-----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, U9IBy30OKPOX8z3b2ubNsNlkV0lAzlNrkT2ONB4Rv71BaBMfuqmlv/OWD32nJrwn CrORRXuH1WDhX07WNiuPOA== 0000950117-99-002362.txt : 19991117 0000950117-99-002362.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950117-99-002362 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755805 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 September 30, 1999 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 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 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 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 November 3, 1999 was 17,403,895. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (UNAUDITED)
December 31 September 30 1998 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents $37,025,445 $33,429,498 Marketable securities 9,001,528 4,022,141 Interest receivable 417,042 243,971 Prepaid expenses and other current assets 683,866 400,275 ----------- ----------- Total current assets 47,127,881 38,095,885 Marketable securities, noncurrent 4,052,824 - Restricted cash 150,000 150,000 Property and equipment, net 1,098,819 1,008,174 ----------- ----------- Total assets $52,429,524 $ 39,254,059 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,117,795 $ 2,624,280 Other current liabilities 794,044 357,730 ----------- ----------- Total current liabilities 2,911,839 2,982,010 ----------- ----------- Commitments Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized, 17,028,649 and 17,366,545 shares issued and outstanding, respectively 170,287 173,666 Additional paid-in-capital 81,626,800 81,703,881 Unearned compensation expense (611,108) (185,768) Deficit accumulated during the development stage (31,668,294) (45,419,730) ----------- ----------- Total stockholders' equity 49,517,685 36,272,049 ----------- ----------- Total liabilities and stockholders' equity $52,429,524 $39,254,059 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 1 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative from For the three months ended For the nine months ended inception to September 30, September 30, September 30, ---------------------------- ------------------------------ --------------- 1998 1999 1998 1999 1999 ---- ---- ---- ---- ---- Revenues $ - $ - $ - $ - $ 3,311,000 ----------- ----------- ------------ ------------ ------------- Operating expenses: Research and development 3,396,058 2,034,575 10,399,536 7,602,365 36,264,495 Selling, general and administrative 1,438,204 1,779,826 3,294,583 7,718,114 19,644,641 ----------- ----------- ------------ ------------ ------------- Total operating expenses 4,834,262 3,814,401 13,694,119 15,320,479 55,909,136 ----------- ----------- ------------ ------------ ------------- Loss from operations (4,834,262) (3,814,401) (13,694,119) (15,320,479) (52,598,136) Interest income 428,501 492,856 1,508,306 1,569,043 7,178,405 ----------- ----------- ------------ ------------ ------------- Net loss $(4,405,761) $(3,321,545) $(12,185,813) $(13,751,436) $(45,419,731) ----------- ----------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------- Net loss per common share $ (0.28) $ (0.19) $ (0.76) $ (0.79) ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Weighted average common shares outstanding 16,018,284 17,366,545 15,991,067 17,341,450 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
The accompanying notes are an integral part of these financial statements. 2 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative from For the nine months ended inception to September 30, September 30, ----------------------------- -------------- 1998 1999 1999 ---- ---- ---- Cash flows from operating activities $(11,150,111) $(12,802,421) $(40,363,899) Cash flows from investing activities: Purchases of marketable securities (25,034,720) (9,842,358) (76,753,015) Redemption of marketable securities 22,947,969 19,000,000 72,853,072 Purchases of property and equipment (1,017,223) (225,357) (1,628,952) ------------ ------------ ------------ Net cash used in investing activities (3,103,974) 8,932,285 (5,528,895) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of preferred stock 6,659,015 Proceeds from issuance of common stock 311,725 274,189 72,663,277 ------------ ------------ ------------ Net cash provided by financing activities 311,725 274,189 79,322,292 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (13,942,360) (3,595,947) 33,429,498 Cash and cash equivalents, beginning of period 20,246,152 37,025,445 - ------------ ------------ ------------ Cash and cash equivalents, end of period $ 6,303,792 $ 33,429,498 $ 33,429,499 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 3 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. LOSS PER SHARE Since the Company incurred net losses in all periods presented, outstanding options and warrants to purchase an aggregate of 1,399,755 and 1,305,001 shares of Common Stock at September 30, 1999, respectively, were not included in diluted per share calculations, as their effect would be antidilutive. 3. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
December 31, September 30, 1998 1999 ---- ---- Accrued compensation expense $318,800 $357,730 Accrued research expenses 475,244 - -------- -------- Total $794,044 $357,730 -------- -------- -------- --------
4. SIGNIFICANT AGREEMENTS In 1996, in connection with the transfer of certain intangible assets, the Company received preferred stock of U.S. Dermatologics Inc. In August 1999, the preferred stock was exchanged for shares of U.S. Dermatololgics, Inc. common stock representing approximately 10% of U.S. Dermatologics, Inc.'s total outstanding common stock. The Company recorded no gain or loss in connection with the exchange. 4 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. Since its formation in January 1992, Algos has devoted a substantial amount of its efforts to licensing technology, recruiting key management and staff, developing products, filing patent and regulatory applications and raising capital. Algos has incurred losses since its inception and expects to incur losses in the future. Algos' product development expenses may increase as additional drugs are developed. In August 1999, Algos received a "not approvable" letter from the U.S. Food and Drug Administration regarding a New Drug Application (NDA) filed in 1998 for its most developmentally advanced drug, MorphiDex'r'. The Company may incur additional development costs for MorphiDex'r' in connection with a resubmission of the NDA and delay certain expenses associated with pre-commercialization activities such as the establishment of a sales force, the preparation of promotional plans and materials, additions to and changes in financial and operating systems, and related administrative activities. Results of Operations Three months ended September 30, 1999 and 1998 Research and development: In the three months ended September 30, 1999, research and development expenses were $2.0 million, a decrease of approximately $1.4 million, or 40%, from 1998. In 1999, expenses decreased due to the impact in 1998 of large-scale, clinical trials of MorphiDex'r' and the costs of preparing the MorphiDex'r' New Drug Application. These effects were partially offset by 1999 expenses related to Phase II clinical studies of other products and the manufacturing of full-scale demonstration batches and other development activities for MorphiDex'r'. Selling, general and administrative: In the three months ended September 30, 1999, selling, general and administrative expenses were $1.8 million, an increase of approximately $0.3 million, or 24% from 1998. The increase was primarily attributable to the possible future commercialization of products including fees to sales and marketing consultants, educational materials and activities, and the addition of marketing personnel, as well as the general expansion of the Company's business activities. Algos expects to delay certain other expenses associated with the possible commercialization of products pending a resubmission of the MorphiDex'r' NDA. Nine months ended September 30, 1999 and 1998 Research and development: In the nine months ended September 30, 1999, research and development expenses were $7.6 million, a decrease of approximately $2.8 million, or 27%, from 1998. In 1999, expenses decreased due to the impact in 1998 of large-scale, clinical trials and toxicology studies of MorphiDex'r'. These effects were partially offset by the costs of obtaining drug supplies and manufacturing of full-scale demonstration batches of MorphiDex'r' in 1999 and expenses related to Phase II clinical studies of other products. 5 Selling, general and administrative: In the nine months ended September 30, 1999, selling, general and administrative expenses were $7.7 million, an increase of approximately $4.4 million from 1998. The increase was primarily attributable to the possible future commercialization of products including fees to sales and marketing consultants, educational materials and activities, and the addition of marketing personnel, as well as the general expansion of the Company's business activities. Algos expects to delay certain other expenses associated with the possible commercialization of products pending a resubmission of the MorphiDex'r' NDA. Liquidity and Capital Resources Primarily as a result of its drug development efforts, the Company has experienced net cash outflows from operations since its inception in 1992. In the nine months ended September 30, 1999, cash outflows from operations amounted to approximately $12.8 million compared to $11.2 million in the first nine months of 1998 primarily as a result of expenses of clinical development and other MorphiDex activities. The Company expects to incur product development expenses as clinical trials of MorphiDex'r' and HydrocoDex'TM' continue and other drugs that the Company currently has under development move into advanced clinical trials and as additional drugs are developed and research and development staff increased. In August 1999, Algos received a "not approvable" letter from the U.S. Food and Drug Administration regarding its NDA for MorphiDex'r'. Algos may incur additional development costs associated with a resubmission of the MorphiDex'r' NDA. The Company currently expects that its cash and marketable securities at September 30, 1999 will be sufficient to fund its development activities through the year 2001 and support a resubmission of the NDA based upon the Company's current schedule of clinical trials and level of business activities. However, if additional trials are necessary or advisable, or if additional products are developed, the Company may require additional funds. In the event that internally generated funds are insufficient for such efforts, the Company will need to raise additional capital. There is no assurance that the Company would be able to obtain such additional financing on terms acceptable to the Company. The Company's future funding requirements will depend on a number of factors, including: the results of its development efforts; the timing and costs of obtaining required regulatory approvals; the amount of resources required for activities in preparation for the possible commercialization of MorphiDex'r'; 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. Year 2000 A potential problem exists for all companies that rely on computers as the year 2000 approaches. Any of Algos' computer software applications and systems that use only the last two digits of a year to refer to a year may not properly recognize the year 2000. This phenomenon (the Year 2000 Issue) could cause a disruption of operations, including, among other things, a temporary inability to engage in normal business activities. Algos has evaluated the impact of the Year 2000 Issue and completed upgrading or modifying critical applications and systems to accommodate Year 2000 dating. This includes computer systems, office machines, phone and security systems, off the shelf systems and applications, custom software applications, and accounting systems. Algos currently believes that the financial and operational systems of Algos, as currently used, will function adequately with respect to the Year 2000 Issue. Algos has limited information concerning the compliance status of its third-party contractors. Algos' current third party contractors generally test Algos products and provide Algos with the results of those tests and manufacture drug supplies. Algos has initiated formal communications with all of its significant suppliers and vendors to determine the extent to which the Company may be vulnerable if those third parties fail to remediate their own Year 2000 issues. Algos is continually evaluating its correspondence with third-parties regarding their readiness for the Year 2000 Issue. Algos believes that any 6 Year 2000 Issue for such third-party contractors would not be material, since many activities could be performed without the aid of a computer. Algos is not significantly reliant on computer software applications and systems during its developmental stage, however, if certain manufacturing, data management or statistical applications do not function properly, the conduct of studies or the analysis and reporting of study results could be delayed and the timing of subsequent development activities and regulatory filings adversely affected. As part of the possible future commercialization of products, Algos intends to have third parties manufacture and distribute its products. Algos will place significant dependence on the third parties' computer systems for purchasing, production, customer order entry and invoicing and other related activities. A disruption in these systems could result in lost revenue from inventory shortages, improper execution of customer orders and/or delays in the resolution and collection of outstanding invoices. In preparation for the possible future commercialization of products Algos may make significant additions to and changes in its existing computer software applications and systems and/or the use of such systems . If Algos makes any such additions or changes, it would affect Algos' exposure to the Year 2000 Issue since Algos would become more reliant on its computer software applications and systems. At this time, Algos does not expect that the cost of its Year 2000 Issue compliance program will be material to its business, financial condition or results of operations and does not currently anticipate any material disruption in its operations. Algos has not incurred more than $10,000 of costs to date related to the Year 2000 Issue. The Year 2000 statement set forth above is hereby designated as a "YEAR 2000" readiness disclosure" in accordance with the Federal Year 2000 Information and Readiness Disclosure Act* *Year 2000 Information and Readiness Disclosure Act of October 19, 1998. Forward Looking Statements This Report contains "forward-looking" statements, within the meaning of Section 27A of Securities Act of 1933, 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 or commercialization schedules 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 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; the availability of future financing and reimbursement policies of government and private health insurers and others. Readers should evaluate any statement in light of these important factors. See "Risk Factors". 7 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (3) Exhibits:
Exhibit No. Title - -------- --------------------------------------------------------------------------------------------- 1.1 -- Purchase and Registration Rights Agreement, dated as of November 9, 1999(6) 3.1 -- Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation(1) 3.2 -- Amended and Restated By-laws of Algos Pharmaceutical Corporation(1) 4.1 -- Form of Stock Certificate of Common Stock(1) 4.2 -- Warrant to Purchase 250,000 Shares of Common Stock of Algos Pharmaceutical Corporation and Biotech Target S.A., a Panamanian corporation, dated November 9, 1998(6) 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(5) 10.2.1 -- 1994 Stock Option Plan(1) 10.2.2 -- 1996 Stock Option Plan(1) 10.2.3 -- 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)(A) 10.4.2 -- License Agreement with McNeil Consumer Products Company(1)(A) 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. (5) Incorporated by Reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (6) Incorporated by Reference to the Registrant's registration statement on Form S-3 dated March 10, 1999. (A) Portions of this Exhibit have received confidential treatment pursuant to Rule 406(b) under the Securities Act. 8 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 November 15, 1999 /s/ John W. Lyle ------------------ ------------------------------------- John W. Lyle President and Chief Executive Officer Date November 15, 1999 /s/ Gary R. Anthony ------------------ ------------------------------------- Gary R. Anthony Chief Financial Officer and Principal Accounting Officer 9 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as ........................... 'TM' The registered trademark symbol shall be expressed as ................ 'r' EX-27 2 EXHIBIT 27
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 33,429,498 4,022,141 243,971 0 0 38,095,885 1,382,240 374,066 39,254,059 2,982,010 0 173,666 0 0 36,098,383 39,254,059 0 0 0 15,320,479 0 0 0 (13,751,436) 0 0 0 0 0 (13,751,436) (.79) (.79) EX-99 3 EXHIBIT 99 EXHIBIT 99 RISK FACTORS Algos operates in a rapidly changing environment that involves a number of risks that may significantly affect Algos' results, some of which are beyond Algos' control. The following discussion highlights some of these risks, and others are discussed elsewhere in other documents filed by Algos with the Securities and Exchange Commission. IF WE ARE UNABLE TO DEVELOP A MARKETABLE PRODUCT FROM WHICH WE CAN DERIVE REVENUES, WE ARE UNLIKELY TO ACHIEVE PROFITABILITY. We have no revenues from product sales and no history of commercial manufacturing or marketing. To date, substantially all of our funding has been provided by contributions of capital made by our founders, sales of our stock and payments received under a license agreement with McNeil Consumer Products Company with whom we are working to develop an over-the-counter pain reliever. As a result, we have experienced losses since our inception and losses are continuing and are expected to continue. We have a limited history upon which you may base an evaluation of our likely performance and there is a risk that we will not be able to develop a marketable product and/or achieve profitability. Algos' prospects must be considered in light of the potential problems, expenses, complications and delays encountered in connection with the formation of a new business and the development of new pharmaceutical products, including obtaining the necessary regulatory approvals, the utilization of unproven technology and the competitive market environment in which Algos plans to operate. IF WE ARE UNABLE TO ADEQUATELY DEMONSTRATE THE SAFETY AND EFFECTIVENESS OF OUR PRODUCTS IN HUMANS, WE MAY NOT BE ABLE TO PROCURE NECESSARY REGULATORY APPROVALS TO BRING OUR PRODUCTS TO MARKET. In order to receive regulatory approval to sell our products, Algos must demonstrate that our potential products are safe and effective in humans. Although the results of Algos' trials to date have been encouraging, the results 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. Therefore, there is a risk that we may fail to adequately demonstrate the safety and efficacy of our products which could delay or prevent regulatory approval of our products and prevent them from being sold. The speed with which we complete our clinical trials is dependent upon, among other factors, the ability to locate and enroll suitable patients at acceptable facilities. Accordingly, delays in planned patient enrollment in Algos' current trials or future clinical trials may result in increased costs, program delays or both, which may delay the ability of Algos to begin generating revenues. We currently do not have regulatory approval to sell any products. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of pharmaceutical products including lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures. Satisfaction of these requirements typically takes a number of years and varies substantially based upon the type, complexity and novelty of the pharmaceutical products. There can be no assurance that if clinical trials are completed, Algos will be able to submit a New Drug Application or that any such application will be reviewed and approved by the FDA in a timely manner, or at all. 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, which may reduce the size of the market for Algos' product. See "Business--Government Regulation" in Algos' 1998 Annual Report on Form 10-K/A. 1 IF ALGOS PRODUCTS ARE NOT ACCEPTED BY THE MARKET, ALGOS WILL NOT BE ABLE TO ACHIEVE PROFITABILITY. Even if regulatory approvals are obtained and Algos products prove to be superior to alternative products on the market, uncertainty exists as to Algos' ability, or the length of time required, to achieve market acceptance of Algos products. A number of factors may limit the market acceptance of Algos products, including: the availability of alternative products with greater name and brand recognition than Algos, the price of Algos 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 Algos. Furthermore, some of the Algos products contain opioid ingredients that may require stringent record-keeping obligations, strict storage requirements and other limitations on such products' availability that could limit the distribution and commercial usage of such products. In light of these factors, there is a significant risk that Algos will not be able to gain market acceptance for its products which may prevent us from achieving profitability. OUR SUBSTANTIAL RELIANCE ON THE CAPITAL MARKETS IN ORDER TO MEET OUR FINANCIAL REQUIREMENTS MAY BE DILUTIVE OF THE VALUE OF ALGOS COMMON STOCK AND MAY IMPEDE OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS. As a development stage company, Algos requires substantial amounts of funding for its research and product development programs, operating expenses, regulatory approvals and sales and marketing expenses, and no assurance can be given that development and commercialization costs will not exceed the amounts budgeted for such purposes. Because we do not currently generate any revenues from product sales, we are dependent on our existing cash and our ability to raise additional capital in order to fund our operations until we can begin marketing our products. Any material delay in the marketing of our products may require us to raise additional capital. Algos has limited financial resources and its substantial reliance on the capital markets to satisfy its financial requirements may dilute the value of Algos common stock. Conversely, if Algos is unable to obtain sufficient funds through the financial markets or through collaborative or other arrangements on a timely basis, there is a risk that Algos may be required to delay, scale back or eliminate certain of its research, development or commercialization programs or to make arrangements with third parties to develop or commercialize products or technologies that Algos would otherwise seek to develop or commercialize itself. In the event this occurs, Algos may not be able to independently develop or commercialize any or all of its products. IF ALGOS IS UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS, WE MAY BE FORCED TO LICENSE OUR PRODUCTS TO OTHERS WHICH WILL HAVE AN ADVERSE EFFECT ON ALGOS' PROFITABILITY. Algos intends to market and sell some or all of its products, if successfully developed and approved, through a direct sales force in the United States. However, Algos currently has limited marketing and sales staff, and has yet to establish any product distribution channels. If we are unable to develop a sales force with technical expertise or to establish appropriate distribution channels, we may be forced to license products we have developed to third parties instead of directly marketing them which may reduce our profitability. IF ALGOS IS UNABLE TO ACQUIRE SUFFICIENT SUPPLIES FROM THIRD PARTIES, THEN ALGOS' ABILITY TO DELIVER OUR PRODUCTS TO THE MARKET MAY BE IMPEDED. Algos currently uses, and expects to continue to use, outside contractors to manufacture drug supplies for its clinical trials. In addition, Algos currently intends to use outside contractors to manufacture products approved for sale, if any. There is no assurance that Algos will be able to obtain its requested amounts of drugs from these contractors or that supplies will not be interrupted due to FDA and/or Drug Enforcement Agency, the DEA, regulatory requirements or other reasons. If Algos cannot obtain a sufficient supply of ingredients or supplies are interrupted, this may have a material adverse effect on our reputation in the marketplace and our ability to develop and commercialize our products. 2 For instance, Algos currently uses a single contract manufacturer for supplies of its most developmentally advanced product, MorphiDex'r', 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 opioid ingredients as components of certain Algos products is subject to quota restrictions imposed and administered by the DEA. Accordingly, there is a risk that Algos will be unable to obtain its requested quantities of opioid ingredients which could be detrimental to Algos' ability to bring its product to market. IF ALGOS IS UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO MAINTAIN OUR COMPETITIVE POSITION. Because of the specialized scientific nature of Algos' business, we are highly dependent upon our 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 Algos' ability to develop and deliver our products to market in a competitive manner. While Algos has consulting agreements with certain key individuals and institutions and has employment agreements with certain key executives, there can be no assurance that Algos will be successful in retaining such personnel or their services under existing agreements. The loss of John Lyle, Algos' Chief Executive Officer, could have a material adverse effect on Algos because of the loss of Mr. Lyle's expertise and because we would need to expend time and financial resources to seek a new Chief Executive Officer which would materially slow our efforts to develop and commercialize our products. Algos currently maintains a $6.0 million life insurance policy on Mr. Lyle. There is intense competition for qualified personnel in the areas of Algos' activities, and there can be no assurance that Algos will be able to continue to attract and retain the qualified personnel necessary for the development of its business. IF WE ARE UNABLE TO PATENT OUR TECHNOLOGY OR ARE FOUND TO HAVE VIOLATED OR INFRINGED ON THE PATENTS OF OTHERS, THIS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES AND WE MAY NOT BE ABLE TO RECEIVE AN APPROPRIATE RETURN ON OUR INVESTMENT. Algos' policy is to seek patent protection and enforce intellectual property rights. However, no assurance can be given that any patents will be allowed or will provide protection against competitive products or otherwise be commercially viable. In this regard, the patent position of pharmaceutical compounds and compositions is particularly uncertain. Because we are a development stage company without brand name recognition for our products, our ability to successfully patent and protect the technologies we are developing or may develop in the future is especially crucial to our ability to generate future revenues and maintain our competitive position. However, there is a risk that Algos' pending patent applications may not be allowed, or if they are allowed, that the scope of the claims allowed will be insufficient to protect Algos products. Furthermore, even issued patents may later be modified or revoked by the United States Patent and Trademark Office, the PTO, or in legal proceedings. Any of these outcomes would reduce future revenues and the return on any investment in Algos. In addition, no assurance can be given as to whether Algos will be able to avoid violating or infringing upon patents issued to others. If Algos were found to be infringing on a patent held by another, Algos might have to seek a license to use the patented technology. There can be no assurance that, if required, Algos would be able to obtain such a license on terms acceptable to Algos, if at all. If a legal action were to be brought against Algos or its licensors or licensees, Algos could incur substantial costs in defending itself, and there can be no assurance that such an action would be resolved in Algos' favor. If a patent infringement dispute were to be resolved against Algos, Algos could be subject to significant damages and the manufacture or sale of one or more of Algos' technologies or proposed products, if developed, could be stopped. IF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNAVAILABLE OR INADEQUATE, WE MAY NOT BE ABLE TO REALIZE AN APPROPRIATE RETURN ON OUR INVESTMENT AND/OR THE MARKET ACCEPTANCE OF OUR PRODUCTS COULD BE ADVERSELY AFFECTED. Algos' 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. 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 3 products for indications for which the FDA has not granted marketing approval. Because we are developing drugs that may have higher costs than generic alternatives that are currently available, there is a risk that insurers will be unwilling to provide coverage for our product. If adequate coverage and reimbursement levels are not provided by government and third-party payers for uses of Algos products, the market acceptance of our products could be adversely affected and/or Algos may not be able to establish and maintain price levels sufficient for the realization of an appropriate return on our investment. IF ALGOS INCURS INDEMNIFICATION LIABILITY, OR A PRODUCTS LIABILITY SUIT IS SUCCESSFULLY PROSECUTED AGAINST US, WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY THE RESULTING LIABILITY. Algos will be exposed to potential product liability risks, which are inherent in the testing, manufacturing and marketing of human therapeutic products. In addition, Algos is contractually obligated under certain of our license agreements to indemnify the individuals and/or institutions from whom we have licensed the technology against claims relating to the manufacture and sale of the products to be sold by Algos. Algos' indemnification liability, as well as direct liability to consumers for any defects or health risks in the products sold, could expose Algos to substantial losses which would reduce earnings and funds available for research and development activities. Algos currently carries certain liability insurance for our clinical trial activities and we plan to purchase such product liability insurance as we deem appropriate prior to marketing our products. McNeil Consumer Products Company is required by its license agreement to maintain product liability insurance and may self-insure to cover its indemnification obligations to Algos. However, there can be no assurance that Algos will be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. IF THE MCNEIL LICENSE AGREEMENT IS TERMINATED AND ALGOS DESIRES TO DEVELOP AND COMMERCIALIZE ITS OVER-THE-COUNTER PRODUCTS, ALGOS MAY BE FORCED TO DO SO ITSELF WHICH MAY REDUCE PROFITS. We are relying on McNeil to commercialize products involving acetaminophen, ibuprofen and certain other over-the-counter pain relievers. Acetaminophen is the active ingredient in Tylenol and ibuprofen is the active ingredient in Motrin, both of which are manufactured by McNeil. If the agreement with McNeil is terminated, then in the event that we desire to develop and commercialize our products, we may be forced to do so ourselves. Because Algos does not have the same level of resources as McNeil, this may reduce any potential future revenues we may otherwise generate. The license agreement dated June 26, 1996 with McNeil Consumer Products Company extends until the later of the expiration of Algos' patent rights or ten years from the date of execution, provided that the agreement is terminable: by either party in the event of a breach by the other party upon 90 days notice or upon certain events of bankruptcy; by McNeil Consumer Products Company, at any time upon 60 days notice; and by Algos upon certain other circumstances. IF ALGOS' COMPETITORS SUCCEED IN DEVELOPING COMPETING TECHNOLOGIES MORE RAPIDLY THAN ALGOS, THE PRODUCTS WE ARE DEVELOPING MAY BE RENDERED OBSOLETE WHICH WOULD PREVENT US FROM SUCCESSFULLY COMPETING IN OUR TARGET MARKETS. As a development stage company, Algos' success will largely depend upon its ability to successfully achieve market share at the expense of existing and established products in Algos' target markets. A number of pharmaceutical companies are developing pain relief products. Many of Algos' competitors have a significantly higher degree of brand name recognition and substantially more financial resources than those of Algos. They also may have greater research and development capacities, experience, recognition and marketing, financial and managerial resources than Algos. Accordingly, if Algos' competitors succeed in developing competing technologies 4 and obtaining FDA approval for products more rapidly than Algos, Algos products or technologies may be rendered non-competitive or obsolete in which case we would be unable to compete in our target market. A THIRD PARTY MAY HAVE DIFFICULTY SUCCESSFULLY MOUNTING A TAKEOVER BID FOR CONTROL OF ALGOS WHICH COULD PREVENT YOU FROM MAXIMIZING THE VALUE OF YOUR ALGOS COMMON STOCK AND COULD MAKE YOUR INVESTMENT LESS LIQUID. The ownership of Algos is concentrated, with a small group of stockholders, directors, officers and related investors owning approximately 40% of the common stock. These stockholders, if they acted together, would have the ability to influence significantly the election of Algos' directors as well as the management and policies of Algos. This concentration of ownership may have the effect of delaying or preventing a change of control of Algos. Certain other provisions of Algos' Amended and Restated Certificate of Incorporation could also have the effect of delaying or preventing changes of control or management of Algos, which could adversely affect the market price and liquidity of our common stock. In addition, Algos is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits Algos 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 Algos and could make your investment less liquid. IF WE, OUR CONTRACTORS OR OTHER ENTITIES ARE UNABLE TO ADEQUATELY ADDRESS THE POTENTIAL DISRUPTIONS TO COMPUTER SYSTEMS THAT MAY OCCUR DUE TO THE ADVENT OF THE YEAR 2000, WE MAY NOT BE ABLE TO EFFECTIVELY DEVELOP OR COMMERCIALIZE OUR PRODUCTS. A potential problem exists for all companies that rely on computers as the year 2000 approaches. Computer software applications and systems that use only the last two digits of a year to refer to a year may not properly recognize the year 2000. This could cause a disruption of our operations, including, among other things, a temporary inability to engage in normal business activities. Because new development projects have not yet commenced and because we have not completed our preparations for the commercialization and marketing of our products, our assessment of our readiness with respect to the potential year 2000 computer problem will be ongoing. With respect to product development activities at Algos, if certain manufacturing, data management or statistical applications do not function properly, the conduct of studies or the analysis and reporting of study results could be delayed and the timing of subsequent development activities and regulatory filings could be adversely affected. Algos may make significant additions to and changes in its existing computer software applications and systems and/or the use of these systems in anticipation of the possible commercialization of products. If Algos makes any of these additions or changes, it would affect Algos' exposure to the potential year 2000 computer problem since Algos would become more reliant on its computer software applications and systems. If Algos commercializes products, it expects to place significant dependence on the third parties' computer systems for purchasing, production, customer order entry and invoicing and other related activities. A disruption in these systems could result in lost revenue from inventory shortages, improper execution of customer orders and/or delays in the resolution and collection of outstanding invoices. As part of our development and commercialization efforts, we will ask our outside vendors, manufacturers, suppliers and service providers whether they and/or any additional information systems and software that we acquire from them are year 2000 compliant. However, these parties may be unable or unwilling to make assurances of their year 2000 compliance. And, even if we do receive assurances of year 2000 compliance, the parties making the assurances may not in fact be year 2000 compliant. In the event any of our outside vendors, manufacturers, suppliers and service providers are not year 2000 compliant, we will likely be prevented from developing or commercializing some or all of our products in a timely or efficient manner. 5 -----END PRIVACY-ENHANCED MESSAGE-----