Rule No. 424(b)(1)
Registration No. 333-23037
LOGO [SIGA]
SIGA PHARMACEUTICALS, INC.
2,500,000 SHARES OF COMMON STOCK
This Prospectus relates to an offering (the "Offering") by SIGA
Pharmaceuticals, Inc. (the "Company") of 2,500,000 shares of common stock, par
value $.0001 per share (the "Common Stock") (sometimes hereinafter referred to
as the "Securities"). Prior to the Offering, there has been no public market
for the Common Stock. The initial public offering price is $5.00 per share.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price.
The Company has been approved for quotation of the Common Stock on the
Nasdaq SmallCap Market ("Nasdaq") under the trading symbol "SGPH".
The Company is a development stage, biopharmaceutical company which has
suffered operating losses since its inception and which has received a going
concern opinion from its independent accountants. As of June 30, 1997, the
Company had an accumulated deficit of $3,582,187. The Company expects to incur
substantial additional operating losses in the development and
commercialization of its technologies.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE
INVESTMENT SHOULD INVEST. FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN
INVESTMENT IN THE COMPANY AND IMMEDIATE SUBSTANTIAL DILUTION, SEE "RISK
FACTORS" (PAGE 10) AND "DILUTION" (PAGE 22).
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share............................... $5.00 $.46 $4.54
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Total(3)................................ $12,500,000 $1,150,000 $11,350,000
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(footnotes appear on page 3)
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SUNRISE SECURITIES CORP. M.H. MEYERSON & CO., INC.
135 East 57th Street 525 Washington Boulevard
New York, New York 10022 Jersey City, New Jersey 07303
(212) 421-1616 (800) 888-8118
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The date of this Prospectus is September 9, 1997.
MECHANISMS TO PREVENT INFECTION
[Photo]
For a pathogen to infect a host, an interaction is required between its
surface proteins and the host's mucosal tissue. SIGA uses two different
methods to prevent serious infection. One is to develop mucosal vaccines,
inducing antibodies at mucosal surfaces, blocking the ability of the pathogen
to adhere. The second is to develop novel anti-infectives that will prevent
surface proteins from being expressed. SIGA has major mucosal vaccine
development programs targeting strep throat and periodontal diseases; gram
positive vectors for STD vaccines--HIV, HSV and HPV; and new targets for the
development of antibiotics.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING COVERING TRANSACTIONS, PENALTY BIDS AND SHORT SALES. FOR A
DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
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(1) Does not include additional compensation consisting of (i) a non-
accountable expense allowance to Sunrise Securities Corp. ("Sunrise") and
M.H. Meyerson & Co., Inc. ("Meyerson") (collectively, the
"Representatives") (the Representatives are also referred to as the
"Underwriters") equal to 3% of the gross proceeds of the Offering, of
which $45,000 has been paid by the Company to date and (ii) warrants
entitling the Representatives to purchase up to 250,000 shares of Common
Stock (the "Representatives' Warrants"). The Company has also agreed to
indemnify the Underwriters against certain civil liabilities, including
those arising under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) After deducting discounts and commissions payable to the Underwriters, but
before payment of the non-accountable expense allowance in the amount of
$375,000 (or $431,250 if the Underwriters' Over-allotment Option (as
defined below) is exercised in full) and the other expenses of the
Offering payable by the Company (estimated at $350,000). See
"Underwriting."
(3) The Company has granted to the Underwriters an option, exercisable for a
period of 30 days after the closing of the Offering, to purchase up to an
additional 375,000 shares of Common Stock, upon the same terms and
conditions solely for the purpose of covering over-allotments, if any (the
"Underwriters' Over-allotment Option"). If the Underwriters' Over-
allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$14,375,000, $1,322,500, and $13,052,500, respectively. See
"Underwriting."
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that any such market for the Common Stock will
develop after the closing of the Offering or that, if developed, it will be
sustained. Pursuant to Rule 2720 of the National Association of Securities
Dealers, Inc. ("NASD") Rules of Conduct, the Common Stock is being offered at
a price no greater than the maximum price recommended by Loeb Partners
Corporation, a qualified independent underwriter. The offering price of the
shares of Common Stock was established by negotiation between the Company and
the Underwriters and does not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. See "Underwriting."
Upon the consummation of the Offering, the Company's management and its
existing stockholders will, in the aggregate, own beneficially shares having
approximately 57% of the total voting power of the Company's outstanding
stock.
The registration statement of which this Prospectus constitutes a part also
covers the offer and proposed sale by the Company of an estimated 100,000
shares of Common Stock issuable upon the exercise by the holders thereof of
warrants (the "Bridge Warrants") to purchase an estimated 100,000 shares (the
actual number of shares will be determined by dividing $500,000 by the initial
offering price per share) at an exercise price per share equal to the actual
initial offering price per share issued to certain investors in connection
with a private placement transaction completed on February 28, 1997 (the
"Bridge Financing"). The Bridge Warrants are not exercisable until the first
anniversary of the date of the consummation of the Offering (or February 28,
1998 if the Offering is not consummated). See "Plan of Operation--Bridge
Financing."
The shares of Common Stock are being offered by the Underwriters on a firm
commitment basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, and subject to certain conditions. The
Underwriters reserve the right to withdraw, cancel or modify the Offering and
to reject any order in whole or in part. It is expected that delivery of
certificates will be made against payment therefor at the offices of Sunrise
Securities Corp., 135 East 57th Street, New York, New York 10022, on or about
September 12, 1997.
TO INVEST IN THESE SECURITIES, A CALIFORNIA OR NEW JERSEY RESIDENT MUST
HAVE, AS A MINIMUM, EITHER (i) A NET WORTH OF $100,000, EXCLUSIVE OF HOME,
HOME FURNISHINGS AND AUTOMOBILES, AND $65,000 OF GROSS INCOME DURING THE LAST
TAX YEAR AND ESTIMATED GROSS INCOME OF $65,000 FOR THE CURRENT TAX YEAR OR
(ii) A NET WORTH OF $250,000, EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES.
3
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy and information statements
and other information can be inspected and copied at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices: New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York 10048,
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and copies of such material may also be obtained from the
Public Reference Section of the Commission at prescribed rates. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file such information electronically. The Company's Common Stock will be
quoted on Nasdaq and such reports and other information can also be inspected
at the offices of Nasdaq Operations, 1735 K Street N.W., Washington, D.C.,
20006. The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law.
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, the information in this
Prospectus does not give effect to the exercise of (a) the Underwriters' Over-
allotment Option, (b) the Representatives' Warrants and (c) other outstanding
options and warrants to purchase an aggregate of 806,017 shares of Common Stock
(includes 100,000 shares of Common Stock issuable upon exercise of the Bridge
Warrants based on the initial public offering price). The initial public
offering price per share of Common Stock is $5.00.
THE COMPANY
The Company is a development stage, biopharmaceutical company focused on the
discovery, development and commercialization of vaccines, antibiotics and novel
anti-infectives for serious infectious diseases. The Company's lead vaccine
candidate is for the prevention of "strep throat." The Company is developing a
technology for the mucosal delivery of its vaccines which may allow those
vaccines to activate the immune system at the mucus-lined surfaces of the
body--the mouth, the nose, the lungs and the gastrointestinal and urogenital
tracts--the sites of entry for most infectious agents. The Company's anti-
infectives programs, aimed at the increasingly serious problem of drug
resistance, are designed to block the ability of bacteria to attach to human
tissue, the first step in the infection process. The Company does not expect to
market any products for at least four years.
VACCINE CANDIDATES
The Company's lead vaccine candidate is for the prevention of group A
streptococcal pharyngitis or "strep throat," a recurrent infection affecting
between seven and 20 million children in the United States each year. Strep
throat remains the most common childhood disease for which there is no vaccine
available, and, if ineffectively treated, can progress to rheumatic fever. No
vaccine has been developed because more than 100 different serotypes of group A
streptococcus are known to cause the disease. In order to be effective, a
vaccine would have to be based upon an antigen (a molecule that triggers an
immune response) common to most of the important serotypes. The high incidence
of the disease, the potentially serious consequences of inadequate treatment
and the recent emergence of drug-tolerant types of group A streptococcus create
an important medical need for an effective vaccine.
The Company's proprietary antigen addresses the challenge of multiple
serotypes in that this antigen is common to most types of the bacteria that
cause strep throat, including types that have been associated with rheumatic
fever. When a vaccine incorporating this antigen was orally administered to
animals, it was shown to provide protection against multiple types of group A
streptococcal infection. The Company's vaccine candidate for strep throat
utilizes this antigen.
The Company is collaborating with the National Institutes of Health and the
University of Maryland Center for Vaccine Development on the clinical
development of this vaccine candidate and expects to file an Investigational
New Drug Application ("IND") with the United States Food and Drug
Administration (the "FDA") in the fall of 1997.
In addition to its strep throat vaccine, the Company is collaborating with
Chiron Corporation ("Chiron") on research toward the development of vaccines
against two sexually transmitted diseases and is testing a vaccine to prevent
periodontal disease in a collaboration with The Research Foundation of State
University of New York at Buffalo ("SUNY Buffalo").
5
MUCOSAL VACCINE DELIVERY SYSTEM
The Company is also developing a proprietary mucosal vaccine delivery system
which is a component of the Company's vaccine candidates and which the Company
intends to license to other vaccine developers. Mucosally-delivered vaccines
are considered attractive because such vaccines may mobilize an immune response
concentrated at the site of infection and because they may activate both a
mucosal IgA antibody response as well as a systemic (IgG and T cell) response.
The Company's mucosal vaccine delivery system utilizes commensal bacteria
(harmless bacteria that live in and on the body) that have been genetically
engineered to continually present disease-associated antigens that stimulate an
immune response at the body's mucosal surfaces. In this manner, the bacteria
may be able to prevent infection at the earliest possible stage. The Company
believes that mucosal vaccines developed using its proprietary commensal
delivery technology could provide a number of potential advantages over
conventional vaccines, including: more complete protection; fewer side effects;
the potential for single dose administration; non-injectable administration;
the potential for combination vaccine delivery; and lower cost production. The
Company's mucosal vaccine delivery technology is potentially applicable to any
infectious disease that begins at a mucosal surface.
ANTI-INFECTIVES AND ANTIBIOTICS THERAPY CANDIDATES
The Company's anti-infectives program is targeted principally toward drug-
resistant bacteria and hospital-acquired infections. According to estimates
from the Centers for Disease Control, approximately two million hospital-
acquired infections occur each year in the United States. According to the
Pharmaceutical Manufacturers Association, the United States and worldwide
antibiotic markets are $7 billion and $22 billion, respectively.
The Company's anti-infective approaches aim to block the ability of bacteria
to attach to and colonize human tissue, thereby blocking infection at the first
stage in the infection process. By comparison, antibiotics available today act
by interfering with either the structure or the metabolism of a bacterial cell,
affecting its ability to survive and to reproduce. No currently available
antibiotics target preventing the attachment of a bacterium to its target
tissue. By preventing attachment, the bacteria should be readily cleared by the
body's immune system.
The Company's lead anti-infectives program is based on a novel target for
antibiotic therapy. The Company's founding scientists have identified an
enzyme, a selective protease, utilized by most gram-positive bacteria to anchor
certain proteins to the bacterial cell wall. These surface proteins are the
means by which certain bacteria recognize, adhere to and colonize specific
tissue. The Company's strategy is to develop protease inhibitors. The Company
believes protease inhibitors will have wide applicability to gram-positive
bacteria in general, including antibiotic resistant staphylococcus and a broad
range of serious infectious diseases including meningitis and respiratory tract
infections.
The Company has entered into a collaborative research and license agreement
with the Wyeth-Ayerst Laboratories Division of American Home Products
Corporation ("Wyeth-Ayerst") to identify and develop protease inhibitors as
novel antibiotics. Pursuant to the agreement, Wyeth-Ayerst is providing funding
for a joint research and development program and is responsible for additional
milestone payments. Under the terms of the agreement, the Company could receive
up to $25 million in research and milestone payments for products developed
from the licensed technologies. Wyeth-Ayerst has exclusive license rights in
the field (as defined in the agreement) to any product resulting from this
research and is required to make royalty payments based on sales of any product
developed from the licensed technologies. See "Business--Collaborative Research
and Licenses."
The Company has entered into a letter of intent with MedImmune, Inc.
("MedImmune") regarding a technology transfer agreement pursuant to which the
Company will acquire all of MedImmune's rights in gram-negative antibiotic
targets, products, screens and services. The Company and MedImmune plan to
collaborate in
6
the development of antibiotics against gram-negative pathogens. These bacteria
utilize structures called pili to adhere to target tissue, and the Company
plans to exploit the assembly and export of these essential infective
structures as novel anti-infective targets. The Company and MedImmune
contemplate that upon the execution of the technology transfer agreement,
MedImmune will receive 335,530 shares of Common Stock (the "MedImmune Shares").
There can be no assurance that the Company will enter into a final agreement
with MedImmune on the terms described above or at all. See "Risk Factors--
Dependence on Others; Collaborations."
SURFACE PROTEIN EXPRESSION SYSTEM
The Company is developing proprietary protein production systems based on its
understanding of the mechanisms used by gram-positive bacteria to export and
anchor surface proteins. Methods have been developed to engineer gram-positive
bacteria to produce and secrete commercially useful proteins such as antigens
or enzymes into the culture medium in a form requiring minimal purification.
The Company believes that this technology provides a cost-effective alternative
to E. coli, yeast and mammalian cell culture systems.
COMPANY BACKGROUND
The Company's technologies are licensed from The Rockefeller University
("Rockefeller"), Oregon State University ("Oregon State") and Emory University
("Emory"). The Company sponsors research and development activities in
laboratories at Rockefeller, Emory, Oregon State and SUNY Buffalo, and does not
maintain its own research and development facilities. See "Risk Factors--
Technologies Subject to Licenses" and "--Lack of Research and Development
Facilities."
The Company was incorporated in Delaware in December 1995. The Company's
executive offices are located at 666 Third Avenue, New York, NY, 10017, and its
telephone number is (212) 681-4970.
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THE OFFERING
Securities offered................................. 2,500,000 shares of Common
Stock.
Offering price..................................... $5.00 per share of Common
Stock.
Common Stock outstanding after the Offering(1)(2).. 5,867,182 shares.
Use of Proceeds.................................... The net proceeds to the
Company, aggregating
approximately $10,625,000,
will be used (i) to repay
short-term indebtedness of
$1,000,000 (plus accrued
interest) incurred in the
Bridge Financing (and held
by non-affiliates of the
Company), (ii) to fund
research and development
activities, and (iii) for
working capital and
general corporate
purposes. See "Use of
Proceeds."
Risk Factors....................................... The securities offered
hereby involve a high
degree of risk and
substantial immediate
dilution to new investors.
Only investors who can
bear the risk of losing
their entire investment
should invest. See "Risk
Factors" and "Dilution."
Nasdaq symbol...................................... "SGPH"
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(1) Excludes (i) 375,000 shares of Common Stock issuable by the Company upon
exercise of the Underwriters' Over-allotment Option in full; (ii) up to
250,000 shares of Common Stock reserved for issuance upon exercise of the
Representatives' Warrants; (iii) 333,333 shares of Common Stock reserved
for issuance upon the exercise of stock options which may be granted
pursuant to the Company's 1996 Incentive and Non-Qualified Stock Option
Plan (the "Plan") (options to purchase 33,334 shares of Common Stock at an
exercise price of $1.50 per share, 16,667 shares of Common Stock at an
exercise price of $3.00 per share and 10,000 shares of Common Stock at an
exercise price per share equal to the initial public offering price (or
$5.00 if the Offering is not completed by November 1, 1997) have been
granted and are outstanding under the Plan); (iv) 461,016 shares of Common
Stock reserved for issuance upon the exercise of warrants granted to David
H. de Weese, the Chairman, President and Chief Executive Officer of the
Company, at an exercise price of $3.00 per share (the "de Weese Warrants");
(v) 150,000 shares of Common Stock reserved for issuance upon the exercise
of warrants granted to Dr. Vincent Fischetti, the principal founding
scientist of the Company's technologies, at an exercise price of $1.50 per
share (the "Fischetti Warrants"); (vi) an estimated 100,000 shares of
Common Stock reserved for issuance upon the exercise of the Bridge
Warrants; and (vii) 35,000 shares of Common Stock reserved for issuance
upon the exercise of warrants granted to two outside directors and three
scientific advisors at an exercise price per share equal to the initial
public offering price or $5.00 if the Offering is not completed by November
1, 1997 (the "Directors/Advisors Warrants"). See "Plan of Operation--Bridge
Financing," "Management--1996 Incentive and Non-Qualified Stock Option
Plan" and "--Employment and Consulting Agreements," "Certain Transactions"
and "Underwriting."
(2) Does not include the MedImmune Shares. There can be no assurance that the
Company will enter into a final agreement with MedImmune on the terms
described herein or at all. See "Risk Factors--Dependence on Others;
Collaborations."
8
SUMMARY FINANCIAL INFORMATION
The summary financial data set forth below is derived from and should be read
in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this prospectus.
DECEMBER 28, DECEMBER 28,
1995 1995 SIX SIX DECEMBER 28
(DATE OF YEAR (DATE OF MONTHS MONTHS 1995
INCEPTION) TO ENDED INCEPTION) TO ENDED ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1996 1996 1997 1997
------------- ------------ ------------- ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Operating expenses:
General and
administrative........ $ 1,000 $ 787,817 $ 788,817 $ 394,229 $ 680,122 $ 1,468,939
Research and
development........... -- 662,205 662,205 311,419 432,668 1,094,873
Patent preparation
fees.................. -- 452,999 452,999 324,514 49,681 502,680
Stock option and
warrant compensation.. -- 367,461 367,461 -- 28,813 396,274
------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 1,000 2,270,482 2,271,482 1,030,162 1,191,284 3,462,766
Interest
income/(expense)....... -- 2,306 2,306 -- (121,727) (119,421)
------- ----------- ----------- ----------- ----------- -----------
Net loss............... $(1,000) $(2,268,176) $(2,269,176) $(1,030,162) $(1,313,011) $(3,582,187)
======= =========== =========== =========== =========== ===========
Net loss per common
share(1).............. -- $ (0.66) $ (0.32) $ (0.36)
======= =========== =========== ===========
JUNE 30, 1997
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(UNAUDITED)
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ACTUAL AS ADJUSTED (2)(3)
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BALANCE SHEET DATA:
Working capital.................................. $ (964,461) $ 9,812,194
Total assets..................................... 558,364 10,150,031
Total liabilities................................ 1,309,582 320,582
Stockholders' (deficit) equity................... (751,218) 9,829,449
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(1) For information concerning the computation of net loss per share, see Note
2 of Notes to Financial Statements.
(2) As adjusted to (i) give effect to the sale of 2,500,000 shares of Common
Stock offered hereby, net of $1,875,000 of underwriting discounts and
commissions and offering expenses ($195,988 of such offering expenses have
been incurred by the Company as of June 30, 1997), at an initial offering
price of $5.00 per share of Common Stock, (ii) repayment of the Bridge
Notes in the principal amount of $1,000,000 and accrued but unpaid interest
thereon and (iii) the recognition of the unamortized portion of the debt
discount associated with the Bridge Notes as an expense.
(3) Does not include the MedImmune Shares. There can be no assurance that the
Company will enter into a final agreement with MedImmune on the terms
described herein or at all. See "Risk Factors--Dependence on Others;
Collaborations."
9
RISK FACTORS
The purchase of Common Stock is speculative and involves a high degree of
risk including, but not necessarily limited to, the Risk Factors described
below. Common Stock should not be purchased by investors who cannot afford the
loss of their entire investment. Prospective investors should carefully review
and consider the following risks as well as the other information contained in
this Prospectus.
BUSINESS RISKS
Limited Operating History; Accumulated Deficit; Operating Losses; Potential
for Future Losses; Going Concern Explanatory Paragraph in Accountant's Report
The Company, a development stage, biopharmaceutical company, was
incorporated in December 1995 and accordingly has a limited operating history.
As of June 30, 1997, the Company had an accumulated deficit of $3,582,187. The
Company expects to incur substantial operating losses over the next several
years and expects cumulative losses to increase as the Company's research and
development and clinical efforts expand. In addition to increased research and
development expenses, the Company also expects general and administrative
expenses to increase due to increased staffing levels and increased costs,
including patent and regulatory costs, necessary to support clinical trials,
research and development and manufacturing. Revenues, if any, that the Company
may receive in the next few years will be limited to payments under research
or product development relationships that the Company may establish and
payments under license agreements that the Company may enter into. There can
be no assurance that the Company will be able to establish any such
relationships, enter into any such license agreements or generate revenues. To
achieve profitable operations, the Company, alone or with others, must
successfully identify and develop pharmaceutical products, conduct clinical
trials, obtain regulatory approvals and manufacture and market its
pharmaceutical products or enter into license agreements with third parties on
acceptable terms. The Company may never achieve significant revenues or
profitable operations.
The report of independent accountants on the Company's financial statements
included herein contains an explanatory paragraph stating that the Company's
financial statements have been prepared assuming that the Company will
continue as a going concern while expressing substantial doubt as to the
Company's ability to do so. The Company's ability to continue as a going
concern is dependent on its ability to generate sufficient cash flow to meet
its obligations as they become due. The Company has suffered operating losses
since inception and expects to incur substantial additional operating losses
in the development and commercialization of its technologies. These and other
factors discussed in Note 1 to the financial statements raise substantial
doubt about the Company's ability to continue as a going concern. See "Plan of
Operation" and Financial Statements and Notes thereto.
Early Stage of Development; Absence of Products; No Commercialization of
Products Expected in Near Future
The Company's product candidates are in an early stage of development. The
Company has not completed the development of any products and, accordingly,
has not received any regulatory approvals, commenced marketing activities or
generated revenues from the sale of products. The Company's product candidates
will require significant additional development, pre-clinical and clinical
trials, regulatory approval and additional investment prior to
commercialization. The Company does not expect to market any products for at
least four years. In addition, the Company's product candidates are subject to
the risks of failure inherent in the development of products based on
innovative technologies. Accordingly, there can be no assurance that the
Company's research and development efforts will be successful, that any of the
Company's product candidates will prove to be safe, effective and non-toxic in
clinical trials, that any commercially successful products will be developed,
that the proprietary or patent rights of others will not preclude the Company
from marketing its product candidates or that others will not develop
competitive or superior products. As a result of the early stage of
development of product candidates and the extensive testing and regulatory
review process that such product candidates must undergo, the Company cannot
predict with certainty when it will be able to market any of its products, if
at all. The failure to develop safe, commercially viable products would have a
material adverse effect on the Company's business, operating results and
financial condition.
10
Uncertainty Due to Unproven Technology
The Company's drug discovery approach faces technical issues which have not
been resolved and requires the development of multiple novel technologies to
create successful product candidates. While the Company has demonstrated that
it has several novel bacterial targets, the Company has not proven that drugs
which inhibit these targets will be safe and effective in human trials.
Furthermore, there can be no assurance that the drug inhibition activity
already demonstrated in primary screening will continue to be encouraging in
further screening or drug discovery studies. The Company has not tested any
product candidates in humans, and there can be no assurance that there will be
clinical benefits associated with any such product candidates. Furthermore,
there can be no assurance that the Company will successfully address these
technological challenges or others that may arise in the course of product
development. Any failure of the Company to anticipate or respond adequately to
technological developments will have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company's technology will lead to the discovery and
development of any viable product candidates in the future or that the Company
will be able to utilize its drug discovery approach successfully.
Future Capital Needs; Uncertainty Of Availability Of Additional Funding
The Company will require substantial additional funds to conduct and sponsor
research and development activities, to conduct pre-clinical and clinical
testing, and to market its products. The Company's future capital requirements
will depend on many factors, including continued scientific progress, progress
with pre-clinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
ability of the Company to establish collaborative arrangements, effective
commercialization activities and arrangements and the purchase or development
of additional equipment and facilities. The Company expects the net proceeds
of the Offering and the interest earned thereon will be sufficient to fund the
Company's activities for at least 20 months. There can be no assurance,
however, that changes in the Company's research and development plans or other
events affecting the Company's operating expenses will not result in the
utilization of such proceeds prior to that time.
The Company has no other current sources of funding, apart from research
payments and potential milestone payments from Wyeth-Ayerst. As a result, the
Company will need to raise substantial additional funds before any of the
Company's product candidates achieves regulatory approvals, if at all. The
Company intends to seek such additional funding through collaborative
arrangements and through public or private financings. There can be no
assurance that additional financing will be available, or, if available, that
such additional financing will be available on terms acceptable to the
Company.
In addition, for a period of 12 months (6 months in the case of any public
offering under the Securities Act) after the date of this Prospectus,
Sunrise's prior written consent is required if the Company seeks to raise
additional funds through the issuance of equity. This may result in the
Company being required to raise needed funding through the issuance of debt.
If additional funds are raised by issuing debt, the Company will incur fixed
payment obligations, which could delay the time, if any, when the Company may
achieve positive cash flow. If adequate funds are not available, the Company
may be required to delay, scale back or eliminate one or more of its principal
product candidates or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to
certain of its technologies, product candidates or products that the Company
would not otherwise relinquish. See "Use of Proceeds" and "Underwriting."
Management's Broad Discretion in Application of Proceeds
The Company intends to use approximately $1,000,000 (excluding accrued
interest), or 9.4%, of the net proceeds of the Offering to repay outstanding
indebtedness and the balance for the other purposes described under "Use of
Proceeds." Although the Company's current estimate as to the amount of such
net proceeds that will be used for each such other purpose is set forth under
"Use of Proceeds," the Company reserves the right to change the amount of such
net proceeds that will be used for any purpose to the extent that management
11
determines that such change is advisable. Accordingly, management of the
Company will have broad discretion as to the application of the net proceeds
of the Offering. See "Use of Proceeds" and "Plan of Operation."
Technologies Subject to Licenses
The Company and Rockefeller have entered into an exclusive worldwide license
and research agreement whereby the Company has obtained the right and license
to make, use and sell mucosal vaccines based on gram-positive organisms and
products for the therapy, prevention and diagnosis of diseases caused by
streptococcus, staphylococcus and other organisms. The technologies licensed
by the Company pursuant to the agreement were developed in Dr. Fischetti's
laboratory at Rockefeller, in Dr. Hruby's laboratory at Oregon State and at
Emory. Researchers at Rockefeller and Oregon State collaborated, and are
continuing to collaborate, on the development of the Company's strep throat
vaccine candidate. Researchers at Rockefeller and Emory collaborated on the
genetic identification of the antigen used in such vaccine candidate.
Therefore, Oregon State and Emory joined in Rockefeller's license grant to the
Company. The agreement generally requires the Company to pay royalties on
sales of products developed from the licensed technologies and fees on
revenues from sublicensees, where applicable, and the Company is responsible
for certain milestone payments, of up to $225,000 per product, for each
product developed from the licensed technologies. Pursuant to each of their
contracts with their respective universities, Dr. Fischetti and Dr. Hruby will
receive a percentage of royalties paid by the Company to Rockefeller and
Oregon State pursuant to the license agreement. Dr. Fischetti will receive not
more than 16.66% of any such royalties received by Rockefeller and Dr. Hruby
will receive not more than 33.3% of any such royalties received by Oregon
State. The Company is also responsible for certain costs incurred by
Rockefeller for filing and prosecuting patent applications. At June 30, 1997,
amounts payable to Rockefeller for patent application costs were $66,437.
Should the Company default on its obligations to Rockefeller under the license
agreement, its license would terminate, which would have a material adverse
effect on the Company's operations and prospects. See "Business--Collaborative
Research and Licenses."
No Assurance of Successful Development of Product Candidates
There can be no assurance that the Company's product candidates will be
successfully developed into drugs that can be administered to humans or that
any such drugs or therapies will prove to be safe and effective in clinical
trials or cost-effective to manufacture. Further, any product candidates
developed by the Company may prove to have adverse side effects.
Dependence on Others; Collaborations
The Company's strategy for the research, development and commercialization
of its product candidates will require the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees
and others, and may therefore be dependent upon the subsequent success of
these outside parties in performing their responsibilities. The Company
currently has a license and research agreement with Rockefeller, Emory and
Oregon State; research support agreements with Emory, Oregon State and SUNY
Buffalo; a consulting agreement with Dr. Vincent Fischetti; a clinical trials
agreement with the National Institutes of Health; a collaborative research and
license agreement with Wyeth-Ayerst; and a collaborative research agreement
with Chiron. In addition, the Company has entered into a letter of intent with
MedImmune regarding a technology transfer agreement pursuant to which the
Company will acquire all of MedImmune's rights in gram-negative antibiotic
targets, products, screens and services. There can be no assurance, however,
that the Company will execute a final agreement with MedImmune on the terms
described herein or at all. In addition, there can be no assurance that the
Company will be able to establish other collaborative arrangements or license
agreements that the Company deems necessary or acceptable to develop and
commercialize its product candidates or that such collaborative arrangements
or license agreements will be successful. Moreover, certain of the
collaborative arrangements that the Company may enter into in the future may
place responsibility for pre-clinical testing and clinical trials and for
preparing and submitting applications for regulatory approval for product
candidates on the collaborative partner. Should a collaborative partner fail
to develop or commercialize successfully any product candidate to which the
Company has rights, the Company's business may be adversely affected. See
"Business--Collaborative Research and Licenses" and "Certain Transactions."
12
Lack of Manufacturing, Marketing or Sales Capabilities
The Company has not invested in the development of commercial manufacturing,
marketing, distribution or sales capabilities for any of its product
candidates. The Company currently lacks the facilities to manufacture its
product candidates in accordance with current Good Manufacturing Practices as
prescribed by the FDA or to produce an adequate supply of compounds to meet
future requirements for clinical trials. If the Company is unable to develop
or contract for manufacturing capabilities on acceptable terms, the Company's
ability to conduct pre-clinical and human clinical testing will be adversely
affected, resulting in delays in the submission of products for regulatory
approval and in the initiation of new development programs, which in turn
could materially impair the Company's competitive position and the possibility
of achieving profitability.
The Company will need to hire additional personnel skilled in clinical
testing, regulatory compliance, marketing and sales as it develops products
with commercial potential. There can be no assurance that the Company will be
able to hire such personnel, or establish third-party relationships to provide
any or all of these resources.
Dependence on Qualified Personnel and Consultants; Need for Additional
Personnel
David de Weese is the President and Chief Executive Officer of the Company.
Dr. Vincent Fischetti is the principal founding scientist and Chief Scientific
Advisor of the Company. Dr. Dennis Hruby is also a scientific founder and the
Company's Vice President of Research. Drs. Hruby and Fischetti, along with Mr.
de Weese, have primary responsibility for directing the Company's research
efforts. Mr. de Weese, along with Dr. Joshua Schein and Judson Cooper,
Executive Vice Presidents of the Company, have primary responsibility for
directing the Company's strategic efforts. The Company's success is highly
dependent on these individuals. The loss of the services of either Dr. Hruby
or Dr. Fischetti or other personnel or consultants could have a material
adverse effect on the Company's operations.
Drs. Hruby and Fischetti, pursuant to each of their contracts with their
respective universities, may spend only 20% of their time on non-university
projects; however, the majority of the research being conducted by each of
them is research sponsored by the Company and the Company has exclusive
license rights to all inventions and discoveries resulting from this research.
Overall, both Dr. Hruby and Dr. Fischetti spend more than 70% of their time on
research sponsored by the Company and other Company business. See "Business--
Collaborative Research and Licenses."
Mr. de Weese is the only full-time executive officer of the Company. Dr.
Schein and Mr. Cooper, are also officers of Virologix Corporation and Callisto
Pharmaceuticals, Inc., privately held, development stage, pharmaceutical
companies, and devote substantial amounts of their time to the three companies
on a substantially equal basis.
Although the Company has entered into employment agreements with each of its
key management and scientific employees and consulting agreements with its key
outside scientific advisors, any of such persons may terminate his or her
employment or consulting arrangement with the Company at any time on short
notice. Accordingly, there can be no assurance that these employees and
consultants will remain associated with the Company. The loss of the services
of any of the Company's key personnel or consultants may impede the Company's
ability to commercialize its product candidates. The Company maintains and is
the named insured under a $1,000,000 life insurance policy on Dr. Fischetti
and has an application pending for a $1,000,000 policy on Mr. de Weese. This
policy is conditionally in force pending final underwriting, which is expected
to be completed in September 1997. There can be no assurance that such
insurance can be maintained or will be adequate to meet the Company's future
needs.
The Company's planned activities may require additional expertise in areas
such as pre-clinical testing, clinical trial management, regulatory affairs,
manufacturing and marketing. Such activities may require the addition of new
personnel and the development of additional expertise by existing management
personnel. The Company faces intense competition for such personnel from other
companies, academic institutions, government entities and other organizations,
and there can be no assurance that the Company will be successful in hiring or
13
retaining qualified personnel. The inability of the Company to develop
additional expertise or to hire and retain such qualified personnel could have
a material adverse effect on the Company's operations.
Lack of Research and Development Facilities
The Company does not maintain its own research and development facilities.
The Company sponsors research and development activities at Dr. Fischetti's
laboratory at Rockefeller and Dr. Hruby's laboratory at Oregon State, and at
Emory and SUNY Buffalo. The Company's research is conducted by its employees
and employees of the aforementioned universities. The Company's research and
development efforts, therefore, are dependent upon its continued relationships
with Dr. Fischetti, Dr. Hruby, Rockefeller, Oregon State, Emory and SUNY
Buffalo. In the absence of such relationships, the Company would need to
develop a new research and development arrangement with a third party, the
availability of which there can be no assurance. If the Company is unable in
the next 12 months to find an alternative source for bacteria used in its
research which is currently being produced at Oregon State, the Company plans
on leasing its own facility to produce such bacteria. The Company expects that
the cost of securing a new source for such bacteria, whether obtained from a
third party or produced at a facility leased by the Company, will not be
materially greater than the fees currently paid to Oregon State allocable to
the production of such bacteria. Any delay in finding suitable research and
development facilities would postpone commercialization of the Company's
products. See "Business--Human Resources and Facilities."
Control by Management and Existing Stockholders
Upon consummation of the Offering, the Company's management and existing
holders of the Company's stock will, in the aggregate, own beneficially shares
having approximately 57% of the total voting power of the Company's
outstanding stock (without giving effect to the exercise of the
Representatives' Warrants, options granted under the Plan, the de Weese
Warrants, the Fischetti Warrants, the Directors/Advisors Warrants or the
Bridge Warrants). As a result, these stockholders, acting together, would be
able to effectively control most matters requiring approval by the
stockholders of the Company, including the election of all of the directors.
See "Principal Stockholders."
Potential Conflicts of Interest
Certain persons who are principal stockholders and executive officers of the
Company are involved in various relationships that could result in conflicts
between their interests and those of other stockholders of the Company. Dr.
Schein and Mr. Cooper have employment arrangements with two other operating
companies, which could force one or both of them to compromise or divert their
business attention from the concerns of the Company from time to time.
Additionally, Dr. Schein and Mr. Cooper are principals of CSO Ventures LLC
("CSO"), a privately held limited liability company which has a consulting
agreement with the Company. Under the terms of Dr. Schein and Mr. Cooper's
employment agreements with the Company, they are each entitled to the payment
of certain fees in connection with any sale of the Company. This provision,
together with lower prices paid by them for their shares of Common Stock
relative to the prices paid by investors in this Offering, could result in a
situation in which the purchase price paid in connection with any sale of the
Company represents a gain on their investment in the Company while
simultaneously representing a loss to investors in this Offering. See "Certain
Transactions" and "Management."
Possible Conflicts of Interest with Participants in Offering
Nathan Low and Richard B. Stone are associated with Sunrise and Steven M.
Oliveira is associated with Hampshire Securities Corporation. Sunrise and
Hampshire Securities Corporation are members of the NASD participating in the
distribution of the Securities in this Offering and Messrs. Low, Stone and
Oliveira own an aggregate of approximately 1,055,367 shares of Common Stock,
representing approximately 31.3% of the outstanding Common Stock prior to this
Offering. In accordance with Rule 2720 of the Conduct Rules of the NASD, the
Securities are being offered at an offering price no greater than that
recommended by a qualified independent underwriter. As a result of such
ownership, such participants may be deemed to have conflicts of interest with
respect to the Offering and the public offering price of the Securities. See
"Underwriting."
14
INDUSTRY RISKS
No Assurance of Regulatory Approval; Need for Extensive Clinical Trials
The production and marketing of the Company's principal product candidates,
as well as certain of its research and development activities, are subject to
regulation by governmental agencies in the United States and other countries.
Any drug developed by the Company will be subject to a rigorous approval
process pursuant to regulations administered by the FDA, comparable agencies
in other countries and, to a lesser extent, state regulatory authorities. The
approval process for any one of the Company's product candidates is likely to
take several years or more depending upon the type, complexity and novelty of
the pharmaceutical product and will involve significant expenditures by the
Company for which additional financing will be required.
The cost to the Company of conducting clinical trials for any potential
product can vary dramatically based on a number of factors, including the
order and timing of clinical indications pursued and the extent of development
and financial support, if any, from collaborators. Because of the intense
competition in the biopharmaceutical market and concern over the safety of
participating in clinical trials, the Company may have difficulty obtaining
sufficient patient populations or the support of clinicians to conduct its
clinical trials as planned and may have to expend substantial additional funds
to obtain access to such resources, or delay or modify its plans
significantly. There can be no assurance that the Company will be able to
obtain necessary clearances for clinical trials or approvals for the
manufacturing or marketing of any of its product candidates, that the Company
will have sufficient resources to complete the required regulatory review
process or that the Company can survive the inability to obtain, or delays in
obtaining, such approvals.
Even if regulatory approvals are obtained, they may provide for significant
limitations on the indicated uses for which a product may be marketed. As with
all investigational products, additional government regulations may be
promulgated requiring that additional research data be submitted that could
delay marketing approval of any of the Company's product candidates. The
subsequent discovery of previously unknown complications or the failure to
comply with applicable regulatory requirements may result in restrictions on
the marketing, or the withdrawal, of products or possible civil or criminal
liabilities. In addition, the Company cannot predict whether any adverse
government regulation might arise from future administrative actions. See
"Business--Government Regulation."
As part of the regulatory review process, the Company must sponsor and file,
or obtain through others, an IND for each of its product candidates before the
Company will be able to initiate the clinical trials necessary to generate
safety and efficacy data for inclusion in an application for FDA marketing
approval. The Company has not filed any INDs to date. Although the Company
anticipates filing its first IND in 1997, the Company cannot predict with
certainty when it might first submit any application for any product
candidates for FDA or other regulatory review. There can be no assurance that
clinical data from studies performed by the Company or others will be
acceptable to the FDA or other regulatory agencies in support of any
applications that may be submitted for regulatory approval and the FDA may,
among other things, require the Company to collect additional data and conduct
additional clinical studies prior to acceptance of any such applications.
Uncertainty Regarding Patents and Proprietary Information
The Company's ability to compete effectively will depend, in part, on its
success in protecting its proprietary technology in the United States and
abroad. The patent positions of biopharmaceutical firms generally are highly
uncertain and involve complex legal and factual questions. No consistent
policy has emerged regarding the breadth of claims covered in
biopharmaceutical patents. As its research projects develop, the Company
intends to file additional patent applications with the United States Patent
and Trademark Office (the "PTO") and with corresponding foreign patent
authorities. There can be no assurance that the PTO or any foreign
jurisdictions will grant the Company's patent applications or that the Company
will obtain any patents or other protection for which application for patent
protection has been made. No assurance can be given that patents issued to or
licensed by the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide any competitive advantage.
The Company will also rely on trade secrets, know-how and
15
continuing technological advancement in seeking to achieve a competitive
position. No assurance can be given that the Company will be able to protect
its rights to its unpatented trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
In addition to protecting its proprietary technology and trade secrets, the
Company may be required to obtain additional licenses to patents or other
proprietary rights from third parties. No assurance can be given that any
additional licenses required under any patents or proprietary rights would be
made available on acceptable terms, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development while it
attempts to design around blocking patents, or it could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed.
The Company could also incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those granted
by third parties. The PTO could institute interference proceedings against the
Company in connection with one or more of the Company's patents or patent
applications, and such proceedings could result in an adverse decision as to
priority of invention. The PTO or others could also institute reexamination
proceedings with the PTO against the Company in connection with one or more of
the Company's patents or patent applications and such proceedings could result
in an adverse decision as to the validity or scope of any patents that the
Company may obtain or have the right to use. See "Business--Patents and
Proprietary Rights."
Technological Change; Competition and Market Risk
The biopharmaceutical industry is characterized by rapid and significant
technological change. The Company's success will depend on its ability to
develop and apply its technologies in the design and development of its
product candidates and to establish and maintain a market for its product
candidates. There also are many companies, both public and private, including
major pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions engaged in developing
pharmaceutical and biotechnology products. Many of these companies have
substantially greater financial, technical, research and development, and
human resources than the Company. Competitors may develop products or other
technologies that are more effective than any that are being developed by the
Company or may obtain FDA approval for products more rapidly than the Company.
If the Company commences commercial sales of products, it still must compete
in the manufacturing and marketing of such products, areas in which the
Company has no experience. Many of these companies also have manufacturing
facilities and established marketing capabilities that would enable such
companies to market competing products through existing channels of
distribution. See "Business--Competition."
Uncertainty of Pharmaceutical Pricing; Healthcare and Related Matters
The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. For example,
in certain foreign markets, pricing of prescription pharmaceuticals is subject
to governmental control. In the United States, there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar government control. It is uncertain what
legislative proposals will be adopted or what actions federal, state or
private payors for healthcare goods and services may take in response to any
healthcare reform or legislation.
The Company cannot predict the effect that healthcare reforms may have on
its business, and there can be no assurance that any such reforms will not
have a material adverse effect on the Company. Further, to the extent that
such proposals or reforms have a material adverse effect on the business,
financial condition and profitability of other pharmaceutical companies that
are prospective collaborators for certain of the Company's potential products,
the Company's ability to commercialize its product candidates may be adversely
affected. In addition, in both the United States and elsewhere, sales of
prescription medical products are dependent in part on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance
16
plans. Third party payors can indirectly affect the pricing or the relative
attractiveness of the Company's product candidates by regulating the maximum
amount of reimbursement that they will provide for the Company's product
candidates or by denying reimbursement. There can be no assurance that, if and
when marketed, the Company's product candidates will be considered cost-
effective by third party payors, that reimbursement will be available or, if
available, that such third party payors' reimbursement policies will not
adversely affect the Company's ability to sell its product candidates on a
profitable basis. Limitations on, or failure to obtain, reimbursement for use
of the Company's product candidates and changes in government and private
third party payors' policies toward reimbursement could have a material
adverse effect on the Company's ability to market its product candidates.
Potential Product Liability and Availability of Insurance
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of pharmaceutical
products. The use of the Company's product candidates in clinical trials may
expose the Company to product liability claims and possible adverse publicity.
These risks will expand with respect to the Company's product candidates, if
any, that receive regulatory approval for commercial sale. Product liability
insurance for the biotechnology industry is generally expensive, if available
at all. The Company does not have product liability insurance but intends to
obtain such coverage if and when its product candidates are tested in clinical
trials. There can be no assurance, however, that the Company will be able to
obtain insurance coverage at acceptable costs or in a sufficient amount, if at
all, or that a product liability claim would not adversely affect the
Company's business, operating results or financial condition.
OFFERING/INVESTMENT RISKS
No Prior Public Market; Possible Volatility of Stock Price
Prior to this Offering, there has been no public market for the Company's
Common Stock. Accordingly, there can be no assurance that an active trading
market will develop or be sustained subsequent to this Offering. The initial
public offering price of the Common Stock has been determined by negotiations
between the Company and the Underwriters and may not be indicative of the
prices that may prevail in the public market. The Common Stock has been
approved for quotation on the Nasdaq SmallCap Market ("Nasdaq"), but there is
no assurance that the Company's future operating results will enable it to
remain eligible for quotation on Nasdaq. If the Company is unable to satisfy
such listing criteria in the future, the Common Stock may be delisted from
trading on Nasdaq and consequently an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the price of, the Common
Stock. The stock market generally, and the biotechnology sector in particular,
have experienced and are likely in the future to experience significant price
and volume fluctuations which could adversely affect the market price of the
Common Stock without regard to the significant fluctuations in response to
variations in quarterly operating results, shortfalls in sales or earnings
below analyst estimates, stock market conditions and other factors. There can
be no assurance that the market price of the Common Stock will not experience
significant fluctuations or decline below the initial public offering price.
Sunrise's First Initial Public Offering
Sunrise has not previously acted as an underwriter in connection with an
initial public offering, although it has acted as a syndicate member, sole
placement agent, co-placement agent, selected dealer or sole participating
broker in more than 18 public and private offerings. Meyerson, however, has
acted as an underwriter in connection with a number of initial public
offerings. As part of its function, an underwriter establishes (in this case
with the qualified independent underwriter) after negotiation with the Company
the initial public offering price for the Common Stock. Sunrise's limited
experience may adversely affect the pricing of the Offering and the liquidity
of the Common Stock. Prospective purchasers of shares of Common Stock offered
hereby should consider Sunrise's limited experience in evaluating an
investment in the Common Stock. See "'Underwriting."
No Market Making Activity by Sunrise
Sunrise has indicated that it does not intend to act as a market maker in
the Common Stock, which may adversely affect the price and liquidity of the
Common Stock.
17
Shares Eligible for Future Sale
Upon completion of this Offering, the Company will have outstanding
5,867,182 shares of Common Stock, without giving effect to (a) shares of
Common Stock issuable upon exercise of (i) the Underwriters' Over-allotment
Option, (ii) the Representatives' Warrants, (iii) options granted under the
Plan, (iv) the de Weese Warrants, (v) the Fischetti Warrants, (vi) the
Directors/Advisors Warrants or (vii) the Bridge Warrants or (b) the MedImmune
Shares. (There can be no assurance that the Company will enter into a final
agreement with MedImmune on the terms described herein or at all. See "Risk
Factors--Dependence on Others; Collaborations.") Of such outstanding shares of
Common Stock, all the shares to be sold by the Company in this Offering will
be freely tradeable without restriction or further registration under the
Securities Act, except for any shares held by "affiliates" of the Company
within the meaning of the Securities Act which shares will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act. In
addition, the estimated 100,000 shares of Common Stock issuable upon the
exercise of the Bridge Warrants, all of which also are being registered under
the Securities Act pursuant to the registration statement of which this
Prospectus constitutes a part, will be freely transferable under the
Securities Act, other than those shares held by affiliates of the Company. See
"Plan of Operations--Bridge Financing."
The remaining 3,367,182 shares (the "Restricted Shares") were issued by the
Company in private transactions in reliance upon one or more exemptions
contained in the Securities Act. 1,288,012 of the Restricted Shares were
issued in connection with two private placement transactions completed in
March and September 1996, respectively (the "Private Shares") and 2,079,170 of
the Restricted Shares were issued to the founders of the Company in December
1995 (the "Founders' Shares"). The Restricted Shares are deemed to be
"restricted securities" within the meaning of Rule 144 promulgated pursuant to
the Securities Act and may be publicly sold only if registered under the
Securities Act or sold pursuant to exemptions therefrom.
Because the Founders' Shares and 1,038,008 of the Private Shares acquired in
the March 1996 private placement will have been held for more than one year as
of the date of this Prospectus, such shares will be eligible for public sale
in accordance with the requirements of Rule 144, as amended. In addition, the
remaining 250,004 of the Private Shares will be eligible for public sale in
September 1997. However, certain holders of the Private Shares and the holders
of the Founders' Shares have agreed with Sunrise not to sell or otherwise
dispose of such shares for a period of six months and 24 months, respectively,
after the date of the consummation of the Offering. See "Shares Eligible for
Future Sale" and "Underwriting."
Dilution; Equity Securities Sold Previously at Below Offering Price
This Offering involves immediate dilution of $3.32 per share between the
adjusted net tangible book value per share after the Offering and the per
share public offering price of $5.00 attributable to the Common Stock.
Investors in the Offering will contribute 84% of the aggregate consideration
received for the aggregate number of shares of Common Stock outstanding after
the Offering, but will only own 43% of the aggregate number of shares of
Common Stock outstanding after the Offering. See "Dilution."
Lack of Dividends
The Company has not paid any dividends and does not contemplate paying
dividends in the foreseeable future. It is currently anticipated that
earnings, if any, will be retained by the Company to finance the development
and expansion of the Company's business. See "Dividend Policy."
Antitakeover Effect of Certificate of Incorporation
The Company's Certificate of Incorporation authorizes the Board of Directors
to determine the rights, preferences, privileges and restrictions of unissued
series of preferred stock, $.0001 par value per share (the "Preferred Stock"),
and to fix the number of shares of any series of Preferred Stock and the
designation of any such series, without any vote or action by the Company's
stockholders. Thus, the Board of Directors can authorize and issue up to
10,000,000 shares of Preferred Stock with voting or conversion rights that
could adversely affect the voting or other rights of holders of the Company's
Common Stock. In addition, the issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change of control of the Company, since
the terms of the Preferred Stock that might be issued could potentially
prohibit the Company's
18
consummation of any merger, reorganization, sale of substantially all of its
assets, liquidation or other extraordinary corporate transaction without the
approval of the holders of the outstanding shares of the Common Stock. The
Company, however, has no intention of adopting a stockholder rights plan
("poison pill") in the foreseeable future. See "Description of Securities--
Preferred Stock."
Possible Delisting of Securities from Nasdaq SmallCap Market
Following the Offering, the Company's Common Stock will meet the current
Nasdaq listing requirements and will be initially included on Nasdaq. There
can be no assurance, however, that the Company will meet the criteria for
continued listing. Continued inclusion on Nasdaq generally requires that (i)
the Company maintain at least $2,000,000 in total assets and $1,000,000 in
capital and surplus, (ii) the minimum bid price of the Common Stock be $1.00
per share, (iii) there be at least 500,000 shares in the public float valued
at $1,000,000 or more, (iv) the Common Stock have at least two active market
makers, (v) the Common Stock be held by at least 300 holders and (vi) the
Company meet certain corporate governance requirements.
If the Company is unable to satisfy Nasdaq's listing standards, its
securities may be delisted from Nasdaq. In such event, trading, if any, in the
Common Stock would thereafter be conducted in the over-the-counter market on
the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, reduction in security analysts'
and the news media's coverage of the Company and lower prices for the
Company's securities than might otherwise be attained.
Risks of Low-Priced Stock; "Penny Stock" Restrictions
If the Company's securities were delisted from Nasdaq (See "--Possible
Delisting of Securities from Nasdaq SmallCap Market"), they could become
subject to Rule 15g-9 under the Exchange Act, which imposes additional sales
practice requirements on broker-dealers which sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes
exceeding $200,000, or $300,000 together with their spouses). For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of purchasers in the Offering
to sell in the secondary market any of the securities acquired hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or
meet certain minimum net tangible assets or average revenue criteria. There
can be no assurance that the Company's securities will qualify for exemption
from these restrictions. In any event, even if the Company's securities were
exempt from such restrictions, it would remain subject to Section 15(b)(6) of
the Exchange Act, which gives the Commission the authority to prohibit any
person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's
securities were subject to the rules on penny stocks, the market liquidity for
the Company's securities could be severely adversely affected.
19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be $10,625,000 ($12,271,250 if the
Underwriters' Over-allotment Option is exercised in full) after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company expects to use the net proceeds as follows:
APPROXIMATE
APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
- ----------------------- ------------- ---------------
Research and development(1)..................... $ 3,750,000 35.3%
General and administrative (2).................. 3,625,000 34.1
Repayment of Bridge Notes and accrued interest
thereon(3)..................................... 1,033,333 9.7
Working capital................................. 2,216,667 20.9
----------- -----
TOTAL......................................... $10,625,000 100.0%
=========== =====
- --------
(1) Includes research support payments, salaries and related expenses for the
Company's principal scientists and other employees currently hired or to
be hired in connection with the Company's research and development
activities, consulting fees for the Company's scientific consultants and
advisors, patent expenses and other research and development related
expenses.
(2) Includes salaries and related expenses for the Company's officers and
staff, consulting fees for the Company's consultants, legal and accounting
expenses and other general and administrative expenses.
(3) Represents the repayment of the outstanding principal amount of $1,000,000
plus estimated accrued interest thereon at the rate of 10% per annum as of
June 30, 1997, on indebtedness incurred in the Bridge Financing. The
proceeds of the Bridge Financing, in the amount of $1,000,000, were used
for research and development, working capital and other general corporate
purposes.
If the Underwriters' Over-allotment Option is exercised in full, the Company
will realize additional net proceeds of approximately $1,646,250, which amount
will be added to the Company's working capital.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds of this Offering will be
sufficient to satisfy the Company's contemplated cash requirements for at
least 20 months following the consummation of the Offering. In the event the
Company's plans change or its assumptions change or prove to be inaccurate or
the proceeds of the Offering prove to be insufficient to fund operations (due
to unanticipated expenses, delays, problems or otherwise), the Company could
be required to seek additional financing sooner than currently anticipated.
The Company has no current arrangements with respect to, or sources of,
additional financing, apart from research payments and potential milestone
payments from Wyeth-Ayerst and there can be no assurance that additional
financing will be available to the Company when needed on commercially
reasonable terms or at all. Any inability to obtain additional financing when
needed would have a material adverse effect on the Company, including possibly
requiring the Company to significantly curtail or cease its operations.
Until required for operations, the Company's policy is to invest its cash
reserves in bank deposits, certificates of deposit, commercial paper,
corporate notes, U.S. government instruments and other investment-grade
quality instruments.
20
CAPITALIZATION
The following table sets forth as of June 30, 1997 (i) the actual
capitalization of the Company; and (ii) the pro forma capitalization of the
Company as adjusted to give effect to the receipt and anticipated use of the
estimated net proceeds of this Offering. This table should be read in
conjunction with the Company's Financial Statements and Notes thereto,
"Selected Financial Data" and "Plan of Operation" included elsewhere in this
Prospectus.
HISTORICAL AS ADJUSTED(1)
----------- --------------
(UNAUDITED)
Bridge Notes(2).................................... $ 955,667 --
----------- ----------
Stockholders' equity:
Preferred Stock ($0.0001 par value, 10,000,000
shares authorized, none issued and
outstanding).................................... -- --
Common Stock ($0.0001 par value, 25,000,000
shares authorized, 3,367,182 shares issued and
outstanding; 5,867,182 shares issued and
outstanding, as adjusted)(3)(4)................. $ 337 $ 587
Additional paid-in capital....................... 2,830,632 13,455,382
Accumulated deficit(5)........................... (3,582,187) (3,626,520)
----------- ----------
Total stockholders' equity (deficit)............. (751,218) 9,829,449
----------- ----------
Total capitalization............................... $ 204,449 $9,829,449
=========== ==========
- --------
(1) As adjusted to reflect the sale of 2,500,000 shares of Common Stock
offered hereby. See "Use of Proceeds."
(2) Represents principal amount of $1,000,000, net of unamortized debt
discount of $44,333 as of June 30, 1997.
(3) Assumes (i) no exercise of the Underwriters' Over-allotment Option; (ii)
no exercise of the Representatives' Warrants; (iii) no exercise of options
granted under the Plan; (iv) no exercise of the de Weese Warrants; (v) no
exercise of the Fischetti Warrants; (vi) no exercise of the
Directors/Advisors Warrants; and (vii) no exercise of the Bridge Warrants.
See "Plan of Operation--Bridge Financing," "Management--1996 Incentive and
Non-Qualified Stock Option Plan," "--Employment and Consulting
Agreements," "Description of Securities," "Underwriting" and "Certain
Transactions."
(4) Does not include the MedImmune Shares. There can be no assurance that the
Company will enter into a final agreement with MedImmune on the terms
described herein or at all. See "Risk Factors--Dependence on Others;
Collaborations."
(5) As adjusted to give effect to the recognition of the unamortized portion
of debt discount associated with the Bridge Financing as an expense.
21
DILUTION
As of June 30, 1997, the Company had a negative net tangible book value
equal to ($947,206). See "Selected Financial Data." After giving effect to the
sale of 2,500,000 shares of Common Stock offered by the Company pursuant to
this Prospectus at an initial offering price per share of $5.00 per share, net
of underwriting discounts and commissions and estimated expenses of the
Offering payable by the Company, and application of a portion of the estimated
net proceeds to repay the Bridge Notes as set forth under "Use of Proceeds,"
the pro forma net tangible book value at such date would have been $9,829,449
or $1.68 per share. This represents an immediate increase in net tangible book
value of $1.96 to the existing stockholders and an immediate dilution of $3.32
per share or 66% to purchasers of Common Stock offered hereby ("New
Investors"). The following tables illustrate the dilution per share:
Public offering price(1).............................................. $5.00
Net tangible book value per share at June 30, 1997(2)........ $(0.28)
Increase per share attributable to New Investors............. 1.96
------
Pro forma net tangible book value per share after the Offering(3)..... $1.68
-----
Dilution per share to New Investors(4)................................ $3.32
=====
- --------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Net tangible book value per share represents the Company's total tangible
assets less its total liabilities divided by the number of shares of
Common Stock outstanding.
(3) Does not include the MedImmune Shares. There can be no assurance that the
Company will enter into a final agreement with MedImmune on the terms
described herein or at all. See "Risk Factors--Dependence on Others;
Collaborations."
(4) The dilution of net tangible book value per share to New Investors
assuming the Underwriters' Over-allotment Option is exercised in full
would be $3.16 (or 63%).
The following tables set forth, with respect to existing stockholders and
New Investors, a comparison of the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total
consideration paid and the average price per share.
SHARES PURCHASED TOTAL CONSIDERATION PAID
----------------- ---------------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
Officers, Directors,
Promoters and
Affiliates............... 2,212,504 37.7% $ 201,248 1.4% $0.09
Unaffiliated Existing
Stockholders............. 1,154,678 19.7% 2,107,000 14.2% 1.82
New Investors............. 2,500,000 42.6% 12,500,000 84.4% 5.00
--------- ------ ----------- ------
Total................... 5,867,182 100.0% $14,808,248 100.0% $2.52
========= ====== =========== ====== =====
The information contained in the above table does not give effect to the
exercise of (i) the Underwriters' Over-allotment Option, (ii) the
Representatives' Warrants, (iii) options granted and outstanding under the
Plan to purchase 60,001 shares of Common Stock at exercise prices ranging from
$1.50 to $5.00 per share, (iv) the de Weese Warrants (461,016 shares of Common
Stock at $3.00 per share), (v) the Fischetti Warrants (150,000 shares of
Common Stock at $1.50 per share), (vi) the Directors/Advisors Warrants (35,000
shares of Common Stock at the initial offering price) or (vii) the Bridge
Warrants (an estimated 100,000 shares of Common Stock at the initial offering
price). Exercise of such options and/or warrants would result in further
dilution to New Investors. If all warrants and options eligible for exercise
at June 30, 1997 (50,001 options and 265,254 warrants) were exercised, per
share dilution to the New Investors would be $3.30. The information in the
above table also
22
does not include the MedImmune Shares. There can be no assurance that the
Company will enter into a final agreement with MedImmune on the terms
described herein or at all. See "Risk Factors--Dependence on Others;
Collaboration."
DIVIDEND POLICY
The Company currently anticipates that it will retain any future earnings
for use in its business and does not anticipate paying any cash dividends in
the foreseeable future. The payment of any future dividends will be at the
discretion of the Board of Directors and will depend, among other things, upon
the Company's future earnings, operations, capital requirements and financial
condition, general business conditions and contractual restrictions on payment
of dividends, if any.
23
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1996 and 1995 and
for each of the periods then ended shown below have been derived from the
Company's audited financial statements. The balance sheet data as of June 30,
1997 and the statement of operations data for the three month periods ended
June 30, 1997 and 1996 have been derived from unaudited financial statements.
In the opinion of management, the unaudited financial statements include all
material adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for the periods presented. This data should be read in conjunction
with the "Plan of Operation" and with the Company's financial statements and
the notes thereto included elsewhere in this Prospectus.
DECEMBER 28, DECEMBER 28,
1995 (DATE 1995 (DATE DECEMBER 28,
OF OF 1995 (DATE
INCEPTION) INCEPTION) SIX SIX OF
TO YEAR ENDED TO MONTHS MONTHS INCEPTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED JUNE ENDED JUNE TO JUNE 30,
1995 1996 1996 30, 1996 30, 1997 1997
------------ ------------ ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Operating expenses:
General and
administrative....... $ 1,000 $ 787,817 $ 788,817 $ 394,229 $ 680,122 $ 1,468,939
Research and
development.......... -- 662,205 662,205 311,419 432,668 1,094,873
Patent preparation
fees................. -- 452,999 452,999 324,514 49,681 502,680
Stock option and
warrant
compensation......... -- 367,461 367,461 -- 28,813 396,274
------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 1,000 2,270,482 2,271,482 1,030,162 1,191,284 3,462,766
Interest
income/(expense)....... -- 2,306 2,306 -- (121,727) (119,421)
------- ----------- ----------- ----------- ----------- -----------
Net loss ............. $(1,000) $(2,268,176) $(2,269,176) $(1,030,162) $(1,313,011) $(3,582,187)
======= =========== =========== =========== =========== ===========
Net loss per common
share(1)............. -- $ (0.66) $ (0.32) $ (0.36)
======= =========== =========== ===========
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
BALANCE SHEET DATA: (UNAUDITED)
Working capital(deficit)................ $(7,937) $232,050 $ (964,461)
Total assets............................ 6,937 580,918 558,364
Total liabilities....................... 7,937 180,938 1,309,582
Stockholders' equity.................... (1,000) 399,980 (751,218)
- --------
(1) For information concerning the computation of net loss per share, see Note
2 of Notes to Financial Statements.
24
PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company is a development stage, biopharmaceutical company. Since its
inception in December 1995, the Company's efforts have been principally
devoted to research and development, securing patent protection and raising
capital. From inception through June 30, 1997, the Company has sustained
cumulative losses of $3,582,187, including non-cash charges in the amount of
$396,274 for stock option and warrant compensation expense. These losses have
resulted primarily from expenditures incurred in connection with research and
development, patent preparation and prosecution and general and administrative
activities. From inception through June 30, 1997, research and development
expenses amounted to $1,094,873, patent preparation and prosecution expenses
amounted to $502,680 and general and administrative expenses amounted to
$1,468,939.
The Company expects to continue to incur substantial research and
development costs in the future resulting from ongoing research and
development programs, manufacturing of products for use in clinical trials and
pre-clinical and clinical testing of the Company's products. The Company also
expects that general and administrative costs, including patent and regulatory
costs, necessary to support clinical trials, research and development,
manufacturing and the creation of a marketing and sales organization, if
warranted, will increase in the future. Accordingly, the Company expects to
incur increasing operating losses for the foreseeable future. There can be no
assurance that the Company will ever achieve profitable operations.
To date, the Company has not marketed, or generated revenues from the
commercialization of, any products. The Company's current product candidates
are not expected to be commercially available for several years.
General and administrative expenses from inception through June 30, 1997,
were $1,468,939, primarily due to personnel costs and associated operating
costs. The Company anticipates that general and administrative expenses will
increase substantially during the next 12 months as the Company increases its
staffing levels.
Research and development expenditures consist primarily of payments for
sponsored research, payments to its scientific consultants and the salaries of
its research staff. Research and development expenses from inception through
June 30, 1997 were $1,094,873. As of June 30, 1997, the Company had made
advance payments of $211,458 for research support to Rockefeller for the
period ending January 31, 1998. The Company has research support agreements
with both Emory and Oregon State pursuant to which the Company is obligated to
fund research through January 31, 1998 in the aggregate annual amount of
$183,320. The Company anticipates that its research and development expenses
will increase during the next 12 months as the Company continues to fund
research programs and pre-clinical and clinical testing for its product
candidates and technologies under development. See "--Product Research and
Development Plan."
From inception through June 30, 1997, the Company recorded non-cash
compensation expense in the amount of $396,274 related to the issuance of
compensatory stock options and warrants to the President of the Company and
the consultant who serves as the Company's Chief Scientific Advisor. The
warrants issued to the consultant were to compensate him for his efforts in
introducing the Company to potential collaborative partners.
LIQUIDITY AND CAPITAL RESOURCES
1996 Private Placement Transactions
In March 1996, the Company completed a private placement transaction in
which it sold 1,038,008 shares of Common Stock for an aggregate gross
consideration of $1,557,000. In September 1996, the Company completed a
private placement transaction in which it sold 250,004 shares of Common Stock
for an aggregate gross consideration of $750,000.
25
Bridge Financing
On February 28, 1997, the Company completed the Bridge Financing pursuant to
which the Company issued Bridge Notes in the aggregate principal amount of
$1,000,000 and Bridge Warrants to purchase an estimated 100,000 shares in
aggregate of the Company's Common Stock (the actual number of shares will be
determined by dividing one-half the principal of the Bridge Notes ($500,000)
by the initial offering price per share) at an exercise price equal to the
initial offering price per share. In the event an initial public offering of
the Common Stock is not completed prior to the maturity date of the Bridge
Notes, the holders of the Bridge Notes will receive Bridge Warrants to
purchase an aggregate of 100,000 shares of Common Stock at an exercise price
of $5.00 per share. The Bridge Notes bear interest at the rate of 10% per
annum and are due on the earlier of six months subsequent to the date of
issuance or the consummation of the Offering. As of August 28, 1997, the
maturity date of Bridge Notes in the principal amount of $1,000,000, which had
maturity dates of July and August 1997 had been extended to the earlier of
October 1, 1997 or completion of the Offering. The Bridge Warrants, which are
exercisable from the first anniversary of the date of the consummation of the
Offering (or February 28, 1998 if the Offering is not consummated) until the
fifth anniversary of the date of the consummation of the Offering (or February
28, 2002 if the Offering is not consummated), were issued to the Bridge
Investors because the interest rate on the Bridge Notes did not provide the
Bridge Investors with a sufficient rate of return given the risks associated
with their investment in the Bridge Notes. None of the Bridge Investors are
affiliates of the Company. The Bridge Investors have also agreed with the
Company not to sell or otherwise dispose of the Bridge Warrants for a period
of 12 months after the date of the consummation of the Offering. The Company
intends to use a portion of the proceeds of the Offering to repay the Bridge
Notes and the interest accrued thereon and will recognize an expense upon
completion of the Offering relating to the unamortized portion of the debt
discount associated with the Bridge Financing which amounted to $44,333 at
June 30, 1997.
Collaborative Research and License Agreement
In July 1997, the Company entered into a collaborative research and license
agreement with Wyeth-Ayerst. Under the terms of the agreement, the Company has
granted Wyeth-Ayerst an exclusive worldwide license to develop, make, use and
sell products derived from specified technologies. The agreement requires
Wyeth-Ayerst to sponsor further research by the Company for the development of
the licensed technologies for a period of two years from the effective date of
the agreement, in return for payments to the Company totaling $1,200,000. An
initial sponsored research payment in the amount of $300,000 was received by
the Company within 30 days of the execution of the agreement. The remaining
sponsored research payments are payable in equal quarterly installments over
the two years. In consideration of the license grant, the Company is entitled
to receive royalties equal to specified percentages of net sales of products
incorporating the licensed technologies. The royalty percentages increase as
certain cumulative and annual net sales amounts are attained. The Company
could receive milestone payments, up to $13,750,000 for the initial product
and up to $3,250,000 for the second product developed from a single compound
derived from the licensed technologies. The Company could also receive, under
certain circumstances, additional milestone payments, for an additional
compound, as defined in the agreement, developed from the licensed
technologies. Such milestone payments are contingent upon the Company meeting
the milestones set forth in the agreement, and, accordingly, if the Company is
unable to meet such milestones, the Company will not receive such milestone
payments.
Current Resources
The Company anticipates that its current resources, together with the net
proceeds of the Offering, will be sufficient to finance the Company's
currently anticipated needs for operating and capital expenditures for at
least 20 months from the consummation of this Offering. In addition, the
Company will attempt to generate additional working capital through a
combination of collaborative agreements, strategic alliances and equity and
debt financings. However, no assurance can be provided that additional capital
will be obtained through these sources. In addition, for a period of 12 months
(6 months in the case of any public offering under the Securities Act) after
the date of this Prospectus, Sunrise's prior written consent is required if
the Company seeks to raise
26
additional funds through the issuance of equity. If the Company is not able to
obtain continued financing the Company may cease operation and purchasers of
the Common Stock will, in all likelihood, lose their entire investment. See
"Underwriting."
The Company's working capital and capital requirements will depend upon
numerous factors, including progress of the Company's research and development
programs; pre-clinical and clinical testing; timing and cost of obtaining
regulatory approvals; levels of resources that the Company devotes to the
development of manufacturing and marketing capabilities; technological
advances; status of competitors; and ability of the Company to establish
collaborative arrangements with other organizations.
Until required for operations, the Company's policy is to invest its cash
reserves in bank deposits, certificates of deposit, commercial paper,
corporate notes, U.S. government instruments and other investment-grade
quality instruments.
At June 30, 1997, the Company had $129,913 in cash and cash equivalents, and
a working capital deficit of $964,461. In accordance with the terms of the
Bridge Notes, the Company will utilize proceeds of approximately $1,000,000
upon completion of the Offering to repay the principal of, and accrued
interest through consummation of the Offering on, the Bridge Notes. See "Use
of Proceeds" and Note 9 of Notes to Financial Statements.
PRODUCT RESEARCH AND DEVELOPMENT PLAN
The Company's plan of operation for the 12 months following completion of
this Offering will consist primarily of research and development and related
activities including:
. formulation and further pre-clinical development of the Company's
vaccine candidate for strep throat, and if successful, the initiation of
clinical trials. See "Business--The Company's Product Candidates and
Research and Discovery Programs--Mucosal Vaccines."
. further development of the Company's anti-infectives programs aimed at
blocking the function or expression of certain bacterial surface
proteins. See "Business--The Company's Product Candidates and Research
and Discovery Programs--Anti-Infectives."
. continuing the funding of the research on mucosal vaccine delivery
systems, mucosal vaccine candidates and novel anti-infectives currently
being conducted at Rockefeller, Oregon State, Emory and SUNY Buffalo.
See "Business--Collaborative Research and Licenses."
. continuing the prosecution and filing of patent applications. See
"Business--Patents and Proprietary Rights."
. hiring additional employees, including filling senior positions in the
areas of finance, product development and regulatory and clinical
affairs.
The actual research and development and related activities of the Company
may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological
advances, determinations as to commercial potential and the status of
competitive products. The focus and direction of the Company's operations will
also be dependent upon the establishment of collaborative arrangements with
other companies, and other factors.
27
BUSINESS
The Company is a development stage, biopharmaceutical company focused on the
discovery, development and commercialization of vaccines, antibiotics and
novel anti-infectives for serious infectious diseases. The Company's lead
vaccine candidate is for the prevention of "strep throat." The Company is
developing a technology for the mucosal delivery of its vaccines which may
allow those vaccines to activate the immune system at the mucus-lined surfaces
of the body--the mouth, the nose, the lungs and the gastrointestinal and
urogenital tracts--the sites of entry for most infectious agents. The
Company's anti-infectives programs, aimed at the increasingly serious problem
of drug resistance, are designed to block the ability of bacteria to attach to
human tissue, the first step in the infection process.
SUMMARY
Vaccine Candidates
The Company's lead vaccine candidate is for the prevention of group A
streptococcal pharyngitis or "strep throat," a recurrent infection affecting
between seven and 20 million children in the United States each year. Strep
throat remains the most common childhood disease for which there is no vaccine
available, and, if ineffectively treated, can progress to rheumatic fever. No
vaccine has been developed because more than 100 different serotypes of group
A streptococcus are known to causes the disease. In order to be effective, a
vaccine would have to be based upon an antigen (a molecule that triggers an
immune response) common to most of the important serotypes. The high incidence
of the disease, the potentially serious consequences of inadequate treatment
and the recent emergence of drug-tolerant types of group A streptococcus
create an important medical need for an effective vaccine.
The Company's proprietary antigen addresses the challenge of multiple
serotypes in that this antigen is common to most types of the bacteria that
cause strep throat, including types that have been associated with rheumatic
fever. When a vaccine incorporating this antigen was orally administered to
animals, it was shown to provide protection against multiple types of group A
streptococcal infection. The Company's vaccine candidate for strep throat
utilizes this antigen.
The Company is collaborating with the National Institutes of Health and the
University of Maryland Center for Vaccine Development on the clinical
development of this vaccine candidate and expects to file an IND with the FDA
in the fall of 1997.
In addition to its strep throat vaccine, the Company is also collaborating
with Chiron on research toward the development of vaccines against two
sexually transmitted diseases and is testing a vaccine to prevent periodontal
disease in a collaboration with SUNY Buffalo.
Mucosal Vaccine Delivery System
The Company is also developing a proprietary mucosal vaccine delivery system
which is a component of the Company's vaccine candidates and which the Company
intends to license to other vaccine developers. Mucosally-delivered vaccines
are considered attractive because such vaccines may mobilize an immune
response concentrated at the site of infection and because they may activate
both a mucosal IgA antibody response as well as a systemic (IgG and T cell)
response. The Company's mucosal vaccine delivery system utilizes commensal
bacteria (harmless bacteria that live in and on the body) that have been
genetically engineered to continually present disease-associated antigens
which stimulate an immune response at the body's mucosal surfaces thereby
preventing infection at the earliest possible stage. The Company believes that
mucosal vaccines developed using its proprietary commensal delivery technology
could provide a number of potential advantages over conventional vaccines,
including: more complete protection; fewer side effects; the potential for
single dose administration; non-injectable administration; the potential for
combination vaccine delivery; and lower cost production. The Company's mucosal
vaccine delivery technology is potentially applicable to any infectious
disease that begins at a mucosal surface.
28
Anti-Infectives and Antibiotics Therapy Candidates
The Company's anti-infectives program is targeted principally toward drug-
resistant bacteria and hospital-acquired infections. According to estimates
from the Centers for Disease Control, approximately two million hospital-
acquired infections occur each year in the United States. According to the
Pharmaceutical Manufacturer's Association, the United States and worldwide
antibiotic markets are $7 billion and $22 billion, respectively.
The Company's anti-infectives approaches aim to block the ability of
bacteria to attach to and colonize human tissue, thereby blocking infection at
the first stage in the infection process. By comparison, antibiotics available
today act by interfering with either the structure or the metabolism of a
bacterial cell, affecting its ability to survive and to reproduce. No
currently available antibiotics target the attachment of a bacterium to its
target tissue. By preventing attachment, the bacteria would be readily cleared
by the body's immune system.
The Company's lead anti-infectives program is based on a novel target for
antibiotic therapy. The Company's founding scientists have identified an
enzyme, a selective protease, utilized by most gram-positive bacteria to
anchor certain proteins to the bacterial cell wall. These surface proteins are
the means by which certain bacteria recognize, adhere to and colonize specific
tissue. The Company's strategy is to develop protease inhibitors. The Company
believes protease inhibitors will have wide applicability to gram-positive
bacteria in general, including antibiotic resistant staphlyococcus and a broad
range of serious infectious diseases including meningitis and respiratory
tract infections. The Company has entered into a collaborative research and
license agreement with Wyeth-Ayerst to identify and develop protease
inhibitors as novel antibiotics.
The Company has entered into a letter of intent with MedImmune regarding a
technology transfer agreement pursuant to which the Company will acquire all
of MedImmune's rights in gram-negative antibiotic targets, products, screens
and services. The Company and MedImmune plan to collaborate in the development
of antibiotics against gram-negative pathogens. These bacteria utilize
structures called pili to adhere to target tissue, and the Company plans to
exploit the assembly and export of these essential infective structures as
novel anti-infective targets. There can be no assurance that the Company will
enter into a final agreement with MedImmune on the terms described herein or
at all. See "Risk Factors--Dependence on Others; Collaborations."
SURFACE PROTEIN EXPRESSION SYSTEM
The Company is developing proprietary protein production systems based on
its understanding of the mechanisms used by gram-positive bacteria to export
and anchor surface proteins. Methods have been developed to engineer gram-
positive bacteria to produce and secrete commercially useful proteins such as
antigens or enzymes into the culture medium in a form requiring minimal
purification. The Company believes that this technology provides a cost-
effective alternative to E. coli, yeast and mammalian cell culture systems.
BACKGROUND
Infectious Diseases
Infectious diseases are the leading cause of death in the world. For most of
the twentieth century, the incidence of infectious disease has decreased
dramatically due to the use of antibiotics and the development of effective
vaccines to prevent many common diseases. In recent years, however, this trend
has reversed with the emergence of many new infectious diseases or the re-
emergence or increased incidence of known infectious diseases worldwide, a
public health issue which has become "a threat to global health and security."
There are many reasons for this emergence, including: (i) the intrusion of
humans into formerly unpopulated or isolated populations has provided exposure
to organisms previously unknown (e.g. Lyme disease, hantavirus, Ebola virus);
(ii) the spread of disease-causing organisms has increased due to the ease of
worldwide transportation; (iii) changes in human behavior, such as increased
sexual activity and intravenous drug abuse, have contributed to the spread of
diseases like human immunodeficiency virus ("HIV"), hepatitis, and chlamydia;
(iv) the
29
widespread use of day care facilities has exposed a larger number of children
to infectious diseases and, as a result, their families; (v) the use of
immunosuppressive drugs, particularly for cancer treatment, has rendered
susceptible an ever growing number of people subject to infectious diseases
which in otherwise healthy individuals would be benign; (vi) past complacency
of public health officials has resulted in lowered surveillance of and reduced
prevention programs for infectious diseases leading to an inability to react
quickly to newly arising infectious threats; and (vii) increased antibiotic
resistance has resulted in a major threat from organisms which were
effectively and easily treated in the past.
As a result of these and other factors, the Centers for Disease Control and
Prevention has estimated that between 1980 and 1992, in the United States, the
mortality rate due to infectious diseases rose by 58%. Alarmingly, the age
group most affected, ages 25 to 44 years, has experienced over a six-fold
increase in infectious disease-related deaths during this period. Due to this
increase, infectious diseases are now the third leading cause of death in the
United States, following only cardiovascular and cancer-related deaths. The
financial burden to the public to treat or prevent infectious diseases has
been conservatively estimated to exceed $120 billion annually. The problem of
emergent infections, combined with the need to provide quality healthcare at a
reasonable cost, have led to a reexamination of the approaches used to combat
infectious diseases.
Immune System
The human immune system is a complex system of checks and balances, coupled
with an intricate network of cells and effector molecules, which has evolved
to stave off the intrusion of foreign elements into the body. To accomplish
this the body has developed a means to determine the difference between self
and non-self ("foreign"). Foreign substances include elements such as dust
particles, pollen grains, infectious agents and antigens (the surface of these
other structures generally are covered with antigens, or secrete them). Once
the determination has been made that a foreign intruder exists, the body's
defenses are triggered, beginning a cascade of events known collectively as
the immune response. The end result, in a healthy person, is the successful
clearance or elimination of the offending material. The immune response has
been divided into two arms based principally on the ultimate effector
mechanism which will fight the initial insult; these arms are known as the
humoral and cellular immune responses. The humoral immune system employs a
family of molecules circulating in the blood stream known as immunoglobulins,
or antibodies, which are secreted by immune cells called lymphocytes. In terms
of infectious diseases, these antibodies are very effective at combating
invasions by bacteria, protozoan parasites, and some viruses, as well as
specific proteins produced by these infectious agents. In contrast, a cellular
immune response, as the name implies, uses effector cells of the immune system
to generally target certain viruses and cancer cells.
A different delineation also exists within the immune system in terms of the
site of the induction and the response of the immune system. The systemic
immune system is generally regarded as that which is internal to the body,
including the antibodies in the blood stream and lymphatic system and the
cellular immune response in the tissues where foreign agents have encroached.
The other active site, and the focus of the Company's vaccine efforts, is the
mucosal immune system. This portion of the immune system is spread over the
tissues lining the cavities of the body and those involved in the secretions
which ultimately find their way to these cavities. Included in this vast
network are the linings of the oral and nasopharyngeal cavity, the respiratory
tract, the gastrointestinal tract, and the urogenital tract. There are a
number of physical barriers present which can prevent the invasion of
infectious agents into the mucosal lining. Among these physical factors are:
(i) the mucus which covers the lining of mucosal tissues; (ii) the production
of protein degrading enzymes which digest proteins either free in the mucosal
environment or attached to infectious organisms, thereby decreasing their
ability to invade the mucosal tissues; (iii) the peristaltic motion of the
walls beneath the mucosa which function in moving digested food and,
consequently, infectious agents which are present, through the digestive tract
and out of the body; (iv) the motion of the cilia lining the mucosal cavities
which carry infectious organisms through the body; and (v) the specialized
cells which line the mucosa coupled with the tight junctions between them also
provide a strong barrier to the penetration of infectious organisms into the
deeper tissues.
30
The specific response which occurs in the mucosal immune system begins with
the uptake of the infectious agent or antigen generally by a specialized cell
lining the mucosa called an M cell. This cell facilitates the movement of the
antigen to cells underlying the epithelial layer which can efficiently prepare
the antigen and present it to cells of the immune system. Once stimulated,
these cells can migrate to various parts of the mucosal system where they can
either produce antibodies or induce effector cells specific for the offending
(or, in the case of vaccines, immunizing) agent. Due to this migratory nature
of the immune cells of the mucosal immune system, the entire system has been
termed the common mucosal immune system. As a result of this trafficking of
immune cells, induction of a mucosal immune response at one site results in
the expression of that specific response at multiple sites within the mucosal
system; i.e. induction of an immune response in the oral cavity would lead to
an immune response there, but also in the gut. The weakness of this common
mucosal system is that generally the immune response is greater at the site of
stimulation than at distant sites within the system, a problem which the
Company hopes to circumvent using the site-specific aspects of its commensal
vaccine delivery system.
The primary effector molecule of the mucosal immune response is an antibody
known as secretory immunoglobulin A (sIgA), which is found in saliva, tears,
and other secretions of the respiratory, gastrointestinal ("GI"), and
urogenital tracts. Given that the mucosal surface covers such a large area, it
is not surprising that the sIgA produced there accounts for greater than 75%
of all the antibodies produced in the body. sIgA performs a variety of
important functions, including: (i) neutralization of viruses, toxins, and
enzymes; (ii) inhibition of adherence of microorganisms to mucosal surfaces;
(iii) immune exclusion of macromolecules and bacterial toxins; (iv)
suppression of antibody-mediated inflammatory responses at mucosal surfaces;
(v) synergism with nonspecific antibacterial factors, such as lactoferrin,
peroxidase, and lysozyme; (vi) clearance of adsorbed antigen from the
circulation; and (vii) interference with other infectious determinants. These
factors, coupled with the non-specific barriers described above, form a
formidable obstacle to invading infectious organisms.
Vaccines
Vaccines prevent disease by stimulating the body to produce a protective
immune response to particular disease-causing organisms, or pathogens.
Conventional vaccines consist of killed microorganisms (e.g. pertussis
vaccine), live attenuated microorganisms (e.g. polio or smallpox vaccines) or
components of microorganisms, called subunit vaccines (e.g. hepatitis B
vaccine). These types of vaccines have been successful in many cases, as
evidenced by the global eradication of smallpox through immunization. However,
conventional vaccines can have significant limitations. For example, killed
vaccines and component vaccines can have variable efficacy and may require
boosters to maintain immunity. Attenuated vaccines, while generally more
effective, can be associated with certain medical complications, such as
neurological damage, allergic reaction, bleeding and infection. There are also
a number of diseases for which conventional approaches have not been able to
evoke a protective immune response. Aside from the oral polio vaccine, all of
these vaccines are administered via the systemic route, i.e. through a needle.
The World Health Organization has recently reported that in Eastern Europe 50%
of the vaccine centers gave unsafe vaccines or used vaccines of doubtful
potency. While clearly there are many factors contributing to this problem,
one of the solutions is to alter the manner in which vaccines are delivered.
Most infectious agents enter the host's body through and initiate infection
at one of the mucosal surfaces--the mouth, the nose, the lungs or the GI or
urogenital tracts. For example, the influenza virus usually enters the body
through the mouth or nose, salmonella through the GI tract and chlamydia
through the urogenital tract. The body's mucosal surfaces present a physical
barrier to pathogens and also possess a specific local immune system, which
provides a primary line of defense against invading organisms. While
conventional vaccines are designed to produce an effective systemic (internal)
immune response, they are relatively ineffective at stimulating the mucosal
immune system. It is now well recognized in the scientific and medical
communities that the mucosal immune system represents an important target for
immunization and that vaccines designed to activate the mucosal immune system
may prevent a variety of diseases for which conventional vaccines provide only
limited protection or do not exist.
31
Anti-infectives and Drug Resistance
Since their introduction in the 1940s, antibiotics have been the first line
of defense against bacterial infections. Over the past few decades, however,
bacterial resistance to existing antibiotics has been increasing, rendering
some previously innocuous infections virtually untreatable. All current
classes of antibiotics function by interfering with either the structure or
the metabolism of a bacterial cell, affecting its ability to survive and to
reproduce. For example, penicillin prevents production of new bacterial cell
walls, tetracycline inhibits the synthesis of new bacterial proteins,
fluoroquinolones inhibit nucleic acid synthesis, and polymyxin B disrupts the
integrity of bacterial membranes. Within any given population of infectious
organisms, there are generally some cells which are not susceptible to the
antibiotic selected for treatment. Because this population is so small, the
host can usually remove the remainder of the resistant cells by its normal
clearance mechanisms. If, however, a population of pathogens is given the
opportunity to increase the percentage of resistant organisms within its
number, then eventually the resistant organisms will predominate. There are
several reasons for the recent emergence of antibiotic resistance in
microorganisms: (i) indiscriminate prescribing of antibiotics by physicians to
patients who do not require antibiotic treatment; (ii) non-compliance of
dosing regimens by patients leading to incomplete clearance of the infectious
agent; (iii) transfer of resistance genes from one organism to another; and
(iv) the widespread use of antibiotics in cattle, which ultimately enters the
human food chain.
Antibiotic resistance has become a problem with many medically important
bacteria, but has become particularly dangerous with respect to Mycobacterium
tuberculosis (which causes TB), Neisseria gonorrheae (gonorrhea), Pseudomonas
aeruginosa (infections in immunocompromised patients), S. aureus (hospital-
acquired and other infections), Streptococcus pneumoniae (pneumonia, otitis
media, meningitis), and Enterococcus spp. (bacteremia and GI tract
infections). While new generations of antibiotics have been developed with
broad spectrum activity, only one new class of antibiotics has been developed
in the last two decades. The need for new classes of antibiotics and new
targets for their action has become crucial to the health of the nation and
the world.
THE COMPANY'S TECHNOLOGIES
Vaccine Technologies: Mucosal Immunity and Vaccine Delivery
Using proprietary technology licensed from Rockefeller, the Company is
developing certain commensal bacteria ("commensals") as a means to deliver
mucosal vaccines. Commensals are harmless bacteria that naturally inhabit the
body's surfaces--with different commensals inhabiting different surfaces,
particularly the mucosal surfaces. The Company's vaccine candidates utilize
genetically engineered commensals to deliver antigens from a variety of
pathogens to the mucosal immune system. When administered, the genetically
engineered ("recombinant") commensals colonize the mucosal surface and
replicate. By activating a local mucosal immune response, the Company's
vaccine candidates are designed to prevent infection and disease at the
earliest possible stage. By comparison, most conventional vaccines are
designed to act after infection has already occurred.
The Company's commensal vaccine candidates utilize gram-positive bacteria,
one of two major classes of bacteria. Rockefeller scientists have identified a
protein region that is used by gram-positive bacteria to anchor proteins to
their surfaces. The Company is using the proprietary technology licensed from
Rockefeller to fuse antigens from a wide range of infectious organisms, both
viral and bacterial, to the surface protein anchor region of a variety of
commensal organisms. By combining a specific antigen with a specific
commensal, vaccines can be tailored to both the target pathogen and its
mucosal point of entry.
To target an immune response to a particular mucosal surface, a vaccine
would employ a commensal organism that naturally inhabits that surface. For
example, vaccines targeting sexually transmitted diseases could employ
Lactobacillus acidophilus, a commensal colonizing the female urogenital tract.
Vaccines targeting GI diseases could employ Lactobacillus casei, a commensal
colonizing the GI tract. The Company has conducted initial experiments using
Streptococcus gordonii ("S. gordonii"), a commensal that colonizes the oral
cavity and that can potentially be used in vaccines targeting pathogens that
enter through the upper respiratory tract, such as the influenza virus.
32
By using an antigen unique to a given pathogen, the technology can
potentially be applied to any infectious agent that enters the body through a
mucosal surface. The Company's founding scientists have expressed and anchored
a variety of viral and bacterial antigens on the outside of S. gordonii,
including the M6 protein from group A streptococcus, a group of organisms that
cause a range of diseases, including strep throat, necrotizing fasciitis,
impetigo and scarlet fever. In addition, proteins from other infectious
agents, such as HIV and human papilloma virus have also been expressed using
this system. The Company believes this technology will enable the expression
of essentially any antigen regardless of size or shape. In animal studies, the
Company has shown that the administration of a recombinant S. gordonii vaccine
prototype induces both a local mucosal immune response and a systemic immune
response.
The Company believes that mucosal vaccines developed using its proprietary
commensal delivery technology could provide a number of advantages, including:
More complete protection than conventional vaccines: Mucosal vaccines in
general may be more effective than conventional parenteral (injectable)
vaccines, due to their ability to produce both a systemic and local
(mucosal) immune response. By stopping infectious organisms at the earliest
stage, the immune response has no need to eliminate pathogens which have
already become established in the host.
Potential single dose administration: The commensal delivery has the
potential to allow for long term colonization of the host, eliminating the
need for boosters, while providing an extended exposure to the selected
vaccine candidate(s).
Safety advantage over other live vectors: A number of bacterial pathogens
have been genetically rendered less infectious, or attenuated, for use as
live vaccine vectors. Commensals, by virtue of their harmless nature, offer
a safer delivery vehicle without fear of genetic reversion to the
infectious state inherent in attenuated pathogens.
Non-injection administration: Oral, nasal, rectal or vaginal
administration of the vaccine eliminates the need for painful injections
with their potential adverse reactions.
Potential for combined vaccine delivery: The Children's Vaccine
Initiative has called for the development of combined vaccines,
specifically to reduce the number of needle sticks per child by combining
several vaccines into one injection, thereby increasing compliance and
decreasing disease. The Company believes its commensal delivery technology
can be an effective method of delivery of multi-component vaccines within a
single commensal organism that address multiple diseases or diseases caused
by multiple strains of an infectious agent.
Eliminating need for refrigeration: One of the problems confronting the
effective delivery of parenteral vaccines is the need for refrigeration at
all stages prior to injection. The stability of the commensal organisms in
a freeze-dried state would, for the most part, eliminate the need for
special climate conditions, a critical consideration, especially for the
delivery of vaccines in developing countries.
Low cost production: By using a live bacterial vector, extensive
downstream processing is eliminated, leading to considerable cost savings
in the production of the vaccine. The potential for eliminating the need
for refrigeration would add considerably to these savings by reducing the
costs inherent in refrigeration for vaccine delivery.
Anti-Infectives Technology: Prevention of Attachment and Infectivity
The bacterial infectious process generally includes three steps:
colonization, invasion and disease. The adherence of bacteria to a host's
surface is crucial to establishing colonization. Bacteria cells adhere through
a number of mechanisms, but generally by using highly specialized surface
structures which, in turn, bind to specific structures or molecules on the
host's cells or, as discussed below, to inanimate objects residing in the
host. Once adhered, many bacteria will invade the host's cells and either
establish residence or continue invasion into deeper tissues. During any of
these stages, the invading bacteria can produce the molecules (toxins) which
result in the outward manifestations of the disease. The severity of disease,
while dependent on a large combination of factors, is often the result of the
ability of the bacteria to persist in the host. These bacteria accomplish this
persistence by using surface molecules which can alter the host's non-specific
mechanisms or its highly specific immune responses to clear or destroy the
organisms.
33
Unlike conventional antibiotics, as discussed above, the Company's anti-
infectives approaches aim to block the ability of pathogenic bacteria to
attach to and colonize human tissue, thereby preventing infection at its
earliest stage. The Company is pursuing two anti-infective strategies: (i)
inhibiting the expression of bacterial surface proteins required for bacterial
infectivity and (ii) blocking the tissue binding sites on bacterial surface
proteins. The Company believes that these approaches have promise in the areas
of hospital-acquired drug-resistant infections and a broad range of other
diseases caused by bacteria.
Many special surface proteins used by bacteria to infect the host are
anchored in the bacterial cell wall. Scientists at Rockefeller have identified
an amino acid sequence and related enzyme, a selective protease, that are
essential for anchoring proteins to the surface of most gram-positive
bacteria. Published information indicates that this amino acid sequence is
shared by more than 50 different surface proteins found on a variety of gram-
positive bacteria. This commonality suggests that this protease represents a
promising target for the development of a new class of antibiotic products for
the treatment of a wide range of infectious diseases. Experiments by the
Company's founding scientists at Rockefeller have shown that without this
sequence, proteins cannot become anchored to the bacterial surface and thus
the bacteria are no longer capable of attachment, colonization or infection.
Such "disarmed" bacteria should be readily cleared by the body's immune
system. The Company is using a combination of structure-based drug design and
high throughput screening procedures to identify compounds that inhibit the
protease, thereby blocking the anchoring process. If successful, this strategy
should provide relief from many gram-positive bacterial infections, but may
prove particularly important in combating diseases caused by the emerging
antibiotic resistance of the gram-positive organisms S. aureus, Streptococcus
pneumoniae, and the enterococci.
Surface Protein Expression System ("SPEX")
The ability to overproduce many bacterial and human proteins has been made
possible through the use of recombinant DNA technology. The introduction of
DNA molecules into E. coli has been the method of choice to express a variety
of gene products, because of this bacteria's rapid reproduction and well-
understood genetics. Yet despite the development of many efficient E. coli-
based gene expression systems, the most important concern continues to be
associated with subsequent purification of the product. Recombinant proteins
produced in this manner do not readily cross E. coli's outer membrane, and as
a result, proteins must be purified from the bacterial cytoplasm or
periplasmic space. Purification of proteins from these cellular compartments
can be very difficult. Frequently encountered problems include low product
yields, contamination with potentially toxic cellular material (i.e.,
endotoxin) and the formation of large amounts of partially folded polypeptide
chains in non-active aggregates termed inclusion bodies.
To overcome these problems, the Company has taken advantage of its knowledge
of gram-positive bacterial protein expression and anchoring pathways. This
pathway has evolved to handle the transport of surface proteins that vary
widely in size, structure and function. Modifying the approach used to create
commensal mucosal vaccines, the Company has developed methods which, instead
of anchoring the foreign protein to the surface of the recombinant gram-
positive bacteria, result in it being secreted into the surrounding medium in
a manner which is readily amenable to simple batch purification. The Company
believes the advantages of this approach include the ease and lower cost of
gram-positive bacterial growth, the likelihood that secreted recombinant
proteins will be folded properly, and the ability to purify recombinant
proteins from the culture medium without having to disrupt the bacterial cells
and liberating cellular contaminants. Gram-positive bacteria may be grown
simply in scales from those required for laboratory research up to commercial
mass production.
THE COMPANY'S PRODUCT CANDIDATES AND RESEARCH AND DISCOVERY PROGRAMS
The following table lists the potential indications and current status of
the Company's product candidates and research and discovery programs. A more
detailed description of these product candidates and research and discovery
programs follows this table. The Company's product candidates are subject to
the risks of failure inherent in the development of products based on
innovative technologies. See "Risk Factors--Early Stage of Development;
Absence of Products; No Commercialization of Products Expected in Near
Future."
34
STAGE OF
PRODUCT CANDIDATES/PROGRAM INDICATION DEVELOPMENT*
-------------------------- ---------- ------------
MUCOSAL VACCINES
Streptococcal vaccine Strep throat Pre-clinical
STD vaccines Herpes, HIV, HPV Research
Periodontal vaccine Periodontal disease Pre-clinical
DELIVERY SYSTEM
Mucosal vaccine delivery system Infectious diseases Pre-clinical
ANTI-INFECTIVES
Protease inhibitor Gram-positive bacterial infections Research
PROTEIN EXPRESSION SYSTEM
SPEX Protein production Research
- --------
* "Research" activities include initial research and development related to
specific vaccine or antibiotic compounds or formulations and their delivery.
"Pre-clinical" indicates that the Company is conducting pharmacology
testing, toxicity testing, formulation process development and/or
development of the manufacturing process prior to possible submission of an
IND.
Mucosal Vaccines
Development of the Company's mucosal vaccine candidates involves: (i)
identifying a suitable immunizing antigen from a pathogen; (ii) selecting a
commensal that naturally colonizes the mucosal point of entry for that
pathogen; and (iii) genetically engineering the commensal to express the
antigen on its surface for subsequent delivery to the target population.
Strep Throat Vaccine Candidate. Until the age of 15, many children suffer
recurrent strep throat infections. Up to five percent of ineffectively treated
strep throat cases progress to rheumatic fever, a debilitating heart disease
which worsens with each succeeding streptococcal infection. Since the advent
of penicillin therapy, rheumatic fever in the United States has experienced a
dramatic decline. However, in the last decade, rheumatic fever has experienced
a resurgence in the United States. Part of the reason for this is the latent
presence of this organism in children who do not display symptoms of a sore
throat, and, therefore, remain untreated and at risk for development of
rheumatic fever. Based on data from the Centers for Disease Control and
Prevention, there are seven to 20 million cases of pharyngitis due to group A
streptococcus in the United States each year. There are over 32 million
children in the principal age group targeted by the Company for vaccination.
Worldwide, it is estimated that one percent of all school age children in the
developing world have rheumatic heart disease. Despite the relative ease of
treating strep throat with antibiotics, the specter of antibiotic resistance
is always present. In fact, resistance to erythromycin, the second line
antibiotic in patients allergic to penicillin, has appeared in a large number
of cases.
No vaccine for strep throat has been developed because of the problems
associated with identifying an antigen that is common to the more than 100
different serotypes of group A streptococcus, the bacterium that causes the
disease. The Company has licensed from Rockefeller a proprietary antigen which
is common to most types of group A streptococcus, including types that have
been associated with rheumatic fever. When this antigen was orally
administered to animals, it was shown to provide protection against multiple
types of group A streptococcal infection. Utilizing this antigen, the Company
is developing a mucosal vaccine for strep throat.
The Company's technology expresses the strep throat antigen on the surface
of the commensal, S. gordonii, which lives on the surface of the teeth and
gums. The Company believes that a single oral dose of the vaccine may be
adequate to provide protection. Indeed, investigators at other institutions
have shown that organisms of this type can safely colonize in the human oral
cavity for up to two years. The Company is currently completing pre-clinical
development of its strep throat vaccine candidate. Pre-clinical research in
mice and rabbits has
35
established the ability of this vaccine candidate to colonize and induce both
a local and systemic immune response. The Company is collaborating with the
National Institutes of Health and the University of Maryland Center for
Vaccine Development on the clinical development of this vaccine candidate and
expects to file an IND with the FDA in the fall of 1997.
STD Vaccine Candidates. One of the great challenges in vaccine research
remains the development of effective vaccines to prevent sexually transmitted
viral diseases. The three principal viral pathogens which are transmitted via
this route are Herpes simplex, type 2 ("HSV-2") which causes recurrent genital
ulcers, HIV, the causative agent of AIDS, and human papilloma virus (HPV)
which is linked to both genital warts and cervical carcinoma. To date, a great
deal of effort has been expended, without appreciable success, to develop
effective injectable prophylactic vaccines versus these pathogens. Given that
each of these viruses enters the host through the mucosa, the Company believes
that induction of a vigorous mucosal response to viral antigens may protect
against acquisition of the initial infection. To test this hypothesis, the
Company is expressing known immunodominant antigens from each of these viral
pathogens in its proprietary mucosal vaccine delivery system. These live
recombinant vaccines will be delivered to animals and tested for local and
systemic immune response induction, and whether these responses can block
subsequent viral infections. The Company is collaborating with Chiron on
research toward the development of vaccines against two sexually transmitted
diseases.
Periodontal Vaccine Candidate. Periodontal disease is characterized by acute
soft tissue inflammation and subsequent alveolar bone loss. It is estimated
that this condition afflicts up to 50% of the adult population by the time
they reach age 65. Current treatments include mechanical debridement, tissue
resection and/or antibiotic therapy. It is believed that periodontal disease
is the result of an interaction between the immune system or the host and a
number of oral bacterial pathogens, principally Porphyromonas gingivalis ("P.
gingivalis"). The Company has entered into a research agreement with SUNY
Buffalo to develop a mucosal vaccine to prevent periodontal disease. The
vaccine, as currently constructed, features a surface antigen, fimbrillin,
from P. gingivalis delivered to the oral cavity via the Company's proprietary
mucosal vaccine delivery system. In pre-clinical trials, mucosal immunization
with, or direct delivery of, fimbrillin-derived peptides to the oral cavity of
germ-free rats blocked the ability of P. gingivalis to colonize in the rats
upon subsequent challenge and dramatically reduced associated periodontal
disease and bone loss. Two vaccine candidates are currently being studied in
pre-clinical animal colonization and challenge experiments.
Mucosal Vaccine Delivery System
The Company's commensal vaccine candidates utilize gram-positive bacteria as
vectors for the presentation of antigens. Scientists at Rockefeller have
identified a protein region used by gram-positive bacteria to anchor proteins
to their surfaces. The Company is using proprietary technology licensed from
Rockefeller to fuse antigens from a wide range of infectious organisms, both
viral and bacterial, to the surface protein anchor region of a variety of
commensal organisms. By combining a specific antigen with a specific
commensal, the Company believes that vaccines can be tailored to both the
target pathogen and its mucosal point of entry.
The Company has developed several genetic methods for recombining foreign
sequences into the genome of gram-positive bacteria at a number of non-
essential sites. Various parameters have been tested and optimized to improve
the level of foreign protein expression and its immunogenicity. In pre-
clinical studies, recombinant commensals have been implanted into the oral
cavities of several animal species with no deleterious effects. The introduced
vaccine strains have taken up residence for prolonged periods of time and
induce both a local mucosal (IgA) as well as a systemic immune response (IgG
and T-cell).
Anti-Infectives
More than two million nosocomial infections occur each year. Of these, a
large number are due to the pathogenic gram-positive bacteria. Many of these
bacteria have acquired antibiotic resistance and have become an increasing
problem. The gram-positive bacteria principally involved in these nosocomial
infections include: S. aureus, coagulase-negative staphylococci and
enterococci. S. aureus has been described above. The coagulase-
36
negative staphylococci have become the leading cause of nosocomial bacteremia
and, alarmingly, have shown a higher percentage of methicillin resistant
strains (up to 78%) than S. aureus (up to 22%). The enterococci have shown a
disturbing propensity toward resistance to the antibiotic of last resort,
vancomycin. Even more alarming is the fact that in certain cases where the
last antibiotic of choice to treat a S. aureus or coagulase-negative infection
is vancomycin, some strains of enterococci have evolved that may actually
thrive on vancomycin, rendering the treatment potentially life threatening.
Another important gram-positive organism with an increasing presence of
antibiotic resistance is Streptococcus pneumoniae, an organism responsible for
pneumonia and meningitis, and which is the leading cause of middle ear
infections in children.
Scientists at Rockefeller have determined that many different surface
proteins from a variety of gram-positive bacteria are attached to the
bacterial surface via a common anchoring mechanism. These surface proteins are
responsible for a wide variety of functions essential to the successful
establishment of infection by the organism, including adherence, binding to
serum proteins, resistance to phagocytosis (ingestion and destruction by the
host's cells), cross-signaling between the bacterium and the host's cells, and
various enzymatic processes. The Company has identified an enzyme, a selective
protease, utilized by most gram-positive bacteria to anchor certain proteins
to the bacterial cell wall. The Company will attempt to identify compounds
that will inhibit this protease, thereby blocking the anchoring process and
the ability of the bacteria to initiate or prolong infection. In this process,
the Company is using molecular modeling to identify possible structures of the
anchor region. Once these structures are identified, natural and synthetic
molecules that may inhibit the anchoring process will be screened using an
existing high throughput assay developed by Rockefeller and licensed to the
Company. The Company believes that this approach represents a departure from
conventional antibiotics and therefore may afford a method to circumvent the
resistance mechanisms already established in many gram-positive organisms. The
Company has entered into an agreement with Wyeth-Ayerst to identify and
develop protease inhibitors as novel antibiotics.
SPEX
The Company's proprietary SPEX protein expression uses the protein export
and anchoring pathway of gram-positive bacteria as a means to facilitate the
production and purification of biopharmaceutical proteins. The Company has
developed vectors which allow foreign genes to be inserted into the chromosome
of gram-positive bacteria in a manner such that the encoded protein is
synthesized, transported to the cell surface and secreted into the medium.
This system has been used to produce milligram quantities of soluble
antigenically-authentic protein that can be easily purified from the culture
medium by affinity chromatography. The Company believes this technology can be
extended to a variety of different antigens and enzymes.
MedImmune Technology
The Company has entered into a letter of intent with MedImmune regarding a
technology transfer agreement pursuant to which the Company will acquire all
of MedImmune's rights in gram-negative antibiotic targets, products, screens
and services. Such rights include MedImmune's rights to technology developed
by scientists at Washington University. Research carried out by these
scientists has demonstrated that assembly of type P pili on gram-negative
bacteria requires the participation of both a periplasmic molecular chaperone
and an outer membrane usher. Since the gram-negative pili are the primary
mechanism by which these organisms adhere to and colonize host tissue,
inhibition of their assembly should effectively inhibit disease caused by this
class of organisms. Detailed structural data is available on the molecular
chaperone and scientists at Washington University are developing the same for
the usher protein. This information will be used in concert with molecular
modeling techniques to identify potential structures that will bind to the
conserved residues of the chaperone and usher proteins. Once these structures
are identified, natural and synthetic molecules that inhibit chaperone/usher
function will be screened using high throughput assays developed by scientists
at Washington University. The Company believes that this approach is a
departure from conventional antibiotics and therefore may afford a method to
circumvent the resistance mechanisms already established in many gram-negative
bacteria. There can be no assurance that the Company will enter into a final
agreement with MedImmune, and, therefore, there can be no assurance that the
Company will acquire the rights to the technology described above. See "Risk
Factors--Dependence on Others; Collaborations."
37
COLLABORATIVE RESEARCH AND LICENSES
The Company sponsors research and development activities in laboratories at
Rockefeller, Emory, Oregon State, and SUNY Buffalo and does not maintain its
own research and development facilities. The Company's research is conducted
by its employees and employees of the aforementioned universities. The
Company's two principal research scientists, Dr. Vincent Fischetti, whose
laboratory is at Rockefeller, and Dr. Dennis Hruby, whose laboratory is at
Oregon State, work together to coordinate the Company's research projects. The
majority of the Company's molecular biology and genetic research is conducted
at Oregon State and the bulk of its bacteriology and immunology research is
conducted at Rockefeller. The Company has entered into the following license
agreements and collaborative research arrangements:
Rockefeller University. The Company and Rockefeller have entered into an
exclusive worldwide license and research agreement whereby the Company has
obtained the right and license to make, use and sell mucosal vaccines based on
gram-positive organisms and products for the therapy, prevention and diagnosis
of diseases caused by streptococcus, staphylococcus and other organisms. The
license covers two issued United States patents and one issued European patent
as well as 11 pending United States patent applications and corresponding
foreign patent applications. The issued United States patents expire in 2005
and 2014, respectively. The agreement generally requires the Company to pay
royalties on sales of products developed from the licensed technologies and
fees on revenues from sublicensees, where applicable, and the Company is
responsible for certain milestone payments and for the costs of filing and
prosecuting patent applications. Pursuant to the agreement, the Company has
provided funding to Rockefeller for sponsored research through January 31,
1998, with exclusive license rights to all inventions and discoveries
resulting from this research.
Emory. Emory is a party to the Company's license agreement with Rockefeller
whereby the Company has obtained the right and license to make, use and sell
products for the therapy, prevention and diagnosis of diseases caused by
streptococcus. Because the license relates to one of the pending United States
patent applications covered by the Rockefeller license, the Company has agreed
to reimburse Rockefeller for Emory's patent expenses and Rockefeller will
remit such amounts to Emory. Pursuant to a separate research support agreement
with Emory, the Company is providing funding for sponsored research through
January 31, 1998, with a right of first refusal to acquire exclusive license
rights to all inventions and discoveries resulting from this research.
Oregon State. Oregon State is also a party to the Company's license
agreement with Rockefeller whereby the Company has obtained the right and
license to make, use and sell products for the therapy, prevention and
diagnosis of diseases caused by streptococcus. Because the license relates to
one of the pending United States patent applications covered by the
Rockefeller license, the Company has agreed to reimburse Rockefeller for
Oregon State's patent expenses and Rockefeller will remit such amounts to
Oregon State. Pursuant to a separate research support agreement with Oregon
State, the Company is providing funding for sponsored research through January
31, 1998, with exclusive license rights to all inventions and discoveries
resulting from this research.
National Institutes of Health. The Company has entered into a clinical
trials agreement with the National Institute of Allergy and Infectious
Diseases, National Institutes of Health ("NIH") pursuant to which NIH, with
the cooperation of the Company, will submit an IND for the Company's strep
throat vaccine and conduct a clinical trial of the Company's strep throat
vaccine.
SUNY Buffalo. The Company has entered into a research agreement with SUNY
Buffalo to develop a mucosal vaccine to prevent periodontal disease. Pursuant
to the agreement, the Company is providing funding for sponsored research
through June 30, 1998 and has an exclusive option to license all inventions
and discoveries resulting from this research.
Wyeth-Ayerst. The Company has entered into a collaborative research and
license agreement with Wyeth-Ayerst in connection with the discovery and
development of anti-infectives for the prevention and treatment of gram-
positive bacterial infections. Pursuant to the agreement, Wyeth-Ayerst is
providing funding for a joint research and development program through June
30, 1999 and is responsible for additional milestone payments. Under the terms
of the agreement, the Company could receive up to $18.2 million in research
and milestone
38
payments for products developed from a single compound, or up to $25.5 million
if products are developed from an additional compound. The milestone payments
are contingent upon the Company meeting the milestones set forth in the
agreement, and, accordingly, if the Company is unable to meet such milestones,
the Company will not receive such milestone payments. Wyeth-Ayerst has
exclusive license rights in the field (as defined in the agreement) to any
product resulting from this research and is required to make royalty payments
based on sales of any product developed from the licensed technologies.
Chiron. The Company has entered into a collaborative research agreement with
Chiron regarding research toward the development of vaccines against two
sexually transmitted diseases. The agreement was entered into as of July 1,
1997 and expires on July 1, 1998. Pursuant to the agreement, each company
retains sole rights to any technology invented solely by such company and the
companies will jointly own any technology jointly developed by the companies.
In addition, the Company has entered into a letter of intent with MedImmune
regarding a technology transfer agreement pursuant to which the Company will
acquire all of MedImmune's rights in gram-negative antibiotic targets,
products, screens and services. The Company and MedImmune plan to collaborate
in the development of antibiotics against gram-negative pathogens. The Company
and MedImmune contemplate that upon the execution of the technology transfer
agreement, MedImmune will receive 335,530 shares of Common Stock. There can be
no assurance that the Company will enter into a final agreement with MedImmune
on the terms described above or at all. See "Risk Factors--Dependence on
Others; Collaborations."
MANUFACTURING
The Company does not intend to invest in large scale manufacturing
facilities unless and until its product candidates pass significant
developmental hurdles. The Company believes that all of its existing products
under development can be made using well understood manufacturing methods.
Nevertheless, the Company has no manufacturing experience and it may not be
able to develop reproducible and effective manufacturing processes at a
reasonable cost. In such event, the Company will have to rely on third party
manufacturers whose availability and cost are presently unknown. The Company
plans to contract with third party manufacturers to produce pre-clinical and
clinical lots of its biological products. No assurances can be given that the
Company will establish such relationships or manufacture its product
candidates successfully. See "Risk Factors--Lack of Manufacturing, Marketing
or Sales Capabilities."
MARKETING
The Company currently has no internal marketing and sales resources and
personnel. The Company recognizes the challenges associated with marketing and
sales in the pharmaceutical industry and anticipates undertaking these
activities only for products that address large but focused therapeutic
markets in which a small marketing organization can compete effectively. It
is, however, the Company's present intention to seek marketing partners to
assist it in later stages of regulatory and clinical development, process
scale up, production and marketing. No assurances can be given that the
Company will establish such relationships or market its product candidates
successfully. See "Risk Factors--Lack of Manufacturing, Marketing or Sales
Capabilities."
PATENTS AND PROPRIETARY RIGHTS
Protection of the Company's proprietary compounds and technology is
essential to the Company's business. The Company's policy is to seek, when
appropriate, protection for its lead compounds and certain other proprietary
technology by filing patent applications in the United States and other
countries. The Company has licensed the rights to two issued United States
patents and one issued European patent. The Company has also licensed the
rights to 11 pending United States patent applications as well as
corresponding foreign patent applications. The two issued United States
patents expire in 2005 and 2014, respectively.
The patents and patent applications licensed by the Company relate to all of
the core technology used in the development of the Company's leading product
candidates, including the mucosal vaccine delivery system, the SPEX protein
expression system for producing biopharmaceutical products, the protective
streptococcal antigens and the antibiotic development target, as well as a
variety of early stage research projects. Each of the Company's products
represented by each of the patents is in a very early stage in its development
process.
39
The Company also relies upon trade secret protection for its confidential
and proprietary information. No assurance can be given that other companies
will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or that the Company can meaningfully protect its trade secrets.
The Company requires its employees, consultants, outside scientific
collaborators and sponsored researchers and certain other advisors to enter
into confidentiality agreements with the Company. These agreements will
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with the Company
will be kept confidential and will not be disclosed to third parties except in
specific circumstances. In the case of employees, such agreements will provide
that all inventions conceived by the employee are the exclusive property of
the Company. There can be no assurance, however, that these agreements will
provide meaningful protection or adequate remedies for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
products that may be developed by the Company. The nature and the extent to
which such regulation may apply to the Company will vary depending on the
nature of any such products. Virtually all of the Company's potential products
will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous pre-clinical and clinical testing and other approval procedures by
the FDA and similar health authorities in foreign countries. Various federal
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such products. The process
of obtaining these approvals and the subsequent compliance with appropriate
federal and foreign statutes and regulations requires the expenditure of
substantial resources.
In order to test clinically, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company
must file an IND and receive clearance from the FDA. This application is a
summary of the pre-clinical studies that were conducted to characterize the
drug, including toxicity and safety studies, as well as an in-depth discussion
of the human clinical studies that are being proposed.
The pre-marketing program required for approval of a new drug typically
involves a time-consuming and costly three-phase process. In Phase I, trials
are conducted with a small number of patients to determine the early safety
profile, the pattern of drug distribution and metabolism. In Phase II, trials
are conducted with small groups of patients afflicted with a target disease in
order to determine preliminary efficacy, optimal dosages and expanded evidence
of safety. In Phase III, large scale, multi-center comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data for statistical proof of efficacy and safety required by the FDA
and others.
The FDA closely monitors the progress of each of the three phases of
clinical testing and may, in its discretion, reevaluate, alter, suspend or
terminate the testing based on the data that have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient. Estimates
of the total time required for carrying out such clinical testing vary between
two and ten years. Upon completion of such clinical testing, a company
typically submits a New Drug Application ("NDA") or Product License
Application ("PLA") to the FDA that summarizes the results and observations of
the drug during the clinical testing. Based on its review of the NDA or PLA,
the FDA will decide whether or not to approve the drug. This review process
can be quite lengthy, and approval for the production and marketing of a new
pharmaceutical product can require a number of years and substantial funding,
and there can be no assurance that any approvals will be granted on a timely
basis, if at all.
40
Once the product is approved for sale, FDA regulations govern the production
process and marketing activities, and a post-marketing testing and
surveillance program may be required to monitor continuously a product's usage
and its effects. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained. Other countries in which any products
developed by the Company may be marketed impose a similar regulatory process.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
most of the major pharmaceutical companies, which have financial, technical
and marketing resources significantly greater than those of the Company.
Biotechnology and other pharmaceutical competitors include Cubist
Pharmaceuticals, Inc., Microcide Pharmaceuticals, Inc., Oravax, Inc., Maxim
Pharmaceuticals, Inc., and Vaxcel, Inc. Academic institutions, governmental
agencies and other public and private research organizations are also
conducting research activities and seeking patent protection and may
commercialize products on their own or through joint venture. There can be no
assurance that the Company's competitors will not succeed in developing
products that are more effective or less costly than any which are being
developed by the Company or which would render the Company's technology and
future products obsolete and noncompetitive.
HUMAN RESOURCES AND FACILITIES
The Company currently has six employees. In addition, the Company has a
consulting agreement with Dr. Vincent Fischetti, the principal founding
scientist and Chief Scientific Advisor of the Company and a Professor and Co-
Chairman of the Laboratory of Bacterial Pathogenesis and Immunology and Co-
Director of the Protein Sequence/Biopolymer Facility at Rockefeller. In
addition, the Company and CSO have entered into a consulting agreement under
which CSO has agreed to provide certain business services to the Company,
including business development, licensing, strategic alliances and
administrative support. See "Certain Transactions."
The Company's President and Chief Executive Officer is David de Weese. Dr.
Dennis Hruby is the Company's Vice President of Research. Drs. Fischetti and
Hruby, along with Mr. de Weese, have primary responsibility for directing the
Company's research efforts. Mr. de Weese, along with Dr. Joshua Schein and
Judson Cooper, Executive Vice Presidents of the Company, have primary
responsibility for directing the Company's strategic efforts.
The Company sponsors research and development activities in laboratories at
Rockefeller, Emory, Oregon State and SUNY Buffalo and does not maintain its
own research and development facilities. The Company leases office space at
666 Third Avenue, New York, New York, 10017. See "Risk Factors--Lack of
Research and Development Facilities."
PRODUCT LIABILITY INSURANCE
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of pharmaceutical
products. The Company does not have product liability insurance but intends to
obtain such coverage if and when its product candidates are tested in clinical
trials. There can be no assurance, however, that the Company will be able to
obtain insurance coverage at acceptable costs or in a sufficient amount, if at
all, or that a product liability claim would not adversely affect the
Company's business, operating results or financial condition. See "Risk
Factors--Potential Product Liability and Availability of Insurance."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
41
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, KEY PERSONNEL AND CONSULTANTS
The following table sets forth information concerning each of the directors,
executive officers, key personnel and consultants of the Company.
NAME AGE POSITION
- ---- --- --------
David H. de Weese....... 54 Chairman, President and Chief Executive Officer
Joshua D. Schein, 36 Executive Vice President, Chief Financial Officer,
Ph.D. ................. Secretary and Director
Judson A. Cooper........ 37 Executive Vice President, Director
Donald S. Howard*....... 68 Director
Terence E. Downer....... 58 Director
Dennis E. Hruby, 45 Vice President of Research
Ph.D. .................
Kevin F. Jones, Ph.D. .. 44 Director of Bacterial Research
Vincent A. Fischetti.... 56 Consultant
- --------
* Subject to the consummation of the Offering.
All Directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board,
subject to the provisions of certain employment agreements. See "--Employment
and Consulting Agreements."
David H. de Weese has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since November 1996.
Prior to joining the Company, Mr. de Weese served as a director and a
consultant to Biovector Therapeutics, S.A., a developer of drug delivery
technology based in France, and as an advisor to Paul Capital Partners, L.P.,
a private equity investment manager with whom he maintains a consulting
relationship. From 1993 to 1995, Mr. de Weese was President, Chief Executive
Officer and a Director of M6 Pharmaceuticals, Inc, a biopharmaceutical
company. From 1986 to 1992, Mr. de Weese was the President, Chief Executive
Officer, a Director and a founder of Cygnus Therapeutic Systems (now Cygnus,
Inc.), a developer and manufacturer of transdermal drug delivery systems.
Prior to that, Mr. de Weese co-founded Medical Innovations Corporation, a
medical device business currently a division of Ballard Medical Products,
Inc., and was Chairman of the Board, President and Chief Executive Officer of
Machine Intelligence Corporation, a developer of computer software and
hardware. Mr. de Weese is a director of Bioject Medical Technologies, Inc., a
publicly traded biotechnology company. Mr. de Weese received his M.B.A. from
the Harvard University Graduate School of Business.
Joshua D. Schein, Ph.D. has served as an Executive Vice President of the
Company since December 1996 and Chief Financial Officer, Secretary and a
Director of the Company since December 1995. Dr. Schein also serves as
Executive Vice President and Director of Virologix Corporation, a private
biotechnology company ("Virologix"). Additionally, Dr. Schein serves as Chief
Financial Officer and a Director of Callisto Pharmaceuticals, Inc., a
privately held, development stage, pharmaceutical company ("Callisto"). Dr.
Schein devotes substantial amounts of his time to the Company, Virologix and
Callisto on a substantially equal basis. Dr. Schein has served as a Director
of DepoMed, Inc., a private biotechnology company, since January 1996. From
October 1994 to December 1995, Dr. Schein served as a Vice President of
Investment Banking at Josephthal, Lyon and Ross, Incorporated, an investment
banking firm. From June 1991 to September 1994, Dr. Schein was a Vice
President at D. Blech & Company, Incorporated, a merchant bank that invested
in the biopharmaceutical industry. Dr. Schein received a Ph.D. in neuroscience
from the Albert Einstein College of Medicine and an MBA from the Columbia
Graduate School of Business. Dr. Schein is a principal of CSO Ventures LLC
("CSO"), a privately held limited liability company. See "Certain
Transactions."
Judson A. Cooper has served as Executive Vice President of the Company since
November 1996 and a Director of the Company since December 1995 and served as
President from December 1995 until November
42
1996. Mr. Cooper also serves as Chief Financial Officer and Director of
Virologix. Additionally, Mr. Cooper serves as President and a Director of
Callisto. Mr. Cooper devotes substantial amounts of his time to the Company,
Virologix and Callisto on a substantially equal basis. Mr. Cooper has also
served as a Director of DepoMed, Inc. since November 1995. Mr. Cooper had been
a private investor from September 1993 to December 1995. From 1991 to 1993,
Mr. Cooper served as a Vice President of D. Blech & Company, Incorporated. Mr.
Cooper is a graduate of the Kellogg School of Management. Mr. Cooper is a
principal of CSO. See "Certain Transactions."
Donald S. Howard has agreed to serve as a Director of the Company beginning
on the date of the consummation of the Offering. Mr. Howard has served as a
consultant to a number of financial institutions since 1993. Mr. Howard served
as Executive Vice President and Chief Financial Officer and a Managing
Director of Salomon Brothers from 1988 to 1993. From 1980 to 1988, Mr. Howard
served as Executive Vice President and Chief Financial Officer of Citicorp,
Inc. Prior to that time, Mr. Howard held numerous positions at Citicorp, Inc.
Mr. Howard is currently a director of Green Garden Inc., Consolidated
Purchasing Services and Bank Leumi New York Trust Co.
Terence E. Downer has served as a Director of the Company since July 1,
1997. Mr. Downer served as Vice President, Corporate Development of Janssen
Pharmaceutica, Inc., an affiliate of Johnson & Johnson, from 1991 to June
1997. Mr. Downer has worked in the pharmaceutical industry for Johnson &
Johnson and its affiliates for over 30 years and has held senior positions in
sales, marketing, research and business development. In addition to Janssen
Pharmaceutica, Inc., Mr. Downer was also involved in starting up two other
companies for Johnson & Johnson, Cyclex, Inc. and Critikon, Inc. Mr. Downer is
on the Board of the National Organization of Orthopaedic Nurses and is the New
Jersey Program Chair for the Licensing Executive Society.
Dennis E. Hruby, Ph.D. has served as Vice-President of Research of the
Company since April 1, 1997. From January 1996 through March 1997, Dr. Hruby
served as a senior scientific advisor to the Company. Dr. Hruby is a Professor
of Microbiology at Oregon State University, and from 1990 to 1993 was Director
of the Molecular and Cellular Biology Program and Associate Director of the
Center for Gene Research and Biotechnology. From 1993 to 1995, Dr. Hruby
served as Vice-President of Research for M6 Pharmaceuticals, Inc. Dr. Hruby
specializes in virology and cell biology research, and the use of viral and
bacterial vectors to produce recombinant vaccines. Dr. Hruby has published
more than 100 research, review articles and book chapters. He is a member of
the American Society of Virology, the American Society for Microbiology and a
fellow of the American Academy of Microbiology. Dr. Hruby received a Ph.D. in
microbiology from the University of Colorado Medical Center and a B.S. in
microbiology from Oregon State University.
Kevin F. Jones, Ph.D. has been the Company's Director of Bacterial Research
since January 1996. From 1992 to 1995, Dr. Jones served as Director of
Bacterial Research for M6 Pharmaceuticals, Inc. From 1990 until joining the
Company, Dr. Jones was a Senior Research Scientist at Lederle-Praxis
Biologicals, Inc., a vaccine company and division of American Cyanamid. Dr.
Jones has written numerous articles on the pathogenesis of group A
streptococcal infection. Dr. Jones is currently Adjunct Professor at
Rockefeller. Dr. Jones received a Ph.D. and an M.S. in immunology from Cornell
University.
Vincent A. Fischetti, Ph.D. has served as a consultant to the Company since
January 1996. Dr. Fischetti is a Professor and Co-Chairman of the Laboratory
of Bacterial Pathogenesis and Immunology and Co-Director of the Protein
Sequence/Biopolymer Facility at Rockefeller. Dr. Fischetti specializes in the
research of group A streptococcus and streptococcal diseases. Dr. Fischetti is
the chairman of the Microbial Pathogenesis Division of the American Society of
Microbiology and was recently elected a fellow of the American Academy of
Microbiology. Dr. Fischetti is the editor-in-chief of Infection and Immunity,
is an editor of the Journal of Immunology and serves on the editorial board of
the Journal of Experimental Medicine. Dr. Fischetti has published
approximately 100 research articles and is a contributing author to 60
textbooks. Dr. Fischetti received a Ph.D. in microbiology from New York
University.
43
BOARD OF DIRECTORS
The number of directors on the Board of Directors is determined from time to
time by the Board of Directors and is currently fixed at four. Directors are
elected at each annual meeting of stockholders by the holders of the Common
Stock and hold office until their successors have been duly elected and
qualified or until their resignation, removal from office or death. Officers
of the Company are appointed by and may be removed by the Board of Directors.
Upon the consummation of the Offering, Mr. Howard will become a director and
the Company plans to appoint an additional person not otherwise affiliated
with the Company as a director.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the consummation of the Offering, the Company will form an Audit
Committee and a Compensation Committee. The Audit Committee will be
responsible for reviewing audit functions, including accounting and financial
reporting practices of the Company, the adequacy of the Company's system of
internal accounting control, the quality and integrity of the Company's
financial statements and relations with its independent accountants. It is
anticipated that the Audit Committee will consist of two non-employee
directors. The Compensation Committee will be responsible for establishing the
compensation of the Company's directors, officers and employees, including
salaries, bonuses, commission, and benefit plans, administering the Plan, and
other forms of or matters relating to compensation. It is anticipated that the
Compensation Committee will consist of two non-employee directors.
SCIENTIFIC ADVISORS
The Company's Scientific Advisory Board currently consists of advisors to
the Company with experience in microbiology, immunology, protein chemistry and
infectious disease. At the Company's request, the scientific advisors review
and evaluate the Company's research programs and advise the Company with
respect to technical matters in fields in which the Company is involved.
The table below sets forth the name and current position of each member of
the Scientific Advisory Board:
NAME POSITION
---- --------
Vincent A. Fischetti, Chief Scientific Advisor; Professor and Co-Chairman
Ph.D..................... of the Laboratory of Bacterial Pathogenesis and
Immunology and Co-Director of the Protein
Sequence/Biopolymer Facility at Rockefeller
Richard M. Krause, Ph.D... Advisor; Senior Scientific Advisor, Fogarty
International Center
Robert J. Genco, Ph.D..... Advisor; Distinguished Professor and Chair of Oral
Biology, State University of New York at Buffalo
Scott Hultgren, Ph.D...... Advisor; Associate Professor of Molecular
Microbiology, Washington University
Each of the scientific advisors are employed by other entities and may have
consulting agreements with entities other than the Company. The Company has
entered into written agreements with each of its scientific advisors. The
terms of such agreements are included in the description of each advisor's
background set forth below.
Vincent A. Fischetti, Ph.D. has served as Chief Scientific Advisor and a
consultant to the Company since January 1996 and is Chairman of the Scientific
Advisory Board. Dr. Fischetti receives an annual consulting fee of $75,000.
See "--Directors, Executive Officers, Key Personnel and Consultants" and "--
Employment and Consulting Agreements."
Richard M. Krause, Ph.D. has served as an advisor to the Company since June
1997. Dr. Krause spent over twenty years on the faculty of Rockefeller
University working on the immune response to streptococcal infections. From
1975 to 1984, Dr. Krause served as the Director of the National Institute of
Allergy and Infectious Disease at the National Institutes of Health where he
directed efforts to combat emerging pathogens.
44
From 1984 to 1989, Dr. Krause was the Dean of the School of Medicine at Emory
University. From 1989 to the present, Dr. Krause has served as a Senior
Scientific Advisor at the Fogarty International Center. During his career, Dr.
Krause has published numerous research papers and several books. In
recognition of his pioneering work, Dr. Krause was elected to the National
Academy of Sciences in 1977. In 1980 he received from President Sadat the
Republic of Egypt Order of Gumhuria Award, in 1985 he received the Robert Koch
Medal in Gold and in 1997 he received the Order of Merit from the President of
the Federal Republic of Germany. Dr. Krause receives an annual advisory fee of
$10,000 and received warrants to purchase 5,000 shares of Common Stock at the
initial offering price per share (or $5.00 per share if the Offering is not
completed by November 1, 1997).
Robert J. Genco, Ph.D. has served as an advisor to the Company since May
1997. Dr. Genco has worked for over two decades on laboratory and clinical
studies which have helped in understanding the causes, prevention and
treatment of oral diseases including caries and periodontal disease. Dr. Genco
is active in many professional organizations including the American Society of
Microbiology, the American Society of Immunology, the International and
American Association for Dental Research, the American Dental Association and
the American Academy of Periodontology. Dr. Genco is a member of the Institute
of Medicine and was awarded the Gold Medal for Excellence in Research by the
American Dental Association, as well as the Gold Medal Award from the American
Academy of Periodontology. Dr. Genco has published over 260 articles
describing his research and edited several books including Contemporary
Periodontics. Dr. Genco is currently Editor of the Journal of Periodontology
and serves on the editorial board of several other journals. Dr. Genco
receives an annual advisory fee of $10,000 and received warrants to purchase
5,000 shares of Common Stock at the initial offering price per share (or $5.00
per share if the Offering is not completed by November 1, 1997).
Scott Hultgren, Ph.D. has served as an advisor to the Company since July
1997. For the past decade Dr. Hultgren has conducted pioneering research aimed
at elucidating the mechanisms by which type P pili are exported and assembled
on the surface of gram-negative bacteria. As a result of his efforts the
genetics and biochemistry of this process are now well-defined. Dr. Hultgren
has published more than 50 research publications and numerous book chapters on
these topics. Dr. Hultgren is a member of the American Society for
Microbiology, the American Association for the Advancement of Science, The
Protein Society, the Erlanger Society, and is a past recipient of a Markey
Young Investigator Faculty Award. Dr. Hultgren receives an annual consulting
fee of $30,000 and received warrants to purchase 5,000 shares of Common Stock
at the initial offering price per share (or $5.00 per share if the Offering is
not completed by November 1, 1997). See "--Employment and Consulting
Agreements."
45
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
and long-term compensation paid by the Company to the Chief Executive Officer
and the other executive officers of the Company (the "Named Executive
Officers") whose 1996 compensation exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION THROUGH 12/31/96 LONG TERM COMPENSATION
------------------------------------------------ -------------------------
STOCK
UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS/ ALL OTHER
POSITION YEAR SALARY BONUSES COMPENSATION WARRANTS COMPENSATION
------------------ -------- ------------ -------- ------------- ---------- ------------
David H. de Weese....... 1996 $ 21,635(1) -- -- (5) 477,683(2) --
Chairman, President and
Chief Executive Officer
Joshua D. Schein, 1996 $ 153,116(3) -- -- (5) 16,667 --
Ph.D. .................
Executive Vice
President, Chief
Financial Officer and
Director
Judson A. Cooper........ 1996 $ 153,116(4) -- -- (5) 16,667 --
Executive Vice
President and Director
- --------
(1) Mr. de Weese became Chairman, President and Chief Executive Officer of the
Company in November 1996. Mr. de Weese's annual salary is $225,000. See
"--Employment and Consulting Agreements."
(2) Includes the 461,016 de Weese Warrants and options to purchase 16,667
shares of Common Stock held by Mr. de Weese. See "--Employment and
Consulting Agreements."
(3) Dr. Schein currently receives an annual salary of $ 150,000. This amount
does not include Dr. Schein's share ($40,000) of payments made to CSO. See
"Certain Transactions."
(4) Mr. Cooper currently receives an annual salary of $150,000. This amount
does not include Mr. Cooper's share ($40,000) of payments made to CSO. See
"Certain Transactions."
(5) Aggregate amount does not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for the named officer.
The following table sets forth certain information concerning all stock
option grants to the Named Executive Officers during the year ended December
31, 1996.
OPTION GRANTS
COMMON STOCK % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE FAIR VALUE EXPIRATION
NAME OPTIONS GRANTED(1) TO EMPLOYEES PRICE PER SHARE AT DATE OF GRANT DATE
---- ------------------ --------------- --------------- ---------------- ----------
David H. de Weese (2)... 16,667 33.3% $3.00 $3.50 11/18/06
Joshua D. Schein (3).... 16,667 33.3% $1.50 $1.50 1/1/01
Judson A. Cooper (3).... 16,667 33.3% $1.50 $1.50 1/1/01
- --------
(1) All options were granted pursuant to the Plan.
(2) The options were granted on November 18, 1996.
(3) The options were granted on January 1, 1996.
The following table sets forth certain information concerning option
exercises and option holdings under the Plan as of December 31, 1996 with
respect to each of the Named Executive Officers.
46
AGGREGATED OPTION EXERCISES AND VALUES AS OF 12/31/96
NUMBER OF SHARES
OF STOCK UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
David H. deWeese(2)..... -- -- 16,667 -- $33,334 --
Joshua D. Schein, Ph.D.. -- -- 16,667 -- $58,335 --
Judson A. Cooper........ -- -- 16,667 -- $58,335 --
- --------
(1) Based upon the initial public offering price of $5.00 per share.
(2) Excludes the 461,016 de Weese Warrants exercisable at $3.00 per share.
EMPLOYMENT AND CONSULTING AGREEMENTS
David H. de Weese, President and Chief Executive Officer of the Company, has
an employment agreement with the Company which expires in November 1999 and is
cancelable by the Company only for cause, as defined in the agreement. Mr. de
Weese currently receives an annual base salary of $225,000 and 16,667 stock
options per year, exercisable at the fair market value on the date of grant,
and is eligible to receive additional stock options and bonuses at the
discretion of the Board of Directors. In addition, Mr. de Weese will receive a
cash payment equal to 1.5% of the total consideration received by the Company
in a transaction resulting in a change of ownership of at least 50% of the
outstanding Common Stock of the Company. The consummation of the Offering will
not result in a change of ownership under the terms of the agreement. In
connection with Mr. de Weese's employment agreement, Mr. de Weese received
warrants to purchase 461,016 shares of Common Stock at $3.00 per share.
Warrants to purchase 25% of such shares are currently exercisable and the
remaining warrants become exercisable on a pro rata basis on the first, second
and third anniversaries of the agreement.
Dr. Joshua Schein, an Executive Vice President and Chief Financial Officer
of the Company, has an employment agreement with the Company which expires in
December 1998 and is cancelable by the Company only for cause, as defined in
the agreement. Dr. Schein currently receives an annual base salary of $150,000
and 16,667 stock options per year, exercisable at the fair market value on the
date of grant, and is eligible to receive additional stock options and bonuses
at the discretion of the Board of Directors. In addition, Dr. Schein will
receive a cash payment equal to 1.5% of the total consideration received by
the Company in a transaction resulting in a change of ownership of at least
50% of the outstanding Common Stock of the Company. The consummation of the
Offering will not result in a change of ownership under the terms of the
agreement.
Judson Cooper, an Executive Vice President of the Company, has an employment
agreement with the Company which expires in December 1998 and is cancelable by
the Company only for cause, as defined in the agreement. Mr. Cooper currently
receives an annual base salary of $150,000 and 16,667 stock options per year,
exercisable at the fair market value on the date of grant, and is eligible to
receive additional stock options and bonuses at the discretion of the Board of
Directors. In addition, Mr. Cooper will receive a cash payment equal to 1.5%
of the total consideration received by the Company in a transaction resulting
in a change of ownership of at least 50% of the outstanding Common Stock of
the Company. The consummation of the Offering will not result in a change of
ownership under the terms of the agreement.
Dr. Dennis Hruby, Vice President of Research of the Company, has an
employment agreement with the Company which expires April 1, 1998, but is
automatically renewed each year unless either party notifies the other of its
intention not to renew. Dr. Hruby currently receives an annual base salary of
$85,000, and in April 1997 received options to purchase 10,000 shares of
Common Stock at the initial offering price (or $5.00 if the Offering is not
completed by November 1, 1997). Dr. Hruby is eligible to receive additional
stock options and bonuses at the discretion of the Board of Directors.
47
Dr. Kevin F. Jones, Director of Bacterial Research of the Company, has an
employment agreement with the Company which expires in December 1997 and is
cancelable by the Company only for cause, as defined in the agreement. Dr.
Jones currently receives an annual base salary of $90,000 and is eligible to
receive additional stock options and bonuses at the discretion of the Board of
Directors.
Dr. Vincent A. Fischetti, the Chief Scientific Advisor of the Company, has
entered into a consulting agreement with the Company under which Dr. Fischetti
has agreed to provide certain research and development services to the
Company. Pursuant to the terms of the agreement, Dr. Fischetti will receive an
annual fee of $75,000. The agreement expires December 31, 1998 and is
cancelable by the Company only for cause as defined in the agreement.
Dr. Scott Hultgren, a Scientific Advisor of the Company since July 1997, has
entered into a consulting agreement with the Company under which Dr. Hultgren
has agreed to provide certain research and development services to the
Company. Pursuant to the terms of the agreement, Dr. Hultgren receives an
annual fee of $30,000. The agreement expires in July 1998, but may be extended
for up to four additional one year terms by mutual agreement. Dr. Hultgren
also received warrants to purchase 5,000 shares of Common Stock at the initial
offering price per share (or $5.00 per share if the Offering is not completed
by November 1, 1997).
1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
As of January 1, 1996, the Company adopted its 1996 Incentive and Non-
Qualified Stock Option Plan (the "Plan"), pursuant to which stock options may
be granted to key employees, consultants and outside directors.
Following the completion of the Offering, the Plan will be administered by a
committee (the "Committee") comprised of disinterested directors. The
Committee will determine persons to be granted stock options, the amount of
stock options to be granted to each such person, and the terms and conditions
of any stock options as permitted under the Plan. The members of the Committee
have not yet been appointed.
Both Incentive Options and Nonqualified Options may be granted under the
Plan. An Incentive Option is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Any Incentive Option granted under the Plan will have an
exercise price of not less than 100% of the fair market value of the shares on
the date on which such option is granted. With respect to an Incentive Option
granted to an employee who owns more than 10% of the total combined voting
stock of the Company or of any parent or Subsidiary of the Company, the
exercise price for such option must be at least 110% of the fair market value
of the shares subject to the option on the date the option is granted. A
Nonqualified Option (i.e., an option to purchase Common Stock that does not
meet the Code's requirements for Incentive Options) must have an exercise
price of at least the fair market value of the stock at the date of grant.
The Plan provides for the granting of options to purchase 333,333 shares of
Common Stock, of which 33,334 options are outstanding at an exercise price of
$1.50 per share, 16,667 options are outstanding at an exercise price of $3.00
per share and 10,000 options are outstanding at an exercise price per share
equal to the initial offering price (or $5.00 if the Offering is not completed
by November 1, 1997).
48
PRINCIPAL STOCKHOLDERS
The table below sets forth information as of the date of this Prospectus
and, as adjusted, assumes the sale of the Common Stock offered pursuant to
this Prospectus. The table also assumes, with respect to each individual
stockholder, the exercise of all warrants, options or conversion of all
convertible securities held by such stockholder. It does not assume the
exercise or conversion of securities held by any other holder of securities.
The table is based on information obtained from the persons named below with
respect to the beneficial ownership of shares of Common Stock by (i) each
person known by the Company to be the owner of more than 5% of the aggregate
outstanding shares of Common Stock, (ii) each Named Executive Officer and
director and (iii) all officers and directors as a group.
PERCENTAGE OF
OUTSTANDING SHARES
AMOUNT AND OWNED
NATURE OF -----------------------
NAMES AND ADDRESSES OF BENEFICIAL PRIOR TO AFTER
BENEFICIAL OWNER(1) OWNERSHIP OFFERING OFFERING(2)(3)
---------------------- ---------- -------- --------------
David H. de Weese(4)....................... 477,683 12.4% 7.5%
Judson Cooper(5)........................... 477,683 14.1% 8.1%
Joshua D. Schein, Ph.D.(6)................. 477,683 14.1% 8.1%
Steven M. Oliveira(7)...................... 461,016 13.7% 7.9%
Richard B. Stone(8)........................ 414,915 12.3% 7.1%
135 East 57th St., 11th FL
New York, NY 10022
Vincent Fischetti, Ph.D.(9)................ 305,938 8.7% 5.1%
Nathan Low(10)............................. 179,436 5.3% 3.1%
135 East 57th St., 11th FL
New York, NY 10022
Terence E. Downer(11)...................... 10,000 * *
All Officers and Directors as a Group (five
persons)................................... 1,503,049 38.6% 23.5%
- --------
* Less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise indicated the address of each beneficial owner identified
is 666 Third Avenue, New York, NY 10017. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Excludes (i) 375,000 shares of Common Stock issuable by the Company upon
exercise of the Underwriters' Over-allotment Option in full; (ii) 250,000
shares of Common Stock reserved for issuance upon exercise of the
Representatives' Warrants; (iii) 333,333 shares of Common Stock reserved
for issuance under the Plan, pursuant to which options to purchase 60,001
of such reserved shares have been granted; and (iv) 746,016 shares of
Common Stock issuable upon the exercise of the de Weese, Fischetti,
Directors/Advisors Warrants and Bridge Warrants.
(3) Does not include the MedImmune Shares. There can be no assurance that the
Company will enter into a final agreement with MedImmune on the terms
described herein or at all. See "Risk Factors--Dependence on Others;
Collaborations."
(4) Includes shares underlying the 461,016 de Weese Warrants and 16,667
options held by Mr. de Weese.
(5) Includes shares underlying 16,667 options held by Mr. Cooper.
(6) Includes shares underlying 16,667 options held by Dr. Schein.
(7) Mr. Oliveira is a member of CSO. Mr. Oliviera is also a registered
representative of Hampshire Securities Corporation, which is anticipated
to participate in the distribution of the Securities in this Offering. See
"Certain Transactions" and "Underwriting."
(8) Mr. Stone is a managing director of Sunrise, one of the Underwriters. See
"Underwriting."
(9) Includes shares underlying the 150,000 Fischetti Warrants.
(10) Mr. Low is a principal of Sunrise, one of the Underwriters. See
"Underwriting."
(11) Consists of shares underlying warrants held by Mr. Downer.
49
CERTAIN TRANSACTIONS
The Company and CSO have entered into a consulting agreement under which CSO
has agreed to provide certain business services to the Company, including
business development, licensing, strategic alliances and administrative
support. Pursuant to the terms of the agreement, CSO receives an annual fee of
$120,000 and will be reimbursed for certain expenses. The agreement expires on
January 15, 1998 and is cancelable by the Company only for cause as defined in
the agreement. Mr. Cooper, Dr. Schein and Steven Oliveira are the members of
CSO.
In March 1996, Dr. Fischetti and the Company entered into an agreement
pursuant to which Dr. Fischetti was to receive options to purchase up to
150,000 shares of Common Stock upon the completion of collaborative agreements
with certain pharmaceutical companies. On September 15, 1996, such agreement
was cancelled and Dr. Fischetti received warrants to purchase 150,000 shares
of Common Stock at $1.50 per share as compensation for introducing the Company
to certain potential collaborative pharmaceutical companies.
The Company believes that the terms of the transactions described above were
no less favorable than the Company could have obtained from unaffiliated third
parties. The Company has adopted a policy, effective following the
consummation of this Offering, that all future transactions between the
Company and its officers, directors and affiliates must (i) be approved by a
majority of those members of the Company's Board of Directors that are not
parties, directly or indirectly through affiliates, to such transactions and
(ii) be on terms no less favorable to the Company than could be obtained from
unrelated third parties.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.0001 per share, and 10,000,000 shares of Preferred Stock, par value
$.0001 per share. As of the date of this Prospectus, there are 3,367,182
shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
The following summary description of the Company's Common Stock and
Preferred Stock is qualified in its entirety by reference to the Articles and
Bylaws, copies of which are included as exhibits to the Registration Statement
of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of any outstanding Preferred Stock. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the prior rights of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this Offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action of the
stockholders of the Company, to issue up to an aggregate of 10,000,000 shares
of Preferred Stock in one or more series and to fix or alter the
50
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series.
The Board of Directors, without stockholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the voting
power of holders of Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
TRANSFER AGENT
The Company's transfer agent and registrar for the Common Stock is American
Stock Transfer & Trust Company.
INDEMNIFICATION
The Certificate of Incorporation (the "Certificate") of the Company provides
that, to the fullest extent permitted by applicable law, as amended from time
to time, the Company will indemnify any person who was or is a party or is
threatened to be made a party to an action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was director, officer, employee or agent of the Company or serves
or served any other enterprise at the request of the Company.
In addition, the Certificate provides that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary
damages for breach of the director's fiduciary duty. However, the Certificate
does not eliminate or limit the liability of a director for any of the
following reasons: (i) a breach of the director's duty of loyalty to the
Company or its stockholders; (ii) acts or omissions not in good faith or that
involve intentional misconduct or knowing violation of law; or (iii) a
transaction from which the director derived an improper personal benefit.
The Company will purchase and maintain Directors' and Officers' Insurance as
soon as the Board of Directors determines practicable, in amounts which they
consider appropriate, insuring the directors against any liability arising out
of the director's status as a director of the Company regardless of whether
the Company has the power to indemnify the director against such liability
under applicable law.
The Company has been advised that it is the position of the Commission that
insofar as the foregoing provisions may be invoked to disclaim liability for
damages arising under the Securities Act, such provisions are against public
policy as expressed in the Securities Act and are, therefore, unenforceable.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
In addition, certain provisions of the Company's Certificate and Bylaws
summarized in the following paragraphs may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
Special Meeting of Stockholders
The Company's Bylaws provide that special meetings of stockholders of the
Company may be called only by the President of the Company, the Board of
Directors or holders of not less than 10% of the votes entitled to be cast at
the special meeting.
51
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions, poison
pills and employee benefit plans. The existence of authorized but unissued and
unreserved Common Stock and Preferred Stock may enable the Board of Directors
to issue shares to persons friendly to current management which could render
more difficult or discourage an attempt to obtain control of the Company by
means of a proxy contest, tender, offer, merger or otherwise, and thereby
protect the continuity of the Company's management.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,867,182 shares of Common Stock, without giving effect to (a) shares of
Common Stock issuable upon exercise of (i) the Underwriters' Over-allotment
Option, (ii) the Representatives' Warrants, (iii) options granted under the
Plan, (iv) the de Weese Warrants, (v) the Fischetti Warrants, (vi) the
Directors/Advisors Warrants or (vii) the Bridge Warrants or (b) the MedImmune
Shares. There can be no assurance that the Company will enter into a final
agreement with MedImmune on the terms described herein or at all. See "Risk
Factors--Dependence on Others; Collaborations." Of such outstanding shares of
Common Stock, all the shares to be sold by the Company in this Offering will
be freely tradeable without restriction or further registration under the
Securities Act, except for any shares held by "affiliates" of the Company
within the meaning of the Securities Act which shares will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act. In
addition, the estimated 100,000 shares of Common Stock issuable upon the
exercise of the Bridge Warrants, all of which also are being registered under
the Securities Act pursuant to the registration statement of which this
Prospectus constitutes a part, will be freely transferable under the
Securities Act, other than those shares held by affiliates of the Company. See
"Plan of Operation--Bridge Financing."
The remaining 3,367,182 Restricted Shares were issued by the Company in
private transactions in reliance upon one or more exemptions contained in the
Securities Act. The 1,288,012 Private Shares were issued in connection with
two private placement transactions completed in March and September 1996 and
the 2,079,170 Founders' Shares were issued to the founders of the Company in
December 1995. The Restricted Shares are deemed to be "restricted securities"
within the meaning of Rule 144 promulgated pursuant to the Securities Act and
may be publicly sold only if registered under the Securities Act or sold
pursuant to exemptions therefrom. Because the Founders' Shares and 1,038,008
of the Private Shares acquired in the March 1996 private placement will have
been held for more than one year as of the date of this Prospectus, such
shares will be eligible for public sale in accordance with the requirements of
Rule 144, as described below. In addition, the remaining 250,004 of the
Private Shares will be eligible for public sale in September 1997. However,
certain holders of the Private Shares and the holders of the Founders' Shares
have agreed with Sunrise not to sell or otherwise dispose of such shares for a
period of six months and 24 months, respectively, after the date of the
consummation of the Offering.
In general, under Rule 144, as amended, subject to the satisfaction of
certain other conditions, a person, including an affiliate of the Company (or
persons whose shares are aggregated with an affiliate), who has owned
restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of one per cent of the total number of outstanding
shares of the same class or, if the common stock is quoted on Nasdaq, the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least three
months immediately preceding the sale and who has beneficially owned shares of
the Company for at least two years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the Plan,
thereby permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. The Company has reserved
up to 333,333 shares of
52
Common Stock for issuance under the Plan. As of the date of this Prospectus,
options to purchase 60,001 of such reserved shares of Common Stock were
outstanding under the Plan. See "Management--1996 Incentive and Non-Qualified
Stock Option Plan."
Prior to this Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that sales of
the Common Stock will have on the market price of such securities from time to
time. Sales of substantial amounts of the Company's securities in the public
market could have a significant adverse effect on prevailing market prices and
could impair the Company's future ability to raise capital through the sale of
its equity securities. See "Risk Factors--Shares Eligible for Future Sale."
UNDERWRITING
The Underwriters below have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the
Company the number of shares of Common Stock set forth below opposite their
respective names:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Sunrise Securities Corp.......................................... 1,900,000
M.H. Meyerson & Co., Inc. ....................................... 600,000
---------
Total.......................................................... 2,500,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock offered hereby if any are purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock initially at the public offering price set forth on the
cover page of the Prospectus and that the Underwriters may allow to selected
dealers a concession of $0.25 per share. After the public offering, the
offering price and other selling terms may be changed by the Underwriters. The
Common Stock has been approved for quotation on Nasdaq.
The Company has granted to the Underwriters a 30-day Underwriters' Over-
allotment Option to purchase from the Company up to an aggregate of 375,000
additional shares of Common Stock exercisable at the initial public offering
price less the underwriting discount. If the Underwriters exercise such Over-
allotment Option, then each of the Underwriters will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of shares of Common Stock to be purchased by it as shown
in the above table bears to the 2,500,000 shares of Common Stock offered
hereby. The Underwriters may exercise such Over-allotment Option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby.
The Underwriting Agreement provides further that Sunrise will receive from
the Company a non-accountable expense allowance of three per cent of the gross
proceeds of the Offering, of which $45,000 has been paid by the Company to
date. The Company has also agreed to pay all expenses in connection with
qualifying the shares of Common Stock offered hereby for sale under the laws
of such states as Sunrise may designate, including expenses of counsel
retained for such purpose by Sunrise.
The Company has agreed to sell to the Representatives, for nominal
consideration, the Representatives' Warrants to purchase up to 250,000 shares
of Common Stock. The Representatives' Warrants will be nonexercisable for one
year after the date of this Prospectus. Thereafter, for a period of four
years, the Representatives' Warrants will be exercisable at an amount equal to
165% of the offering price of the Common Stock sold in this Offering. The
Representatives' Warrants are not transferable for a period of one year after
the date of this Prospectus, except to officers and partners of the
Representatives, members of the selling group and their officers and partners.
The Company has also granted certain demand and "piggyback" registration
rights to the holders of the Representatives' Warrants.
53
For the life of the Representatives' Warrants, the holders thereof are
given, at a nominal cost, the opportunity to profit from a rise in the market
price of the Common Stock with a resulting dilution in the interest of other
stockholders. Further, such holders may be expected to exercise the
Representatives' Warrants at a time the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in
the Representatives' Warrants.
Nathan Low, President of Sunrise, beneficially owns an aggregate of 179,436
shares of Common Stock (representing 5.3% of the outstanding Common Stock) of
the Company. Richard Stone, a managing director of Sunrise, beneficially owns
an aggregate of 414,915 shares of Common Stock (representing 12.3% of the
outstanding Common Stock) of the Company. In addition, Steven Oliveira, a
registered representative of Hampshire Securities Corporation, which is
anticipated to participate in the distribution of the Securities in this
Offering, beneficially owns an aggregate of 461,016 shares of Common Stock
(representing 13.7% of the outstanding Common Stock). As a result, this
Offering is being conducted in accordance with the applicable provisions of
Rule 2720 of the NASD Rules of Conduct. Accordingly, the initial public
offering price can be no higher than that recommended by a "qualified
independent underwriter" meeting certain standards. Loeb Partners Corporation
served as qualified independent underwriter in connection with this Offering.
Loeb Partners Corporation has assumed the responsibilities of acting as
qualified independent underwriter in pricing the Offering, has performed due
diligence with respect to the information contained herein and has
participated in preparing the Registration Statement. In its role as qualified
independent underwriter, Loeb Partners Corporation will receive an aggregate
fee from the Underwriters of $25,000, $12,500 of which has been paid and
$12,500 of which is to be paid upon consummation of the Offering. In addition,
Loeb Partners Corporation will be reimbursed by the Underwriters for up to
$5,000 for certain expenses incurred in connection with its services,
including its independent counsel.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against liabilities in connection with the
Offering, including liabilities under the Securities Act.
The initial public offering price of the shares of Common Stock offered
hereby has been determined by negotiation between the Company and the
Underwriters, and within the parameters set forth above, and does not
necessarily bear any direct relationship to the Company's assets, earnings,
book value per share or other generally accepted criteria of value. Factors
considered in determining the offering price of the shares of Common Stock
included the business in which the Company is engaged, the Company's financial
condition, an assessment of the Company's management, the general condition of
the securities markets and the demand for similar securities of comparable
companies.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include stabilizing
transactions and purchases to cover short positions created in connection with
the Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the Common Stock sold in
the Offering for their account may be reclaimed if such shares are repurchased
by the Underwriters in stabilizing or covering transactions. These activities
may stabilize, maintain or otherwise affect the market price of the Common
Stock which may be higher than the price that might otherwise prevail in the
open market. The Company and the Underwriters make no representation or
prediction as to the discretion or magnitude of any effect that the
transactions described above may have on the price of the Common Stock.
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy
of the Underwriting Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the securities offered by this Prospectus will be passed
upon for the Company by Eilenberg & Zivian, New York, New York. Eilenberg &
Zivian owns 4,668 shares of Common Stock and has from time to time represented
CSO and its members. Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York,
New York, has acted as counsel to the Underwriters with respect to certain
legal matters related to this Offering.
54
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996,
for the period from inception (December 28, 1995) through December 31, 1995,
for the year ended December 31, 1996, and for the period from inception
through December 31, 1996 included in this Prospectus have been so included in
reliance on the report (which contains an explanatory paragraph relating to
the Company's ability to continue as a going concern as described in Note 1 to
such financial statements) of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Securities and Exchange Commission with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto: certain portions
have been omitted pursuant to rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, however all material terms of
such contract or document are reflected in this Prospectus. In each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge, at the Public
Reference Facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, 1400 Citicorp Center, 500 West Madison, Chicago,
Illinois 60661; and 7 World Trade Center, New York, New York 10048 and copies
of all or any part thereof may be obtained upon payment of the fees prescribed
by the Commission. Electronic registration statements made through the
Electronic Data Gathering, Analysis and Retrieval System are publicly
available through the Commissions's World Wide Web site at http://www.sec.gov.
55
GLOSSARY
ANTIBIOTIC. A substance, such as penicillin or streptomycin, produced by or
derived from certain fungi, bacteria, and other organisms, that can destroy or
inhibit the growth of other microorganisms. Antibiotics are widely used in the
prevention and treatment of infectious diseases.
ANTIGEN. A substance that when introduced into the body stimulates the
production of an antibody. Antigens include toxins, bacteria, foreign blood
cells, and the cells of transplanted organs.
COMMENSAL. An organism participating in a symbiotic relationship in which
one species derives some benefit while the other is unaffected.
EFFECTOR. A small molecule that when bound to the allosteric site of an
enzyme causes either a decrease or an increase in the activity of the enzyme.
ENTEROCOCCUS. A usually nonpathogenic streptococcus that inhabits the
intestine.
ENZYME. Any of numerous proteins or conjugated proteins produced by living
organisms and functioning as biochemical catalysts.
FLUOROQUINOLONE. Chemical analogs of nalidixic acid, fluoroquinolones exert
their anti-microbial activity by inhibition of bacterial DNA gyrase (involved
in DNA coiling) and, generally, have a wide spectrum of antibiotic activity.
HUMORAL IMMUNITY. The component of the immune response involving the
transformation of B-lymphocytes into plasma cells that produce and secrete
antibodies to a specific antigen.
IMMUNE RESPONSE. An integrated bodily response to an antigen, especially one
mediated by lymphocytes and involving recognition of antigens by specific
antibodies or previously sensitized lymphocytes.
IMMUNE SYSTEM. The integrated body system of organs, tissues, cells, and
cell products such as antibodies that differentiates self from nonself and
neutralizes potentially pathogenic organisms or substances.
IMMUNOGLOBULIN. Any of a group of large glycoproteins secreted by plasma
cells in vertebrates that function as antibodies in the immune response by
binding the specific antigens. Immunoglobulins are found along the respiratory
and intestinal tracts, on mucosal surfaces, and in milk, saliva, tears, and
blood serum.
IMMUNOSUPPRESSION. Suppression of the immune response, as by drugs or
radiation, in order to prevent the rejection of grafts or transplants or
control autoimmune diseases. Also called immunodepression.
LACTOFERRIN. An iron-binding glycoprotein found in mucosal secretions and
blood neutrophils, which has antimicrobial activity.
LYMPHOCYTE. Any of the nearly colorless cells formed in lymphoid tissue, as
in the lymph nodes, spleen, thymus, and tonsils, constituting between 22 and
28 percent of all white blood cells in the blood of a normal adult human
being. Lymphocytes function in the development of immunity and include two
specific types, B cells and T cells.
LYSOZYME. An enzyme occurring naturally in egg white, human tears, saliva,
and other body fluids, capable of destroying the cell walls of certain
bacteria and thereby acting as a mild antiseptic.
METHICILLIN. A synthetic antibiotic, C\\17\\H\\19\\N\\2\\O\\6\\NaS, related to
penicillin and most commonly used in treatment of infections caused by
penicillinase-producing staphylococci.
56
MUCOUS MEMBRANE. A membrane lining all body passages that communicate with
the air, such as the respiratory and alimentary tracts, and having cells and
associated glands that secrete mucus.
PATHOGEN. An agent that causes disease, especially a living microorganism
such as a bacterium or fungus.
PENICILLIN. Any of a group of broad-spectrum antibiotic drugs obtained from
penicillium molds or produced synthetically, most active against gram-positive
bacteria and used in the treatment of various infections and diseases.
PEROXIDASE. Any of a group of enzymes that occur especially in plant cells
and catalyze the oxidation of a substance by a peroxide.
PHARYNGITIS. Inflammation of the pharynx, the section of the alimentary
canal that extends from the mouth and nasal cavities to the larynx, where it
becomes continuous with the esophagus.
RHEUMATIC FEVER. A severe infectious disease occurring chiefly in children,
characterized by fever and painful inflammation of the joints and frequently
resulting in permanent damage to the valves of the heart.
SEROTYPE. A group of closely related microorganisms distinguished by a
characteristic set of antigens.
STREPTOCOCCUS. A round to ovoid, gram-positive, often pathogenic bacterium
of the genus Streptococcus that occurs in pairs or chains, many species of
which destroy red blood cells and cause various diseases in human beings,
including erysipelas, scarlet fever, and septic sore throat.
SUBUNIT VACCINE. A vaccine consisting of purified or semi-purified
components of an infectious organism for which protection is desired.
SYSTEMIC. Of, relating to, or affecting the entire body or an entire
organism.
TETRACYCLINE. A yellow crystalline compound, C\\22\\H\\24\\N\\2\\O\\8\\,
synthesized or derived from certain microorganisms of the genus Streptomyces
and used as a broad-spectrum antibiotic.
TOXIN. A poisonous substance, especially a protein, that is produced by
living cells or organisms and is capable of causing disease when introduced
into the body tissues but is often also capable of inducing neutralizing
antibodies or antitoxins.
VACCINE. A preparation of a weakened or killed pathogen, such as a bacterium
or virus, or of a portion of the pathogen's structure that upon administration
stimulates antibody production against the pathogen but is incapable of
causing severe infection.
VANCOMYCIN. An antibiotic, C\\66\\H\\75\\Cl\\2\\N\\9\\O\\24\\, produced by the
actinomycete Streptomyces orientalis, found in Indonesian and Indian soil, and
effective against staphylococci and spirochetes.
VIRUS. Any of various simple submicroscopic parasites of plants, animals,
and bacteria that often cause disease and that consist essentially of a core
of RNA or DNA surrounded by a protein coat. Unable to replicate without a host
cell, viruses are typically not considered living organisms.
57
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants......................................... F-2
Balance Sheet as of December 31, 1995 and 1996 and June 30, 1997
(unaudited).............................................................. F-3
Statement of Operations for the period from December 28, 1995 (inception)
through December 31, 1995, for the year ended December 31, 1996, for the
period from inception through December 31, 1996, for the six months ended
June 30, 1996 and 1997 (unaudited) and for the period from December 28,
1995 (inception) through June 30, 1997 (unaudited)....................... F-4
Statement of Changes in Stockholders' Equity for the period from inception
through December 31, 1996 and for the six months ended June 30, 1997
(unaudited).............................................................. F-5
Statement of Cash Flows for the period from inception through December 31,
1995, for the year ended December 31, 1996, for the period from inception
through December 31, 1996, for the six months ended June 30, 1996 and
1997 (unaudited) and for the period from December 28, 1995 (inception)
through June 30, 1997 (unaudited)........................................ F-6
Notes to Financial Statements............................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of SIGA Pharmaceuticals, Inc.
In our opinion, the accompanying balance sheet and related statements of
operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of SIGA
Pharmaceuticals, Inc. (a development stage company) at December 31, 1995 and
1996, and the results of its operations for the period from inception
(December 28, 1995) through December 31, 1995, for the year ended December 31,
1996 and for the period from inception through December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company and has
suffered operating losses since inception. These and other factors, as
discussed in Note 1, raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Price Waterhouse LLP
New York, New York
March 3, 1997
F-2
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents............. -- $ 42,190 $ 129,913
Prepaid sponsored research (Note 7)... -- 370,798 215,208
Prepaid expenses...................... -- -- --
Deferred offering costs (Note 2)...... -- 115,688 195,988
------- ----------- -----------
Total current assets................ -- 528,676 541,109
Prepaid sponsored research (Note 7)... -- 30,208 --
Equipment, net (Note 3)............... -- 21,425 16,646
Other assets.......................... $ 6,937 609 609
------- ----------- -----------
Total assets........................ $ 6,937 $ 580,918 $ 558,364
======= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................... $ 7,937 $ 92,241 $ 148,160
Accrued expenses...................... -- 22,260 139,318
Patent preparation fees payable (Note
7)................................... -- 66,437 66,437
Bridge notes (Note 9)................. -- -- 955,667
------- ----------- -----------
Total liabilities................... 7,937 180,938 1,309,582
------- ----------- -----------
Commitments and contingencies (Notes 6,
7, 8 and 9) -- -- --
Stockholders' equity
Preferred stock ($.0001 par value,
10,000,000 shares authorized, none
issued and outstanding).............. -- -- --
Common stock ($.0001 par value,
25,000,000 shares authorized,
2,079,170, 3,367,182 and 3,367,182
shares issued and outstanding at
December 31, 1995, December 31, 1996,
and June 30, 1997, respectively)
(Notes 4 and 9)...................... 208 337 337
Additional paid-in capital............ 1,040 2,668,819 2,830,632
Stock subscriptions outstanding....... (1,248) -- --
Deficit accumulated during the
development stage.................... (1,000) (2,269,176) (3,582,187)
------- ----------- -----------
Total stockholders' equity
(deficit).......................... (1,000) 399,980 (751,218)
------- ----------- -----------
Total liabilities and stockholders'
equity............................. $ 6,937 $ 580,918 $ 558,364
======= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
DECEMBER 28, YEAR DECEMBER 28,
1995 (INCEPTION) ENDED 1995 (INCEPTION) SIX MONTHS SIX MONTHS DECEMBER 28,
TO DECEMBER DECEMBER TO DECEMBER ENDED JUNE ENDED JUNE 1995 (INCEPTION)
31, 1995 31, 1996 31, 1996 30, 1996 30, 1997 TO JUNE 30, 1997
---------------- ----------- ---------------- ----------- ----------- ----------------
(Unaudited) (Unaudited) (Unaudited)
Operating expenses
General and
administrative
(including amounts to
related parties of
$444,000 for the year
ended December 31,
1996 and $216,000 for
each of the six months
ended June 30, 1996
and 1997)............. $ 1,000 $ 787,817 $ 788,817 $ 394,229 $ 680,122 $ 1,468,939
Research and
development (including
amounts to related
parties of $75,000 for
the year ended
December 31, 1996 and
$37,500 for each of
the six months ended
June 30, 1996 and
1997)................. -- 662,205 662,205 311,419 432,668 1,094,873
Patent preparation
fees.................. -- 452,999 452,999 324,514 49,681 502,680
Stock option and
warrant compensation.. -- 367,461 367,461 -- 28,813 396,274
---------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 1,000 2,270,482 2,271,482 1,030,162 1,191,284 3,462,766
---------- ----------- ----------- ----------- ----------- -----------
Interest
income/(expense)....... -- 2,306 2,306 -- (121,727) (119,421)
---------- ----------- ----------- ----------- ----------- -----------
Net loss............... $ (1,000) $(2,268,176) $(2,269,176) $(1,030,162) $(1,313,011) $(3,582,187)
========== =========== =========== =========== =========== ===========
Net loss per common
share................. -- $ (0.66) $ (0.32) $ (0.36)
========== =========== =========== ===========
Weighted average number
of shares
outstanding........... 2,498,581 3,413,531 3,211,499 3,686,589
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL STOCK DURING THE TOTAL
------------------- PAID-IN SUBSCRIPTIONS DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL OUTSTANDING STAGE EQUITY (DEFICIT)
--------- --------- ---------- ------------- ----------- ----------------
Issuance of common
stock at inception.... 2,079,170 $208 $ 1,040 $(1,248) -- --
Net loss............... -- -- -- -- $ (1,000) $ (1,000)
--------- ---- ---------- ------- ----------- -----------
Balance at December 31,
1995................... 2,079,170 208 1,040 (1,248) (1,000) (1,000)
Net proceeds from
issuance and sale of
common stock.......... 1,038,008 104 1,551,333 -- -- 1,551,437
Net proceeds from
issuance and sale of
common stock.......... 250,004 25 748,985 -- -- 749,010
Receipt of stock
subscriptions
outstanding........... -- -- -- 1,248 -- 1,248
Issuance of
compensatory options
and warrants.......... -- -- 367,461 -- -- 367,461
Net loss............... -- -- -- -- (2,268,176) (2,268,176)
--------- ---- ---------- ------- ----------- -----------
Balance at December 31,
1996................... 3,367,182 337 2,668,819 -- (2,269,176) 399,980
Issuance of warrants
with bridge notes
(Note 9) (unaudited).. -- -- 133,000 -- -- 133,000
Stock warrant
compensation
(unaudited)........... -- -- 28,813 -- -- 28,813
Net loss (unaudited)... -- -- -- -- (1,313,011) (1,313,011)
--------- ---- ---------- ------- ----------- -----------
Balance at June 30, 1997
(unaudited)............ 3,367,182 $337 $2,830,632 -- $(3,582,187) $ (751,218)
========= ==== ========== ======= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
DECEMBER 28, DECEMBER 28,
1995 1995 SIX DECEMBER 28,
(INCEPTION) TO YEAR ENDED (INCEPTION) TO SIX MONTHS MONTHS ENDED 1995
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED JUNE JUNE 30, (INCEPTION) TO
1995 1996 1996 30, 1996 1997 JUNE 30, 1997
-------------- ------------ -------------- ----------- ------------ --------------
(Unaudited) (Unaudited) (Unaudited)
Cash flows from
operating activities:
Net loss............... $(1,000) $(2,268,176) $(2,269,176) $(1,030,162) $ (1,313,011) $(3,582,187)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation.......... -- 7,249 7,249 3,127 4,779 12,028
Stock option and
warrant
compensation......... -- 367,461 367,461 -- 28,813 396,274
Amortization of debt
discount............. -- -- -- -- 88,667 88,667
Changes in assets and
liabilities:
Prepaid sponsored
research............ -- (401,006) (401,006) (567,776) 185,798 (215,208)
Prepaid expenses..... -- -- -- (32,820) -- --
Other assets......... (6,937) 6,328 (609) -- -- (609)
Accounts payable and
accrued expenses.... 7,937 173,001 180,938 48,981 172,977 353,915
------- ----------- ----------- ----------- ------------ -----------
Net cash used in
operating
activities.......... -- (2,115,143) (2,115,143) (1,578,650) (831,977) (2,947,120)
------- ----------- ----------- ----------- ------------ -----------
Cash flows from
investing activities:
Capital expenditures... -- (28,674) (28,674) (26,043) -- (28,674)
------- ----------- ----------- ----------- ------------ -----------
Net cash used in
investing
activities........... -- (28,674) (28,674) (26,043) -- (28,674)
------- ----------- ----------- ----------- ------------ -----------
Cash flows from
financing activities:
Net proceeds from
issuance of common
stock................. -- 2,300,447 2,300,447 1,551,437 -- 2,300,447
Receipt of stock
subscriptions
outstanding........... -- 1,248 1,248 -- -- 1,248
Deposits on stock
subscriptions......... -- -- -- 350,000 -- --
Deferred offering
costs................. -- (115,688) (115,688) -- (80,300) (195,988)
Proceeds from bridge
notes................. -- -- -- -- 1,000,000 1,000,000
------- ----------- ----------- ----------- ------------ -----------
Net cash provided from
financing
activities........... -- 2,186,007 2,186,007 1,901,437 919,700 3,105,707
------- ----------- ----------- ----------- ------------ -----------
Net increase in cash and
cash equivalents....... -- 42,190 42,190 296,744 87,723 129,913
Cash and cash
equivalents, beginning
of period.............. -- -- -- -- 42,190 --
------- ----------- ----------- ----------- ------------ -----------
Cash and cash
equivalents, end of
period................. -- $ 42,190 $ 42,190 $ 296,744 $ 129,913 $ 129,913
======= =========== =========== =========== ============ ===========
There were no cash payments for interest or income taxes for the periods
ended December 31, 1995 and 1996 and the period ended June 30, 1997.
The accompanying notes are an integral part of these financial statements.
F-6
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
SIGA Pharmaceuticals, Inc. (the "Company") was incorporated in the State of
Delaware on December 28, 1995. The Company is engaged in the discovery,
development and commercialization of vaccines, antibiotics, and novel anti-
infectives for the prevention and treatment of infectious diseases. The
Company's technologies are licensed from third parties and the Company depends
on third parties to conduct research on its behalf pursuant to research and
consulting agreements.
Basis of presentation
The Company's activities since inception have consisted primarily of
sponsoring research and development, performing business and financial
planning, preparing and filing patent applications, and raising capital.
Accordingly, the Company is considered to be a development stage company and
will require additional financing to achieve commercialization of its
technologies.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net operating losses and expects to incur substantial
additional losses to complete the commercialization of its technologies. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The Company's ability to continue as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations as they come due. Management is actively pursuing various options
which include securing additional equity financing through an initial public
offering and believes that sufficient funding will be available to meet its
planned business objectives. The Company has entered into a non-binding letter
of intent with an underwriter to sell shares of the Company's common stock in
an initial public offering (the "IPO") pursuant to the Securities Act of 1933.
The financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash equivalents
Cash equivalents consist of short term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Equipment
Equipment is stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets, none of which
exceeds three years.
Deferred offering costs
In connection with the Company's proposed IPO, the Company has incurred
certain costs which have been deferred. In the event the proposed IPO is not
consummated the deferred offering costs will be expensed.
Research and development
Research and development costs are expensed as incurred and include costs of
third parties who conduct research and development, pursuant to development
and consulting agreements, on behalf of the Company. Costs related to the
acquisition of technology rights, for which development work is still in
process, and that have no alternative future uses, are expensed as incurred
and considered a component of research and development costs.
F-7
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
Income taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recorded for temporary
differences between financial statement carrying amounts and the tax basis of
assets and liabilities. Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided if it is more likely
than not that some or all of the deferred tax asset will not be realized.
Net loss per common share
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents assumed to be outstanding during
the period. Common share equivalents consist of the Company's common shares
issuable upon exercise of stock options and outstanding warrants. Pursuant to
the requirements of the Securities and Exchange Commission, stock options,
warrants and shares issued by the Company within one year of the date of the
initial public offering at prices below the proposed offering price have been
included in the calculation of weighted average shares outstanding as if they
were outstanding for all periods presented using the treasury stock method.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Fair value of financial instruments
The carrying value of cash and cash equivalents, and accounts payable and
accrued expenses approximates fair value due to the relatively short maturity
of these instruments.
New accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS") by all entities that have publicly
traded common stock or potential common stock (options, warrants, convertible
securities or contingent stock arrangements). FAS 128 also requires
presentation of earnings per share by an entity that has made a filing or is
in the process of filing with a regulatory agency in preparation for the sale
of those securities in a public market. Basic EPS is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or contingent
exercise of securities that would have an antidilutive effect on earnings. The
statement is effective for both interim and annual periods ending after
December 15, 1997. The effect on the Company's earnings per share resulting
from the adoption of FAS 128 is not expected to be significant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"),
which requires the presentation of the components of comprehensive income in a
company's financial statements for reporting periods beginning subsequent to
F-8
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
December 15, 1997. Comprehensive income is defined as the change in a
company's equity during a financial reporting period from transactions and
other circumstances from nonowner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available for sale securities). The adoption of FAS 130 is not expected to
have a material impact on the Company's financial statements.
3. EQUIPMENT
Equipment consisted of the following at December 31, 1996 and June 30, 1997:
JUNE
DECEMBER 31, 30,
1996 1997
------------ -------
Computer equipment................................... $28,674 $28,674
Less--Accumulated depreciation..................... (7,249) (12,028)
------- -------
Equipment, net..................................... $21,425 $16,646
======= =======
4. STOCKHOLDERS' EQUITY
In March 1996, the Company completed a private offering of 1,038,008 shares
of its common stock at the price of $1.50 per share, providing gross proceeds
of $1,557,000, and net proceeds, after deducting expenses, of $1,551,437. In
September 1996, the Company completed a second private offering of 250,004
shares of common stock at a price of $3.00 per share providing gross proceeds
of $750,000 and net proceeds, after deducting expenses, of $749,010.
Reverse stock split
Effective December 1996, the Company implemented a one for six reverse stock
split (without changing the par value thereof) applicable to all issued and
outstanding shares of the Company's common stock. All fractional shares
resulting from such stock split were rounded up to the next whole share. All
common shares, stock options, warrants and related per share data, reflected
in the accompanying financial statements and notes thereto, have been
presented as if such change had occurred at December 28, 1995.
Stock option plan and warrants
In January 1996, the Company implemented its 1996 Incentive and Non-
Qualified Stock Option Plan (the "Plan") whereby options to purchase up to
333,333 shares of the Company's common stock may be granted to employees,
consultants and outside directors of the Company. The exercise period for
options granted under the Plan, except those granted to outside directors, is
determined by a committee of the Board of Directors. Stock options granted to
outside directors pursuant to the Plan must have an exercise price equal to or
in excess of the fair market value of the Company's common stock at the date
of grant and become exercisable over a period of three years with a third of
the grant being exercisable at the completion of each year of service
subsequent to the grant. The fair market value of the Company's common stock
is determined by a committee of the Board of Directors. The committee is
comprised entirely of employees who receive stock options under the Plan.
During the year ended December 31, 1996, the Company granted options under the
Plan to employees to purchase 33,334 shares of its common stock at an exercise
price of $1.50 per share and options to purchase 16,667 shares at an exercise
price of $3.00 per share. These options expire on January 1, 2001 and November
18, 2006, respectively. All such grants were outstanding at December 31, 1996
and were eligible for exercise. There were no grants to outside directors
during the year ended December 31, 1996. The weighted-average grant-date fair
value of options granted during the year ended December 31, 1996 whose
exercise price equaled the fair market
F-9
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
value on the date of grant was $.22. The weighted-average grant-date fair
value of options granted during the year ended December 31, 1996 whose
exercise price was less than the fair market value on the date of grant was
$.99. The weighted-average remaining contractual life of options outstanding
at December 31, 1996 was 6.5 years.
In November 1996, the Company entered into an employment agreement with its
President and Chief Executive Officer. Under the terms of the agreement, the
employee received warrants to purchase 461,016 shares of common stock at $3.00
per share. Warrants to purchase 25% of such shares were exercisable upon
issuance and the remaining warrants are exercisable on a pro rata basis on the
first, second and third anniversaries of the agreement (see Note 8). These
warrants expire on November 18, 2006. The grant date fair value of such
warrants was $.99. At December 31, 1996, the remaining contractual life of
such warrants was approximately 9.9 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
warrants issued to employees and stock options granted under the Plan. During
the year ended December 31, 1996, compensation expense of $57,627 has been
recognized for warrants issued to employees and $8,334 for options issued
pursuant to its stock-based compensation plan calculated based upon the
difference between the exercise price of the warrant or option and the fair
market value of the Company's common stock on the date of grant. Had
compensation cost for warrants issued and stock options granted been
determined based upon the fair value at the grant date for awards consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased by
approximately $72,000, or approximately $.02 per share.
In March 1996, the Company entered into an agreement with a consultant, who
is a stockholder, whereby the consultant would be granted options to purchase
150,000 shares of the Company's common stock, at an exercise price of $1.50
per share, contingent upon completion of collaborative agreements with
specified pharmaceutical companies. In September 1996, such agreement was
terminated and the consultant was issued warrants to purchase 150,000 shares
of its common stock, at an exercise price of $1.50 per share. The warrants
were exercisable upon issuance and expire on the twentieth anniversary of the
date of issuance. The Company has recognized non-cash compensation expense of
$301,500 for the year ended December 31, 1996, based upon the fair value of
such warrants on the date of grant (see Note 6). At December 31, 1996, the
remaining contractual life of such warrants was approximately 19.7 years.
The fair value of the options and warrants granted to employees and the
warrants issued to the consultant during 1996 ranged from $.22 to $2.01 on the
date of the respective grant using the Black-Scholes option-pricing model
assuming (a) no dividend yield, (b) a risk-free interest rate ranging from
5.26% to 6.26% based on the date of the respective grant, (c) no forfeitures,
and (d) an expected life of three years. As permitted under the provisions of
FAS 123, and based on the historical lack of a public market for the Company's
common stock, no factor for volatility has been reflected in the option and
warrant pricing calculation.
5. INCOME TAXES
The Company has incurred losses since inception which have generated net
operating loss carryforwards of approximately $1,901,000 and $3,185,000,
respectively, at December 31, 1996 and June 30, 1997 for federal and state
income tax purposes. These carryforwards are available to offset future
taxable income and expire in 2011 and 2012 for federal income tax purposes.
These losses are subject to limitation on future years' utilization should
certain ownership changes occur.
F-10
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
The net operating loss carryforwards and temporary differences, arising
primarily from noncash compensation expense, result in a noncurrent deferred
tax benefit at December 31, 1996 and June 30, 1997 of approximately $877,000
and $1,274,000, respectively. In consideration of the Company's accumulated
losses and the uncertainty of its ability to utilize this deferred tax benefit
in the future, the Company has recorded a valuation allowance of an equal
amount on such dates to fully offset the deferred tax benefit amount.
For the year ended December 31, 1996 and the six months ended June 30, 1997,
the Company's effective tax rate differs from the federal statutory rate
principally due to net operating losses and other temporary differences for
which no benefit was recorded, state taxes and other permanent differences.
6. RELATED PARTIES
Consulting agreements
The Company has entered into a consulting agreement, expiring January 15,
1998, with CSO Ventures LLC ("CSO") under which CSO provides the Company with
business development, operations and other advisory services. Pursuant to the
agreement CSO is paid an annual consulting fee of $120,000. Two Executive Vice
Presidents of the Company are principals of CSO. The agreement is only
cancelable by the Company for cause, as defined in the agreement. During the
year ended December 31, 1996 and the six months ended June 30, 1997, the
Company incurred expense of $120,000 and $60,000, respectively, pursuant to
the agreement.
In connection with the development of its licensed technologies the Company
has entered into a consulting agreement with the scientist who developed such
technologies, under which the consultant serves as the Company's Chief
Scientific Advisor. The scientist, who is a stockholder, shall be paid an
annual consulting fee of $75,000. The agreement, which commenced in January
1996 and is only cancelable by the Company for cause, as defined in the
agreement, has an initial term of two years and provides for automatic
renewals of three additional one year periods unless either party notifies the
other of its intention not to renew. Research and development expense incurred
under the agreement amounted to $75,000 and $37,500 for the year ended
December 31, 1996 and the six month period ended June 30, 1997, respectively.
During the year ended December 31, 1996, the scientist was issued warrants to
purchase 150,000 shares of the Company's common stock at an exercise price of
$1.50 per share (see Note 4).
Employment agreements
The Company has employment agreements, expiring in December 1998, with its
two Executive Vice Presidents ("EVPs"), who are principal shareholders of the
Company and CSO, under which the EVPs are each to be paid minimum annual
compensation of $150,000. In addition, the Company granted each of the EVPs
options to purchase 16,667 shares of the Company's common stock, at an
exercise price of $1.50 per share, upon execution of the respective
agreements. During the term of the agreements the EVPs are each to receive
annual stock option grants to purchase 16,667 common shares exercisable at the
fair market value at the date of grant. Under the provisions of the agreements
the EVPs will each receive a cash payment equal to 1.5% of the total
consideration received by the Company in a transaction resulting in a greater
than 50% change in ownership of the outstanding common stock of the Company.
The Company incurred $324,000 and $156,000 of expense for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively,
pursuant to these agreements.
Underwriting agreement
As discussed in Note 1, the Company has secured a nonbinding letter of
intent with an underwriter to sell shares of the Company's common stock in an
IPO. At December 31, 1996 and June 30, 1997, employees of the underwriter hold
594,351 shares or approximately 18% of the Company's outstanding common stock.
F-11
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
7. LICENSE AND RESEARCH SUPPORT AGREEMENT
In January 1996, the Company entered into a license and research support
agreement with third parties. Under the terms of the agreement, the Company
has been granted an exclusive world-wide license to make, use and sell
products derived from the licensed technologies. In consideration of the
license grant the Company is obligated to pay royalties equal to a specified
percentage of net sales of products incorporating the licensed technologies.
In the event the Company sublicenses any technologies covered by the agreement
the third parties would be entitled to a significant percentage of the
sublicense revenue received by the Company. In addition, the Company is
required to make milestone payments, up to $225,000 per product, for each
product developed from the licensed technologies.
The Company has agreed to sponsor further research by the third parties for
the development of the licensed technologies for a period of two years from
the date of the agreement, in return for a payment of $725,000 to such third
parties. The period of sponsored research will automatically be renewed for
additional one-year periods unless terminated by the Company. Amortization of
prepaid sponsored research under this agreement was $332,292 and $181,250 for
the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively. The Company also agreed to reimburse the third parties for costs
associated with the preparation, filing and prosecution of patent rights for
the licensed technologies incurred prior to the execution of the license and
research support agreement. The agreement is only cancelable by the Company
for cause, as defined in the agreement. The Company has expensed $310,986 of
reimbursable patent preparation costs pursuant to the agreement during the
year ended December 31, 1996, of which $66,437 remains accrued at December 31,
1996 and June 30, 1997.
In January 1996, the Company entered into research agreements with third
parties. Under the terms of the agreements, the Company has agreed to fund two
years of research in return for annual payments of $183,320. Research and
development expense under these agreements amounted to $175,024 and $91,661
for the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
8. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has an employment agreement with its Director of Bacterial
Research which expires in December 1997. Under the terms of the agreement, the
employee is to receive minimum annual compensation of $90,000. The agreement
is only cancelable by the Company for cause, as defined in the agreement.
During the year ended December 31, 1996 and the six months ended June 30,
1997, the Company incurred $90,000 and $45,000, respectively, of expense
pursuant to the agreement.
In November 1996, the Company entered into an employment agreement, expiring
in November 1999, with its President and Chief Executive Officer. Under the
terms of the agreement, the employee is to receive annual base compensation of
$225,000 and options to purchase 16,667 shares of the Company's common stock,
exercisable at the fair market value on the date of grant. Upon execution of
the agreement, the Company granted the employee options to purchase 16,667
shares of its common stock at an exercise price of $3.00 per share. In
addition, the employee was issued warrants to purchase 461,016 shares of
common stock at $3.00 per share (see Note 4). Under the provisions of the
agreement, the President will receive a cash payment equal to 1.5% of the
total consideration received by the Company in a transaction resulting in a
greater than 50% change in ownership of the outstanding common stock of the
Company. During the year ended December 31, 1996 and the six months ended June
30, 1997, the Company incurred $28,435 and $112,500, respectively, of expense
pursuant to the agreement.
F-12
SIGA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited with respect to June 30, 1996 and 1997 and for each six month
period then ended)
9. SUBSEQUENT EVENTS (UNAUDITED)
In January and February 1997, in contemplation of its proposed IPO, the
Company issued bridge notes (the "Bridge Notes") in the principal amount of
$1,000,000. The Bridge Notes bear interest at 10% per annum and are due and
payable together with accrued but unpaid interest, on the earlier of (a) the
closing of an initial public offering of the Company's common stock, or (b)
six months after the date of execution of the Bridge Notes. In conjunction
with the issuance of the Bridge Notes, the Company entered into warrant
agreements whereby to the purchasers of the Bridge Notes will be issued
warrants to purchase a number of shares of common stock determined by dividing
(i) one-half of the gross proceeds of the Bridge Notes ($500,000) by (ii) the
IPO price per share. The warrants will provide for an exercise price per share
equal to the IPO price per share and will not be exercisable until the first
anniversary of the date of the consummation of the IPO (or February 28, 1998
if the IPO is not consummated). In the event that prior to the maturity date
of the Bridge Notes (i) the Company's proposed IPO is not consummated, or (ii)
the Company is acquired by another corporation, the holders of the Bridge
Notes will receive warrants to purchase an aggregate of 100,000 shares of
common stock at an exercise price of $5.00 per share. As of August 28, 1997,
the maturity date of Bridge Notes in the principal amount of $1,000,000, which
had original maturity dates of July and August 1997, had been extended to the
earlier of October 1, 1997 or completion of the IPO.
The fair value of the warrants, in the amount of $133,000, issued by the
Company in connection with the bridge financing, has been recorded as debt
discount and is being amortized over the six month term of the Bridge Notes.
During the period ended June 30, 1997 the Company recognized $88,667 of debt
discount amortization as interest expense. Upon completion of the Company's
planned IPO and repayment of the Bridge Notes from the net proceeds of the
offering, the unamortized portion of the debt discount will be immediately
expensed.
In July 1997, the Company entered into a collaborative research and license
agreement with a large pharmaceutical company. Under the terms of the
agreement, the Company has granted the pharmaceutical company an exclusive
worldwide license to develop, make, use and sell products derived from
specified technologies. The agreement requires the pharmaceutical company to
sponsor further research by the Company for the development of the licensed
technologies for a period of two years from the effective date of the
agreement, in return for payments to the Company totaling $1,200,000. In
consideration of the license grant the Company is entitled to receive
royalties equal to specified percentages of net sales of products
incorporating the licensed technologies. The royalty percentages increase as
certain cumulative and annual net sales amounts are attained. The Company
could receive milestone payments, under the terms of the agreement of up to
$13,750,000 for the initial product and up to $3,250,000 for the second
product developed from a single compound derived from licensed technologies.
The Company could also receive, under certain circumstances additional
milestone payments for an additional compound, as defined in the agreement,
developed from the licensed technologies. Such milestone payments are
contingent upon the Company making project milestones set forth in the
agreements, and, accordingly, if the Company is unable to make such
milestones, the Company will not receive such milestone payments.
In July 1997, the Company entered into a non-binding letter of intent with a
third party pursuant to which the Company will acquire the third party's
rights to certain technology, intellectual property and related rights in the
field of gram negative antibiotics in exchange for 335,530 shares of the
Company's common stock. There can be no assurance that the Company will enter
into a final agreement with the third party on the terms described above or at
all.
F-13
SIGA'S FOCUS
APPLYING CUTTING-EDGE SCIENCE
TO FIGHT INFECTIOUS DISEASE
[Photo]
SIGA is engaged in the discovery, development and commercialization of novel
products for the prevention and treatment of infectious diseases. The company
has four lead programs in development, including gram positive commensal
vectors for the delivery of mucosal vaccines; mucosal vaccines against strep
throat and periodontal diseases; novel targets for new antibiotics; and
Surface Protein Expression System (SPEX) for cost-effective mass production of
proteins.
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NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, BY
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
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TABLE OF CONTENTS
PAGE
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Prospectus Summary ........................................................ 5
Risk Factors .............................................................. 10
Use of Proceeds............................................................ 20
Capitalization ............................................................ 21
Dilution .................................................................. 22
Dividend Policy............................................................ 23
Selected Financial Data.................................................... 24
Plan of Operation.......................................................... 25
Business .................................................................. 28
Management ................................................................ 42
Principal Stockholders .................................................... 49
Certain Transactions ...................................................... 50
Description of Securities.................................................. 50
Shares Eligible for Future Sale............................................ 52
Underwriting .............................................................. 53
Legal Matters.............................................................. 54
Experts.................................................................... 55
Available Information...................................................... 55
Glossary .................................................................. 56
Index to Financial Statements.............................................. F-1
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UNTIL OCTOBER 6, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WITH RESPECT TO THEIR SOLICITATIONS TO PURCHASE THE
SECURITIES OFFERED HEREBY.
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2,500,000 SHARES OF COMMON STOCK
[LOGO] SIGA
SIGA PHARMACEUTICALS, INC.
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PROSPECTUS
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SUNRISE SECURITIES CORP.
M.H. MEYERSON & CO., INC.
SEPTEMBER 9, 1997
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