-----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, RzCCD728LimMkSxwQnNY7ii5wx9le4p872JSMiekGcAJqTNoxQHuurMOr32/dfqG UBqvgHI+NvLrZ08ak1tUrA== 0000950117-98-001571.txt : 19980817 0000950117-98-001571.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950117-98-001571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALGOS PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000924862 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223142274 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28844 FILM NUMBER: 98689751 BUSINESS ADDRESS: STREET 1: 4900 ROUTE 33 CITY: NEPTUNE STATE: NJ ZIP: 07753 BUSINESS PHONE: 9089385959 10-Q 1 ALGOS PHARMACEUTICAL CORPORATION 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________________ to ____________________ Commission file number 000-28844 ALGOS PHARMACEUTICAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-3142274 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1333 Campus Parkway, Neptune, New Jersey, 07753-6815 (Address of principal executive offices) 732-938-5959 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __x__ No ____ The aggregate number of shares of the Registrant's common stock outstanding on August 3, 1998 was 16,016,649 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEEETS (UNAUDITED)
December 31, June 30, 1997 1998 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 20,246,152 $ 308,127 Marketable securities, current 17,922,359 29,989,167 Interest receivable 484,789 680,445 Prepaid expenses 315,679 225,011 ------------ ------------ Total current assets 38,968,979 31,202,750 Marketable securities, noncurrent 3,004,580 4,000,000 Restricted cash 150,000 150,000 Property and equipment, net 146,328 1,021,119 Other assets 90,591 30,582 ------------ ------------ Total assets $ 42,360,478 $ 36,404,451 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,861,976 $ 3,749,039 Other current liabilities 739,415 349,305 ------------ ------------ Total current liabilities 2,601,391 4,098,344 ------------ ------------ Commitments Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized, 15,951,701 and 15,999,551 shares outstanding as of December 31, 1997 and June 30, 1998, respectively 159,517 159,996 Additional paid-in-capital 56,151,504 56,645,431 Unearned compensation expense (753,707) (921,041) Deficit accumulated during the development stage (15,798,227) (23,578,279) ------------ ------------ Total stockholders' equity 39,759,087 32,306,107 ============ ============ Total liabilities and stockholders' equity $ 42,360,478 $ 36,404,451 ============ ============
The accompanying notes are an integral part of these financial statements. 2 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended For the six months ended Cumulative June 30, June 30, from inception -------------------------- ------------------------ to June 30, 1997 1998 1997 1998 1998 ---- ---- ---- ---- ---- Revenues $ -- $ -- $ -- $ -- $ 3,311,000 Operating expenses: Research and development 1,968,683 3,783,018 5,134,043 7,003,478 22,580,109 General and administrative 617,594 1,114,847 1,234,331 1,856,379 8,969,629 ----------------- ----------------- ----------------- ----------------- ----------------- Total operating expenses 2,586,277 4,897,865 6,368,374 8,859,857 31,549,738 ----------------- ----------------- ----------------- ----------------- ----------------- Loss from operations (2,586,277) (4,897,865) (6,368,374) (8,859,857) (28,238,738) Interest income 655,544 515,615 1,212,862 1,079,804 4,660,458 ----------------- ----------------- ----------------- ----------------- ----------------- Net loss $ (1,930,733) $(4,382,250) $ (5,155,512) $ (7,780,053) $ (23,578,280) ================= ================= ================= ================= ================= Net loss per common share, basic and diluted $ (0.12) $ (0.27) $ (0.33) $ (0.49) Weighted average common shares outstanding 15,818,662 15,999,551 15,799,475 15,977,459
The accompanying notes are an integral part of these financial statements. 3 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative from For the six months ended inception to June 30, June 30, 1997 1998 1998 ---------------- --------------- -------------- Cash flows from operating activities $ (4,400,086) $ (6,079,205) $(18,316,022) Cash flows from investing activities: Purchases of marketable securities (30,813,025) (13,063,945) (60,877,393) Redemption of marketable securities 26,816,072 Purchases of property and equipment (81,596) (918,000) (1,227,011) ----------------- ---------------- --------------- Net cash used in investing activities (30,894,621) (13,981,945) (35,288,332) ----------------- ---------------- --------------- Cash flows from financing activities: Proceeds from issuance of preferred stock 6,659,015 Proceeds from issuance of common stock 73,601 123,125 47,253,465 ----------------- ---------------- --------------- Net cash provided by financing activities 73,601 123,125 53,912,480 ----------------- ---------------- --------------- Net increase (decrease) in cash and cash equivalents (35,221,106) (19,938,025) 308,127 Cash and cash equivalents, beginning of period 48,575,719 20,246,152 -- ----------------- ---------------- --------------- Cash and cash equivalents, end of period $ 13,354,613 $ 308,127 $ 308,127 ================= ================ ===============
The accompanying notes are an integral part of these financial statements. 4 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The financial statements presented herein have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and are unaudited. In the opinion of management, the financial statements reflect all adjustments (which consist of normal recurring accruals and adjustments) necessary for a fair statement of the financial position and results of the interim periods presented. 2. ACCOUNTING POLICIES In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes standards for determining and reporting comprehensive income and its components. Comprehensive income represents the change in net assets of a business enterprise as a result of nonowner transactions. The adoption of the standard did not have an impact on the Company's financial statements. 3. LOSS PER SHARE Since the Company incurred net losses in all periods presented, outstanding options and warrants to purchase an aggregate of 1,020,642 and 1,270,415 shares of Common Stock at June 30, 1997 and 1998, respectively, and 100,000 shares of convertible Series B Preferred Stock which were outstanding at June 30, 1997 were not included in diluted per share calculations, as their effect would be antidilutive. 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net consist of the following:
December 31, June 30, 1997 1998 ------------ ----------- Leasehold improvements $ 506,770 Office furniture and equipment $ 152,727 525,714 Computer equipment 156,284 194,527 ---------- ---------- 309,011 1,227,011 Less accumulated depreciation 162,683 205,892 ---------- ---------- $ 146,328 $1,021,119 ========== ==========
5. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
December 31, June 30, 1997 1998 ------------ -------- Accrued research expenses $392,618 $166,273 Accrued compensation 346,797 183,032 -------- -------- $739,415 $349,305 ======== ========
5 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 6. COMMITMENTS In April 1998, the Company relocated its executive offices and a ten-year operating lease agreement signed in 1997 became effective. Minimum annual lease payments are as follows: 1998 $179,080 1999 268,620 2000 268,620 2001 268,620 2002 268,620 Balance of Term 1,643,300
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Algos, a development stage company, is engaged primarily in the development and commercialization of proprietary pharmaceutical products for pain management. Since its formation in January 1992, the Company has devoted a substantial amount of its efforts to licensing technology, recruiting key management and staff, developing products, filing patents and other regulatory applications and raising capital. The Company has incurred losses since its inception and expects to incur losses in the future. The Company expects that its product development expenses will increase as the drugs that the Company currently has under development move into advanced clinical trials and as additional drugs are developed. In January 1998, the Company initiated the filing of a sequential NDA for its most developmentally advanced drug, MorphiDex. Upon completion of an NDA, the Company may incur significant costs associated with the possible commercialization of MorphiDex prior to the first commercial sale of the product, including inventory, the establishment of a sales force, initial promotional activities and other administrative expenses. Results of Operations Three months ended June 30, 1997 and 1998 Research and development: In the three months ended June 30, 1998, research and development expenses were $3.6 million, an increase of approximately $1.6 million or 82%, from 1997. In 1998, expenses increased significantly due to large-scale, advanced clinical trials of MorphiDex. The Company also incurred higher expenses due to increased development activity for HydrocoDex and the expansion of the Company's development staff since the second quarter of the prior year. The effect of these increases was partially offset by reduced expenses in other development programs. General and administrative: In the three months ended June 30, 1998, general and administrative expenses were $1.1 million, an increase of $0.5 million or 81%, from 1997. In 1998, expenses increased due to the general expansion of the Company's business and preliminary activities related to the possible future commercialization of products, including the addition of sales and marketing personnel and the expansion of the Company's administrative offices. Interest income: Interest income decreased 21% in the three months ended June 30, 1998 to $0.5 million due to lower average cash and securities balances compared to the second quarter of the prior year. 7 Six months ended June 30, 1997 and 1998 Research and development: In the six months ended June 30, 1998, research and development expenses were $6.8 million, an increase of approximately $1.7 million or 33%, from 1997. In 1998, expenses increased significantly due to large-scale, advanced clinical trials for MorphiDex and the expansion of the Company's development staff since mid-1997. The effect of these increases was partially offset by reduced expenses related to bioavailability studies and the costs of manufacturing small-scale regulatory test batches of MorphiDex, which occurred in 1997. General and administrative: In the six months ended June 30, 1998, general and administrative expenses were $1.9 million, an increase of $0.6 million or 50%, from 1997. In 1998, expenses increased due to the general expansion of the Company's business and preliminary activities related to the possible future commercialization of products, including the addition of sales and marketing personnel and the expansion of the Company's administrative offices. Interest income: Interest income decreased 11% in the six months ended June 30, 1998 to $1.1 million as a result of lower average cash and securities balances. Liquidity and Capital Resources As a result of its drug development efforts, the Company has experienced net cash outflows from operations since its inception in 1992. In the six months ended June 30, 1998, cash outflows from operations amounted to approximately $6.1 million compared to $4.4 million in the first six months of 1997, primarily as a result of its increased development spending on MorphiDex. The Company's future funding requirements will depend on a number of factors, including: the amount of resources required for the establishment of sales and distribution capabilities; promotion and other activities in preparation for the possible commercialization of MorphiDex; the results of its development efforts; the timing and costs of obtaining required regulatory approvals; the commercialization of competing products; the execution of licensing or other collaborative research agreements on terms acceptable to the Company; and the cost of prosecuting and defending patents. The Company intends to continue certain ongoing large-scale clinical trials for MorphiDex and has entered into several research and development commitments for HydrocoDex. The Company expects that its product development expenses will continue or increase as clinical trials of MorphiDex continue and other drugs that the Company currently has under development, including HydrocoDex, move into advanced clinical trials and as additional drugs are developed. Additionally, the Company will incur increased expenses resulting from the planned expansion of its research and development staff. The Company currently expects that its cash and marketable securities at June 30, 1998 would be sufficient to fund its development 8 activities for approximately two years, based upon the Company's current schedule of clinical trials. If, however, a significant portion of these funds is required in the commercialization of MorphiDex, or if additional trials are necessary or advisable, or if additional products are developed, the Company may require additional funds to complete such trials. In the event that revenue and income from successful product introductions or other internally generated funds are insufficient for such efforts, the Company will need to raise additional funds either by incurring debt, issuing additional equity or through collaborative or license arrangements to ensure continuity of operations. There is no assurance that the Company would be able to obtain such additional financing on terms acceptable to the Company. YEAR 2000 The Company believes that its existing financial and operational systems will function adequately with respect to the use of dates in the year 2000 and thereafter. The Company estimates that the costs associated with the Year 2000 issue will not have a material impact on the Company's financial position or operating results. However, there is no assurance that other entities will not have Year 2000 problems that will affect the Company. In addition, the Company may make significant additions to and changes in its existing systems in anticipation of the possible commercialization of products which would affect the Company's exposure to Year 2000 problems. Therefore, the Company's assessment of its Year 2000 issues is not complete. This Management's Discussion and Analysis of Financial condition and Results of Operations contains "forward-looking" statements, within the meaning of Section 27A of Securities Act of 1993, as amended and Section 21E of the Securities Exchange Act of 1934, that are based on management's beliefs and assumptions, current expectations, estimates and projections. Statements that are not historical facts, including statements which are preceded by, followed by, or that include the words "believes;" "anticipates;' "plans;" "expects;" or similar expressions and statements about the Company's development schedule and future use of funds are forward-looking statements. Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. These statements are subject to risks and uncertainties and, therefore, actual results may differ materially. The reader should not rely on any forward-looking statement. The Company undertakes no obligations to update any forward-looking statement whether as a result of new information, future events or otherwise. Important factors that may affect future results include, but are not limited to: uncertainty associated with pre-clinical studies and clinical trials and regulatory approval; uncertainty of market acceptance of new products; impact of competitive products and pricing; product development; changes in laws and regulations; customer demand; possible future litigation; and the availability of future financing. Readers should evaluate any statement in light of these important factors. See "Risk Factors". 9 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of Stockholders of Algos Pharmaceutical Corporation was held on June 9, 1998. (b) The following Directors nominated by the Company were elected for three-year terms: Roger H. Kimmel and Dieter A. Sulser John W. Lyle, Donald G. Drapkin, Michael Hyatt and James R. Ledley continue their terms as Director after the meeting. (c) At the Annual Meeting, stockholders approved the following: (i) Election of Directors:
Votes For Votes Against Abstain --------- ------------- ------- Roger H. Kimmel 12,072,985 2,765 0 Dieter A. Sulser 12,072,985 2,765 0
(ii) An increase in the number of shares which may be granted under the Company's 1996 Incentive Stock Option Plan by 800,000 shares.
Votes For Votes Against Abstain --------- ------------- ------- 12,003,286 41,038 31,426
10 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits:
Exhibit No. Title --------------------------------------------------------------------------- 3.1 Form of Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation(1) 3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation(1) 4.1 Form of Stock Certificate of Common Stock(1) 5.1 Opinion of Latham & Watkins as to the validity of the Common Stock(1) 10.1.1 Employment Agreement with Respect to John W. Lyle(4) 10.1.3 Employment Agreement with Respect to Frank S. Caruso(1) 10.1.4 Employment Agreement with Respect to Joseph Sardella 10.2.1 1994 Stock Option Plan(1) 10.2.2 Form of 1996 Stock Option Plan(1) 10.2.3 Form of 1996 Non-Employee Director Stock Option Plan(2) 10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement(1) 10.4.1 License Agreement with The Medical College of Virginia(1)'D''D' 10.4.2 License Agreement with McNeil(1)'D''D' 10.4.3 Registration Rights Agreement with The Medical College of Virginia(1) 10.5 Lease Agreement with Commercial Realty & Resources Corp.(3) 21 Subsidiaries of the Registrant(1) 27 Financial Data Schedule 99 Risk Factors
(1) Incorporated by reference to the Registrant's registration statement on Form S-1 declared effective on September 25, 1996. (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. 'D''D' Portions of this Exhibit have received confidential treatment pursuant to Rule 406(b) under the Securities Act. Reports on Form 8K: None 11 SIGNATURES Pursuant to the requirements 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. ALGOS PHARMACEUTICAL CORPORATION Date August 14, 1998 /s/ John W. Lyle ------------------------- ------------------------------------- John W. Lyle President and Chief Executive Officer Date August 14, 1998 /s/ Gary R. Anthony ------------------------- ------------------------------------- Gary R. Anthony Chief Financial Officer and Principal Accounting Officer 12 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as............................. 'TM' The dagger symbol shall be expressed as................................ 'D' EX-10 2 EXHIBIT 10.1.4 EXHIBIT 10.1.4 EMPLOYMENT AGREEMENT PARTIES: This Employment Agreement ("Agreement") made as of June 29, 1998 is entered into by and between ALGOS PHARMACEUTICAL CORPORATION, having its principal business address at 1333 Campus Parkway, Neptune, NJ 07753 (the "Company"), and Joseph Sardella residing at 7 Adams Court, Hamilton Square, NJ 08690 ("Executive"). RECITALS: The parties agree as follows: A. The Company desires to retain Executive to provide the services hereinafter set forth. B. Executive is willing to provide such services to the Company on the terms and conditions hereinafter set forth. TERMS OF AGREEMENT: 1. Employment. 1.1 The Company hereby employs Executive, on a full-time basis commencing on July 13, 1998 to be employed in an executive capacity as the Company's Executive Vice President and Chief Administrative Officer during the Employment Period (as defined below). The Executive shall perform such duties and services, consistent with his position, as may be assigned to him from time to time by the Board of Directors of the Company or its designee. In furtherance of the foregoing, the Executive hereby agrees to perform well and faithfully the aforesaid duties and responsibilities and the other reasonable senior executive duties and responsibilities assigned to him from time to time by the Board of Directors of the Company or its designee. During the Employment Period, the Company shall provide the Executive with an office, secretarial and other support services comparable to those provided to other senior executive officers of the Company at its headquarters. Specifically, the Company will provide Executive with an Administrative Assistant, to be selected by Executive. In addition, the Executive will be responsible for hiring and supervising key Managers. All hiring shall be subject to the approval of the Chief Executive Officer and the Board of Directors, and in conformity with the Company's Hiring Committee Procedures. 1.2 Executive hereby accepts this employment on and subject to the terms and conditions set forth in this Agreement, and shall use his reasonable best efforts to promote the Company's interests. 2. Compensation: 2.1 Salary. During the Employment Period, as compensation for Executive's performance of Executive's duties under this Agreement, the Company shall pay Executive a Base Salary ("Base Salary") at the annual rate of $200,000.00 during the first twelve (12) months of employment. Thereafter, the Base Salary shall be reviewed by the Board of Directors annually and shall be increased such amount as the Board of Directors, in its sole discretion, may deem appropriate. The Base Salary shall be payable in installments pursuant to the Company's executive payroll policies in force at the time of payment (but not less frequently than monthly) for the month or shorter pay period then ended, subject to applicable withholding for FICA, income taxes and other required payroll deductions. 2.1.1 The Executive's Base Salary will be supplemented by payment of performance bonuses based upon Executive's performance against specific milestone achievements. Milestone achievements will be mutually agreed upon and set forth in writing by Executive and the Company's Board of Directors annually, or more frequently as deemed appropriate. Attainment of milestone achievements will result in a performance bonus of up to thirty-three percent (33%) of Executive's Base Salary, depending upon the importance and number of the milestone achievements attained. 2.2 Expenses. During the Employment Period, to the extent such expenditures meet the requirements and the policies of the Company for senior executives, the Company shall reimburse Executive promptly for all reasonable travel, entertainment, parking, business meeting and similar expenditures in pursuance and furtherance of the Company's business, upon presentation of proper vouchers or receipts therefor. 2.3 Vacation, etc. During the Employment Period, Executive shall be entitled to three weeks paid vacation for each 12 months of employment (i.e., after the first six months of employment at the Company, you will be eligible for seven and one-half days paid vacation); up to four sick days (the Company will pay 50% of unused sick days for that calendar year); and ten paid holidays each calendar year 2.4 Other Benefits. Executive shall be entitled to participate, at Executive's option and if eligible, in any Company plans for the benefit of officers and key employees as from time to time established, including profit sharing, pension plan, stock option plans and performance bonus plans. In particular, Executive shall be entitled to the following Company paid benefits: (i) If you are currently covered or can be covered under the family major medical and family dental policy of your spouse, the Company will pay 100% of the incremental premium cost, if any, for your coverage under your spouse's family policy; if such insurance is not available to you, the Company will pay eighty percent (80%) of the cost of family comprehensive major medical and dental insurance; (ii) the Company will pay 80% of the cost of a life insurance policy in the amount of two times your base salary; (vi) Dues reimbursement for professional associations and meetings. 3. Employment Period and Termination. 3.1 Employment Period. Executive's employment term ("Employment Period") shall commence on the date of July 13, 1998 and shall expire on December 31, 2001 (the "Employment Expiration Date"), unless earlier terminated pursuant to Section 3.2. 3.2. Termination. 3.2.1 Termination for Cause. The Company may discharge Executive and terminate the Employment Period for cause. Discharge for cause shall be effective ten (10) days after Executive's receipt of written notice of discharge or at such later date as may be specified in that notice, provided such notice contains the specific reasons and specific events upon which discharge is predicated. If Executive is discharged for cause, Executive shall only be entitled to Base Salary through the effective date of the discharge or termination. As used in this paragraph, "cause" shall mean any or all the following: (i) Willful or negligent action taken by Executive which materially harms, or can reasonably be expected to harm, the Company; (ii) Commission of fraud, misappropriation, embezzlement, or criminal misconduct that would constitute a felony or any other act or conduct, whether criminal or noncriminal and regardless of whether committed in the course of the Company's business, which adversely affects the reputation of the Company or otherwise brings disrepute on the Company or any of its affiliates (for purposes of this Employment Agreement, the terms "affiliates" shall be deemed to include, but not necessarily be limited to the corporation to which the Company assigns its rights). (iii) If Executive shall be in breach of, or in default under, any provision, term or covenant of this Agreement (other than a breach or default described in clauses (i) and (ii)). 3.2.2 Termination Without Cause. The Company may terminate the employment of the Executive hereunder at any time during the Employment Period without "cause" (such termination being herein referred to as "Termination Without Cause") by giving the Executive written notice of such termination, upon the giving of which such termination shall take effect immediately. 3.2.3 Involuntary Termination. If, during the Employment Period, Executive becomes ill, disabled or otherwise incapacitated so as to be unable regularly to perform his usual duties for a period in excess of 120 days in any consecutive twelve month period (such condition being hereinafter referred to as "Disability"), the Company shall have the right, with approval of a majority of the members of the Board of Directors, to terminate Executive's employment on 30 days' written notice to Executive (such termination, or Executive's death, being herein referred to as "Involuntary Termination"). If the Executive dies during the Employment Period, his employment hereunder shall be deemed to have ceased as of the date of his death. 3.2.4 Voluntary Termination. Any termination of the employment of the Executive hereunder otherwise than as a result of an Involuntary Termination, a Termination for Cause of a Termination Without Cause shall be deemed to be a "Voluntary Termination." A Voluntary Termination shall be deemed to be effective immediately upon such termination. 3.3 Effect of Termination of Employment. 3.3.1 Upon the termination of the Executive's employment hereunder pursuant to a Voluntary Termination or a Termination for Cause, neither the Executive nor his beneficiary or estate shall have any further rights or claims against the Company under this Agreement except to receive: (i) the unpaid portion of the Base Salary provided for in Section 2.1, computed on a pro rata basis to the date of termination; and (ii) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed as provided in Section 2.2. 3.3.2 Upon the termination of the Executive's employment hereunder pursuant to an Involuntary Termination, neither the Employee nor his beneficiary or estate shall have any further rights or claims against the Corporation under this Agreement except to receive: (i) the unpaid portion of the Base Salary provided for in Section 2.1, computed on a pro rata basis to the date of termination; (ii) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed as provided in Section 2.2. (iii) a termination payment in an amount equal to six (6) month's Base Salary, payable in six (6) equal monthly installments; and (iv) the continuation of the benefits afforded pursuant to Section 2.4(i) for a period of six (6) months from the effective date of termination. 3.3.3 Upon the termination of the Executive's employment hereunder pursuant to a Termination Without Cause, neither the Executive nor his beneficiary or estate shall have any further rights or claims against the Company pursuant to this Agreement except to receive: (i) the unpaid portion of the Base Salary provided for in Section 2.1, computed on a pro rata basis to the date of termination; (ii) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed as provided in Section 2.2; (iii) a termination payment in an amount equal to twelve (12) month's Base Salary, payable in twelve (12) equal monthly installments; and (iv) the continuation of the benefits afforded pursuant to Section 2.4(i) for a period of twelve (12) months from the effective date of termination. 4. Executive's Convenants. 4.1 Executive agrees that he will not from and after the date hereof through the second anniversary of the Employment Expiration Date as defined in Section 3.1 above, regardless of whether the Employment Period is terminated earlier for any reason, directly or indirectly, through any other person, firm or corporation, solicit, raid, entice, induce or encourage any employee, sales representative, agent or consultant of or for the Company or its affiliates, to (i) cease his or her association with or leave the employ of the Company or its affiliates, (ii) solicit customers or suppliers of the Company or its affiliates for Executive's or any other person's or entity's benefit or (iii) otherwise act in violation of that person's obligations to the Company or its affiliates, and Executive shall not authorize or knowingly approve the taking of such actions by any other person. 4.2 Executive acknowledges that, by reason of his employment with the Company, he will obtain confidential or non-public proprietary knowledge or information pertaining to the business and policies of the Company and its affiliates. Executive agrees that during and after the term of this Agreement, he shall not disclose, without the prior written consent of the Board of Directors of the Company or the Chief Executive Officer, any confidential or non-public proprietary knowledge or information pertaining to the Company and its affiliates ("Confidential Information"), including, but not limited to information relating to management, financial condition, customer lists, sources of supply, business methods and personnel policies, to any person, firm, corporation or other entity, for any reason or purpose whatsoever. Confidential Information shall not include information that: (a) was known to Executive prior to his first employment with the Company or its affiliates, or (b) is public knowledge, or becomes public knowledge other than by action (or omission) of (i) Executive or persons obtaining access to such information directly or indirectly from Executive or (ii) other persons disclosing such information in breach of obligations to the Company. 4.3 Executive acknowledges and agrees that all memoranda, notes, reports, records and other documents made or compiled by Executive, or made available to Executive prior to or during the term of this Agreement concerning the Company's and its affiliates' business, shall be the Company's or its affiliates' property and shall be delivered to the Company on the termination of this Agreement or at any other time on request by the Board of Directors or Chief Executive Officer of the Company. 4.4 Executive agrees that he will not, from and after the date hereof through the second anniversary of the Employment Expiration Date as defined in Section 3.1 above, regardless of whether the Employment Period is terminated earlier for any reason, (i) directly or indirectly engage in, represent in any way, or be connected with, any business or activity (such business or activity being hereinafter called a "Competing Business"), which engages in the pain management field, within any state in which the Company or its affiliates transact business, whether such engagement shall be as an officer, director, owner, employee, partner, affiliate or other participant in any Competing Business; or (ii) assist others in engaging in any Competing Business in the manner described in the foregoing clause (i). The Executive acknowledges and understands that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the business of the Company, but he nevertheless believes that he has received and will receive sufficient consideration and other benefits in connection with the Company's issuance of certain stock to the Executive, as an employee of the Company and as otherwise provided hereunder to clearly justify such restrictions which, in any event (given his education, skills and ability), the Executive does not believe would prevent him from earning a living. 4.5 The Executive shall promptly disclose, grant and assign to the Company for its sole use and benefit any and all inventions, improvements, technical information and suggestions relating in any way to the business of the Company, which he may develop or acquire during the Employment Period (whether or not during usual working hours), together with all patent applications, letters patent, copyrights and reissues thereof that may at any time be granted for or upon any such invention, improvement or technical information. In connection therewith: (i) The Executive shall without charge, but at the expense of the Company, promptly at the times hereafter execute and deliver such applications, assignments, descriptions and other instruments as may be reasonably necessary or proper in the reasonable opinion of the Company to vest title to any such inventions, improvements, technical information, patent applications, patents, copyrights or reissues thereof in the Company and to enable it to obtain and maintain the entire right and title thereto throughout the world; and (ii) The Executive shall render to the Company at its expense (including a reasonable payment for the time involved in case he is not then in its employ) all such assistance as it may reasonably require in the prosecution of applications for said patents, copyrights or reissues thereof, in the prosecution or defense of interferences which may be declared involving any said applications, patents or copyrights and in any litigation in which the Company may be involved relating to any such patents, inventions, improvements or technical information. 4.6 The provisions of this paragraph 4 shall survive the termination or expiration of this Agreement irrespective of the reason therefor. 4.7 Executive acknowledges that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to Confidential Information vital to the Company's business. By reason of this, Executive consents and agrees that if he violates any of the provisions of this Agreement with respect to the diversion of the Company's or its affiliates' employees or confidentiality, the Company or its affiliates would sustain irreparable harm, and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining Executive from committing or continuing any such violation of this Agreement, and Executive shall not object to any such application. 5. Indemnification. The Company will defend, indemnify and hold harmless Executive to the full extent permitted by law from and against any and all losses, claims, damages or liabilities related to or arising out of the services performed by Executive under this Agreement in the capacity of (and his status as) an officer of the Company or in the capacity of (and his status as) an officer or otherwise of the Company's affiliates, to the extent that those companies do not indemnify Executive, and will promptly reimburse Executive for any legal or other expenses reasonably incurred by him in connection with (i) investigating or defending any such loss, claim, damage or liability or (ii) any litigation or investigation related to or arising out of such service or status (in either case whether or not in connection with pending or threatened litigation to which Executive is a party); provided, however that (i) the Company shall not be liable to anyone for any such losses, claims, damages or liabilities which result from the gross negligence or willful misconduct of Executive and (ii) the Company shall not be liable for any legal fees or costs incurred by Executive, except for counsel retained on behalf of Executive by the Company in connection with any investigation, litigation or defense pursuant to this Section 5. Such obligation of the Company to defend and indemnify the Executive shall survive the termination of this Agreement notwithstanding anything contained herein to the contrary. 6. Incentive Stock Option Plan. 6.1 Incentive Stock Option. As an additional inducement to encourage the Executive to enter into this Agreement and as an incentive to Executive during the course of the Employment Period, the Company agrees to grant Executive options to purchase up to 100,000 shares of the Company's Common Stock at a per share exercise price equal to the closing price of the Company's common stock on the Executive's first day of employment subject to and in accordance with the Company's 1996 Stock Option Plan (the "ISO Plan"). 6.2 Option Vesting Schedule. The Company and Executive understand and agree that the ISO Plan will provide that the right to exercise said options to be granted to Executive pursuant to the ISO Plan will vest in accordance with the following vesting schedule: (i) on December 31, 1998, Executive shall be vested with the right to exercise options to purchase 25,000 shares of the Common Stock of the Company; (ii) on December 31, 1999, Executive shall be vested with the right to exercise options to purchase an additional 25,000 shares of the Common Stock of the Company for a total of 50,000 shares: (iii) on December 31, 2000, Executive shall be vested with the right to exercise options to purchase an additional 25,000 shares of the Common Stock of the Company for a total of 75,000 shares, (iv) on December 31, 2001, Executive shall be vested with the right to exercise options to purchase an additional 25,000 shares of the Common Stock of the Company for a total of 100,000 shares and shall thereupon be fully vested. Executive shall have no right to exercise any options that have not vested as of the date of the termination of his employment with the Company; provided, however, that the Company and Executive understand and agree that in the event of the Executive's Involuntary Termination or Termination Without Cause, the aforementioned vesting schedule shall be accelerated by one year and the Executive shall also be deemed to be vested with the right to exercise those additional shares that would have vested on the December 31 next succeeding the effective date of Executive's termination as determined pursuant to Section 3.2.2, in the case of a Termination Without Cause, or pursuant to Section 3.2.3, in the case of an Involuntary Termination. 6.3 Option Rights Governed by ISO Plan. Notwithstanding anything contained in this Agreement to the contrary, all of the Executive's rights pursuant to this Section shall be subject to and governed by the terms and in accordance with the Company's 1996 Stock Option Plan (the "ISO Plan"), as that ISO Plan may be amended by the Board of Directors from time to time. 7. Renewal. This Employment Agreement shall be automatically renewed for additional twelve (12) month terms unless either the Executive or the Company shall notify the other in writing at least sixty (60) days before expiration of the then current 12-month term that it does not wish to renew the Employment Agreement. 8. Miscellaneous. 8.1 Notices. Any notice or communication given by either party hereto to the other party shall be in writing and shall be deemed duly given (i) when personally delivered, or (ii) when five (5) days have elapsed after its transmittal, by registered or certified mail, return receipt requested, postage prepaid; or (iii) if transmitted by telecopy, when sent, or (iv) if transmitted by telex (or equivalent service), when the sender's receiving apparatus has printed the answer back of the addressee on a copy of the telex message. Notices shall be addressed as follows: If to the Company: Algos Pharmaceutical Corporation 1333 Campus Parkway Neptune, NJ 07753 Fax number: 732-983-2825 Attention: Chief Executive Officer If to Executive: Joseph Sardella 7 Adams Court Hamilton Square, NJ 08690 With copies in each case to: Latham & Watkins 885 Third Avenue New York, NY 10022 Fax number: 212-751-4864 Attention: Roger H. Kimmel, Esq. Any person entitled to receive notice (or a copy of thereof) may designate in writing, by notice to the others, such other address to which notices to such personal shall thereafter be sent. 8.2 Entire Agreement; Amendment; Waiver. This Agreement contains the entire understanding of the parties covering its subject matter and supersedes all prior agreements between the parties. This Agreement may be amended or waived only by a writing signed by both parties. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other breach of that provision nor as a waiver of any breach of another provision. 8.3 Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be considered a part of or be referred to interpreting this Agreement. 8.4 Governing Law; Interpretation: Service of Process. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policies of the State of New Jersey applicable to contracts executed and to be wholly performed in that State. Service of process in any dispute shall be effective (a) upon the Company, if service is made on any officer of the Company; (b) upon Executive, if service is made to Executive's residence last known to the Company with an information copy of Executive at any other residence, or care of a subsequent employer, of which the Company may be aware. 8.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. 8.6 Assignment. Assignment of the rights and obligations of this Agreement shall bind and enure to the benefit of any successor of the Company by reorganization, merger, or consolidation, or any assignee of all or substantially all of the Company's business and properties, provided that the successor shall assume the obligations of the Company under this Agreement. Executive's rights or obligations under this Agreement may not be assigned by Executive. 8.7 Further Assurances. Each of the parties agrees to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, at any time and/or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers-of-attorney and/or assurances as may be necessary and/or proper to carry out the provisions and/or intent of this Agreement. 8.8 Severability. If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated, unless the parties hereto would not have entered into this Agreement without said invalid, void or unenforceable term, provision, covenant or restriction. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting or reducing it, so as to be enforceable to the extent compatible with then applicable law. EXECUTION The parties have duly executed this Agreement as of the date first above written whereupon this Agreement enters into full force and effect in accordance with its terms. ALGOS PHARMACEUTICAL CORPORATION a Delaware Corporation ------------------------------------- John W. Lyle, President and Chief Executive Officer ------------------------------------- Joseph Sardella 7 Adams Court Hamilton Square, NJ 08690 EX-27 3 EXHIBIT 27
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 308,127 29,989,167 0 0 0 31,202,750 1,227,011 205,892 36,404,451 4,098,344 0 159,996 0 0 32,146,111 36,404,451 0 0 0 8,859,857 0 0 0 (7,780,053) 0 0 0 0 0 (7,780,053) (.49) (.49) EX-99 4 EXHIBIT 99 EXHIBIT 99 RISK FACTORS The Company operates in a rapidly changing environment that involves a number of risks that may significantly affect the Company's results, some of which are beyond the Company's control. The following discussion highlights some of these risks, and others are discussed elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission. Development Stage of the Company; Continuing Losses; Uncertainty of Future Profitability Since its formation in January 1992, the Company has been engaged primarily in organizational and start-up activities, conducting research and development programs, recruiting officers and key scientists, and negotiating and consummating technology licensing and research agreements. The Company has no revenues from product sales and no history of manufacturing or marketing. To date, substantially all of its funding has been provided by contributions of capital made by its founders, sales of its stock and payments from McNeil pursuant to the McNeil License Agreement. There can be no assurance that the Company will have any source of product revenue or that its operations will eventually generate sufficient revenues to achieve profitability. The Company has experienced losses since its inception and losses are continuing and are expected to continue. Therefore, the Company has a limited history upon which investors may base an evaluation of its likely performance. The Company's prospects must be considered in light of the potential problems, expenses, complications and delays frequently encountered in connection with the formation of a new business, the development of new pharmaceutical products, including obtaining the necessary regulatory approvals, the utilization of unproven technology and the competitive market environment in which the Company plans to operate. Uncertainty Associated with Pre-Clinical Studies and Clinical Trials In order to receive regulatory approval to sell its products commercially, the Company must demonstrate in pre-clinical studies and clinical trials that its potential products are safe and effective in humans. Although the results of the Company's initial pre-clinical studies and clinical trials to date have been encouraging, the results of initial pre-clinical studies and clinical trials are not by themselves predictive of results that will be obtained from subsequent or more extensive trials. Furthermore, there can be no assurance that clinical trials of products under development will demonstrate the safety and efficacy of such products to the extent necessary to obtain regulatory approvals. Many pharmaceutical companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate 1 the safety and efficacy of a product could delay or prevent regulatory approval of such product and could have a material adverse effect on the Company. The rate of completion of clinical trials is dependent upon, among other factors, the enrollment of patients. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. Delays in planned patient enrollment in the Company's current trials or future clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company. There can be no assurance that if clinical trials are completed the Company will be able to submit an NDA as scheduled or that any such application will be reviewed and approved by the FDA in a timely manner, or at all. See "Business -- Government Regulation" in the Company's 1997 Annual Report on Form 10-K. Government Regulation; No Assurance of United States or Foreign Regulatory Approval The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products through lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures. Satisfaction of these requirements typically takes a number of years, varies substantially based upon the type, complexity and novelty of the pharmaceutical products and is subject to uncertainty. Government regulation also affects the manufacture and marketing of pharmaceutical products. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product may be marketed. The FDA actively enforces regulations prohibiting marketing of products for non-indicated use. Failure to comply with applicable regulatory requirements can result in, among other things, government imposed fines, suspensions of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could prevent the Company from obtaining, or affect the timing of, future regulatory approvals. The effect of government regulation may be to delay marketing of the Company's new products for a considerable period of time, to impose costly procedures upon the Company's activities and to furnish a competitive advantage to larger companies that compete with the Company. There can be no assurance that FDA or other regulatory approval for any products developed by the Company will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals would adversely affect the marketing of the Company's products and the ability to generate product revenue. The Company is also subject to certain DEA regulations, including restrictions on storage, transportation and administration, for its narcotic products. Government regulation may increase at any time, creating additional hurdles for the Company. The extent of potentially adverse government regulation which might arise from future legislation or administrative action cannot be predicted. See 'Business -- Government Regulation' in the Company's 1997 Annual Report on Form 10-K. Uncertainty of Market Acceptance 2 Even if regulatory approvals are obtained, uncertainty exists as to whether the Company's products will be accepted by the market. A number of factors may limit the market acceptance of the Company's products, including the timing of regulatory approvals and market entry relative to competitive products, the availability of alternative products, the price of the Company's products relative to alternative products, the availability of third-party reimbursement and the extent of marketing efforts by third-party distributors or agents retained by the Company. There can be no assurance of the Company's ability, or the length of time required, to achieve market acceptance of the Company's products. In addition, certain of the Company's products contain narcotic ingredients that may require stringent record-keeping obligations, strict storage requirements and other limitations on such products' availability that could limit the commercial usage of such products. Need for Additional Funds The amount and timing of the Company's expenditures will depend on the progress of its research and development, the cost and timing of regulatory approvals, the amount of spending on sales, marketing and distribution activities in preparation for the possible commercialization of MorphiDex, general market conditions, relationships with potential strategic partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances and other factors. The Company's cash requirements may vary materially from those now planned and no assurance can be given that development costs will not exceed the amounts budgeted for such purposes. The Company may require additional funding for its research and product development programs, operating expenses, regulatory clearances and sales and marketing expenses. Adequate funds for these purposes, whether obtained through financial markets or through collaborative or other arrangements with partners or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to delay, scale back or eliminate certain of its research and development programs or to make arrangements with third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. As a result, the Company may not be able to independently develop any or all of the products described in this Report. Limited Sales and Marketing Experience The Company intends to market and sell certain of its products, if successfully developed and approved, through a direct sales force in the United States. The Company currently has no marketing and sales staff, and has yet to establish any product distribution channels. In order to market its products directly, the Company must develop a sales force with technical expertise. There can be no assurance that the Company will be able to successfully establish a direct sales organization or distribution channels. Failure to establish a sales force capability in the U.S. may have a material adverse effect on the Company. 3 Reliance on Third-Party Manufacturers The Company currently uses, and expects to continue to use, outside contractors to manufacture drug supplies for its clinical trials. In addition, the Company currently intends to use outside contractors to manufacture products approved for sale, if any. There is no assurance that supplies from any such contractor will not be reduced or interrupted due to FDA and DEA regulatory requirements or other reasons. Such a reduction or interruption could have a material adverse effect on the Company's development and commercialization activities. The Company currently uses a single contract manufacturer for supplies of its most developmentally advanced product, MorphiDex'TM' and suppliers of raw materials are limited. The regulatory qualification of additional suppliers and/or manufacturers may require significant time and expense. In addition, the acquisition of narcotics as components of certain of the Company's products is subject to quota restrictions imposed and administered by DEA. There is no assurance that the Company will be able to obtain its requested quantities of such narcotics. Dependence on Qualified Personnel Because of the specialized scientific nature of the Company's business, the Company is highly dependent upon its ability to attract and retain qualified scientific and technical personnel. The loss of significant scientific and technical personnel or the failure to recruit additional key scientific and technical personnel could have a material adverse effect on the Company. While the Company has consulting agreements with certain key individuals and institutions and has employment agreements with its key executives, there can be no assurance that the Company will be successful in retaining such personnel or their services under existing agreements. The loss of John Lyle, the Company's Chief Executive Officer, could have a material adverse effect on the Company. The Company currently maintains a $6.0 million life insurance policy on Mr. Lyle. There is intense competition for qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. Uncertain Ability to Protect Proprietary Technology The Company's success, competitive position and amount of potential future income will depend in part on its ability to obtain patent protection relating to the technologies, processes and products it is developing and may develop in the future. The Company's policy is to seek patent protection and enforce intellectual property rights. No assurance can be given that any patent issued or licensed to the Company will provide protection against competitive products or otherwise be commercially viable. In this regard, the patent position of pharmaceutical compounds 4 and compositions is particularly uncertain. Even issued patents may later be modified or revoked by the PTO or in legal proceedings. Moreover, the Company believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws, and accordingly, its patent position may be stronger in the U.S. than abroad. In addition, foreign patents may be more difficult to protect and/or the remedies available may be less extensive than in the U.S. Patent applications in the U.S. are maintained in secrecy until patents issue and, since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries. The Company cannot be certain that it was the first creator of the inventions covered by pending patent applications or the first to file patent applications on such inventions. No assurance can be given that any of the Company's pending patent applications will be allowed, or if allowed, whether the scope of the claims allowed will be sufficient to protect the Company's products. The Company also expects to rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or be issued patents that may prevent the sale of the Company's products or know-how or require licensing and the payment of significant fees or royalties by the Company in order to produce its products. Moreover, there can be no assurance that the Company's technology does not infringe upon any valid claims of patents owned by others. If the Company were found to be infringing on a patent held by another, the Company might have to seek a license to use the patented technology. There can be no assurance that, if required, the Company would be able to obtain such a license on terms acceptable to the Company, if at all. If a legal action were to be brought against the Company or its licensors, the Company could incur substantial costs in defending itself, and there can be no assurance that such an action would be resolved in the Company's favor. If such a dispute were to be resolved against the Company, the Company could be subject to significant damages and the testing, manufacture or sale of one or more of the Company's technologies or proposed products, if developed, could be enjoined. No assurance can be given as to the degree of protection any patents will afford, whether patents will be issued or whether the Company will be able to avoid violating or infringing upon patents issued to others. Despite the use of confidentiality agreements and non-compete agreements, which themselves may be of limited effectiveness, it may be difficult for the Company to protect its trade secrets. See "Risk Factors -- Dependence on Qualified Personnel." Uncertain Availability of Health Care Reimbursement The Company's ability to commercialize its pain management products may depend in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health insurers and others. There can be no assurance that third-party insurance coverage will be 5 adequate for the Company to establish and maintain price levels sufficient for realization of an appropriate return on its investment. Government, private insurers and other third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for uses of approved products for indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payers for uses of the Company's products, the market acceptance of these products could be adversely affected. No Product Liability Insurance The Company will be exposed to potential product liability risks, which are inherent in the testing, manufacturing and marketing of human therapeutic products. The Company is contractually obligated under certain of its license agreements to indemnify the individuals and/or institutions from whom it has licensed the technology against claims relating to the manufacture and sale of the products to be sold by the Company. McNeil, however, has agreed to indemnify the Company for third party claims or suits resulting from the manufacture, use or sale of the products pursuant to the McNeil License Agreement. The Company's indemnification liability, as well as direct liability to consumers for any defects in the products sold, could expose the Company to substantial risk and losses. The Company currently carries liability insurance for its clinical trial activities but does not have product liability insurance covering commercial use of its products. The Company plans to purchase such product liability insurance as it deems appropriate prior to marketing its products. McNeil is required by the McNeil License Agreement to maintain product liability insurance and may self-insure to cover its indemnification obligations to the Company. However, there can be no assurance that the Company will be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. Certain Risks Associated With the McNeil License Agreement The McNeil License Agreement extends until the later of the expiration of the Company's patent rights or ten years from the date of execution, provided that the McNeil License Agreement is terminable: (i) by either party in the event of a breach by the other party upon 90 days notice or upon certain events of bankruptcy; (ii) by McNeil, at any time upon 60 days notice; and (iii) by the Company upon certain other circumstances. Under certain circumstances, the McNeil License Agreement could terminate with respect to either acetaminophen or NSAID products without terminating with respect to the other category. In the event of a termination by McNeil, McNeil must pay all royalty payments and milestone payments due, if any, through the date of termination and the technology licensed by McNeil reverts to the Company. In such event, the Company retains the rights to the results of the two clinical studies funded by the Company, and McNeil retains the rights to the results of the clinical studies funded by McNeil during the term of the McNeil License Agreement. 6 Competition and Technological Changes, Uncertainty and Obsolescence The Company's success will depend, in part, upon its ability to successfully achieve market share at the expense of existing and established products in the Company's target markets. The Company's products will be competing directly with the products of companies that are well-established and which may have a significantly higher degree of brand and name recognition and substantially more financial resources than those of the Company. The Company is also in competition with other pharmaceutical companies, hospitals, research organizations, individual scientists and non-profit organizations engaged in the development of new pain management pharmaceuticals. Many of these companies and entities have greater research and development capacities, experience, recognition and marketing, financial and managerial resources than the Company and represent significant competition for the Company. Also, the Company's competitors may succeed in developing competing technologies and obtaining FDA approval for products more rapidly than the Company. There can be no assurance that developments by others will not render the Company's products or technologies non-competitive or obsolete. Concentration of Ownership As of April 1998, the Company's directors and officers beneficially own approximately 28% of the Company's Common Stock. In addition, the Company's largest stockholder, Unifina AG, and related investors control approximately 11% of the Common Stock. As a result, these stockholders, if they acted together, would have the ability to influence significantly the election of the Company's directors as well as the management and policies of the Company. This concentration of ownership may have the effect of delaying or preventing a change of control of the Company. Possible Volatility of Stock Price The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price of the Company's Common Stock may prove to be highly volatile from a variety of variable influences. Announcements of technological innovations, regulatory matters or new commercial products by the Company or its competitors, developments or disputes concerning patent or proprietary rights, publicity regarding actual or potential clinical results relating to products under development by the Company or its competitors, regulatory developments in both the U.S. and foreign countries, public concern as to the safety of pharmaceutical products, economic and other external factors, as well as period-to-period fluctuations in financial results, may have a significant impact on the market price of the Company's Common Stock. The timing and amount of the Company's development and commercialization expenditures are subject to significant uncertainties; operating results for any accounting period may not be indicative of expected results for future periods. 7 Absence of Dividends The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. Effect of Anti-Takeover Provisions The Company's Amended and Restated Certificate of Incorporation provides for a classified Board of Directors and that members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least a majority of the shares of capital stock of the Company entitled to vote. The Company's Amended and Restated Certificate of Incorporation requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and will require reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only by the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. In addition, the Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences of, and issue shares of, Preferred Stock. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a 'business combination' with an 'interested stockholder' for a period of three years after the date of the transaction in which the person first becomes an 'interested stockholder,' unless the business combination is approved in a prescribed manner. The application of these provisions could have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Company's Amended and Restated Certificate of Incorporation could also have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Common Stock. Forward Looking Statements This Report contains "forward-looking" statements, within the meaning of Section 27A of Securities Act of 1993, as amended and Section 21E of the Securities Exchange Act of 1934, that are based on management's beliefs and assumptions, current expectations, estimates and projections. Statements that are not historical facts, including statements which are preceded by, followed by, or that include the words "believes;" "anticipates;' "plans;" "expects;" or similar expressions and statements about the Company's development schedule and future use of funds are forward-looking statements. Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. These statements are subject 8 to risks and uncertainties and, therefore, actual results may differ materially. The reader should not rely on any forward-looking statement. The Company undertakes no obligations to update any forward-looking statements whether as a result of new information, future events or otherwise. Important factors that may affect future results include, but are not limited to: uncertainty associated with pre-clinical studies and clinical trials and regulatory approval; uncertainty of market acceptance of new products; impact of competitive products and pricing; product development; changes in laws and regulations; customer demand; possible future litigation; and the availability of future financing. Readers should evaluate any statement in light of these important factors. 9 -----END PRIVACY-ENHANCED MESSAGE-----