party with all available evidence of such infringement. HOLDINGS and JHU shall use commercially reasonable efforts to eliminate such infringement without litigation. If the efforts of the parties are not successful in eliminating the infringement within ninety (90) days after the infringer has been formally notified of the infringement by HOLDINGS, HOLDINGS shall have the right, but not the obligation, to commence suit against such infringement on its own account; provided that, HOLDINGS may elect to commence any such suit prior to said ninety (90) day period. 3.2 Subject to Paragraph 3.1 above, JHU may bring suit on its own account and at its cost, but only if HOLDINGS elects not to commence suit, either by formal notice or by failure by HOLDINGS to act within ninety (90) days following the end of the initial ninety (90) day period referenced in Paragraph 3.1 above. The COMPANY shall retain the right to join any suit initiated by JHU. 3.3 If JHU is made a party through the actions of HOLDINGS to an infringement suit brought by HOLDINGS, any costs, expenses or fees incurred by JHU as a result of such action shall be reimbursed by HOLDINGS, provided that nothing herein shall be deemed to require HOLDINGS to reimburse JHU for any such costs incurred by JHU as a result of JHU's suit on its account pursuant to Paragraph 3.2 above. -7- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 8 3.4 Legal action to eliminate infringement and/or recover damages brought pursuant to this ARTICLE 3 shall be at the full expense of the party by whom suit is brought. All such damages actually recovered by a party hereto ("LITIGATION PROCEEDS") shall first be used to reimburse each party for its expenses in connection with such legal action (in proportion to the expenses of each party, if recovery is insufficient to cover all such expenses) and the remainder of such LITIGATION PROCEEDS (the "REMAINDER") shall be allocated 85% to the party hereto taking the lead in representing the interests of the owners of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS in the action, and 15% to the other party hereto. 3.5 Each party agrees to cooperate with the other in litigation proceedings. Either party may be represented at its own expense by counsel of its choice in any suit. ARTICLE 4 - ROYALTY AND OTHER PAYMENTS 4.1 HOLDINGS shall pay to JHU: (a) As a running royalty, for each PATENTED ROYALTY PRODUCT sold for one or more indications within the FIELD, and for each PATENTED ROYALTY SERVICE relating to the FIELD provided, by the COMPANY or by any AFFILIATED COMPANY, * of NET SALES and NET SERVICE REVENUES relating to such PATENTED ROYALTY PRODUCTS sold and such PATENTED ROYALTY SERVICES provided for the term of this Agreement; (b) As a running royalty, for each PATENTED ROYALTY PRODUCT sold for one or more indications within the FIELD, and for each PATENTED ROYALTY SERVICE relating to the FIELD provided, by any SUBLICENSEE other than an AFFILIATED COMPANY, * of NET SALES and NET SERVICE REVENUES relating to such PATENTED ROYALTY PRODUCTS sold and such PATENTED ROYALTY SERVICES provided for the term of this Agreement; (c) As a running royalty, for each PATENTED ROYALTY PRODUCT sold exclusively for indications outside the field, and for each PATENTED ROYALTY SERVICE unrelated to the FIELD provided, by the COMPANY, any AFFILIATED COMPANY or any SUBLICENSEE, * of NET SALES and NET SERVICE REVENUES relating to such PATENTED ROYALTY PRODUCTS sold and such PATENTED ROYALTY SERVICES provided for the term of this Agreement. -8- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 9 (d) As a running royalty, for each UNPATENTED ROYALTY PRODUCT sold, and for each UNPATENTED ROYALTY SERVICE provided, by the COMPANY or by any AFFILIATED COMPANY * of NET SALES and NET SERVICE REVENUES relating to such UNPATENTED ROYALTY PRODUCTS sold and UNPATENTED ROYALTY SERVICES provided for the term of this Agreement; and (e) In the event the COMPANY or any AFFILIATED COMPANY receives royalty payments from a SUBLICENSEE with respect to an UNPATENTED ROYALTY PRODUCT or an UNPATENTED ROYALTY SERVICE, then a running royalty, for each such UNPATENTED ROYALTY PRODUCT sold, and for each such UNPATENTED ROYALTY SERVICE so provided, equal to * of the of NET SALES and NET SERVICE REVENUES relating to such UNPATENTED ROYALTY PRODUCTS sold and UNPATENTED ROYALTY SERVICES provided during the term of this Agreement. All such royalty payments shall be made quarterly as provided in Paragraph 4.3 below. In determining royalties, it will be assumed that the status of a ROYALTY PRODUCT (i.e., whether it is a PATENTED ROYALTY PRODUCT or an UNPATENTED ROYALTY PRODUCT) at the end of the applicable quarter was in effect for the entire period. 4.2 (a) In addition to the royalty payments outlined in Paragraph 4.1 above, HOLDINGS shall pay to JHU * of all PARTNERSHIP PROCEEDS paid on or after the EFFECTIVE DATE no later than forty-five (45) days following the end of the calendar quarter in which the COMPANY (or any AFFILIATED COMPANY) receives amounts constituting PARTNERSHIP PROCEEDS. (b) In respect of the exclusive licenses granted hereby and the other mutual agreements, covenants and consideration contained herein, simultaneously with the execution and delivery of this Agreement the COMPANY shall pay to JHU by check or wire transfer, as JHU shall instruct the COMPANY in writing no less than three (3) business days prior to such date of execution, *. In reliance upon the COMPANY's representations in Paragraph 4.9 below, JHU acknowledges and agrees that the COMPANY, on or prior to the EFFECTIVE DATE, has paid to JHU all amounts that may be due to JHU under the 1996 AGREEMENT, and all amounts that may be due to JHU under the 1997 AGREEMENT insofar as they relate to the 1997 NIL PATENT RIGHTS. 4.3 Following the first commercial sale of a ROYALTY PRODUCT or ROYALTY SERVICE, HOLDINGS shall provide to JHU within sixty (60) days of the end of each March, June, September and December, a written report to JHU -9- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 10 stating the amount of ROYALTY PRODUCT(S) and ROYALTY SERVICE(S) sold, the total NET SALES and NET SERVICE REVENUES of such ROYALTY PRODUCT(S) and ROYALTY SERVICE(S), and the running royalties due to JHU as a result of NET SALES and NET SERVICE REVENUES by the COMPANY, AFFILIATED COMPANIES and SUBLICENSEES. Payment of any such royalties due shall accompany such report. The parties understand and agree that in the event such products or services are sold, whether pursuant to a sublicense, marketing and sales agreement or other contract, by a party other than the COMPANY or an AFFILIATED COMPANY, HOLDINGS may base its reports of NET SALES and payments of royalty to JHU under this Paragraph 4.3 on information as and when received from such other party, provided in no event will HOLDINGS be required to report and pay royalty on a given due date under this Paragraph 4.3 based on a report or payment received less than ten (10) business days prior to such due date under this Paragraph 4.3. By way of example and without limitation, if a third party markets and sells a ROYALTY PRODUCT and reports to HOLDINGS a certain quarter's domestic sales by the 45th day following such quarter, and international sales by the 60th day following such quarter, HOLDINGS will report and make a royalty payment to JHU with respect to such domestic sales by the 60th day following such quarter, and a royalty payment with respect to such international sales at the next report due date under this Paragraph 4.3. Until the COMPANY, an AFFILIATED COMPANY or a SUBLICENSEE has made the first commercial sale of a ROYALTY PRODUCT(S) pursuant to FDA commercial approval, HOLDINGS shall cause to be submitted to JHU a report at the end of every June and December after the EFFECTIVE DATE of this Agreement describing the COMPANY's direct and indirect technical efforts towards meeting the milestones set forth in ARTICLE 6. 4.4 The COMPANY shall make and retain, for a period of three (3) years following the period of each report required by Paragraph 4.3 above, true and accurate records, files and books of account containing all the data reasonably required for the full computation and verification of sales and other information required in Paragraph 4.3. Such books and records shall be in accordance with generally accepted accounting principles consistently applied. The COMPANY shall permit the inspection and copying of such records, files and books of account by JHU or its agents during regular business hours upon ten (10) business days' written notice to the COMPANY. Such inspection shall not be made more than once each calendar year. JHU's election from time to time not to conduct such inspection shall not be deemed to constitute a waiver of its right to conduct future inspections under this Paragraph 4.4. All costs of such inspection and copying shall be paid by JHU, provided that if any such inspection shall reveal that an error has been made in the amount equal to ten percent (10%) or more of such payment, such -10- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 11 costs shall be borne by HOLDINGS. The COMPANY shall include in any agreement with its AFFILIATED COMPANIES or its SUBLICENSEES which agreement permits such party to make, use or sell the ROYALTY PRODUCT(S) or provide ROYALTY SERVICE(S), a provision requiring such party to retain records of sales of ROYALTY PRODUCT(S) and records of ROYALTY SERVICE(S) and other information as required in Paragraph 4.3 and permit JHU to inspect such records as required by this Paragraph 4.4. 4.5 In order to insure JHU the full royalty payments contemplated hereunder, the COMPANY agrees that in the event any ROYALTY PRODUCT is sold to an AFFILIATED COMPANY, a SUBLICENSEE or to a corporation, firm or association with which COMPANY has a business relationship (such as, among other things, an option to purchase stock or actual stock ownership, or an arrangement involving division of profits or special rebates or allowances) (collectively, "Affiliated Purchasers"), the royalties to be paid hereunder for such ROYALTY PRODUCT(S) shall be based upon the greater of: (1) the net selling price at which such Affiliated Purchasers of ROYALTY PRODUCT(S) resell such product to the end user; (2) the Net Service Revenue such Affiliated Purchasers receive from using the ROYALTY PRODUCT(S) in providing a service; (3) the fair market value of the ROYALTY PRODUCT(S) being sold at that level of distribution; or (4) the net price paid by such Affiliated Purchasers for ROYALTY PRODUCT(S); provided, however, that, subject to the following sentence, the foregoing shall not apply in the event that a ROYALTY PRODUCT or a ROYALTY SERVICE is supplied at no charge or below fair market value for bona fide business reasons such as supply for clinical trials, distributions for compassionate use, an indigent program and the like, or for advertising and promotion (collectively, "DISCRETIONARY USES"). In the event that the COMPANY receives any revenues from an Affiliated Purchaser as a result of such Affiliated Purchaser's DISCRETIONARY USES, any such amounts paid to the COMPANY shall be considered PARTNERSHIP PROCEEDS for purposes of Paragraph 4.2(a) above. 4.6 It is the sole responsibility of JHU to distribute to the JHU inventors of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS such portion of the amounts paid pursuant to this ARTICLE 4 as JHU may be required to distribute pursuant to its internal policies. 4.7 All payments due under this Agreement shall be made in U.S. Dollars. 4.8. GPI hereby guarantees the payment obligations of HOLDINGS under this ARTICLE 4. -11- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 12 4.9 Except for the amounts set forth in Schedule 4.9 hereto, COMPANY represents that as of the EFFECTIVE DATE it has received no payments from any third party respecting the NEUROIMMUNOPHILIN TECHNOLOGY. Further, COMPANY represents that as of the EFFECTIVE DATE: (i) other than the Amgen Agreement, the COMPANY has not entered into a sublicense with any third party for the JHU NEUROIMMUNOPHILIN PATENT RIGHTS respecting the research, development and/or commercialization of NEUROIMMUNOPHILIN TECHNOLOGY; and (ii) HOLDINGS, GPI and Amgen have not entered into any amendment of the Amgen Agreement. 4.10 In the event that PARTNERSHIP PROCEEDS, royalties or other payments would be due JHU under both this Agreement and any other license agreement existing between JHU and GPI and/or HOLDINGS in respect of the sale of any particular product or service or the sublicensing of any NEUROIMMUNOPHILIN TECHNOLOGY, the COMPANY's aggregate liability to JHU for such payments nevertheless shall not exceed the amount due under any single agreement. ARTICLE 5 - JHU NEUROIMMUNOPHILIN PATENT RIGHTS AND CONFIDENTIAL INFORMATION 5.1 HOLDINGS will, at its expense, take lead responsibility for, and have final authority with respect to, the preparation, filing, prosecution, and maintenance of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS, using competent and experienced patent counsel. Unless JHU and HOLDINGS specifically consent in writing in particular cases, counsel for HOLDINGS shall not have authority to act as counsel for JHU in connection with patent matters, and JHU shall be free to appoint its own counsel at its own expense. HOLDINGS will use commercially reasonable efforts to: (i) diligently prepare, file, prosecute and maintain patents and patent applications specified under the JHU NEUROIMMUNOPHILIN PATENT RIGHTS; (ii) seek the allowance of broad generic claims, consistent with HOLDINGS' good faith determinations of enforceability, business considerations and other factors; (iii) provide JHU and its patent counsel with copies of patent applications and other substantive patent prosecution documents pertaining to the JHU NEUROIMMUNOPHILIN PATENT RIGHTS prior to filing in the United States or foreign patent offices so as to afford JHU a reasonable opportunity to review and comment; (iv) consider JHU's input in the formulation and execution of HOLDINGS' strategy with respect to filings constituting the JHU NEUROIMMUNOPHILIN PATENT RIGHTS; provided however, that HOLDINGS shall have the right to make the final determination in all matters relating to the JHU NEUROIMMUNOPHILIN PATENT RIGHTS. Title to all patents and patent applications constituting JHU NEUROIMMUNOPHILIN PATENT RIGHTS which are solely owned by JHU shall reside in JHU, and, in the case of patents and patent applications constituting JHU -12- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 13 NEUROIMMUNOPHILIN PATENT RIGHTS which are jointly owned by JHU and the COMPANY, title shall reside jointly in JHU and HOLDINGS. HOLDINGS will use commercially reasonable efforts to provide timely notice of actions or omissions which to its knowledge would result in JHU NEUROIMMUNOPHILIN PATENT RIGHTS being irrevocably lost, so that JHU may if it so desires take appropriate action to preserve the JHU NEUROIMMUNOPHILIN PATENT RIGHTS. In any TERRITORY where HOLDINGS elects not to have a patent application filed or to pay expenses associated with filing, prosecuting, or maintaining a patent application or patent encompassed by the NEUROIMUNOPHILIN PATENT RIGHTS, JHU may file, prosecute, and/or maintain a patent application or patent at its own expense. In the event JHU files, prosecutes, and/or maintains a patent application or patent at its own expense pursuant to this Paragraph 5.1(b), the COMPANY shall not thereafter be licensed hereunder with respect to JHU's interest in such patent or patent application in such jurisdiction. Attached as Schedule 5.1 hereto is a current list of jurisdictions in which the COMPANY is pursuing patent rights with respect to JHU Matter No. DM-9986. Except as JHU may specifically give written notice to the COMPANY, JHU does not expect to pursue patent rights in jurisdictions not pursued by the COMPANY, except in North America, Europe, Australia, or Japan. 5.2 The COMPANY agrees to use commercially reasonable efforts to mark all packaging containing individual LICENSED PRODUCT(S) sold by the COMPANY, AFFILIATED COMPANIES and SUBLICENSEES of COMPANY with the number of the applicable patent(s) licensed hereunder in accordance with each TERRITORY's patent laws. 5.3 From time to time in the course of performing under this Agreement or developing a ROYALTY PRODUCT or ROYALTY SERVICE, each of JHU, on the one hand, and the COMPANY, on the other, may disclose confidential information to the other. The recipient of such information agrees to employ all reasonable efforts to maintain any such information as secret and confidential, such efforts to be no less than the degree of care employed by the recipient to preserve and safeguard its own confidential information. Such confidential information shall not be disclosed or revealed to anyone except inventors or employees who have entered into a secrecy agreement with the recipient under which such inventors or employees are required to maintain confidential the proprietary information of the recipient (including confidential information received by the recipient) and such inventors or employees shall be advised by the recipient of the confidential nature -13- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 14 of the information and that the information shall be treated accordingly. The recipient's obligations under this Paragraph 5.3 shall not extend to any information: a. that can be demonstrated to have been in the public domain or publicly known and readily available to the trade or the public prior to the date of the disclosure; b. that can be demonstrated, from written records, to have been in the recipient's possession or available to the recipient from another source not under obligation of secrecy to the disclosing party prior to the disclosure; c. that becomes part of the public domain or publicly known by publication or otherwise, not due to any unauthorized act by the recipient; d. that is received by the recipient in good faith from a third party who is not, directly or indirectly, under an obligation of confidentiality to the disclosing party with respect to same; or e. that can be demonstrated is independently discovered or developed by the recipient without reference to any information or material disclosed hereunder. The COMPANY shall have the right to disclose confidential information received from JHU hereunder to AFFILIATED COMPANIES, SUBLICENSEES and/or professional advisors, provided that such persons or entities are subject to substantially similar obligations of confidentiality as are contained in this Paragraph 5.3. Upon any termination of this Agreement, all copies of any confidential information in the recipient's possession shall promptly be returned to the disclosing party or destroyed; provided, however, that a recipient may retain one copy of such information in the office of its legal counsel for archival purposes. The obligations set forth in this Paragraph 5.3 shall apply during the term of this Agreement and shall extend for a period of five (5) years from the date this Agreement is terminated. ARTICLE 6 - TERM, MILESTONES AND TERMINATION 6.1. This Agreement shall expire in each TERRITORY on the date the last patent directed to JHU NEUROIMMUNOPHILIN PATENT RIGHTS expires in that TERRITORY, or twenty (20) years from the EFFECTIVE DATE of this Agreement, whichever is later; provided, however, that in no event shall royalty payments due under this Agreement extend beyond the time period permitted by local law. -14- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 15 6.2 The COMPANY (either directly or through AFFILIATED COMPANIES or SUBLICENSEES) shall spend at least One Hundred Thousand dollars ($100,000) in each calendar year period (or a pro rata portion thereof for any period less than a year) to research, develop or test the ROYALTY PRODUCT(S), until such time as the COMPANY (either directly or through AFFILIATED COMPANIES or SUBLICENSEES) has filed and received approval of the first NDA with the FDA for a ROYALTY PRODUCT. Such required expenditures (in each case a "Minimum Annual Expenditure") shall be inclusive of internal expenses, such as salaries and overhead of COMPANY employees prorated for the percent of time worked on developing ROYALTY PRODUCT(S) and external expenses, such as sponsored research funding provided by the COMPANY to a third party to develop ROYALTY PRODUCT(S). No later than March 31st of each calendar year during the term of this Agreement, HOLDINGS shall provide JHU with a certificate signed by an officer of the COMPANY certifying as to whether the COMPANY has spent in the preceding calendar year at least the Minimum Annual Expenditure for such year. If requested by JHU, the COMPANY shall also provide JHU a written accounting of the expenditures. In the event the COMPANY (either directly or through AFFILIATED COMPANIES or SUBLICENSEES) fails to spend the full amount of the Minimum Annual Expenditure in a given year, the COMPANY (either directly or through AFFILIATED COMPANIES or SUBLICENSEES) shall be obligated to spend in the research, development or testing of the ROYALTY PRODUCT(S) in the succeeding year period both the amount of such shortfall and the Minimum Annual Expenditure for such succeeding year. If at the conclusion of such succeeding year the COMPANY (either directly or through AFFILIATED COMPANIES or SUBLICENSEES) has failed to meet the foregoing expenditure obligation, JHU shall have the option of terminating this Agreement upon sixty (60) days prior written notice to the COMPANY. However, if the actual expenditure in any given year is less than seventy five percent (75%) of the required Minimum Annual Expenditure in that year, JHU shall have the option of terminating this Agreement upon sixty (60) days prior written notice to COMPANY. 6.3 The COMPANY must meet the following milestones relative to a ROYALTY PRODUCT: -15- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 16 MILESTONE ANNIVERSARY FROM JUNE 26, 1997 Candidate ROYALTY PRODUCT identified Fourth year IND filed for first candidate ROYALTY PRODUCT Seventh year NDA filed for first ROYALTY PRODUCT Twelfth year Initial Commercial Sale of FDA approved first Six (6) months following ROYALTY PRODUCT as part of a nationwide approval of NDA sales effort Failure to meet any milestone set forth above shall be grounds for termination of this Agreement by JHU upon sixty (60) days prior written notice to the COMPANY; provided, however, that failure to meet the milestone above shall not be grounds for termination if the delay results from additional time needed for clinical trials or for the FDA to review the COMPANY's NDA, so long as the COMPANY exercises commercially reasonable efforts to meet the milestones as promptly as practicable. 6.4 After FDA commercial approval has been granted, the COMPANY (either directly or through AFFILIATED COMPANIES or SUBLICENSEES) shall exercise commercially reasonable efforts to market a ROYALTY PRODUCT(S) in the U.S. and worldwide, conditioned upon obtaining regulatory approval in the relevant foreign nation or region. The COMPANY shall also exercise commercially reasonable efforts to develop other ROYALTY PRODUCT(S) suitable for different indications, so that the JHU NEUROIMMUNOPHILIN PATENT RIGHTS can be commercialized as broadly and as speedily as good scientific and business judgment dictate, such determination to be made in good faith by the COMPANY. 6.5 Upon any material breach or default of any of the terms and conditions of this Agreement, the defaulting party shall be given written notice of such default in writing and a period of sixty (60) days after receipt of such notice to correct the default or breach. If the default or breach is not corrected within said sixty (60) day period, the party not in default shall have the right to terminate this Agreement. Notwithstanding the foregoing, wherever an uncured default or right to terminate arises under this Agreement which relates solely to obligations relating to one or more but not all of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS covered by this Agreement, any such termination may, at the election of the party whose rights are being terminated pursuant thereto, be limited to a termination of the license relating to such one or more but not all of the JHU -16- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 17 NEUROIMMUNOPHILIN PATENT RIGHTS covered by this Agreement. By way of example and without limitation, (i) if HOLDINGS fails to timely deliver a required report on the progress of research with respect to a single NEUROIMMUNOPHILIN PATENT RIGHT, but timely delivers required reports with respect to other JHU NEUROIMMUNOPHILIN PATENT RIGHTS, and JHU elects to seek termination of the Agreement pursuant to the terms of this ARTICLE 6, the COMPANY may elect to limit such termination solely to termination of the license under this Agreement with respect to that single NEUROIMMUNOPHILIN PATENT RIGHT, so long as HOLDINGS continues to be in compliance with other terms of this Agreement; and (ii) if JHU elects to seek termination of the Agreement pursuant to this ARTICLE 6 because of the COMPANY's failure to timely make the Minimum Annual Expenditure, the COMPANY may not elect to limit such termination to the license for any one or more of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS under this Agreement, because the COMPANY's breached obligation does not relate solely to a specific single NEUROIMMUNOPHILIN PATENT RIGHT. 6.6 Termination shall not affect JHU's right to recover unpaid royalties or fees accrued prior to termination. 6.7 Termination shall not affect JHU's and the COMPANY's respective joint ownership interest in the 1996 NIL PATENT RIGHTS, and each party may following any termination exercise its respective 1996 NIL PATENT RIGHTS as a joint owner thereof. ARTICLE 7 - MISCELLANEOUS 7.1 All notices pertaining to this Agreement shall be in writing and sent by: (i) certified mail, postage prepaid and return receipt requested, (ii) recognized national express courier service such as Federal Express, DHL or UPS, (iii) hand delivery, or (iv) facsimile (against receipt of answer-back confirming delivery), to the parties at the following addresses or such other address as such party shall have furnished in writing to the other party in accordance with this Paragraph 7.1: FOR JHU: Office of Technology Licensing The Johns Hopkins University School of Medicine 2024 E. Monument Street Suite 2-100 Baltimore, MD 21205 Attention: Director Fax: 410/955-1245 -17- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 18 FOR GPI: Guilford Pharmaceuticals Inc. 6611 Tributary Street Baltimore, MD 21224 Attention: General Counsel Fax: 410/631-6899 FOR HOLDINGS: GPI NIL Holdings, Inc. 222 Delaware Avenue Wilmington, DE 19899 Attention: Secretary Fax: 302/571-1750 In the case of notices given by facsimile transmission, a confirmation copy shall also be sent by first class mail but such notice shall be deemed given upon receipt of the facsimile transmission. 7.2 All written progress reports, royalty and other payments, and any other related correspondence shall be in writing and sent to: Office of Technology Licensing The Johns Hopkins University School of Medicine 2024 E. Monument Street Suite 2-100 Baltimore, MD 21205 Attention: Director or such other addressee which JHU may designate in writing form time to time. Checks are to be made payable to "The Johns Hopkins University." 7.3 This Agreement is binding upon and shall inure to the benefit of the parties hereto and their respective successors and assignees and shall not be assignable to another party without mutual written consent, such consent not to be unreasonably withheld, except that the COMPANY shall have the right to assign this Agreement without the consent of JHU to a third party in the case of the sale or transfer by the COMPANY of all, or substantially all, of its assets relating to its neuroimmunophilin program to such third party. Any assignment not in accordance with this Paragraph 7.3 shall be void, and no assignment of this Agreement by any party hereto shall be effective unless and until the assignee delivers to the other party hereto a binding written agreement to assume all duties and obligations of the assignor. -18- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 19 7.4 In the event that any one or more of the provisions of this Agreement should for any reason be held by any court or authority having jurisdiction over this Agreement, or over any of the parties hereto, to be invalid, illegal or unenforceable, such provision or provisions shall be reformed to approximate as nearly as possible the intent of the parties, and if unreformable, shall be divisible and deleted in such jurisdictions. The invalidity or unenforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision. 7.5 The construction, performance, and execution of this Agreement shall be governed by the laws of the State of Maryland (without giving effect to conflict of law provisions that might otherwise look to the substantive law of a jurisdiction other than the State of Maryland). Each of the parties hereto irrevocably consents that any legal action or proceeding against it or any of its property related to or arising out of this Agreement or any other agreement executed in connection herewith may be brought in any court of the State of Maryland or any Federal Court of the United States of America in the State of Maryland, and by the execution and delivery of this Agreement each party hereto hereby accepts with regard to any such action or proceeding, generally and unconditionally, the jurisdiction and venue of the aforesaid courts. 7.6 The COMPANY shall not use the name of THE JOHNS HOPKINS UNIVERSITY, THE JOHNS HOPKINS HEALTH SYSTEM or the NATIONAL INSTITUTES OF HEALTH or any of their constituent parts, such as the Johns Hopkins Hospital or any contraction thereof (a "HOPKINS ENTITY") in any advertising, promotional, sales literature or fund-raising documents without prior written consent of the appropriate officer of JHU, such consent not to be unreasonably withheld. The foregoing notwithstanding, the COMPANY will not be required to obtain the aforementioned consent of JHU: (a) if such disclosure is required by applicable law, rule or regulation; (b) to the extent the COMPANY simply states that it and JHU are joint owners of the applicable JHU NEUROIMMUNOPHILIN PATENT RIGHTS and that the COMPANY is the exclusive licensee from JHU under one or more patents and/or applications comprising the JHU NEUROIMMUNOPHILIN PATENT RIGHTS; or (c) where the affiliation of a JHU inventor is disclosed solely for identification purposes, provided, however, that the COMPANY shall provide JHU, reasonably contemporaneously, representative samples of any such uses or disclosures for advertising, promotional, sales literature, or fundraising purposes. 7.7 Subject to Schedule 7.7, JHU warrants, as of the EFFECTIVE DATE, that: (i) it has good and marketable title to its interest in the inventions claimed under the JHU NEUROIMMUNOPHILIN PATENT RIGHTS with the -19- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 20 exception of the retained rights, if any, of the United States Government and HOLDINGS' joint ownership right therein; (ii) it has the full right and authority to enter into this Agreement and to grant the rights and licenses granted herein; and (iii) there are no pending or, to JHU's knowledge, threatened actions, suits or claims against JHU or others with respect to the JHU NEUROIMMUNOPHILIN PATENT RIGHTS. JHU does not warrant the validity of any patents or that practice under such patents shall be free of infringement. EXCEPT AS EXPRESSLY SET FORTH IN THIS PARAGRAPH 7.7, THE COMPANY, AFFILIATED COMPANIES AND SUBLICENSEES AGREE OR WILL AGREE, AS APPROPRIATE THAT THE JHU NEUROIMMUNOPHILIN PATENT RIGHTS ARE PROVIDED "AS IS", AND THAT JHU MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE PERFORMANCE OF THE LICENSED PRODUCT(S) AND LICENSED SERVICE(S) INCLUDING THEIR SAFETY, EFFECTIVENESS, OR COMMERCIAL VIABILITY. JHU DISCLAIMS ALL WARRANTIES WITH REGARD TO PRODUCT(S) AND SERVICES LICENSED UNDER THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, ALL WARRANTIES, EXPRESS OR IMPLIED, OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS AGREEMENT, JHU ADDITIONALLY DISCLAIMS ALL OBLIGATIONS AND LIABILITIES ON THE PART OF JHU, OR THE JHU INVENTORS, FOR DAMAGES, INCLUDING, BUT NOT LIMITED TO, DIRECT, INDIRECT, SPECIAL, AND CONSEQUENTIAL DAMAGES, ATTORNEYS' AND EXPERTS' FEES, AND COURT COSTS (EVEN IF JHU HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, FEES, OR COSTS), ARISING OUT OF OR IN CONNECTION WITH THE MANUFACTURE, USE OR SALE OF THE PRODUCT(S) AND SERVICES LICENSED UNDER THIS AGREEMENT. THE COMPANY, AFFILIATED COMPANIES AND SUBLICENSEES ASSUME, OR WILL ASSUME, AS APPROPRIATE ALL RESPONSIBILITY AND LIABILITY FOR LOSS OR DAMAGE CAUSED BY A PRODUCT AND SERVICE MANUFACTURED, USED, OR SOLD BY COMPANY, ITS SUBLICENSEES AND AFFILIATED COMPANIES WHICH IS A LICENSED PRODUCT OR LICENSED SERVICE AS DEFINED IN THIS AGREEMENT. 7.8 JHU and the JHU inventors of the LICENSED PRODUCT(S) and LICENSED SERVICE(S) will not, under the provision of this Agreement or otherwise, have control over the manner in which the COMPANY, its AFFILIATE COMPANIES, its SUBLICENSEES, those operating for its account or third parties who purchase LICENSED PRODUCT(S) or LICENSED SERVICE(S) from any of the foregoing entities, practice the invention of LICENSED PRODUCTS) or LICENSED SERVICE(S). The COMPANY shall defend and hold JHU, The Johns Hopkins Health Systems, their present and former regents, trustees, officers, JHU -20- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 21 inventors, agents, faculty, employees and students harmless as against any judgments, fees, expenses, or other costs arising from or incidental to any product liability or other lawsuit, claim, demand or other action brought as a consequence of the practice of said inventions by any of the foregoing entities, whether or not JHU, or the inventors, either jointly or severally, is named as a party defendant in any such lawsuit; provided that the COMPANY shall have sole control of the defense and settlement of any such lawsuit. Practice of the inventions covered by LICENSED PRODUCT(S) or LICENSED SERVICE(S) by an AFFILIATED COMPANY, an agent or a SUBLICENSEE, a third party on behalf of or for the account of the COMPANY or by a third party who purchases LICENSED PRODUCT(S) or LICENSED SERVICE(S) from the COMPANY, shall be considered the COMPANY's practice of said inventions for purposes of this Paragraph 7.8. The obligation of the COMPANY to defend and indemnify as set out in this Paragraph 7.8 shall survive any termination of this Agreement. 7.9 Prior to initial human testing or first commercial sale of any LICENSED PRODUCT(S) or LICENSED SERVICE(S) as the case may be in any particular TERRITORY, HOLDINGS shall cause to be established and maintained, in each TERRITORY in which COMPANY, an AFFILIATE COMPANY or SUBLICENSEES shall test or sell LICENSED PRODUCT(S) or LICENSED SERVICES(S), product liability or other appropriate insurance coverage appropriate to the risks involved in so testing or selling LICENSED PRODUCT(S) or LICENSED SERVICE(S) and will, upon the request of JHU but no more than once annually, present evidence to JHU that such coverage is being maintained. Upon JHU's request, HOLDINGS will cause to be furnished to JHU a Certificate of Insurance of each product liability insurance policy obtained and agree to increase or change the kind of insurance pertaining to the LICENSED PRODUCT(S) or LICENSED SERVICE(S) at the reasonable request of JHU. JHU shall be listed as name insured in COMPANY's said insurance policies. 7.10 JHU may publish manuscripts, abstracts or the like describing the JHU NEUROIMMUNOPHILIN PATENT RIGHTS and inventions contained therein provided confidential information of the COMPANY, as defined in Paragraph 5.3, is not included, or is not published without first obtaining prior written approval from the COMPANY to include such confidential information. Otherwise, JHU, and the JHU inventors shall be free to publish manuscripts and abstracts or the like directed to the work done at JHU related to LICENSED PRODUCT(S) or LICENSED SERVICE(S) without prior approval, provided, however, that the JHU inventors will provide copies of such manuscripts and abstracts to the COMPANY at least sixty (60) days prior to publication. If the COMPANY has not been given an opportunity to review such materials for the full -21- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 22 sixty (60) day period, JHU will upon the COMPANY's request delay publication of such materials in order to offer the COMPANY the full benefit of such sixty (60) day review period. During this period, the parties will confer in good faith and cooperate with each other with respect to any patent applications which may be filed in order to protect the intellectual property rights of JHU or the COMPANY prior to publication. 7.11 This Agreement (including the Schedules hereto, which are incorporated by reference and made part hereof) constitutes the entire understanding between the parties with respect to the obligations of the parties with respect to the subject matter hereof, and amends, restates and supersedes all prior agreements, understandings, writings, and discussions between the parties relating to said subject matter, including, but not limited to, the 1996 AGREEMENT and, to the extent relating to the 1997 NIL PATENT RIGHTS, the 1997 AGREEMENT. 7.12 This Agreement may be amended and any of its terms or conditions may be waived only by a written instrument executed by the authorized officials of the parties or, in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by either party of any condition or term in any one or more instance shall be construed as a further or continuing waiver of such conditions or term or of any other condition or term. 7.13 This Agreement shall be binding upon and inure to the benefit of and been enforceable by the parties hereto and their respective successors and permitted assigns. 7.14 Upon termination of this Agreement for any reason, Paragraphs 5.3, 6.6, 6.7, 7.6, 7.7, 7.8 and 7.9 shall survive termination of this Agreement. 7.15 JHU covenants that it will caused a true and complete copy of the prosecution history and all patent filings constituting the JHU NEUROIMMUNOPHILIN PATENT RIGHTS through the EFFECTIVE DATE to be delivered to HOLDINGS's outside patent counsel on or prior to the date that is five (5) business days following the EFFECTIVE DATE, and JHU further covenants to cause to be delivered to the COMPANY, simultaneously with the execution and delivery of this Agreement, a document in form and substance reasonably acceptable to the COMPANY signed by JHU and/or its patent counsel transferring lead responsibility for prosecution of the JHU NEUROIMMUNOPHILIN PATENT RIGHTS to HOLDINGS' outside patent pursuant to Section 5.1 of this Agreement -22- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 23 from and after the EFFECTIVE DATE. JHU further agrees to keep he COMPANY fully informed, and to consult with the COMPANY on a regular basis, with respect to any action, suit and/or claim by any third party with respect to the JHU NEUROIMMUNOPHILIN PATENT RIGHTS and the licenses granted hereunder to the COMPANY. JHU shall promptly inform the COMPANY in writing in the event JHU shall receive a written notice of any such action, suit and/or claim from a third party. 7.16 The COMPANY covenants that, in the event (1) the COMPANY and Amgen hereafter agree to any modification of the Amgen Agreement having the effect of reducing the amount of any milestone payments to be made by Amgen in consideration (at least in part) of an increase in any royalty payments to be made by Amgen, and (2) JHU does not consent in writing to such modification, the COMPANY shall continue to make payments to JHU pursuant to Paragraph 4.2(a) above as if such milestone provisions had not been modified and Amgen had made the specified payments to HOLDINGS in accordance with their original terms. -23- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 24 IN WITNESS WHEREOF, the respective parties hereto have executed this Agreement by their duly authorized officers on the date appearing below their signatures. THE JOHNS HOPKINS UNIVERSITY GUILFORD PHARMACEUTICALS INC. By: By: ------------------------- ------------------------- Name: Craig R. Smith, M.D. ----------------------- President and Chief Executive Title: Officer ---------------------- Date: , 1998 Date: , 1998 ------------------ ------------------- GPI NIL HOLDINGS, INC. By: ------------------------- Daniel P. McCollum Vice President and Secretary Date: , 1998 ------------------- -24- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 25 SCHEDULE 4.9 LIST OF PAYMENTS FROM AMGEN UNDER AMGEN AGREEMENT As of the EFFECTIVE DATE, the following describes all amounts paid by Amgen to the COMPANY pursuant to the Amgen Agreement: 1) $15 million Signing Fee in August 1997. 2) $15 million for the purchase of 640,095 shares of GPI common stock in October 1997. 3) $5 million for purchase of warrants to purchase up to 700,000 shares of GPI common stock in October 1997. 4) $4.5 million in Research Program Funding through the period ending September 30, 1998. 5) $1 million as a milestone payment related to the initiation of Lead Selection in September 1998. 6) Reimbursement of miscellaneous COMPANY expenses, including certain foreign patent counsel costs, and payment for the purchase of certain laboratory animals, and for reimbursement of third-party vendor costs incurred by the COMPANY. For the purpose of illustration only, the parties acknowledge that, were the payments set forth above in items 1) through 6) above made after, rather than prior to, the EFFECTIVE DATE, the proceeds received by the COMPANY from Amgen above would have given rise to payment obligations to JHU under this Agreement as follows: a. The $15 million Signing Fee would have constituted PARTNERSHIP PROCEEDS under Section 4.2(a) of the Agreement; b. No amounts would have been due and owing to JHU with respect to the $15 million payment for GPI common stock or the $5 million payment for warrants because of Section 1.13(i); c. No amounts would have been due and owing to JHU with respect to the $4.5 million in Research Program Funding because of Section 1.13(ii); d. The $1 million milestone amount would have constituted PARTNERSHIP PROCEEDS under Section 4.2(a); and -25- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 26 e. No amounts would have been due and owing to JHU with respect to the amounts reimbursed to the Company as described in item 6) above because of Section 1.13(iii). -26- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 27 SCHEDULE 5.1 * [1 page omitted] -27- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 28 SCHEDULE 7.7 * [2 pages omitted] -28- *The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. EX-10.19B 6 AMENDMENTS TO DIRECTORS' STOCK OPTION PLAN 1 EXHIBIT 10.19B AMENDMENT TO THE DIRECTORS' STOCK OPTION PLAN I. Pursuant to Section 17.2 of the Guilford Pharmaceuticals Inc. Directors' Stock Option Plan (the "Plan") the limitation on exercise of all outstanding options granted under the Plan is modified and by adding the following at the end of Section 8 of the Plan to read as follows: Notwithstanding any other provisions of the Plan, in the event of a "Change in Control" (as defined below), any unvested Options granted hereunder shall be accelerated and be fully vested as of the date immediately prior to the effective date of the Change in Control if the Optionee continues to be provide services to the Company as of the date of such accelerated vesting. A "Change in Control" shall be deemed to have occurred if: (a) any "person" (including, without limitation, any individual, sole proprietorship, partnership, trust, corporation, association, joint venture, pool, syndicate, or other entity, whether or not incorporated), or any two or more persons acting as a syndicate or group or otherwise acting in concert with regard to the ownership of securities of the Company and thereby deemed collectively to be a "person") as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, unless, in transaction in which a "person" becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d- 3 under the Exchange Act), directly or indirectly, of securities of the Company representing less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, prior to the acquisition by such person of securities of the Company which causes such person to have such beneficial ownership, the full Board shall by at least a two-thirds vote have specifically approved such acquisition and determined that such acquisition shall not constitute a Change in Control for purposes of options granted under the Plan despite such beneficial ownership; or (b) during any two (2) year period, individuals who at the beginning of such period constitute the Board, together with any new directors elected or appointed during the period whose election or appointment resulted from a vacancy on the Board caused by retirement, death , or disability of a director and whose election or appointment was approved by a vote of at least two-thirds (2/3rds) of the directors then still in office who were directors at the beginning of the period, cease for any reason to constitute a majority thereof. II. Section 21 is added to the Plan to read as follows: 21. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. 2 (a) Notwithstanding any other provision of any share option agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Optionee and the Company, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this section 21 (the "other agreements"), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company for the direct or indirect compensation of the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for an Optionee (a "benefit arrangement"), if the Optionee is a "disqualified individual," as defined in section 280g(c) of the code, in the event it shall be determined that any right to receive any payment or other benefit under this share option agreement, taking into account all other rights, payments, or benefits to or for Optionee under the plan, all other agreements, and all benefit arrangements, would cause any payment or benefit to an Optionee under this plan to be considered a "parachute payment" within the meaning of section 280g(b)(2) of the code as then in effect (a "payment") which would be subject to the excise tax imposed by section 4999 of the code or any interest or penalties are incurred by the Optionee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "excise tax"), then the Optionee shall be entitled to receive an additional payment (a "gross-up payment") in an amount such that after payment by the Optionee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and excise tax imposed upon the gross-up payment, the Optionee retains an amount of the gross-up payment equal to the excise tax imposed upon the payments. (b) Subject to the provisions of section 21(c), all determinations required to be made under this section, including whether and when a gross-up payment is required and the amount of such gross-up payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick or such other certified public accounting firm as may be designated by the Optionee (the "accounting firm") which shall provide detailed supporting calculations both to the Company and the Optionee within 15 business days of the receipt of notice from the Optionee that there has been a payment, or such earlier time as is requested by the Company. In the event that the accounting firm is serving as accountant or auditor for the individual, entity or group effecting the change of control, the Optionee may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the accounting firm hereunder). All fees and expenses of the accounting firm shall be borne solely by the Company. Any gross-up payment, as determined pursuant to this section, shall be paid by the Company to the Optionee within five days of the receipt of the accounting firm's determination. Any determination by the accounting firm shall be binding upon the Optionee and the Optionee. As a result of the uncertainty in the application of section 4999 of the code at the time of the initial determination by the accounting firm hereunder, it is possible that gross-up payments which will not have been made by the Optionee should have been made ("underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to section 21(c) and the Optionee thereafter is required to make a payment of any excise tax, the accounting firm shall determine the amount of the underpayment that has occurred and any such underpayment shall be promptly paid by the Company to or for the benefit of the Optionee. - 2 - 3 (c) The Optionee shall notify the Company in writing of any claim by the internal revenue service that, if successful, would require the payment by the Optionee of the gross-up payment. Such notification shall be given as soon as practicable but no later than ten business days after the Optionee is informed in writing of such claim and shall apprise the Optionee of the nature of such claim and the date on which such claim is requested to be paid. The Optionee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Optionee (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Optionee notifies the Optionee in writing prior to the expiration of such period that it desires to contest such claim, the Optionee shall: (i) give the Company any information reasonably requested by the Optionee relating to such claim, (ii) take such action in connection with contesting such claim as the Optionee shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Optionee in good faith in order effectively to contest such claim, and (iv) permit the Optionee to participate in any proceedings relating to such claim; provided, however, that the Optionee shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Optionee harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this section 21(c), the Optionee shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Optionee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Optionee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Optionee shall determine; provided, however, that if the Optionee directs the Optionee to pay such claim and sue for a refund, the Optionee shall advance the amount of such payment to the Optionee, on an interest-free basis and shall indemnify and hold the Optionee harmless, on an after-tax basis, from any excise tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Optionee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Optionee's control of the contest shall be limited to issues with - 3 - 4 respect to which a gross-up payment would be payable hereunder and the Optionee shall be entitled to settle or contest, as the case may be, any other issue raised by the internal revenue service or any other taxing authority. (d) If, after the receipt by the Optionee of an amount advanced by the Optionee pursuant to section 21(c), the Optionee becomes entitled to receive any refund with respect to such claim, the Optionee shall (subject to the Optionee's complying with the requirements of section 21(c)) promptly pay to the Optionee the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Optionee of an amount advanced by the Optionee pursuant to section 21(c), a determination is made that the Optionee shall not be entitled to any refund with respect to such claim and the Optionee does not notify the Optionee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of gross-up payment required to be paid. * * * * * This Amendment to the Directors Stock Option Plan was duly approved by the Board of Directors of the Company at a meeting held on the 17th day of August, 1998. Secretary of the Company - 4 - EX-10.19C 7 AMEND. TO FORM OF DIRECTORS' STOCK OPTION AGRMNT 1 EXHIBIT 10.19C AMENDMENT TO STOCK OPTION AGREEMENT UNDER THE DIRECTORS' STOCK OPTION PLAN I. Pursuant to Section 17.2 of the Guilford Pharmaceuticals Inc. Directors' Stock Option Plan (the "Plan") the limitation on exercise of all outstanding options granted under the Plan is modified and by adding new Section 3.6 of the Optionee's Stock Option Agreement to read as follows: 3.6 VESTING UPON A CHANGE IN CONTROL Notwithstanding any other provisions of the Plan or this Agreement, in the event of a "Change in Control" (as defined below), any unvested Options granted hereunder shall be accelerated and be fully vested as of the date immediately prior to effective date of the Change in Control if the Optionee continues to provide services to the Company as of the date of such accelerated vesting. A "Change in Control" shall be deemed to have occurred if: (a) any "person" (including, without limitation, any individual, sole proprietorship, partnership, trust, corporation, association, joint venture, pool, syndicate, or other entity, whether or not incorporated), or any two or more persons acting as a syndicate or group or otherwise acting in concert with regard to the ownership of securities of the Company and thereby deemed collectively to be a "person") as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities, unless, in transaction in which a "person" becomes, after the date hereof, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing less than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, prior to the acquisition by such person of securities of the Company which causes such person to have such beneficial ownership, the full Board shall by at least a two-thirds vote have specifically approved such acquisition and determined that such acquisition shall not constitute a Change in Control for purposes of options granted under the Plan despite such beneficial ownership; or (b) during any two (2) year period, individuals who at the beginning of such period constitute the Board, together with any new directors elected or appointed during the period whose election or appointment resulted from a vacancy on the Board caused by retirement, death , or disability of a director and whose election or appointment was approved by a vote of at least two-thirds (2/3rds) of the directors then still in office who were directors at the beginning of the period, cease for any reason to constitute a majority thereof. 2 II. Section 17 is added to each Optionee's Stock Option Agreement to read as follows: 17. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding any other provision of this Share Option Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Optionee and the Company, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this Section 17 (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company for the direct or indirect compensation of the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for an Optionee (a "Benefit Arrangement"), if the Optionee is a "disqualified individual," as defined in Section 280G(c) of the Code, in the event it shall be determined that any right to receive any payment or other benefit under this Share Option Agreement, taking into account all other rights, payments, or benefits to or for Optionee under the Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to an Optionee under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Payment") which would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Optionee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Optionee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Optionee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Optionee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 17(c), all determinations required to be made under this Section, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick or such other certified public accounting firm as may be designated by the Optionee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Optionee within 15 business days of the receipt of notice from the Optionee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Optionee may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section, shall be paid by the Company to the - 2 - 3 Optionee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Optionee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 17(c) and the Optionee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Optionee. (c) The Optionee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. The Optionee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Optionee in writing prior to the expiration of such period that it desires to contest such claim, the Optionee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Optionee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 17(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Optionee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Optionee agrees to prosecute such contest to a determination - 3 - 4 before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Optionee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Optionee, on an interest-free basis and shall indemnify and hold the Optionee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Optionee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Optionee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Optionee of an amount advanced by the Company pursuant to Section 17(c), the Optionee becomes entitled to receive any refund with respect to such claim, the Optionee shall (subject to the Company's complying with the requirements of Section 17(c)) promptly pay to the Company the amount of such refund (together with any interest actually paid or credited thereon after taxes applicable thereto). If, after the receipt by the Optionee of an amount advanced by the Company pursuant to Section 17(c), a determination is made that the Optionee shall not be entitled to any refund with respect to such claim and the Company does not notify the Optionee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. * * * * * - 4 - 5 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment to Stock Option Agreement, or caused this Amendment to Stock Option Agreement to be duly executed and delivered on their behalf, as of the 17th day of August, 1998. ATTEST: GUILFORD PHARMACEUTICALS INC. By: - ------------------------------------ ---------------------------------- Title: ------------------------------- OPTIONEE: ------------------------------------- - 5 - EX-13.01 8 PORTIONS OF 1998 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL DATA The following selected consolidated financial data of our company for each of the years in the five year period ended December 31, 1998 have been derived from our consolidated financial statements which have been audited by KPMG LLP, our independent auditors. Our consolidated financial statements as of December 31, 1997 and 1998, and for each of the years in the three year period ended December 31, 1998, including the footnotes to these financial statements, are included elsewhere in this annual report beginning on page 24. The information set forth below should be read in conjunction with our consolidated financial statements and the related footnotes as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 1 of this annual report.
YEARS ENDED DECEMBER 31, ------------------------ 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Total Revenues.................... $ - $ 586 $ 28,020 $ 23,828 $ 12,483 Costs and Expenses: Cost of sales.................... - - - 2,585 2,036 Research and development......... 2,869 9,688 18,761 30,293 37,722 General and administrative....... 2,369 4,367 6,736 9,076 10,546 Compensation - warrants.......... 991 - - - - ------- -------- -------- -------- -------- Total costs and expenses... 6,229 14,055 25,497 41,954 50,304 ------- -------- -------- -------- -------- Operating income (loss)........... (6,229) (13,469) 2,523 (18,126) (37,821) ------- -------- -------- -------- -------- Other income, net................. 332 832 2,550 6,689 8,123 ------- -------- -------- -------- -------- Net income (loss).......... $(5,897) $(12,637) $ 5,073 $(11,437) $(29,698) ------- -------- -------- -------- -------- Basic earnings (loss) per common share (1)................. $ (1.45) $ (1.72) $ 0.39 $ (0.65) $ (1.52) ------- -------- -------- -------- -------- Average common shares outstanding (1).................. 4,067 7,354 13,001 17,570 19,479 Diluted earnings (loss) per common share (1)................. $ (1.45) $ (1.72) $ 0.35 $ (0.65) $ (1.52) ------- -------- -------- -------- -------- Average common and dilutive equivalent shares outstanding (1) 4,067 7,354 14,634 17,570 19,479
DECEMBER 31, ------------ 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (in thousands) BALANCE SHEET DATA: Cash, cash equivalents and investments (2)............. $11,834 $19,454 $77,439 $160,219 $128,261 Total assets(2)............. 14,562 26,048 93,659 180,081 151,028 Long-term debt.............. 1,431 4,696 10,905 10,926 8,766 Total stockholders' equity.. 11,421 17,773 75,877 158,294 130,379
- ------------- (1) For information concerning the calculation of earnings (loss) per share, see Note 16, "Earnings (loss) per share", to the footnotes to our Consolidated Financial Statements on page 44. (2) Includes restricted investments of $1.2 million, $3.6 million, $10.1 million, $12.1 million, and $16.5 million at December 31, 1994, 1995, 1996, 1997 and 1998, respectively. See Notes 7 and 8, "Indebtedness" and "Leases", to the footnotes to our Consolidated Financial Statements. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE From time to time in this annual report we may make oral or written statements which reflect our current expectations regarding our future results of operations, economic performance, and financial condition as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as: - "anticipate", - "believe", - "expect", - "estimate" and similar expressions While these statements reflect our current plans and expectations and we base the statements on information currently available to us, we cannot be sure that we will be able to implement these plans successfully. We may not realize our expectations in whole or in part in the future. The forward-looking statements contained in this annual report may cover, but are not necessarily limited to, the following topics: - our efforts in conjunction with Rhone-Poulenc Rorer Pharmaceuticals Inc. (or "RPR") to obtain international regulatory clearances to market and sell GLIADEL, - our efforts in conjunction with RPR to increase end-user sales of GLIADEL, - our efforts to expand the labeled uses for GLIADEL, - our efforts to develop polymer product line extensions, - conducting and completing research programs related to our FKBP neuroimmunophilin ligand, NAALADase inhibition and PARP inhibition and other technologies, - clinical development activities, including commencing and conducting clinical trials related to our polymer-based drug delivery products and product candidates (including GLIADEL), and our pharmaceutical product candidates (including NIL-A and any other lead compounds in our FKBP neuroimmunophilin ligand program, and any lead compounds in our NAALADase and PARP programs, and DOPASCAN), - our strategic plans, - anticipated expenditures and the potential need for additional funds, and 3 - plans to assess and implement solutions, if necessary, to the Year 2000 issue, All of these items involve significant risks and uncertainties. Any of the statements we make in this annual report that are forward-looking we are making pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual results may differ significantly from the results we discuss in the forward-looking statements. We discuss factors that could cause or contribute to such differences elsewhere in this annual report as well as in our filings with the Securities and Exchange Commission. Our SEC filings include the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 1998. For convenience we refer to this document as the "1998 Form 10-K" in the discussion set forth below. In addition, we intend that any forward-looking statement we make speaks only as of the date on which we make it. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which we make such statement. INTRODUCTION In the following section, called "Management's Discussion and Analysis", we explain the general financial condition and the results of operations for Guilford and its subsidiaries, including: - what factors affect our business, - what our earnings or losses and costs were in 1998, 1997, and 1996, - for 1998 and 1997, why earnings or losses and costs changed from the year before, - where our revenues came from, - how all of the foregoing affect our overall financial condition, and - what our expenditures for capital projects were in 1998 and a description of our capital requirements. As you read Management's Discussion and Analysis, you may find it helpful to refer to our Consolidated Financial Statements beginning on page 24 of this annual report. These financial statements present the results of our operations for 1998, 1997, and 1996 as well as our financial position at December 31, 1998 and 1997. In Management's Discussion and Analysis, we analyze and explain the annual changes in the specific line items set forth in the section of our Consolidated Financial Statements entitled "Consolidated Statements of Operations". Our 2 4 analysis may be important to you in making decisions about your investment in Guilford. You will notice some changes in this year's discussion compared to past years. In 1998 the SEC adopted new rules requiring public companies like us to write certain documents in plain English. Even though the Commission does not require us to present our Management's Discussion and Analysis in plain English, we have decided voluntarily to apply these rules to the following discussion. Our goal is to describe and analyze our financial condition in language that may be easier for our stockholders to understand. GENERAL Guilford is a biopharmaceutical company engaged in the development and commercialization of novel products in two principal areas: - targeted and controlled drug delivery products using proprietary biodegradable polymers for the treatment of cancer and other diseases, and - therapeutic and diagnostic products for neurological diseases and conditions. In February 1997, we commercially launched our first product, GLIADEL(R) Wafer, in the United States through Rhone-Poulenc Rorer Pharmaceuticals Inc., or "RPR". GLIADEL is a proprietary polymer product for the treatment of certain types of brain cancer. This product degrades over time and releases an anti-cancer drug known as "BCNU" (or carmustine) directly to the tumor site. RPR is our exclusive worldwide marketing partner for GLIADEL, except in Japan and Scandinavia. Orion Corporation Pharma (formerly Orion Corporation Farmos) is our marketing partner for GLIADEL in Scandinavia. We have also licensed from others and internally developed on our own: - technologies that may be useful in preventing and treating certain neurological diseases and conditions, and - a new class of biodegradable polymers different from the type used in GLIADEL. In addition, in 1998 we accelerated research and development activities with respect to certain of these technologies. We anticipate that our future revenues will come primarily from the following sources: - payments from our marketing partners for goods we manufacture and sell to them, which we refer to as "transfer payments", such as transfer payments from RPR for GLIADEL, 3 5 - royalties from our marketing partners related to sales of products to third parties, such as RPR's sales of GLIADEL to hospitals, and any sales of other products we may develop in the future, and/or - one-time rights, milestone, and other payments from corporate partners under our current collaborative agreements and new ones we may enter into with others in the future. As we discuss in greater detail below, if we or our corporate collaborators, RPR and Amgen Inc., attain certain regulatory and/or development objectives, we are eligible to receive certain milestone and other payments from these companies. We view these potential payments as significant future revenue opportunities. As we discuss in the 1998 Form 10-K, we cannot be sure that our corporate partners will achieve the designated milestones and that we will receive any or all of the milestone payments for which we are eligible under our existing or any future collaborations. We also cannot be sure that we will be able to enter into collaborations in the future with others for the research, development and/or commercialization of our technologies. Since the commercial launch of GLIADEL in the United States in February 1997 through December 31, 1998, we have recognized an aggregate of $13.7 million in transfer payments and royalties. Of this amount, $9.6 million are transfer payments from both RPR and Orion Corporation Pharma for our sales of GLIADEL to these two collaborators. The additional $4.1 million are royalties paid to us from RPR on RPR's sales of GLIADEL to third parties, such as hospitals. Under the terms of our agreements with RPR, if RPR is able to achieve certain specified regulatory objectives, RPR is obligated to pay us up to an additional $35 million in milestone payments and payments for the purchase of shares of our stock. These regulatory objectives include obtaining approvals to market GLIADEL in certain foreign countries. As we discuss below and in greater detail in the 1998 Form 10-K, a number of factors subject our future sales of GLIADEL to significant risk and uncertainty. We cannot be sure that our sales of GLIADEL to RPR and RPR's sales of GLIADEL to third parties will increase over time or even continue at the current rate. The milestone payments and other amounts payable by RPR are contingent on: - making certain U.S. and international regulatory filings and obtaining clearances to market GLIADEL, - obtaining authorization from the FDA to expand the description of the clinical uses for GLIADEL that we can put on the label for that product, and - obtaining permission to sell GLIADEL in certain countries at prices that are acceptable to us and RPR. 4 6 We cannot control the timing and extent of governmental clearances. We also cannot be sure that we and RPR will attain any of these regulatory objectives. Except for GLIADEL, we do not expect to sell other products for at least the next several years, if ever. In August 1997, we entered into a collaboration with Amgen to research, develop and commercialize our FKBP neuroimmunophilin compound technology. Under our agreement with Amgen, Amgen paid us $35 million in 1997. Of this amount, Amgen paid $15 million in the form of a one-time, non-refundable rights fee upon signing the agreement. Amgen paid us the remaining $20 million for the purchase of 640,095 shares of our common stock and warrants to purchase up to an additional 700,000 shares of our common stock. These warrants are exercisable for five years and have an exercise price of $35.15 per share. We also granted to Amgen certain rights to register shares of our common stock with the SEC for sale in the public markets. As part of this collaboration, Amgen agreed to fund up to a total of $13.5 million to support Guilford's research relating to the FKBP neuroimmunophilin ligand technology. This research funding began on October 1, 1997 and is payable quarterly over three years. As of December 31, 1998, we had recognized an aggregate of approximately $5.6 million in research support from Amgen under this arrangement. Amgen also has the option to fund a fourth year of research, or under certain conditions, to terminate the research program after two years. Our agreement also requires that Amgen make milestone payments to us if Amgen achieves specified regulatory and product development milestones. If Amgen is able to meet all of these milestones for each of 10 different specified clinical indications (i.e., uses), these payments could total up to $392 million in the aggregate. Amgen is also required to pay us royalties on its sales to third parties of any product(s) that result from our collaboration. So long as it funds two years of research, Amgen may elect at any time to discontinue all development and commercialization for the FKBP neuroimmunophilin compound technology. As we discuss below and in greater detail in the 1998 Form 10-K, we cannot be sure that Amgen will be successful in its efforts to develop one or more FKBP neuroimmunophilin compounds into products that the FDA and foreign regulatory authorities will approve as safe and effective drugs for neurological or other uses. Consequently, we cannot be sure that we will earn any of the milestone payments related to these regulatory and product development activities. In addition to revenues related to GLIADEL, the only other significant revenues we recognized in 1998 consist of: - $4.5 million in research payments from Amgen, and - $1.0 million as a one-time, milestone payment from Amgen. Amgen made this $1.0 million payment following its initiation of a one-month Good 5 7 Laboratory Practices (GLP) toxicology study of Amgen's first lead FKBP neuroimmunophilin compound. Amgen refers to this compound as "NIL-A". Amgen is initially working to advance NIL-A into human clinical trials for the treatment of Parkinson's disease. As we describe above, pursuant to our agreement, we expect Amgen to pay us $4.5 million in 1999 to support our research on the FKBP neuroimmunophilin ligand technology. As we note above, Amgen may make certain other milestone payments to us in the future if Amgen achieves certain product development and/or regulatory milestones. Amgen will also pay royalties to us on future sales of products that result from our collaboration, if there are any. As we discuss below and in greater detail in the 1998 Form 10-K, whether Amgen will ever make milestone or royalty payments to us in the future is subject to significant risk and uncertainty. We cannot be sure that we will recognize any or significant revenues from Amgen in the future. With the sole exception of 1996, we have not earned an operating profit in any year since our inception in July 1993. Our operating profit in 1996 was $5.1 million. This operating profit was primarily due to two, one-time rights payments from RPR which totaled $27.5 million: - a $7.5 million payment in June 1996 upon the signing of our agreements with RPR for the sales, marketing and distribution of GLIADEL, and - a $20 million payment following FDA approval of the New Drug Application to market GLIADEL in September 1996. For the year ended December 31, 1998, we incurred a net loss of $29.7 million. Since inception through December 31, 1998, we had an accumulated deficit of $56.0 million. Our accumulated deficit is equal to the sum of our cumulative profits and losses since inception in July 1993. We do not expect 1999 to be profitable. We cannot be sure that we will ever achieve or sustain profitability in the future. Furthermore, our revenues have fluctuated significantly in the past because of the nature of their sources. We expect fluctuations in our revenues to continue, and thus our operating results should also vary significantly from quarter-to-quarter and year-to-year. A variety of factors cause these fluctuations, including: - the timing and amount of sales of GLIADEL to RPR and RPR's sales to others, - the timing and realization of milestone and other payments from our corporate partners, including RPR and Amgen, - the timing and amount of expenses relating to our research, product development, and manufacturing activities, and 6 8 - the extent and timing of costs related to our activities to: - obtain patents on our inventions, and - extend, enforce and /or defend our patent and other rights to our intellectual property. We expect that expenses in all areas of our business will continue to increase as we conduct our research and product development activities. These areas include research and product development, preclinical testing, human clinical trials, regulatory affairs, operations, manufacturing and general and administrative activities. The number of our employees has grown significantly since inception. At December 31, 1998, we had 218 full-time employees. This compares to 198 full-time employees at December 31, 1997 and 138 full-time employees at December 31, 1996. Our ability to achieve consistent profitability in the future will depend on many factors, including: - the level of future sales of GLIADEL, - our ability, either alone or with others, to develop our product candidates successfully, including any product candidates identified pursuant to our collaboration with Amgen, - the extent of any human clinical trials necessary to develop our product candidates, - our ability, either alone or with others, to obtain required regulatory approvals to market our product candidates, - our ability and that of our corporate partners to manufacture products at reasonable cost, - our ability and that of our collaborators to market products successfully, and - our ability to enter into acceptable collaborative arrangements for our technologies and license agreements for new technologies of others in the future. For a discussion of these and other risks, you should read the "Risk Factors" section of the 1998 Form 10-K, particularly those paragraphs specifically addressing the risks we note above. RESULTS OF OPERATIONS In this section we discuss our 1998, 1997 and 1996 revenues, costs and expenses, and other income and expenses as well as the factors affecting each of them. YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 In 1998, 1997 and 1996 our revenues primarily came from the following sources: 7 9 - transfer payments on our sales of GLIADEL to our marketing partners, - royalty payments from RPR on its sales of GLIADEL to others, - one-time rights or milestone payments from RPR and Amgen, - quarterly research funding from Amgen, and - amounts RPR reimbursed to us for costs related to our efforts to develop a high dose GLIADEL product. In 1998, 1997 and 1996, we recognized revenues of $12.5 million, $23.8 million and $28.0 million, respectively. These revenues consisted primarily of the following:
- --------------------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- - --------------------------------------------------------------------------------- ($ amounts in thousands) - --------------------------------------------------------------------------------- REVENUES RELATED TO GLIADEL: - --------------------------------------------------------------------------------- Transfer Payments.... $ 3,860 $ 5,741 $ - - --------------------------------------------------------------------------------- Royalties............ 2,563 1,578 - - --------------------------------------------------------------------------------- Licensing Revenues... 100 - - - --------------------------------------------------------------------------------- Non-Recurring Rights & Milestone Payments. - - 27,600 - --------------------------------------------------------------------------------- Reimbursement of high dose GLIADEL expenses................. 194 320 420 - --------------------------------------------------------------------------------- REVENUES FROM AMGEN: - --------------------------------------------------------------------------------- Non-Recurring Rights & Milestone Payments. 1,000 15,000 -- - --------------------------------------------------------------------------------- Research Funding..... 4,500 1,125 -- - ---------------------------------------------------------------------------------
Revenues from the sale and distribution of GLIADEL consist primarily of: - transfer payments on our sales of GLIADEL directly to our marketing and distribution partners, RPR (for the entire world except Scandinavia and Japan) and Orion 8 10 Corporation Pharma (for Scandinavia only), and - royalties from RPR based on its sales of GLIADEL to others, primarily hospitals. We did not recognize transfer payments or royalty revenues related to the sale and distribution of GLIADEL prior to 1997 because RPR did not commercially launched GLIADEL in the United States until February 1997. GLIADEL Transfer Payments RPR and Orion Corporation Pharma made $3.9 million in transfer payments to us in 1998. This amount was $5.7 million in 1997. Our sales of GLIADEL to RPR in 1997 include relatively high levels of sales made in the first half of 1997 to support RPR's initial build-up of inventory to support commercial launch. The reduction in our sales of GLIADEL to RPR in 1998 as compared to 1997 resulted from a leveling-off of RPR's current inventory requirements for GLIADEL. This reduction in sales caused a corresponding reduction in transfer payments to us. GLIADEL Royalties Net royalty revenue on RPR's sales of GLIADEL to third parties increased to $2.6 million in 1998 as compared to $1.6 million in 1997. This represents a 62% increase in net royalty revenue in 1998 as compared to 1997. An increase in the amount of RPR's sales to third parties caused this increase in royalty revenue during 1998. We believe RPR's sales of GLIADEL to third parties increased in 1998 as compared to 1997 because: - awareness about GLIADEL has increased among neurosurgeons, the physician group that uses GLIADEL and makes treatment recommendations to brain cancer patients, - neurosurgeons have gained familiarity and experience in using GLIADEL, and - GLIADEL sales commenced in late February 1997, and thus were made only for approximately 10 months in 1997 as compared to 12 months in 1998. Since launch, RPR's sales of GLIADEL to third parties have increased on an annual basis. As we discuss in greater detail in the 1998 Form 10-K, a number of factors subject our future sales of GLIADEL to significant risk and uncertainty. We cannot be sure that GLIADEL sales will increase from, or even remain at, current levels or will ever generate significant revenues for us in the future. Cost of Sales Our cost of sales for the years ended December 31, 1998 and 1997 were $2.0 million and 9 11 $2.6 million, respectively. Included in these amounts are approximately $159,000 and $281,000, respectively, representing: - royalty payments made to the university from which we have licensed certain technology related to GLIADEL, and - with respect to 1997 only, certain additional costs specifically related to the commercial product launch of GLIADEL in the United States. Because GLIADEL was commercially launched in the United States in February 1997, we did not incur cost of sales prior to 1997. The reduction in the cost of sales for 1998 compared to 1997 primarily reflects a reduction in the number of units of GLIADEL manufactured for sale to RPR during 1998. In 1998 cost of product sales represented 53% of total product sales revenues as compared to 45% in 1997. To the extent GLIADEL production levels increase in the future, we expect the cost per unit to manufacture GLIADEL may decrease as we achieve economies of scale. We cannot be sure, however, that GLIADEL product sales will ever reach levels necessary for us to realize significant cost savings related to manufacturing economies of scale. Research and Development Expenses Our research and development expenses increased to $37.7 million in 1998. These amounts were $30.3 million in 1997 and $18.8 million in 1996. The increases in research and development expenses of $7.4 million from 1997 to 1998, and $11.5 million from 1996 to 1997, were primarily attributable to costs related to: - increased personnel costs, - outside services such as contracted research and consulting services, - laboratory and other supplies related to our research and development programs, and - royalties on dollar amounts from Amgen that we paid to a university which has licensed certain neuroimmunophilin ligand technology to us. At December 31, 1998, we employed 185 individuals on a full-time basis in the areas of research, development and manufacturing. We employed 167 individuals and 113 individuals in these areas at December 31, 1997 and 1996, respectively. During 1998, we continued to increase our research and product development efforts, particularly with respect to our NAALADase inhibitor and PARP inhibitor neuroprotectant programs, our FKBP neuroimmunophilin compound program, and our polymer development 10 12 program. We also continued to fund development activities at a third-party manufacturer of clinical supply of DOPASCAN(R) Injection as well as certain costs not reimbursed to us by RPR for Phase I clinical trials for a high-dose formulation of GLIADEL. In addition, we provided financial support for RPR's Phase III clinical trial program in support of a first surgery indication for GLIADEL. During 1997, we continued to increase our research and development efforts, particularly with respect to our FKBP neuroimmunophilin compound program, our NAALADase inhibitor program, our biodegradable polymer program, and other research and development programs. We also continued to fund development activities at the third-party manufacturer for DOPASCAN(R)Injection as well as Phase I clinical trials for a high-dose formulation of GLIADEL. In 1998, 1997 and 1996 our research and development expenses included charges relating to certain consulting agreements we entered into in April 1996. These charges consisted of: - non-cash compensation expense of $439,000, $985,000 and $1.2 million, respectively, and - cash compensation expense of $264,000, $244,000 and $135,000, respectively. We entered into these agreements to assist in the commercialization of GLIADEL, including our efforts to expand the labeling for this product and to generate product line extensions, and to enhance our ability to develop new polymer technologies and products for the delivery of anti- cancer agents for those diseases or conditions where local tumor recurrence is likely and controlled release may be more effective than current therapies. We expect to record up to an additional $750,000, in total, of non-cash compensation charges in our research and development expenses quarterly through 2001 because of these agreements. We also anticipate that our research and development expenses will continue to increase in future periods. General and Administrative Expenses Our general and administrative expenses increased to $10.5 million in 1998. These amounts were $9.1 million in 1997 and $6.7 million in 1996. We attribute the increases in general and administrative expenses of $1.4 million from 1997 to 1998 and $2.4 million from 1996 to 1997 to higher legal services, patent and professional contract services costs as well as higher personnel costs. These costs increased, in part, because of an increase in the activities necessary to support our research, product development and commercialization efforts. At December 31, 1998, we employed 33 individuals on a full-time basis in general and administrative areas. We employed 31 individuals and 25 individuals in these areas at December 31, 1997 and 1996, respectively. We included the costs to prepare, file and prosecute domestic and international patent applications and for other activities to establish and preserve our intellectual property rights in 11 13 our general and administrative expenses. These costs also increased from 1996 through 1998. Costs related to our operations as a publicly-traded company contributed to the increase in general and administrative costs for 1997 as compared to 1996. We anticipate that our general and administrative expenses will continue to increase in future periods. Other Income and Expense Other income and expense consists primarily of interest income on our monetary investments and interest expense on our debt and other financial obligations. Our interest income increased to $8.9 million in 1998 compared to $7.5 million in 1997 and $3.1 million in 1996. The increases over these periods were primarily due to an increase in the average amount of money we invested each year as compared to the prior year, and to a lesser extent, a higher average yield on our investment portfolio. We were able to invest greater amounts during 1997 and 1998 primarily because of: - the public sale of our common stock in April 1997, - Amgen's payment of a one-time signing fee of $15 million in August 1997, and - the sale of our shares and warrants to Amgen for $20 million in October 1997. In 1998, 1997 and 1996, we incurred interest expense of $768,000, $837,000 and $528,000, respectively. These expenses resulted from loans we have with First Union National Bank. These loans have helped fund the construction of our manufacturing, administrative, and research and development facilities and the purchase of certain furniture and equipment. Because we continued to repay these loans, interest expense decreased in 1998 as compared to 1997, resulting in a lower average principal balance during 1998. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and investments were approximately $128.3 million at December 31, 1998. Of this amount, we pledged $16.5 million as collateral for certain of our loans and other financial lease obligations. We have recorded this amount under "Investments - restricted" on our Consolidated Balance Sheets. We include these balance sheets as part of our Consolidated Financial Statements on page 24. The increase of $4.4 million in the amount of restricted investments at December 31, 1998 as compared to December 31,1997 resulted from an increase in the amount of cash collateral related to our design and construction of a new research and development facility. We describe the financing for this facility below. A decrease in cash collateral on certain of our loans with First Union National Bank partially offset this increase in cash collateral. In June 1998, the State of Maryland increased its commitment to guarantee repayment of one of our loans with First Union National Bank. As a result, First Union National Bank reduced the amount of cash collateral related to that loan. In addition, our cash collateral levels decreased somewhat in 12 14 1998 as a result of our continued repayment of our loans with First Union National Bank. We describe our cash collateral requirements in Notes 7 and 8, "Indebtedness - Restrictive Covenants" and "Leases", to the footnotes to our Consolidated Financial Statements on pages 35 and 36. In 1998, we began a program to purchase up to 1,000,000 shares of our common stock in the open market from time to time in our discretion. As of December 31, 1998, we had repurchased 39,600 of our shares for an aggregate of $475,000. In addition, in 1998, individuals holding options to purchase shares of our stock exercised their rights to acquire an aggregate of approximately 178,678 shares. In exchange for issuing these shares, these individuals paid us approximately $1.0 million in cash. Our debt decreased to $10.9 million at December 31, 1998 compared to $13.1 million at December 31, 1997. This decrease resulted primarily because of our continued repayment of principal under our loans with First Union National Bank. We incurred net capital expenditures of $5.2 million in 1998. These amounts were $6.4 million in 1997 and $9.1 million in 1996. We used these capital expenditures to fund the construction of our GLIADEL and biodegradable polymer manufacturing facilities. They also funded improvements to our current facility for research and development laboratories and administrative offices. Additionally, we purchased capital equipment, including laboratory and manufacturing equipment, and computer hardware and software. In March 1998, we entered into arrangements with others that permit us to lease up to $10.8 million in equipment, including computer hardware and software, furniture and fixtures. We leased $3.4 million in equipment under these arrangements in 1998. Depending on the type of equipment covered and certain other factors, the term of any lease we enter under these arrangements can range from two to four years. At December 31, 1998, $7.4 million was available under these arrangements to lease additional equipment. In addition, at December 31, 1998, we were leasing an additional $3.5 million in equipment under a prior lease arrangement. We expect our existing financing arrangements, our internal capital resources and potential external sources of funds to provide for our current equipment needs at least until the end of 1999. If we decide to expand our research and development programs, our capital equipment requirements may increase and thus we may require additional capital funding. In order to meet our anticipated future facilities needs, in 1997 we initiated a project to design and construct a new research and development facility. To accomplish this task, in February 1998 we entered into an operating lease and other related agreements with a trust affiliated with First Union National Bank for such a facility. This new facility is being constructed on a lot adjacent to our current headquarters in Baltimore, Maryland and will be approximately 73,000 square feet when complete. We anticipate that this new R&D facility, along with our current facility, will support our research, development, commercialization and administrative activities until at least the end of 2000. 13 15 Since construction began in the first quarter 1998, we have been acting as construction agent for the First Union National Bank trust, responsible for performing substantially all of the duties associated with the development of the property. We anticipate that we will be able to move into the facility prior to the end of the second quarter of 1999 and expect to consolidate all of our operations into our current headquarters and the new facility in 1999. Our lease to the new facility expires in February 2005. We anticipate that the lease payments for this facility will not exceed $1.5 million annually. At the expiration of the lease term, we may purchase the property for an amount equal to: - all unamortized acquisition and construction costs, plus - all accrued but unpaid interest and similar costs the First Union National Bank trust incurs as part of its acquisition and construction of the property. For convenience we refer to this amount as the "Termination Amount". In the alternative, we may sell the property on behalf of the First Union National Bank trust. The trust then has to credit the proceeds from the sale against our repayment of the Termination Amount. If the sale proceeds are not enough to cover the entire Termination Amount, we then have to repay an amount equal to the difference between 83% of the Termination Amount and the shortfall. In addition, we may extend the lease term, but only if First Union National Bank in its discretion agrees to such an extension. We describe these arrangements with First Union National Bank in Note 8, "Leases", of the footnotes to our Consolidated Financial Statements on page 36. Under our agreements with First Union National Bank related to this new facility, we are required to hold in the aggregate unrestricted cash, cash equivalents and investments of $40 million at all times during the term of the lease. This requirement is in addition to the cash collateral requirements we discuss above in this "Liquidity and Capital Resources" section. RPR has extended to us a $7.5 million line of credit to support expansion of our GLIADEL and polymer manufacturing capacity. As of January 2, 1997, $4.0 million was available to us. The remaining $3.5 million becomes available no earlier than 12 months nor later than 18 months following funding of the initial portion. Any principal amounts we borrow are due five years from the date borrowed. These amounts will carry an interest rate equal to the lowest rate RPR pays from time to time on its most senior debt. We had not borrowed any amounts under this credit facility as of December 31, 1998. We have not yet determined whether to draw on the capital available from RPR to finance the expansion of our polymer manufacturing facilities. During 1998, we entered into a series of interest rate swap transactions with First Union 14 16 National Bank covering $20 million in financial obligations under our lease with the First Union National Bank trust. In January 1999, we entered into additional interest rate swap agreements with First Union covering $10 million in floating rate debt. As a result, we fixed the interest rates on these financial lease obligations and debt at approximately 6% in the aggregate. We describe these interest rate swap transactions with First Union National Bank in Note 4, "Interest Rate Swap Agreements", of the footnotes to our Consolidated Financial Statements on page 33. We expect to need much more money to continue our research and product development programs and preclinical and clinical testing and to manufacture and possibly market our products. We will also need additional funds to meet our future facilities needs. Our capital requirements depend on a number of factors, including: - the progress of our research and development programs, - the progress of preclinical and clinical testing, - the time and costs involved in obtaining regulatory approvals, - the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, - competing technological and market developments, - changes in our existing research relationships, - our ability to establish collaborative arrangements, - our ability to enter into licensing agreements and contractual arrangements with others, and - the progress of efforts to scale- up manufacturing processes. We believe that our existing resources will be sufficient to fund our activities for at least the next 24 months. We may, however, expend these resources before that time for a number of reasons including, among others: - changes in our research, product development and commercialization plans, - other factors that increase our expenses, including potential acquisitions of other companies, assets or technologies, - repurchases of our stock under our ongoing stock repurchase program, and 15 17 - unanticipated capital expenditures. We anticipate that we will fund future capital requirements through a combination of (1) our existing working capital, (2) future revenues generated under our agreements with RPR and Amgen, (3) potential public or private equity or debt financing, (4) additional collaborative agreements with corporate partners for research and product development and/or commercialization, and (5) other potential sources. Our ability to raise capital in the future on acceptable terms depends on conditions in the public and private markets for stock and our performance as well as the overall performance of other companies in our industry. We cannot be sure that any future financing arrangements that we may need will be available to us on acceptable terms, or at all. SUBSEQUENT EVENT During the first quarter of 1999, through March 15, 1999, we repurchased an additional 121,900 shares of our stock on the open market under our stock repurchase program for an aggregate of $1.3 million. THE YEAR 2000 ISSUE Introduction The so-called "Year 2000 issue" results from computer programs that rely on two-digit date codes instead of four-digit date codes to indicate the year. For example, these types of computer systems, which include computer software for desktop computers, software used in scientific equipment, and software embedded in computer chips, indicate the year 1966 by the digits "66". As the year 2000 approaches, these systems will have to process information involving the year 2000 and later years. Systems that only use two-date digit codes may confuse the year 2000 with the year 1900. As a result, these computer programs may not be able to perform computations and decision-making functions correctly. This inability could also cause computer systems or other equipment to malfunction or shutdown completely. We have developed a multi-phase program to address this potential problem. It consists of the following steps: - assess those corporate systems and operations that the Year 2000 issue could adversely affect, - fix or replace non-compliant systems and components, if any, and then - test these systems and components to ensure proper functioning. We have focused our Year 2000 compliance assessment program on four principal areas: 16 18 - our internal information technology system, which includes our internal computer network and phone system; - our internal, non-information technology facilities systems, which include software embedded in: - environmental controls, - security systems, - fire protection systems, - manufacturing hardware and monitoring controls, and - public utility connections for gas, electric and telephone systems, which for convenience we refer to as "Facilities Systems", - software we use with our laboratory and other equipment, which may either be located outside of the equipment or embedded within it, and - Year 2000 compliance of those third parties with which we do important business. They include: - our main vendors of goods and services, including raw materials, laboratory and other equipment, - our financial institutions such as banks and investment managers, - our major insurance companies, and - our corporate partners such as RPR and Amgen. For convenience purposes, we refer to these institutions as our "Major Third Parties". Assessment and Remediation of Internal Systems We continue to conduct an inventory of the internal information technology systems, Facilities Systems, and equipment that we believe the Year 2000 issue could adversely affect. We are also assessing the likelihood of there being a Year 2000 problem with these systems, which together make up our internal company systems. We are currently taking the following actions to address the Year 2000 issue: - repair or replace, as necessary, those internal company systems that we find not to be Year 2000 compliant, - re-test these internal company systems to verify Year 2000 compliance, and - engage an outside consultant to review our approach to Year 2000 compliance. We believe that we will complete these actions no later than June 30, 1999, but expect to continue to test our systems intermittently through the end of 1999. 17 19 Our information technology personnel have discussed whether our enterprise-wide software systems are Year 2000 compliant with the vendors of those systems. We have also tested those systems for Year 2000 compliance. Based on these activities, we believe that such systems are Year 2000 compliant. We will continue to stay in contact with these vendors in order to obtain any additional revisions or upgrades the vendors issue to ensure that such enterprise-wide software remains Year 2000 compliant. Inquiries of Third Parties We are also examining the Year 2000 readiness of our Major Third Parties. We consider these institutions, either together as a group or in certain cases on an individual basis, to pose the greatest Year 2000 risk to our business. Their failure to become Year 2000 compliant could: - limit our ability to obtain raw materials, equipment and supplies in a timely manner, - limit or prevent us from getting: - our cash and other financial assets, and - timely and accurate information about our financial assets, - significantly disrupt our financial transactions, and - interfere with the efforts of our corporate partners to continue their research, development and/or commercialization activities with respect to GLIADEL and the FKBP neuroimmunophilin compound technology. We are in the process of contacting our Major Third Parties, which consist of approximately 20 institutions, to ask that they give us information about their Year 2000 compliance status, and we recently mailed Year 2000 compliance inquiry letters to them in this regard. Except for asking these third parties about their Year 2000 compliance and assessing their responses, we cannot independently verify whether these institutions are or will be Year 2000 compliant. In most cases we have limited or no ability to influence directly the Year 2000 compliance activities of these Major Third Parties. If any or all of these institutions fail to achieve substantial Year 2000 compliance, this failure could have a material adverse effect on our business, financial condition and results of operations. Furthermore, most of RPR's sales of GLIADEL are to hospitals. The failure of these hospitals, or of any of RPR's other customers for GLIADEL, to pay for their GLIADEL purchases because of a Year 2000 problem could materially and adversely affect our business. In addition, sales of GLIADEL are dependent, in part, on the availability of reimbursements from third-party healthcare payors, such as government insurance plans like Medicare and Medicaid, and private insurance plans. Again, the failure of these third-party healthcare payors to 18 20 reimburse claims because of Year 2000 problems could materially and adversely affect our business. Remediation Costs As of December 31, 1998, the total costs for our Year 2000 compliance program have not been significant. We historically have not tracked these costs but estimate that our costs did not exceed $200,000 in 1998. We did not incur any external costs during 1998 related to the Year 2000 issue. Based on information currently available to us, we do not believe that the future costs associated with developing a Year 2000 compliance plan and bringing our internal computer systems into Year 2000 compliance will be material. We estimate that the total costs will not exceed $400,000 in the aggregate. As of December 31, 1998, we estimate that we have incurred approximately 25% of the total costs we anticipate that we will incur to address Year 2000 issues relating to our internal company systems. Further, as of December 31, 1998, we had not separately set aside funds specifically to address the Year 2000 issue, but rather are using funds allocated to our yearly information technology budget. However, as we note above, with respect to most of our internal computer systems, we are still conducting our Year 2000 compliance and remediation activities. Depending on the actual outcome of our Year 2000 compliance testing activities, the costs may be significantly greater than our current estimates. We also do know whether the costs associated with our efforts to assess and address any Year 2000 compliance concerns regarding our Major Third Parties will be material. As we note above, with most Major Third Parties, we have little or no direct ability to influence the Year 2000 compliance efforts of these institutions. Depending on the responses we get from suppliers, we will decide on a case-by-case basis whether to seek out alternative suppliers. As of March 15, 1999, we had not switched vendors because of concerns over Year 2000 readiness. If we determine to seek out an alternative supplier in the future because of that supplier's inability to assure us of its Year 2000 compliance, we may not be able to find an adequate alternative supplier. In certain cases, a vendor may represent the sole supplier for a good or service. Disaster Recovery Plans and Certain Mitigating Factors In addition to our Year 2000 compliance activities, we are working with an outside consulting firm to implement a comprehensive disaster recovery plan. This plan will cover a variety of areas, including the Year 2000 issue. We currently anticipate putting such a plan into place no later than June 30, 1999. We do not anticipate that the external costs for putting such a plan in place will exceed $125,000 in the aggregate. We currently make complete back-up copies of all of the data generated on our computer systems on a weekly basis. We also track changes to such data on a daily basis. We believe this 19 21 practice should limit the amount of computer system data that would be lost if our computer systems were to fail as a result of a Year 2000 issue. Many of our Facilities Systems, including our environmental controls, security systems, and fire protection systems, have manual override functions. These will allow us to operate certain of our Facilities Systems even if their software malfunctions. In addition, while we primarily hold our financial assets at a single banking institution, we hold certain financial assets at, and have established a $5 million line of credit with, another banking institution. This arrangement should allow us to meet our operating expenses in the short term in the event our primary banking relationship were to be interrupted because of a Year 2000 issue. With respect to GLIADEL, we maintain what we believe to be sufficient inventories of raw materials, package components and product to prevent a product supply interruption if a vendor should have a Y2K problem. Due to the nature of our business, even if (1) we were to fail to implement our Year 2000 compliance program successfully for our internal company systems or (2) the Year 2000 compliance provisions of our disaster recovery plan prove inadequate, we believe that these circumstances would not have a material adverse effect on our business, financial condition and results of operations over the long term. They would, however, disrupt our operations in the short-term. However, the failure of one or more of our Major Third Parties, particularly our banks, investment managers, corporate partners, and suppliers of key raw materials to be Year 2000 compliant could have a material adverse effect on our business, financial condition and results of operations over the long term. Risks We have based our estimate as to the costs of our Year 2000 compliance program and disaster recovery plan and our expected dates for implementing these initiatives on the information currently available to us. We have based these estimates on a number of assumptions regarding future events. These include the continued availability of certain resources and other factors. We cannot be sure that these costs will not exceed our expectations or that the Year 2000 issue will not substantially and adversely affect our business, financial condition or results of operations. Specific factors that might cause our estimates not to be correct include: - our ability to locate and correct all relevant computer codes, including software embedded in environmental controls and manufacturing and laboratory equipment, - the ability of the Major Third Parties to identify and resolve their own Year 2000 issues, - the availability and cost of personnel trained in the area of Year 2000 compliance, and - unforeseen or unanticipated problems that we are unable to address or can only remedy at 20 22 great cost. Furthermore, our current cost estimates do not include costs that we may incur as a result of the failure of Major Third Parties, including Amgen and RPR, to become Year 2000 compliant on a timely basis. Moreover, if a Year 2000 issue causes (1) hospitals and other of RPR's customers for GLIADEL to fail to pay for their GLIADEL purchases or (2) third-party healthcare payors to fail to reimburse claims for GLIADEL, such failures could materially and adversely affect our business. Finally, our ability to continue to manufacture GLIADEL, conduct our research and product development programs, and function as a viable business enterprise depends on the continued availability of various basic infrastructure systems. These include electric power, telecommunications and transportation systems. We cannot be sure that the Year 2000 issue will not disrupt these infrastructure systems. If such disruptions were to occur in the Baltimore, Maryland metropolitan region where our manufacturing facilities and research and development laboratories are located and/or the East Coast of the United States, these disruptions could very well have a material adverse effect on our business, financial condition, results of operations, or business prospects. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 21 23 GUILFORD PHARMACEUTICALS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report ............................................ 23 Consolidated Balance Sheets ............................................. 24 Consolidated Statements of Operations ................................... 25 Consolidated Statements of Changes in Stockholders' Equity .............. 26 Consolidated Statements of Cash Flows ................................... 27 Notes to Consolidated Financial Statements .............................. 28 22 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Guilford Pharmaceuticals Inc.: We have audited the accompanying consolidated balance sheets of Guilford Pharmaceuticals Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guilford Pharmaceuticals Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Philadelphia, Pennsylvania February 12, 1999 23 25 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------- ------------------- ASSETS - ------ Current assets: Cash and cash equivalents $ 8,480 $ 24,980 Investments 103,281 123,120 Accounts receivable 1,241 606 Inventories 1,291 1,342 Other current assets 709 494 --------------------- ------------------- Total current assets 115,002 150,542 Investments - restricted 16,500 12,119 Property and equipment, net 18,790 17,153 Other assets 736 267 --------------------- ------------------- $ 151,028 $ 180,081 ===================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 3,265 $ 2,743 Current portion of long-term debt 2,159 2,159 Accrued payroll related costs 2,279 2,000 Accrued contracted services 2,095 1,527 Accrued expenses and other current liabilities 960 1,307 Deferred income 1,125 1,125 --------------------- ------------------- Total current liabilities 11,883 10,861 Long-term debt, net of current portion 8,766 10,926 --------------------- ------------------- Total liabilities 20,649 21,787 --------------------- ------------------- Stockholders' equity: Preferred stock, par value $.01 per share Authorized 4,700,000 shares, none issued - - Series A junior participating preferred stock, par value $.01 per share. Authorized 300,000 shares, none issued - - Common stock, par value $.01 per share Authorized 75,000,000 shares 19,594,316 and 19,387,946 issued at December 31, 1998 and December 31, 1997, respectively 196 194 Additional paid-in capital 187,139 185,205 Accumulated deficit (56,009) (26,311) Accumulated other comprehensive income 876 426 Note receivable from officer (60) (60) Treasury stock, at cost: 77,224 and 35,547 shares in 1998 and 1997, respectively (1,399) (878) Deferred compensation (364) (282) --------------------- ------------------- Total stockholders' equity 130,379 158,294 --------------------- ------------------- $ 151,028 $ 180,081 ===================== ===================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 24 26 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------------------------------------------------------- Revenues: Contract revenues $ 1,000 $ 15,000 $ 27,600 Net product sales 3,860 5,741 - License fees and royalties 2,713 1,628 - Revenues under collaborative agreements 4,910 1,459 420 ----------------------------------------------------------- Total revenues 12,483 23,828 28,020 Costs and Expenses: Cost of sales 2,036 2,585 - Research and development 37,722 30,293 18,761 General and administrative 10,546 9,076 6,736 ----------------------------------------------------------- Total costs and expenses 50,304 41,954 25,497 ----------------------------------------------------------- Operating income (loss) (37,821) (18,126) 2,523 Other income (expense): Interest income 8,855 7,477 3,070 Interest expense (768) (837) (528) Other income 36 49 8 ----------------------------------------------------------- Net income (loss) $ (29,698) $ (11,437) $ 5,073 =========================================================== Basic earnings (loss) per common share $ (1.52) $ (0.65) $ 0.39 =========================================================== Average common shares outstanding 19,479 17,570 13,001 =========================================================== Diluted earnings (loss) per common share $ (1.52) $ (0.65) $ 0.35 =========================================================== Average common and dilutive equivalent shares outstanding 19,479 17,570 14,634 ===========================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 25 27 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK -------------- ADDITIONAL NUMBER PAID-IN OF SHARES AMOUNT CAPITAL ------------- ----------- -------------- BALANCE, JANUARY 1, 1996 6,793,065 $ 68 $ 38,121 Comprehensive income Net income for the year Other comprehensive income Unrealized gain on available-for-sale securities Total comprehensive income Issuance of common stock in follow-on public offering at $20.00 * per share, net of offering costs 2,300,000 23 42,880 Other issuances of common stock 226,595 2 7,679 Three-for-two stock split 4,659,830 47 (47) Equity proceeds from Gell Pharmaceuticals relating to the put option 1,076 Amortization of stock option compensation 1,171 Amortization of deferred compensation Reduction in notes receivable on common stock BALANCE, DECEMBER 31, 1996 13,979,490 $ 140 $ 90,880 Comprehensive loss Net loss for the year Other comprehensive income Unrealized gain on available-for-sale securities Total comprehensive loss Issuance of common stock in follow-on public offering at $20.00 per share, net of offering costs 3,737,500 37 70,429 Other issuances of common stock 1,670,956 17 22,911 Purchase of 35,547 shares of common stock Amortization of stock option compensation 985 Amortization of deferred compensation Reduction in notes receivable on common stock BALANCE, DECEMBER 31, 1997 19,387,946 $ 194 $ 185,205 Comprehensive loss Net loss for the year Other comprehensive income Unrealized gain on available-for-sale securities Total comprehensive loss Issuances of common stock 206,370 2 1,485 Purchase of 41,677 shares of common stock Stock option compensation 449 Amortization of deferred compensation ------------- ----------- -------------- BALANCE, DECEMBER 31, 1998 19,594,316 $ 196 $ 187,139 ============= =========== ==============
ACCUMULATED NOTE OTHER RECEIVABLE ACCUMULATED COMPREHENSIVE FROM DEFICIT INCOME OFFICER ---------------- --------------- ----------- BALANCE, JANUARY 1, 1996 $ (19,947) $ - $ (139) Comprehensive income Net income for the year 5,073 Other comprehensive income Unrealized gain on available-for-sale securities 62 Total comprehensive income Issuance of common stock in follow-on public offering at $20.00 * per share, net of offering costs Other issuances of common stock Three-for-two stock split Equity proceeds from Gell Pharmaceuticals relating to the put option Amortization of stock option compensation Amortization of deferred compensation Reduction in notes receivable on common stock 10 BALANCE, DECEMBER 31, 1996 $ (14,874) $ 62 $ (129) Comprehensive loss Net loss for the year (11,437) Other comprehensive income Unrealized gain on available-for-sale securities 364 Total comprehensive loss Issuance of common stock in follow-on public offering at $20.00 per share, net of offering costs Other issuances of common stock Purchase of 35,547 shares of common stock Amortization of stock option compensation Amortization of deferred compensation Reduction in notes receivable on common stock 69 BALANCE, DECEMBER 31, 1997 $ (26,311) $ 426 $ (60) Comprehensive loss Net loss for the year (29,698) Other comprehensive income Unrealized gain on available-for-sale securities 450 Total comprehensive loss Issuances of common stock Purchase of 41,677 shares of common stock Stock option compensation Amortization of deferred compensation ---------------- --------------- ----------- BALANCE, DECEMBER 31, 1998 $ (56,009) $ 876 $ (60) ================ =============== ===========
TOTAL TREASURY DEFERRED STOCKHOLDERS' STOCK, AT COST COMPENSATION EQUITY ---------------- -------------- --------------- BALANCE, JANUARY 1, 1996 $ - $ (330) $ 17,773 Comprehensive income Net income for the year 5,073 Other comprehensive income Unrealized gain on available-for-sale securities 62 --------------- Total comprehensive income $ 5,135 --------------- Issuance of common stock in follow-on public offering at $20.00 * per share, net of offering costs 42,903 Other issuances of common stock 7,681 Three-for-two stock split - Equity proceeds from Gell Pharmaceuticals relating to the put option 1,076 Amortization of stock option compensation 1,171 Amortization of deferred compensation 128 128 Reduction in notes receivable on common stock 10 BALANCE, DECEMBER 31, 1996 $ - $ (202) $ 75,877 Comprehensive loss Net loss for the year (11,437) Other comprehensive income Unrealized gain on available-for-sale securities 364 --------------- Total comprehensive loss $ (11,073) --------------- Issuance of common stock in follow-on public offering at $20.00 per share, net of offering costs 70,466 Other issuances of common stock (331) 22,597 Purchase of 35,547 shares of common stock (878) (878) Amortization of stock option compensation 985 Amortization of deferred compensation 251 251 Reduction in notes receivable on common stock 69 BALANCE, DECEMBER 31, 1997 $ (878) $ (282) $ 158,294 Comprehensive loss Net loss for the year (29,698) Other comprehensive income Unrealized gain on available-for-sale securities 450 --------------- Total comprehensive loss $ (29,248) --------------- Issuances of common stock (191) 1,296 Purchase of 41,677 shares of common stock (521) (521) Stock option compensation 449 Amortization of deferred compensation 109 109 ---------------- -------------- --------------- BALANCE, DECEMBER 31, 1998 $ (1,399) $ (364) $ 130,379 ================ ============== ===============
- --------------- * Per share prices are pre-stock split. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 26 28 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (29,698) $ (11,437) $ 5,073 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,575 2,735 1,102 Noncash compensation expense 558 1,236 1,309 Gain on sale of assets 26 - - Changes in assets and liabilities: Accounts receivable, other current assets, and other assets (1,339) (135) (94) Inventory 51 191 (1,533) Accounts payable and other current liabilities 908 3,306 2,110 ----------------- --------------- --------------- Net cash provided by (used in) operating activities (25,919) (4,104) 7,967 ----------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (5,104) (6,433) (9,101) Sales and maturities of available-for-sale securities 100,130 100,457 47,010 Purchases of available-for-sale securities (84,222) (174,453) (92,633) ----------------- --------------- --------------- Net cash provided by (used in) investing activities 10,804 (80,429) (54,724) ----------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of common stock 1,296 93,063 50,584 Purchase of treasury stock (521) (878) - Proceeds from bond and term loan issuances - 1,843 7,867 Equity proceeds from Gell Pharmaceuticals Inc. relating to the put option - - 1,076 Payment of notes receivable on common stock - 69 - Principal payments on bond and term loan payable (2,160) (1,144) (470) ----------------- --------------- --------------- Net cash provided by (used in) financing activities (1,385) 92,953 59,057 ----------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents (16,500) 8,420 12,300 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 24,980 16,560 4,260 ----------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT THE END OF YEAR $ 8,480 $ 24,980 $ 16,560 ================= =============== =============== Supplemental disclosures of cash flow information: Net interest paid $ 784 $ 828 $ 470
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 27 29 GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) ORGANIZATION AND BUSINESS ACTIVITIES Guilford Pharmaceuticals Inc. (together with its subsidiaries, "Guilford" or the "Company") is a biopharmaceutical company, located in Baltimore, Maryland, engaged in the development and commercialization of novel products in two principal areas: (i) targeted and controlled drug delivery systems using proprietary biodegradable polymers for the treatment of cancer and other diseases; and (ii) therapeutic and diagnostic products for neurological diseases and conditions. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Guilford Pharmaceuticals Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Highly liquid investments with an original maturity of three months or less are classified as cash equivalents. Investments The Company classifies investments at the time of purchase as either available-for-sale or held-to-maturity. Investments in securities that are classified as available-for-sale are carried at their fair values. Changes in the fair values of available-for-sale securities are recognized as a separate component of stockholders' equity as "Accumulated Other Comprehensive Income". Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Held-to-maturity securities are carried at cost adjusted for amortized premium or discount. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary is an impairment which would result in a reduction in the carrying amount to fair value. Such impairment, if any, is charged to earnings and a new cost basis for the security is established. Dividends and interest income are recognized when earned. Inventories Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in, first-out method. 28 30 Property and Equipment Property and equipment are recorded at cost, including interest on funds borrowed to finance construction of real property. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, generally three to seven years for furniture and equipment, and over the shorter of the estimated useful life of leasehold improvements or the related lease term for such improvements. Upon the disposition of assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the consolidated statements of operations. Expenditures for repairs and maintenance are expensed as incurred. Revenue Recognition Product sales are recognized at the time the product has received a certificate of analysis and has been shipped. Sales are reported net of estimated discounts, rebates, chargebacks and product returns. Royalty revenue is recognized at such time as the Company's sales, marketing and distribution partner sells the product (see note 14). Collaborative research revenue is recognized, up to the contractual limits, when the Company meets its performance obligations under the respective agreements. Contract and non-refundable licensing revenue is recognized when milestones are met and the Company's significant performance obligations have been satisfied in accordance with the terms of the respective agreements. Payments received that relate to future performance are deferred and recognized as revenue at the time such future performance has been accomplished. Research and Development, Patent and Royalty Costs Research and development, patent, and royalty costs are expensed as incurred. Royalty expense related to product sales is recognized concurrently with the recognition of product revenue and included as part of cost of sales. Royalty expense from third party sales is expensed as incurred and is offset against royalty revenue related to third party sales. Accounting for Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. Stock-Based Compensation On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which permits companies to continue to apply the provisions of Accounting Principles Board APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, in accounting for its employee share option plans. The Company continues to apply APB No. 25. Under the Company's employee share option plans, share options are granted at an exercise price that equals the current fair market value at the date of grant. Under APB 25, no compensation 29 31 expense is recorded for employee share options issued at current fair market value. Under FAS 123, the Company is required to provide pro forma net earnings (loss) and pro forma earnings (loss) per share footnote disclosures for employee stock option grants as if the fair-value based method defined in FAS 123 had been applied. Stock-based awards issued to non-employees are accounted for under the fair-value based method defined in FAS 123. Comprehensive Income On January 1, 1998, the Company adopted FAS No. 130 "Reporting Comprehensive Income" ("FAS 130"). Under FAS 130, the Company is required to display comprehensive income (loss) and its components as part of the Company's full set of financial statements. Comprehensive income (loss) is comprised of net income (loss) and net unrealized gains (losses) on securities and is presented in the consolidated statements of changes in stockholders' equity. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform with the requirements of FAS 130. Earnings (Loss) per Share Basic EPS is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. The computation of Diluted EPS is similar to Basic EPS except that the weighted-average number of shares outstanding for the period is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares are excluded if the effect on earnings (loss) per share is antidilutive. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Such asset is deemed impaired and written down to its fair value if expected future net cash flows are less than its carrying amount. Interest Rate Swap Agreements As a hedge against fluctuations in interest rates, the Company has entered into interest rate swap agreements to exchange a portion of its variable rate interest payment obligations for fixed rates. The Company does not speculate on the future direction of interest rates nor does the Company use these derivative financial instruments for trading purposes. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the financial obligation. Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. The fair values of financial instruments approximate their recorded value. Concentration of Credit Risk The Company invests excess cash in accordance with a policy objective that seeks to preserve both liquidity 30 32 and safety of principal. The policy limits investments to certain instruments issued by institutions with strong investment grade credit ratings at the time of purchase and places restrictions on their terms and concentrations by type and issuer. Uncertainties The Company is subject to certain risks common to companies within the biotechnology industry. These include, but are not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, estimation by the Company of the size and characteristics of the market for the Company's product(s), acceptance of the Company's product(s), health care containment initiatives, product liability, and compliance with government regulations and agencies, including the U.S. Food and Drug Administration. Use of Estimates The preparation of the Company's 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 disclosures 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. Significant Customer and Product The Company sells only one product, GLIADEL, a novel treatment for recurrent malignant gliablastoma multiforme, the most fatal form of brain cancer. The Company markets, sells and distributes its product through one of its partners Rhone-Poulenc Rorer Pharmaceuticals Inc ("RPR") (see note 14). Substantially all sales were with RPR for the years ended December 31, 1998 and 1997. GLIADEL was launched in February of 1997; accordingly, there were no sales in 1996. The Company expects that future sales will also be derived largely from the same customer and will be relying upon that customer's ability to obtain regulatory clearance where necessary and then market, sell and distribute the product. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS 133"), effective beginning in the first quarter of 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative 31 33 instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting under FAS 133. Based on the requirements of FAS 133, there may be changes to the balance sheet and reported assets and liabilities. The Company is currently evaluating the impact of FAS 133 on its consolidated financial position and results of operations. (3) INVESTMENTS Investments in marketable securities as of December 31, 1998 and 1997 are as follows:
Gross Gross Unrealized Unrealized Holding Holding Fair 1998 Cost Gains Losses Value ---- ---- ----- ------ ----- (in thousands) Available-for-sale: U.S. Treasury Securities $ 89,399 $689 $ - $ 90,088 Corporate Debt Securities 15,900 36 - 15,936 Other Debt Securities 11,073 151 - 11,224 -------- --- --------- -------- $116,372 $876 $ - $117,248 -------- ---- --------- -------- Held-to-maturity: U.S. Treasury Securities $2,023 $ 16 $ - $ 2,039 Corporate Debt Securities 510 - (1) 509 --- ----- --- -------- $ 2,533 $ 16 $ (1) $ 2,548 --------- ---- ---------- -------- $118,905 $892 $ (1) $119,796 ======== ==== ========== ======== 1997 ---- Available-for-sale: U.S. Treasury Securities $ 97,499 $ 458 $ (89) $ 97,868 Corporate Debt Securities 6,990 13 (5) 6,998 Other Debt Securities 6,292 49 - 6,341 -------- ------ ------- --------- $110,781 $ 520 $ (94) $ 111,207 -------- ----- ------- --------- Held-to-maturity: U.S. Treasury Securities $ 20,162 $ 24 $ (4) $ 20,182 Corporate Debt Securities 3,870 7 (4) 3,873 -------- ------ ----------- --------- $ 24,032 $ 31 $ (8) $ 24,055 -------- ---- -------- --------- $ 134,813 $ 551 $ (102) $135,262 ========= ===== ======= =========
At December 31, 1998 and 1997, investments of $16.5 million and $12.1 million, respectively, are classified as "Investments - restricted" in the accompanying consolidated balance sheets (see notes 7 and 8). Maturities of debt securities classified as available-for-sale and held-to-maturity were as follows at December 31, 1998. 32 34
December 31, 1998 ----------------- Amortized Fair Cost Value ---- ----- (in thousands) Available-for-sale Due in 1 year or less $23,869 $23,962 Due in 1- 5 years 86,555 87,320 Greater than 5 years 5,948 5,966 -------- -------- $116,372 $117,248 -------- -------- Held-to-maturity Due in 1 year or less $ 2,023 $ 2,033 Due in 1-5 years 510 515 -------- --------- $ 2,533 $ 2,548 -------- --------- $118,905 $119,796 ======== =========
(4) INTEREST RATE SWAP AGREEMENTS During 1998, the Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on certain financial lease obligations (see note 8). The interest rate swap agreements are with First Union National Bank ("First Union"), having a total notional principal amount of $20 million at December 31, 1998. In January 1999, the Company entered into additional interest rate swap agreements having a total notional principal amount of $10 million on its long-term debt (see note 7). As a result of these interest rate swap agreements, the Company has effectively fixed the interest rates on its long-term debt and certain financial lease obligations to an annual rate of approximately 6%. The interest rate swap agreements have the same maturity as its long-term debt and certain financial lease obligations. First Union has the right to terminate these agreements on the fifth year anniversary date of each such agreement. The fair value of the Company's interest rate swap agreements approximate carrying value at December 31, 1998. The Company is not directly exposed to credit risk. In the event of non-performance by First Union, which is unlikely, the Company could be exposed to market risk related to interest rates. (5) INVENTORIES Inventories consist of the following:
December 31, ---------------------- 1998 1997 -------- -------- (in thousands) Raw materials $ 283 $ 386 Work in process 371 497 Finished goods 637 459 ------- ------- $ 1,291 $ 1,342 ======= =======
Inventories are net of applicable reserves and allowances. Inventories include products and materials that may be either available for sale and/or production or utilized internally in the Company's development activities. Inventories identified for development activities are expensed in the period in which such inventories are designated for such use. (6) PROPERTY AND EQUIPMENT Property and equipment consist of the following: 33 35
December 31, ----------------------- 1998 1997 ------ ------ (in thousands) Laboratory equipment $ 4,055 $ 4,779 Manufacturing equipment 2,544 2,299 Computer and office equipment 4,106 3,825 Leasehold improvements 15,838 7,773 Construction in process - 2,925 ------- -------- $26,543 $ 21,601 Less accumulated depreciation and amortization (7,753) (4,448) ------- -------- $18,790 $ 17,153 ======= ========
34 36 (7) INDEBTEDNESS Long-term debt at December 31, 1998 and 1997 consists of the following:
December 31, ----------------------- 1998 1997 -------- -------- (in thousands) Borrowings under bond financing arrangement, payable in monthly installments of $78,431, plus interest at LIBOR + .75% (6.287% at December 31,1998), final payment due December 2004 $ 5,647 $ 6,588 Borrowings under term loan, payable in monthly installments of $101,515, plus interest at LIBOR + .625% (6.172% at December 31, 1998), final payment due April 2003 5,278 6,497 ------- ------- Total long-term debt $10,925 $13,085 Less current potion of long-term debt (2,159) (2,159) ------- ------- Long-term debt, net of current portion $ 8,766 $10,926 ======= =======
See note 4 - Interest Rate Swap Agreements Bond Financing Arrangement In 1994, the Company entered into a $8 million bond financing arrangement with a commercial bank. The bond was issued by the Maryland Economic Development Corporation and 50% of the outstanding borrowings were guaranteed by the Maryland Industrial Development Financing Authority ("MIDFA"). Effective June 1998, MIDFA increased its guarantee from 50% to 81.73% of the outstanding borrowings. Term Loan Agreement In 1996, the Company entered into a term loan agreement, as amended, with a commercial bank for up to $6.7 million. During 1997, the Company borrowed $1.8 million, the remaining available principal amount under the term loan agreement. The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1998 are approximately: 1999, $2.2 million; 2000, $2.2 million; 2001, $2.2 million; 2002, $2.2 million; and 2003, $1.3 million. Restrictive Covenants The aforementioned debt agreements contain certain restrictions which require the Company to meet certain financial covenants. Under the bond financing arrangement, the Company maintained $0.9 million at December 31, 1998 as cash collateral (approximately 18.27% of the outstanding principal balance). In accordance with the term loan agreement, the Company maintained $5.3 million at December 31, 1998 (equal to 100% of the outstanding principal balance). The total cash collateral is included in the accompanying consolidated balance sheets as "Investments-restricted". Other covenants preclude the Company from declaring any cash dividends on its common stock without prior written consent. 35 37 Revolving Line of Credit In 1998, the Company entered into a revolving line of credit agreement with a commercial bank for $5 million. Borrowings under the line of credit, if any, require interest at LIBOR plus .55% and are payable on demand. Under the terms of the agreement, the Company is required to maintain cash, cash equivalents and investments in the aggregate equal to $40 million. There were no amounts outstanding under the line of credit at December 31, 1998. (8) LEASES In February 1998, the Company entered into a Real Estate Development Agreement and an operating lease agreement in connection with the construction of a new research and development facility. The facility, which is expected to be approximately 73,000 square feet, will be adjacent to the Company's corporate headquarters in Baltimore, Maryland. Construction costs are estimated not to exceed $20 million in the aggregate. The lease term is for a maximum of 84 months, which includes a construction period of up to 24 months. The Company will not make rental payments during the construction period and will have the option to purchase the facility at the end of the lease term in February 2005. The Company anticipates that the annual lease payments will not exceed $1.5 million. In the event the Company chooses not to exercise its purchase option, the Company is obligated to arrange for the sale of the facility and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility. If the sales proceeds are less than the lessor's net investment in the Facility, the Company has to pay an amount equal to the difference between 83% of the lessor's net investment in the facility and the shortfall. During the construction period, the Company must maintain cash collateral equal to 100% of the cost of construction not to exceed $20 million. Upon completion of construction, the Company may reduce the amount of aggregate cash collateral by approximately $5.1 million. As of December 31, 1998, the Company had established cash collateral of approximately $8.1 million related to this transaction. The cash collateral is included in the accompanying consolidated balance sheets as "Investments-restricted". In addition the Company is subject to certain financial covenants the most restrictive of which requires that the Company maintain unrestricted cash, cash equivalents and investments in the aggregate equal to $40 million. The Company has several non-cancelable operating leases for equipment and buildings. In March 1998, the Company entered into certain Master Lease Agreements to provide up to $10.8 million for computer and equipment financing. The Company's ability to draw on these Master Lease Agreements expires on December 31, 1999. The term of each operating lease may range from 24 to 48 months based upon the type of equipment being financed. As of December 31, 1998, the Company had leased approximately $4.1 million in computer and other equipment under these agreements. 36 38 The Company's future minimum lease payments under these non-cancelable operating leases for years subsequent to December 31, 1998 are as follows:
Amount Year (in thousands) ---------- -------------- 1999 $ 3,943 2000 3,658 2001 2,870 2002 2,221 2003 and thereafter 6,240 ------- $18,932 -------
Rent expense for operating leases was approximately $2.7 million, $ 1.5 million and $0.7 million in 1998, 1997 and 1996, respectively. (9) INCOME TAXES As of December 31, 1998, the Company had net operating loss ("NOL") carryforwards available for federal income tax purposes of approximately $51 million, which expire at various dates between 2010 and 2018. NOL carryforwards are subject to ownership change limitations and may also be subject to various other limitations on the amounts to be utilized. As of December 31, 1998, the Company had tax credit carryforwards of approximately $1 million expiring between 2010 and 2015. Actual income tax expense differs from the expected income tax expense computed at the effective federal rate as follows:
1998 1997 1996 --------- ---------- ------- (in thousands) Computed "expected" tax expense (benefit) at statutory rate $(10,097) $(3,889) $1,725 State income tax, net of federal expense (1,965) (515) 230 Research collaboration revenue - - 557 Compensatory stock awards - (373) - Change in valuation allowance 12,608 4,734 (2,552) Other, net (546) 43 40 --------- ------- ---------- $ - $ - $ - ========= ======= ==========
Realization of net deferred tax assets related to the Company's NOL carryforwards and other items is dependent on future earnings, which are uncertain. Accordingly, a valuation allowance has been established equal to net deferred tax assets which are not likely to be realized in the future, resulting in net deferred tax assets of approximately $138,000 at December 31, 1998 and 1997. The change in the valuation allowance was an increase of approximately $12.6 million in 1998 and an increase of approximately $6.6 million in 1997. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1997 are shown below. 37 39
December 31, ----------------------- 1998 1997 ------ ------ (in thousands) Deferred tax assets: Net operating loss carryforwards $20,771 $ 8,869 Research and experimentation credits 960 1,710 Compensatory stock grants 1,599 1,228 Alternative minimum tax credit carryforwards 138 138 Accrued expenses 1,502 403 Contribution carryover and capitalized start-up costs 88 51 --------- ----------- $25,058 $12,399 Deferred tax liabilities: Prepaid expenses and depreciation (266) (215) ------- ------ Net deferred tax assets 24,792 12,184 Valuation allowance (24,654) (12,046) ------- ------- Net deferred tax assets reported $ 138 $ 138 ======== ========
(10) CAPITAL TRANSACTIONS In September 1998, the Company announced that a Committee of the Company's Board of Directors had authorized a common stock repurchase program of up to 1,000,000 shares of the Company's common stock in the aggregate. The Company plans to purchase its common stock in the open market or in block transactions from time to time as it deems appropriate. As of December 31, 1998, the Company has repurchased 39,600 shares of its common stock under this repurchase program at an aggregate cost of approximately $475,000. On October 1, 1997, the Company sold 640,095 shares of common stock to Amgen Inc. ("Amgen") for $15 million (see note 14). In addition, the Company issued for $5 million a five-year warrant to purchase up to 700,000 shares of the Company's common stock at an exercise price of $35.15 per share. In April 1997, the Company completed a follow-on public equity offering of approximately 3.7 million shares of its common stock providing net proceeds of approximately $71 million to the Company. In March 1997, The Abell Foundation, Inc. exercised its put option to receive the 750,000 shares of the Company's common stock in exchange for its 80% interest in Gell Pharmaceuticals Inc. After such date, Gell became a wholly owned subsidiary of the Company and is included in the accompanying consolidated financial statements. On October 15, 1996, the Board of Directors declared a three-for-two stock split. Equity transactions (including number of shares) prior to that date have been adjusted to reflect the stock split. In June 1996, the Company entered into a stock purchase agreement with Rhone-Poulenc Rorer Pharmaceuticals Inc. and its parent corporation (collectively "RPR") (see note 14) whereby, RPR purchased 281,531 shares of the Company's common stock for $7.5 million. In March 1996, the Company completed a follow-on public equity offering of approximately 3.5 million shares of its common stock, providing net proceeds of approximately $43 million to the Company. The Company is authorized to issue up to 4,700,000 shares of preferred stock in one or more different series with terms fixed by the Board of Directors. Stockholder approval is not required to issue this preferred stock. There are no shares of this preferred stock outstanding at December 31, 1998. 38 40 (11) STOCKHOLDER RIGHTS PLAN In September 1995, the Board of Directors adopted a Stockholder Rights Plan in which preferred stock purchase rights ("Rights") were granted at the rate of one Right for each share of common stock. All Rights expire on October 10, 2005. At December 31, 1998, the Rights were neither exercisable nor traded separately from the Company's common stock, and become exercisable only if a person or group becomes the beneficial owner of 20% or more of the Company's common stock or announces a tender or exchange offer which would result in its ownership of 20% or more of the Company's common stock. Each holder of a Right, other than the acquiring person, would be entitled to purchase $120 worth of common stock of the Company for each Right at the exercise price of $60 per Right, which would effectively enable such Rights holders to purchase common stock at one-half of the then current price. If the Company is acquired in a merger, or 50% or more of the Company's assets are sold in one or more related transactions, each Right would entitle the holder thereof to purchase $120 worth of common stock of the acquiring company at the exercise price of $60 per Right. At any time after a person or group of persons becomes the beneficial owner of 20% or more of the common stock, the Board of Directors, on behalf of all stockholders, may exchange one share of common stock for each Right, other than Rights held by the acquiring person. (12) SHARE OPTION AND RESTRICTED SHARE PLANS Employee Share Option and Restricted Share Plans The Company adopted Employee Share Option and Restricted Share Plans (the "Plans") in 1998 and 1993. The Plans were established to provide eligible individuals with an opportunity to acquire or increase an equity interest in the Company and to encourage such individuals to continue in the employment of the Company. Under both plans, share options are granted at the fair market value of the stock on the day immediately preceding the date of grant or date of initial employment, if later. Share options are exercisable for a period not to exceed ten years from the date of grant. In general, share options vest over four years. Shares awarded under the restricted share provisions of the Plans are valued at the fair market value of the stock on the day immediately preceding the date of award (date of grant, if later) and require a vesting period determined by the Board of Directors. Should an individual leave the employment of the Company for any reason (other than by reason of death or permanent disability), the award recipient would forfeit their ownership rights for all share options and restricted shares not otherwise fully vested. At December 31, 1998, the maximum share options issuable under the Plans are 4,035,000, of which up to 350,000 shares may be issued under the restricted share provisions. At December 31, 1998, there were 1,898,239 share options available for grant under the Plans. The Directors' Plan The Director's Stock Option Plan (the "Directors' Plan") was established to provide non-employee directors an opportunity to acquire or increase an equity interest in the Company. Under the Directors' Plan, 300,000 shares of common stock are reserved for issuance at an exercise price not less than fair value of the Company's common stock on the day immediately preceding the date of grant. Such share options vest 50% at the end of year one and 100% at the end of year two. Under the Directors' Plan, 52,500, 22,500, and 37,500 share options were granted during 1998, 1997 and 1996, respectively. As of December 31, 1998, 172,500 share options were outstanding under the Directors' Plan, of which 108,750 are exercisable as of December 31, 1998. At December 31, 1998, there were 127,500 share options available for grant under the Directors' Plan. In 1996, the Company granted 120,000 options outside of the Directors' Plan to two directors with an exercise price of $13.54 (market value at date of grant). These share options fully vested in 1998. 39 41 Consultants In 1996, the Company granted share options to each of two consultants to purchase up to 225,000 shares of the Company's common stock, valid for 10 years from issuance, with varying exercise prices. Vesting periods are based on either the passage of time or based upon the achievement of certain milestones, which, if ever achieved, would result in accelerated vesting. Of the aforementioned share options for each consultant, 150,600 were exercisable as of December 31, 1998. The Company recognized $439,000, $985,000 and $1.2 million in non-cash compensation expense in accordance with FAS 123 relating to the value of such share options (as established using the Black Scholes pricing model) for the years ended December 31, 1998, 1997 and 1996, respectively, and it expects to charge varying amounts (up to an additional $750,000 in the aggregate) of non-cash compensation expense to operations through 2001 relating to such agreements. Additional information with respect to the Company's share option plan(s) activity is summarized as follows:
Weighted - Share Average Options Exercise Price -------------- -------------- Balance, January 1, 1996 782,037 $ 4.47 Granted 1,786,740 15.05 Exercised (58,363) 3.02 Canceled ( 6,658) 10.82 --------- -------- Balance, December 31, 1996 2,503,756 12.04 Granted 337,600 25.20 Exercised (262,925) 6.58 Canceled (156,942) 13.35 --------- -------- Balance, December 31, 1997 2,421,489 14.38 Granted 867,403 19.31 Exercised (178,678) 5.91 Canceled (137,984) 17.63 --------- ------- Balance, December 31, 1998 2,972,230 $ 16.18 ========= =========
Share options outstanding and exercisable by price range are as follows:
Options Outstanding Options Exercisable ------------------------------------------------------------------------ ---------------------------------------- Outstanding Weighted Average Weighted Exercisable Weighted- Range of as of Remaining Average as of Average Excercise Prices Dec. 31, 1998 Contractual Life Exercise Price Dec. 31, 1998 Exercise Price ----------------- ------------------ --------------------- ------------------ ------------------ -------------- $ 0.00 - $10.00 455,095 6.6 $ 5.46 378,980 $ 5.58 $10.01 - $20.00 2,120,859 8.0 $16.91 653,162 $15.58 $20.01 - $30.00 388,776 6.2 $24.46 86,627 $24.53 $30.01 - $40.00 7,500 8.7 $30.63 7,500 $30.63 --------------- ----- ------ -------------- ------ 2,972,230 7.6 $16.18 1,126,269 $13.00 =============== ===== ====== ============== ======
40 42 Pro Forma Option Information The per share weighted-average fair value of all share options granted during 1998, 1997 and 1996 was $10.00, $10.00 and $7.21, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions. 1998 1997 1996 --------- -------- -------- Expected dividend yield 0% 0% 0% Risk-free interest rate 4.7% 6.2% 6.1% Volatility 62.5% 40.0% 50.0% Expected life in years 4 4 4
The per share weighted-average fair value of share options granted during 1996 to consultants was $6.12 using similar assumptions. The Company applies APB 25 in accounting for share options granted to employees and, accordingly, no compensation expense has been recognized related to such share options to the extent that such share options were granted at an exercise price that equaled the fair market value at the grant date. Had the Company determined compensation cost based on the fair value at the grant date for its share options under FAS 123, (using the Black-Scholes pricing model), the Company's net income (loss) would have been reduced (increased) to the pro forma amounts indicated below:
1998 1997 1996 ------------- -------------- --------- in thousands, (except per share data) Net earnings (loss) As reported ($29,698) ($11,437) $5,073 Pro forma ($32,827) ($12,532) $4,373 Basic earnings (loss) per share As reported ($1.52) ($0.65) $.39 Pro forma ($1.69) ($0.71) $.34 Diluted earnings (loss) per share As reported ($1.52) ($.65) $.35 Pro forma ($1.69) ($0.71) $.30
(13) 401(k) PROFIT SHARING PLAN The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") available to all employees meeting certain eligibility criteria which permits participants to contribute up to certain limits as established by the Internal Revenue Code. The Company may make "matching contributions" equal to a percentage of a participant's contribution or may contribute a discretionary amount to the 401(k) Plan. Effective January 1997, the Company elected to make "matching contributions" in the Company's common stock equal to 50% of the first 6% of an employee's salary contributed to such employees 401(k) Plan account. Such amounts vest 25% per year based on a participant's years of service with the Company. The Company has made "matching contributions" of approximately $308,000 and $241,000 for the years ended December 31, 1998 and 1997, respectively. 41 43 (14) SIGNIFICANT CONTRACTS AND LICENSING AGREEMENTS Agreements with Amgen Inc. In August 1997, the Company entered into an agreement with Amgen (the "Agreement") relating to the research, development and commercialization of the Company's FKBP neuroimmunophilin ligand technology ("FKBP Neuroimmunophilin Technology") for all human therapeutic and diagnostic applications. Pursuant to the terms of the Agreement, the Company received an aggregate of $35 million, consisting of a one-time non-refundable payment of $15 million upon the signing of the Agreement and $20 million for 640,095 shares of the Company's common stock and five-year warrants to purchase up to an additional 700,000 shares of the Company's common stock at an exercise price of $35.15 per share. In connection with the sale of these securities, the Company granted Amgen certain demand and "piggyback" registration rights under applicable securities laws. Under the terms of the Agreement, Amgen agreed to provide the Company up to $13.5 million over three years in the aggregate to support research activities relating to the FKBP Neuroimmunophilin Technology, with an option to fund a fourth year of research. The Company has recognized approximately $4.5 million and $1.1 million in research support the for the years ended December 31, 1998 and 1997, respectively. Additionally, the Agreement provides for certain milestone payments to the Company, in up to ten different specified clinical indications, in the event Amgen achieves certain development milestones. In addition, the Company will receive royalties on product sales, if any, related to the FKBP Neuroimmunophilin Technology. Agreements with Rhone-Poulenc Rorer Pharmaceuticals Inc. In June 1996, the Company entered into a Marketing, Sales and Distribution Rights Agreement (together with related agreements, the "RPR Agreements") with RPR. Under the RPR Agreements, RPR has worldwide marketing rights (excluding Scandinavia and Japan) for GLIADEL. The Company received $15 million upon the signing of these agreements ($7.5 million as an equity investment and $7.5 million as a non-refundable rights payment). On September 23, 1996, the Company obtained clearance from the FDA for GLIADEL for recurrent glioblastoma multiforme where surgical tumor removal is indicated and, accordingly, received a $20 million non-refundable milestone payment from RPR. RPR is obligated to make up to $35 million (as amended in September 1998) in additional milestone payments, including $7.5 million in the form of an equity investment, only if the Company achieves certain domestic and international regulatory approvals. In addition, RPR may also fund up to $17 million for the development of a higher-dose GLIADEL product and to fund certain additional clinical studies, if any, related to GLIADEL. The Company manufactures and supplies GLIADEL to RPR and receives a transfer price and royalties based on sales. Under the RPR Agreements, the Company has the right to borrow up to an aggregate of $7.5 million under certain conditions, including $4 million which became available January 2, 1997, and the remainder no earlier than 12 nor later than 18 months following funding of the initial $4 million. The loan proceeds are available to provide for expansion of the Company's existing facility supporting the production of GLIADEL and the construction of a second facility for the scale-up, production of GLIADEL and other polymer systems. Any principal amounts borrowed under this loan agreement are due five years from the date borrowed and will carry an interest rate equal to the lowest rate paid by RPR on its most senior indebtedness. Both the principal and 42 44 interest due under this agreement may, at the Company's election, be repaid by offsetting certain amounts due to the Company under the RPR Agreements. The Company has not drawn down any of the available funds under the RPR Agreements. In September 1998, the Company and RPR amended its RPR Agreements. Under the original Marketing, Sales and Distribution Rights agreement, the Company was to conduct and pay for an U.S. Phase III clinical trial for a first surgery indication for GLIADEL. Independently, RPR was already conducting and paying for an international Phase III clinical trial to support the first surgery indication for GLIADEL which included clinical sites in the United States. One of the principal amendments to the agreement now provides for the companies to share the costs (subject to an aggregate cap of $3 million for the Company) of this single, multinational Phase III clinical trial. A second principal amendment provides for an equal splitting of the previously determined international regulatory milestones (previously $40 million, amended to $35 million) between first and recurrent surgery for market clearances of GLIADEL in France, Germany, Italy, Spain, U.K. and Australia. Under the amended agreement, the Company is entitled to receive up to $11 million upon receipt of marketing clearance with a claim for use in recurrent surgery and an additional $16.5 million (of which $7.5 million would be as an equity investment), payable upon receipt of marketing clearance for use in first surgery. Other amendments include a scale back of RPR's right of first offer, from six months on all new polymer oncology products, to 90 days only on products being developed directly by Guilford specifically for brain cancer; elimination of RPR's right to a seat on Guilford's Board of Directors at the time RPR subscribes to $7.5 million in the Company's common stock upon any market clearance in the U.S. of GLIADEL for first surgery; a clarification of the allocation of certain costs; and an acknowledgment that rights to GLIADEL in Japan have reverted back to the Company thereby reducing the original milestone payments from a total of $40 million to $35 million. Other significant contracts and agreements The Company has entered into licensing, technology transfer and development agreements with The Johns Hopkins University under which it is required to make certain payments for patent maintenance costs, processing fees, license payments and development payments aggregating approximately $288,000 through 2002. The Company has also agreed to spend $500,000 per year through 2014 with respect to internal research and development activities to develop such technologies and may be required to make certain payments, as defined, to The Johns Hopkins University should agreed-upon milestones be attained. In addition, the Company will be required to pay a royalty on future net sales of all licensed products, if any, as well as a percentage (as defined) of payments received by the Company from sublicensees, if any. The Company has also entered into various other licensing, research and development agreements which commit the Company to fund certain mutually agreed-upon research and development projects, either on a best efforts basis or upon attainment of certain performance milestones, as defined, or both, for various periods unless canceled by the respective parties. Such future amounts to be paid are approximately $778,000 through 2001. In addition, the Company will be required to pay a royalty on future net sales of all licensed products, if any, as well as a percentage of all payments received by the Company from sublicensees, if any. (15) RELATED PARTY TRANSACTIONS Scios Inc., a significant stockholder, has billed the Company for facility rents related to the Company's research and development activities aggregating $883,000, $341,000 and $295,000 in 1998, 1997 and 1996, respectively. 43 45 (16) EARNINGS (LOSS) PER SHARE The following table presents the computations of basic and diluted EPS:
1998 1997 1996 ---- ---- ---- (in thousands, except share data) Net income (loss) applicable to common stockholders $ (29,698) $ (11,437) $5,073 ========== ========== ========= Weighted-average shares outstanding 19,479 17,570 13,001 Employee stock options - - 751 Warrants and put options - - 882 --------- ---------- ------------ Dilutive potential common shares - - 1,633 --------- ---------- ------------ Total weighted-average diluted shares (1) 19,479 17,570 14,634 ========= ========== ============= Basic EPS $ (1.52) $ (.65) $ .39 =========== ======== ========== Diluted EPS $ (1.52) $ (.65) $ .35 =========== ======== ==========
(1) At December 31, 1998 and 1997, there were 652,355 and 1,293,317 instruments, respectively, that were considered antidilutive and accordingly excluded in the above calculation. (17) LEGAL MATTERS The Company from time to time is involved in routine legal matters incidental to its normal operations. In management's opinion, the resolution of such matters will not have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. 44 46 STOCK DESCRIPTION AND FORM 10-K Our common stock is listed on the Nasdaq(R) Stock Market under the symbol "GLFD." As of March 16, 1999, we had approximately 192 holders of record of our common stock and in excess of 400 beneficial holders. We have never declared or paid any cash dividends and do not intend to do so for the foreseeable future. The following table sets forth the range of high and low sale prices for our common stock as reported on the Nasdaq(R) Stock Market for the periods indicated below.
High Low ---- --- 1996 First Quarter.................... $17.17 $10.17 Second Quarter................... 25.17 13.33 Third Quarter.................... 20.50 11.00 Fourth Quarter................... 23.38 16.00 1997 First Quarter.................... 30.25 20.50 Second Quarter................... 27.75 19.75 Third Quarter.................... 31.63 20.50 Fourth Quarter................... 32.25 17.88 1998 First Quarter.................... 24.88 17.50 Second Quarter................... 24.00 17.00 Third Quarter.................... 18.25 11.63 Fourth Quarter................... 18.88 11.19 1999 First Quarter (through 3/16/99).. 15.13 10.00
Stockholders may obtain, at no charge, a copy of the Guilford Pharmaceuticals Inc. Form 10-K, filed with the Securities and Exchange Commission, by writing to: Guilford Pharmaceuticals Inc. c/o Investor Relations 6611 Tributary Street Baltimore, Maryland 21224 Attention: Angela Rubin (410) 631-6449 EX-21.01 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.01 SUBSIDIARIES OF GUILFORD PHARMACEUTICALS INC. Below is a list of direct and indirect subsidiaries of the Corporation. All subsidiaries are wholly-owned. 1. GPI Holdings, Inc., a Delaware corporation 2. Gell Pharmaceuticals, Inc., a Delaware corporation 3. Holabird Holdings N.V., a Netherlands corporation 4. GPI Polymer Holdings, Inc., a Delaware corporation 5. GPI NIL Holdings, Inc., a Delaware corporation EX-23.01 10 CONSENT OF KPMG LLP 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANT The Board of Directors and Stockholders of Guilford Pharmaceuticals Inc.: We consent to incorporation by reference in the registration statements (No. 33-90828, No. 333-17833, and No. 333-72319) on Form S-8 and registration statement No. 333-35415 on Form S-3 of Guilford Pharmaceuticals Inc. of our report dated February 12, 1999, relating to the consolidated balance sheets of Guilford Pharmaceuticals Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, and the related consolidated financial statement schedule, which report appears in the December 31, 1998 annual report on Form 10-K of Guilford Pharmaceuticals Inc. /S/ KPMG LLP Philadelphia, Pennsylvania March 26, 1999 EX-27.01 11 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated financial statements of Guilford Pharmaceuticals Inc. and subsidiaries for the year ended December 31, 1998 and is qualified in its entirety by reference to such Annual Report on Form 10K for the period December 31, 1998. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 8,480 119,781 1,241 0 1,291 115,002 26,543 7,753 151,028 11,883 8,766 0 0 196 130,183 151,028 6,573 12,483 2,036 50,304 0 0 768 (29,698) 0 (29,698) 0 0 0 (29,698) (1.52) (1.52) ESP-PRIMARY DENOTES BASIC EPS
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