ITEM 1. BUSINESS
Overview
Emisphere Technologies, Inc. is a biopharmaceutical company that has taken a leadership position in solving one of the most challenging technical hurdles in the pharmaceutical industry--the oral delivery of medicines, which, for a variety of reasons, cannot be offered to patients directly in an oral form. We have pioneered the oral delivery of otherwise injectable drugs, including proteins, peptides, polysaccharides and other compounds not currently deliverable by oral means. These drugs present challenges for oral delivery because they are often large molecules (macromolecules), which are inactivated in the gastrointestinal tract, have limited ability to cross cell membranes and generally cannot be delivered orally.
Sales of therapeutic protein medicines totaled $17 billion in 1999 and are estimated to be over $32.5 billion by 2005. Most of these drugs are currently delivered by injection. Injections are undesirable for numerous reasons including patient discomfort, inconvenience and risk of infection. Poor patient acceptance of, and compliance with, injectable therapies can lead to increased incidence of medical complications and higher healthcare costs. While many medications are taken orally, all proteins and other large or highly charged molecules are not administered this way because they degrade in the stomach or intestine before they can be absorbed into the bloodstream. We believe that our oral drug delivery technology provides an important competitive advantage in the delivery of macromolecules compared with the current alternatives.
Oral delivery is the preferred delivery modality as compared to other routes of drug administration including injection. Patient acceptance of and adherence to a dosing regimen is higher among orally deliverable medications when compared to injectables. To date, alternatives to injection including, respiratory, nasal and transdermal delivery have been considered commercially unattractive due to low natural bioavailability--the amount of drug absorbed from the delivery site into the bloodstream (thereby also often not delivering optimal amounts to the target organ).
Currently, we have several product candidates in preclinical and clinical development across a broad range of therapeutic areas including, cardiovascular, osteoporosis, growth disorders, diabetes, asthma/allergies, obesity and anti-infectives. Our most advanced program is an oral heparin solution which began Phase III clinical trials in late 1999, and which is currently being self-developed. At the end of February 2002, with our oral heparin family of product candidates counting as one, we have six product candidates, or eight formulations in clinical trials using our unique carrier technology.
The Company
We were originally founded as Clinical Technologies Associates, Inc. in 1986 by a group of physicians and scientists at New York University and the City University of New York. The original technology was focused on amino-acid microspheres for the oral delivery of both proteins and non-protein drugs. Under the Clinical Technologies Associates, Inc. moniker, we went public in 1989, listed on Nasdaq, under the ticker, "CTAI". In the early 1990's, our strategic focus was narrowed and our efforts were redirected exclusively to developing our oral drug delivery technology. In 1992, we changed our name to Emisphere Technologies, Inc.
In 1994, we discovered our delivery agent for heparin, a well-known and highly prescribed anticoagulant/antithrombotic agent that is currently administered only as an injection. In 1997, we discovered a second delivery agent, which demonstrated efficiency in preclinical testing for the delivery of our lead product, oral heparin.
In 1996, we formed a joint venture with Elan Pharmaceuticals, plc for the development of oral heparin. In July 1999, we reacquired all product, marketing and technology rights for our heparin products from Elan Corporation, plc. We based this decision on the belief that at this stage of development, complete ownership and control of our products in development allowed for more rapid clinical development and commercialization.
In February 1997, we formed a strategic alliance with Eli Lilly & Company ("Lilly") for the development of oral formulations of recombinant parathyroid hormone (PTH 1-34, or teraparatide) for the treatment of osteoporosis and recombinant human growth hormone (rhGH, or somatropin) for treatment of growth disorders. In March 1998, Lilly executed license agreements for both proteins and we received a $4.0 million milestone payment. In June 2000, we executed a follow-on agreement with Lilly to develop oral parathyroid hormone, and oral human growth hormone. Emisphere and Lilly continue to collaborate further to bring oral forms of parathyroid hormone and recombinant growth hormone into and through clinical testing. We entered an oral formulation of parathyroid hormone into the clinic with Lilly in late 2001 and in June 2000 and we received a $2 million milestone payment for the selection of the EMISPHERE(R) carrier. Upon entrance of the oral parathyroid hormone formulation into the clinic, Lilly is responsible for all further development costs for oral parathyroid hormone. Emisphere is responsible for the clinical testing through first human dosing of an oral formulation of human growth hormone. However, Lilly is reimbursing Emisphere for its costs, and will be responsible for all clinical development costs thereafter. We plan to enter rhGH into first human dosing (Phase I clinical testing) with Lilly in 2002.
In December 1997, we entered into a collaboration agreement with Novartis Pharma AG (Novartis) to develop oral formulations of salmon calcitonin (used in the treatment of osteoporosis). In February 2000, Novartis executed a license agreement for the development of an oral form of salmon calcitonin. In March 2000, Novartis paid Emisphere $2.5 million to obtain an option to use our technology for a second compound.
In March 2000, Regeneron Pharmaceuticals, Inc. established a collaboration agreement with us for the development of an oral form of ciliary neutrophic factor (CNTF), which is under development as an injectable by Regeneron as AXOKINE(TM), for use in the treatment of obesity.
In June 2000, DuPont Pharmaceuticals Company (the pharmaceutical division of E.I. du Pont de Nemours and Company, the Dupont Companies, announced a non-binding letter of intent with us for the development and marketing of oral heparin. In July of 2000, Dupont announced the appointment of a non-executive chairman of the board of DuPont Pharmaceuticals Company to evaluate various strategic alternatives for the pharmaceuticals business, including its potential sale. In December of 2000, the Dupont Companies issued an announcement approving the intent to separate the pharmaceutical business from Dupont. Based on the uncertainty of the fate of the pharmaceutical business, we announced in May 2001 that we elected to withdraw from the letter of intent with DuPont Pharmaceuticals Company regarding the potential product alliance. Following our announcement, Bristol-Myers Squibb Company announced on June 7, 2001, the acquisition of this division for $7.8 billion. We continue to have discussions with potential partners for the marketing and/or development of our oral heparin products.
In November 2000, Cubist Pharmaceuticals, Inc. established a collaboration agreement with us for the development of an oral form of daptomycin which is under development as an injectable by Cubist as CIDECIN(R) for use in the treatment of serious or life-threatening soft skin tissue infections.
Throughout 2001, our clinical development pace quickened as we continued our strategic shift from fundamental research and technology licensing, to identifying additional therapeutic compounds that address large markets. Specifically, we gained momentum by entering our self-developed product candidates into and through the clinic for human testing. Specifically, we began human testing (clinical trials) with additional oral formulations related to our existing oral heparin program (heparin tablets), and with oral formulations for new therapeutic programs (e.g., insulin and cromolyn sodium). Our goal in 2002 continues to be to develop these oral product candidates through at least Phase I trials and then evaluate the option of establishing relationships with partners to complete the development and commercialization of these candidates.
Business Strategy
Our objective is to be the leader in developing orally administered formulations of therapeutic macromolecules and other compounds currently available only by injection. Our business strategy includes:
. entering into strategic alliances with pharmaceutical partners who have marketed products or compounds in development that would benefit from our oral delivery technology
. pursuing new product opportunities by:
-- identifying additional therapeutic compounds (preferably already approved for use) that address large markets;
-- developing compounds that we already have demonstrated to be orally deliverable in animals by performing proof of concept in man;
-- further developing products through Phase I or Phase II studies using an EMISPHERE(R) carrier; and
-- establishing relationships with partners to complete the development and commercialization of these products.
Though we intend to collaborate with leading pharmaceutical and biotechnology companies, we will also strategically select how far to develop our own product candidates depending on the risk level and cost benefits.
The Drug Delivery Industry
The drug delivery industry develops technologies for the improved administration of therapeutic compounds. These technologies have focused primarily on safety, efficacy, ease of patient use and patient compliance. In addition, alternative drug delivery technologies can be utilized to expand markets for existing products, as well as to develop new products. Pharmaceutical and biotechnology companies are looking to drug delivery as a way to gain competitive advantage by improving the safety, efficacy, convenience and patient compliance of their product candidates.
Drug delivery technologies can provide pharmaceutical companies with an avenue for developing new products, as well as for extending existing drug franchises. Drug delivery companies can also apply their technologies to off-patent products to develop on their own.
We believe focusing on drug delivery of existing drugs to be less risky than attempting to discover new drugs, because the product development risk is lower. On average, it takes 15 years in the U.S. for an experimental drug to progress from the laboratory to use in patients. It has been estimated that this process now costs $800 million on average.
By contrast, therapeutics that could be optimized through alternative delivery, but already have large established markets for which there is an established medical need, are targets for the drug delivery industry. Doctors, therefore, are familiar with these drugs and are accustomed to prescribing them. The product candidates we typically target have been through the regulatory process demonstrating safety and efficacy and are already on the market. Our estimated cost of developing a carrier through first human studies is less than $4.0 million, and it typically takes less than two years.
In addition, focusing on drug delivery compared to drug discovery allows us to form a number of collaborations to deliver a wide variety of medicines without limiting rights to use our proprietary technology with additional drug product opportunities.
Delivery of Macromolecule Medicines
The size of most macromolecules makes penetration of the skin inefficient or ineffective. Passive transdermal delivery using "patch" technology for macromolecules has not been successful to date since the skin is naturally impermeable to macromolecules. We are currently not aware of any macromolecule drugs, which have been approved for marketing in the United States utilizing patch technology. Some peptides and proteins can be transported across the skin barrier into the bloodstream using high-pressure "needle-less" injection devices. The devices, which inject proteins like human growth hormone through the skin into the body, have been available for many years. However, we believe these devices have not been well accepted due to patient discomfort, relatively high cost, and the inconvenience of placing the drugs into the device.
The nasal route of drug administration has been limited by low and variable bioavailability for proteins and peptides. As a result, penetration enhancers are often used with nasal delivery to achieve higher bioavailability. These enhancers may cause local irritation to the nasal tissue and result in safety concerns with long-term use. We believe a limited number of peptides have been approved for marketing in the United States utilizing nasal delivery. We believe these same obstacles will affect sublingual drug delivery, which relies on the penetration of similar tissue under the tongue.
Pulmonary delivery of systemic drugs is emerging as a delivery route for large molecules. The lungs are highly absorptive, providing a potential route for difficult to deliver drugs. While local delivery to the lungs of respiratory drugs is common, systemic delivery of macromolecule drugs requires new formulations and delivery technologies to achieve efficient, reproducible dosing. Long-term safety for certain compounds such as insulin, has yet to be established. In addition, while pulmonary devices may be amenable to a limited number of compounds, we believe that the total efficiency of pulmonary systems is generally not high enough to become commercially feasible for systemic delivery of most macromolecule drugs.
Buccal delivery (through the cheek wall) is also emerging as a delivery route for large molecules. This is sometimes considered "oral delivery" when referenced because of the site of application, but it is not truly an oral therapeutic option, due to the fact that buccally delivered drugs are not swallowed and absorbed in the gastrointestinal tract, but are absorbed through the local tissue into the systemic circulation. Like the pulmonary route, long-term safety for insulin, has yet to be established.
All four delivery routes are not optimal for treating many disease states (i.e., diabetes) if the key to effective therapy is first reaching a specific target organ, like the liver.
To date, the most practical and efficient route of macromolecules administration, particularly recombinant proteins, has, therefore, been injections. Drug injections that require administration in hospitals or doctors' offices can be expensive and inconvenient to patients. Many patients find self-injectable therapies unpleasant. As a result, injectable therapies for many chronic and subchronic diseases meet with varying degrees of patient acceptance and compliance with prescribed dosing regimens. Poor acceptance and compliance can lead to increased incidence of medical complications and potentially higher health-care costs. In addition, some elderly, infirm or pediatric patients cannot administer their own injections and require assistance, thereby increasing both inconvenience to these patients and the cost of therapy.
Emisphere's Oral Drug Delivery Technology
Our oral drug delivery technology is based upon proprietary, synthetic chemical compounds that facilitate the transport of therapeutic macromolecules and other compounds, across biological membranes, such as in the small intestine. Our proprietary oral drug delivery agents, also known as our "carriers", or EMISPHERE(R) carriers, represent a broad-based technology platform. Our carriers, which use the body's natural transport process, allow macromolecules to cross membranes and yet remain therapeutically active. Under physiological conditions, drug molecules naturally exist in many different shapes, or "conformations." Some of these
conformations can be transported across the cell membranes. Once the drug crosses the membrane, the carrier dissociates from the drug and the drug reestablishes its natural distribution of conformations, ensuring that the delivered drug molecules are in their therapeutically active state.
Our system maintains the biological effects of the drug through oral delivery by overcoming four potential obstacles.
The development of an efficient, safe and reproducible delivery system for macromolecules represents a significant commercial opportunity for us. Given the advantages of oral delivery over injectable forms, we believe that oral administration would represent the preferred means of delivery for most biopharmaceuticals. This would significantly expand the potential market for many biotechnology drugs.
Key Characteristics of Emisphere's Platform Technology
We believe that our oral delivery approach may have potential competitive advantages, including:
Broad applicability: Our carriers are applicable across a diverse group of molecules (proteins, carbohydrates, and peptides and other poorly absorbed compounds);
Stand-alone delivery approach: Oral drug delivery using our carriers does not rely upon the addition of other agents that can have adverse effects on the intestinal membranes or digestion process (for example, penetration enhancers or enzyme inhibitors);
Versatility of formulation: We believe that various types of oral formulations, including suspensions, tablets and capsules, can be created; and
Ease of manufacture: The technology and manufacturing equipment required to produce our carrier material in commercial quantities are readily available and easily scalable.
Advances to the Platform Technology Made in 2001
We continue to make a substantial investment in research and development to maintain our technological leadership position in oral drug delivery.
In March of 2000, we initiated and completed a Phase I safety and tolerability study in healthy subjects of oral heparin in a capsule using the EMISPHERE carrier "SNAC" (Sodium N[8(2-hydroxybenzoyl)amino] caprylate), our delivery agent currently in Phase III development with our oral heparin solution formulation. Preliminary clinical data indicated that SNAC enabled adequate oral delivery from the capsule dosage form. Data generated from preclinical studies demonstrated that "SNAD" (Sodium N-[10-(2 hydroxybenzoyl)amino] decanoate) was an effective EMISPHERE carrier for delivering solid forms of heparin, with a comparable safety profile when compared to SNAC. In January 2001, we announced that the Investigational New Drug application (IND) submitted to the United States Food and Drug Administration (FDA) for testing oral heparin in a tablet solid dosage form was accepted using the EMISPHERE(R) carrier, SNAD.
However, we recently have also moved forward with the development of a tablet formulation with the EMISPHERE carrier, SNAC, as part of our efforts to develop the oral solid dosage form. Heparin represents a significant formulation challenge for our oral delivery technology in that the potency of heparin is significantly lower than all other macromolecules we are developing. As a result, the combination of heparin plus our carrier represents 1.9 grams to 2.75 grams before any excipients. With the addition of excipients, the tablet burden on patients could be excessive. We have efforts underway to decrease the volume of material to achieve a more patient friendly dosage form. We believe reducing the volume of both carrier and drug will provide us with the most patient preferred and commercially viable solid dosage form. Our efforts to explore optimizing an oral solid heparin formulation are ongoing.
For all other materials tested, we are evaluating principally capsule and tablet dosage forms, except for indications in the elderly or pediatric patient populations, which may benefit from the availability of a solution dosage form.
During 2001, we conducted human studies which demonstrated successful absorption using our drug delivery technology with additional oral product candidates in new therapeutic categories. For example, we developed an EMISPHERE carrier selected for insulin, which successfully completed Phase I studies in healthy human subjects. We began testing the safety and tolerability of this oral insulin formulation in Type II diabetic patients in October 2001. Also, an oral formulation of cromolyn sodium, which completed a Phase I study in November 2001, demonstrated absorption using an EMISPHERE carrier. Subsequent Phase I and Phase II testing will use an EMISPHERE carrier selected for cromolyn sodium. In 2002, we will be progressing with oral insulin and oral cromolyn sodium in patient testing.
Carrier Library
We have designed and synthesized a library of over 1,500 carriers and evaluated them for their ability to facilitate the delivery of therapeutic macromolecules and other compounds across biological membranes without altering the activity of these molecules. Our technology offers the pharmaceutical industry a relatively inexpensive route to generate significant new product opportunities. Beyond enabling the oral delivery of heparin, insulin, parathyroid hormone, cromolyn and salmon calcitonin in humans, this technology has demonstrated oral delivery in a variety of over 40 other compounds--among them human growth hormone, erythropoietin and deferoxamine--in animals.
Product Candidates Currently in Development
The following table sets forth, for both Emisphere's partnered development programs and Emisphere's programs available for partnering, the drugs currently in development, the indication(s) for each particular drug, its present stage of clinical development and, with respect to Emisphere's partner development programs, the identity of Emisphere's corporate partner for each drug, as disclosed in prior public documentation by one or both parties, by way of contractual and/or licensing agreement.
- -------- * Development Status Explanations: . Pre-clinical--Investigate safety of product candidate in a controlled laboratory environment; establish activity in standard animal model. . Phase I--Investigate safety and proper dose ranges of a product candidate in a small number of normal human subjects. . Phase II--Investigate side effect profiles and efficacy of a product candidate in a small number of patients who have the disease or condition under study. . Phase III--Investigate safety and efficacy of a product candidate in a large number of patients who have the disease or condition under study, with adequate sampling size to make statistical inferences.
Cardiovascular
Oral Heparin
Unfractionated heparin (UFH) and low molecular weight heparin (LMWH) are widely used anti-coagulants. These anticoagulants are primarily indicated for treating and preventing post-surgical deep vein thrombosis (blood clots following major surgery) and the more severe sequlae of pulmonary embolism. However, these drugs are also frequently prescribed for acute myocardial infarction, coronary angioplasty, coronary artery bypass graft surgery, stroke and unstable angina. Currently, heparins are administered as either a continuous intravenous infusion or a subcutaneous injection.
Studies have shown that heparin does not cause major bleeding but may exacerbate bleeding that has already occurred. In comparison with LMWH, heparin has a shorter circulating half-life, which may reduce its role in worsening bleeding which is already occurring. Furthermore, studies indicate that UFH may have utility for indications other than anticoagulation.
Heparin is often considered the anticoagulant of choice for the prevention and treatment of cardiovascular complications, such as deep vein thrombosis (DVT) or blood clots and pulmonary embolism in high-risk, hospitalized patients. Heparin is favored over warfarin (or COUMADIN(R)) because heparin is more effective, produces a rapid onset of anticoagulation activity, and has a shorter physiological half-life and, is indicated in fewer drug-drug interactions. The major disadvantage of heparin (and LMWH) therapy is the requirement for administration by injection, because current formulations are ineffective when dosed orally.
Our goal is to extend usage of heparin in the deep vein thrombosis prevention market to the home setting for 30 days.
Currently, the use of parenteral (injected or infused) unfractionated heparin is typically restricted to in-hospital use. Low molecular weight heparin (LMWH), which is considered the standard of therapy for DVT prevention and treatment, is limited to subcutaneous injection. LMWHs are typically administered for 7- 14 days on an outpatient basis for treatment of DVT. To follow an injectable treatment regimen on an outpatient basis, patients have to self-inject, or may have to incur additional cost for a home healthcare aid to administer the injections. For many patients, hospital treatment with one of the two U.S. approved low molecular weight heparins for 7-14 days is typically followed by a 30 to 90 day or longer course of out-patient treatment using warfarin, the only oral anti-coagulant available. Warfarin is not an ideal anti-coagulant because it has more negative interactions with other pharmaceuticals than most FDA-approved drugs and requires constant patient monitoring. Though LMWH is administered as an injectable, its introduction has also been studied for use in the home setting, for up to 28 days. The introduction of oral heparin, which we believe will be considered a more convenient and "patient-friendly" therapy by both patients and physicians, could open the home market to heparin by replacing warfarin and injectable low molecular weight heparin use. We also believe that our oral heparin products will ultimately be applicable for a wide range of anti-coagulant/antithrombotic uses.
Emisphere is evaluating a family of proprietary oral heparin formulations, including a solution and solid dosage forms of heparin, and, solution and solid dosage forms of LMWH. Worldwide heparin sales, including the low molecular weight heparins are estimated to be over $2.5 billion, with a 15% annual growth rate. Currently, heparin is prescribed primarily for the treatment of venous (vein related) indications for a period of one to two weeks. Emisphere believes that its initial oral heparin solution formulation, and subsequent solid oral heparin and LMWH formulations will substantially penetrate and expand existing markets. We anticipate that, large new markets for the heparins will be created, including the development of oral heparin for new clinical indications in inflammation and cancer.
At the end of 1999, we initiated the Phase III development of our oral heparin solution formulation. We launched a multi-center Phase III trial, named, PROTECT (PRophylaxis with Oral SNAC/heparin against ThromboEmbolic Complications following Total hip replacement surgery). The objective of this international trial is designed to demonstrate the safety and superior efficacy of Emisphere's oral heparin solution when used for 30 days, compared to injectable enoxaparin used as per its currently prescribed 7-14 day regimen to prevent DVT, following hip replacement surgery. In 2001, patient enrollment in this Phase III trial was completed.
In February 2002, we received FDA approval to initiate the "PROTECT 2" trial. This study will evaluate the same endpoints as PROTECT, with a slightly altered design. (For more information on PROTECT 2, see section entitled, "Phase III Clinical Development Plan", below.)
Initial Indications and Market
Currently, the most common indications for heparin therapy are the prevention of venous thrombosis (blood clots) following surgical procedures lasting longer than 30 minutes (especially orthopedic, pelvic, abdominal,
trauma, angioplasty or heart surgery). In the United States, it is estimated that more than 3 million such surgical procedures are performed each year and more than 250,000 cases of DVT are reported. Without DVT prophylaxis, the incidence of a patient getting a blood clot is often greater than 50% in hip replacement patients. Preventative therapy is typically recommended for at least 10 to 14 days post-surgery. Recent literature supports 4 weeks of treatment as the optimal duration of treatment. DVT treatment generally includes about 1-2 weeks of injectable LMWH, followed by 90-180 days of warfarin. However, several studies indicate that longer heparin treatment (preferably for 30 days) is preferred because the risk of DVT remains high throughout this period.
Phase III Clinical Development Plan
A Phase III clinical trial (called "PROTECT"), evaluating the prevention of DVT using our oral heparin solution following hip replacement, started in December 1999. This trial is designed to demonstrate the safety and superior efficacy of oral heparin solution, when used for 30 days post operatively compared to injectable enoxaparin (LOVENOX(R)), used as per its currently prescribed 7-14 day regimen to prevent DVT following total hip replacement surgery. The PROTECT trial is a randomized three-arm study conducted in over 120 centers in the United States, Russia, Czech Republic, Denmark, Poland, Spain, the Ukraine, the United Kingdom, Canada, and Australia. The study enrolled approximately 2,300 patients, and enrollment was completed at the end of 2001. The primary efficacy endpoint is the occurrence of venographically-confirmed DVT, pulmonary embolism, or death during the treatment phase, when measured at day 30.
In February 2002, we received approval from the FDA to initiate PROTECT 2, which is a trial that will measure the same endpoints as PROTECT but the dosing regimen will be slightly altered. The first study was designed to ensure that the performance of our oral heparin would be demonstrated for a full 30 days following total hip replacement surgery. However, as anticipated, during the course of the study, it was apparent that this dosing regimen, which started immediately after surgery, was not well tolerated because post-surgical patients are particularly sensitive to oral medication. This sensitivity is attributed to, among other things, the residual effects of analgesics or concurrently administered pain medications. To overcome this limitation, we introduced a modified design for PROTECT 2. Instead of dosing oral heparin immediately following surgery, all PROTECT 2 patients will be administered any U.S. approved injectable DVT prophylaxis (i.e., Pharmacia's FRAGMIN(TM) or Aventis' LOVENOX(R)) for the first three perioperative days. On the fourth perioperative day, patients in the oral heparin arm of the trial will receive oral heparin for 27 days, until day 30. Thus PROTECT 2 patients will receive oral heparin for 27 days versus 30 days for patients in the first PROTECT study. This altered study design was accepted by FDA.
PROTECT 2 may provide for a broader label of oral heparin, enabling more flexible clinical use of our oral heparin product (providing physicians with a choice to either administer immediately following surgery, or after the perioperative period). PROTECT 2 will provide additional Phase III data to the FDA.
Oral Heparin Products
We are focused on developing a family of oral heparin products. Our heparin oral solution formulation is furthest along the path to commercialization. This product candidate is in Phase III trials for the prevention of deep vein thrombosis (DVT) following total hip replacement surgery. Concurrently, other oral heparin formulations are currently in development.
A heparin capsule formulation with the EMISPHERE carrier, SNAC, entered Phase I clinical trials in March 2000. A tablet dosage formulation with the EMISPHERE carrier, SNAD, entered Phase I in March of 2001. Both solid and solution formulations of low molecular weight heparin are being evaluated. In October 2001, we presented a study demonstrating the mechanism of oral heparin delivery using the EMISPHERE carrier, SNAC. The study demonstrated that SNAC facilitated the transport of heparin across the intestinal epithelium -- or membrane -- transcellularly. In additional studies, uptake of heparin was seen as early as five minutes after incubation of cells with heparin and SNAC.
In June 2000, we published two studies that demonstrated the successful treatment of deep vein thrombosis in animal models using oral SNAC/heparin and oral SNAD/low molecular weight heparin.
If approved, the oral heparin solution will be the first oral heparin product to market providing an extended prophylaxis in a safe and effective dosing regimen. We believe that the oral heparin solution offers a significant advantage in several patient populations. For example, elderly patients, often choose or prefer the liquid dosage form over the solid dosage form. Additionally, severely ill patients, who have difficulty swallowing solids, may also benefit from a solution product. Therefore, we believe there will remain an opportunity for us to retain value from the oral heparin solution formulation after the potential introduction of the oral heparin solid formulations, based on the needs and preferences of these patient populations.
Additional Indications and Markets
We believe that many additional cardiovascular diseases could be treated more effectively by extending the duration of heparin therapy from the current standard of practice. Such a dosing regimen would be possible with an oral formulation of unfractionated heparin or LMWH. These indications include: unstable angina, arterial fibrillation, acute myocardial infarction, coronary angioplasty, stent placement, coronary artery bypass graft, pulmonary embolism and stroke. A large and growing body of pre-clinical and clinical data also indicates that heparin has potent anti-inflammatory and anti-cancer properties. Recently heparin has been shown to be beneficial as a treatment for inflammatory bowel disease, rheumatoid arthritis, asthma, psoriasis, transplant rejection and proteinurias.
In December 2001, along with our research collaborators at MIT-Harvard, we published in the journal, Circulation, experimental results evaluating oral heparin in a preclinical model for the prevention of restenosis. This data further supports previously published studies which demonstrate the beneficial properties of heparin in multiple indications.
Heparin Product Manufacturing
Heparin is a commodity product that can be obtained from multiple suppliers. Several liquid fill/finish vendors have been identified and a number are qualified to produce the heparin oral solution product.
We have developed a novel propriety process to produce the carrier, SNAC, at large scale under the FDA's good manufacturing practices, or "GMP." SNAC has been produced in approximately 200 kg batch sizes. Batches of liquid product have been produced at a 1,800 liter scale.
To date, the component materials and liquid product have shown good long-term stability. Emisphere is considering building its own facilities to self-produce the EMISPHERE carrier, SNAC and possibly the end drug product (heparin/SNAC), instead of outsourcing the manufacture of SNAC and the heparin/SNAC fill/finish process.
Osteoporosis
Osteoporosis is a disease characterized by low bone mass and structural deterioration of bone tissue, leading to bone fragility and an increased susceptibility to fractures. It is a common condition among the elderly--both men and women. The disease is estimated to affect 1 in 4 women over age 65, 1 in 2 women over age 80, and 1 in 10 men over age 80. The most common consequence of osteoporosis is greatly increased risk of broken bones, especially in the hip region. Osteoporosis is estimated to affect over 10 million Americans and be responsible for more than 1.5 million hip, vertebral, wrist and other fractures annually in the U.S. The disease is relatively expensive to treat. The estimated cost of osteoporosis on the U.S. health care system amounts to an estimated $14 billion per year. It is estimated that by the year 2020, the cost of hip fractures, which account for the highest percentage of fractures, will increase six-fold. In the U.S. market, osteoporosis therapeutics revenues grew from
$2.4 billion in 1998 to $4.0 billion in 2001. This growth is expected to continue through 2006. Several medicines are available to either delay the onset of, or reverse, bone loss. New therapies currently under development should further boost market expansion, will foster greater patient compliance, and ultimately improve the market penetration rate. We are developing with our collaborators, Novartis and Lilly, two promising medicines for the treatment and prevention of osteoporosis.
Salmon Calcitonin
Treatment with salmon calcitonin (sCT) has been shown to maintain bone mineral density in the spine and reduce the risk of new vertebral fractures in post-menopausal women with osteoporosis. It is also used in the treatment of Paget's disease, hypercalcemia of cancer and bone pain. Salmon calcitonin is more potent than human calcitonin and is currently available as an injection or nasal spray. Salmon calcitonin has also been shown to be effective in slowing bone loss. Calcitonin's major advantages are its lack of serious side effects, excellent long-term safety profile and ease of administration. Some studies even suggest that sCT produces an analgesic effect. As a result, the nasal spray has been used in the treatment of acute vertebral fracture syndrome to increase bone density and decrease pain. Annual worldwide sales of sCT are estimated to be in excess of $600 million.
We have conducted collaborative research with Novartis AG (Novartis) on an oral form of sCT since 1997. Under the terms of our collaboration agreement, Novartis has made quarterly payments to us to fund the initial research required to apply our technology to develop an oral sCT product. In October 1999, Novartis completed a Phase I clinical study in the United Kingdom, testing a capsule form of salmon calcitonin utilizing our technology. The study results, released in January 2000, indicated that Novartis achieved its targeted endpoint of therapeutic sCT blood levels, following oral administration of capsules containing sCT and an EMISPHERE carrier. We believe that these results demonstrate the successful oral delivery of a protein macromolecule from a solid oral dosage form without chemical modification of the molecule or damage to the biological membrane.
In February 2000, Novartis agreed to execute its option to acquire an exclusive license to develop and commercialize oral sCT. Under the terms of the agreement Novartis may be required to make milestone payments and an equity investment. We will also receive royalties on sales of any oral products that may result from the collaboration. As a result, Novartis made a $2.5 million milestone payment to us in 2000. We will receive the next milestone payment from Novartis upon successful entry into Phase III clinical testing.
In 2002, Novartis entered Phase II testing with oral salmon calcitonin using one of the EMISPHERE carriers. Also, Novartis has obtained an option to select a second compound for development with our technology.
Recombinant Parathyroid Hormone (PTH)
Recombinant Parathyroid Hormone (PTH) is a bone anabolic/formation compound currently being developed by Lilly as an injectable for the treatment of osteoporosis. In contrast to sCT that reduces bone loss, PTH stimulates new bone formation. In Phase III testing, Lilly's daily injectable recombinant form of PTH (being developed by Lilly as Forteo(TM)) reduced spine fractures by more than 65% and reduced non-traumatic, non-spine fractures by 54% in women with osteoporosis. PTH would be targeted toward patients aged 65 and older with advanced osteoporosis. Lilly received an approval recommendation of its New Drug Application (NDA) for the injectable version of PTH by the FDA advisory panel in July of 2001, and the status of its application is pending with the FDA.
In August 2001, we announced the joint publication of a paper with Lilly researchers on the oral delivery of parathyroid hormone 1-34 in the American Association of Pharmaceutical Scientists' July issue of Pharmaceutical Research (Vol. 18, No. 7, 2001). This paper was jointly authored by Lilly and Emisphere scientists. The paper reported the first reproducible, oral delivery of biologically active PTH in a preclinical model of osteoporosis.
The Emisphere/Lilly oral PTH (terapartide; PTH 1-34) program is currently in Phase I development. Lilly is managing the clinical development program at their expense. Emisphere is supporting the development phase for this product candidate. However all costs incurred are paid by Lilly.
Growth Disorders
Many children and adults suffer from growth hormone deficiency. Growth hormone is necessary to simulate growth in children by promoting the growth of muscle and bone. In adults, growth hormone maintains muscle and bone quality.
Recombinant human growth hormone (somatropin, or rhGH) has been available for many years. Growth hormone deficient children who respond well to treatment will be taller adults following rhGH therapy. Unfortunately, rhGH must be administered by injection and so compliance is particularly difficult in pediatric patients. rhGH therapy requires a long-term commitment by the patient and his or her family to achieve the best response. The prescribed dosing ranges between three and seven injections per week. Treatment continues for several years until the child has completed puberty or has stopped responding.
The overall psychological effects of rhGH therapy are encouraging. The potential for an increased growth rate, more mature appearance and the hope for an adult height within the normal range are viewed as positive by both parents and children. rhGH is approved for pediatric growth hormone deficiency, adult growth hormone deficiency, pre-kidney transplantation, and short stature due to chronic kidney disease and Turner's syndrome. The injectable rhGH worldwide market is estimated to be over $1.5 billion.
Recombinant Human Growth Hormone (rhGH)
In 2001, we selected a carrier for the oral delivery of rhGH. As part of our renewed agreement with Lilly, we will collaborate to bring an oral formulation of rhGH into clinical testing. We plan to enter oral rhGH into Phase I testing this year. An injectable formulation of rhGH, is currently marketed by Lilly as HUMATRODE and indicated for certain growth disorders.
We believe that an oral product would be the preferred method of delivery for both children and adults.
Emisphere is managing the preclinical and early clinical development of this product candidate through contract research organizations, in cooperation with Lilly. Under the agreement, Lilly will reimburse Emisphere for all costs incurred in these development stages.
Diabetes
Currently, approximately 135 million people worldwide are afflicted by diabetes, with approximately 16 million in the United States. Nearly one-third of individuals in the United States with diabetes are unaware that they have this chronic disease. In the United States, diabetes is estimated to be the seventh largest cause of death, and is estimated to account for approximately $98 billion, or 5.8%, of total healthcare costs. There are two principal types of diabetes:
. Type 1. An autoimmune disease in which the body does not produce any insulin. It first appears most often in children and young adults. People with Type 1 diabetes must take multiple daily insulin injections to stay alive. Type 1 diabetes accounts for approximately 5-10% of total diabetes cases.
. Type 2. A metabolic disorder resulting from the body's inability to make enough, or properly use, insulin. It is the most common form of the disease. Type 2 diabetes accounts for approximately 90-95% of diabetes cases. The incidence of Type 2 diabetes is rising rapidly as a result of an aging population, greater prevalence of obesity, and a more sedentary lifestyle.
Most recent estimates indicate that the worldwide total insulin market is estimated at over $1.0 billion and is projected to grow to over $4.0 billion in 2006. The overall diabetes market, including injection systems, needles and other supplies, is approximately $10 billion, and is estimated to reach over $16 billion by 2005. Approximately one-third of all Type 2 diabetics also use insulin to control the disease. This accounts for approximately 50% of the total insulin use. Although many Type 2 diabetics could benefit from insulin therapy, they do not use the drug because it is administered by injection. We believe that an oral form of insulin would greatly facilitate the use of insulin in this patient population.
Oral Insulin
An oral formulation of insulin using an EMISPHERE carrier successfully entered human testing in June of 2001. In August 2001, we contracted the services of investment bank, J.P. Morgan Chase, to assist us in the preliminary negotiation process with potential partners for our oral insulin product candidate. Phase I oral insulin data was announced at an Emisphere-sponsored Investor Day in September 2001.
Initially we tested two insulin/carrier combinations. Now, we are continuing the development of the most promising of these two oral insulin formulations. The safety and tolerability of this formulation is currently being evaluated in diabetics.
In October 2001, we completed a Phase I study using the most promising EMISPHERE carrier selected for insulin. These data were used to support the testing of this formulation in Type 2 diabetic patients. Preliminary testing in Type 2 diabetic patients (a "euglycemic clamp study") was completed in November 2001. In 2002, we plan to initiate another study in Type 2 diabetic patients. This study will be designed to demonstrate the pharmacokinetics of insulin, absorption, and subsequent effects on blood glucose of this product candidate following a standardized meal. We will continue to evaluate and consider the best possible partnership terms with interested parties for the collaborative development and potential marketing of this product candidate.
Oral insulin therapy would greatly facilitate compliance for diabetic patients who are not diligent with their prescribed injection regimens. However, in addition to improving patient compliance, we believe oral insulin should offer a more effective therapy. Oral delivery directs the insulin to the liver. It is important for insulin to travel directly to the liver (the target organ) because this route mimics the normal physiological insulin secretion of the pancreas. We believe the available and market-pending non-oral insulin therapies (i.e. injection), should be inferior to an insulin delivered orally, because they are administered into the general (systemic) circulatory system first, then must be delivered to the liver. This systemic introduction of insulin requires higher circulating insulin levels, so that the appropriate amount of the insulin can be presented to the liver. This excess insulin in the general circulation may cause unwanted complications. Thus, the Company believes that orally delivered insulin is the ideal option for therapy in diabetics.
Asthma/Allergies
An allergy is an immune response by the body to certain stimuli in the environment. One of the most common forms of allergy is hay fever, which is estimated to affect as many as 35.9 million people in the United States. Asthma is a chronic inflammatory disorder of the body's airways caused by allergens and viral respiratory infections leading to bronchial hyper responsiveness and obstruction of airways. More than 17 million Americans are currently estimated to have asthma.
Cromolyn Sodium
Cromolyn sodium mitigates allergic reactions by the inhibition of histamine, a chemical mediator released from the mast cells. Cromolyn sodium is marketed as a nebulized solution, or aerosol formulation, eye solution and nasal spray for the treatment of asthma and allergies. Annual sales of cromolyn sodium are estimated to be approximately $300 million in the United States.
Cromolyn sodium is currently not available orally due to its low bioavailability. Cromolyn sodium is considered by physicians to be safer than the most common medications used to control allergies and inflammation, principally antihistamines and corticosteroids. As an asthma treatment, cromolyn sodium can decrease airway hyperresponsiveness in patients and has virtually no systemic toxicity.
We are developing an oral form of cromolyn sodium for the treatment of asthma and allergy, and related allergic conditions. Development efforts to date have demonstrated oral delivery in animal models and healthy human subjects. In November 2001, we announced Phase I data for this product candidate using an EMISPHERE carrier, which demonstrated absorption was achieved in under 30 minutes in healthy human subjects. We have conducted additional Phase I dose ranging studies since then, and have found the data to be consistent. We plan on conducting additional Phase I-II testing in 2002, using an EMISPHERE carrier selected for cromolyn sodium, in asthma, allergy and sickle-cell patients.
Obesity
Obesity is a major health problem in all developed countries. The prevalence of obesity in the United States has increased substantially during the past decade. According to the 1997 National Task Force on the Prevention and Treatment of Obesity, 1 in 3 American adults is now considered overweight. A 1998 National Institutes of Health report confirmed that obesity significantly increases a number of health risks, including Type II diabetes. Obesity-related conditions such as stroke and myocardial infarction are estimated to contribute to approximately 350,000 deaths annually, ranking second only to smoking as a cause of preventable death. As of 1995, the economic cost of being overweight and obese in the United States was estimated at $99.2 billion annually. Current treatment of obesity consists of diet, exercise and other life-style changes, and a limited number of drugs. We believe that the fact that the population overall is rapidly becoming more obese indicates that treatment of obesity is difficult and characterized by very high recidivism.
Axokine
Regeneron Pharmaceuticals, Inc. is developing subcutaneous AXOKINE(TM) for the treatment of obesity. In the spring of 2000, Regeneron completed a Phase I trial to study the safety of AXOKINE in severely obese patients. A double-blind, placebo-controlled Phase II trial began in the spring of 2001. In January 2002, Regeneron announced that it completed Phase III enrollment for its AXOKINE injectable product candidate.
During 2000, Emisphere established a research and development collaboration and option agreement with Regeneron for the oral delivery of its protein product candidate, a ciliary neutrophic factor (CNTF) being developed as an injectable as AXOKINE. The collaboration was formed after our oral delivery technology successfully produced significant blood levels of CNTF in Regeneron's preclinical animal models. This agreement adds an important biotechnology company to our existing group of partners. Emisphere has selected an EMISPHERE carrier for oral CNTF and the program is currently in the carrier selection stage (pre-clincal development).
Anti-infectives
Cubist Pharmaceuticals, Inc. is in late-stage development with an injectable daptomycin (being developed as CIDECIN(R)) for the treatment of serious or life-threatening gram positive infections. In March 2001, Cubist announced that it plans to seek U.S. approval of CIDECIN for complicated skin and soft tissue infections, and plans submit a new drug application to the FDA by the end of 2002.
In November 2001, Cubist Pharmaceuticals, Inc. announced an extension of the research and development collaboration with us to utilize Emisphere's oral drug delivery technology for daptomycin and other lipopeptides. This agreement follows successful completion of proof-of-principle feasibility studies using Emisphere carrier molecules and daptomycin. The oral daptomycin program is currently in the carrier selection stage (pre-clinical development).
Collaborative Agreements
We are a party to collaborative agreements with corporate partners to provide research and development services relating to the partners' products. These agreements are in the form of research collaboration and licensing agreements. In connection with these agreements, we have granted licenses or the rights to obtain licenses to our oral drug delivery technology. In return, we will receive certain payments upon the achievement of milestones and will receive royalties on sales of products developed. Under these agreements, we will also be reimbursed for research and development costs. We also have the right to manufacture and supply our delivery agents developed under these agreements to our corporate partners.
All of our collaborative agreements are retractable by our corporate partners without significant financial penalty to them.
Eli Lilly and Company In June 2000, the Company and Lilly executed a follow-on development agreement to their 1997 multi-year research and option agreement to develop oral formulations of recombinant parathyroid hormone (PTH) and human growth hormone (rhGH) utilizing the Company's proprietary drug delivery technology. Under the new agreement, the two companies will collaborate to bring oral forms of PTH and rhGH into clinical testing. The new agreement also provides for supplemental research and development funding along with milestone payments.
In connection with the Lilly agreements, the Company recognized contract research revenues of $3.8 million, $3.4 million, $1.2 million (including a $0.6 million milestone payment), $2.2 million (including a $2.0 million milestone payment), and $1.4 million, for the years ended December 31, 2001 and 2000, the five months period ended December 31, 2000, and the years ended July 31, 2000 and 1999, respectively.
Novartis Pharma AG In connection with the 1997 research collaboration between the Company and Novartis, Novartis, in February 2000, agreed to execute its option to acquire an exclusive license to develop and commercialize oral salmon calcitonin and to obtain an option from the Company to investigate the oral delivery of a second Novartis compound.
Under the salmon calcitonin technology license and the technology license option for the second compound, Novartis has the obligation, subject to the Company's approval, to purchase up to $11.0 million of the Company's common stock upon Novartis' decision to exercise its technology license option and upon the attainment by the Company of certain development and clinical milestones. These equity investments are based on market prices at the time of purchase. In addition to the above mentioned equity there are milestone and research collaboration payments based on the attainment of the milestones.
In connection with the Novartis agreement, the Company has recognized $3.5 million, $1.0 million, $1.0 million, $3.5 million (including a $2.5 million milestone payment), and $2.9 million for the year ended December 31, 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999, respectively.
Regeneron Pharmaceuticals, Inc. In 2000, the Company entered into a research collaboration with Regeneron to investigate the applicability of the Company's technology for the oral delivery of a ciliary neutrophic factor (CNTF), being developed for injection as AXOKINE, by Regeneron, for the treatment of obesity.
In connection with the Regeneron agreement, the Company recognized contract research revenue of $0.2 million for the year ended December 31, 2001. Regeneron will continue to pay for all studies related to the pre-clinical product candidate development.
Cubist Pharmaceuticals, Inc. In November 2000, the Company entered into a research and development collaboration agreement with Cubist for the oral delivery of daptomycin (being developed for injection as
CIDECIN) and other lipopeptides. Under the terms of the collaboration, the Company could receive milestone payments totaling $30 million should a product be successfully commercialized. The Company would also receive a royalty on sales of any product resulting from the collaboration, while Cubist would be responsible for drug development and would receive exclusive worldwide commercialization rights to any oral products.
In connection with the Cubist agreement, the Company recognized contract research revenue of $0.4 million, $0.1 million, and $0.1 million, for the years ended December 31, 2001 and 2000, and the five months ended December 31, 2000, respectively. Cubist will continue to pay for all studies related to the pre-clinical product candidate development.
Feasibility Studies We have also entered into a number of proof-of-concept studies with additional pharmaceutical and biotechnology companies for various injectable compounds. These feasibility studies are ongoing. Emisphere will continue to pursue additional feasibility studies to determine the potential for further collaborative development programs. We believe that our increasing number of feasibility arrangements indicate that Emisphere's oral delivery technology is gaining momentum as the platform technology of choice for the oral delivery of therapeutic macromolecules.
Patents, and Other Forms of Intellectual Property
Our patent strategy is designed to maximize our potential patent portfolio, proprietary rights and any future licensing opportunities we might pursue. We seek patent protection on all aspects of our proprietary chemical and pharmaceutical delivery technologies. This involves seeking patent protection for not only the carrier compounds themselves, but also for the combination of our compounds with a pharmaceutical or chemical agent and for generic structures that encompass our carriers. We also seek to patent the processes utilized in manufacturing our carriers, the uses of our carriers, as well as improvements on the core technology which are important to the success of our business. We concentrate our efforts in the key geographic markets of the United States, Canada, Mexico, Europe, Japan and Australia, and file in additional countries on a case-by-case basis. With regard to our SNAC/heparin formulation, we have patents issued which claim the SNAC compound itself, its compositions with heparin, and generic structures encompassing SNAC. In June 2001 we were granted a patent on the use of our proprietary drug delivery technology with chemical compositions of PTH with Lilly.
We also have patents, or patent applications pending, for carriers that we currently use in conjunction with heparin, calcitonin, human growth hormone, deferoxamine, cromolyn sodium and insulin. To date, we have been issued 60 patents on our drug delivery technologies in the United States which will expire beginning in 2007, and have other patents issued or applications pending in various countries around the world. Of our 60 U.S. patents, 9 were issued by the U.S. Patent and Trademark Office during fiscal 2001. We have 49 patent applications relating to our drug delivery technologies pending in the United States. Internationally, a total of 207 patents have been granted or applications are pending in 35 countries, including Canada, Mexico, Europe, Japan and Australia. Additionally, we registered the trademark, EMISPHERE, with the U.S. Patent and Trademark Office for use with our drug delivery agents or "carriers", and the Emisphere logo for both goods and services rendered by Emisphere.
Manufacturing
The primary raw materials used in making the carriers for our heparin products, and the carriers under consideration for our other product candidates, are readily available from multiple sources and in large quantities. We currently have arrangements with third parties to produce these carriers in accordance with the FDA's good manufacturing practices, (GMP), regulations in batch sizes of approximately 200 kilograms. Generally, commercial manufacturers can produce batch sizes of up to 2,000 kilograms. We are in the process of investigating potential manufacturing sites for the bulk manufacture of our carrier, SNAC.
We have identified numerous other commercial manufacturers meeting the FDA's GMP regulations that have the capability of producing our carriers. We will continue to manufacture carriers on a small scale for
research purposes and contract with third-party producers for clinical testing. A third-party manufacturer whose facilities comply with the FDA's GMP regulations is currently producing our carrier and the oral heparin solution formulation for our Phase III clinical trials.
Competition
Our success depends, in part, upon maintaining a competitive position in the development of products and technologies in an evolving field in which developments are expected to continue at a rapid pace. We compete with other drug delivery, biotechnology and pharmaceutical companies, research organizations, individual scientists and non-profit organizations engaged in the development of alternative drug delivery technologies or new drug research and testing, as well as with entities developing new drugs that may be orally active. Our product candidates also compete against alternative therapies for each of the medical conditions our products address, independent of the means of delivery. Many of our competitors have substantially greater research and development capabilities, experience and marketing, financial and managerial resources than we do, and could represent significant competition for us.
Our competitors may succeed in developing competing technologies and obtaining governmental approval for products before we do. We cannot assure you that developments by other drug delivery innovators will not render our product candidates, or the therapeutic compounds used in combination with our product candidates, noncompetitive or obsolete.
Oral Heparin Competition
For example, we are aware that AstraZeneca PLC is in Phase III clinical trials of a pro-drug form of melagatran, a direct thrombin inhibitor, which, if successfully developed, would compete with our oral heparin products. We are also aware of the recently approved injectable pentassacharide product, ARIXTRA(TM), which is indicated for the prevention of DVT in patients undergoing surgery for hip fracture, hip replacement or knee replacement. ARIXTRA is an injectable product and is not approved for a 30 day dosing regimen.
We are aware of other technologies, around the world, that use micro-encapsulation and other forms of technology to orally deliver heparin, however are not aware of any that demonstrate the preservation of both the biological effects of the drug and the integrity of the intestinal membrane as is the case with Emisphere's technology.
Oral Insulin Competition
We are aware of a number of companies and academic institutions that are developing oral insulin analogues. These analogues differ from ours, in that insulin is chemically modified, creating a new chemical entity (NCE).
We are not aware of any technology, other than ours, that demonstrate the preservation of both the biological effects of the drug and the integrity of the intestinal membrane as is the case with Emisphere's technology.
Oral Osteoporosis Therapeutics
We are aware that a nasal dosage form of salmon calcitonin already exists. Salmon calcitonin also competes with other osteoporosis therapies, including estrogen replacement therapy, bisphosphonates, selective estrogen receptor modulators and several new biologics that are under development.
We are aware of other technologies, around the world to orally deliver salmon calcitonin and parathyroid hormone, however are not aware of any that demonstrate the preservation of both the biological effects of the drug and the integrity of the intestinal membrane as is the case with Emisphere's technology.
We believe that our orally delivered products will be preferred by doctors and patients over the injectable forms. Furthermore, we believe that we will be the leader in oral drug delivery, because in most cases, we are striving for delivering already approved therapeutics with our EMISPHERE carriers, preserving the biological effects of the drug and the integrity of the intestinal membrane.
Nevertheless, our oral formulations are expected to continue to compete against well established injectable versions of the same drugs. For example, oral heparin will continue to compete with other forms of generic heparin and low molecular weight heparin, along with the new recently approved pentasaccharide. Low molecular weight heparin is offered in the U.S. principally by Aventis SA, under the trade name "Lovenox, and Pharmacia Corporation, under the trade name "Fragmin". Internationally, there are more than ten approved forms of low molecular weight heparin. Outside of the hospital, warfarin is currently prescribed as an anti-coagulant/antithrombotic. Warfarin is a generic drug marketed under the trade name, Coumadin(R), by Bristol-Myers Squibb Company.
Government Regulation
Our operations and products under development are subject to extensive regulation by the FDA and other governmental authorities in the United States and other governmental authorities in other countries.
The duration of the governmental approval process for marketing new pharmaceutical substances, from the commencement of preclinical testing to the receipt of a governmental final letter of approval for marketing a new substance, varies with the nature of the product and with the country in which such approval is sought. For entirely new drugs, the approval process could take eight to ten years or more; however, for reformulations of existing drugs, the process is typically shorter. In either case, the procedures required to obtain governmental approval to market new drug products are costly and time-consuming, requiring rigorous testing of the new drug product. There can be no assurance that even after such time and expenditures, regulatory approval will be obtained for any products that we develop.
The steps required before a new human pharmaceutical product can be marketed or shipped commercially in the United States include, in part, preclinical testing, the filing of an IND, the conduct of clinical trials and the filing with the FDA of either an NDA for drugs or a Product License Application (PLA) for biologics.
In order to conduct the clinical investigations necessary to obtain eventual regulatory approval, an applicant must file an IND with the FDA to permit the shipment and use of the drug for investigational purposes. The IND sets forth, in part, the results of preclinical (laboratory and animal) toxicology and efficacy testing and the applicant's plans for clinical (human) testing. If the FDA does not deny the exemption to ship or use the investigative drug or place a "hold" on clinical testing within 30 days of the submission of the IND, it becomes effective and clinical testing may begin after Institutional Review Board approval of research involving human subjects.
Under the FDA's regulations, the clinical testing program required for marketing approval of a new drug typically involves three clinical phases. In Phase I, safety studies are generally conducted on normal, healthy human volunteers to determine the maximum dosages and side effects associated with increasing doses of the substance being tested. In Phase II, studies are conducted on small groups of patients afflicted with a specific disease to gain preliminary evidence of efficacy and to determine the common short-term side effects and risks associated with the substance being tested. Phase III involves large-scale trials conducted on disease-afflicted patients to provide statistical evidence of efficacy and safety and to provide an adequate basis for product labeling. Frequent reports are required in each phase and, if unwarranted hazards to patients are found, the FDA may request modification or discontinuance of clinical testing until further studies have been conducted. Phase IV testing is conducted either to meet FDA requirements for additional information as a condition of approval, or to post-approval market acceptance of the pharmaceutical product.
Once clinical testing has been completed pursuant to an IND, the applicant files an NDA or PLA with the FDA seeking approval for marketing the drug product. The FDA reviews the NDA or PLA to determine if the drug is safe and effective, and adequately labeled, and if the applicant can demonstrate proper and consistent manufacture of the drug. The time required for FDA action on an NDA or PLA varies considerably, depending on the characteristics of the drug, whether the FDA needs more information than is originally provided in the NDA or PLA and whether the FDA finds problems with the evidence submitted.
The facilities of each company involved in the manufacturing, processing, testing, control and labeling must be registered with and approved by the FDA. Continued registration requires compliance with GMP regulations. The FDA conducts periodic establishment inspections to confirm continued compliance with its regulations.
We are also subject to various federal, state and local laws, regulations and recommendations relating to such matters as laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development work. Although we believe we are in compliance with these laws and regulations in all material respects, there can be no assurance that we will not be required to incur significant costs to comply with environmental and other laws or regulations in the future.
Employees
As of March 1, 2002, we had 241 employees, 213 engaged in scientific research and technical functions and 28 performing administrative and clerical functions. Of the 241 employees, 52 hold Ph.D. or M.D. degrees. We believe that our relationships with our employees are strong.
ITEM 2.
ITEM 2. PROPERTIES
We currently lease approximately 107,000 square feet of office space at 765 Old Saw Mill River Road, Tarrytown, New York for use as executive offices and laboratories. Our current lease expires in September 2007 with a ten-year extension at then-current rates at our option.
In April 2001, we acquired an additional 100,000 square feet of research and development capacity, with accreditation for expanded pharmaceutical testing, located on 29 acres of land in Connecticut for approximately $3.3 million in cash. We anticipate that the acquisition of this facility will help us to better control our time lines for insulin, cromolyn sodium and other programs, as well as reduce development times.
In order to accommodate our internal growth, we are building out approximately 7,200 square feet of additional office space for occupation in April 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any litigation that is expected to have a material effect on our operations or business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market under the symbol EMIS.
The following table sets forth the range of high and low bid prices for our Common Stock for the periods indicated, as reported by Nasdaq.
As of March 22, 2002 there were approximately 279 stockholders of record, including record owners holding shares on behalf of an indeterminate number of beneficial owners, and 17,828,250 shares of Common Stock outstanding. The closing price of our Common Stock on March 22, 2002 was $17.09.
We have never paid cash dividends and do not intend to pay cash dividends in the foreseeable future. We intend to retain earnings, if any, to finance the growth of our business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended July 31, 1997, 1998, 1999 and 2000, the five months ended December 31, 2000 and the year ended December 31, 2001 have been derived from the financial statements of Emisphere and notes thereto, which have been audited by Emisphere's independent accountants. The selected financial data for the five months ended December 31, 1999 and the year ended December 31, 2000 are unaudited. We did not declare or pay any dividends during the five years ended December 31, 2001.
- -------- (1) unaudited
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Emisphere Technologies, Inc., is a biopharmaceutical company specializing in the oral delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means. Since our inception in 1986, we have devoted substantially all of our efforts and resources to research and development conducted on our own behalf and through collaborations with corporate partners and academic research institutions. We have had no product sales to date. The timing of future product sales depends on many factors, including the progress of our products in development through clinical trials, regulatory approval, commercialization and market acceptance. These and other factors that may impact future results are described under "Risk Factors" below.
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Contract research revenues were $4.7 million in 2001, representing a decrease of $2.5 million or 34% compared to the year ended December 31, 2000. The decrease was primarily attributable to the absence of revenues from the Novartis Pharma AG development program, due to a non-recurring milestone payment and the near completion of the Company's related research efforts. Revenues for 2001 related to research and development expense reimbursement primarily under our collaborative agreements with Eli Lilly and Company, Cubist Pharmaceuticals, Inc., and Regeneron Pharmaceuticals Inc. Costs of contract research revenues approximate such revenues and are included in research and development expenses.
Total operating expenses were $67.0 million for 2001, an increase of $32.9 million, or 96%, compared to the year ended December 31, 2000. The details of the increase are as follows:
Research and development costs were $53.3 million for 2001, an increase of $28.5 million, or 115%, compared to the year ended December 31, 2000. This increase is mainly attributable to an increase of $14.8 million related to conducting Phase I and Phase III clinical trials for our product candidates. The remainder of the increase was primarily due to increased outside laboratory fees and laboratory supply expenses of $5.9 million, salaries of $4.6 million, and cost of occupancy of $3.0 million associated with the increased activities under collaborative and proprietary development programs.
General and administrative expenses were $9.7 million in 2001, an increase of $3.0 million, or 45%, compared to the year ended December 31, 2000. This increase is primarily the result of increased legal and professional fees, general occupancy costs, and salaries to support the increase in research activity.
Depreciation and amortization was $4.0 million in 2001, an increase of $1.4 million, or 54%, compared to the year ended December 31, 2000. The increase was primarily due to depreciation of equipment and leasehold improvements made in 2001 as we expanded our facilities at Tarrytown, New York and acquired land, building and equipment in Connecticut.
Other income and expenses were $5.7 million of net income in 2001, a decrease of $2.5 million, or 30%, compared to the year ended December 31, 2000. This decrease is primarily the result of a $2.0 million decrease in investment income resulting from lower cash, investment balances, and interest rates and an increase of $0.5 million in non-cash interest accrued on a note payable.
Based on the above factors, we sustained a net loss of $56.5 million in 2001 an increase of $37.9 million compared to a net loss of $18.7 million in the year ended December 31, 2000.
Five Months Ended December 31, 2000 Compared to Five Months Ended December 31, 1999
Contract research revenues were $2.4 million in the five months ended December 31, 2000, representing an increase of $1.3 million or 121%, compared to the five months ended December 31, 1999. This $1.3 million increase was due to the reimbursement of the PTH development expense from Eli Lilly and Company. Revenues for the five months ended December 31, 2000 related to research and development expense reimbursement primarily under our collaborative agreements with Novartis Pharma AG, Eli Lilly and Company and Cubist Pharmaceuticals, Inc. Costs of contract research revenues approximate such revenues and are included in research and development expenses.
Total operating expenses were $14.6 million in the five months ended December 31, 2000, a decrease of $1.6 million, or 10%, compared to the same period last year. The details of this decrease are as follows:
Research and development costs were $10.4 million in the five months ended December 31, 2000, a decrease of $2.6 million or 20%, compared to the same period last year. This decrease is due to the absence of $5.8 million of expenses incurred in 1999 related to pre-initiation start up costs for the ongoing oral heparin solution Phase III clinical trial, partially offset by an increase of $3.2 million of expenses comprised of outside laboratory fees and salaries associated with the increased activities under collaborative and proprietary development programs and increased scientific staff to support these programs.
General and administrative expenses were $3.0 million in the five months ended December 31, 2000, an increase of $0.8 million, or 38%, compared to the same period last year. This increase is primarily the result of additional staff needed to support our expanded levels of research and development efforts.
Depreciation and amortization costs were $1.2 million in the five months ended December 31, 2000, an increase of $0.2 million, or 17%, compared to the same period of 1999. This increase is primarily the result of amortization expense for leasehold improvements related to additional laboratory and office space made during the five months ended December 31, 2000.
As a result of the above, our operating loss was $12.2 million in the five months ended December 31, 2000, a decrease of $2.9 million, as compared to $15.1 million for the five months ended December 31, 1999.
Other income and expense increased to approximately $4.6 million of income, compared to a net expense of $0.7 million in the comparative period for the five months ended December 31, 1999. The change is primarily the result of an increase in investment income of $5.5 million, as compared to the prior year. This increase resulted from higher cash and investment balances from the sale of common stock in the follow-on public offerings completed in November 1999 and March 2000.
Based on the above, we sustained a net loss of $7.6 million in the five months ended December 31, 2000, as compared to a net loss of $15.8 million in the same period of 1999.
Year Ended July 31, 2000 Compared to Year Ended July 31, 1999
Contract research revenues were $5.9 million for the year ended July 31, 2000, a decrease of $4.3 million, compared to the year ended July 31, 1999. The decrease was primarily attributable to the absence of revenues from our former heparin development joint venture, which was acquired in July 1999, offset by increases from both the Novartis Pharma AG and Eli Lilly and Company development programs.
In the year ended July 31, 1999, we shifted our strategic focus from fundamental research and technology licensing to product development. A key step in the implementation of this strategy occurred with the July 1999 acquisition of our former partner's equity interest in a heparin development joint venture with us. In the year ended July 31, 1999, development expense reimbursement from the former joint venture was $5.7 million and approximated the costs associated with research efforts conducted on behalf of the joint venture.
Revenues from Novartis approximated $3.5 million in the year ended July 31, 2000, which included reimbursed research and development efforts of $1 million and milestone payments of $2.5 million compared to $2.9 million of reimbursed research and development efforts in the year ended July 31, 1999. Revenues from Lilly were $2.2 million in the year ended July 31, 2000 and were comprised of milestone payments related to the Forteo development collaboration, compared to $1.4 million of reimbursed research and development efforts in the year ended July 31, 1999.
Total operating expenses were $35.8 million for the year ended July 31, 2000, a decrease of $5.9 million, or 14%, compared to the year ended July 31, 1999. The details of the decrease are as follows:
Research and development costs were $27.4 million for the year ended July 31, 2000, an increase of $6.2 million, or 29%, compared to the year ended July 31, 1999. This increase is mainly attributable to increased costs related to initiating and conducting Phase III clinical trials for our oral heparin solution.
We recognized an expense in the year ended July 31, 1999 for acquired in-process research and development, which is discussed below. There were no similar costs incurred during the year ended July 31, 2000.
General and administrative expenses were $5.9 million in the year ended July 31, 2000, a decrease of $0.2 million, or 3%, compared to the year ended July 31, 1999. This decrease is primarily the result of a decline in consulting costs associated with the completion during the year ended July 31, 2000 of a multi-year laboratory management system implementation and a decrease in executive recruiting costs.
Depreciation and amortization was $2.4 million in the year ended July 31, 2000, an increase of $0.8 million, or 49%, compared to the year ended July 31, 1999. The increase was primarily due to amortization of purchased technology acquired in conjunction with the fiscal 1999 purchase of our former partner's equity interest in the heparin development joint venture and to depreciation of equipment and leasehold improvements made in the year ended July 31, 1999, as we expanded our facilities.
The loss in Ebbisham Ltd. (heparin development joint venture with Elan Pharmaceuticals, plc) decreased by $3.1 million in the year ended July 31, 2000 from the year ended July 31, 1999 due to the consolidation of the joint venture after we acquired our former partner's interest in the joint venture, attaining 100% ownership. Thereafter, we discontinued the equity method of accounting. We assumed heparin development efforts, and the related costs are included in research and development in the year ended July 31, 2000.
As a result of these factors, our operating loss was $29.9 million in the year ended July 31, 2000, a decrease of $1.6 million compared to an operating loss of $31.5 million in the year ended July 31, 1999.
Our other income and expenses were $3.0 million of net income in the year ended July 31, 2000, an increase of $2.2 million from the year ended July 31, 1999. This increase is primarily the result of a $4.4 million increase in investment income resulting from higher cash and investment balances, partially off-set by an increase of $2.9 million in non-cash interest accrued on a note payable. The increase in cash and investments resulted from the sale of common stock in two follow-on public offerings.
Based on the above factors, we sustained a net loss of $26.9 million in the year ended July 31, 2000, a decrease of $3.8 million, compared to a net loss of $30.7 million in the year ended July 31, 1999.
Liquidity and Capital Resources
As of December 31, 2001, we had cash, cash equivalents and investments totaling $139.3 million, a decrease of $57.5 million, compared to December 31, 2000.
Net cash used in operations was $39.6 million in 2001, as compared to $15.5 million in the year ended December 31, 2000. The increase in cash used in operations was primarily due to the initiation of Phase I clinical trials and the continuation of our oral heparin solution Phase III clinical development and to support our overall expansion in operations.
Capital expenditures were approximately $18.7 million in 2001 compared to $6.3 million for the year ended December 31, 2000. The increase in capital expenditures is primarily due to the purchase of the Connecticut facilities and the build-out of our leased laboratory and office space in Tarrytown, New York.
Net cash provided by financing activities was approximately $0.4 million in 2001, compared to net cash provided of $191.6 million during the year ended December 31, 2000. The change was due primarily to the repurchase of our common stock in 2001, and proceeds received from a follow-on public offering of common stock completed in March 2000.
We expect to continue to incur substantial oral heparin solution clinical development expenses in 2002, as the product progresses through PROTECT 2 clinical development. In addition, we expect to expand our own development of products, including oral insulin, solid heparin, and cromolyn sodium. As a result, we expect to continue to incur increasing operating losses over those incurred in 2001.
Likewise, our cash requirements are expected to increase due to cost associated with expanding research and development of our technologies, development of our own additional drug formulations, and general and administrative costs. These costs include, but are not limited to, increases in personnel and personnel related costs, purchases of capital equipment, and facilities expansion in New York and Connecticut. Capital expenditures are expected to be in the range of $16 to $20 million in 2002, which includes $5 to $10 million of the capital to build manufacturing facilities for our oral heparin solution, contingent upon management and Board of Directors' approval. Assuming the success of our oral heparin solution trial and management's approval, the total cost of building the manufacturing facilities over the next two to three years is estimated to amount to $50 to $60 million. Subsequent to December 31, 2001, we also committed to lease and build-out an additional 7,200 square feet of administrative space at our leased facility in Tarrytown, New York.
We expect our cash, cash equivalent and investment balances to decrease by $75 to $95 million in 2002. This level of spending assumes the PROTECT trials will meet their required endpoints and that we will not enter into partnership agreements for either oral heparin solution and/or oral insulin. If we had to develop heparin and insulin without a partner, we would be required to seek additional financing to fund operations beyond 2002. However, if we enter into an agreement, depending upon the terms of any partnership agreement, we could receive expense reimbursement and/or cash infusions, which may delay the need for equity funding. A negative outcome of the PROTECT trial also would reduce our cash requirements by $15 to $30 million as a result of lower clinical trial and operating expenses. However, it could have an adverse effect on our potential for raising additional cash through public stock offerings and entering into other partnerships. A negative outcome of PROTECT also will potentially trigger a significant write-down of intangible assets between 25% to 50% and other fixed assets purchased for oral heparin solution may be partially impaired.
In September 2001, we enacted a share repurchase program, which our Board of Directors authorized for up to $30 million. During 2001, we repurchased approximately 200,000 shares of our common stock for a total of $3.6 million. The current share repurchase program was terminated in October 2001. Such stock, which is deemed to be treasury stock, is recorded at cost. From time to time, in order to meet corporate needs, we may repurchase further shares of our common stock. The timing of stock repurchases is made at the discretion of management, with the approval of our Board of Directors.
The following table summarizes our contractual obligations for long-term debt, Clinical Research Organization expense and research consulting agreements.
- -------- (1) $20 million Note Payable to Elan in connection with the purchase of Ebbisham Ltd due in 2006; accrued interest to accumulate to $35.0 million if held to maturity; payable in cash or Emisphere stock at Emisphere's option; balance due at December 31, 2001 was approximately $28.7 million. (2) Excluding PROTECT 2 for which the Company has not signed a contract as of December 31, 2001.
Critical Accounting Policies
Investments The Company invests excess cash in accordance with a policy objective seeking to preserve both liquidity and safety of principal. Investments are carried at fair value, with unrealized holding gains and losses reported in stockholders' equity. The Company generally invests its excess funds in obligations of the U.S. government and its agencies, bank deposits, mortgage-backed securities, and investment grade debt securities issued by corporations and financial institutions at ratings of A-1 or A (Standard and Poor's). The Company considers all highly liquid, interest-bearing debt instruments with maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include demand deposits held in banks and interest bearing money market funds. Short- and long-term investments are considered to be available for sale. Although the Company's investments carry high ratings when purchased, a lowering of the rating of the corporate debt securities in our portfolio could result in impairment to our investments.
Purchased Technology Purchased technology represents the value assigned to research and development projects of Ebbisham Ltd, that were commenced but not yet completed as of the date of the Company's acquisition of full ownership and which, if unsuccessful, have no alternative future use. American Appraisal Associated, Inc., was engaged to assess the value of the technology in connection with the acquisition of Ebbisham Ltd. The data and underlying assumptions of that valuation, including projections of discounted cash flows related to the development of our oral heparin products, were updated and determined to be accurate based upon the continued progress of the oral heparin development program. We amortize purchased technology on a straight-line basis over a period of 15 years, the average life of the related patents. The fair value of purchased technology is reviewed for impairment whenever events or changes in circumstances, such as the manner in which an asset is used, indicate that its carrying value may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Should the outcome of PROTECT prove negative, a substantial portion of this intangible asset will be written-off due to impairment.
Clinical Research Trial Accrual Methodology Clinical research expenses represent obligations resulting from the Company's contracts with various research organizations in connection with conducting clinical trials for the Company's product candidates. The Company accounts for those expenses on an accrual basis according to the progress of the trial as measured by patient enrolment and the timing of the various aspects of the trial. Accruals are recorded as follows: (1) contract costs are broken down based on the nature and the timing of costs which trigger the recognition of expense; (2) the costs for period expenses, such as investigator meetings and initial start-up costs, are expensed/accrued as incurred based on management's estimates; such estimates are
impacted by the change in the number of sites and recruitment of patients and when they start; (3) direct service costs are recognized on a straight-line basis over the life of the contract (on-going monitoring costs); and (4) principal investigator expenses that are directly associated with recruitment are recognized based on actual patient recruitment. All changes to the contract amounts due to change orders are analyzed and recognized in accordance with the above methodology. Change orders are triggered by changes in the scope, time to completion and the number of sites. The Company adjusts its rate of clinical expense recognition if actual results differ from our estimates.
Revenue Recognition Contract research revenues consist of revenue from collaborative agreements and feasibility studies and are comprised of reimbursed research and development costs, as well as upfront and research and development milestone payments. Deferred revenue represents payments received, which are related to future performance. Non-refundable upfront and research and development milestone payments and payments for services are recognized as revenue as the related services are performed over the term of the collaboration. Revenue recognized is the lower of (i) the percentage complete, measured by incurred costs, applied to expected contractual payments or (ii) the total non-refundable cash received to date. With regards to our revenues from non-refundable fees, changes in our assumptions of estimated costs to complete could have a material impact on the revenue we recognize. Contract research revenues are expected to fluctuate from year to year and are dependent upon the timing of work plans mutually agreed to with collaborators and to the allocation of efforts between ourselves and our collaborators.
Research Project Spending
We have devoted substantially all of our efforts and resources to research and development conducted on our own behalf (self-funded) and through collaborations with corporate partners (partnered). Due to the uncertainties and "Risk Factors" as described below, including the progress of our products in development through clinical trials, regulatory approval, commercialization and market acceptance, it is not possible to reliably predict future spending by project or project category.
The following table summarizes spending by project category:
- -------- (1) Cumulative spending from August 1, 1995 through December 31, 2001
Transactions with Related Parties
During 2001, the Company paid $0.08 million for general consulting services to one member of our Board of Directors.
Risk Factors
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements that we make in this Report and elsewhere (including oral statements) from time to time. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Report.
Risks Related to Emisphere Technologies
We are highly dependent on the success of our heparin products.
Our leading product candidate is an oral heparin solution for the prevention of deep vein thrombosis. Heparin is currently not available in oral form. We commenced Phase III clinical trials ("PROTECT") for this product in 1999 and began dosing patients in January 2000. The outcome of clinical trials is inherently subject to uncertainty, as is the FDA's drug approval. Enrollment in the Phase III trial was completed as of year-end 2001. While our objective is to show the superiority of oral heparin solution to Lovenox, we cannot assure that this data will in fact demonstrate true superiority. As of this annual report, nearly 100% of the data is in, however, the data continues to be blinded. Even if our oral heparin solution does show superiority, PROTECT 2, our second Phase III trial, will be costly and the outcome is uncertain. If both PROTECT and PROTECT 2 are successful, there are still risks in commercialization.
In addition, the manufacture, marketing and distribution of pharmaceuticals is a formidable undertaking. We do not have the marketing expertise to bring oral heparin to market on our own. In July 1999, we reacquired all product, marketing and technology rights for Emisphere's heparin products from Elan Corporation, plc, which had been our joint venture partner since 1996. Until we enter into a new partnership agreement, we remain responsible for the clinical trials, development, manufacturing, marketing and distribution of our oral forms of heparin. In accordance with the Elan agreement we will be required to pay Elan royalties on our sales which are capped on an annual basis. See Note 10 to our consolidated financial statements.
Our product candidates are in various stages of development, and we cannot be certain that any will be suitable for commercial purposes.
To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products under development. The time necessary to achieve these goals for any individual product is long and uncertain. Before we can sell any of our products under development, we must demonstrate through preclinical (animal) studies and clinical (human) trials that each product is safe and effective for human use for each targeted indication. We cannot be certain that we will be able to begin, or continue, our planned clinical trials for our product candidates, or if we are able, that our product candidates will prove to be safe and will produce their intended effects.
A number of companies in the drug delivery, biotechnology and pharmaceutical industries have suffered significant setbacks in clinical trials, even after showing promising results in earlier studies or trials. We cannot assure you that favorable results in any preclinical study or early clinical trial will mean that favorable results will ultimately be obtained in future clinical trials. Nor can we assure you that results of our limited animal and human studies are indicative of results that would be achieved in future animal studies or human clinical studies, all or some of which will be required in order to have our proposed products obtain regulatory approval. Similarly, we cannot assure you that any of our product candidates will be approved by the FDA.
Our future business success depends heavily upon regulatory approvals, which can be difficult to obtain for a variety of reasons, including cost.
Our preclinical studies and clinical trials, as well as the manufacturing and marketing of our technologies, are subject to extensive, costly and rigorous regulation by various governmental authorities in the United States and other countries. The process of obtaining required regulatory approvals from the FDA and other regulatory authorities often takes many years, is expensive and can vary significantly based on the type, complexity and novelty of the product candidates. We cannot assure you that any technologies or carriers developed by us, either independently or in collaboration with others, will meet the applicable regulatory criteria in order to receive the required approvals for manufacturing and marketing. Delays in obtaining United States or foreign approvals for our self-funded projects could result in substantial additional costs to us, and, therefore, could adversely affect our ability to compete with other companies. Additionally, delays in obtaining regulatory approvals encountered by others with whom we collaborate, or other licensees of ours, could also adversely affect our business and prospects.
If regulatory approval of a product is granted, the approval may place limitations on the intended uses of the product we wish to commercialize, and may restrict the way in which we are permitted to market the product, either of which may affect cost greatly.
We are dependent upon collaborative partners to develop and commercialize compounds using our carriers.
A key part of our strategy is to form collaborations with pharmaceutical companies that will assist us in developing, testing, obtaining government approval for and commercializing oral forms of therapeutic compounds using our drug delivery technologies. We do not currently possess the ability or resources necessary to reach these goals alone, and we do not currently intend independently to market products incorporating our technologies in the foreseeable future. Other than our strategic alliances with Novartis, Lilly, Cubist, and Regeneron we have no commitments or development agreements currently in effect.
Accordingly, we cannot assure you that:
. we will be able to enter into collaborative arrangements to develop products utilizing our drug delivery technologies;
. any existing or future collaborative arrangements will be successful; or
. milestones in these agreements will be met.
If we are unable to obtain development assistance and funds from other pharmaceutical companies to fund a portion of our product development costs and to commercialize products, we may have to delay, scale back or curtail one or more of our projects.
We have incurred substantial losses since inception and may require additional capital.
Since our inception in 1986, we have generated significant losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. On December 31, 2001, our accumulated deficit was approximately $179 million. Operations to date have been funded with the proceeds from collaborative research agreements, public and private equity and debt financings and income earned on investments.
We expect to experience a substantial increase in clinical development expenses for self-funded projects and in oral heparin solution clinical development expenses in 2002 as we conduct Phase III clinical trials, the most expensive phase of the clinical development process. As a result, we believe that we will continue to incur increasing operating losses for the foreseeable future.
We anticipate that our existing capital resources will enable us to maintain currently planned operations through at least the next fourteen to eighteen months. However, this expectation is based on our current operating plan, that could change as a result of many factors, and we may need additional funding sooner than anticipated. To the extent operating and capital resources are insufficient to meet future requirements, we will have to raise additional funds to continue the development and commercialization of our products. Such funds may not be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to our existing stockholders.
If we cannot adequately protect our patent and proprietary rights, our business will suffer.
Although we have patents for some of our product candidates and have applied for additional patents, there can be no assurance that patents applied for will be granted, that patents granted to or acquired by us now or in the future will be valid and enforceable and provide us with meaningful protection from competition or that we will possess the financial resources necessary to enforce any of our patents. There can also be no assurance that any products that we (or a licensee) develop will not infringe upon any patent or other intellectual property right of a third party.
We also rely upon trade secrets, know-how and continuing technological advances to develop and maintain our competitive position. We maintain a policy of requiring employees, scientific advisors, consultants and collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with us. We cannot assure you, however, that these agreements will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.
Our success also depends, in part, on our ability to obtain patent protection for our products, processes and technologies, to preserve our trade secrets, and to operate without infringing the proprietary rights of third parties, in various jurisdictions. We cannot assure you that any patent applications relating to our potential products or processes will result in patents being issued, or that resulting patents, if any, are valid, enforceable or will provide protection against competitors who challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or are able to circumvent our patent position. We cannot assure you that we will have the necessary financial resources to enforce any of our patents.
Part of our strategy involves collaborative arrangements with other pharmaceutical companies for the development of new formulations of drugs developed by others and, ultimately, the receipt of royalties on sales of the new formulations of those drugs. These drugs are generally the property of the pharmaceutical companies and may be the subject of patents or patent applications and other forms of protection owned by the pharmaceutical companies. To the extent those patents or other forms of protection expire, become invalid or otherwise ineffective, or to the extent those drugs are covered by patents or other forms of protection owned by third parties, sales of those drugs by the collaborating pharmaceutical company may be restricted, limited, enjoined, or may cease. Accordingly, the potential for royalty revenues to us may be adversely affected.
We are dependent on third parties to manufacture our products.
We currently have no manufacturing facilities for large-scale clinical or commercial production of any compounds under consideration as products. Management is currently evaluating its options to manufacture or rely on third parties.
We may face product liability claims related to participation in clinical trials or the use or misuse of our products.
We have product liability insurance with a policy limit of $10 million per occurrence and in aggregate. The testing, manufacturing and marketing of products for humans utilizing our drug delivery technologies may expose us to potential product liability and other claims resulting from their use.
Liability may also result from claims made directly by consumers or by pharmaceutical companies or others selling our products. We seek to structure future development programs with pharmaceutical companies that would complete the development, manufacturing and marketing of the finished product, but the indemnity undertakings for product liability claims that we secure from the pharmaceutical companies may later prove to be insufficient.
Risks Related to Our Industry
We face rapid technological change and intense competition.
Our success depends, in part, upon maintaining a competitive position in the development of products and technologies in an evolving field in which developments are expected to continue at a rapid pace. We compete with other drug delivery, biotechnology and pharmaceutical companies, research organizations, individual scientists and non-profit organizations engaged in the development of alternative drug delivery technologies or new drug research and testing, as well as with entities developing new drugs that may be orally active. Many of these competitors have greater research and development capabilities, experience, and marketing, financial and managerial resources than we do, and, therefore, represent significant competition for us.
Our products, when developed and marketed, may compete with existing injectable versions of the same drug, some of which are well established in the marketplace and manufactured by formidable competitors, as well as other existing drugs. For example, our oral heparin products will compete with injectable heparin, injectable low molecular weight heparin and warfarin, an oral anti-coagulant. These products are marketed throughout the world by very large companies such as Aventis SA, Pharmacia & Upjohn, Inc. and Bristol Myers Squibb. Similarly, our salmon calcitonin product candidate, if developed and marketed, would compete with a wide array of existing osteoporosis therapies, including a nasal dosage form of salmon calcitonin, estrogen replacement therapy, bisphosphonates and selective receptor modulators.
Our competitors may succeed in developing competing technologies or obtaining government approval for products before we do. Developments by others may render our product candidates, or the therapeutic compounds used in combination with our product candidates, noncompetitive or obsolete. For example, we are aware that AstraZeneca PLC has completed Phase II clinical trials of a pro-drug form of melagantran, a direct thrombin inhibitor, which, if successfully developed, would compete with our oral heparin products. Similarly, we are aware that Nobex Corporation has an oral insulin formulation in Phase II development and that at least one competitor has notified the FDA that it is developing a competing formulation of salmon calcitonin. We cannot assure you that, if our products are marketed, they will be preferred to existing drugs or that they will be preferred to or available before other products in development.
Risks Relating to Our Common Stock
Anti-takeover provisions of our corporate charter documents, Delaware law and our agreements with collaborators may affect the price of our common stock.
Our board of directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the rights, preferences and privileges of those shares without any further vote or action by our stockholders. Of these 1,000,000 shares, 200,000 are currently designated Series A Junior Participating Cumulative Preferred Stock in connection with our stockholders' rights plan, and the remaining 800,000 shares remain available for future issuance. Your rights as a holder of common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. Additional provisions of our certificate of incorporation and by-laws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common stock. These include provisions that classify our board of directors, limit the ability of stockholders to take action by written consent, call special meetings, remove a director for cause, amend the by-laws or approve a merger with another company.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation's voting stock.
We also have a stockholder's right's plan, commonly referred to as a "poison pill," that makes it difficult, if not impossible, for a person to acquire control of us without the consent of our Board of Directors.
In addition, we have contractual "standstill" agreements with Lilly, Novartis, Regeneron and Elan, which generally prohibit each company from acquiring shares of our outstanding voting stock above specified levels. We may enter into additional standstill agreements with future collaboration partners and with prospective collaboration partners before we begin negotiating collaborations with them.
Our stock price has been and may continue to be volatile.
The trading price for our common stock has been and is likely to continue to be highly volatile. The market prices for securities of drug delivery, biotechnology and pharmaceutical companies have historically been highly volatile. Factors that could adversely affect our stock price include:
. fluctuations in our operating results;
. announcements of technological collaborations, innovations or new products by us or our competitors;
. governmental regulation;
. developments in patent or other proprietary rights;
. public concern as to the safety of drugs developed by us or others;
. the results of preclinical testing and clinical studies or trials by us or our competitors;
. litigation;
. general market conditions; and
. number of shares available for trading (float).
Future sales of common stock, or the prospect of future sales, may depress our stock price.
Sales of a substantial number of shares of common stock, or the perception that sales could occur, could adversely affect the market price of our common stock. As of December 31, 2001, we have outstanding options to purchase up to 3,955,473 shares of common stock which are currently exercisable and additional options to purchase up to 1,734,015 shares of common stock are exercisable over the next several years. In addition, an aggregate of 25,000 shares of common stock have been reserved for issuance under our Directors' Deferred Compensation Plan, of which 5,358 shares are currently issuable. The holders of these options or rights have an opportunity to profit from a rise in the market price of our common stock with a resulting dilution in the interests of the other stockholders. The existence of these options or rights may adversely affect the terms on which we may obtain additional financing.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary investment objective is to preserve principal while maximizing yield without significantly increasing our risk. Our investments consist of U.S. Treasuries, commercial paper and corporate notes. Our investments totaled $96.4 million at December 31, 2001. Approximately $64.9 million, of which $57.9 million were short-term and $7.0 million were long-term investments, had fixed interest rates, and $31.5 million, which were all short-term investments, had variable interest rates.
Due to the conservative nature of our short-term fixed interest rate investments (maturities in less than one year), we do not believe that we have a material exposure to interest rate risk. Our fixed interest rate long-term investments are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these investments due to differences between the market interest rate and the rate at the date of purchase of the investment. A 100 basis point increase in the year-end market interest rates would result in a decrease of approximately $0.7 million in the market values of these investments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules begin on page of this report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the Proxy Statement to be distributed in connection with our next annual meeting of stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the Proxy Statement to be distributed in connection with our next annual meeting of stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the Proxy Statement to be distributed in connection with our next annual meeting of stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the Proxy Statement to be distributed in connection with our next annual meeting of stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
A list of the financial statements filed as a part of this report appears on page.
(2) Financial Statement Schedules
Schedules have been omitted, because the information required is not applicable or is shown in the Financial Statements or the corresponding Notes to the Consolidated Financial Statements.
(3) Exhibits
A list of the exhibits filed as a part of this report appears on pages E-1 and E-2, which follow immediately after the financial statements.
(b) Reports on Form 8-K
None.
(c) See Exhibits listed under the heading "Exhibit Index" set forth on page E-1.
(d) Not applicable. See Item 14 (a) (2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2002
EMISPHERE TECHNOLOGIES, INC.
By: /s/ MICHAEL M. GOLDBERG ----------------------------- Michael M. Goldberg, M.D. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature Title Date ------------------ ----- ----
/s/ MICHAEL M. GOLDBERG Director, Chairman of the March 27, 2002 - ----------------------------- Board and Chief Executive Michael M. Goldberg, M.D. Officer
/s/ JERE E. GOYAN Director March 27, 2002 - ----------------------------- Jere E. Goyan, Ph.D
/s/ PETER BARTON HUTT Director March 27, 2002 - ----------------------------- Peter Barton Hutt, Esq.
/s/ HOWARD M. PACK Director March 27, 2002 - ----------------------------- Howard M. Pack
/s/ MARK I. GREENE Director March 27, 2002 - ----------------------------- Mark I. Greene, M.D., Ph.D.
/s/ JOSEPH R. ROBINSON Director March 27, 2002 - ----------------------------- Joseph R. Robinson, Ph.D.
/s/ ROBERT J. LEVENSON Director March 27, 2002 - ----------------------------- Robert J. Levenson
/s/ FREDRICK D. COBB General Manager, Finance and March 27, 2002 - ----------------------------- Accounting Officer Fredrick D. Cobb
/s/ FRIEDRICH K. PFETSCH Controller and Chief March 27, 2002 - ----------------------------- Accounting Officer Friedrich K. Pfetsch
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Index
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Emisphere Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Emisphere Technologies, Inc., and subsidiaries, at December 31, 2001 and 2000, and the results of its operations and its cash flows for the year ended December 31, 2001, the five months ended December 31, 2000, and the years ended July 31, 2000 and 1999 in conformity with generally accepted accounting principles in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States of America, 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 audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
New York, New York February 1, 2002
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
The accompanying notes are an integral part of the financial statements
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
The accompanying notes are an integral part of the financial statements
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
The accompanying notes are an integral part of the financial statements
EMISPHERE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the year ended December 31, 2001, the five months ended December 31, 2000 and the years ended July 31, 2000 and 1999 (in thousands, except share data)
The accompanying notes are an integral part of the financial statements
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. Emisphere Technologies, Inc. (the "Company") is a biopharmaceutical company specializing in the oral delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means. Since its inception in 1986, the Company has devoted substantially all of its efforts and resources to research and development conducted on its own behalf as well as through collaborations with corporate partners and academic research institutions. The Company has no product sales to date. The Company operates under a single segment.
The Company expects to incur a substantial increase in oral heparin solution clinical development expenses in 2002 as the product continues through Phase III clinical trials. As a result, management believes that the Company will continue to incur increasing operating losses and will require substantial financial resources to continue not only its oral heparin clinical development program, but also the expansion of its internal research and development efforts, including Phase I and II clinical trials of other product candidates. Management believes that cash, cash equivalents, and investments at December 31, 2001, will be sufficient to fund the Company's operation through 2002 and that additional funding, either through a corporate partnership or equity financing, will be required to fund operations beyond 2002.
Use of Estimates. The Company has no products approved for sale by the U.S. Food and Drug Administration. There can be no assurance that the Company's research and development will be successfully completed, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, the Company operates in an environment of rapid change in technology and is dependent upon the continued services of its current employees, consultants and subcontractors.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results will differ from those estimates. Significant estimates include fair value and recoverability of carrying value of purchased technology, accrued amounts for on-going clinical trials and estimated costs to complete research collaboration projects.
Change in Fiscal Year. On January 30, 2001, Emisphere's Board of Directors approved a change in the Company's fiscal year end from July 31 to December 31. A five-month transition period from August 1, 2000 to December 31, 2000 preceded the start of the first calendar year reporting period 2001.
Principles of Consolidation. The consolidated financial statements include the accounts of all significant subsidiaries. All significant inter-company transactions have been eliminated in consolidation. Investments in 20% to 50% owned partnerships and corporate investments (joint ventures) are reported under the equity method of accounting.
Concentration of Credit Risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash equivalents and investments. The Company invests excess cash in accordance with a policy objective seeking to preserve both liquidity and safety of principal. The Company generally invests its excess funds in obligations of the U.S. government and its agencies, bank deposits, mortgage-backed securities, and investment grade debt securities issued by corporations and financial institutions. The Company holds no collateral for these financial instruments.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Cash, Cash Equivalents, and Investments. The Company considers all highly liquid, interest-bearing debt instruments with maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include demand deposits held in banks and interest bearing money market funds.
The Company considers its short- and long-term investments to be available for sale. Investments are carried at fair value, with unrealized holding gains and losses reported in stockholders' equity.
Realized gains and losses are included as a component of investment income. For the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999 and the years ended July 31, 2000 and 1999, gross realized gains and losses were not significant. In computing realized gains and losses, the Company determines the cost of its investments on a specific identification basis. Such cost includes the direct costs to acquire the investments, adjusted for the amortization of any discount or premium. The fair value of the investments has been estimated based on quoted market prices.
The following is a summary of the fair value of available for sale investments as of December 31, 2001 and 2000:
As of December 31, 2001 and 2000, the difference between the fair value and amortized cost of available for sale investments was immaterial.
Equipment and Leasehold Improvements. Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided for on the straight-line basis over the estimated useful life of the asset. Leasehold improvements are amortized over the life of the lease or of the improvements whichever is shorter. Expenditures for maintenance and repairs that do not materially extend the useful lives of the respective assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold, are removed from the respective accounts and any gain or loss is recognized in operations.
Purchased Technology. Purchased technology (see Note 10) is amortized on a straight-line basis over a period of 15 years, the average life of the related patents. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the fair value of purchased technology is reviewed for impairment whenever events or changes in circumstances, such as the manner in which an asset is used, indicate that its carrying value may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value, which is based upon discounted cash flows.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Impairment of Long-Lived Assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances, such as the manner in which an asset is used, indicate that their carrying amount may not be recoverable. Impairment losses are recognized when a long-lived asset's carrying value exceeds the expected undiscounted cash flows related to that asset. The amount of the impairment loss is the difference between the carrying value and the fair market value of the asset. The fair market value of an asset is determined based upon discounted cash flows.
Deferred Lease Liability. Various leases entered into by the Company provide for rental holidays and escalations of the minimum rent during the lease term, as well as additional rent based upon increases in real estate taxes and common maintenance charges. The Company records rent expense from leases with rental holidays and escalations using the straight-line method, thereby prorating the total rental commitment over the term of the lease. Under this method, the deferred lease liability represents the differences between the minimum cash rental payments and the rent expense computed on a straight-line basis.
Repurchase of Common Stock. From time to time, in order to meet corporate needs, the Company repurchases shares of its common stock. Such stock, which is deemed to be treasury stock, is recorded at cost. The timing of stock repurchases is made at the discretion of management, with the approval of the Company's Board of Directors.
Revenue Recognition. On August 1, 2000, the Company adopted the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"). In accordance with SAB101, contract research revenues consist of revenue from collaborative agreements and feasibility studies and are comprised of reimbursed research and development costs, as well as upfront and research and development milestone payments. Deferred revenue represents payments received, which are related to future performance. Non-refundable upfront and research and development milestone payments and payment for services ("Non-refundable Fees") are recognized as revenue as the related services are performed over the term of the collaboration. Revenue recognized is the lower of (i) the percentage complete, measured by incurred costs, applied to expected contractual payments or (ii) the total non-refundable cash received to date. Adoption of SAB 101 did not have a material impact on the Company's financial statements.
Prior to August 1, 2000, the Company recognized revenue as described above, except that certain Non-refundable Fees, including reimbursements from Ebbisham Ltd. (see Note 10), were recognized as revenue when there were no additional contractual services to be provided or costs to be incurred by the Company in connection with the Non-refundable Fee.
Interest Income. Interest income, which is included in investment income, is recognized as earned.
Patent Costs. As a result of research and development efforts conducted by the Company, it has received, applied for, or is in the process of applying for a number of patents to protect proprietary inventions. Costs incurred in connection with patent applications have been expensed as incurred.
Clinical Research Trial Expenses. Clinical research expenses represent obligations resulting from the Company's contracts with various research organizations in connection with conducting clinical trials for the Company's product candidates. The Company accounts for those expenses on an accrual basis according to the progress of the trial as measured by patient enrolment and the timing of the various aspects of the trial. Accruals are recorded as follows: (1) Contract costs are broken down based on the nature and the timing of costs which
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
trigger the recognition of expense; (2) the costs for period expenses, such as investigator meetings and initial start-up costs, are expensed/accrued as incurred based on management's estimates. Such estimates are impacted by the change in the number of sites and recruitment of patients and when they start; (3) direct service costs are recognized on a straight-line basis over the life of the contract (on-going monitoring costs); and (4) principal investigator expenses that are directly associated with recruitment are recognized based on actual patient recruitment. All changes to the contract amounts due to change orders are analyzed and recognized in accordance with the above methodology. Change orders are triggered by changes in the scope, time to completion and the number of sites. The Company adjusts its rate of clinical expense recognition if actual results differ from our estimates.
Purchased In-Process Research and Development. Purchased in-process research and development represents the value assigned in a purchase business combination to research and development projects of the acquired business that were commenced but not yet completed at the date of acquisition and which, if unsuccessful, have no alternative future use. Amounts assigned to purchased in-process research and development are charged to expense at the consummation date of the purchase business combination.
Income Taxes. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. These liabilities and assets are determined based on differences between the financial reporting and tax basis of assets and liabilities measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which realization is not more likely than not to occur.
Stock-Based Employee Compensation. The accompanying financial position and results of operations of the Company have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, generally no compensation expense is recognized in connection with the awarding of stock option grants to employees, provided that, as of the grant date, all terms associated with the award are fixed and the quoted market price of the Company's stock as of the grant date is equal to or less than the option exercise price.
Disclosure required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), including pro forma operating results had the Company prepared its financial statements in accordance with the fair value based method of accounting for stock-based compensation, has been included in Note 7.
The fair value of options and warrants granted to non-employees for goods or services is included in the financial statements and expensed as the goods are utilized or the services performed.
Net Loss Per Share. Net loss per share, basic and diluted, is computed using the weighted average number of shares of the Company's common stock outstanding during the period. For all periods presented, the Company reported net losses and, therefore, no common stock equivalents were included in the computation of diluted net loss per share, since such inclusion would have been anti-dilutive. Stock options that have been excluded from diluted loss per share amounted to 4,794,148, 4,469,101 (unaudited), 4,470,251, 4,578,756 (unaudited), 4,466,661 and 2,559,295 shares for the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999, respectively.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Fair Value of Financial Instruments. The carrying amounts for cash, cash equivalents, accounts payable, and accrued expenses approximate fair value because of their short-term nature. The carrying amount for the Company's debt instrument approximates fair value.
Future Impact of Recently Issued Accounting Standards. Statement of Financial Accounting Standards No. 141 ("FAS 141"), Business Combinations, requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill, and requires unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized).
Statement of Financial Accounting Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets, addresses the accounting for goodwill and intangible assets subsequent to their acquisition. FAS 142 requires that goodwill and indefinite lived intangible assets will no longer be amortized; goodwill will be tested for impairment at least annually at the reporting unit level; intangible assets deemed to have an indefinite life will be tested for impairment at least annually; and the amortization period of intangible assets with finite lives will no longer be limited to forty years. The provisions of FAS 142 will be effective for fiscal years beginning after December 15, 2001 and must be applied prospectively.
The Financial Accounting Standards Board recently issued FASB Statement No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets. The objectives of FAS 143 are to establish accounting standards for the recognition and measurement of an asset retirement obligation (ARO) and its associated asset retirement cost. FAS 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002.
The Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The objectives of FAS 144 are to address significant issues relating to the implementation of FASB Statement No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and to develop a single accounting model, based on the framework established in FAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. The provisions of FAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001.
Management does not expect that the adoption of FAS 141, FAS 142, FAS 143, or FAS 144 will have a material impact on the Emisphere's financial statements.
2. Fixed Assets
Fixed assets as of December 31, 2001 and 2000 consist of the following:
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
In April 2001, the Company acquired a 100,000 square foot research facility, with equipment, on approximately 29 acres of land in Connecticut for $3.3 million in cash.
Depreciation expense for the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999 was $3.5 million, $2.0 million (unaudited), $0.9 million, $0.8 million (unaudited), $1.9 million and $1.6 million, respectively.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31, 2001 and 2000:
4. Commitments
Leases. The Company leases office and laboratory space under non-cancelable operating leases expiring in various years through 2007. As of December 31, 2001, future minimum rental payments are as follows:
Subsequent to December 31, 2001, the Company entered into an additional lease to expand its current facilities for administrative activities. Total future minimum rental payments for the additional lease are approximately $0.7 million.
In 1998, the Company entered into a sublease (the "Sublease") for a portion of its former premises, which extends to January 2002. Sublease rental income for the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, the years ended July 31, 2000 and 1999 was $0.2 million, $0.2 million (unaudited), $0.1 million, $0.1 million (unaudited), $0.2 million and $0.2 million, respectively. As of December 31, 2001, future minimum rental payments to be received under the Sublease are $0.02 million.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Rent expense for the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999 was approximately $2.0 million, $1.3 million (unaudited), $0.6 million, $0.5 million (unaudited), $1.2 million, and $1.1 million, respectively. Additional charges for real estate taxes and common maintenance charges for the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, the years ended July 31, 2000 and 1999 were approximately $0.4 million, $0.3 million (unaudited), $0.3 million, $0.4 million (unaudited), $0.7 million, and $0.2 million, respectively.
Other. The Company, for the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999, made payments for research totaling approximately $1.4 million, $1.4 million (unaudited), $0.01 million, $0.4 million (unaudited), $0.5 million, and $0.6 million, respectively, to several universities and a research organization (the "Entities"). Certain members of the Company's Board of Directors are affiliated with certain of these Entities. As of December 31, 2001, future aggregate payments to the Entities amounted to approximately $0.4 million.
5. Income Taxes
As of December 31, 2001, the Company has available, for tax reporting purposes, unused net operating loss carry-forwards of approximately $153.1 million, which will expire in various years from 2002 to 2021. The Company's research and experimental tax credit carry-forwards expire in various years from 2002 to 2021. Future ownership changes may limit the future utilization of these net operating loss and research and development tax credit carry-forwards as defined by the Internal Revenue Code. The tax effect of temporary differences, net operating loss carry-forwards, and research and experimental tax credit carry-forwards as of December 31, 2001 and 2000 is as follows:
6. Stockholders' Equity
The Company's certificate of incorporation provides for the issuance of 1,000,000 shares of preferred stock with the rights, preferences, qualifications, and terms to be determined by the Company's Board of Directors. As of December 31, 2001 and 2000, there were no shares of preferred stock outstanding.
During 2001, the Company repurchased approximately 200,000 shares of its common stock for a total of $3.6 million. Such repurchased stock is held by the Company as treasury stock.
During the year ended July 31, 2000 the Company issued approximately 5.1 million shares of common stock in two public follow-on offerings for net proceeds of approximately $212.0 million.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
The Company has a stockholder rights plan in which Preferred Stock Purchase Rights (the "Rights") have been granted at the rate of one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock ("A Preferred Stock") at an exercise price of $80 for each share of the Company's common stock.
The Rights are not exercisable, or transferable apart from the common stock, until the earlier of (i) ten days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding common stock of the Company or (ii) ten business days (or such later date, as defined) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person, or group, of 20% or more of the outstanding common stock of the Company.
Furthermore, if the Company enters into consolidation, merger, or other business combinations, as defined, each Right would entitle the holder upon exercise to receive, in lieu of shares of A Preferred Stock, a number of shares of common stock of the acquiring company having a value of two times the exercise price of the Right, as defined. The Rights contain antidilutive provisions, are redeemable at the Company's option, subject to certain defined restrictions for $.01 per Right, and expire on February 23, 2006.
As a result of the Rights dividend, the Board designated 200,000 shares of preferred stock as A Preferred Stock. A Preferred Stockholders will be entitled to a preferential cumulative quarterly dividend of the greater of $1.00 per share or 100 times the per share dividend declared on the Company's common stock. Shares of A Preferred Stock have a liquidation preference, as defined, and each share will have 100 votes and will vote together with the common shares.
The note receivable from officer and director resulted from the July 31, 2000 exercise of stock options by an officer and director of the Company. The exercise price and income taxes resulting from the exercise were loaned to the officer by the Company. The loan is in the form of a full recourse promissory note bearing a variable interest rate based upon LIBOR plus 1.00% (2.8% and 7.2% at December 31, 2001 and 2000, respectively), and collateralized by the stock issued upon exercise of the stock options. Interest is payable monthly and principal is due the earlier of July 31, 2005 or upon the sale of stock held as collateral.
7. Stock Plans
Stock Option Plans. Under the Company's 1991 and 2000 Stock Option Plans and the 1995 Non-Qualified Stock Option Plan (individually, the "91 Plan", "00 Plan", and "95 Plan," respectively, or collectively, the "Plans") a maximum of 2,500,000, 689,500, and 2,550,000 shares of the Company's common stock, respectively, are available for awards to employees, consultants, and other individuals who render services to the Company. The 91 and 00 Plans provide for the grant of either incentive stock options ("ISOs"), as defined by the Internal Revenue Code, or options, which do not qualify as ISOs. The 95 Plan provides for grants to officers and other key employees of Non-Qualified stock options. An independent committee of the Board of Directors, which determines option terms including exercise price and vesting period, awards the options under the Plans. Generally, the options expire within a five- to ten-year period, as determined by the Committee and as defined by the Plans. As of December 31, 2001, shares available for future grants under the Plans amounted to 208,723.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
The following table summarizes stock option information for the Plans as of December 31, 2001:
Transactions involving stock options awarded under the Plans during the years ended July 31, 1999 and 2000, the five months ended December 31, 2000 and the year ended December 31, 2001 are summarized as follows:
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Outside Directors' Plan. The Company has adopted a stock option plan for outside directors, who are neither officers nor employees of the Company nor holders of more than 5% of the Company's common stock, (the "Outside Directors' Plan"). Under this plan, as amended, a maximum of 600,000 shares of the Company's common stock is available for the granting of options to directors (i) to purchase 35,000 shares of the Company's common stock on the date of initial election or appointment to the Board of Directors and (ii) to purchase 21,000 shares on the fifth anniversary thereof and every three years thereafter. The options have an exercise price equal to the fair market value of the Company's common stock on the date of grant, vest at the rate of 7,000 shares per year, and expire ten years after the date of grant.
The following table summarizes stock option information for the Outside Directors' Plan as of December 31, 2001:
Transactions involving stock options awarded under the Outside Directors' Plan during the years ended July 31, 1999 and 2000, the five months ended December 31, 2000 and the year ended December 31, 2001 are summarized as follows:
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Directors' Deferred Compensation Stock Plan. Pursuant to the Directors' Deferred Compensation Stock Plan (the "Directors' Deferred Plan"), outside directors have a right to receive for each meeting of the Board of Directors, or a committee thereof, attended a number of shares of the Company's common stock equal to the amount determined by the Board of Directors as compensation for the meeting divided by the fair market value of the Company's common stock on the date of the meeting. An aggregate of 25,000 shares of the Company's common stock has been reserved for issuance under the Directors' Deferred Plan. During the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999, the outside directors earned the rights to receive an aggregate of 948 shares, 651 shares (unaudited), 295 shares, 403 shares (unaudited), 743 shares, and 2,778 shares, respectively. Under the terms of the Directors' Deferred Plan, shares are to be issued to a director within six months after he or she ceases to serve on the Board of Directors. The Company records as an expense the fair market value of the common stock issuable.
Non-Plan Options. The Company's Board of Directors has issued options ("Non-Plan Options") to an executive officer ("Executive"), a former exeutive officer, the Emisphere Charitable Foundation, and a consultant, who are not covered by the Plans or the Outside Directors' Plan. The employment agreement for the Executive also contains provisions whereby the Executive is allowed to borrow defined amounts from the Company at specified interest rates in connection with the exercise of options. The Board of Directors determines the number and terms of each grant (option exercise price, vesting, and expiration date). Non-Plan Options generally vest over a five-year period.
The following table summarizes stock option information for the Non-Plan Options as of December 31, 2001:
Transactions involving awards of Non-Plan Options during the years ended July 31, 1999 and 2000, the five months ended December 31, 2000 and the year ended December 31, 2001 are summarized as follows:
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Employee Stock Purchase Plans. The Company has adopted two employee stock purchase plans (the "Purchase Plans")--the 1994 Employee Stock Purchase Plan (the "Qualified Plan") and the 1994 Non-Qualified Employee Stock Purchase Plan (the "Non-Qualified Plan"). The Purchase Plans provide for the grant to qualified employees of options to purchase the Company's common stock. These options are granted for dollar amounts of up to 15% of an employee's quarterly compensation. The exercise price per share is equal to the lesser of the fair market value of the Company's common stock on the date of grant or 85% of the fair market value on the date of exercise. Options are granted automatically on February 1, May 1, August 1, and November 1 and expire six months after the date of grant. The Qualified Plan is not available for employees owning more than 5% of the Company's common stock and imposes certain other quarterly limitations on the option grants. Options under the Non-Qualified Plan are granted to the extent that the option grants are restricted under the Qualified Plan. The Purchase Plans provide for the issuance of up to 600,000 shares of the Company's common stock under the Qualified Plan and 100,000 shares under the Non-Qualified Plan.
Purchases of common stock under the Purchase Plans during the year ended December 31, 2001, the five months ended December 31, 2000, and the years ended July 31, 2000 and 1999 are summarized as follows:
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
At December 31, 2001, shares reserved for future purchases under the Qualified and Non-Qualified Plans were 146,575 and 44,545, respectively.
Pro Forma Operating Results. The following tables summarize the Company's pro forma operating results had compensation costs for the Plans, Outside Directors' Plan, Directors' Deferred Plan, the Non-Plan Options, and the Purchase Plans been determined in accordance with the fair value-based method of accounting for stock-based compensation as prescribed by SFAS No. 123. Since option grants awarded during 2001, 2000 and 1999 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value-based method. The options' exercise prices equal the quoted market price of the Company's common stock on the date of grant.
For the purpose of the above pro forma calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted during the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999 was $15.68, $44.86 (unaudited), $14.36, $10.55 (unaudited), $26.24, and $5.94, respectively. The following assumptions were used in computing the fair value of options granted: expected volatility of 85% in 2001 and 80% in 2000 and 1999, expected lives of five years (except for the Employee Stock Purchase Plans, where the expected lives are six months), zero dividend yield, and weighted-average risk-free interest rate of 3.0% in 2001, 6.4% in 2000, and 5.2% in 1999.
8. Retirement Plan
The Company has a defined contribution retirement plan (the "Plan"), the terms of which, as amended, allow eligible employees who have met certain age and service requirements to participate by electing to contribute a percentage of their compensation to be set aside to pay their future retirement benefits, as defined by the Plan. The Company has agreed to make discretionary contributions to the Plan. For the years ended December 31, 2001 and 2000, the five months ended December 31, 2000 and 1999, the years ended July 31, 2000 and 1999, the Company made contributions to the Plan totaling approximately $0.4 million, $0.3 million (unaudited), $0.2 million, $0.1 million (unaudited), $0.2 million, and $0.2 million, respectively.
9. The Emisphere Charitable Foundation, Inc.
The Emisphere Charitable Foundation, Inc. (the "Foundation") intends to seek tax-exempt status under section 501(c)(3) of the Internal Revenue Code. The Foundation's charitable purpose is to grant financial assistance to pay expenses incurred by persons or their families who are suffering from serious, debilitating, or prolonged illnesses. The Company intends to contribute cash and Company stock options to the Foundation. Two officers of the Company are directors of the Foundation. The Foundation currently has 14,275 options to acquire an equal number of shares of the Company's common stock at an exercise price of $9.75 per share.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
10. Ebbisham Limited
Ebbisham Limited ("Ebbisham"), was an Irish corporation owned jointly by Elan Corporation, plc ("Elan") and the Company until July 1999 when it was acquired by the Company. Ebbisham was formed to develop and market heparin products using technologies contributed by Elan and the Company. Prior to the Company's acquisition of Ebbisham, the Company recorded its investment in Ebbisham in accordance with the equity method of accounting.
In July 1999, the Company acquired Elan's ownership interest in Ebbisham, in exchange for a seven year $20.0 million zero coupon note carrying a 15% interest rate, compounding semi-annually, plus royalties on oral heparin product sales, subject to an annual maximum and certain milestone payments. Under certain conditions, Elan has agreed to subscribe to the Company's common stock.
The acquisition by the Company of Elan's ownership interest in Ebbisham has been accounted for in accordance with the purchase method of accounting. The purchase price of approximately $18.1 million ($20.4 million, including transaction costs, net of purchase accounting adjustments for accrued funding liabilities in excess of actual funding requirements of $2.3 million) has been allocated $9.7 million and $8.4 million to acquired in-process research and development, which was expensed at the date of acquisition, and purchased technology, respectively.
As of the acquisition date, it was determined that the acquired in-process research and development had not reached technological feasibility and did not have an alternative future use. Approximately 48%, 80%, and 80% of the research and development effort remained to be completed for oral heparin solution, solid dosage heparin, and solid dosage low molecular weight heparin, respectively, as of the acquisition date. Before these products can be commercialized, the Company is required to complete Phase III clinical trials for oral heparin solution, initiate and complete Phase I through III clinical studies for both solid dosage forms of heparin and low molecular weight heparin, and file New Drug Applications with the United States Food and Drug Administration. At the time acquired, the Company estimated the cost to complete clinical trials and to obtain regulatory approval to be in excess of $30.0 million. In valuing the acquired in-process research and development, the Company used discounted cash flows over a ten-year period and risk adjusted discount rates ranging from 20% to 45%, depending on the product's stage of development. Purchased technology is being amortized using the straight-line method over its expected useful life of approximately 15 years. At December 31, 2001, the assumptions used in evaluating the purchased technology have not changed materially from the acquisition date. At December 31, 2001 and 2000, accumulated amortization of purchased technology was $1.4 million and $0.8 million, respectively.
At December 31, 2001 Ebbisham was in the process of being liquidated.
Selected financial data of Ebbisham, prior to acquisition, for the period from August 1, 1998 to July 2, 1999 (the acquisition date), are as follows:
- -------- (1) Includes $5.7 million related to services performed by the Company on behalf of Ebbisham for the period from August 1, 1998 to July 2, 1999.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
11. Collaborative Research Agreements
The Company is a party in collaborative agreements with corporate partners (the "Partners") to provide research and development services relating to the Partners' products. These agreements are in the form of research collaboration and licensing agreements. In connection with these agreements, the Company has granted licenses or the rights to obtain licenses to the Company's oral drug delivery technology. In return, the Company will receive certain payments upon the achievement of milestones and will receive royalties on sales of products developed. Under these agreements, the Company will also be reimbursed for development costs. The Company also has the right to manufacture and supply to its Partners its delivery agents developed under these agreements.
The Company also performs research and development for others pursuant to feasibility agreements, which are of short duration and are designed to evaluate the applicability of the Company's drug delivery carriers to specific drugs. Under the feasibility agreements, the Company is generally reimbursed for the cost of work performed.
All of the Company's collaborative agreements are cancelable by the Partners without significant financial penalty to the Partners.
Eli Lilly and Company In June 2000, the Company and Lilly executed a follow-on development agreement to their 1997 multi-year research and option agreement to develop oral formulations of recombinant parathyroid hormone (PTH) and human growth hormone (rhGH) utilizing the Company's proprietary drug delivery technology. Under the new agreement, the two companies will collaborate to bring oral forms of PTH and rhGH into clinical testing. The new agreement also provides for supplemental research and development funding.
In connection with the Lilly agreements, the Company has recognized contract research revenues of $3.8 million, $3.4 million (unaudited), $1.2 million (including a $0.6 million milestone payment), $0 (unaudited), $2.2 million (including a $2.0 million milestone payment), and $1.4 million, for the years ended December 31, 2001 and 2000, the five months period ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999, respectively.
Novartis Pharma AG In connection with the 1997 research collaboration between the Company and Novartis, Novartis, in February 2000, agreed to execute its option to acquire an exclusive license to develop and commercialize oral salmon calcitonin and to extend its collaboration with the Company to investigate the oral delivery of a second Novartis compound.
Under the salmon calcitonin technology license and the technology license option for the second compound, Novartis has the obligation, subject to the Company's approval, to purchase up to $11.0 million of the Company's common stock upon Novartis' decision to exercise its technology license option and upon the attainment by the Company of certain development and clinical milestones. These equity investments are based on market prices at the time of purchase.
In connection with the Novartis agreement, the Company has recognized $3.5 million (unaudited), $1.0 million, $1.0 million (unaudited), $3.5 million (including a $2.5 million milestone payment), and $2.9 million for the year ended December 31, 2000, the five months ended December 31, 2000 and 1999, and the years ended July 31, 2000 and 1999, respectively.
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited with respect to the year ended December 31, 2000 and the five months ended December 31, 1999) (in thousands, except share and per share data)
Regeneron Pharmaceuticals Inc. In 2000, the Company entered into a research collaboration with Regeneron to investigate the applicability of the Company's technology to the development of an oral form of Regeneron's protein compound candidate in development, AXOKINE, for the treatment of obesity.
In connection with the Regeneron agreement, the Company recognized contract research revenue of $0.2 million for the year ended December 31, 2001. Regeneron will continue to pay for all studies related to the pre-clinical product candidate development.
Cubist Pharmaceuticals Inc. In November 2000, Emisphere entered into research and development collaboration with Cubist for the oral delivery of daptomycin (being developed for injection as CIDECIN(TM)) and other lipopeptides. Under the terms of the collaboration, Emisphere could receive milestone payments totaling $30 million, should a product be successfully commercialized. Emisphere would also receive a royalty on sales of any product resulting from the collaboration, while Cubist would be responsible for drug development and would receive exclusive worldwide commercialization rights to any oral products.
In connection with the Cubist agreement, the Company recognized contract research revenue of $0.4 million, $0.1 million (unaudited), and $0.1 million, for the years ended December 31, 2001 and 2000, and the five months ended December 31, 2000, respectively. Cubist will continue to pay for all studies related to the pre-clinical product candidate development.
12. Summarized Quarterly Financial Data (Unaudited)
Following are summarized quarterly financial data for the years ended December 31, 2001 and 2000:
EXHIBIT INDEX
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- -------- * Filed herewith. (1) If not filed herewith, filed as an exhibit to the document referred to by letter as follows: A. Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999. B. Registration Statement on Form 8-A12G/A dated and filed June 7, 2001. C. Current Report on Form 8-K dated July 2, 1999. D. Annual Report on Form 10-K for the fiscal year ended July 31, 1997. E. Annual Report on Form 10-K for the fiscal year ended July 31, 1995. F. Annual Report on Form 10-K for the fiscal year ended July 31, 1998. G. Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1997. H. Quarterly Report on Form 10-Q for the quarterly Period ended January 31, 1997. I. Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2000. J. Annual Report on Form 10-K for the fiscal year ended July 31, 1999. K. Annual Report on Form 10-K for the fiscal year ended July 31, 2000. (2) Management contract or compensatory plan or arrangement. (3) Omitted in part pursuant to Instruction 2 of Item 601 of Regulation S-K. (4) Portions of this exhibit have been omitted based on a request for confidential treatment filed separately with the Securities and Exchange Commission.
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