AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 2002
REGISTRATION NO. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RIBAPHARM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2834 95-4805655
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL IDENTIFICATION
CLASSIFICATION CODE NUMBER)
NUMBER)
3300 HYLAND AVENUE
COSTA MESA, CA 92626
(714) 545-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROGER D. LOOMIS, JR.
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
3300 HYLAND AVENUE
COSTA MESA, CA 92626
(714) 545-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
Copies to:
Jeffrey Bagner
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. [x]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
---------------
CALCULATION OF REGISTRATION FEE
======================================== =================== ======================== ================================
Title of Securities Amount to be Proposed Maximum Amount of
to be Registered Registered Aggregate Offering Registration Fee
Price
---------------------------------------- ------------------- ------------------------ --------------------------------
---------------------------------------- ------------------- ------------------------ --------------------------------
Common Stock, $0.1 par value 21,922,032(1) 229,633,286(2) $21,127
======================================== =================== ======================== ================================
(1) Represents the number of shares of common stock that are
initially issuable upon conversion of the notes and includes an
additional indeterminate number of shares of common stock
issuable upon conversion in the future pursuant to Rule 416 of
the Securities Act. The notes are presently convertible into
15,326,010 shares of ICN common stock. The number of our shares
of common stock issuable upon conversion of the notes after the
spin-off is completed is determined by multiplying that number by
approximately 1.43 shares, the assumed rate of Ribapharm common
stock for each share of ICN common stock in the spin-off. This
number is subject to change depending on the actual shares of ICN
common stock outstanding on the record date for the spin-off.
This distribution ratio is based upon 83,963,648 shares of ICN
common stock outstanding as of May 3, 2002. Upon the spin-off, a
holder of the notes who converts notes will receive, in addition
to ICN common stock, the same number of shares of Ribapharm
common stock that the holder would have received had the holder
converted the notes immediately prior to the record date for the
spin-off.
(2) Estimated in accordance with Rule 457 of Regulation C under the
Securities Act of 1933, as amended, solely for the purpose of
determining the registration fee. The above calculation is based
upon the average of the high and low sale prices of our common
stock reported on the New York Stock Exchange on May 7, 2002.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
The information in this prospectus is not complete and may be changed. The
selling securityholders may not sell their securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell the securities and it is
not soliciting an offer to buy the securities in any state where the offer
or sale is not permitted.
PRELIMINARY PROSPECTUS Subject to completion May 13, 2002
------------------------------------------------------------------------------
21,922,032 Shares
Ribapharm Inc.
Common Stock
------------------------------------------------------------------------------
This prospectus relates to the issuance and sale of the estimated
21,922,032 shares of our common stock that will become issuable upon
conversion of the 6 1/2% convertible subordinated notes due 2008 issued by
ICN Pharmaceuticals, Inc. in July 2001 after ICN distributes its remaining
interest in our common stock to its stockholders in a tax-free spin-off. We
became jointly and severally liable for the obligations under the notes on
April 17, 2002. Upon the spin-off, a holder of the notes who converts notes
will receive, in addition to ICN's common stock, the same number of shares
of our common stock that the holder would have received had the holder
converted the notes immediately prior to the record date for the spin-off.
Holders of notes may convert the notes into our common stock at any time
after completion of the spin-off until the maturity date of the notes.
Holders of the notes may offer the shares of our common stock into which
notes are convertible any time either at prevailing market prices at the
time of sale or at privately negotiated prices.
All of the shares of our common stock offered by this prospectus are being
offered by the selling securityholders identified in this prospectus. We
will not receive any of the proceeds from the sale of our comon stock by
the selling securityholders.
Our common stock is listed on the New York Stock Exchange under the symbol
"RNA." On May 10, 2002, the last reported sale price of our common stock on
the New York Stock Exchange was $10.70 per share.
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS
OF INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Important notice to readers.................................... ii
Recent developments............................................ ii
Prospectus summary............................................. 1
The offering................................................... 4
Summary financial data......................................... 6
Risk factors................................................... 7
Forward-looking information.................................... 20
Use of proceeds................................................ 21
Price range of common stock and dividend policy................ 21
Capitalization................................................. 22
Selected financial data........................................ 23
Management's discussion and analysis of financial condition and
results of operations.......................................... 24
Business....................................................... 29
Management..................................................... 52
Relationship with ICN.......................................... 62
Selling securityholders........................................ 68
Description of capital stock................................... 72
Plan of distribution........................................... 75
Legal matters.................................................. 77
Experts........................................................ 77
Where you can find more information............................ 78
Index to financial statements.................................. F-1
Important notice to readers
Since shares of our common stock covered by this prospectus are only
issuable upon conversion of the notes after the spin-off has occurred, this
prospectus has been prepared assuming that ICN has distributed all of its
interest in us to ICN's stockholders in a tax-free spin-off.
ICN has filed a Registration Statement on Form S-3, as amended and
supplemented, (SEC File No. 333-67376) relating to the registration of the
6 1/2% convertible subordinated notes issued by ICN in July 2001 and ICN
common stock issuable upon conversion of the notes. Readers are referred to
the ICN registration statement for a description of the notes.
Recent developments
On May 2, 2002, we announced that our royalty revenue in the first quarter
of 2002 increased nearly 107% to $57.0 million compared to $27.6 million in
the first quarter of 2001. Prior to our initial public offering on April
17, 2002, we were operated as a division of ICN. ICN will retain all of the
royalty payments for sales of ribavirin in the first quarter of 2002. The
royalty payment for sales of ribavirin in the second quarter of 2002 is
payable in late August 2002. This royalty payment will be divided between
us and ICN on a pro-rata basis from April 17, 2002. We will retain all
subsequent royalty payments. We expect to file our quarterly report on Form
10-Q by May 27, 2002.
Prospectus summary
This summary highlights information contained elsewhere in this prospectus.
We urge you to read this entire prospectus carefully, including the "Risk
factors" section, before making an investment decision. We derived the
financial and other information contained in this prospectus from our
historical performance as a division within the ICN Pharmaceuticals, Inc.
consolidated group.
OUR BUSINESS
We are a biotechnology company that seeks to discover, develop, acquire and
commercialize innovative products for the treatment of significant unmet
medical needs, principally in the antiviral and anticancer areas. Prior to
April 17, 2002, we were operated as a division of ICN Pharmaceuticals, Inc.
Our product ribavirin is an antiviral drug that Schering-Plough Ltd.
markets under license from us as a therapy for the treatment of hepatitis C
in the United States, the European Union and Japan. Ribavirin is marketed
in combination with Schering-Plough's interferon alfa-2b and
Schering-Plough's pegylated interferon alfa-2b. Our royalties from sales of
ribavirin by Schering-Plough were $110 million for 1999, $155 million for
2000 and $139 million for 2001. The royalty payment for sales of ribavirin
in the first quarter of 2002 is payable in late May 2002. ICN will retain
this royalty payment. The royalty payment for sales of ribavirin in the
second quarter of 2002 is payable in late August 2002. This royalty payment
will be divided between us and ICN on a pro-rata basis from April 17, 2002.
We will retain all subsequent royalty payments.
We have two next generation compounds, which are similar to ribavirin, as
product candidates. These product candidates are Levovirin and Viramidine.
We filed an investigational new drug application with the US Food and Drug
Administration, or FDA, for Levovirin in December 2000. In February 2001,
we began Phase I clinical trials on Levovirin in the United States. In June
2001, we licensed Levovirin to F. Hoffmann-La Roche. In September 2001, we
initiated Phase I clinical trials on Viramidine in Europe. We filed an
investigational new drug application with the FDA in December 2001 for
Viramidine. In late March 2002, we began additional Phase I clinical trials
on Viramidine in the United States.
To further expand our antiviral pipeline, we and ICN licensed two other
compounds from third parties. These compounds are Hepavir B and IL-12. ICN
licensed Hepavir B from Metabasis Therapeutics, Inc. in October 2001.
Hepavir B is a compound we intend to develop for the treatment of hepatitis
B. ICN contributed the Hepavir B license to us. We and ICN licensed rights
to IL-12 from F. Hoffmann-La Roche in June 2001. IL-12 is a developmental
compound for the treatment of cancer and allergies. We have not taken any
steps at this time to develop IL-12. ICN contributed all of its rights
under the IL-12 license to us.
Ribavirin, Levovirin and Viramidine came from our extensive library of
nucleoside analog chemical compounds. ICN initially began discovering the
compounds from 1968 through 1976. ICN developed additional compounds from
1985 through 1988. Since March 2000, we discovered additional compounds
using chemical methods known as combinatorial chemistry. In total, we
presently have over 6,500 nucleoside analog compounds in our library.
Nucleoside analogs are small-molecule-type chemicals that resemble the
natural building blocks of human and viral genetic material. This genetic
material is commonly known as DNA and RNA. We believe that our library
contains one of the largest collections of nucleoside analogs in the world.
We intend to combine our scientific expertise with advanced drug screening
techniques in an effort to discover and develop new product candidates
using our nucleoside analog library. During 2001, we acquired more than
70,000 diverse non-nucleoside analog compounds from third parties to
complement our nucleoside analog library. These non-nucleoside compounds
also target antiviral and anticancer areas. We intend to use these
non-nucleoside compounds to facilitate our development of new products. To
date, ribavirin is the only compound we have commercialized from our
library.
RELATIONSHIP WITH ICN
On April 17, 2002, we became jointly and severally liable with ICN for the
principal and interest obligations under $525 million of 6 1/2%
subordinated notes due 2008 issued by ICN in July 2001. As between ICN and
us, ICN agreed to make all interest and principal payments on these notes.
However, we will be responsible for these payments to the extent ICN does
not make these payments. In that event, we would have a claim against ICN
for any payments ICN does not make. We can only amend this agreement, in a
manner adverse to us, with the approval of holders of a majority of our
outstanding shares of common stock, excluding shares held by ICN.
Upon the spin-off by ICN of its remaining interest in us to its
stockholders, a holder who converts these notes will receive, in addition
to shares of ICN common stock, the same number of shares of our common
stock that the holder would have received had the holder converted the
notes immediately prior to the record date for the spin-off. See
"Relationship with ICN -- ICN Notes."
RIBAVIRIN FOR HEPATITIS C
In 1995, ICN granted an exclusive license to Schering-Plough for all oral
forms of ribavirin for the treatment of chronic hepatitis C. ICN also
granted to Schering-Plough an option to license oral forms of ribavirin for
additional indications we develop.
In 1998, Schering-Plough received FDA approval to market ribavirin in the
United States in combination with Schering-Plough's interferon alfa-2b for
the treatment of chronic hepatitis C in patients with compensated liver
disease who have relapsed following alpha interferon therapy. Most
hepatitis C patients have compensated liver disease. This means that these
patients have relatively normal liver function. According to the World
Health Organization, as many as 170 million people worldwide are infected
by the hepatitis C virus. Of these, it is estimated that approximately 10
million reside in the United States, Europe and Japan.
In May 1999, the European Union granted Schering-Plough authorization to
market ribavirin with interferon alfa-2b as a combination therapy in the
European Union for the same patient populations as those approved in the
United States.
In March 2001, the European Union granted Schering-Plough authorization to
market ribavirin with pegylated interferon alfa-2b, a longer lasting form
of interferon alfa-2b, as a combination therapy in the European Union for
the same patient populations as those previously approved for the ribavirin
and interferon alfa-2b combination therapy.
In August 2001, the FDA granted Schering-Plough authorization to market
ribavirin with pegylated interferon alfa-2b as a combination therapy for
the treatment of chronic hepatitis C in the United States in patients with
compensated liver disease previously untreated with interferon alpha and
who are at least 18 years of age.
In late 2001, Schering-Plough received marketing and pricing approval for
ribavirin and interferon alfa-2b as a combination therapy for the treatment
of chronic hepatitis C in Japan.
OUR TECHNOLOGY PLATFORM
We believe nucleoside analogs present significant opportunities for drug
development. Nucleoside analogs treat viruses and cancers by modifying the
natural structure of DNA and RNA in a way that disrupts the replication of
viruses and cancer cells. The FDA has approved approximately 15 nucleoside
analogs for antiviral and anticancer indications. Ribavirin is the only one
of these nucleoside analogs that we own. Some of these nucleoside analogs
are marketed as monotherapy treatments. Others, like ribavirin, are
marketed as part of a combination therapy with other drugs. According to
IMS Health Incorporated, revenues for 2000 in the United States for the top
four selling nucleoside analogs were approximately $2.6 billion. According
to IMS Health Incorporated, the top four selling nucleoside analogs in the
United States for 2000 were Epivir, also known as Lamivudine, marketed by
GlaxoSmithKline plc, Famvir, marketed by Novartis AG, Gemzar, marketed by
Eli Lily and Company, and Zerit, marketed by Bristol-Myers Squibb Company.
We also believe that our nucleoside analog library provides a potentially
greater opportunity for successful antiviral and anticancer drug discovery
when compared to the random screening of large numbers of diverse chemical
compounds. We base our belief on the fact that the chance of fitting
molecules like nucleoside analogs to genetic targets with viruses and
cancer cells is higher than the chance of fitting random unrelated small
molecules to these same targets. During 2001, we acquired more than 70,000
diverse non-nucleoside compounds from third parties to complement our
nucleoside analog library. These non-nucleoside compounds also target
antiviral and anticancer areas.
RESEARCH AND DEVELOPMENT PROGRAM
Our research and development efforts seek to capitalize on our chemical
compound library. We believe this library may provide us with a large
supply of potential new drug candidates. We are screening our chemical
compound library for our target indications, hepatitis C, hepatitis B, HIV
and cancer.
In March 2000, we hired Johnson Y.N. Lau, MD, PhD, to lead our research and
development efforts. Dr. Lau, an expert in viruses and liver diseases, was
formerly senior director in antiviral research at the Schering-Plough
Research Institute. We expanded our research team from 12 scientists on
March 1, 2000 to approximately 100 scientists on December 31, 2001. We plan
to continue to expand our research team to over 120 scientists by the end
of 2002. We spent approximately $6 million in each of 2000 and 2001 to
upgrade and modernize our research equipment. In addition, ICN spent
approximately $12 million in 2000 and $16 million in 2001 on capital
improvements to ICN's headquarters. A substantial portion of these
improvements were to upgrade and modernize our laboratories that we lease
from ICN.
In addition to ribavirin, to date we derived four product candidates from
our nucleoside analog library. These include Levovirin and Viramidine.
o Based on preclinical studies, we believe that Levovirin may have an
ability to stimulate an immune response to some viral infections
without the anemia associated with ribavirin. We filed an
investigational new drug application to begin clinical testing of
Levovirin for use in combination with interferon alpha for the
treatment of hepatitis C in December 2000. Based on this
investigational new drug application, we began Phase I clinical trials
on Levovirin in the United States in February 2001. In June 2001, we
exclusively licensed Levovirin to F. Hoffmann-La Roche for further
development. See Business -- Products in development -- Levovirin."
o Based on preclinical studies we believe that Viramidine may generate an
antiviral and immune response to hepatitis C virus infections better
than ribavirin, but with less side effects. In September 2001, we
initiated Phase I clinical trials on Viramidine in Europe. We filed an
investigational new drug application with the FDA in December 2001. In
late March 2002, we began additional Phase I clinical studies on
Viramidine in the United States.
We continuously evaluate the status of the research and development
programs of our product candidates. We may reduce or eliminate any of these
programs if we believe that a candidate may not be successfully
commercialized or if we decide to devote our resources to other product
candidates.
We have an agreement that provides Schering-Plough with the option or right
of first/last refusal to license various products we may develop. See
"Business -- Products in development -- November 2000 Schering-Plough
agreement."
We intend to fund our research and development from the royalty income we
receive from sales of ribavirin by Schering-Plough. These royalties
presently are our only source of revenues. If this royalty income decreases
significantly in the future, we would need to find an alternative funding
source. ICN will retain all royalty payments relating to sales of ribavirin
prior to April 17, 2002. The royalty payment for sales of ribavirin in the
first quarter of 2002 is payable in late May 2002. ICN will retain this
royalty payment. The royalty payment for sales of ribavirin in the second
quarter of 2002 is payable in late August 2002. This royalty payment will
be divided between us and ICN on a pro-rata basis from April 17, 2002. We
will retain all subsequent royalty payments. Prior to receiving our first
royalty payment for sales of ribavirin, we intend to fund our operations by
borrowing up to $60 million from ICN.
OUR STRATEGY
Our objective is to be a leader in the discovery, development, acquisition
and commercialization of novel drugs that can be effective in the treatment
of viral diseases, cancer and other unmet medical needs. We plan to pursue
this objective by:
o focusing on diseases that we believe provide substantial commercial
opportunities;
o maximizing the value of our new product candidates by leveraging our
internal development capabilities;
o accelerating development of identified drug candidates from our current
product pipeline; and
o expanding our existing product pipeline and technologies through
acquisitions and in-licensing opportunities.
The offering
Common stock being registered for selling
securityholders................................ 21,922,032 shares
Common stock outstanding....................... 150,000,000 shares
Conversion of the 6 1/2%
subordinated notes due 2008 ................... This prospectus relates to registration of the estimated 21,922,032
shares of our common stock issuable upon conversion of 6 1/2%
subordinated notes due 2008 issued by ICN Pharmaceuticals, Inc. in
July 2001. The notes are presently convertible into 15,326,010 shares
of ICN common stock. The number of our shares of common stock
issuable upon conversion of the notes after the spin-off is completed
is determined by multiplying that number by approximately 1.43 shares,
the assumed rate of Ribapharm common stock for each share of ICN
common stock in the spin-off. This number is subject to change
depending on the actual shares of ICN common stock outstanding on the
record date for the spin-off. This distribution ratio is based upon
83,963,648 shares of ICN common stock outstanding as of May 3, 2002.
Upon the spin-off, a holder of the notes who converts notes will
receive, in addition to ICN common stock, the same number of shares of
Ribapharm common stock that the holder would have received had the
holder converted the notes immediately prior to the record date for
the spin-off. Holders will receive the shares of our common stock
from authorized but unissued shares of our common stock.
After our initial public offering on April 17, 2002, we became jointly
and severally liable with ICN for the obligations under the notes. We
have the same obligation as ICN to purchase the notes upon a change of
control of us or ICN.
Risk factors................................... In analyzing an investment in our common stock offered by this
prospectus, prospective investors should carefully consider, along with
other matters referred to in this prospectus, the information set forth
under "Risk factors."
New York Stock Exchange symbol................. RNA
Use of proceeds................................ No proceeds will be received by us upon the sale of our common stock
offered in this prospectus.
The number of shares of our common stock shown above as outstanding after
this offering does not include the following:
o 22,500,000 shares reserved for issuance under our 2002 Stock Option
Plan, including 3,025,000 shares issuable upon the exercise of options
outstanding as of May 9, 2002; and
o any shares that may be reserved for issuance, in the event that the
spin-off is completed, as a result of an adjustment to ICN's existing
stock option plans to account for the spin-off. As of December 31,
2001, there were outstanding options to purchase 10,721,000 shares of
ICN common stock. See "Relationship with ICN -- Adjustment of ICN's
stock option plans upon the spin-off."
HOW TO CONTACT US
Our principal executive offices are located at Ribapharm Inc., 3300 Hyland
Avenue, Costa Mesa, California 92626 and our telephone number is (714)
545-0100.
ABOUT THIS PROSPECTUS
Virazole(R), Levovirin(TM), Tiazole(TM), Adenazole(TM), Viramidine(TM) and
Hepavir B(TM) are our trademarks. All other brand names, trademarks or
service marks referred to in this prospectus are the property of their
owners. Schering-Plough markets ribavirin under the trade name Rebetron as
part of a combination therapy with its interferon alfa-2b and under the
trade name Peg-Intron/Rebetol as part of a combination therapy with its
pegylated interferon alfa-2b. Schering-Plough also markets ribavirin as a
separately packaged product under the trade name Rebetol for use in either
of these combination therapies.
For ease of presentation, we will sometimes refer to Rebetol and the
ribavirin component of Rebetron or Peg-Intron/Rebetol in this prospectus as
ribavirin.
Summary financial data
The following table summarizes the financial data for our business during
the periods indicated. You should read the data set forth below in
conjunction with "Management's discussion and analysis of financial
condition and results of operations" and our financial statements and
related notes included elsewhere in this prospectus. We derived the
statement of income data for the years ended December 31, 1999, 2000 and
2001 and the balance sheet data as of December 31, 2001 from our audited
financial statements, which are included elsewhere in this prospectus. We
derived the statement of income data for the years ended December 31, 1997
and 1998 from our audited financial statements not included in this
prospectus. Basic and diluted earnings per share has been calculated using
150,000,000 shares outstanding. Historical results are not necessarily
indicative of the results to be expected in the future.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
STATEMENT OF INCOME DATA 1997 1998 1999 2000 2001
------------------------ ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................ $ 3,223 $ 36,830 $109,592 $154,818 $143,622
Costs and expenses:
Research and development...... 7,011 9,530 5,523 13,015 25,212
General and administrative.... 9,676 7,392 5,608 11,103 5,945
--------- -------- -------- ------- --------
Total costs and expenses... 16,687 16,922 11,131 24,118 31,157
--------- -------- -------- ------- --------
Income (loss) before income taxes (13,464) 19,908 98,461 130,700 112,465
Interest expense................ -- -- -- -- --
--------- -------- -------- ------- --------
Income (loss) before income taxes (13,464) 19,908 98,461 130,700 112,465
Provision (benefit) for income
taxes......................... (4,847) 7,167 35,446 48,717 40,487
--------- -------- -------- ------- --------
Net income (loss)............... $ (8,617) $ 12,741 $ 63,015 $ 81,983 $ 71,978
========= ======== ======== ======== ========
Basic and diluted earnings (loss)
per share..................... $ (.06) $ .08 $ .42 $ .55 $ .48
========= ======== ======== ======== ========
Shares used in computation...... 150,000 150,000 150,000 150,000 150,000
========= ======== ======== ======== ========
AS OF DECEMBER 31, 2001
---------------------------
BALANCE SHEET DATA ACTUAL PRO FORMA(1)
--------------------- -------- ------------
(IN THOUSANDS)
Working capital.... $10,813 $ 10,813
Total assets....... 26,634 26,634
Current liabilities 5,415 5,415
Total liabilities.. 5,415 530,415
Total equity 21,219 (503,781)
(deficit)..........
------------------------
(1) Pro forma balance sheet data gives effect to our joint and several
obligation with ICN for principal and interest under the 6 1/2%
subordinated notes due 2008 issued by ICN. As between us
and ICN, ICN agreed to make all interest and principal payments on
these notes and to make any payments due upon a change of control of
ICN or us. We can only amend this agreement, in a manner adverse to us,
with the approval of holders of a majority of our outstanding shares of
common stock, excluding shares held by ICN. We will record the
obligation under the 6 1/2% subordinated notes due 2008 as a
receivable from ICN within stockholder's equity. This receivable from
ICN will remain as a component of our equity to the extent that an
obligation for principal and interest for these notes remains
outstanding or until ICN can no longer make principal and interest
payments as discussed above. See "Relationship with ICN -- ICN Notes."
Risk factors
An investment in our common stock is risky. You should carefully consider
the following risks, as well as the other information contained in this
prospectus. If any of the following risks occur, our business could be
harmed. In that case, the trading price of our common stock could decline
and you might lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE ARE DEPENDENT ON ROYALTIES FROM SCHERING-PLOUGH TO FUND OUR OPERATIONS.
The royalties we receive from Schering-Plough presently represent
substantially all of our revenues. As a result, we will be dependent upon
these royalties to fund our operations. Until we receive our first royalty
payment for sales of ribavirin in the second quarter of 2002 payable in
late August 2002, we intend to finance our operations by borrowing up to
$60 million from ICN. If ICN were unable to provide us with this financing,
other financing might not be available on economically favorable terms, if
at all.
IF OUR ROYALTIES FROM SCHERING-PLOUGH DECLINE SIGNIFICANTLY IN THE FUTURE,
WE MAY NOT HAVE SUFFICIENT FUNDS TO OPERATE OUR BUSINESS.
We are dependent upon royalties from our license agreement with
Schering-Plough for ribavirin to fund our research and development program.
During the term of the license agreement, Schering-Plough has sole
discretion to determine the pricing of ribavirin and the amount and timing
of resources devoted to the marketing of ribavirin. Any significant
decrease in royalties from this license agreement could require us to cut
back on our research and development expenditures and other activities. We
also may not be able to repay any borrowings we have incurred in
anticipation of receiving these royalties.
In addition, ICN has advised us that Schering-Plough has informed ICN that
it believes royalties paid under the ribavirin license agreement should not
include royalties on products distributed as part of an indigent patient
marketing program. Schering-Plough claims that because it receives no
revenue from products given to indigent patients, it is not required to pay
royalties on these products under the ribavirin license agreement. We and
ICN do not agree with Schering-Plough's interpretation of the agreement. In
August 2001, Schering-Plough withheld approximately $11.6 million from its
royalty payment relating to the second quarter of 2001. The amount withheld
was purportedly intended by Schering-Plough to be a retroactive adjustment
of royalties previously paid to ICN through the third quarter of 2000 on
products distributed as part of this indigent patient marketing program.
Since the beginning of the fourth quarter of 2000, Schering-Plough is
withholding on a current basis all royalty payments purportedly related to
this indigent patient marketing program. We recognized the approximately
$11.6 million of withheld royalty payments for the retroactive adjustment
and approximately $3 million of royalty payments withheld for the fourth
quarter of 2000 and the first quarter of 2001 as income. These amounts
appear on our balance sheet as a receivable. Since the second quarter of
2001, we no longer recognize any of these withheld royalty payments as
income because we can no longer determine the amounts due to a lack of
information from Schering-Plough.
ICN has given Schering-Plough written notice of its intention to arbitrate
this royalty payment dispute to collect these royalties and prevent
Schering-Plough from withholding royalty payments on sales under the
indigent patient marketing program in the future. The parties expect to
select an arbitrator and set an arbitration schedule during May 2002. If
ICN does not succeed in this alternative dispute resolution process, we may
have to write off all or a portion of this receivable. If ICN does succeed,
we will be entitled to receive the royalty payments on these indigent sales
withheld by Schering-Plough. See "Business -- Legal proceedings of ICN --
Arbitration with Schering-Plough."
Royalties received from the sale of ribavirin by Schering-Plough could also
decline in the future for a variety of other reasons, including:
o reductions in the pricing of ribavirin by Schering-Plough or in
reimbursement by health care payors;
o the expiration or invalidation of the patents related to ribavirin;
o a decrease in Schering-Plough's marketing efforts;
o fluctuations in foreign currency exchange rates;
o an increase in the severity or frequency of side effects associated
with ribavirin, the Rebetron or Peg-Intron/Rebetol combination
therapies, interferon alfa-2b or pegylated interferon alfa-2b, or the
discovery of other harmful effects attributable to these drugs and
therapies;
o the suspension or withdrawal of the FDA's approval of ribavirin
marketed by Schering-Plough or changes in the terms of that approval or
the approved labeling for ribavirin;
o any FDA or court imposed restrictions on the manner in which ribavirin
is promoted; and
o any reduction in supplies due to a natural or accidental disaster or
regulatory concerns like good manufacturing practices compliance.
In addition, future royalties from Schering-Plough may also decrease if
competing therapies are developed for the treatment of hepatitis C.
Competing therapies may include:
o Copegus, a form of ribavirin, being developed by F. Hoffmann-La Roche;
o generic or follow-on forms of ribavirin manufactured by others,
including Geneva Pharmaceuticals Technology Corporation, Three Rivers
Pharmaceuticals, LLC and Teva Pharmaceuticals USA, Inc.;
o pegylated interferon developed by F. Hoffmann-La Roche;
o Infergen being developed by InterMune, Inc.;
o Albuferon being developed by Human Genome Sciences, Inc.;
o natural interferon being developed by Viragen, Inc.; and
o protease and polymerase inhibitors being developed by Eli Lilly and
Company, Vertex Pharmaceuticals Incorporated, ViroPharma Incorporated,
American Home Products Corporation, Schering-Plough, Merck & Co. Inc.
and Boehringer Ingelheim.
Other companies that engage in research activities similar to our research
activities include Abbott Laboratories, Chiron Corporation, Bristol-Myers
Squibb Company, Triangle Pharmaceuticals, Inc., GlaxoSmithKline plc and
Novartis AG.
OTHER PHARMACEUTICAL COMPANIES ARE SEEKING TO INTRODUCE COMPETING VERSIONS
OF RIBAVIRIN TO THE MARKET WITHOUT OBTAINING A LICENSE FROM US.
We depend on the protection afforded by our patents and patents of
Schering-Plough relating to ribavirin for market exclusivity. We have three
US patents relating to ribavirin for use as part of a combination therapy
for the treatment of hepatitis C. In addition, Schering-Plough has at least
three US patents relating to ribavirin for use as part of a combination
therapy for the treatment of hepatitis C.
Three generic pharmaceutical companies, Geneva Pharmaceuticals Technology
Corporation, Three Rivers Pharmaceuticals, LLC and Teva Pharmaceuticals
USA, Inc., have filed abbreviated new drug applications to market generic
forms of ribavirin for use as part of a combination therapy for the
treatment of hepatitis C. ICN has sued two of these pharmaceutical
companies, and the parent of one of these companies, to prevent these two
companies from marketing a generic form of ribavirin. Schering-Plough has
sued all three of these companies to prevent them from marketing a generic
form of ribavirin. See "Business -- Ribavirin for hepatitis C -- Patent and
regulatory strategy." Unlike a new drug application, the Federal Food, Drug
and Cosmetic Act, as amended by the Drug Price Competition and Patent Term
Restoration Act of 1984, also known as the Hatch-Waxman Act, generally
prohibits the FDA from giving final marketing approval to these abbreviated
new drug applications for 30 months after the applicants notified us of
their intent to seek approval from the FDA. However, the FDA could grant
marketing approval prior to expiration of this 30-month stay if a court
rules that our patents are invalid or unenforceable or that a generic
manufacturer of ribavirin would not infringe our patents or if a court
determines that a party has unreasonably delayed the progress of the patent
litigation. There is also a risk that other pharmaceutical companies will
file abbreviated new drug applications without notifying us. The FDA may
approve these applications without giving us a chance to bring litigation.
We understand that F. Hoffmann-La Roche has developed its own version of
ribavirin, which it calls Copegus, for use in combination therapy with F.
Hoffmann-La Roche's version of pegylated interferon, called Pegasys, for
the treatment of hepatitis C. Schering-Plough has advised us that it has
licensed its patents relating to ribavirin as part of a combination therapy
for the treatment of hepatitis C to F. Hoffmann-La Roche in connection with
the settlement between Schering-Plough and F. Hoffmann-La Roche of
litigation between them relating to pegylated interferon. In addition, F.
Hoffmann-La Roche has filed a notice of opposition with the European Patent
Office seeking to invalidate Ribapharm's issued European patents relating
to ribavirin. It is also possible that F. Hoffmann-La Roche will challenge
our US patents. We believe that F. Hoffmann-La Roche may have filed a new
drug application in the United States and the European Union seeking
approval for Copegus for use as part of a combination therapy with Pegasys
for the treatment of hepatitis C. Since new drug applications are not
publicly available, we are unable to confirm whether F. Hoffmann-La Roche
made a new drug application filing for Copegus or when this filing might
have been made. Unlike an abbreviated new drug application filing under the
Hatch-Waxman Act, the FDA could approve this new drug application at any
time.
If any other pharmaceutical company is able to obtain regulatory approval
of a competing version of ribavirin for use as part of a combination
therapy for the treatment of hepatitis C without obtaining a license from
us, our royalties from sales of ribavirin by Schering-Plough may decrease
significantly. See "Business -- Ribavirin for hepatitis C -- Patent and
regulatory strategy."
OBTAINING NECESSARY GOVERNMENT APPROVALS IS TIME-CONSUMING AND NOT ASSURED.
We must obtain FDA approval in the United States and approval from
comparable agencies in other countries prior to marketing or manufacturing
new pharmaceutical products, including biological products, intended for
use by humans. These approvals do not ensure that a product will be
commercially successful.
Obtaining FDA approval for new products and manufacturing processes can
take a number of years and involves the expenditure of substantial
resources. We must satisfy numerous requirements, including preliminary
testing programs on animals and subsequent clinical testing programs on
humans, to establish product safety and efficacy. Pre-clinical studies and
clinical trials are inherently unpredictable. Clinical trials can be
delayed or halted for various reasons, including disagreements with the FDA
over protocol design, the inability to enroll a sufficient quantity of
patients in the clinical trials at the rate we expect, the inability to
maintain a supply of the investigational drug in sufficient quantities to
support the trial, the reporting of severe adverse side effects or
fatalities during or following the trial or a finding during the trial that
the drug is not effective for the particular indication being studied. Even
if our clinical trials are successful, we may not secure authorization for
the commercial sale of any new drugs or compounds for any application, or
for existing drugs or compounds for new applications in the United States
or any other country.
The FDA and foreign regulatory authorities have substantial discretion in
the approval process and may disagree with our interpretation of the data
from our trials. Even if we do secure authorization, the FDA or a foreign
regulatory authority may impose restrictions on the distribution of the
product and may request that we conduct ongoing post-marketing studies of
the product. In addition, the approved labeling may have significant
labeling limitations that could affect our ability to market the product
and, in turn, our profitability. For example, the FDA may require
distribution to patients of a medication guide for prescription drug
products that the FDA determines pose a serious and significant health
concern in order to provide information necessary to patients' safe and
effective use of these products. The FDA's approval of Schering-Plough's
pegylated interferon alfa-2b in combination with ribavirin included a
requirement to conduct post-marketing studies, as well as a requirement to
distribute a medication guide.
After a product is approved or licensed for marketing, it remains subject
to extensive regulatory control, including FDA adverse event reporting
requirements and FDA requirements governing product distribution,
advertising, and promotion. Newly discovered or developed safety or
efficacy data may require changes to a product's approved labeling,
including the addition of new warnings and contraindications, or even in
some instances revocation or withdrawal of the approval. For example, the
approved labeling for Schering-Plough's Rebetol includes strong warnings
against the use of ribavirin by persons with cardiac disease and by women
who are or may become pregnant.
The FDA and regulatory agencies in other countries also periodically
inspect manufacturing facilities, including third parties who manufacture
our products or our active ingredients for us. Pharmaceutical manufacturing
facilities must comply with applicable good manufacturing practice
standards, and manufacturers usually must invest substantial funds, time
and effort to ensure full compliance with these standards. Failure to
comply with applicable regulatory requirements can result in sanctions,
fines, delays or suspensions of approvals, seizures or recalls of products,
operating restrictions, manufacturing interruptions, costly corrective
actions, injunctions, adverse publicity against us and our products and
criminal prosecutions. Furthermore, changes in existing regulations or
adoption of new regulations could prevent or delay us from obtaining future
regulatory approvals or jeopardize existing approvals.
See "Business-- Government regulation."
Further, as a result of a legal proceeding involving ICN, we may for a
period of time be required to pre-clear with the FDA any public
communication concerning any matter subject to FDA regulation. See
"Business -- Legal proceedings of ICN -- SEC litigation and US Attorney
investigation."
BECAUSE OUR EFFORTS TO DISCOVER, DEVELOP AND COMMERCIALIZE NEW PRODUCT
CANDIDATES ARE IN A VERY EARLY STAGE, THESE EFFORTS ARE SUBJECT TO HIGH
RISK OF FAILURE.
A key component of our strategy is to discover, develop and commercialize
new product candidates. The process of successfully commercializing product
candidates is very time-consuming, expensive and unpredictable. We have
only recently begun to direct significant efforts toward the expansion of
our scientific staff and research capabilities in order to pursue this
strategy.
We may not identify any additional compounds from our chemical compound
library that we believe have sufficient commercial promise to warrant
further development. Furthermore, compounds selected from the library for
development may not be patentable. Also, our development work may not
identify patentable uses.
Clinical trials may not demonstrate that our products are safe or
effective. Even if we successfully complete clinical trials, we may not be
able to obtain the required regulatory approvals to commercialize any
product candidate. For example, prior to its approval as part of the
combination therapy to treat hepatitis C patients, the FDA denied our
request for regulatory approval to market ribavirin as a monotherapy to
treat hepatitis C. If we gain regulatory approval for a product, the
approval will be limited to those diseases for which our clinical trials
demonstrate the product is safe and effective. To date, ribavirin is our
only product that has received regulatory approval for commercial sale. A
more detailed discussion regarding government regulation of our products is
included in this prospectus under the heading "Business -- Government
regulation."
IF OUR INTELLECTUAL PROPERTY RIGHTS EXPIRE OR ARE NOT BROAD ENOUGH, OUR
ABILITY TO COMPETE IN OUR MARKETS MAY BE IMPAIRED BECAUSE THIRD PARTIES MAY
BE ABLE TO USE OUR TECHNOLOGY OR SELL GENERIC FORMS OF OUR PRODUCTS.
Our success will depend in part on our ability to obtain and maintain
meaningful patent protection for our products or product candidates
throughout the world. The patent positions of pharmaceutical,
biopharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. We seek patents to protect our
intellectual property and to enhance our competitive position. We will be
able to protect our intellectual property rights from unauthorized use by
third parties only to the extent that our technologies are covered by valid
and enforceable patents or are effectively maintained as trade secrets.
However, our presently pending or future patent applications may not issue
as patents. Any patent issued to us may be challenged, invalidated, held
unenforceable or circumvented. Furthermore, our patents may not be
sufficiently broad to prevent third parties from producing competing
products. See "-- Other pharmaceutical companies are seeking to introduce
competing versions of ribavirin to the market without obtaining a license
from us."
In order to protect or enforce our patent rights, we may initiate patent
litigation against third parties, and we may be similarly sued by others.
We may also become subject to interference proceedings conducted in the
patent and trademark offices of various countries to determine the priority
of inventions. The defense and prosecution, if necessary, of intellectual
property actions is costly and diverts our technical and management
personnel from their normal responsibilities. We may not prevail in any of
these suits. An adverse determination of any litigation or defense
proceedings may put our patents at risk of being invalidated or interpreted
narrowly and may put our patent applications at risk of not issuing.
We have limited patent rights in selected countries of the European Union,
Switzerland and Japan relating to the antiviral use of ribavirin. These
patents are currently scheduled to expire by 2005, although we are seeking
to extend these patents until 2010. We may not be able to have these
patents extended.
ICN previously licensed six chemical compounds to Dr. Devron Averett, a
former research director of ICN. ICN did not contribute any of these six
compounds to us. ICN will retain the rights to any royalties that may
become payable under this license with respect to these six chemical
compounds. Dr. Averett and his employer and sublicensee, Anadys
Pharmaceuticals, Inc., have, from time to time, asserted that the license
may cover additional compounds that ICN has contributed to us, including
Levovirin and Viramidine. Dr. Averett and Anadys have not taken legal
action to enforce these alleged rights. ICN has advised us that it believes
that these assertions are without merit. If Dr. Averett and Anadys were to
have rights to Levovirin and/or Viramidine, this may materially adversely
affect our ability to commercialize Viramidine and may materially adversely
affect our license agreement related to Levovirin with F. Hoffmann-La
Roche. In addition, to the extent Dr. Averett and Anadys have rights to
other compounds in our library, we could be precluded from commercializing
these other compounds.
Some of the compounds in our compound library may have been patented
previously or otherwise disclosed to the public. This would prevent us from
obtaining patent protection for the compounds themselves. In these cases,
we intend to seek patent protection for our intended uses of these
compounds or for derivatives of these compounds.
We licensed rights in IL-12 from F. Hoffmann-La Roche, including the
non-exclusive rights to IL-12 that F. Hoffmann-La Roche had previously
licensed from Genetics Institute. We may also need to pursue a license
agreement from Genetics Institute. If we are required to obtain license
rights from Genetics Institute, we cannot assure you that we will be able
to do so on terms acceptable to us.
Because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our
confidential information could be compromised by disclosure during
intellectual property litigation. In addition, during the course of this
kind of litigation, there could be public announcements of the results of
hearings, motions or other interim proceedings or developments in the
litigation. If securities analysts or investors perceive these results to
be negative, it could have a substantial negative effect on the trading
price of our common stock.
We have filed a trademark registration application with the US Patent and
Trademark Office for the mark RIBAPHARM. Our application was published in
the Federal Register on January 8, 2002 and notice of allowance was issued
April 23, 2002. Although we expect to be able to register and use this
mark, if we cannot, we may choose a different mark. We also reserve the
right to change our company name. Furthermore, we may be subject to
monetary damages for infringing any other company's right to the mark
RIBAPHARM. In late April we received a letter from attorneys for a company
named Ribopharm, Inc., stating that they consider our use of the RIBAPHARM
name to infringe their rights. We are currently discussing those
allegations with Ribopharm's attorney.
See "Business -- Patents and proprietary technology" and "Business --
Ribavirin for hepatitis C -- Patent and regulatory strategy."
IF COMPETITORS DEVELOP MORE EFFECTIVE OR LESS COSTLY DRUGS FOR OUR TARGET
INDICATIONS, OUR BUSINESS COULD BE SERIOUSLY HARMED.
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Ribavirin and
many of the drugs that we are attempting to discover will be competing with
new and existing therapies. Many companies in the United States and abroad
are pursuing the development of pharmaceuticals that target the same
diseases and conditions that we are targeting. We believe that a
significant number of drugs are currently under development and may become
available in the future for the treatment of hepatitis C, hepatitis B, HIV
and cancer. For example, F. Hoffmann-La Roche is developing a new form of
pegylated interferon called Pegasys, and a new formulation of ribavirin
called Copegus, for the treatment of hepatitis C. In addition, in October
2000, Human Genome Sciences, Inc. submitted an investigational new drug
application with the FDA to initiate Phase I human clinical trials of
Albuferon for the treatment of hepatitis C.
If pegylated interferon, Albuferon, Copegus or other therapies prove to be
a more effective treatment for hepatitis C than the combination therapies
or if the FDA approves any generic or other form of ribavirin, then our
royalty revenues from Schering-Plough could significantly decrease. See --
Other pharmaceutical companies are seeking to introduce competing versions
of ribavirin to the market without obtaining a license from us and
"Business -- Ribavirin for hepatitis C -- Developments related to new forms
of interferon."
Many of our competitors, particularly large pharmaceutical companies, have
substantially greater financial, technical and human resources than we do.
We believe that many of our competitors spend significantly more on
research and development related activities than we do. Others may succeed
in developing products that are more effective than those presently
marketed or proposed for development by us. Progress by other researchers
in areas similar to those being explored by us may result in further
competitive challenges. We may also face increased competition from
manufacturers of generic pharmaceutical products when the patents covering
some of our products expire. In addition, academic institutions, government
agencies and other public and private organizations conducting research may
seek patent protection with respect to potentially competitive products.
They may also establish exclusive collaborative or licensing relationships
with our competitors.
See "Business -- Ribavirin for hepatitis C -- Patent and regulatory
strategy."
IF WE FAIL TO MEET OUR INDEBTEDNESS OBLIGATIONS, OUR BUSINESS COULD BE IMPAIRED.
On April 17, 2002, we became jointly and severally liable with ICN for
principal and interest for $525 million of subordinated notes issued by ICN
in July 2001. As between ICN and us, ICN agreed to make all interest and
principal payments on these notes. However, we will be responsible for
these payments to the extent ICN does not make these payments. In that
event, we would have a claim against ICN for any payments ICN does not
make. We have entered into an agreement with ICN providing that we may
borrow up to $60 million from ICN and we may incur additional indebtedness
in the future. Our level of indebtedness may have several important effects
on our future operations, including:
o adversely affecting our ability to carry out our business strategy;
o increasing the impact on our business of negative changes in general
economic and industry conditions, as well as competitive pressures; and
o affecting our ability to obtain additional financing for working
capital, capital expenditures or general corporate purposes.
General economic conditions, industry cycles and financial, business and
other factors affecting our operations may affect our future performance.
Many of these factors are beyond our control. These and other factors may
affect our ability to make principal and interest payments on our
indebtedness, including on the notes if ICN does not make the required
payments. If we cannot generate sufficient cash flow from operations in the
future to service our debt, we may:
o seek additional financing in the debt or equity markets;
o refinance or restructure all or a portion of our indebtedness;
o sell selected assets; or
o reduce or delay planned capital or research and development
expenditures.
These measures might not be sufficient to enable us to service our debt. In
addition, any financing, refinancing or sale of assets might not be
available on economically favorable terms, if at all.
BECAUSE OUR EXPENSES WILL INCREASE SIGNIFICANTLY FROM PRIOR LEVELS, OUR
HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR FUTURE
RESULTS.
Prior to April 17, 2002, we did not operate as a stand-alone entity. Our
research and development activities have increased significantly since we
hired Dr. Johnson Lau in March 2000. As a result, the historical financial
information we have included in this prospectus may not reflect what our
results of operations, financial position and cash flows would have been
had we been a separate, stand-alone entity during the periods presented.
This information may also not be indicative of what our results of
operations, financial position and cash flows will be in the future. As a
result, there is limited information which you have to evaluate our
business and your investment decision. This is because:
o as a division of ICN, ICN provided us with various services and
allocated expenses for these services to us in amounts that may not
have been the same as the expenses we would have incurred had we
performed or acquired these services ourselves;
o the information does not reflect other events and changes that will
occur as a result of our separation from ICN, including the
establishment of our capital structure and changes in our expenses as a
result of new employee plans, our tax sharing agreement with ICN, and
other matters; and
o we are in the process of significantly expanding our research and
development activities in connection with the implementation of our
business strategy, including our plan to spend approximately $140
million in 2002 and 2003 on research and development activities.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY RESEARCH SCIENTISTS AND OTHER
RESEARCH AND DEVELOPMENT PERSONNEL, WE MAY NOT BE ABLE TO IMPLEMENT OUR
BUSINESS STRATEGY.
We depend on the principal members of our scientific staff, including Dr.
Johnson Lau. We have entered into employment agreements with our executive
officers, including Dr. Lau. The loss of services of any of these persons
could delay or reduce our product development and commercialization
efforts. Our success depends upon our ability to attract, train, motivate
and retain qualified scientific personnel. Qualified personnel are in great
demand throughout the biotechnology and pharmaceutical industries. We
expanded our research team from 12 scientists on March 1, 2000 to
approximately 100 scientists on December 31, 2001. We plan to continue to
expand our research team to over 120 scientists by the end of 2002.
However, we may not be able to attract additional personnel or retain
existing employees.
In addition, the existence of non-competition agreements between
prospective employees and their previous employers may prevent us from
hiring these individuals, or subject us to suit from their former
employers.
IF OUR PRODUCTS ARE ALLEGED TO BE HARMFUL, WE MAY NOT BE ABLE TO SELL THEM
AND WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
The nature of our business exposes us to potential liability risks inherent
in the testing, manufacturing and marketing of pharmaceutical products.
Using our drug candidates in clinical trials may expose us to product
liability claims. These risks will expand with respect to drugs, if any,
that receive regulatory approval for commercial sale. Even if a drug were
approved for commercial use by an appropriate governmental agency, there
can be no assurance that users will not claim that effects other than those
intended may result from our products. We generally self-insure against
potential product liability exposure with respect to our marketed products,
including ribavirin. While to date no material adverse claim for personal
injury resulting from allegedly defective products, including ribavirin,
has been successfully maintained against us, a substantial claim, if
successful, could have a negative impact on us.
In the event that anyone alleges that any of our products are harmful, we
may experience reduced consumer demand for our products or our products may
be recalled from the market. In addition, we may be forced to defend
lawsuits and, if unsuccessful, to pay a substantial amount in damages. We
do not currently have insurance against product liability risks. Insurance
is expensive and, if we seek insurance in the future, it may not be
available on acceptable terms. Even if obtained, insurance may not fully
protect us against potential product liability claims.
We maintain insurance covering normal business operations, including fire,
property and casualty protection. We will not carry insurance that covers
political risk, nationalization or losses resulting from anti-government
violence.
IF WE ARE UNABLE TO USE OUR FACILITIES, IT WOULD BE COSTLY AND DISRUPTIVE
TO FIND OTHER FACILITIES.
We do not own our laboratory and office facilities. We lease our laboratory
and office facilities from ICN under a lease which expires in 2007, with a
five-year option by us to renew. If our lease terminates earlier than
contemplated by our lease with ICN or we are unable to use our facilities
for some other reason, it would be very costly and disruptive to find other
comparable facilities. Since 2000, ICN spent approximately $28 million on
capital improvements to its headquarters. A substantial portion of these
improvements were to upgrade and modernize our laboratories that we lease
from ICN.
IF WE CANNOT SUCCESSFULLY DEVELOP OR OBTAIN FUTURE PRODUCTS, OUR GROWTH MAY
BE DELAYED.
Our future growth will depend, in large part, upon our ability to develop
or obtain and commercialize new products and new formulations or
indications relating to products. We are engaged in an active research and
development program involving compounds owned by us or licensed from others
which we may commercially develop in the future. Although Schering-Plough
has received regulatory approvals for the sale of oral ribavirin for
treatment of chronic hepatitis C in combination with Schering-Plough's
interferon alfa-2b and pegylated interferon alfa-2b, there can be no
assurance that we will be able to develop or acquire new products, obtain
regulatory approvals to use these products for proposed or new clinical
indications, manufacture our potential products in commercial volumes or
gain market acceptance for such products. It may be necessary for us to
enter into other licensing agreements, similar to our agreement with
Schering-Plough for ribavirin and F. Hoffmann-La Roche for Levovirin, with
other pharmaceutical companies in order to market effectively any new
products or new indications for existing products. There can be no
assurance that we will be successful in entering into any new licensing
agreements on terms favorable to us or at all. We have granted
Schering-Plough an option or right of first/last refusal to license various
compounds we may develop. See "Business -- Products in development --
November 2000 Schering-Plough agreement."
OUR FLEXIBILITY IN MAXIMIZING COMMERCIALIZATION OPPORTUNITIES FOR OUR
COMPOUNDS MAY BE LIMITED BY OUR OBLIGATIONS TO SCHERING-PLOUGH.
In November 2000, we entered into an agreement that provides
Schering-Plough with an option or right of first/last refusal to license
various compounds we may develop. This agreement was entered into as part
of a resolution of claims asserted by Schering-Plough against us and ICN
regarding our alleged improper hiring of several former Schering-Plough
research and development personnel and claims that our license agreement
with Schering-Plough precluded us from conducting hepatitis C research. We
believe we are in compliance with our obligations under this agreement. The
interest of potential collaborators in obtaining rights to our compounds or
the terms of any agreements we ultimately enter into for these rights may
be impacted by this agreement. Furthermore, a commercialization partner
other than Schering-Plough might have otherwise been preferable due to that
potential partner's strength in a given disease area or geographic region
or for other reasons. See "Business -- Products in development -- November
2000 Schering-Plough agreement."
In June 2001, we licensed Levovirin to F. Hoffmann-La Roche. See Business
-- Products in development -- Levovirin. Our agreement with Schering-Plough
granted Schering-Plough a right of first/last refusal to license Levovirin.
Although we believe we have complied with our obligations under the right
of first/last refusal, and Schering-Plough has not alleged otherwise,
Schering-Plough may allege in the future that we did not comply with these
obligations as to Levovirin.
IF WE DO NOT DEVELOP OUR OWN MANUFACTURING, SALES, MARKETING AND
DISTRIBUTION CAPABILITIES, WE WILL REMAIN DEPENDENT ON THIRD PARTIES TO
MANUFACTURE AND COMMERCIALIZE OUR PRODUCTS.
We currently have no manufacturing, sales, marketing or distribution
capabilities. Other than our agreements with Schering-Plough and F.
Hoffmann-La Roche, we currently have no agreements with third parties to
manufacture, sell, market or distribute our products. If we do not develop
our own internal capabilities, we will have to rely on third parties to
manufacture, sell, market and distribute some or all of our products. We
may have limited or no control over the activities of these third parties.
These third parties may not be able to manufacture or market our products
successfully. The agreement we entered into with Schering-Plough which
grants Schering-Plough rights of first/last refusal to license compounds we
may develop may restrict our ability to manufacture, sell, market or
distribute our products with third parties. This could prevent us from
obtaining the increased revenue and assistance that agreements with other
third parties could provide. Before we can manufacture, sell, market or
distribute products, we will need to build manufacturing capacity and a
marketing and sales force with technical expertise and with supporting
distribution capabilities. In January 2002, due to demand in excess of its
manufacturing capacity of the pegylated interferon alfa-2b component of the
combination therapy, Schering-Plough announced it started a waiting list
for new patients to begin treatment with ribavirin in combination with
Schering-Plough's pegylated interferon alfa-2b. Schering-Plough announced
that new patients would have to wait for a period of 10 to 12 weeks to
begin treatment with the combination therapy. See Business -- Ribavirin for
hepatitis C -- Schering-Plough license agreement and "Business -- Products
in development -- November 2000 Schering--Plough agreement."
OUR THIRD-PARTY MANUFACTURERS' FAILURE TO COMPLY WITH FDA REGULATIONS COULD
CAUSE INTERRUPTION OF THE MANUFACTURE OF OUR PRODUCTS.
We do not have the internal capability to manufacture pharmaceutical
products. Schering-Plough manufactures the ribavirin sold under license
from us. Our manufacturers are required to adhere to regulations enforced
by the FDA. Our dependence upon others to manufacture our products may
adversely affect our profit margins and our ability to develop and
commercialize products on a timely and competitive basis. Delays or
difficulties with contract manufacturers in producing, packaging or
distributing our products could adversely affect sales of ribavirin or
introduction of other products.
In February 2001, Schering-Plough announced that the FDA has been
conducting inspections of various Schering-Plough manufacturing facilities
and issued reports citing deficiencies concerning compliance with current
good manufacturing practices, primarily relating to production processes,
controls and procedures. In June 2001, Schering-Plough announced that FDA
inspections at some of these facilities in May and June 2001 cited
continuing and additional deficiencies in manufacturing practices. In
January 2002, Schering-Plough announced that it was in negotiations with
the FDA for a consent decree to resolve the issues regarding the FDA
inspections. Schering-Plough also announced that it recorded a $500 million
reserve against a possible consent decree payment. While Schering-Plough
has advised us that the deficiencies were not specifically applicable to
the production of ribavirin, any deviations from current good manufacturing
practices can affect the capabilities of a manufacturing site.
Schering-Plough's ability to manufacture and ship ribavirin, interferon
alfa-2b and pegylated interferon alfa-2b could be affected by temporary or
indefinite interruptions of some production lines to install system
upgrades and further enhance compliance, and other technical production and
equipment qualification issues.
If the FDA is not satisfied with Schering-Plough's responses and proposed
corrective action, the FDA could take regulatory actions against
Schering-Plough, including seizure of products, injunction against further
manufacture, recall or other actions that could interrupt production of
ribavirin or the products used in combination with ribavirin. Interruption
of ribavirin or related product manufacturing for a sustained period of
time could materially reduce our royalty payments.
WE ARE SUBJECT TO UNCERTAINTY RELATED TO HEALTH CARE REFORM MEASURES AND
REIMBURSEMENT POLICIES.
The levels at which government authorities, private health insurers, HMOs
and other organizations reimburse the costs of developing and manufacturing
drugs and treatments related to those drugs will have an effect on the
successful commercialization of our drug candidates. We cannot be sure that
reimbursement in the United States or elsewhere will be available for any
drugs we may develop or, if already available, will not be decreased in the
future. Also, we cannot be sure that reimbursement amounts will not reduce
the demand for, or the price of, our drugs. If reimbursement is not
available or is available only to limited levels, we may not be able to
obtain a satisfactory financial return on the manufacture and
commercialization of any future drugs. In addition, as a result of the
trend towards managed health care in the United States, as well as
legislative proposals to reduce government insurance programs, third-party
payors are increasingly attempting to contain health care costs by limiting
both coverage and the level of reimbursement of new drug products.
Consequently, significant uncertainty exists as to the reimbursement status
of newly-approved health care products. Third-party payors may not
establish and maintain price levels sufficient for us to realize an
appropriate return on our investment in product development.
IF WE FAIL TO MANAGE OUR EXPANSION, OUR BUSINESS COULD BE IMPAIRED.
We are in the process of significantly increasing the number of our
employees and expanding the scope of our operations. We expanded our
research team from 12 scientists on March 1, 2000 to approximately 100
scientists on December 31, 2001. We plan to continue to expand our research
team to over 120 scientists by the end of 2002. We spent approximately $6
million in each of 2000 and 2001 to update and modernize our research
equipment. In addition, ICN spent approximately $12 million in 2000 and $16
million in 2001 on capital improvements to ICN's headquarters. A
substantial portion of these improvements were to upgrade and modernize our
laboratories that we lease from ICN. This internal expansion and any
acquisitions of products or businesses we make will result in an increase
in responsibilities for both existing and new management personnel. Our
ability to manage our expansion and acquisitions effectively will require
us to continue to implement and improve our operational, financial and
management information systems. We may also have to recruit additional
employees. If we fail to manage our research and development expansion, our
business could be impaired.
IF OUR COMPOUND LIBRARY IS DESTROYED BECAUSE OF AN EARTHQUAKE OR OTHER
DISASTER, OUR RESEARCH AND DEVELOPMENT PROGRAM WILL BE SERIOUSLY HARMED.
The laboratory books and the compounds that comprise our compound library
are all located at our facilities in Costa Mesa, California, near areas
where earthquakes have occurred in the past. There are no duplicate copies
off-premises and there are no backup materials for the product candidates
we are currently developing. No duplicate copies of our compound library
exist because making copies would be prohibitively expensive. The library
has not been moved off-site because our scientific staff is currently in
the process of screening it. Our ability to develop potential product
candidates from our compound library would be significantly impaired if
these records were destroyed in an earthquake or other disaster. Any
insurance we maintain may not be adequate to cover our losses.
IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES INJURY
OR VIOLATES LAWS, WE MAY BE LIABLE FOR DAMAGES NOT COVERED BY INSURANCE.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate
the risk of accidental contamination or injury from the use, storage,
handling or disposal of these materials. In the event of contamination or
injury, we could be held liable for damages that result. Any liability
could exceed our resources. We are subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of these
materials and specified waste products. The cost of compliance with, or any
potential violation of, these laws and regulations could be significant.
Any insurance we maintain may not be adequate to cover our losses.
IF WE ACQUIRE EXCESS CASH FROM OUR OPERATIONS, THE TYPES OF INVESTMENTS IN
WHICH WE MAY BE ABLE TO INVEST THIS CASH MAY BE LIMITED.
The Investment Company Act of 1940 requires registration as an investment
company for companies that are engaged primarily in the business of
investing, reinvesting, owning, holding or trading in securities. Unless an
exemption or safe harbor applies, a company may be deemed to be an
investment company if it owns "investment securities" with a value
exceeding 40% of the value of its total assets on an unconsolidated basis,
excluding government securities and cash items. Securities issued by
companies other than majority-owned subsidiaries are generally counted as
investment securities for purposes of the Investment Company Act.
If we acquire significant amounts of cash from our royalty payments which
are not used in our operations, we will be limited in our ability to invest
these excess cash reserves. If we were to invest even a small percentage of
this excess cash in speculative investment securities, we could be
considered an investment company. However, under interpretations by the
staff of the SEC, we would not be considered an investment company if we
invest this cash in various non-speculative investment securities and
engage in activities that are consistent with our goal of discovering,
developing and commercializing antiviral and anticancer medications.
Registration as an investment company would subject us to restrictions that
are inconsistent with our fundamental business strategies. We may have to
take actions, including buying, refraining from buying, selling or
refraining from selling securities, when we would otherwise not choose to
in order to continue to avoid registration under the Investment Company
Act.
RISKS RELATING TO OUR SEPARATION FROM ICN
WE MAY HAVE CONFLICTS WITH ICN THAT MAY BE RESOLVED IN A MANNER UNFAVORABLE
TO US.
We entered into a number of intercompany agreements with ICN. The terms of
those intercompany agreements were determined by ICN in a manner that ICN
believed would be reasonable for both ICN and us. The prices and other
terms under these agreements may be less favorable to us than those we
could have obtained in arm's-length negotiations with unaffiliated third
parties for similar services or under similar agreements. For more
information about these agreements, see "Relationship with ICN." In
addition, a number of our directors and executive officers continue to own
ICN stock and options on ICN stock that they acquired as employees of ICN.
This ownership could create, or appear to create, potential conflicts of
interest when these directors and officers are faced with decisions that
could have different implications for our company and ICN. These conflicts
may not ultimately be resolved in a manner fair to us.
SHARES RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS WE GRANTED AND
ANY SHARES RESERVED FOR ISSUANCE AS A RESULT OF AN ADJUSTMENT TO ICN'S
EXISTING STOCK OPTION PLANS IN THE SPIN-OFF WILL RESULT IN ADDITIONAL
DILUTION.
We granted options to acquire 3,075,000 shares of common stock to our
employees and directors at the time of our initial public offering on April
17, 2002. The vesting schedule of these options will be 25% each year,
commencing on the first anniversary of the grant. See "Management --
Employee benefit plans -- 2002 Stock Option and Award Plan."
ICN has not determined what adjustments to make to its existing stock
option plans at the time of the spin-off. One alternative is to split each
existing option into two options, one option being exercisable for our
common stock on the basis of the distribution ratio used in the spin-off
and the other option being exercisable for ICN common stock. The exercise
price of each option would be allocated to each component on an equitable
basis. As of December 31, 2001, options to purchase 10,721,000 shares of
ICN common stock were outstanding.
OUR ABILITY TO EFFECT BUSINESS COMBINATION TRANSACTIONS OR TO ISSUE
ADDITIONAL SHARES OF OUR STOCK COULD BE LIMITED.
Under current law, one or more transactions involving the acquisition of a
total of 50% or more of the value or voting power of our stock that
generally occur prior to, or during the two years after, a spin-off of
ICN's interest in us could cause the spin-off to become taxable to ICN.
Under our tax sharing agreement with ICN, we would be required to indemnify
ICN for this tax liability. Because of concerns regarding the tax-free
nature of the spin-off, we may not be able to consider, negotiate or enter
into transactions with third parties that we might otherwise have pursued
to acquire businesses or products using our common stock as consideration.
See "Relationship with ICN -- Tax sharing agreement."
A CHANGE OF CONTROL OF ICN COULD ADVERSELY AFFECT OUR BUSINESS AND WE COULD
BE HELD LIABLE IF THE SPIN-OFF BECOMES TAXABLE.
At ICN's annual meeting of stockholders on May 30, 2001, three persons
nominated by a group of dissident stockholders calling themselves the ICN
Committee to Maximize Shareholder Value were elected to ICN's board of
directors. Nine other of ICN's directors remain in office. The terms of
office for six of these directors expire at the 2002 annual meeting and the
terms of office for three of these directors expire at the 2003 annual
meeting. Under ICN's bylaws and an agreement between ICN and SSP-Special
Situations Partners Inc., a member of the ICN Committee to Maximize
Shareholder Value, only three directors will be elected at the 2002 annual
meeting, so that after the 2002 annual meeting, ICN's board will be
comprised of nine directors. Franklin Mutual Advisors, LLC and Iridian
Asset Management LLC filed a definitive proxy statement with the SEC on
April 18, 2002 for ICN's 2002 annual meeting. The proxy statement states
that Franklin and Iridian seek to elect three nominees as directors at this
meeting. According to information contained in a Schedule 13D filed on
April 9, 2002 and a Schedule 14A filed on April 18, 2002 with the SEC,
Franklin and Iridian together beneficially own approximately 10.22% of the
common stock of ICN. If the three nominees of this dissident group are
elected at ICN's 2002 annual meeting, it is our position that a change in
control would occur under employment agreements with our executive
officers. Under the provisions of these employment agreements, we may be
obligated to pay our executive officers approximately $3.5 million, based
on present compensation, if these executive officers were to terminate
their services with us after the change in control. In addition, the
vesting of options granted to the executives would be accelerated. See
"Management -- Employment agreements/change in control agreements."
In addition, if ICN experiences a change of control, as defined in the
indenture governing the 6 1/2% subordinated notes issued by ICN, ICN is
required to make an offer to purchase all of these notes. As between ICN
and us, ICN agreed to pay for each note tendered in the offer an amount
equal to 100% of the principal amount plus accrued interest. However, we
will be responsible for this amount to the extent ICN does not make the
payment. In that event, we would have a claim against ICN for any payments
ICN does not make. The election of the slate of directors nominated by
Franklin and Iridian will not in and of itself result in a change of
control of ICN under these notes. See "Relationship with ICN -- ICN notes."
Under current law, one or more transactions involving the acquisition of a
total of 50% or more of the value or voting power of ICN's stock that
generally occur prior to, or during the two years after, a spin-off of
ICN's interest in us could cause the spin-off to become taxable to ICN. If
a spin-off becomes taxable to ICN and ICN is unable to pay the tax, as a
member of ICN's consolidated group at the time of the spin-off, we could be
held liable for the tax.
A CHANGE OF CONTROL OF US WOULD REQUIRE US TO MAKE AN OFFER TO PURCHASE ALL
OF ICN'S OUTSTANDING 61/2% SUBORDINATED NOTES AND MAY REQUIRE US TO MAKE
SIGNIFICANT PAYMENTS TO OUR EXECUTIVE OFFICERS.
If we experience a change of control, as defined in the indenture governing
the 6 1/2% subordinated notes issued by ICN, we are required to make an
offer to purchase all of these notes. As between ICN and us, ICN agreed to
pay for each note tendered in the offer an amount equal to 100% of the
principal amount plus accrued interest. However, we will be responsible for
this amount to the extent ICN does not make the payment. In that event, we
would have a claim against ICN for any payments ICN does not make. The
election of the slate of directors nominated by Franklin and Iridian will
not in and of itself result in a change of control of ICN under these
notes. See "Relationship with ICN -- ICN notes."
In addition, if we experience a change of control, as defined in the
employment agreements with our executive officers, we may be obligated to
pay up to $3.5 million, based upon present compensation, if these executive
officers were to terminate their services with us after the change in
control. In addition, the vesting of options granted to the executives
would be accelerated. If the slate of directors nominated by Franklin and
Iridian is successful in being elected to ICN's board of directors, it is
our position that a change in control would occur under the employment
agreements with our executive officers. See "Management -- Employment
agreements/change in control agreements."
BECAUSE OF AN ONGOING DISPUTE INVOLVING ICN'S INTEREST IN A YUGOSLAVIAN
JOINT VENTURE, OUR RIGHTS TO COMMERCIALIZE TIAZOLE AND ADENAZOLE MAY BE
LIMITED.
In connection with our separation from ICN, ICN contributed to us its
rights related to Tiazole and Adenazole. These are two of the compounds in
our product development pipeline. However, ICN is involved in arbitration
with the Republic of Serbia, the Federal Republic of Yugoslavia and the
State Health Fund of the Republic of Serbia that could impact those rights.
In this arbitration, ICN has taken the position that rights related to
Tiazole and Adenazole were previously validly transferred to ICN
Yugoslavia, a joint venture between ICN and Yugoslavian entities. Depending
on the resolution of this arbitration, we may not have valid rights related
to Tiazole and Adenazole. We may be required to obtain licenses from, or
grant licenses to, third parties prior to any effort by us to commercialize
these products. In addition, it may be difficult for us to license Tiazole
and Adenazole to third parties for commercialization if rights related to
these compounds remain unclear. See "Business -- Legal proceedings of ICN."
As a result of the changing political environment in Yugoslavia, ICN has
advised us that it is attempting to regain control of ICN Yugoslavia. There
can be no assurance that ICN will be successful in its efforts.
WE MAY BE ADVERSELY AFFECTED BY AN ONGOING LITIGATION INVOLVING ICN AND ITS
CHAIRMAN.
ICN and Milan Panic, its chairman, are defendants in a pending civil
lawsuit by the SEC that seeks to bar Mr. Panic from acting as an officer or
director of any publicly traded company. As a company controlled by ICN
prior to the spin-off, any adverse result in this lawsuit may affect us.
For example, we may be subject to the terms of any judgment or settlement
and may be liable for any fines or settlement payments. In addition, while
we will be indemnified by ICN for any expenses related to this SEC action,
we will be required for financial reporting purposes to expense 50% of
ICN's expenses related to this action. See "Business -- Legal proceedings
of ICN" for a description of this litigation.
On December 17, 2001, ICN entered a guilty plea in the United States
District Court for the Central District of California. This plea was
entered pursuant to a plea agreement with the office of the US Attorney in
Los Angeles to settle a six year investigation. As part of the guilty plea,
ICN agreed to a three-year term of probation. The conditions of the
probation require ICN to create a compliance program to ensure no future
violations of the federal securities laws and to pre-clear with the FDA any
public communication by ICN concerning any matter subject to FDA
regulation. The terms of the compliance program include ICN retaining an
expert to review its procedures for public communications regarding matters
subject to FDA regulation and to develop written procedures for these
communications. The compliance program also requires preparation of an
annual report by the expert on ICN's compliance with the written procedures
and annual certification by ICN management that ICN is complying with the
expert's recommendations. ICN has advised us that these conditions of
probation also apply to us unless, after the spin-off or other change in
control of us occurs, the District Court grants us, upon application, early
termination of the probation. The US Attorney may oppose any application we
may make and the District Court may not grant early termination of the
probation. See "Business -- Legal proceedings of ICN."
WE COULD BE HELD LIABLE FOR THE FEDERAL INCOME TAX LIABILITY OF MEMBERS
OF ICN'S CONSOLIDATED GROUP.
We and ICN have entered into a tax sharing agreement pursuant to which the
tax amounts to be paid or received by us with respect to federal
consolidated returns of ICN in which we are included generally is
determined as though we file separate federal income tax returns. Also, we
will calculate our state and local income taxes taking into account ICN's
worldwide apportionment schedule, where applicable. In addition, ICN will
have sole responsibility and authority to respond to and conduct all tax
proceedings relating to ICN consolidated or combined income tax returns in
which we are included. Moreover, notwithstanding the tax sharing agreement,
federal income tax law provides that each member of a consolidated group is
jointly and severally liable for the federal income tax liability of each
other member of the consolidated group for any taxable year during any part
of which it is a member. Thus, to the extent ICN or other members of the
group fail to make any federal income tax payments required of them by law,
including any federal income tax payments due if the spin-off is determined
to be taxable to ICN, for any taxable year during any part of which we were
a member of the ICN consolidated group, we could be liable for the
shortfall. Similar principles may apply for state income tax purposes in
many states.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has fluctuated in the past and may
continue to fluctuate as a result of changes in our operating performance
or prospects. In addition, the stock market in general has recently
experienced extreme volatility often unrelated to the operating performance
or prospects of specific companies. In particular, the market prices for
securities of biotechnology companies in general have been highly volatile
and may continue to be highly volatile in the future. The market price of
our common stock may be subject to substantial volatility depending upon
many factors. Many of these are beyond our control. These factors include:
o announcements regarding the results of discovery efforts and
preclinical and clinical activities by us or our competitors;
o announcements regarding the acquisition of technologies or companies by
us or other biotechnology companies;
o changes in our relationship with Schering-Plough or F. Hoffmann-La
Roche;
o establishment of additional corporate partnerships or licensing
agreements;
o technological innovations or new commercial products developed by us or
our competitors;
o changes in our intellectual property portfolio;
o developments or disputes concerning our proprietary rights;
o changes in government regulations affecting us or our industry;
o progress or withdrawal of regulatory approvals with respect to our
product candidates;
o issuance of new or changed securities analysts' reports and/or
recommendations;
o economic and other external factors;
o additions or departures of key personnel;
o actual or anticipated fluctuations in our quarterly financial and
operating results; and
o developments with respect to legal proceedings that we or ICN may be
involved in.
One or more of these factors could significantly harm our business and/or
cause a decline in the price of our common stock in the public market.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
MAY PREVENT ATTEMPTS TO REMOVE OR REPLACE OUR MANAGEMENT.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party
to acquire us or replace or remove our current management. These provisions
include:
o Article IV(c) of our certificate of incorporation, which authorizes the
issuance of "blank check" preferred stock that could be issued by our
board of directors to increase the number of outstanding shares and
thwart a takeover attempt;
o Article VI(a) of our certificate of incorporation, which limits who may
call a special meeting of stockholders; and
o Article I, Section 8 of our bylaws, which establishes advance notice
requirements for nominations for election to the board of directors or
for proposing matters that can be acted upon at stockholder meetings.
Forward-looking information
Some of the statements under the captions "Prospectus summary," "Risk
factors," "Use of proceeds," "Management's discussion and analysis of
financial condition and results of operations" and "Business" and elsewhere
in this prospectus are forward-looking statements. These forward-looking
statements include statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should," "will" or "would" or the negative of these
terms or similar expressions are generally intended to identify
forward-looking statements.
Forward-looking statements necessarily involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set
forth above under "Risk factors" and elsewhere in this prospectus. The
factors set forth above in the "Risk factors" section and other cautionary
statements made in this prospectus should be read and understood as being
applicable to all related forward-looking statements wherever they appear
in this prospectus. The forward-looking statements contained in this
prospectus represent our judgment as of the date of this prospectus. We
caution readers not to place undue reliance on these statements.
Use of proceeds
We will not receive any proceeds from the sale of the common stock in this
offering. See "Selling securityholders."
Price range of common stock and dividend policy
Since April 17, 2002 our common stock has been traded on the New York Stock
Exchange under the symbol "RNA." The following table sets forth the high
and low sales prices as reported by the New York Stock Exchange for the
periods indicated.
2002 HIGH LOW
---- ---- ---
Second Quarter (beginning April 17, 2002 $11.85 $9.75
through May 10, 2002)
As of May 9, 2002, there were 4 holders of record of our common stock.
We currently intend to retain our future earnings, if any, to support the
growth and development of our business. We do not anticipate paying
dividends for the foreseeable future. Our board of directors will make all
future determinations relating to our dividend policy. This determination
will depend on a number of other factors, including future earnings,
capital requirements, financial condition and future prospects and other
factors our board of directors may deem relevant.
Capitalization
The following table shows our capitalization as of December 31, 2001 on an
actual basis and pro forma basis to reflect the completion of the initial
public offering on April 17, 2002.
AS OF DECEMBER 31, 2001
------------------------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
61/2% subordinated notes due 2008(1)............. $ -- $ 525,000
Stockholder's equity (deficit):
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued and outstanding..... -- --
Common stock, $0.01 par value; 400,000,000 shares
authorized; 150,000,000 issued and outstanding(2) 1,500 1,500
Advances due from ICN(3)....................... (188,017) --
Receivable from ICN(1)......................... -- (525,000)
Retained earnings.............................. 207,736 19,719
Total stockholder's equity (deficit)........... 21,219 (503,781)
Total capitalization........................ $ 21,219 $ 21,219
-------------------
(1) On April 17, 2002, we became jointly and severally liable for the
principal and interest obligations under the 6 1/2% subordinated notes
issued by ICN. As between us and ICN, ICN agreed to make all interest
and principal payments on these notes and to make any payments due
upon a change of control of ICN or us. We can only amend this
agreement, in a manner adverse to us, with the approval of holders of
a majority of our outstanding shares of common stock, excluding shares
held by ICN. We will record the obligation under the 6 1/2%
subordinated notes as a receivable from ICN within stockholder's
equity. This receivable from ICN will remain as a component of our
equity to the extent that an obligation for principal and interest for
the notes remains outstanding or until ICN can no longer make
principal and interest payments as discussed above. See "Relationship
with ICN -- ICN notes."
(2) The number of shares of our common stock shown above as outstanding
does not include the following:
o 22,500,000 shares reserved for issuance under our 2002 Stock
Option Plan, including 3,025,000 shares issuable upon the exercise
of options outstanding as of May 9, 2002.
o any shares that may be reserved for issuance, in the event the
spin-off is completed, as a result of an adjustment to ICN's
existing stock option plans to account for the spin-off. As of
December 31, 2001, there were outstanding options to purchase
10,721,000 shares of ICN common stock. See "Relationship with ICN
-- Adjustment of ICN's stock option plans upon the spin-off."
(3) Advances due from ICN prior to completion of the initial public
offering on April 17, 2002 represent our historical revenues less
amounts ICN provided to us to fund our operations. We will not be
repaid any of the advances due to us from ICN outstanding immediately
prior to the initial public offering. Accordingly, these advances
reduced our retained earnings upon completion of the initial public
offering.
Selected financial data
The following selected financial data should be read in conjunction with
the financial statements and the notes to the statements and "Management's
discussion and analysis of financial condition and results of operations"
included elsewhere in this prospectus.
We derived the statement of income data for the years ended December 31,
1999, 2000 and 2001 and the balance sheet data as of December 31, 2000 and
2001 from our audited financial statements, which are included elsewhere in
this prospectus. We derived the statement of income data for the years
ended December 31, 1997 and 1998 and the balance sheet data as of December
31, 1997, 1998 and 1999 from our audited financial statements not included
in this prospectus. Basic and diluted earnings per share has been
calculated using 150,000,000 shares outstanding. Historical results are not
necessarily indicative of the results to be expected in the future.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
STATEMENT OF INCOME DATA 1997 1998 1999 2000 2001
------------------------------------ --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................. $ 3,223 $ 36,830 $109,592 $154,818 $143,622
Costs and expenses:
Research and development................ 7,011 9,530 5,523 13,015 25,212
General and administrative.............. 9,676 7,392 5,608 11,103 5,945
--------- -------- -------- -------- --------
Total costs and expenses.................. 16,687 16,922 11,131 24,118 31,157
--------- -------- -------- -------- --------
Income (loss) before income taxes......... (13,464) 19,908 98,461 130,700 112,465
Interest expense.......................... -- -- -- -- --
--------- -------- -------- -------- --------
Income before income taxes (loss)......... (13,464) 19,908 98,461 130,700 112,465
Provision (benefit) from income taxes..... (4,847) 7,167 35,446 48,717 40,487
--------- -------- -------- -------- --------
Net income (loss)......................... $ (8,617) $ 12,741 $ 63,015 $ 81,983 $ 71,978
========= ======== ======== ======== ========
Basic and diluted earnings (loss) per share $ (.06) $ .08 $ .42 $ .55 $ .48
========= ======== ======== ======== ========
Shares used in computation................ 150,000 150,000 150,000 150,000 150,000
========= ======== ======== ======== ========
PRO FORMA
AS OF DECEMBER 31, AS OF
----------------------------------------------------- DECEMBER 31,
BALANCE SHEET DATA 1997 1998 1999 2000 2001 2001(1)
--------------------- --------- -------- -------- --------- ------- ------------
(IN THOUSANDS)
Working capital (deficit).. $ (3,162) $ (626) $ (1,112) $ 527 $ 10,813 $ 10,813
Total assets............... 7,961 2,854 1,048 9,853 26,634 26,634
Current liabilities........ 4,962 626 1,112 3,073 5,415 5,415
Total liabilities.......... 17,904 4,949 1,112 3,073 5,415 530,415
Total equity (deficit)..... (9,943) (2,095) (64) 6,780 21,219 (503,781)
--------------------
(1) Pro forma balance sheet data gives effect to our joint and several
obligations with ICN for principal and interest under the 6 1/2%
subordinated notes due 2008 issued by ICN. As between us and ICN, ICN
agreed to make all interest and principal payments on these notes and
to make any payments due upon a change of control of ICN or us. We can
only amend this agreement, in a manner adverse to us, with the
approval of holders of a majority of our outstanding shares of common
stock, excluding shares held by ICN. We have recorded the obligation
under the 6 1/2% subordinated notes as a receivable from ICN within
stockholder's equity. This receivable from ICN will remain as a
component of our equity to the extent that an obligation for principal
and interest for these notes remains outstanding or until ICN can no
longer make principal and interest payments as discussed above. See
"Relationship with ICN -- ICN notes."
Management's discussion and analysis of financial condition
and results of operations
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
the notes to those statements included elsewhere in this prospectus. This
discussion may contain forward-looking statements that involve risks and
uncertainties. As a result of many factors such as those set forth under
"Risk factors" and elsewhere in this prospectus, our actual results may
differ materially from those anticipated in these forward-looking
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been
prepared in conformity with generally accepted accounting principles. The
preparation of these statements require our management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Our actual results could differ from those
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our financial
statements:
o We earn royalty revenue at the time the products subject to the royalty
are sold by a third party. Additionally, we recognize as revenue
up-front non-refundable fees associated with royalty and license
agreements when all performance obligations under the agreements are
completed. Milestone payments received, if any, related to scientific
achievement are recognized as revenue when the milestone is
accomplished by the third party.
o Research and development costs are expensed as incurred.
o Our management performs an ongoing credit evaluation of our customers'
financial condition. We generally do not require collateral to secure
accounts receivable. Our exposure to credit risk associated with
non-payment is affected principally by conditions or occurrences
affecting our primary customer, Schering-Plough. To date, we have not
experienced losses relating to accounts receivable from
Schering-Plough. See the discussion below in "-- Results of operations"
regarding Schering-Plough's dispute relating to the royalty receivables
due under an indigent patient marketing program. All of our revenues
for the years ended December 31, 1999 and 2000 and 97% of our revenues
for the year ended December 31, 2001 were derived from Schering-Plough.
o Our operations were included in ICN's consolidated tax returns until the
date of the spin-off. Income tax provision and benefits have been
calculated on a separate return basis for federal income tax purposes
and based upon ICN's worldwide apportionment California tax rate of 1%.
o Our balance sheets have been prepared using the historical basis of
accounting and include all of the assets and liabilities specifically
identifiable to us. Our statements of income include all revenue and
costs attributable to us, including a corporate allocation of costs of
shared services with ICN, including legal, finance, corporate
development, information systems and corporate office expenses. These
costs are allocated to us on a basis that we consider to reflect most
fairly or reasonably our utilization of services provided or the
benefit we obtained, such as the square footage, headcount or actual
utilization. It is not practicable to determine the costs specifically
attributable to either ICN or us with respect to the US Attorney
investigation or the SEC litigation. Additionally, allocation methods
based upon revenue, net income, assets, equity or headcount are not
reflective of the nature of the costs incurred in connection with the
US Attorney investigation and the SEC litigation. Therefore, ICN and we
used a joint responsibility approach in allocating these charges such
that 50% of the costs and expenses, including any reserve for
settlement, are allocated to each of us. We believe the methods used to
allocate these amounts are reasonable. However, our financial
information does not necessarily reflect what our financial position or
results of operation would have been had we operated as a stand-alone
public entity during the periods covered and may not be indicative of
future results of operation or financial position.
RESULTS OF OPERATIONS
ICN has advised us that Schering-Plough has informed ICN that it believes
that royalties paid under the ribavirin license agreement should not
include royalties on products distributed as part of an indigent patient
marketing program. Schering-Plough claims that because it receives no
revenue from products given to indigent patients, it is not required to pay
royalties on these products under the ribavirin license agreement. We and
ICN do not agree with Schering-Plough's interpretation of the agreement. In
August 2001, Schering-Plough withheld approximately $11.6 million from its
royalty payment relating to the second quarter of 2001. The amount withheld
was purportedly intended by Schering-Plough to be a retroactive adjustment
of royalties previously paid to ICN through the third quarter of 2000 on
products distributed as part of this indigent patient marketing program.
Since the beginning of the fourth quarter of 2000, Schering-Plough is
withholding on a current basis all royalty payments purportedly related to
this indigent patient marketing program. We recognized the approximately
$11.6 million of withheld royalty payments for the retroactive adjustment
and approximately $3 million of royalty payments withheld for the fourth
quarter of 2000 and the first quarter of 2001 as income. These amounts
appear on our balance sheet as a receivable. We have not established a
reserve for these amounts because in the opinion of our management
collectibility is reasonably assured. Since the second quarter of 2001, we
no longer recognize any of these withheld royalty payments as income since
we can no longer determine the amounts due to a lack of information from
Schering-Plough.
ICN has given Schering-Plough written notice of its intention to arbitrate
this royalty payment dispute to collect these royalties and prevent
Schering-Plough from withholding royalty payments on sales under the
indigent patient marketing program in the future. The parties expect to
select an arbitrator and set an arbitration schedule during May 2002. If
ICN does not succeed in this alternative dispute resolution process, we may
have to write off all or a portion of this receivable. If ICN does succeed,
we will be entitled to receive the royalty payments on these indigent sales
withheld by Schering-Plough. See "Business -- Legal proceedings of ICN --
Arbitration with Schering-Plough."
PRODUCTS IN DEVELOPMENT
We expect our research and development expenses to increase in the
foreseeable future. We expect that we will incur a large percentage of our
research and development expenses in support of our product development
programs for Viramidine, Hepavir B, IL-12, Adenazole and Tiazole.
We licensed Levovirin to F. Hoffmann-La Roche in June 2001 on an exclusive
basis. Our development expenses for Levovirin were approximately $5
million. F. Hoffmann-La Roche is responsible for all future development
costs of Levovirin.
In September 2000, we initiated Phase I clinical trials on Viramidine in
Europe. We filed an investigational new drug application with the FDA in
December 2001. In late March 2002, we began additional Phase I clinical
trials on Viramidine in the United States. Our development expenses for
Viridamine were approximately $4 million through December 31, 2001.
ICN licensed Hepavir B from Metabasis Therapeutics, Inc. in October 2001.
ICN contributed the Hepavir B license to us. Under the terms of the license
agreement, we are required to pay a $2 million nonrefundable license fee,
$1 million of which was paid in October 2001 and $0.5 million of which was
paid in April 2002. We will pay the remaining $0.5 million in October 2002.
The $2 million represents the valuation of acquired in-process research and
development for which no alternative use exists and has been charged to
operations as research and development expense. We have initiated biology,
drug metabolism, pharmacokinetic and toxicology studies on this compound.
We expect to finish these studies and, if these studies produce
satisfactory results, file an investigational new drug application with the
FDA in the second half of 2002. If that filing is made and accepted by the
FDA, we intend to initiate Phase I clinical trials on Hepavir B.
We have completed two Phase I trials on Adenazole. Our development expenses
for Adenazole were approximately $1 million as of December 31, 2001.
The FDA granted Tiazole orphan drug designation in January 2001 for the
treatment of chronic myelogenous leukemia in blast crisis. Additionally,
through a Russian subsidiary of ICN, we are also conducting a limited Phase
II study in patients with advanced ovarian cancer and planning a limited
Phase II study in patients with multiple myeloma resistant to conventional
therapy. Our development expenses for Tiazole were approximately $0.5
million as of December 31, 2001.
In connection with our license of Levovirin to F. Hoffmann-La Roche, F.
Hoffmann-La Roche licensed to us, on an exclusive basis, a compound known
as IL-12 that is at a pre-clinical trial stage of development. We have not
taken any steps at this time to develop this compound. We are currently
unable to estimate the length of time or the costs that will be required to
complete the development of this product.
It is not unusual for the clinical development of these types of products
to take five years or more, and to cost over $100 million. The time and
cost of completing the clinical development of these product candidates
will depend on a number of factors, including the disease or medical
condition to be treated, clinical trial design, availability of patients to
participate in trials and the relative efficacy of the product versus
treatments already approved and whether or when we license the product
candidates to third parties. Due to these many uncertainties, we are unable
to estimate the length of time or the costs that will be required to
complete the development of these product candidates. In addition, we
cannot assure you that any of these product candidates will receive
regulatory approval for use for the proposed indications or that these
product candidates will be commercially successful.
YEARS ENDED DECEMBER 31, 2000 AND 2001
REVENUES
Revenues for the year ended December 31, 2000 were $154,818,000 compared to
$143,622,000 for 2001. Royalties on ribavirin sales for 2001 were
$138,622,000, a decrease of $16,196,000, or 10%, compared to the same
period of 2000. We believe the decrease is primarily reflective of a
slowdown in sales of ribavirin by Schering-Plough as physicians awaited
marketing authorization pending FDA review and clearance for the use of
pegylated interferon with ribavirin, which occurred in August 2001. The
launch of this combination therapy was delayed until October 2001.
Royalties from Schering-Plough for the fourth quarter of 2001 increased by
$25,319,000 as compared to the similar period in 2000. Revenues for 2001
includes other revenues of $5,000,000 in connection with the licensing of
Levovirin to F. Hoffmann-La Roche.
RESEARCH AND DEVELOPMENT
Research and development expenses were $13,015,000 for 2000 and $25,212,000
in 2001. The increase of 94% reflects our expanded and intensified research
and development efforts in 2001, primarily in the area of antiviral and
anticancer drugs. We increased spending on the antiviral drugs Levovirin
and Viramidine during the period due to the initiation of Phase I clinical
trials. Additionally, research and development expenses increased on other
initiatives, including work on the drug Tiazole as well as work on
anti-hepatitis C, anti-hepatitis B, anticancer and antivirus compounds.
Also, in 2001 we expensed our purchase of Hepavir B from Metabasis as
in-process research and development for which no alternative use exists.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $11,103,000 for 2000 compared with
$5,945,000 for 2001, a decrease of 46%. These expenses include corporate
allocations of $10,098,000 for 2000 and $3,594,000 for 2001. These
corporate allocations include legal expenses and professional fees,
facility and central services charges, corporate development expenses and
other general and administrative expenses. Legal expenses and professional
fees were $7,637,000 for 2000 and $876,000 for 2001, a decrease of
$6,761,000. The decrease of 89% in legal expenses and professional fees was
mainly related to a decrease in activity involving the SEC litigation
against ICN and the investigation by the US Attorney's Office of ICN during
2001 as compared to 2000. Facility and central services charges were
$2,425,000 for 2000 and $1,967,000 for 2001. For 2001, we were allocated
$635,000 of corporate development expenses as a result of our recent
acquisition of products and product rights. The decrease in corporate
allocations was offset by an increase of $1,346,000 in other general and
administrative expenses relating to increases in compensation, information
systems expenses and depreciation.
INCOME TAXES
Our effective tax rate was 36% for 2001 compared to 37% for 2000. Our
operations were included in the consolidated ICN tax returns. Income tax
provisions have been calculated on a separate return basis for federal
income tax purposes and based upon ICN's worldwide apportionment California
tax rate of 1%. The decrease in the effective rate of 1% in 2001 is because
the effective tax rate in 2000 reflects $4,625,000 of expenses not
deductible for income taxes.
YEARS ENDED DECEMBER 31, 1999 AND 2000
REVENUES
Revenues for the year ended December 31, 1999 were $109,592,000 compared to
$154,818,000 for the same period in 2000, an increase of 41%, reflecting
additional sales of ribavirin by Schering-Plough resulting from the 1999
and 2000 launches into certain European markets.
RESEARCH AND DEVELOPMENT
Research and development expenses were $5,523,000 in 1999 and $13,015,000
in 2000. The increase of 136% reflects our expanded and intensified
research and development efforts in 2000, primarily in the area of
antiviral and anticancer drugs. Total research and development spending for
2000 was $18,904,000, which included capital for new equipment, as well as
accelerated research programs to focus on the pipeline and new product
development.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $5,608,000 for 1999 compared with
$11,103,000 for 2000, an increase of 98%. These include corporate
allocations of $4,852,000 for 1999 and $10,098,000 for 2000. General and
administrative costs include legal expenses and professional fees, facility
and central service charges, and other general and administrative expenses.
Legal expenses and professional fees were $2,844,000 for 1999 and
$7,637,000 for 2000, an increase of $4,793,000. The legal expenses were
mainly related to the SEC litigation against ICN, the investigation by the
US Attorney's Office of ICN and the hepatitis C and AIDS class action
lawsuits previously paid by ICN. Legal expenses for 2000 include $4,625,000
allocated to us from ICN related to the potential combined settlement of
the investigation involving the US Attorney's Office and SEC litigation.
Facility and central service charges were $1,963,000 for 1999 and
$2,425,000 for 2000, an increase of 24%, primarily due to our increased
utilization of ICN's headquarters building.
INCOME TAXES
Our effective tax rate was 37% for the year ended December 31, 2000 and 36%
for the year ended December 31, 1999. Our operations were included in the
consolidated ICN tax returns. The increase in the effective tax rate in
2000 reflects $4,625,000 of expenses not deductible for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $44,546,000 for 2001. Operating
cash flows primarily reflect net income of $71,978,000, which was partially
offset by an increase in royalties receivable transferred to ICN of
$19,351,000 and an increase in our receivable from Schering-Plough of
$12,628,000. We record amounts related to the royalty receivable from
Schering-Plough as a component of advances due from ICN, except for the
portion related to indigent sales. ICN assigned the rights to this portion
of the royalty receivable to us. We had a receivable from Schering-Plough
under the license agreement related to sales of ribavirin of $3,600,000 as
of December 31, 2000 and $16,228,000 as of December 31, 2001.
Cash used in investing activities was $6,358,000 for 2001 and $5,889,000
for 2000. The investment in capital expenditures reflects the purchases of
state-of-the-art research equipment.
Cash used in financing activities was $38,188,000 for 2001 and $74,525,000
for 2000. In 2001, cash used in financing activities reflects cash retained
by ICN of $82,269,000 offset by allocated expenses of $44,081,000.
Historically, we did not maintain cash and cash equivalents balances. We
received cash from ICN on an as needed basis. During 2001 and 2000, we
transferred our excess cash to ICN.
Under the terms of our affiliation and distribution agreement with ICN, ICN
will indemnify us against any cash payments arising out of the SEC
litigation and the plea settling the US Attorney's Office investigation.
However, after the completion of the initial public offering, these
expenses will continue to be allocated on a 50% basis to us for financial
reporting purposes by way of a capital contribution from ICN.
ICN will retain all royalty payments relating to sales of ribavirin prior
to the completion of the initial public offering. The royalty payment for
sales of ribavirin in the first quarter of 2002 is payable in late May
2002. ICN will retain this royalty payment. The royalty payment for sales
of ribavirin in the second quarter of 2002 is payable in late August 2002.
This royalty payment will be divided between us and ICN on a pro-rata basis
from April 17, 2002. We will retain all subsequent royalty payments. We
believe that borrowings under our $60 million credit facility from ICN and
our royalty payments from Schering-Plough for sales of ribavirin in the
second and third quarters of 2002 will be sufficient to fund our operations
for the year 2002. We believe that our royalty payments from
Schering-Plough for sales of ribavirin after the third quarter of 2002 will
be sufficient to fund our research and development activities, potential
acquisitions and capital expenditures for the medium term and to repay any
borrowings under our $60 million credit facility from ICN.
Any borrowings from ICN under our $60 million credit facility will be
payable on December 31, 2003. The interest on these borrowings will be at
LIBOR plus 200 basis points. See "Risk factors -- Risks related to our
business -- If our royalties from Schering-Plough decline significantly in
the future, we may not have sufficient funds to operate our business."
We expect to spend approximately $140 million in 2002 and 2003 on research
and development activities, which represents a substantial increase over
our historical spending. We plan to continue to expand our research team
from 12 scientists on March 1, 2000 to over 120 scientists by the end of
2002.
In October 2001, ICN purchased the license rights to the compound Hepavir B
from Metabasis Therapeutics, Inc. As part of ICN's contribution of its US
research and development operations to us, ICN contributed the Hepavir B
license to us. We will be responsible for the development costs of this
compound, milestone payments and royalties if the compound is successfully
developed. Under the terms of the license agreement, we are required to pay
a $2 million nonrefundable license, $1 million of which was paid in October
2001 and $0.5 million of which was paid in April 2002. We will pay the
remaining $0.5 million in October 2002.
On April 17, 2002, we became jointly and severally liable for the principal
and interest obligations under the $525 million of 6 1/2% subordinated
notes issued by ICN. As between us and ICN, ICN agreed to make all interest
and principal payments on these notes and to make any payments due upon a
change of control of ICN or us. We can only amend this agreement, in a
manner adverse to us, with the approval of holders of a majority of our
outstanding shares of common stock, excluding shares held by ICN. See Note
10 to "Notes to Financial Statements." Therefore, we do not expect our
obligations under these notes to have an impact on our liquidity or capital
resources.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Under SFAS No. 142,
goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets
will continue to be amortized over their useful lives. In August 2001, the
FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. The adoption of these standards will not have a material
effect on our results of operations, financial position or cash flows.
Business
OVERVIEW
We are a biotechnology company that seeks to discover, develop, acquire and
commercialize innovative products for the treatment of significant unmet
medical needs, principally in the antiviral and anticancer areas. Prior to
April 17, 2002, we were operated as a division of ICN.
Our product ribavirin is an antiviral drug that Schering-Plough Ltd.
markets under license from us as a therapy for the treatment of hepatitis C
in the United States, the European Union and Japan. Ribavirin is marketed
in combination with Schering-Plough's interferon alfa-2b and
Schering-Plough's pegylated interferon alfa-2b. Our royalties from sales of
ribavirin by Schering-Plough were $110 million for 1999, $155 million for
2000 and $139 million for 2001.
We have two next generation compounds, which are similar to ribavirin, as
product candidates. These product candidates are Levovirin and Viramidine.
We filed an investigational new drug application with the FDA for Levovirin
in December 2000. In February 2001, we began Phase I clinical trials on
Levovirin in the United States. In June 2001, we exclusively licensed
Levovirin to F. Hoffmann-La Roche. In September 2001, we initiated Phase I
clinical trials on Viramidine in Europe. We filed an investigational new
drug application with the FDA in December 2001 for Viramidine. In late
March 2002, we began additional Phase I clinical trials on Viramidine in
the United States.
To further expand our antiviral pipeline, we and ICN licensed two other
compounds from third parties. These compounds are Hepavir B and IL-12. ICN
licensed Hepavir B from Metabasis Therapeutics, Inc. in October 2001.
Hepavir B is a compound we intend to develop for the treatment of hepatitis
B. ICN contributed the Hepavir B license to us. We and ICN licensed rights
to IL-12 from F. Hoffmann-La Roche in June 2001. IL-12 is a developmental
compound for the treatment of cancer and allergies. We have not taken any
steps at this time to develop this compound. ICN contributed all of its
rights under the IL-12 license to us.
Ribavirin, Levovirin and Viramidine came from our extensive library of
nucleoside analog chemical compounds. ICN initially began discovering the
compounds from 1968 through 1976. ICN developed additional compounds from
1985 through 1988. Since March 2000, we discovered additional compounds
using chemical methods known as combinatorial chemistry. In total, we
presently have over 6,500 nucleoside analog compounds in our library.
Nucleoside analogs are small-molecule-type chemicals that resemble the
natural building blocks of human and viral genetic material. This genetic
material is commonly known as DNA and RNA. We believe that our library
contains one of the largest collections of nucleoside analogs in the world.
We intend to combine our scientific expertise with advanced drug screening
techniques in an effort to discover and develop new product candidates
using our nucleoside analog library. During 2001, we acquired more than
70,000 diverse non-nucleoside analog compounds from third parties to
complement our nucleoside analog library. These non-nucleoside compounds
also target antiviral and anticancer areas. We intend to use these
non-nucleoside compounds to facilitate our development of new products. To
date, ribavirin is the only compound we have commercialized from our
library.
Beginning in April 2000, we expanded our research facilities and assembled
an experienced research and development team under the leadership of
Johnson Y.N. Lau, MD, PhD. Dr. Lau joined us in March 2000. Dr. Lau is an
expert in viruses and liver diseases. He was formerly senior director in
antiviral research at the Schering-Plough Research Institute. At that
institute, he was involved in the development and approval of the Rebetron
combination therapy for hepatitis C. Under Dr. Lau's leadership, we have
already hired all of our lead scientists in the areas of drug discovery,
molecular biology, computer-assisted drug design, enzymology,
pharmacology/toxicology, and clinical and regulatory affairs. For a brief
description of the professional experience of these department heads, see
"Management -- Scientific staff." We expanded our research team from 12
scientists on March 1, 2000 to approximately 100 scientists on December 31,
2001. We plan to continue to expand our research team to over 120
scientists by the end of 2002. We spent approximately $6 million in each of
2000 and 2001 to upgrade and modernize our research equipment. In addition,
ICN spent approximately $12 million in 2000 and $16 million in 2001 on
capital improvements to ICN's headquarters. A substantial portion of these
improvements were to upgrade and modernize our laboratories that we lease
from ICN. This included the expansion of our physical research and
development facilities and the purchase of equipment for sophisticated
molecular, biological and animal experiments. Furthermore, we intend to
accelerate our drug discovery and development process by utilizing advanced
screening techniques and equipment, biological assays, and sophisticated
computer assisted drug design. We believe these steps are key components of
our strategy.
Until April 17, 2002, we were operated as a division of ICN. We were
incorporated in Delaware on April 14, 2000. On August 7, 2000, ICN
contributed to us our assets and operations. Until the spin-off, we were
controlled by ICN. Our certificate of incorporation and bylaws provide that
any person who was a director, officer, employee or consultant of ICN at
any time during the immediately preceding three years will not be qualified
to serve as one of our directors. This restriction will remain in place
until after the 2006 annual meeting of stockholders but is subject to
amendment by our board of directors and, as is the case with any amendment
to our certificate of incorporation, the holders of at least 66 2/3% of our
outstanding shares of common stock. This restriction on persons serving as
our directors does not apply to our current directors.
OUR TECHNOLOGY PLATFORM
We believe nucleoside analogs present significant opportunities for drug
development. Nucleoside analogs are chemical compounds created by modifying
nucleosides, which are the natural building blocks of human and viral DNA
and RNA. Much antiviral and anticancer research has focused on nucleoside
analogs because viruses and cells use nucleosides to multiply. By mimicking
the role of nucleosides in the cell division process, nucleoside analogs
have been used to treat viruses and cancers by modifying the natural
structure of DNA and RNA in a way that disrupts the viral and cellular
replication machinery. Some nucleoside analogs also stimulate antiviral
immune responses.
Pharmaceutical and biotechnology companies commonly focus their drug
discovery efforts on the random screening of large numbers of diverse
chemical compounds. We believe researchers screening nucleoside analogs may
be more likely to discover compounds for antiviral and anticancer drug
development because nucleoside analogs resemble the building blocks of
human and viral DNA and RNA. This approach has attracted significant
attention by a number of academic and pharmaceutical investigators.
Examples of antiviral and anticancer nucleoside analogs approved by the FDA
are:
o ICN's antiviral Virazole and Schering-Plough's antiviral Rebetol;
o Bristol-Myers Squibb's antivirals Videx and Zerit;
o GlaxoSmithKline's antivirals Famvir, Retrovir, Epivir, also known as
Lamivudine, and Zovirax;
o F. Hoffmann-La Roche's antiviral Hivid and anticancer Xeloda;
o Gilead Sciences' antiviral Viread;
o Eli Lilly's anticancer Gemzar; and
o Pharmacia's anticancer Cytarabine.
According to IMS Health Incorporated, revenues for 2000 in the United
States for the top four selling nucleoside analogs were approximately $2.6
billion. According to IMS Health Incorporated, the top four selling
nucleoside analogs in the United States for 2000 were Epivir, marketed by
GlaxoSmithKline plc, Famvir marketed by Novartis AG, Gemzar marketed by Eli
Lily and Company and Zerit marketed by Bristol-Myers Squibb Company. We
believe that nucleoside analogs may capture larger portions of the
antiviral and anticancer markets in the future for use as monotherapies and
as part of combination therapies.
To complement our nucleoside analog library, we have acquired more than
70,000 non-nucleoside analog compounds to develop a non-nucleoside analog
library. Our non-nucleoside compounds also target antiviral and anticancer
areas.
MARKET OPPORTUNITY
We intend to focus our product discovery efforts on treatments for
hepatitis C, hepatitis B, HIV, cancer and other life threatening diseases.
We believe that the hepatitis C, hepatitis B, HIV and cancer markets are
attractive for us because these diseases are highly prevalent and there are
few treatment alternatives. In addition, drugs that treat these diseases
may qualify for accelerated FDA review procedures. These drugs have a
potential for premium pricing in the marketplace and favorable pricing
reimbursement policies from third-party payors.
HEPATITIS C
Hepatitis C is a highly infectious and potentially fatal virus that can be
contracted through blood and bodily fluid contact. It is one of the most
prevalent chronic infectious diseases in the United States. The disease
attacks the liver and can cause liver scarring, liver failure and liver
cancer. Most people infected with hepatitis C have no symptoms and are
unaware that they carry this potentially deadly virus. Because they are
symptomless carriers, they can unknowingly infect others. The hepatitis C
virus also has the ability to adapt rapidly to antiviral treatment and host
immune response. For this reason, mutants which are resistant to treatment
can arise. In most cases, the body is not able to fight off the hepatitis C
infection and the infected individual becomes a chronic hepatitis C
carrier. According to the World Health Organization, as many as 170 million
people worldwide are infected by the hepatitis C virus. Of these, it is
estimated that approximately 10 million people are infected with hepatitis
C in the United States, Europe and Japan. These areas include the world's
leading pharmaceutical markets. According to the Centers for Disease
Control, approximately 36,000 people become infected and approximately
10,000 people die from complications of hepatitis C each year in the United
States. The hepatitis C virus was not specifically identified until 1989.
Approximately 20% of infected persons develop cirrhosis of the liver 10 to
30 years after infection. For others, the rate of disease progression is
much slower and may extend over 30 to 40 years or more. Aside from the fact
that this is a blood borne disease, the proliferation of hepatitis C within
a population is not fully understood. Without improved prevention and
treatment, the American Liver Foundation and the Centers for Disease
Control and Prevention estimate the number of deaths from hepatitis C in
the United States will more than triple to 38,000 annually by 2010.
Currently, there is no approved vaccine to prevent hepatitis C.
We believe that the hepatitis C market is important not only because of the
potential size of the market, but because of the growing education and
public awareness campaigns that are focusing the public's attention on the
scale and severity of the disease. With this increasing awareness of
hepatitis C virus infection, we believe the market potential of hepatitis C
will expand further and the demand for effective treatments will increase.
We believe that Peg-Intron/Rebetol combination therapy, which consists of
pegylated interferon alfa-2b with ribavirin, is currently the most
effective treatment approved by the FDA for patients with chronic hepatitis
C. Pegylated interferon differs from interferon in that a substance called
polyethylene glycol is attached to the interferon protein. The presence of
polyethylene glycol is believed to result in longer-acting, sustained
activity of interferon. By prolonging the activity of interferon, patients
could potentially take pegylated interferon only once a week, as opposed to
the three times per week regimen currently followed with the Rebetron
combination therapy, which consists of interferon alfa-2b and ribavirin.
However, only approximately 54% of patients with chronic hepatitis C who
were not previously treated with interferon alpha respond to the
Peg-Intron/Rebetol combination therapy. In addition, pegylated interferon
alfa-2b and interferon alfa-2b can cause flu-like symptoms and malaise
while ribavirin causes some patients to experience anemia. Therefore, we
believe that safer and more effective treatments for hepatitis C will have
significant market potential.
HEPATITIS B
Hepatitis B causes inflammation of the liver and is potentially fatal. It
is one of the most common chronic infectious diseases in the world.
Hepatitis B is transmitted through contaminated needles or blood and also
through sexual contact. According to the American Liver Foundation, 90% of
patients who acquire hepatitis B as adults are able to defeat the hepatitis
B virus on their own. However, approximately 5% of those infected with
hepatitis B will become chronic carriers of the virus. Children are
particularly susceptible to the virus. As many as 90% of those children
exposed to the virus during the neonatal period become chronic carriers.
The World Health Organization estimates that approximately 2 billion people
have evidence of past or current hepatitis B virus infection and 350
million individuals worldwide, or 5% of the world's population, are long
term carriers of hepatitis B in their blood. There are over 1 million
carriers of hepatitis B in the United States. Most people who contract
acute hepatitis B remain in good health, have no symptoms, and completely
recover. However, chronic carriers of the hepatitis B virus have an
approximately 100-fold increased chance of developing liver cancer and a
significant number develop cirrhosis of the liver.
A safe and effective vaccine against hepatitis B is available. However, the
vaccine only benefits those who have not yet been infected by the hepatitis
B virus. There are two FDA approved therapies for patients infected with
hepatitis B: interferon alpha and lamivudine. Interferon alpha has the
ability to reduce the amount of hepatitis B virus in the blood for long
periods of time in approximately 40% of patients, but it has side effects
such as flu-like symptoms and malaise. Lamivudine, which is a nucleoside
analog, decreases the amount of hepatitis B virus in the blood in a
majority of patients. However, if lamivudine therapy is discontinued,
hepatitis B virus levels in the blood can rebound and liver disease can
result. In addition, up to 70% of the patients taking lamivudine will
develop drug resistance within three years. Therefore, we believe that more
effective drugs, including drugs that are effective against lamivudine
resistant hepatitis B, will have significant market potential.
To further expand our antiviral pipeline, ICN licensed Hepavir B from
Metabasis Therapeutics, Inc. in October 2001. Hepavir B is a compound we
intend to develop for the treatment of hepatitis B. ICN contributed the
Hepavir B license to us.
See "-- Products in development -- Hepavir B."
HIV
AIDS, acquired immune deficiency syndrome, is caused by the human
immunodeficiency virus, or HIV. HIV attacks cells of the immune system. It
thereby destroys the body's ability to fight infections and some cancers.
Individuals diagnosed with AIDS are susceptible to life-threatening
diseases, including opportunistic infections and cancer. The infections are
caused by microbes that usually do not cause illness in healthy people.
According to the World Health Organization, by the end of 1999, 33.4
million people worldwide were living with HIV or AIDS. More than 600,000
cases of AIDS have been reported in the United States since 1981, and as
many as 900,000 Americans may be infected with HIV. HIV is spread most
commonly by sexual contact with an infected partner. HIV is also spread
through contact with infected blood, including by the sharing of needles or
syringes contaminated with minute quantities of blood of someone infected
with the virus.
The life cycle of HIV is still not fully understood. Researchers have
focused on an enzyme crucial to the replication of HIV, reverse
transcriptase. This research has led to the development of several reverse
transcriptase inhibitors as antiviral therapies. AZT is the best known and
most widely used reverse transcriptase inhibitor. More recently, inhibitors
of a second enzyme required for viral replication, HIV protease, have been
approved as treatments for HIV infection. The market for HIV protease
inhibitors is highly competitive. Five different protease inhibitors
compete for a share of a $1 billion US market. According to IMS Health
Incorporated, worldwide sales of HIV protease inhibitors were an estimated
$2.0 billion in 1999 and $1.8 billion in 2000.
Initial treatments for HIV focused on monotherapies. Monotherapy involves
treatment with only one drug at a time. However, in an effort to combat
resistance to drugs, doctors now use a combination of two or more drugs.
Often called a "cocktail," combination therapy is used for a number of
reasons. These include the fact that combination therapy reduces the
likelihood of developing resistant strains and that the effect of the drugs
may be synergistic and/or cumulative. Current combination therapy is
usually composed of two nucleoside analogs and either a protease inhibitor
or a non-nucleoside reverse transcriptase inhibitor. We believe that novel
potent antiviral drugs to treat HIV, and in particular treatments that are
less susceptible to drug resistance, will have significant market potential
if approved by regulatory authorities.
CANCER
Cancer is characterized by uncontrolled division of cells and can occur in
almost any tissue or organ in the body. Cancerous cells can grow into a
mass known as a tumor. If not destroyed, cancer cells can spread throughout
the body. Cancer is the second leading cause of death in the United States.
The National Cancer Advisory Board reports that more than 8 million people
in the United States have cancer.
The three most prevalent methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often
receives a combination of two or all three of these treatment methods.
Surgery and radiation therapy are particularly effective in patients in
whom the disease has not yet spread to other tissues or organs.
Chemotherapy is the principal treatment for tumors that have spread. These
tumors are referred to as having metastasized. The purpose of chemotherapy
is to interfere with the molecular and cellular processes that control the
development, growth and survival of malignant tumor cells. Chemotherapy
involves the administration of drugs designed to kill cancer cells or the
administration of hormone analogs to either reduce the production of, or
block the action of, some hormones, including estrogens and androgens.
These hormones affect the growth of tumors. In many cases, chemotherapy
consists of the administration of several different drugs in combination.
Use of these agents often has adverse effects since chemotherapeutic agents
generally attack rapidly dividing cells indiscriminately. As a result, most
chemotherapeutic agents damage both normal and cancerous cells.
Although several types of tumors can now be treated effectively with drugs,
survival rates for the most common tumors have only begun to improve
slightly. In recent years, however, there have been significant advances in
molecular biology, immunology and other related fields of biotechnology.
These advances have led to a better understanding of the processes that
regulate the proliferation and metastasis of malignant cells and by which
malfunctioning genes can result in the formation of tumors.
The anti-cancer pharmaceutical market is expanding due to aging
demographics, early detection and new treatments. According to the National
Cancer Institute, total US anti-cancer pharmaceutical sales were estimated
at $6 billion in 1999, representing approximately 50% of the global market
and $6 billion in 2000, representing approximately 40% of the global
market.
We and ICN licensed rights to IL-12 from F. Hoffmann-La Roche in June 2001.
IL-12 is a developmental compound for the treatment of cancer and
allergies. We have not taken any steps at this time to develop this
compound. ICN contributed all of its rights under the IL-12 license to us.
OUR STRATEGY
Our objective is to be a leader in the discovery, development, acquisition
and commercialization of novel drugs that can be effective in the treatment
of viral diseases, cancer and other unmet medical needs. We plan to pursue
this objective by:
FOCUSING ON DISEASES THAT WE BELIEVE PROVIDE SUBSTANTIAL COMMERCIAL
OPPORTUNITIES
We intend to continue to focus our drug discovery and development efforts
on serious diseases that represent large potential markets for drug
products. Our current program areas include hepatitis C, hepatitis B, HIV
and cancer, each of which affects a large number of patients. Drugs that
treat some of these life-threatening diseases may be eligible for
accelerated FDA review procedures. These drugs may also have the potential
for premium pricing in the marketplace and favorable reimbursement policies
from third-party payors.
MAXIMIZING THE VALUE OF OUR NEW PRODUCT CANDIDATES BY LEVERAGING OUR
INTERNAL DEVELOPMENT CAPABILITIES
We intend to retain control of our product candidates through preclinical
development and as far into the clinical trial process as our resources
permit. We intend to do so in order to obtain the maximum value for our
research efforts. We believe that our royalty revenues from sales of
ribavirin by Schering-Plough may give us the financial flexibility to
develop our product candidates through the clinical trial process without
being compelled to prematurely out-license our product candidates to third
parties. We may choose to market and sell our products on our own and
develop an internal sales force in connection with these efforts.
Alternatively, we may choose to collaborate with other pharmaceutical
companies to market and sell our products. If we choose to collaborate with
third parties, we believe we may be in a stronger position to negotiate
more favorable terms if we can demonstrate our new product candidate's
commercial potential in clinical testing.
Schering-Plough has an option to license from us up to three compounds that
we may develop for the treatment of hepatitis C, other than Levovirin and
Viramidine. In addition, Schering-Plough has rights of first/last refusal
to license Viramidine as well as compounds relating to the treatment of
non-hepatitis C infectious disease or oncology indications. See "Business
-- Products in development -- November 2000 Schering-Plough agreement."
ACCELERATING DEVELOPMENT OF IDENTIFIED DRUG CANDIDATES FROM OUR CURRENT
PRODUCT PIPELINE
We intend to expedite the development of the drug candidates in our current
pipeline by committing additional resources to the preclinical and clinical
evaluation of these compounds. Between June 2000 and February 2001, we
initiated a development program and filed an investigational new drug
application for Levovirin, a compound that is currently in Phase I clinical
trials for the treatment of hepatitis C. In June 2001, we exclusively
licensed Levovirin to F. Hoffmann-La Roche. Between February 2001 and
December 2001, we initiated a development program and filed an
investigational new drug application for Viramidine, a compound we intend
to develop in oral form for the treatment of hepatitis C. Viramidine is
currently in Phase I clinical trials in Europe. In late March 2002, we
began additional Phase I clinical trials of Viramidine in the United
States. We are also working to develop Tiazole for the treatment of late
stages of chronic myelogenous leukemia in patients who are not responding
to traditional chemotherapy treatments as well as for the treatment of
ovarian cancer and multiple myeloma. We are also working to develop
Adenazole for the treatment of colon cancer.
EXPANDING OUR EXISTING PRODUCT CANDIDATE PIPELINE AND TECHNOLOGIES THROUGH
ACQUISITIONS AND IN-LICENSING OPPORTUNITIES
In addition to our in-house development efforts, we plan to selectively
license or acquire product candidates, technologies and businesses from
third parties that complement our business. We believe that our drug
development expertise may allow us to recognize licensing opportunities and
to capitalize on research initially conducted and funded by others. In
addition, our existing technologies and product pipeline may be expanded
through acquisitions that present additional commercial opportunities. In
October 2001, ICN licensed Hepavir B from Metabasis Therapeutics, Inc.
Hepavir B is a compound being developed for the treatment of hepatitis B.
ICN contributed the Hepavir B license to us. We and ICN licensed rights to
IL-12 from F. Hoffmann-La Roche in June 2001. IL-12 is a developmental
compound for the treatment of cancer and allergies. We have not taken any
steps at this time to develop this compound. ICN contributed all of its
rights under the IL-12 license to us.
RIBAVIRIN FOR HEPATITIS C
INTRODUCTION
Ribavirin is a nucleoside analog that we discovered from our library of
nucleoside analog compounds. Ribavirin was one of the first antiviral drugs
ever discovered and was first approved by the FDA in 1985 for the treatment
of a respiratory syncytial virus infection in children with respiratory
distress. In 1995, we granted an exclusive license to Schering-Plough for
all oral forms of ribavirin for the treatment of chronic hepatitis C. Prior
to that time, clinical studies had indicated that ribavirin, in combination
with Schering-Plough's interferon alfa-2b, was potentially an effective
treatment for hepatitis C. When approved by the FDA in 1998, the Rebetron
combination therapy represented a significant advance in the treatment of
patients with chronic hepatitis C. In August 2001, the FDA granted approval
for Schering-Plough's pegylated interferon alfa-2b for use in combination
with ribavirin, also known as Peg-Intron/Rebetol. We believe the
Peg-Intron/Rebetol combination therapy is currently the most effective
treatment approved by the FDA for patients with chronic hepatitis C. The
mechanism of action of ribavirin in conjunction with interferon alpha and
pegylated interferon for the treatment of hepatitis C is not clear.
Published data suggest that ribavirin not only has an antiviral effect, but
it also may stimulate some aspects of the body's immune responses to
viruses. Under the license agreement, Schering-Plough is responsible for
all clinical development and regulatory activities relating to oral forms
of ribavirin. Schering-Plough markets ribavirin under the trade name
Rebetron as part of a combination therapy with its interferon alfa-2b and
under the trade name Peg-Intron/Rebetol as part of a combination therapy
with its pegylated interferon alfa-2b. Schering-Plough also markets
ribavirin as a separately packaged product under the trade name Rebetol for
use in either of these combination therapies.
On August 7, 2000, ICN contributed to us all of its rights under the
license agreement with Schering-Plough with respect to ribavirin. ICN has
retained perpetual, exclusive and royalty-free rights to all indications
for ribavirin in a given jurisdiction to the extent currently approved in
that jurisdiction, but not in other jurisdictions for which that indication
is not currently approved. ICN generally markets ribavirin for these
indications under the trade name Virazole. However, ICN will not retain any
rights to any indications or forms of ribavirin licensed to
Schering-Plough. ICN has also retained perpetual and royalty-free rights
with respect to the use of ribavirin in aerosol form for the treatment of
bone marrow transplant patients with respiratory infections caused by
respiratory syncytial virus. Any future indications for ribavirin that we
develop will be our property and are not subject to ICN's retained rights.
However, Schering-Plough will have an option to exclusively license from us
oral indications for ribavirin developed by us in the future. See
"Relationship with ICN," "-- Schering-Plough license agreement" and "--
Products in development -- November 2000 Schering-Plough agreement."
CLINICAL TRIALS AND APPROVALS
In June 1998, Schering-Plough received FDA approval to market the ribavirin
and interferon alfa-2b combination therapy under the brand name Rebetron
for the treatment of chronic hepatitis C in patients with compensated liver
disease who had relapsed following interferon alpha therapy. In December
1998, Schering-Plough received FDA approval to market the combination
therapy for the treatment of chronic hepatitis C in patients with
compensated liver disease previously untreated with interferon alpha
therapy. These patients are commonly referred to as treatment-naive
patients. Clinical trials evaluating the efficacy of the Rebetron
combination therapy indicated that the combination therapy, as opposed to
treatment with interferon alfa-2b alone, produced a greater sustained
response to the hepatitis C virus. In two clinical trials involving
hepatitis C patients who had relapsed following interferon alfa-2b therapy,
45.7% of the patients had no detectable hepatitis C virus in their blood
after receiving interferon alfa-2b plus ribavirin, as compared to 4.7% who
received interferon alfa-2b alone. In two clinical trials involving
treatment-naive hepatitis C patients, 41% of the patients who received
combination therapy responded compared to 16% of the patients who received
interferon alfa-2b alone. These results represented a significant
advancement in the treatment of patients with chronic hepatitis C.
In May 1999, the European Union granted Schering-Plough authorization to
market ribavirin capsules for use in combination with interferon alfa-2b
injection for the treatment of both relapsed and treatment naive chronic
hepatitis C patients. The European Union approval was immediately valid in
all 15 European Union-Member States. The 15 members of the European Union
are Germany, Italy, the United Kingdom, France, Spain, Portugal, Austria,
Sweden, Finland, Greece, the Netherlands, Belgium, Luxembourg, Denmark and
Ireland. We believe that Schering-Plough markets ribavirin throughout the
European Union.
In January 2001, the FDA granted Schering-Plough authorization to market
pegylated interferon alfa-2b, a longer lasting form of interferon alfa-2b,
as a monotherapy for the treatment of chronic hepatitis C patients who have
not previously been treated with interferon alpha.
In March 2001, the European Union granted Schering-Plough authorization to
market ribavirin with pegylated interferon alfa-2b as a combination therapy
for the same patient populations as those previously approved in the
European Union. The European Union approval was immediately valid in all 15
European Union-Member States and Iceland and Norway.
In July 2001, the FDA granted Schering-Plough authorization to market
Rebetol capsules as a separately marketed product for use only in
combination with interferon alfa-2b for the treatment of chronic hepatitis
C in patients with compensated liver disease previously untreated with
interferon alpha or who have relapsed following interferon alpha therapy.
In August 2001, the FDA granted Schering-Plough authorization to market
ribavirin with pegylated interferon alfa-2b as a combination therapy for
the treatment of chronic hepatitis C in patients with compensated liver
disease previously untreated with interferon alpha and who are at least 18
years of age.
In November 2001, Schering-Plough received marketing approval from the
Ministry of Health, Labor and Welfare of Japan for ribavirin in combination
with interferon alfa-2b for the treatment of chronic hepatitis C. The
combination therapy is the first combination therapy approved in Japan for
treating patients with chronic hepatitis C. In December 2001,
Schering-Plough received pricing approval for this combination therapy in
Japan.
Schering-Plough also markets the combination therapy in many other
countries around the world based on the US and European Union regulatory
approvals.
DEVELOPMENTS RELATED TO NEW FORMS OF INTERFERON
Each of Schering-Plough and F. Hoffmann-La Roche has developed pegylated
interferon. In August 2001, F. Hoffmann-La Roche and Schering-Plough
settled an action initiated by F. Hoffmann-La Roche against Schering-Plough
alleging that Schering-Plough violated F. Hoffmann-La Roche's patents on
pegylated interferon. The settlement provides for each company to
manufacture and market worldwide their separate pegylated interferon
products free from liability for infringement under the other's existing
patent rights. F. Hoffmann-La Roche and Schering-Plough have terminated all
patent litigation against each other in the United States and Europe
involving their pegylated interferon products. In addition, Schering-Plough
agreed to cooperate should F. Hoffmann-La Roche wish to acquire a license
for ribavirin from us. Schering-Plough has advised us that it has licensed
its patents relating to ribavirin as part of a combination therapy for the
treatment of hepatitis C to F. Hoffmann-La Roche. This license was entered
into in connection with the settlement between Schering-Plough and F.
Hoffmann-La Roche of litigation between them relating to pegylated
interferon. We have not licensed any of our patents related to ribavirin to
F. Hoffmann-La Roche. Our license agreement with Schering-Plough prohibits
Schering-Plough from sublicensing our patent rights, but not
Schering-Plough's rights, related to ribavirin to third parties without our
consent. We are involved in preliminary discussions to license our rights
in ribavirin to F. Hoffmann-La Roche. Any license of our rights in
ribavirin would be between F. Hoffmann-La Roche and us, rather than ICN. We
cannot predict whether we will reach an agreement on a license for
ribavirin with F. Hoffmann-La Roche. We believe F. Hoffmann-La Roche may be
seeking FDA approval of its own form of ribavirin without obtaining a
licence from us. See "Risk factors -- Risks related to our business --
Other pharmaceutical companies are seeking to introduce competing versions
of ribavirin to the market without obtaining a licence from us."
In August 2001, the FDA granted Schering-Plough authorization to market
ribavirin with pegylated interferon alfa-2b as a combination therapy for
the treatment of chronic hepatitis C in patients with compensated liver
disease previously untreated with interferon alpha and who are at least 18
years of age.
F. Hoffmann-La Roche is also conducting Phase III clinical trials of its
pegylated interferon alfa-2a, known as Pegasys, in combination with
ribavirin. In May 2001, F. Hoffmann-La Roche presented data that 56% of
patients with chronic hepatitis C who were not previously treated with
interferon alpha responded to the Pegasys combination therapy. In March
2002, F. Hoffmann-La Roche announced that the European Committee for
Proprietary Medicinal Products issued a positive recommendation for the
approval of Pegasys as a combination therapy with ribavirin for the
treatment of hepatitis C in adult patients with compensated liver disease
and monotherapy for those intolerant to ribavirin. F. Hoffmann-La Roche
stated that European Union regulatory approval is typically issued within
three months following a positive recommendation by the European Committee
for Proprietary Medicinal Products. F. Hoffmann-La Roche also announced
that it filed a new drug application with the FDA for Pegasys as a
monotherapy treatment for hepatitis C and that F. Hoffmann-La Roche expects
approval in the fourth quarter of 2002. We believe that F. Hoffmann-La
Roche may also have filed a new drug application in the United States and
European Union for a form of ribavirin using the brand name Copegus in
combination therapy with Pegasys. F. Hoffmann-La Roche announced at its
annual media conference that it expects regulatory approval of Copegus in
the second half of 2002. Since new drug applications are not publicly
available, we are unable to confirm whether F. Hoffmann-La Roche made a new
drug application filing for Copegus or when this filing might have been
made. We believe others cannot manufacture, import or sell ribavirin for
treatment of hepatitis C in the United States, designated countries of the
European Union or Japan without infringing on our patent rights, unless
those patents are invalidated or they obtain a license from us.
InterMune, Inc. has been testing a therapy of high dose interferon
alfacon-1, under the brand name Infergen, for the treatment of chronic
hepatitis C in patients that do not respond to or relapse after treatment
with the Rebetron combination therapy. In October 2000, Human Genome
Sciences, Inc. submitted an investigational new drug application with the
FDA to initiate Phase I human clinical trials of Albuferon for the
treatment of hepatitis C. Albuferon is a new protein created by fusing the
gene for the human protein, interferon alpha, to the gene of another human
protein, albumin. Human Genome Sciences, Inc. claims Albuferon should
provide patients with a longer acting therapeutic activity and an improved
side-effect profile when compared to recombinant human interferon alpha.
PATENT AND REGULATORY STRATEGY
We have three US patents related to ribavirin. These patents claim uses of
ribavirin for treatment of hepatitis C alone and in combination therapy
with interferon alpha. We believe these patents may provide additional
protection for the Rebetron combination therapy. These patents expire in
2016.
Schering-Plough has five US patents claiming specific formulations of
ribavirin. These patents expire in 2017. Schering-Plough also has at least
three US patents claiming uses of ribavirin with interferon alpha-2b in
combination therapy for the treatment of hepatitis C. These patents expire
between 2015 and 2018. Schering-Plough has advised us that it has licensed
its patents relating to ribavirin as part of a combination therapy for the
treatment of hepatitis C to F. Hoffmann-La Roche. This license was entered
into in connection with the settlement between Schering-Plough and F.
Hoffmann-La Roche of litigation between them relating to pegylated
interferon. We have not licensed any of our patents related to ribavirin to
F. Hoffmann-La Roche. Our license agreement with Schering-Plough prohibits
Schering-Plough from sublicensing our patent rights, but not
Schering-Plough's rights, related to ribavirin to third parties without our
consent. We are involved in preliminary discussions to license our rights
in ribavirin to F. Hoffmann-La Roche.
We have a European Union patent covering the method of use of ribavirin for
medical treatment for arboviruses, including the virus responsible for
hepatitis C. This patent expires in 2005. We have filed for an extension of
this patent until 2010 in the relevant countries of the European Union,
Switzerland and Japan. F. Hoffmann-La Roche has filed an opposition to this
patent with the European Patent Office seeking to invalidate this patent.
We believe that F. Hoffmann-La Roche may have filed a new drug application
in the United States and European Union for a form of ribavirin using the
brand name Copegus in combination therapy with Pegasys. F. Hoffmann-La
Roche announced at its annual media conference that it expects regulatory
approval of Copegus in the second half of 2002. Since new drug applications
are not publicly available, we are unable to confirm whether F. Hoffmann-La
Roche made a new drug application filing for Copegus or when this filing
might have been made.
On February 11, 2002, F. Hoffmann-La Roche filed a notice of opposition
with the European Patent Office seeking to invalidate our European patents
relating to ribavirin. We and ICN intend to file a response to F.
Hoffmann-La Roche's filing with the European Patent Office. Each of
Germany, France, Great Britain, The Netherlands, Austria, Italy and
Switzerland have issued national patents from one of the patents issued by
the European Patent Office.
It is possible that F. Hoffmann-La Roche has filed a reexamination
procedure with the US Patent and Trademark Office for our patents related
to ribavirin. If F. Hoffmann-La Roche has filed a reexamination procedure,
then the US Patent and Trademark Office will conduct an internal
investigation which could take four to six months from the date of filing.
If the US Patent and Trademark Office finds a reexamination is in order, it
will notify us and begin a formal proceeding.
If F. Hoffmann-La Roche is able to successfully market a combination
therapy of interferon alpha or pegylated interferon without licensing
ribavirin from us, our royalty revenues may decrease significantly.
We believe others, including F. Hoffmann-La Roche, cannot manufacture,
import or sell ribavirin for the treatment of hepatitis C in the United
States, designated countries of the European Union or Japan without
infringing on our patent rights, unless those patents are invalidated or
they obtain a license from us.
Schering-Plough currently has regulatory protection under the Hatch-Waxman
Act in the United States for the treatment of hepatitis C using the
Rebetron combination therapy. This protection means that the FDA cannot
give final approval to an abbreviated new drug application for a generic
form of the Rebetron combination therapy until June 2002. In addition,
final approval of abbreviated applications may be stayed for up to 30
months pending the outcome of patent litigation.
Geneva Pharmaceuticals Technology Corporation, a subsidiary of Geneva
Pharmaceuticals, Inc. and an indirect subsidiary of Novartis, Three Rivers
Pharmaceuticals, LLC and Teva Pharmaceuticals USA, Inc. submitted
abbreviated new drug applications for generic forms of ribavirin. ICN has
sued Geneva and its parent, Geneva Pharmaceuticals, Inc., and Teva to
prevent them from marketing a generic form of ribavirin that relies on
Schering-Plough's new drug application approvals. Schering-Plough has sued
Geneva, Three Rivers and Teva to prevent them from marketing a generic form
of ribavirin that relies on Schering-Plough's new drug application
approvals. Geneva has answered the Schering-Plough and ICN complaints and
has asserted that the Schering-Plough and ICN patents are not infringed and
that the claims of the patents are invalid. Three Rivers has answered the
Schering-Plough complaint and has asserted that the Schering-Plough patents
are not infringed and that the claims of the patents are invalid. Teva
filed procedural motions in response.
SCHERING-PLOUGH LICENSE AGREEMENT
ICN contributed the license agreement with Schering-Plough to us on August
7, 2000. We have filed a copy of this license agreement as an exhibit to
the registration statement of which this prospectus is a part. Some
portions of the license agreement have been omitted from the filing under
the terms of a confidentiality order from the SEC. Under the license
agreement, we are entitled to receive royalty revenues associated with
Schering-Plough's sale of ribavirin throughout the world. The license
agreement provides for two royalty rates: one rate that is associated with
sales in the European Union and another that is associated with sales in
the United States and the rest of the world. Pursuant to the license
agreement, each calendar year the royalty rates reset to a baseline rate,
which is the same each year. These rates increase during the course of the
year upon the achievement by Schering-Plough of different revenue
milestones.
Schering-Plough's exclusive license expires at the earliest in September
2010. After the expiration of exclusivity, Schering-Plough will have a
perpetual non-exclusive license to oral forms of ribavirin. Pursuant to the
license agreement, Schering-Plough can terminate the license agreement at
any time upon giving prior written notice to us. If Schering-Plough were to
terminate the license agreement pursuant to this provision, our license to
Schering-Plough would become a perpetual non-exclusive license. We would be
free to license oral forms of ribavirin to third parties. However, if
Schering-Plough terminates pursuant to this provision, Schering-Plough
would not be relieved from its obligation to pay us royalties on its sales
of ribavirin.
We also have an agreement that provides Schering-Plough with the option or
right of first/last refusal to license various compounds we may develop.
See "-- Products in development -- November 2000 Schering-Plough
agreement."
PRODUCTS IN DEVELOPMENT
The following is a description of our current product candidates. Each of
these product candidates was derived from our nucleoside analog library,
except for Hepavir B and IL-12. As discussed below under "-- November 2000
Schering-Plough agreement," we have granted Schering-Plough rights to
license up to three product candidates we may develop for the treatment of
hepatitis C, other than Levovirin and Viramidine, and rights of first/last
refusal to license Viramidine for any indication as well as other product
candidates we develop for the treatment of infectious disease other than
hepatitis C or for the treatment of cancer or other oncology indications.
LEVOVIRIN
Levovirin is a nucleoside analog that we discovered.
Preclinical studies suggested that Levovirin may have an ability to
stimulate an immune response to viral infections similar to ribavirin but
without a direct antiviral effect and without the anemia associated with
ribavirin. In preliminary toxicology studies on animals, Levovirin appeared
to have less side effects than ribavirin at the same dosage levels. We
completed chemical development and formulation studies, as well as the
ancillary pharmacology and short-term toxicology studies, on Levovirin. We
filed an investigational new drug application in December 2000. Based on
this investigational new drug application, we began Phase I clinical trials
on Levovirin in February 2001 in the United States.
On June 29, 2001, we licensed Levovirin to F. Hoffmann-La Roche on an
exclusive basis. We licensed Levovirin to F. Hoffmann-La Roche in exchange
for the license of IL-12 to us by F. Hoffmann-La Roche, plus a payment to
us by F. Hoffmann-La Roche of $5 million. We have filed a copy of this
license agreement as an exhibit to the registration statement of which this
prospectus is a part. Some portions of the license agreement have been
omitted from the filing under the terms of a request for confidential
treatment with the SEC. Our development costs for Levovirin were
approximately $5 million. F. Hoffmann-La Roche will be responsible for all
future developmental costs of Levovirin. We will be entitled to receive
milestone payments from F. Hoffmann-La Roche in connection with drug
development and regulatory approvals and royalty payments from F.
Hoffmann-La Roche upon commercialization of the product. In that case, it
is expected that Levovirin will be used in combination therapy with
Pegasys, F. Hoffmann-La Roche's pegylated interferon alfa-2a. F.
Hoffmann-La Roche's exclusive license can be terminated by F. Hoffmann-La
Roche without cause upon six months prior written notice to us or by either
party for cause. If F. Hoffmann-La Roche terminates the license agreement
without cause, F. Hoffmann-La Roche would not be relieved of its obligation
to pay us amounts owed up to the termination date. The license agreement
will expire 10 years after the first commercial sale of any human
pharmaceutical product containing Levovirin or after the expiration or
invalidation of licensed patents used in connection with this agreement,
whichever occurs later. Under the license agreement, we have the option or
right of first refusal to develop, market, import, use, offer for sale or
sell Levovirin in some Eastern European countries.
We have submitted patent applications in the United States and in many
foreign countries for Levovirin relating both to the compound and for
numerous indications. We have a composition of matter patent for Levovirin
from the US Patent and Trademark Office. This patent expires in October
2016. See "Risk factors -- Risks related to our business -- Our flexibility
in maximizing commercialization opportunities for our compounds may be
limited by our obligations to Schering-Plough."
VIRAMIDINE
Viramidine is a nucleoside analog that we intend to develop in oral form
for the treatment of hepatitis C. We expect to test Viramidine's effect on
the hepatitis C virus both on its own and in combination with interferon
alpha or pegylated interferon alpha.
Preclinical studies indicated that Viramidine, a liver-targeting prodrug of
ribavirin, stimulates an immune response to viral infections similar to
ribavirin. In an animal hepatitis model, Viramidine showed antiviral
activity similar to ribavirin. The liver-targeting properties of Viramidine
were also confirmed in two animal models. Short-term toxicology studies in
an animal model also suggested that Viramidine may be safer than ribavirin
at the same dosage levels. This data suggests that Viramidine, as a
liver-targeting prodrug of ribavirin, may have the potential of having
better efficacy and less side effects compared to ribavirin.
In September 2001, we initiated Phase I clinical trials on Viramidine in
Europe. We filed an investigational new drug application with the FDA in
December 2001. In late March 2002, we began additional Phase I clinical
trials on Viramidine in the United States.
We have filed a number of patent applications for the use of Viramidine and
its related compounds. The structure of Viramidine was disclosed many years
ago, and cannot itself be patented. Patent efforts are therefore directed
to claiming related compounds, and novel indications including
immunomodulatory activity and activity against specific viruses. The US
Patent and Trademark Office allowed a broad method of use patent for
Viramidine hydrochloride in October 2001, including for the treatment of
hepatitis C. Another broad use patent application covering modifications of
Viramidine was allowed in February 2002.
HEPAVIR B
Hepavir B is a nucleoside analog that ICN licensed from Metabasis
Therapeutics, Inc. in October 2001. ICN contributed the Hepavir B license
to us. We have filed a copy of this license agreement as an exhibit to the
registration statement of which this prospectus is a part. Some portions of
the license agreement have been omitted from the filing because of the
terms of our confidentiality agreement with Metabasis. Our exclusive
license can be terminated by either party for cause and will expire 10
years after the first commercial sale of any human pharmaceutical product
containing Hepavir B or after the expiration or invalidation of licensed
patents used in connection with this agreement, whichever occurs later. We
are required to pay a $2 million nonrefundable license fee, $1 million of
which was paid in October 2001 and $0.5 million of which was paid in April
2002. We will pay the remaining $0.5 million in October 2002. In addition,
Metabasis is entitled to receive milestone payments from us of up to $18
million in connection with drug development and regulatory approvals and
royalty payments from us if the drug is commercialized. We are exploring
the possibilities of developing this compound into an oral once a day
monotherapy for patients with chronic hepatitis B infection.
The active molecule in this compound exhibits anti-hepatitis B activity
against both the wild type and Lamivudine drug-resistant hepatitis B. Based
on biologic and molecular modeling data, this compound binds to the active
site of the hepatitis B replication enzyme so that the virus is prevented
from utilizing the natural substrate from the host to replicate. A prodrug
modification developed by Metabasis significantly improved the compound's
physiochemical properties and ability to target the liver. In preliminary
experiments in rodents, the active molecule was delivered in significantly
greater proportion to the targeted organ, the liver, as compared to the
non-targeted organs, the kidneys. The kidneys are the organs responsible
for causing potential toxicity. In these experiments, the amount of
metabasis-modified compound delivered to the liver versus kidneys was
approximately 10 times greater than the amount of compound delivered by
another well established process. We are working on large- scale synthesis
of this compound and we have commenced formulation studies. We have also
initiated additional biology, drug metabolism, pharmacokinetic, and
toxicology studies. We expect to finish these studies and, if these studies
produce satisfactory results, file an investigational new drug application
with the FDA in the second half of 2002. If that filing is made and
accepted by the FDA, we intend to initiate Phase I clinical trials on
Hepavir B.
Metabasis has one US patent on the structure of this compound and is in the
process of preparing patent applications on this compound in other
countries.
IL-12
On June 29, 2001, F. Hoffmann-La Roche exclusively licensed to us and ICN
both its own rights in IL-12 and the non-exclusive rights to IL-12 that F.
Hoffmann-La Roche had previously licensed from Genetics Institute. IL-12 is
a developmental compound for the treatment of cancer and allergies. At the
time F. Hoffmann-La Roche licensed IL-12 to us, F. Hoffmann-La Roche had
completed Phase I clinical trials on IL-12. ICN contributed all of its
rights under this license agreement to us on February 7, 2002. While this
license agreement transfers F. Hoffmann-La Roche's property rights in
IL-12, we are negotiating, for clarification purposes, a revised definitive
agreement as contemplated by this license agreement. We may also need to
pursue a license agreement from Genetics Institute. We have filed a copy of
this license agreement as an exhibit to the registration statement of which
this prospectus is a part. Some portions of the license agreement have been
omitted from the filing under the terms of a request for confidential
treatment with the SEC. We licensed rights to IL-12 from F. Hoffmann-La
Roche in exchange for the license of our rights in Levovirin to F.
Hoffmann-La Roche, plus a payment to us by F. Hoffmann-La Roche of $5
million. In addition, F. Hoffmann-La Roche is entitled to milestone
payments from us of up to $24 million in connection with drug development
and regulatory approvals and royalty payments from us if the drug is
commercialized. We will be responsible for the development costs of this
compound. The patent applications underlying the licensed rights have not
yet issued. We have not taken any steps at this time to develop this
compound. We have the right to terminate the agreement at any time without
cause with six months prior written notice. The license agreement will
expire 10 years after the first commercial sale of any human pharmaceutical
product containing IL-12 or after the expiration or invalidation of
licensed patents used in connection with this agreement, whichever occurs
later.
TIAZOLE (TIAZOFURIN)
Tiazole is a nucleoside analog we are developing for the treatment of
chronic myelogenous leukemia with blast crisis, ovarian cancer and multiple
myeloma. We believe Tiazole may cause inhibition of the biosynthesis of
guanosine triphosphate, which is a building block essential for tumor cell
growth in various cancer cell lines. We believe that the resulting
reduction in the concentration of these building blocks may reduce the
capacity of the cancer cells to proliferate. We expect that Tiazole will be
administered to patients intravenously.
The US National Cancer Institute sponsored preliminary studies of Tiazole
from 1996 through 1998. The Institute concluded these studies after finding
an absence of data showing activity in the oncologic diseases studied in
the trials. We believe one of these studies indicated that Tiazole may be
useful in the treatment of chronic myelogenous leukemia in blast crisis,
which represents the transformation of chronic leukemia to acute leukemia.
To date a total of 21 patients with this disease received this therapy.
Seven patients were reported to have a complete hematologic response. Of
these patients, six had marrow and peripheral blood response and one had
peripheral blood response only.
Through a Russian subsidiary of ICN, we are also conducting a limited Phase
II study in patients with advanced ovarian cancer and planning a limited
Phase II study in patients with multiple myeloma resistant to conventional
therapy. We do not plan to advance this compound unless the Phase II
proof-of-concept studies yield decisive results.
ICN secured a use patent for Tiazole several years ago, and that patent is
scheduled to expire in February 2005. There is substantially no patent
protection for the compound itself. In May 2001, Novartis announced that it
received FDA approval to market its product Gleevec for the treatment of
chronic myelogenous leukemia, including the blast crisis stage.
ICN is currently involved in a dispute with Yugoslavian governmental bodies
regarding ownership rights in Tiazole. See "-- Legal Proceedings of ICN"
and "Risk factors -- Risks Relating to Our Separation from ICN -- Because
of an ongoing dispute involving ICN's interest in a Yugoslavian joint
venture, our rights to commercialize Tiazole and Adenazole may be limited."
ADENAZOLE (8-CI CAMP, TOCLADESINE)
Adenazole is a nucleoside analog being developed for the treatment of colon
cancer. Adenazole may potentially control cell growth and cause cancer
cells to behave more like normal cells in various cancer cell lines. We
expect that Adenazole will be administered to patients intravenously.
In December 1999, we submitted various data to US regulatory authorities to
obtain permission to proceed with Phase I trials in the treatment of colon
cancer. A Phase Ib study was initiated in September 2000. This study is
being conducted at the University of California at San Diego and Los
Angeles and the University of Southern California. The ongoing Adenazole
studies are designed to determine tolerable dose levels in colon cancer
patients. The study has tested two doses that did not demonstrate
unacceptable toxicity and a third dose is now being investigated. This type
of Phase I study is not designed to demonstrate efficacy and, as expected,
the majority of patients have discontinued therapy because of disease
progression. Out of 11 patients receiving the lowest dose, however, one
remained stable for 12 weeks and another remained stable for 16 weeks. One
of seven patients receiving the second dose also showed disease stability
for 12 weeks. A few patients have begun receiving the third dose. We do not
plan to advance this compound unless these studies yield decisive results.
ICN and/or its affiliates has rights to five patents relating to Adenazole,
including anti-cancer uses of Adenazole and related cAMP compounds. Also
claimed are methods of manufacturing Adenazole. The major US patents are
scheduled to expire in 2015.
ICN is currently involved in a dispute with Yugoslavian governmental bodies
regarding ownership rights in Adenazole. See "-- Legal proceedings of ICN"
and "Risk factors -- Risks related to our separation from ICN -- Because of
an ongoing dispute involving ICN's interest in a Yugoslavian joint venture,
our rights to commercialize Tiazole and Adenazole may be limited."
NOVEMBER 2000 SCHERING-PLOUGH AGREEMENT
In November 2000, we and ICN entered into an agreement to provide
Schering-Plough with rights to license various compounds we may develop.
Under the terms of this agreement, Schering-Plough has the option to
exclusively license on a worldwide basis up to three compounds that we may
develop for the treatment of hepatitis C on terms specified in the
agreement. The option does not apply to Levovirin or Viramidine. The option
is exercisable as to a particular compound at any time prior to the start
of Phase II clinical trials for that compound. Once it exercises the option
with respect to a compound, Schering-Plough is required to fund all further
developmental costs and assume responsibility for regulatory approval for
that compound. Under the agreement, we will receive royalties based on the
sales of licensed products. These royalties will increase upon the
achievement of different revenue milestones and may be reduced upon the
expiration of some of our patent rights.
Under the terms of the agreement, we also granted Schering-Plough rights of
first/last refusal to license compounds relating to the treatment of
non-hepatitis C infectious diseases or cancer or other oncology indications
as well as rights of first/last refusal with respect to Levovirin and
Viramidine. Under the terms of these refusal rights, if we intend to offer
a license or other rights with respect to any of these compounds to a third
party, we are required to notify Schering-Plough. At Schering-Plough's
request, we are required to negotiate in good faith with Schering-Plough on
an exclusive basis the terms of a mutually acceptable exclusive worldwide
license or other form of agreement on commercial terms to be mutually
agreed upon. If we cannot reach an agreement with Schering-Plough, we are
permitted to negotiate a license agreement or other arrangement with a
third party. Prior to entering into any final arrangement with the third
party, we are required to offer substantially similar terms to
Schering-Plough, which terms Schering-Plough has the right to match.
If Schering-Plough does not exercise its option or refusal rights as to a
particular compound, we may continue to develop that compound or license
that compound to other third parties. The agreement with Schering-Plough
will terminate on the later of November 14, 2012 or the termination of the
1995 license agreement with Schering-Plough. The agreement was entered into
as part of the resolution of claims asserted by Schering-Plough against us
and ICN, including claims regarding our alleged improper hiring of former
Schering-Plough research and development personnel and claims that we were
not permitted to conduct hepatitis C research under our license agreement
with Schering-Plough. We also agreed for the term of the agreement not to
hire or solicit directly for employment any employee of Schering-Plough or
any of its corporate affiliates
In June 2001, we licensed Levovirin, a compound that is currently in Phase
I clinical trials for the treatment of hepatitis C, to F. Hoffmann-La
Roche. Although we believe we have complied with our obligations under the
right of first/last refusal, and Schering-Plough has not alleged otherwise,
Schering-Plough may allege in the future that we did not comply with the
obligations as to Levovirin.
RESEARCH AND DEVELOPMENT PROGRAM
OUR CHEMICAL LIBRARY
We believe our nucleoside analog library contains one of the largest
collections of nucleoside analogs in the world. The late Roland K. Robins,
PhD, a prominent nucleoside chemist who worked in ICN's Nucleic Acid
Research Institute division, created the first collection of the compounds
in our library. Dr. Robins was the Director of the Cancer Research Center
at Brigham Young University and Professor of Chemistry and Biochemistry.
During his affiliation with ICN, Dr. Robins was responsible for the
discovery and development of ribavirin and other compounds. Dr. Robins and
the Nucleic Acid Research Institute created the first collection of the
compounds from 1968 through 1976, and later created additional nucleoside
analogs from 1985 through 1988 with funding from the Eastman Kodak Company
in Kodak's joint venture with the Nucleic Acid Research Institute. ICN
received all rights to the nucleoside analogs created during the Nucleic
Acid Research Institute-Kodak joint venture when that arrangement was
terminated in 1988.
Between 1970 and 1980, we screened a number of compounds in the nucleoside
analog library for activity against the virus that causes the common cold,
herpes viruses and adenoviruses. We selected ribavirin from a large panel
of nucleoside analogs for development because it demonstrated
broad-spectrum antiviral activity and because the financial resources of
ICN at that time only permitted the development of one compound.
Since March 2000, we discovered additional compounds using chemical methods
known as combinatorial chemistry. In total, we presently have over 6,500
nucleoside analog compounds in our library. We intend to pursue US and
foreign patent protection with respect to both compounds and uses of
nucleoside analogs from our library that show promise for development.
During 2001, we acquired more than 70,000 diverse non-nucleoside compounds
from third parties to complement our nucleoside analog library. We intend
to use both the nucleoside and non-nucleoside libraries to facilitate our
potential to develop new products.
We have initiated screening of our chemical compound library for our target
indications, hepatitis C, hepatitis B, HIV and cancer. With our investments
in our research and development facilities and equipment, together with our
royalty revenues from sales of ribavirin by Schering-Plough, we believe we
now have the financial resources and technological equipment necessary to
perform this screening. We believe that our chemical compound library may
provide us with a large supply of potential new drug candidates.
OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAM
SCREENING
The initial step in the drug development process entails identification of
compounds for potential future development. Our initial screening is
accomplished through the use of cell-based assays and biochemical assays.
We use cell-based assays to analyze a drug candidate's activity in an
environment similar to the cells in which the drug would act. In addition,
cell-based assays help us to assess the toxicity of drug candidates and
their ability to penetrate cellular membranes. Prior to conducting
screening with cell-based assays, we may need to resynthesize some of our
nucleoside analogs to the extent that our library does not contain the
necessary physical samples to perform the cell-based assay. After a
potentially promising drug candidate is identified through the use of cell
based assays, we will screen the compound using biochemical assays.
Using biochemical assays, we can determine how a compound works and
determine its activity with better precision and this will provide further
information to further modify the compound.
After performing our initial cell-based assays and biochemical assays, we
screen compounds using secondary assays. Secondary assays are designed to
eliminate those compounds that lack potency or specificity, or have
unwanted characteristics. If a compound survives the secondary assay
screening process, we then conduct further tests on the compound and,
ultimately, conduct chemistry optimization. We intend to develop the
appropriate secondary assays for initial counterscreening. We intend to
engage contract research organizations to further test the compounds that
pass the initial screening for a broader secondary screening. Generally,
compounds with promising results in animal models and desirable chemical
characteristics become lead compounds.
LEAD OPTIMIZATION
After identifying a compound with activity, we will attempt to improve the
pharmaceutical properties of that compound before clinical development.
This is the process of lead optimization.
Using traditional structure-activity relationship studies for lead
optimization, we seek to synthesize new analogs of a lead compound with
improved properties using chemistry techniques. In addition, we utilize
computational chemistry capabilities, including molecular modeling, to
support lead optimization. To further expand our drug discovery capability,
we are acquiring a non-nucleoside compound library biased towards
polymerase and kinase inhibitors to prepare for the next phase of antiviral
and anticancer drug discovery. We believe our significant knowledge of the
chemical aspects of nucleoside analogs will help us to modify lead
compounds in an attempt to create more potent and selective compounds.
We also will use structural biology techniques to aid in drug design and
optimization by providing molecular "snapshots" that allow scientists to
visualize the interactions between a lead compound and its protein target.
Nuclear magnetic resonance, spectroscopy and X-ray crystallography comprise
the essential techniques of structural biology. We have upgraded our
laboratory facilities to allow for the use of these tools for lead
optimization. We have purchased and installed all of the instruments
necessary to conduct these activities. Utilizing structural information, we
may be able to design and synthesize new analogs of lead compounds that
have a better fit with the target protein, and therefore have greater
potency. By combining the latest biology and computer technologies, we feel
that we will be better positioned to maximize the value of our chemical
compound library.
PHARMACOLOGY AND PRE-CLINICAL DEVELOPMENT
Once we have identified a lead compound, we perform animal pharmacokinetics
and toxicology studies on the compound. Since March 2000, we have
established drug safety and metabolism, pharmacokinetics, and toxicology
teams to address these needs. As programs move forward for selected
compounds, we expect that our pharmacology and pre-clinical development
group will support our chemists and biologists by performing the necessary
studies essential for investigational new drug application submissions.
CLINICAL DEVELOPMENT AND REGULATORY AFFAIRS
We also plan to make use of early phase proof of principle studies to
evaluate promising compounds early in the development process. These
studies are designed to preliminarily determine the safety and efficacy of
product candidates prior to incurring the expense of clinical trials. We
have assembled a drug development team to design and implement clinical
trials and to analyze the data derived from these studies.
SALES AND MARKETING
We currently do not have a marketing or sales force or any distribution
capabilities. We may decide to build a sales and marketing force in the
future, although we may establish corporate collaborations with
pharmaceutical and biotechnology companies to fill these needs. As a part
of the ordinary course of our business, we may consider forming
arrangements or collaborations with strategic partners, including
pharmaceutical companies, government organizations, academic institutions
and others, to help develop and market our drug candidates. In November
2000, we entered into an agreement that provides Schering-Plough with an
option or right of first/last refusal to license various compounds we may
develop. See "Business -- Products in development -- November 2000
Schering-Plough agreement." In addition, we may enter into marketing, sales
and distribution arrangements with ICN and its affiliates.
MANUFACTURING
We do not have manufacturing facilities. We currently expect to contract
out our manufacturing requirements to third parties who have plants with a
history of compliance with good manufacturing practices requirements. We
obtain compounds for our clinical trials from third-party contract
manufacturers and other third parties.
PATENTS AND PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain patents for our
technology to preserve our trade secrets and to operate without infringing
upon the proprietary rights of others. ICN has contributed to us all of its
patents and patent applications that relate to nucleoside analogs in our
nucleoside library, including those patents relating to ribavirin. Patent
positions in the biotechnology field are often uncertain and may involve
complex legal, scientific and factual questions. There has been increasing
litigation in the biotechnology industry with respect to the manufacture,
use and sale of new therapeutic and diagnostic products that are the
subject of conflicting patent rights. The validity and breadth of claims in
biotechnology patents may involve complex factual and legal issues for
which no consistent policy has emerged. Therefore, these patents are highly
uncertain. Moreover, the patent laws of foreign countries differ from those
of the United States. Hence, the degree of protection afforded by foreign
patents may be different from the protection offered by US patents. There
can be no assurance that patent applications relating to products and
technologies developed by us will result in patents being issued or that,
if issued, the patents will provide a competitive advantage or will afford
protection against competitors with similar technologies. There also can be
no assurance that these patents will not be challenged successfully or
circumvented by competitors, or that our technologies, products or
processes will not infringe on third parties' patent rights. In addition,
the US Patent and Trademark Office has a substantial backlog of
biotechnology patent applications and the approval or rejection of patent
applications may take several years.
We have an active patent program. New discoveries are rapidly disclosed to
our patent counsel. We attempt to file patent applications within weeks of
discoveries. Our patent applications include claims on both compounds and
uses, as appropriate. See "Business -- Ribavirin for Hepatitis C" and
"Business -- Products in development" for more detailed descriptions of our
patent position with respect to specific compounds.
Our commercial success also will depend in part on not infringing patents
or proprietary rights of others. We cannot be sure that we will be able to
obtain a license to any third-party technology we may require to conduct
our business. In some cases, litigation or other proceedings may be
necessary to defend against or assert claims of infringement, to enforce
patents issued to us, to protect our trade secrets, know-how or other
intellectual property rights, or to determine the scope and validity of the
proprietary rights of third parties. Any potential litigation could result
in substantial costs to us and diversion of our resources. We cannot be
sure that any of our issued or licensed patents would ultimately be held
valid or that efforts to defend any of our patents, trade secrets, know-how
or other intellectual property rights would be successful. An adverse
outcome in any litigation or proceeding could subject us to significant
liabilities, require us to cease using the subject technology or require us
to license the subject technology from the third party, which license may
not be available.
Much of the know-how of importance to our technology and many of our
processes depend upon the knowledge, experience and skills of key
scientific and technical personnel. This experience and these skills are
not patentable. To protect our rights to and to maintain the
confidentiality of trade secrets and proprietary information, we require
employees and consultants to execute confidentiality and invention
assignment agreements upon commencement of a relationship with us. These
agreements prohibit the disclosure of confidential information to anyone
outside our company and require disclosure and assignment to us of ideas,
developments, discoveries and inventions made by employees, advisors and
consultants. We cannot be sure, however, that these agreements will not be
breached or that our trade secrets or proprietary information will not
otherwise become known or developed independently by others.
We have filed a trademark registration application with the US Patent and
Trademark Office for the mark RIBAPHARM. Our application was published in
the Federal Register on January 8, 2002 and Notice of Allowance was issued
April 23, 2002. Although we expect to be able to register and use this
mark, if we cannot, we may choose a different mark. We also reserve the
right to change our company name.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Many of the
drugs that we are attempting to discover will be competing with existing
therapies. In addition, a number of companies are pursuing the development
of pharmaceuticals that target the same diseases and conditions that we are
targeting. We face competition from pharmaceutical and biotechnology
companies both in the United States and abroad. Our competitors may utilize
discovery technologies and techniques or partner with collaborators in
order to develop products more rapidly or successfully than we or our
collaborators are able to do. Many of our competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical
and human resources than we do. In addition, academic institutions,
government agencies, and other public and private organizations conducting
research may seek patent protection with respect to potentially competitive
products or technologies. These organizations may also establish exclusive
collaborative or licensing relationships with our competitors.
We believe that our ability to compete depends, in part, upon our ability
to create, maintain and license scientifically advanced technology. We also
are dependent upon our ability and the ability of third parties we license
to sell and market our products to develop and commercialize pharmaceutical
products based on this technology. Further, we need to attract and retain
qualified personnel, obtain patent protection or otherwise develop
proprietary technology or processes and secure sufficient capital resources
for the expected substantial time period between technological conception
and commercial sales of products based upon our technology. The failure by
us or any of our collaborators in any of those areas may prevent the
successful commercialization of our potential drug candidates.
Our competitors might develop technologies and drugs that are more
effective or less costly than any which we are developing or which would
render our technology and potential drugs obsolete and noncompetitive. In
addition, our competitors may succeed in obtaining the approval of the FDA
or other regulatory approvals for drug candidates more rapidly than us or
our strategic partners. Companies that complete clinical trials, obtain
required regulatory agency approvals and commence commercial sale of their
drugs before their competitors may achieve a significant competitive
advantage, including FDA marketing exclusivity rights that might delay or
prevent our ability to market our products. Any drugs resulting from our
research and development efforts might not be able to compete successfully
with competitors' existing or future products or obtain regulatory approval
in the United States or elsewhere.
Our principal competitors include Schering-Plough, F. Hoffmann-La Roche,
Human Genome Sciences, Inc., Chiron Corporation, Eli Lilly and Company,
Bristol-Myers Squibb Company, Vertex Pharmaceuticals, Incorporated,
Triangle Pharmaceuticals, Inc., Abbott Laboratories, GlaxoSmithKline plc,
Merck & Co. Inc. and Novartis AG.
GOVERNMENT REGULATION
NEW DRUG DEVELOPMENT AND APPROVAL PROCESS
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of our
products and in ongoing research and product development activities. All of
our pharmaceutical products, including biological and other drug
candidates, will require regulatory approval by governmental agencies prior
to commercialization. In particular, our products are subject to rigorous
preclinical and clinical testing and other premarket approval requirements
by the FDA and regulatory authorities in other countries. In the United
States, various statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of
pharmaceutical products. The lengthy process of seeking these approvals,
and the subsequent compliance with applicable statutes and regulations,
require the expenditure of substantial resources. We believe that we are
currently in compliance with applicable statutes and regulations.
Regulatory approval, when and if obtained, may be limited in scope. In
particular, regulatory approvals will restrict the marketing of a product
to specific indications. Further, approved drugs, as well as their
manufacturers, are subject to ongoing review. Discovery of previously
unknown problems with these products may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market. Failure to
comply with regulatory requirements may result in criminal prosecution,
civil penalties, recall or seizure of products, total or partial suspension
of production or injunction, as well as other action affecting our
potential products or us. Any failure by us to obtain and maintain, or any
delay in obtaining, regulatory approvals could materially adversely affect
our business.
The process for new drug approval has many steps, including:
PRECLINICAL TESTING
Once a drug candidate is identified for development, the drug candidate
enters the preclinical testing stage. During preclinical studies,
laboratory and animal studies are conducted to show biological activity of
the drug candidate in animals, both healthy and with the targeted disease.
Also, preclinical tests evaluate the safety of drug candidates. These tests
typically take approximately two years to complete. Preclinical tests must
be conducted in compliance with good laboratory practice regulations. In
some cases, long term preclinical studies are conducted while clinical
studies are ongoing.
INVESTIGATIONAL NEW DRUG APPLICATION
When the preclinical testing is considered adequate by the sponsor to
demonstrate the safety and the scientific rationale for initial human
studies, an investigational new drug application is filed with the FDA to
seek authorization to begin human testing of the drug candidate. The
investigational new drug application becomes effective if not rejected by
the FDA within 30 days after filing. The investigational new drug
application must provide data on previous experiments, how, where and by
whom the new studies will be conducted, the chemical structure of the
compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the
compound is manufactured. All clinical trials must be conducted under the
supervision of a qualified investigator in accordance with good clinical
practice regulations. These regulations include the requirement that all
subjects provide informed consent. In addition, an institutional review
board, comprised primarily of physicians and other qualified experts at the
hospital or clinic where the proposed studies will be conducted, must
review and approve each human study. The institutional review board also
continues to monitor the study. The institutional review board also must be
kept aware of the study's progress, particularly as to adverse events and
changes in the research. Progress reports detailing the results of the
clinical trials must be submitted at least annually to the FDA and more
frequently if adverse events occur. In addition, the FDA may, at any time
during the 30-day period after filing of an investigational new drug
application or at any future time, impose a clinical hold on proposed or
ongoing clinical trials. If the FDA imposes a clinical hold, clinical
trials cannot commence or recommence without FDA authorization and then
only under terms authorized by the FDA. In some instances, the
investigational new drug application process can result in substantial
delay and expense.
Some limited human clinical testing may also be done under a physician's
investigational new drug application that allows a single individual to
receive the drug, particularly where the individual has not responded to
other available therapies. A physician's investigational new drug
application does not replace the more formal investigational new drug
application process, but can provide a preliminary indication as to whether
further clinical trials are warranted, and can, on occasion, facilitate the
more formal investigational new drug application process.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap.
PHASE I CLINICAL TRIALS
Phase I human clinical trials usually involve between 20 and 80 healthy
volunteers or patients and typically take one to two years to complete. The
tests study a drug's safety profile, and may seek to establish the safe
dosage range. The Phase I clinical trials also determine how a drug
candidate is absorbed, distributed, metabolized and excreted by the body,
and the duration of its action. We may conduct early phase
proof-of-principle studies of some drug candidates in Eastern Europe to
preliminarily study the safety and pharmacological activity of product
candidates. In such a situation, if the drug candidate is sourced from the
United States, an investigational new drug application may be necessary
unless there is conformity with statutes and FDA regulations applicable to
the export of products not approved in the United States.
PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on an
expanded population of patients with the targeted disease. The primary
purpose of these tests is to evaluate the effectiveness of the drug
candidate on the volunteer patients as well as to determine if there are
any side effects or other risks associated with the drug. These studies
generally take approximately two years, and may be conducted concurrently
with Phase I clinical trials. In addition, Phase I/II clinical trials may
be conducted to evaluate not only the efficacy of the drug candidate on the
patient population, but also its safety.
PHASE III CLINICAL TRIALS
This phase typically lasts two to three years and involves an even larger
patient population, often with several hundred or even several thousand
patients depending on the use for which the drug is being studied. Phase
III trials are intended to establish the overall risk-benefit ratio of the
drug and provide, if appropriate, an adequate basis for product labeling.
During the Phase III clinical trials, physicians monitor the patients to
determine efficacy and to observe and report any reactions or other safety
risks that may result from use of the drug candidate.
NEW DRUG APPLICATION
After the completion of the clinical trial phases of development, if the
sponsor concludes that there is substantial evidence that the drug
candidate is effective and that the drug is safe for its intended use, a
new drug application may be submitted to the FDA. The new drug application
must contain all of the information on the drug candidate gathered to that
date, including data from the clinical trials. New drug applications are
often over 100,000 pages in length.
The FDA reviews all new drug applications submitted before it accepts them
for filing. It may request additional information rather than accepting a
new drug application for filing. In this event, the new drug application
must be resubmitted with the additional information. The resubmitted
application is also subject to review before the FDA accepts it for filing.
Once the submission is accepted for filing, the FDA begins an in-depth
review of the new drug application. Under the Federal Food, Drug and
Cosmetic Act, the FDA has 180 days in which to review the new drug
application and respond to the applicant. In practice, the review process
is often significantly extended by FDA requests for additional information
or clarification regarding information already provided in the submission.
The FDA may refer the application to an appropriate advisory committee,
typically a panel of clinicians, for review, evaluation and a
recommendation. The FDA is not bound by the recommendation of an advisory
committee. If FDA evaluations of the new drug application and the
manufacturing facilities are favorable, the FDA may issue an approval
letter authorizing commercial marketing of the drug candidate for specified
indications. The FDA could also issue an approvable letter, which usually
contains a number of conditions that must be met in order to secure final
approval of the new drug application. When and if those conditions have
been met to the FDA's satisfaction, the FDA will issue an approval letter.
On the other hand, if the FDA's evaluation of the new drug application
submission or manufacturing facilities is not favorable, the FDA may refuse
to approve the new drug application or issue a non-approvable letter.
Among the conditions for new drug application approval is the requirement
that each prospective manufacturer's quality control and manufacturing
procedures conform to good manufacturing practice standards and
requirements. Although we expect to contract with third parties for the
manufacture of any products that are approved, these manufacturers must
meet and continue to comply with the standards set forth in the good
manufacturing practices regulations. Manufacturing establishments are
subject to periodic inspections by the FDA and by other federal, state or
local agencies.
MARKETING APPROVAL
If the FDA approves the new drug application, the drug becomes available
for physicians to prescribe. Periodic reports must be submitted to the FDA,
including descriptions of any adverse reactions reported. The FDA may
require post-marketing studies, also known as Phase IV studies, as a
condition of approval. The FDA's approval of pegylated interferon in
combination with ribavirin (Peg-Intron/Rebetol) included a requirement to
conduct post-marketing studies. In addition, the FDA may require
distribution to patients of a medication guide for prescription drug
products that the FDA determines pose a serious and significant health
concern in order to provide information necessary to patients' safe and
effective use of such products. The FDA requires distribution of medication
guides with Rebetron and Peg-Intron/Rebetol.
PHASE IV CLINICAL TRIALS AND POST-MARKETING STUDIES
In addition to studies required by the FDA after approval, these trials and
studies are often conducted to explore new indications. The purpose of
these trials and studies and related publications is to develop data to
support additional indications for the drug and to increase its acceptance
in the medical community. In addition, some post-market studies are done at
the request of the FDA to develop additional information regarding the
safety of a product. For example, when the FDA approved the Rebetron
combination therapy in 1998, the FDA requested that Schering-Plough conduct
a five-year follow-up study of all patients who had participated in the
Phase III studies of Rebetron.
POST-MARKETING REGULATION
Approved drug products are subject to continuing post-market review,
monitoring, and surveillance by the FDA and foreign regulatory bodies. In
addition, approved drug products that are also biological products may be
subject to lot-by-lot release testing by the FDA before these products can
be commercially distributed. Also, newly discovered or developed safety or
efficacy data may result in withdrawal of products from marketing. Other
areas of ongoing FDA regulation for marketed drugs include compliance with
current good manufacturing practices requirements, adverse event reporting,
drug sampling and distribution requirements, notifying the FDA and gaining
its approval of certain manufacturing or labeling changes, being subject to
FDA inspections, complying with electronic records and signature
requirements, and complying with FDA promotion and advertising
requirements. In addition, as a result of a legal proceeding involving ICN,
we may for a period of time be required to pre-clear with the FDA any
public communication concerning any matter subject to FDA regulation. See
"--Legal proceedings of ICN--SEC litigation and US Attorney investigation."
ORPHAN DRUG DESIGNATION
The FDA may grant orphan drug designation to drug candidates intended to
treat a "rare disease or condition," which is generally a disease or
condition that affects fewer than 200,000 individuals in the United States.
An applicant must request orphan drug designation before submitting a new
drug application. After the FDA grants orphan drug designation, the FDA
publicly discloses the identity of the sponsor, generic identity of the
therapeutic agent and its potential orphan use. Orphan drug designation
does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process. If a product that has orphan drug
designation is the first to receive FDA approval for the indication for
which it had been designated, the product receives orphan exclusivity. This
means the FDA may not approve for seven years any other application to
market the same drug for the same indication, except in very limited
circumstances.
APPROVALS OUTSIDE OF THE UNITED STATES
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any
product can be commercialized in those countries. The approval procedure
and the time required for approval vary from country to country and may
involve additional testing. The relevant authorities may not grant
approvals on a timely basis or at all. In addition, most countries other
than the United States require regulatory approval of prices. There can be
no assurance that the resulting prices would be sufficient to generate an
acceptable return to us.
OTHER GOVERNMENT REGULATIONS
The Food and Drug Administration Modernization Act of 1997 was enacted, in
part, to ensure the timely availability of safe and effective drugs,
biologics and medical devices by expediting the FDA review process for new
products. This act establishes a statutory program for the approval of
"fast track products." The fast track provisions essentially codified
existing FDA accelerated approval regulations for drug candidates and
biologics. A "fast track product" is defined as a new drug or biologic
intended for the treatment of a serious or life-threatening condition that
demonstrates the potential to address unmet medical needs. Under the fast
track program, the sponsor of a drug candidate or biologic may request the
FDA to designate the drug candidate or biologic as a "fast track product"
at any time during the clinical development of the product. The act
specifies that the FDA must determine if the product qualifies for fast
track designation within 60 days of receipt of the sponsor's request.
Approval of a new drug application for a fast track product can be based on
an effect on a clinical endpoint or on a surrogate endpoint that is
reasonably likely to predict clinical benefit. Approval of a fast track
product may be subject to post-approval studies to validate the surrogate
endpoint or confirm the effect on the clinical endpoint. If a preliminary
review of the clinical data suggests efficacy, the FDA may initiate review
of sections of an application for a "fast track product" before the
application is complete. This "rolling review" is available if the
applicant provides a schedule for submission of remaining information and
pays applicable user fees.
We intend to seek fast track designation to secure expedited review of
appropriate drug candidates. It is uncertain if fast track designation will
be obtained.
We are also subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or
potentially hazardous substances used in connection with our research,
including radioactive compounds and infectious disease agents. We believe
we are currently in compliance with all these laws and regulations. The
extent of governmental regulation that might result from any legislative or
administrative action cannot be accurately predicted.
PHARMACEUTICAL PRICING AND REIMBURSEMENT
In both domestic and foreign markets, sales of our products will depend in
part upon the availability of reimbursement from third-party payors.
Third-party payors include government health administrative authorities,
managed care providers, private health insurers and other organizations.
These third-party payors are increasingly challenging the price and
examining the cost-effectiveness of medical products and services. In
addition, significant uncertainty exists as to the reimbursement status of
newly approved healthcare products. We may need to conduct post-marketing
studies in order to demonstrate the cost-effectiveness of our products.
These studies may require us to provide a significant amount of resources.
Our product candidates may not be considered cost-effective. Adequate
third-party reimbursement may not be available to enable us to maintain
price levels sufficient to realize an appropriate return on our investment
in product development. US and foreign governments continue to propose and
pass legislation designed to reduce the cost of healthcare. Accordingly,
legislation and regulations affecting the pricing of pharmaceuticals may
change before our proposed products are approved for marketing. Adoption of
new legislation could further limit reimbursement for pharmaceuticals. The
marketability of our products may suffer if the government and third-party
payors fail to provide adequate coverage and reimbursement rates for our
product candidates. In addition, an increasing emphasis on managed care in
the United States has and will continue to increase the pressure on
pharmaceutical pricing.
EMPLOYEES
As of April 17, 2001, we employed approximately 110 persons, 95 of whom are
involved in research and development. Approximately half of our research
and development employees hold PhD or MD degrees. In March 2000, we hired
Dr. Johnson Y.N. Lau to lead our research and development efforts. Since
Dr. Lau joined us, he has hired a molecular biologist, a computer-assisted
drug designer, an enzymologist, a pharmacologist/toxicologist and a
regulatory affairs MD to lead their respective departments. We expanded our
research team from 12 scientists on March 1, 2000 to approximately 100
scientists on December 31, 2001. We plan to continue to expand our research
team to over 120 scientists by the end of 2002. We face competition in this
regard from other companies, research and academic institutions, government
entities and other organizations. Our employees are not covered by a
collective bargaining agreement and we consider relations with our
employees to be good.
FACILITIES
We lease approximately 65,000 square feet from ICN in its Costa Mesa,
California headquarters building. This lease primarily covers our second
floor research and development facilities in which we conduct substantially
all of our operations. The lease has an initial term of five years which we
can renew at our option for an additional five years. We will initially pay
ICN rent of $416,667 per month, or $5 million per year, which rent will be
adjusted annually based on the Orange County, California consumer price
index. In addition, we will pay ICN our pro rata portion of facility and
central service costs. These costs will include utilities, security,
parking, building maintenance, cleaning services, insurance premiums and
other facility costs.
In August 2000, ICN adopted a resolution to contribute to us the entire
headquarters building. At that time, it was contemplated that we would
occupy the first two floors of this building and lease the third floor to
ICN. After re-evaluating the financial implications of this arrangement,
ICN rescinded the contribution resolution to the extent it related to the
building. The contribution was never effected as a conveyance of the real
property. No lease, deed or other transfer documents had been filed or
recorded with any government authorities prior to the recission of that
part of the contribution resolution.
ICN also contributed to us all of the equipment and furniture contained in
our facilities. ICN, however, continues to own all of the fixtures in our
facilities.
In September 2001, an upgrade of our research and development facilities
was completed. This upgrade included modernizing our biology, chemistry,
enzymology, and drug safety and metabolism laboratories, constructing an
animal facility and biosafety facilities, constructing a room to house our
nuclear magnetic resonance machine and our X-ray machine for our structural
biology studies and renovating our chemical development/formulation and
medical departments. We believe our facilities are adequate to meet our
immediate needs and that suitable additional space will be available in the
future on commercially reasonable terms as needed.
LEGAL PROCEEDINGS OF ICN
SEC LITIGATION AND US ATTORNEY INVESTIGATION
On August 11, 1999, the SEC filed a civil complaint in the United States
District Court for the Central District of California against ICN, its
chairman, Milan Panic, David Watt, its Executive Vice President,
Biomedicals and formerly its Executive Vice President, General Counsel and
Corporate Secretary, and Nils O. Johannesson, former Executive Vice
President of ICN. The SEC complaint alleges that ICN and the individually
named defendants made material misstatements and/or omissions and engaged
in acts which operated as a fraud and deceit upon other persons in
violation of Section 10(b) of the Securities Exchange Act of 1934. The
civil lawsuit concerns public disclosures made by ICN with respect to the
status and disposition of ICN's 1994 new drug application for ribavirin as
a monotherapy treatment for chronic hepatitis C. The FDA did not approve
this new drug application. The SEC complaint seeks injunctive relief,
unspecified civil penalties, and an order barring Mr. Panic from acting as
an officer or director of any publicly-traded company, which would include
us. A pre-trial schedule has been set which requires the end of discovery
by August 1, 2002, and the commencement of trial on May 6, 2003. ICN has
advised us that ICN and the SEC appeared before a settlement judge, for the
purpose of settlement negotiations. ICN has advised us that pending
completion of these negotiations, the courts have stayed discovery for 90
days. ICN has advised us that there can be no assurance that the SEC
litigation will be settled by mutual agreement or what the amount of any
settlement may ultimately be. ICN has advised us that in the event that a
settlement is not reached, ICN will vigorously defend any litigation.
As a majority-owned subsidiary of ICN until the date of the spin-off, we
could be adversely affected by a judgment or settlement agreement arising
from the SEC civil lawsuit.
On December 17, 2001, ICN plead guilty in the United States District Court
for the Central District of California to a single felony count for
securities fraud for omitting to disclose until February 17, 1995, the
existence and content of a letter received from the FDA in late December
1994 regarding the not approvable status of ICN's 1994 new drug application
for ribavirin as a monotherapy treatment for chronic hepatitis C. This plea
was entered pursuant to a plea agreement with the office of the US Attorney
in Los Angeles to settle a six-year investigation. ICN paid a fine of $5.6
million and became subject to a three-year term of probation. The plea
agreement provides that the US Attorney will not further prosecute ICN and
will not bring any further criminal charges against ICN or any individuals,
except one non-officer employee of ICN who will not become an employee of
ours, relating to any matters that have been the subject of the
investigation and will close its investigation of these matters.
The conditions of the probation require ICN to create a compliance program
to ensure no future violations of the federal securities laws and to
pre-clear with the FDA any public communication by ICN concerning any
matter subject to FDA regulation. The terms of the compliance program
include ICN retaining an expert to review its procedures for public
communications regarding matters subject to FDA regulation and to develop
written procedures for these communications. The compliance program also
requires preparation of an annual report by the expert on ICN's compliance
with the written procedures and annual certification by ICN management that
ICN is complying with the expert's recommendations. ICN has advised us that
these conditions of probation also apply to us unless, after the spin-off
or other change in control of us occurs, the District Court grants us, upon
application, early termination of the probation. The US Attorney may oppose
any application we may make and the District Court may not grant early
termination of the probation.
ICN has advised us that in connection with the US Attorney investigation
and SEC litigation, ICN recorded a reserve in the fourth quarter of 2000 of
$9,250,000 to cover the potential combined settlement liability and all
other related costs of which $4,625,000 was allocated to us. The $5.6
million fine paid by ICN is included in that reserve.
LITIGATION RELATING TO ICN YUGOSLAVIA
ICN contributed the rights to the compounds Tiazole and Adenazole to ICN
Yugoslavia in connection with ICN's acquisition of its majority ownership
interest in that company pursuant to a Foundation Agreement executed in
November 1990. As part of the Foundation Agreement, ICN acquired a 75%
ownership interest in ICN Yugoslavia and a socially-owned Yugoslavian
corporation acquired the balance.
Beginning in the Fall of 1998 and culminating in the February 6, 1999,
physical seizure of the company's premises, government bodies in Yugoslavia
took over control of ICN Yugoslavia and purported to reallocate the
ownership interests in the company. ICN's ownership interest was
purportedly reduced to approximately 35%. Approximately 65% of the equity
of ICN Yugoslavia was allocated to the Republic of Serbia by Yugoslav
authorities, based upon a purported conclusion that ICN had failed to
comply with its obligations under the Foundation Agreement to contribute
identified assets to ICN Yugoslavia, including the rights to the compounds
Tiazole and Adenazole.
On or about February 9, 1999, ICN commenced an action in the United States
District Court for the District of Columbia against the Republic of Serbia,
the State Health Fund of Serbia, and the Federal Republic of Yugoslavia
seeking damages in the amount of at least $500 million and declaratory
relief arising out of the unlawful taking of ICN's majority ownership
interest in ICN Yugoslavia. On or about March 9, 1999, the State Health
Fund of Serbia commenced an arbitration against ICN by filing a Request for
Arbitration with the International Chamber of Commerce International Court
of Arbitration in Paris, seeking unspecified injunctive relief and
unquantified damages based upon alleged breaches of the Foundation
Agreement by ICN.
On April 27, 1999, ICN filed its answer and counterclaims against the State
Health Fund of Serbia. At the same time, ICN also filed a Request for
Arbitration with the ICC International Court of Arbitration against the
Republic of Serbia and the Federal Republic of Yugoslavia. This request
seeks declaratory relief and damages arising out of the unlawful taking of
ICN's majority ownership interest in ICN Yugoslavia and the State Health
Fund of Serbia's failure to pay for goods sold and delivered. Thereafter,
the action in the United States District Court for the District of Columbia
was dismissed without prejudice pending the outcome of the ICC arbitration
proceedings. On February 23, 2001, the arbitration panel issued decisions
that the State Health Fund of Serbia is a proper party to the ICC
arbitration, that the issue of jurisdiction over the Republic of Serbia in
the ICC arbitration will be joined to the merits of the case, and that
there is no jurisdiction over the Federal Republic of Yugoslavia in the ICC
arbitration. ICN has advised us that ICN intends to prosecute vigorously
its claims against the Federal Republic of Yugoslavia, the Republic of
Serbia, and the State Health Fund of Serbia, and to defend against the
State Health Fund of Serbia's claims against ICN. An evidentiary hearing
before the arbitration panel is scheduled for July 2002.
It is ICN's position in the ICC arbitrations that ICN validly transferred
the rights to Tiazole and Adenazole, as well as other intangible assets, to
ICN Yugoslavia and ICN is entitled to a declaration that it continues to
own 75% of the equity of ICN Yugoslavia and has the right to manage and
control the company as the majority owner. Alternatively, ICN is pursuing a
claim for damages equal to the decline in the value of its ownership
interest in ICN Yugoslavia.
Pursuant to the affiliation and distribution agreement between us and ICN
described in "Relationship with ICN -- Intercompany Agreements --
Affiliation and Distribution Agreement", ICN has agreed that it will take
all required actions to cause ICN Yugoslavia to transfer or license Tiazole
and Adenazole to us or, in the event that the rights to these compounds are
deemed to have reverted to ICN, to contribute these compounds to us.
However, there cannot be any assurance that ICN's dispute with the Republic
of Serbia, the Federal Republic of Yugoslavia and the State Health Fund of
Serbia will not result in the impairment of ICN's ability to fulfill its
obligations to transfer or license these assets to us. In addition, if we
are able to commercialize Tiazole or Adenazole, we may have to license the
compounds from ICN Yugoslavia which may involve the payment of fees by us
to ICN Yugoslavia.
As a result of the changing political environment in Yugoslavia, ICN has
advised us that it is attempting to regain control of ICN Yugoslavia. There
can be no assurance that ICN will be successful in its efforts.
ARBITRATION WITH SCHERING-PLOUGH
ICN has advised us that Schering-Plough has informed ICN that it believes
that royalties paid under the ribavirin license agreement should not
include royalties on products distributed as part of an indigent patient
marketing program. Schering-Plough claims that because it receives no
revenue from products given to indigent patients, it is not required to pay
royalties on these products under the ribavirin license agreement. In
August 2001, Schering-Plough withheld approximately $11.6 million from its
royalty payment relating to the second quarter of 2001. The amount withheld
was purportedly intended by Schering-Plough to be a retroactive adjustment
of royalties previously paid to ICN through the third quarter of 2000 on
products distributed as part of this indigent patient marketing program. We
and ICN do not agree with Schering-Plough's interpretation of the
agreement. Since the beginning of the fourth quarter of 2000,
Schering-Plough is withholding on a current basis all royalty payments
purportedly related to this indigent patient marketing program. We
recognized the approximately $11.6 million of withheld royalty payments for
the retroactive adjustment and approximately $3 million of royalty payments
withheld for the fourth quarter of 2000 and the first quarter of 2001 as
income. These amounts appear on our balance sheet as a receivable. We have
not established a reserve for these amounts because in the opinion of our
management collectibility is reasonably assured. Since the second quarter
of 2001, we no longer recognize any of these withheld royalty payments as
income since we can no longer determine the amounts due to a lack of
information from Shering-Plough.
ICN has given Schering-Plough written notice of its intention to arbitrate
this royalty payment dispute to collect these royalties and prevent
Schering-Plough from withholding royalty payments on sales under the
indigent patient marketing program in the future. The parties expect to
select an arbitrator and set an arbitration schedule during May 2002. If
ICN does not succeed in this alternative dispute resolution process, we may
have to write off all or a portion of this receivable. If ICN does succeed,
we will be entitled to receive the royalty payments on these indigent sales
withheld by Schering-Plough.
Upon completion of the spin-off, we assumed control over the management and
direction of all disputes with third parties related to our rights to
ribavirin, including the dispute with Schering-Plough.
PRIOR CONSENT DECREES INVOLVING ICN AND MILAN PANIC
ICN and its chairman, Milan Panic, are parties to two prior consent decrees
with the SEC entered into in February 1977 and October 1991. Pursuant to
these consent decrees, in each case without admitting or denying any
violation of the securities laws, ICN and Mr. Panic agreed not to violate
securities laws in the future.
In May 1991, ICN entered into a civil settlement with the United States
Justice Department. This consent decree expired by its terms in 1994.
INVESTMENT COMPANY ACT OF 1940
The Investment Company Act of 1940 requires registration for companies that
are engaged primarily in the business of investing, reinvesting, owning,
holding or trading in securities. A company may be deemed to be an
investment company if it owns "investment securities" with a value
exceeding 40% of the value of its total assets, excluding government
securities and cash items, on an unconsolidated basis, unless an exemption
or safe harbor applies. Securities issued by companies other than
majority-owned subsidiaries are generally counted as investment securities
for purposes of the Investment Company Act.
If we are deemed to be, and are required to register as, an investment
company, we will be forced to comply with the substantive requirements
under the Investment Company Act, including:
o limitations on our ability to borrow;
o limitations on our capital structure;
o prohibitions on transactions with affiliates;
o restrictions on specific investments; and
o compliance with reporting, record keeping, voting, proxy disclosure and
other rules and regulations.
The SEC has recognized that bona fide research and development companies in
the ordinary operation of their businesses could become investment
companies. Accordingly, the SEC established conditions as a method by which
the SEC could address its regulatory concern, regulating true investment
companies, while not imposing burdensome regulations on bona fide operating
companies. These conditions, as applicable to us, are that:
o we use our cash to finance the research and development of our
products, with our spending on research and development exceeding our
gross investment income;
o a substantial portion of our gross expenses consists of research and
development expenses, with our gross investment expenses being de
minimis in comparison to our overall gross expenses;
o we invest in securities with the goal of preserving assets until they
are needed to finance our operations;
o our historical development reflects our status as a biotechnology
company;
o our officers and directors devote substantially all of their time to
our biotechnology business; and
o our public representations of policy are consistent with our activities
as a biotechnology company.
We intend to operate in a manner that is consistent with the conditions
noted above and believe that we will be able to do so. We note that any
significant deviation from these conditions could cause us to become an
investment company, which would, in turn, subject us to regulation under
the Investment Company Act.
Management
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is the name, age, position and a brief account of the
business experience of each of our executive officers and directors.
NAME AGE TITLE
-------------------------------------------------------------------------------------------------
Johnson Y.N. Lau, MD, PhD(3)(5)..... 41 President, Chief Executive Officer and Director
Thomas Stankovich................... 41 Senior Vice President and Chief Financial Officer
Roger D. Loomis, Jr................. 53 Senior Vice President, General Counsel and Secretary
Hans Thierstein(1)(2)(3)............ 71 Chairman of the Board and Director
Kim Campbell PC, QC(4)(6)........... 55 Director
Roger Guillemin, MD, PhD(5)......... 78 Director
Arnold H. Kroll(1)(2)(4)............ 67 Director
Roberts A. Smith, PhD(3)(4)(5)(6)... 73 Director
John Vierling, MD(1)(2)(5)(6)....... 56 Director
----------
(1) Member of the audit committee
(2) Member of the compensation committee
(3) Member of the executive committee
(4) Member of the nominating committee
(5) Member of the science and technology committee
(6) Member of the transition committee
Johnson Y.N. Lau, MD, PhD, our President, Chief Executive Officer and
director, was Senior Vice President, Research and Development of ICN from
March 2000 until April 17, 2002. Before joining ICN, he was a Senior
Director in Antiviral Research at the Schering-Plough Research Institute
from 1997 to February 2000. He served as a faculty member at the University
of Florida from 1992 to 1996. From 1989 to 1991, he served as a faculty
member at the Institute of Liver Studies, King's College Hospital School of
Medicine and Dentistry, University of London.
Thomas Stankovich, our Senior Vice President and Chief Financial Officer,
was Vice President/Finance and Controller, ICN Europe, AAA of ICN from 1996
until April 17, 2002. Prior to that time, he held various positions at ICN
since 1986, including Director of Financial Reporting, Corporate, Assistant
Controller, Senior Accountant, Assistant to Chairman of the Board and
Financial Analyst.
Roger D. Loomis, Jr., our Senior Vice President, General Counsel and
Secretary, was Senior Vice President, Law of ICN from November 2001 until
April 17, 2002. Prior to joining ICN, Mr. Loomis was President of Advanced
Document Services LLC in Los Angeles since 2000. Prior to that, Mr. Loomis
was of counsel to the law firm of Coudert Brothers, in Los Angeles, since
1997, and, prior thereto, a shareholder of the law firm of Buchalter,
Nemer, Fields & Younger, in Los Angeles, since 1995.
Hans Thierstein, our Chairman of the Board, was Chairman of the Board of
Ares-Serono from 1992 until 1999 and a board member since 1987. Mr.
Thierstein was Chief Financial Officer of Ares-Serono from 1980 until 1996.
Mr. Thierstein held various positions with ICN from 1971 until 1980,
including Treasurer and Controller of ICN's European operations, Vice
President-Corporate Controller of ICN in the United States, General Manager
of ICN's Swiss and Italian operations and Vice President of Corporate
Development Europe.
Kim Campbell, PC, QC, was a director of ICN from November 2, 2000 until May
30, 2001. Since January 2001, Ms. Campbell has been a Fellow at the Center
for Public Leadership at the John F. Kennedy School of Government at
Harvard University. From September 2000 until January 2001, Ms. Campbell
was an author and lecturer. She was the Consul General of Canada in Los
Angeles from September 1996 until September 2000. From February 1996 until
September 1996 she was an author and lecturer. Ms. Campbell held several
positions in the Canadian government including Prime Minister from June
1993 to November 1993, Minister of Justice and Attorney General from
February 1990 to January 1993, and Minister of National Defense from
January 1993 to June 1993. Ms. Campbell also serves on the Governing Board
of Harvard University, Northeastern University, UCLA and the Thunderbird
American Graduate School of International Management.
Roger Guillemin, MD, PhD, was a member of ICN's board of directors from
1989 until April 17, 2002. Dr. Guillemin has been an Adjunct Professor of
Medicine at the University of California College of Medicine in San Diego
since 1970. He was a Distinguished Scientist at the Whittier Institute in
La Jolla, California from March 1989 to 1995 and was Resident Fellow and
Chairman of the Laboratories for Neuroendocrinology at the Salk Institute
in La Jolla, California. He was awarded the Nobel Prize in Medicine in 1977
and in the same year, was presented the National Medal of Science by the
President of the United States. He was affiliated with the Department of
Physiology at Baylor College of Medicine in Houston, Texas from 1952 to
1970. He is a member of the National Academy of Sciences, and a Fellow of
the American Association for the Advancement of Science. He has also served
as President of the American Endocrine Society.
Arnold H. Kroll, has been a senior advisor of Burnham Securities since May
2000. From March 1997 through April 2000, he was a senior advisor at
Schroder & Co. During that time, Mr. Kroll represented ICN in three
issuances of senior notes, including ICN's 8 3/4% senior notes due 2008. He
was a managing director at Schroder & Co. and its predecessors from 1988 to
1997. Prior to that time, he was a managing director of L.F. Rothschild and
its predecessor from 1972 to 1988. Mr. Kroll is a member of the board of
directors of National Airlines and ShareSpan Inc.
Roberts A. Smith, PhD, was a director of ICN from 1960 until May 30, 2001.
Dr. Smith was President of Viratek, Inc., then a subsidiary of ICN, and
Vice-President, Research and Development of SPI Pharmaceuticals, Inc., then
a subsidiary of ICN through 1992. For more than 11 years, Dr. Smith was
Professor of Chemistry and Biochemistry at the University of California at
Los Angeles.
John Vierling, MD, has been on the executive committee of the board of
directors for the American Liver Foundation since 1992. He has been a
medical professor in residence at the University of California, Los Angeles
since July 1996 and a Director of Hepatology at Cedars-Sinai Medical Center
since 1990.
OTHER CORPORATE STAFF
Joseph Schepers -- Vice President, Corporate Communications. Mr. Schepers
joined us in March 2002. Prior to joining us, he was Vice President of
Investor Relations of ICN since January 2001. Prior to that time, Mr.
Schepers was Director of Investor Relations at Novartis AG for eight years.
SCIENTIFIC STAFF
The following are key members of our scientific staff:
Jane Wing-Sang Fang, MD -- Vice President, Clinical Affairs and Clinical
Operations. Dr. Fang joined us in April 2000. She was employed by the
Schering-Plough Research Institute from January 1998 to February 2000 as
Associate Director, Clinical Research, Gastroenterology & Liver Diseases.
She served as Assistant Professor of Pediatric Gastroenterology &
Hepatology with the University of Florida in Gainesville from July 1997 to
December 1997. Dr. Fang is the spouse of Dr. Johnson Y.N. Lau, our
President, Chief Executive Officer and director.
Chin-chung Lin, PhD -- Vice President, Drug Development. Dr. Lin joined us
in May 2000 from the Schering-Plough Research Institute, where he was
employed from January 1984. He served as a Senior Research Fellow --
Exploratory Drug Metabolism from April 1998 to April 2000, and Senior
Associate Director -- Exploratory Drug Metabolism from July 1992 to March
1998. He held various other positions at Schering-Plough prior to that
time.
Humberto Fernandez, MD -- Vice President, Clinical Affairs. Dr. Fernandez
joined us in 1995 from Shaman Pharmaceuticals, where he was employed from
1993. He was also working with ICN Pharmaceuticals from 1975 to 1993.
Zhi Hong, PhD -- Vice President, Drug Discovery. Dr. Hong joined us in June
2000 from the Schering-Plough Research Institute, where he was employed
from April 1992. Dr. Hong worked in Schering-Plough's Department of
Antiviral Therapy, where he held the titles of Section Leader from March
2000 until June 2000, Principal Scientist from January 1998 to March 2000,
Associate Principal Scientist from January 1996 to January 1998, and Senior
Scientist from April 1994 to December 1995. He was a post-doctoral fellow
prior to that time.
Robert Orr, BS -- Chemical Development/Formulation. Mr. Orr joined us in
1986 from Interpor International, where he was employed from 1985. He
worked as production manager in Viratek, Inc. from 1984 to 1985. From 1982
to 1984, he worked as manufacturing and process engineer in Beckman
Instruments, Inc. From 1979 to 1982, he worked as a chemist in ICN
Pharmaceuticals.
Nanhua Hugh Yao, PhD -- Structural Biology/Computer-Assisted Drug Design.
Dr. Yao joined us from the Schering-Plough Research Institute in June 2000,
where he was an Associate Principal Scientist from 1998 to June 2000, and a
Senior Scientist from 1995 to 1998.
Jingfan Huang, PhD -- Analytical Chemistry. Dr. Huang joined us in August
2000 from Wyeth-Ayerst Research. She was employed by Wyeth-Ayerst from
September 1995 to July 2000, where she held the titles of Senior Research
Scientist II from December 1998 -- August 2000, and Senior Research
Scientist I from September 1995 to November 1998. Prior to joining
Wyeth-Ayerst, she was employed as a Research Scientist with Lederle Labs
from September 1991 to August 1995.
Weidong Zhong, PhD -- Molecular Biology. Dr. Zhong joined us in June 2000
from the Schering-Plough Research Institute, where he was an Associate
Principal Scientist in the Department of Antiviral Therapy from October
1998 to June 2000. Prior to that time, he was an Investigator in the
Department of Molecular Virology and Host Defense with SmithKline Beecham
Pharmaceuticals from November 1996 to September 1998.
Robert Kiyoshi Hamatake, PhD -- Virology/Cell Biology. Dr. Hamatake joined
us in September 2000 from the Department of Virology in GlaxoWellcome,
Inc., where he was employed from 1998. He worked in the Department of
Virology in Bristol-Myers Squibb Pharmaceutical Research Institute from
1989 to 1998. From 1984 to 1989, he worked in the Laboratory of Molecular
Genetics in the National Institute of Environmental Health Sciences.
Haoyun An, PhD -- Medicinal Chemistry. Dr. An joined us from Isis
Pharmaceuticals, Inc. in February 2001, where he was an associate director
in chemistry from January 1997, and a senior scientist from July 1995 to
December 1996. Prior to that time, he was a post-doctoral researcher with
Professor Sidney M. Hecht at the University of Virginia in Charlottesville
from 1993 to 1995.
Zhen Wu, PhD -- Biochemistry/Enzymology. Dr. Wu joined us in May 2000 from
the Schering-Plough Research Institute, where he was employed since 1995.
He was an Associate Principal Scientist and Project Leader from 1998 to May
2000, and Senior Scientist from 1995 to 1998.
As part of the agreement we entered into with Schering-Plough in November
2000, we agreed for the term of the agreement not to hire or solicit
directly for employment any employee of Schering-Plough or any of its
corporate affiliates. See "Business -- Products in Development -- November
2000 Schering-Plough Agreement."
BOARD COMPOSITION
We have seven directors. Under our certificate of incorporation, the
authorized number of directors is determined by our board of directors from
time to time. The authorized number of directors may be changed only by
resolution of the board of directors or by vote of our stockholders. Our
certificate of incorporation and bylaws provide that any person who was a
director, officer, employee or consultant of ICN at any time during the
immediately preceeding three years will not be qualified to serve as one of
our directors. This restriction will remain in place until after the 2006
annual meeting of stockholders. This provision does not apply to any person
currently serving as one of our directors.
BOARD COMMITTEES
AUDIT COMMITTEE
Our audit committee, consisting of Messrs. Kroll and Thierstein and Dr.
Vierling, reviews our internal accounting procedures and the services
provided by our independent auditors.
COMPENSATION COMMITTEE
Our compensation committee, consisting of Dr. Vierling and Mr. Thierstein,
reviews and recommends to our board of directors the compensation and
benefits of all our officers and establishes and reviews general policies
relating to compensation and benefits of our employees.
EXECUTIVE COMMITTEE
Our executive committee, consisting of Dr. Lau, Mr. Thierstein and Dr.
Smith, is empowered to act on any matter for the board of directors, other
than matters which may not be delegated under Delaware law.
NOMINATING COMMITTEE
Our nominating committee, consisting of Ms. Campbell, Mr. Kroll and Dr.
Smith, considers potential candidates for election to the board of
directors and recommends candidates to the board of directors.
SCIENCE AND TECHNOLOGY COMMITTEE
Our science and technology committee, consisting of Dr. Guillemin, Dr. Lau,
Dr. Smith and Dr. Vierling, oversees our scientific and technology policy.
TRANSITION COMMITTEE
Our transition committee, consisting of Ms. Campbell, Dr. Smith and Dr.
Vierling, oversees issues relating to our ongoing relationship with ICN,
including monitoring compliance with the various agreements between us and
ICN.
SCIENTIFIC AND CLINICAL ADVISORY BOARD
We are in the process of establishing a scientific and clinical advisory
board, consisting of leading experts in the fields of virology, oncology,
chemistry, molecular biology, pharmacology and preclinical and clinical
development. These advisors will consult on matters relating to the
development of the products described elsewhere in this prospectus.
We expect that members of our scientific and clinical advisory board will
review our research, development and operating activities and will be
available for consultation with management and staff relating to their
respective areas of expertise. We anticipate that our scientific and
clinical advisory board will hold regular meetings. We intend to have
separate consulting relationships with several members of the scientific
and clinical advisory board which will provide for more frequent meetings
with our management and staff to discuss our ongoing research and
development projects. Some of our scientific advisors may own shares of our
common stock and/or hold options to purchase our common stock. Our
scientific advisors are expected to devote only a small portion of their
time to our business.
Our scientific advisors will all be employed by other entities. We will
require each of our scientific advisors to enter into a letter agreement
with us that contains confidentiality and non-disclosure provisions that
prohibit the disclosure of confidential information to anyone else. These
letter agreements will also provide that all inventions, discoveries or
other intellectual property that come to the attention of or are discovered
by our scientific advisors while performing services under this letter
agreement will be assigned to us.
DIRECTOR COMPENSATION
Directors who are also our employees will receive no additional
compensation for their services as directors. We will pay each of our
non-employee directors a quarterly fee of $7,500, payable at the election
of each director either one-half in cash and one-half in common stock or in
all common stock. These payments are governed by our 2002 Nonemployee
Director Retainer Fee Plan. Non-employee directors also will be eligible to
receive options to purchase common stock under the 2002 Stock Option Plan
as compensation for their services as directors. Each non-employee
director, other than Dr. Roger Guillemin, received 15,000 options to
purchase common stock at the initial public offering price on the date of
the initial public offering. In addition, each non-employee director will
receive 15,000 options to purchase common stock on the date of each annual
meeting, at the then current market price. Each non-employee director will
also be paid a fee of $1,000 for each board meeting attended, including
committee meetings, and will be reimbursed for reasonable expenses incurred
to attend director and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between any member of our board of
directors or our compensation committee and any member of the board of
directors or compensation committee of any other company, and no
interlocking relationship has existed in the past.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
to our executive officers for services rendered in all capacities to ICN
and its subsidiaries for the year ended December 31, 2001. These executive
officers held the following positions with ICN prior to the initial public
offering:
o Johnson Y.N. Lau, MD, PhD-- Senior Vice President, Research and
Development, effective March 2000
o Thomas Stankovich -- Vice President/Finance and Controller, ICN Europe,
AAA
o Roger D. Loomis, Jr. -- Senior Vice President, Law, effective November
2001
References to stock options and restricted stock relate to awards of ICN
options and stock under ICN's 1998 Stock Option Plan and Long Term
Incentive Plan.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------------ --------------------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS(#)(2) COMPENSATION
--------------------------------------------------------------------------------------------------------------------------
Johnson Y.N. Lau, MD,
PhD................. 2001 $257,250 $305,000 $ -- $ -- 75,000 $ 4,025(3)
2000 208,000 75,000 -- -- -- 78,221(4)
1999 -- -- -- -- -- --
Thomas Stankovich..... 2001 164,500 47,300 -- -- 20,000 6,348(5)
2000 158,000 68,300 -- -- -- 1,221(6)
1999 144,000 5,000 -- -- -- 12,350(7)
Roger D. Loomis,
Jr.................. 2001 31,250(8) -- -- -- 100,000 --
2000 -- -- -- -- -- --
1999 -- -- -- -- -- --
----------------------------
(1) Unless otherwise indicated, with respect to any individual named in the
above table, the aggregate amount of perquisites and other personal
benefits, securities or property was less than either $50,000 or 10% of
the total annual salary and bonus reported for the named executive
officer.
(2) Includes grants of options to purchase shares of ICN's common stock.
(3) Consists of a 401(k) company match.
(4) Consists of moving expenses of $78,026 and life insurance of $195.
(5) Consists of life insurance of $818, a 401(k) company match of $4,960
and executive membership of $570.
(6) Consists of life insurance of $125, executive membership of $484 and
other of $612.
(7) Consists of vacation payout of $11,077, life insurance of $114,
executive membership of $528 and other of $631.
(8) Mr. Loomis joined ICN in November 2001 and was compensated on the basis
of an annual salary of $250,000.
The following table sets forth summary information regarding ICN option
grants made by ICN to each of our executive officers during 2001.
2001 ICN OPTION GRANTS
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION GRANT DATE
NAME GRANTED(1) IN 2001(2) (PER SHARE) DATE PRESENT VALUE(3)
-----------------------------------------------------------------------------------------------
Johnson Y.N. Lau, MD, PhD. 50,000 1.5% $ 21.60 3/22/11 $ 483,260
25,000 0.7% 26.98 10/12/11 301,813
Thomas Stankovich......... 10,000 0.3% 23.44 1/19/11 104,871
10,000 0.3% 21.60 3/22/11 96,651
Roger D. Loomis, Jr....... 100,000 2.9% 26.03 11/16/11 1,164,751
------------------
(1) Unless otherwise noted, the options granted have ten year terms. The
options granted to the executive officers vest according to the
following schedule: 25% on the first anniversary of the date of grant
and 25% on each of the next succeeding three anniversary dates of the
grant date. Except as otherwise noted, all options were granted with an
exercise price equal to the fair market value of the underlying shares
on the date of grant.
(2) Options to purchase a total of 3,419,185 shares were granted to
employees of ICN, including executive officers, during year 2001.
(3) Based on the Black-Scholes option pricing model. The actual value, if
any, an executive may realize will depend on the excess of the stock
price over the exercise price on the date the option is exercised, so
that there is no assurance the value realized by an executive will be
at or near the value estimated by the Black- Scholes model. The
estimated values under that model are based on arbitrary assumptions as
to variables such as interest rates, stock price volatility and future
dividend yield.
The following table sets forth summary information regarding the number and
value of ICN options held as of December 31, 2001 by our executive
officers. Options shown as exercisable in the table below are immediately
exercisable. We determined the value of unexercised in-the-money options as
of December 31, 2001 by taking the difference between the market price of
ICN common stock as of the close of business on December 31, 2001 and the
option exercise price, multiplied by the number of shares underlying the
options as of that date.
YEAR-END 2001 ICN OPTION EXERCISES AND OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
NUMBER OF OPTIONS AT YEAR-END YEAR-END(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------------
Johnson Y.N. Lau, MD, PhD. 0 $ 0 18,750 131,250 $234,375 $1,461,125
Thomas Stankovich......... 2,702 76,290 57,018 33,125 535,348 246,031
Roger D. Loomis, Jr....... 0 0 0 100,000 0 747,000
-------------
(1) Difference between the fair market value of the shares of ICN common
stock at the date of exercise and the exercise price.
(2) Difference between the fair market value of the shares of ICN common
stock on December 31, 2001 and the exercise price.
EMPLOYMENT AGREEMENTS/CHANGE IN CONTROL AGREEMENTS
The board of directors adopted employment agreements which contain "change
in control" benefits for our key senior executive covered officers. The
executives include Dr. Johnson Y.N. Lau, Thomas Stankovich and Roger D.
Loomis, Jr. The employment agreements provide for initial base salaries of
$400,000 for Dr. Lau, $180,950 for Mr. Stankovich and $250,000 for Mr.
Loomis. Dr. Lau is also entitled to receive a bonus that would guarantee
that his cash compensation received during calendar year 2002 would equal
at least $465,000, including cash compensation received from ICN prior to
the completion of the initial public offering. The employment agreements
are intended to retain the services of these executives and provide for
continuity of management in the event of any actual or threatened change in
control. Each agreement has an initial term of three years and
automatically extends for successive one year terms unless we or the
executive elects not to extend it. In addition, if a change in control of
us occurs, each agreement will generally remain in effect until the third
anniversary of the change in control. These employment agreements provide
that each executive shall receive severance benefits equal to three times
salary and bonus and other benefits under specified circumstances. These
circumstances include the executive's employment being terminated other
than for cause, death or disability or the executive terminating employment
for enumerated reasons following or in connection with a change in control
of us. The reasons permitting an executive to terminate his employment
following or in connection with a change in control of us include a
reduction in the executive's compensation, a change in the executive's
position, title or reporting responsibilities that does not represent a
promotion from his position, title or reporting responsibilities as in
effect immediately prior to a change in control, a failure by us to
continue a material benefit plan in which the executive participated at the
time of a change in control of us, or a change in the executive's job
location. The executive is under no obligation to mitigate amounts payable
under the employment agreements. For purposes of the employment agreements,
a "change in control" generally means any of the following events:
o the acquisition by any person of beneficial ownership of more than 25%
of our outstanding shares or the combined voting power of our
outstanding voting securities other than an acquisition directly from
us;
o the acquisition by any person of beneficial ownership of more than 25%
of the outstanding shares or the combined voting power of any parent
entity other than an acquisition from that parent entity;
o our existing board of directors ceases for any reason to constitute at
least a majority of our board of directors, unless the election, or
nomination for election, of any new director, other than a director who
initially assumed office as a result of either an actual or threatened
election contest or proxy contest including by reason of any agreement
intended to avoid or settle any election contest or proxy contest, was
approved by a vote of at least two- thirds of the then existing board
of directors;
o the consummation of a merger or consolidation involving us or any
parent entity if our stockholders or the stockholders of any parent
entity immediately before the merger or consolidation do not, as a
result of the merger or consolidation, own, directly or indirectly, at
least 50% of the combined voting power of the then outstanding voting
securities of the corporation resulting from the merger or
consolidation or the ultimate controlling person of that entity, or the
members of our existing board of directors immediately prior to the
merger or consolidation do not constitute at least a majority of the
members of the board of the corporation resulting from the merger or
consolidation or the ultimate controlling person of the entity; or
o consummation of a complete liquidation or dissolution of us or any
parent entity or the sale or other disposition of all or substantially
all of our assets or the assets of any parent entity.
For purposes of the definition of change in control, a "parent entity"
means any entity which owns more than 50% of our outstanding voting
securities or the combined voting power of our outstanding voting
securities.
Based upon present compensation, our executives would be entitled to
receive the following approximate amounts if the employment of these key
senior executives is terminated under any of the circumstances described
above: Dr. Johnson Y.N. Lau, $2,115,000; Thomas Stankovich, $685,000; and
Roger D. Loomis, Jr., $750,000. In addition, the vesting of options granted
pursuant to the 2002 Stock Option and Award Plan to the executives would be
accelerated. The value of the accelerated options would depend upon the
market price of the shares of common stock at that time. If these payments,
along with any other benefits payable to the executives prior to their
termination, are subject to the excise tax imposed under Section 4999 of
the Internal Revenue Code, then these payments and other benefits will be
reduced if and to the extent that a reduction in the payments would result
in the executive retaining a larger amount on an after-tax basis, taking
into account federal, state and local income taxes and excise taxes, than
if the executive received the entire amount of such payments and benefits.
LIMITATIONS OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, our certificate of incorporation provides
that no director will be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
o for any breach of duty of loyalty to us or to our stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law;
or
o for any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation further provides that we must indemnify
our directors to the fullest extent permitted by Delaware law. In addition,
our amended and restated bylaws provide that:
o we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
o we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by
law, our certificate of incorporation, our bylaws or other agreements;
o we are required to advance expenses to our directors and executive
officers as incurred in connection with legal proceedings against them
for which they may be indemnified; and
o the rights conferred in the bylaws are not exclusive.
We entered into indemnification agreements with each of our directors and
officers that require us to indemnify them against liabilities that may
arise by reason of their status or service as directors or officers and to
advance their expenses incurred as a result of any proceeding against them.
However, we will not indemnify directors or officers with respect to
liabilities arising from willful misconduct of a culpable nature.
EMPLOYEE BENEFIT PLANS
We intend to adopt a management-based cash bonus program with terms and
conditions similar to those provided to employees of comparable companies
in our industry. ICN has advised us that it has not yet determined what
action, if any, it intends to take with respect to its existing stock
option plans to account for the spin-off. Any action ICN takes may include
having us grant additional options to employees to acquire our common
stock. This grant would have a dilutive effect on our then outstanding
common stock.
2002 STOCK OPTION AND AWARD PLAN
Our board of directors adopted the 2002 Stock Option and Award Plan prior
to the completion of the initial public offering. ICN has approved this
plan as our sole stockholder. This plan provides for the grant of incentive
stock options intended to qualify under Section 422 of the Internal Revenue
Code and stock options which do not so qualify, stock appreciation rights,
restricted stock, performance units and performance shares, phantom stock
awards, and share awards. Persons eligible to receive grants under this
plan include directors, officers, employees, and consultants of us, and
while we were a subsidiary of ICN, ICN and any of ICN's affiliates. This
plan is designed to comply with the requirements for "performance-based
compensation" under Section 162(m) of the Internal Revenue Code, and the
conditions for exemption from the short-swing profit recovery rules under
Rule 16b-3 under the Securities Exchange Act.
This plan is administered by a committee that consists of at least two
nonemployee outside board members. The compensation committee of the board
currently serves as the committee. Generally, the committee has the right
to grant options and other awards to eligible individuals and to determine
the terms and conditions of options and awards, including the vesting
schedule and exercise price of options. This plan authorizes the issuance
of 22,500,000 shares of common stock.
The plan provides that the term of any option may not exceed 10 years.
However, in the case of the death of an optionee, an option, other than an
incentive stock option, may be exercised for up to one year following the
date of death. This provision applies even if it extends the exercisability
of the option beyond 10 years from the date of grant.
Unless an employment agreement with us provides otherwise, if a
participant's employment or service with us is terminated without cause,
the optionee may generally exercise any portion of the option that is
vested and unexercised as of the termination date for a period of 6 months
thereafter. In any event, the option may not be exercised after the
expiration of the option term. Unless an employment agreement provides
otherwise, if an optionee's employment or service with us is terminated
without cause following a change in control of us, then any options
generally become immediately and fully vested and exercisable at that time.
Options will generally remain exercisable for a period of six months if the
options become vested by reason of a change of control. The agreement
evidencing the stock options or stock appreciation rights may provide for
different treatment of options in the event of a change of control of us.
The term "change in control" has the same meaning as that set forth in the
employment agreements for the senior executives which are described above.
See "--Employment Agreements/Change in Control Agreements."
We have granted stock options to various employees, including our executive
officers, under this plan. An aggregate of 3,000,000 shares of common stock
would be issuable upon exercise of these options. In addition, we granted
options to acquire 15,000 shares to each of our non-management directors at
the completion of the initial public offering. The exercise price of these
options was the initial public offering price. The options have a term of
10 years.
The vesting schedule of the options granted to our employees, officers,
directors and consultants will be 25% each year, commencing on the first
anniversary of grant. The following table sets forth the number of shares
of our common stock underlying these options to be granted to our executive
officers.
SHARES OF
COMMON STOCK
NAME UNDERLYING OPTIONS GRANTED
-------------------------------------------------------
Johnson Y.N. Lau, MD, PhD. 1,200,000
Thomas Stankovich......... 350,000
Roger D. Loomis, Jr....... 350,000
We have not granted any options to acquire shares of our common stock to
directors, officers or employees of ICN. ICN has advised us that, it has
paid from its own funds success bonuses totaling $47.8 million in cash to
its directors, officers and employees.
EMPLOYEE STOCK PURCHASE PROGRAM
We have adopted the Employee Stock Purchase Program. This program allows
our employees to purchase additional shares of our common stock on the New
York Stock Exchange at the then current market price. Employees who elect
to participate in the program will pay for these subsequent purchases with
funds that we will withhold from their paychecks.
Relationship with ICN
CONTRIBUTION
ICN has contributed to us:
o its rights, title and interest under the license agreement with
Schering-Plough, which entitles us to receive all of the royalties from
Schering-Plough in connection with the sale of oral forms of ribavirin;
o all of the chemical compounds contained in its chemical compound
library, along with all associated records, journals and data;
o all intellectual property rights, including all patents, copyrights and
trademarks, related to our business, including all intellectual
property rights held by ICN in ribavirin, Tiazole, Adenazole,
Levovirin, Viramidine and the chemical compounds in our nucleoside
analog library;
o all of our furniture and equipment, excluding fixtures, contained in,
and personnel employed in, our research and development department in
our Costa Mesa facility; and
o all other assets used in the conduct of our business.
To further expand our antiviral pipeline, we and ICN licensed two other
compounds from third parties. These compounds are Hepavir B and IL-12. ICN
licensed Hepavir B from Metabasis Therapeutics, Inc. in October 2001. ICN
contributed the Hepavir B license to us, subject to the consent of
Metabasis, which has been obtained. We and ICN licensed rights to IL-12
from F. Hoffmann-La Roche in June 2001. IL-12 is a developmental compound
for the treatment of cancer and allergies. We have not taken any steps at
this time to develop this compound. ICN contributed all of its rights under
the IL-12 license to us.
However, ICN retains perpetual, exclusive and royalty-free rights to all
indications for ribavirin in a given jurisdiction to the extent currently
approved in that jurisdiction, but not in other jurisdictions for which
that indication is not currently approved. This license excludes all
indications and forms of ribavirin licensed to Schering-Plough. ICN also
retains perpetual, exclusive and royalty-free rights with respect to the
use of ribavirin in aerosol form for the treatment of bone marrow
transplant patients with respiratory syncytial virus.
The royalty payment for sales of ribavirin in the first quarter of 2002 is
payable in late May 2002. ICN will retain this royalty payment. The royalty
payment for sales of ribavirin in the second quarter of 2002 is payable in
late August 2002. This royalty payment will be divided between us and ICN
on a pro-rata basis from April 17, 2002. We will retain all subsequent
royalty payments.
INTERCOMPANY AGREEMENTS
We have entered into a number of agreements with ICN and may enter into
several other agreements with ICN for the purpose of defining our
relationship with them after the initial public offering. These agreements
were developed in the context of a parent/subsidiary relationship and
therefore are not the result of arms-length negotiations between
independent parties.
AFFILIATION AND DISTRIBUTION AGREEMENT
THIRD-PARTY DISPUTE MANAGEMENT
Upon completion of the spin-off, we assumed control over the management and
direction of all disputes with third parties related to our rights to
ribavirin, including the dispute with Schering-Plough.
FINANCIAL INFORMATION
Pursuant to the affiliation and distribution agreement, we agreed that for
so long as ICN is required to include us in its consolidated financial
statements, we will provide ICN financial information regarding our company
and our subsidiaries, consult with ICN regarding the timing and content of
our earnings releases and cooperate fully with ICN in connection with its
public filings.
INDEMNIFICATION
We agreed to indemnify ICN and its affiliates against all liabilities
arising out of:
o any breach by us or our affiliates of any of the provisions of the
affiliation and distribution agreement;
o any incorrect or incomplete financial information provided by us or our
affiliates to ICN as required by the affiliation and distribution
agreement; and
o any third-party claims relating to our business and operations.
ICN agreed to indemnify us and our affiliates against all liabilities
arising out of:
o any breach by ICN or its affiliates of any of the provisions of the
affiliation and distribution agreement;
o any incorrect or incomplete financial information provided by ICN or
its affiliates to us as required by the affiliation and distribution
agreement;
o any expenses, monetary judgment or settlement incurred in connection
with the SEC litigation, the plea settling the US Attorney's Office
investigation and the dispute involving ICN's interest in its
Yugoslavian joint venture; and
o any third-party claims relating to ICN's business and operations,
excluding the business and operations ICN contributed to us.
EXPENSES
We will pay the costs and expenses incurred in connection with the tax-free
spin-off of our financial, legal, accounting and other advisors, if they
are not also acting as advisors to ICN. ICN will pay all other costs and
expenses incurred in connection with the tax-free spin-off.
INTERIM FINANCING
ICN will provide us with working capital financing of up to $60 million. We
may draw upon this commitment until August 31, 2002. Any borrowings from
ICN will be repayable on December 31, 2003. The interest on the note will
be at LIBOR plus 200 basis points and will be payable monthly.
MANAGEMENT SERVICES AGREEMENT
We and ICN entered into a management services agreement. Under this
agreement, ICN will provide administrative and corporate support services
to us on a transitional basis, including human resource, accounting,
treasury, tax, and information services. Over time, it is our intention to
provide these services ourselves or contract with third parties to provide
these services. ICN will charge us for these services at its cost,
including all out-of-pocket, third-party costs and expenses incurred by ICN
in providing the services. If ICN incurs third-party expenses on behalf of
us as well as an ICN entity, ICN will be required to allocate these
expenses in good faith between us and the ICN entity. ICN will determine
this allocation in the exercise of its reasonable judgment.
The agreement provides for monthly invoicing of service charges. If the
invoiced amount is not paid within 60 days following receipt of the
invoice, interest will be required to be paid at a specified rate, unless
the invoiced amount is in dispute. ICN and we will be required to use
reasonable efforts to resolve any disputes promptly.
The management services agreement provides that the services provided by
ICN will be substantially similar in scope, quality and nature to those
services provided to us prior to April 17, 2002. ICN is also required to
provide the services to us through the same or similarly qualified
personnel, but the selection of personnel to perform the various services
will be within the sole control of ICN. In addition, ICN is not required to
increase materially the volume, scope or quality of the services provided
beyond the level at which they performed these services for us in the past.
The agreement provides that ICN may cause any third party to provide any
service to us that ICN is required to provide, but that ICN will remain
responsible for any services it causes to be provided in this manner. ICN
is not required to provide any service to the extent the performance of the
service becomes impracticable due to a cause outside the control of ICN,
which could include natural disasters, governmental actions or similar
events of force majeure. Similarly, ICN is not required to provide any
service if doing so would require ICN to violate any laws, rules or
regulations. The management services and facilities agreement also provides
that ICN may provide additional services to us upon our mutual agreement.
We will mutually agree on the terms and costs of these additional services.
These additional services may include services that were not provided to us
prior to April 17, 2002.
Pursuant to the management services agreement, we have agreed to indemnify
and hold harmless ICN, each of its subsidiaries and their directors,
officers, agents and employees from any claims, damages and expenses
arising out of the services rendered to us. This indemnity would not apply
to claims, damages or expenses resulting from breach of contract, gross
negligence or willful misconduct on the part of ICN or its representatives.
In addition, we have agreed that these same persons shall be liable to us
only for any claims, damages or expenses resulting from breach of contract,
gross negligence or willful misconduct on their part.
The management services agreement will commence on April 17, 2002 and will
continue until December 31, 2003. We may terminate one or more of the
services provided under the agreement upon 30 days written notice to ICN if
we determine at any time that we no longer require these services. ICN and
we may, by mutual agreement, provide for the continuation of some services
after this termination date. In addition, either ICN or we will be able to
terminate the management services agreement with respect to one or more of
the services provided under the agreement:
o if the other party has failed to perform any material obligation
relating to the terminated service; and
o if the failure continues for a period of 30 days after the other party
receives notice of the failure from the terminating party.
CONFIDENTIALITY AGREEMENT
We and ICN entered into a confidentiality agreement with respect to
confidential and proprietary information, intellectual property and other
matters and ICN will agree to keep confidential and to cause our affiliates
to keep confidential, and not to use for any unauthorized purpose,
confidential information regarding the other party. Confidential
information includes:
o unpublished technology and know-how;
o unpublished patent applications; and
o other confidential or proprietary technical and business information.
Confidential information does not include any information that:
o is already known to the other party from a third-party source;
o is or becomes publicly known;
o is received from a third party without any obligations of
confidentiality;
o is independently developed by employees or consultants of the party
receiving the information; or
o is approved for release by the disclosing party.
TAX SHARING AGREEMENT
We and ICN have entered into a tax sharing agreement pursuant to which the
tax amounts to be paid or received by us with respect to federal
consolidated returns of ICN in which we are included generally is
determined as though we file separate federal income tax returns. Also, we
will calculate our state and local income taxes taking into account ICN's
worldwide apportionment schedule, where applicable. Under the terms of the
tax sharing agreement, ICN is not required to make any payment to us for
the use of our tax attributes that come into existence until we would
otherwise be able to utilize these attributes. Under the agreement, ICN
will:
o continue to have all the rights of a parent of a consolidated group;
o have sole and exclusive responsibility for the preparation and filing
of consolidated federal and consolidated or combined state, local and
foreign income tax returns (or amended returns); and
o have the power, in its sole discretion, to contest or compromise any
asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund relating to these returns.
We were included in ICN's consolidated group for federal income tax
purposes prior to the spin-off . Each member of a consolidated group is
jointly and severally liable for the federal income tax liability of each
other member of the consolidated group for any taxable year during any part
of which it is a member. Accordingly, although the tax sharing agreement
allocates tax liabilities between us and ICN during the period in which
were included in ICN's consolidated group, we could be liable in the event
that any federal tax liability is incurred, but not paid, by any other
member of ICN's consolidated group. Specifically, as a member of ICN's
consolidated group, if the spin-off is determined to be taxable to ICN, we
could be liable for any federal income tax liability incurred, but not
paid, by ICN. See "Risk factors -- Risks relating to our separation from
ICN. - We could be liable for federal income tax liability of members of
ICN's consolidated group."
Under the terms of the tax sharing agreement, we have agreed to indemnify
ICN in the event that the spin-off is not tax free to ICN as a result of
various actions taken by or with respect to us, or our failure to take or
prevent various actions, during the two years before and after a spin-off,
including:
o liquidation of us or, subject to certain exceptions, merger of us with
or into another corporation;
o excluding this offering, the issuance by us of more than 10%, in the
aggregate, by vote or value, of our capital stock;
o the redemption, purchase or reacquisition by us of our capital stock,
subject to certain exceptions;
o the sale, exchange, distribution or other disposition, other than in
the ordinary course of our business, of more than 25% of our assets;
o discontinuing the active conduct of our current trade or business; and
o entering into any negotiation, agreement or arrangement pursuant to
which one or more persons acquire 50% of the voting power or value of
our stock.
We have agreed to indemnify ICN for any tax liability resulting from any
misstatement or omission of any fact and any breach by us of any
representation that we provide in connection with a ruling from the
Internal Revenue Service or an opinion of counsel regarding the federal
income tax consequences of the spin-off.
We may not be able to control some of the events that could trigger our
indemnification obligation.
Furthermore, as noted above, as a member of ICN's consolidated group, we
could be liable for any taxes resulting from the spin-off even if it is not
our action, or failure to take or prevent an action, that causes the
spin-off to be taxable to ICN.
IRS SPIN-OFF RULING
A ruling from the Internal Revenue Service regarding the federal income tax
consequences of the spin-off will be based, in part, upon facts and
representations that we and ICN provide. The conclusions reached in such a
ruling will be subject to the accuracy and completeness of such facts and
representations. As noted above, we have agreed to indemnify ICN for any
tax liability resulting from any misstatement or omission of any fact and
any breach by us of any representation that we provide in connection with a
ruling from the Internal Revenue Service.
LEASE
Under a lease agreement with ICN, we lease approximately 65,000 square feet
from ICN of its Costa Mesa, California headquarters building. This lease
primarily covers our second floor research and development facilities in
which we conduct substantially all of our operations. The lease has an
initial term of five years which we can renew at our option for an
additional five years. We will initially pay ICN rent of $416,667 per
month, or $5 million per year, which rent will be adjusted annually based
on the Orange County, California consumer price index. In addition, we will
pay ICN our pro rata portion of facility and central service costs. These
costs will include utilities, security, parking, building maintenance,
cleaning services, insurance premiums and other facility costs. ICN also
contributed to us all of the equipment and furniture contained in our
facilities. ICN, however, continues to own all of the fixtures in our
facilities.
POTENTIAL TRANSACTION WITH ROCHE
In late 2000 and early 2001, ICN had discussions with Roche Capital
Corporation, an affiliate of F. Hoffmann-La Roche, regarding the possible
exchange of a portion of its shares of ICN common stock for shares of our
common stock at the time of completion of the initial public offering
and/or the time of the spin-off. These discussions have terminated.
ICN NOTES
In July 2001, ICN completed a private placement of $525 million aggregate
principal amount of 6 1/2% convertible subordinated notes due 2008. The
notes:
o are initially convertible into ICN common stock at a price of $34.25
per share;
o mature on July 15, 2008;
o are unsecured, general obligations of ICN;
o are subordinated to all of ICN's then existing and future senior
indebtedness and effectively subordinated to all existing and future
liabilities of ICN's subsidiaries, except that upon completion of the
initial public offering we became jointly and severally liable for the
principal and interest obligations under the notes;
o have interest payment dates of January 15 and July 15 of each year
starting on January 15, 2002;
o are redeemable at ICN's option on or after July 21, 2004; and
o are not entitled to any mandatory redemption or sinking fund.
On April 17, 2002:
o we became jointly and severally liable for the principal and interest
obligations under the notes;
o we have the same obligation as ICN has to purchase the notes upon a
change of control and we and ICN are jointly and severally liable for
the principal and interest obligations; and
o our obligation to make payments on the notes is subordinated to the
same extent as ICN's obligations.
As between us and ICN, ICN agreed to make all interest and principal
payments on these notes and to make any payments due upon a change of
control of ICN or us. We will be responsible for these payments, however,
to the extent ICN does not make these payments. In that event, we would
have a claim against ICN for any payments ICN does not make. We can only
amend this agreement, in a manner adverse to us, with the approval of
holders of a majority of our outstanding shares of common stock, excluding
shares held by ICN.
Upon the spin-off:
o This prospectus relates to registration of the estimated 21,922,032
shares of our common stock issuable upon conversion of 6 1/2%
convertible subordinated notes due 2008 issued by ICN in July 2001. The
notes are presently convertible into 15,326,010 shares of ICN common
stock. The number of our shares of common stock issuable upon
conversion of the notes after the spin-off is completed is determined
by multiplying that number by approximately 1.43 shares, the assumed
rate of Ribapharm common stock for each share of ICN common stock in
the spin-off. This number is subject to change depending on the actual
shares of ICN common stock outstanding on the record date for the
spin-off. This distribution ratio is based upon 83,963,648 shares of
ICN common stock outstanding as of May 3, 2002. Upon the spin-off, a
holder of the notes who converts notes will receive, in addition to ICN
common stock, the same number of shares of Ribapharm common stock that
the holder would have received had the holder converted the notes
immediately prior to the record date for the spin-off. Holders will
receive the shares of our common stock from authorized but unissued
shares of our common stock.
CONTRACT SERVICES WITH ICN
From time to time, if we determine that it is in our best interest to do
so, we will seek to enter into arrangements with ICN and foreign affiliates
of ICN to conduct studies or clinical trials on our product candidates. By
conducting these studies in Eastern Europe, we will be able to determine
preliminarily the safety and efficacy of product candidates prior to
incurring the expense of full clinical trials in the United States. In
addition, we may enter into license arrangements with ICN or ICN
International for products we develop. Neither we, ICN nor ICN
International will have any obligation to enter into any of these
arrangements.
ADJUSTMENT OF ICN'S STOCK OPTION PLANS UPON THE SPIN-OFF
ICN has not determined what adjustments to make to its existing stock
option plans at the time of the spin-off. One alternative is to split each
existing option into two options, one option being exercisable for our
common stock on the basis of the distribution ratio used in the spin-off
and the other option being exercisable for ICN common stock. Assuming
83,963,648 outstanding shares of ICN common stock as of May 3, 2002, the
distribution ratio would be approximately 1.43 shares of our common stock
for each share of ICN common stock. The exercise price of each option would
be allocated to each component on an equitable basis. As of December 31,
2001, options to purchase 10,721,000 shares of ICN common stock were
outstanding.
Selling securityholders
All of our shares offered for sale by this prospectus by the selling
securityholders are issuable upon conversion of the notes after the
spin-off. Selling securityholders, including their transferees, pledgees or
donees or their successors, may from time to time after the spin-off offer
and sell pursuant to this prospectus any or all of our common stock into
which the notes are convertible.
The following table sets forth information with respect to the selling
securityholders and the number of shares of our common stock beneficially
owned by each selling securityholder that may be offered under this
prospectus. The information is based on information provided by or on
behalf of the selling securityholders. The selling securityholders may
offer all, some or none of the common stock into which the notes are
convertible. Because the selling securityholders may offer all or some
portion of our common stock, no estimate can be given as to the amount of
our common stock that will be held by the selling securityholders upon
termination of any sales. In addition, the selling securityholders
identified below may have sold, transferred or otherwise disposed of all or
a portion of their notes convertible into our common stock since the date
on which they provided the information below in transactions exempt from
the registration requirements of the Securities Act. This prospectus
relates to registration of the estimated 21,922,032 shares of our common
stock issuable after the spin-off has been completed upon conversion of 6
1/2% subordinated notes due 2008 issued by ICN issued in July 2001. The
notes are presently convertible into 15,326,010 shares of ICN common stock.
The number of shares of our common stock issuable upon conversion of the
notes after the spin-off is completed is determined by multiplying that
number by approximately 1.43 shares, the assumed rate of Ribapharm common
stock for each share of ICN common stock in the spin-off. This number is
subject to change depending on the actual shares of ICN common stock
outstanding on the record date for the spin-off. This distribution ratio is
based upon 83,963,648 shares of ICN common stock outstanding as of May 3,
2002. Upon the spin-off, a holder of the notes who converts notes will
receive, in addition to ICN common stock, the same number of shares of
Ribapharm common stock that the holder would have received had the holder
converted the notes immediately prior to the record date for the spin-off.
SHARES OF ICN
COMMON STOCK SHARES OF RIBAPHARM SHARES OF RIBAPHARM
ISSUABLE UPON COMMON STOCK ISSUABLE COMMON STOCK OWNED
CONVERSION OF THE UPON CONVERSION OF AFTER COMPLETION OF
NAME NOTES(1) THE NOTES(1) THIS OFFERING (2)
---- ----------------- --------------------- --------------------
AFTRA Health Fund 5,546 7,932 --
AIG SoundShore Holding Ltd. 64,398 92,113 --
AIG SoundShore Opportunity Holding Fund Ltd. 59,231 84,722 --
AIG SoundShore Strategic Holding Fund Ltd. 20,288 29,019 --
AIM Dent Demographics Trends Fund 11,676 16,701 --
AIM VI Dent Demographics Trends Fund 5,838 8,350 --
AIM Dent Demographics Trends Fund 14,596 20,877 --
Alexandria Global Investment Fund 1 Ltd. 904,964 1,294,443 --
Allstate Insurance Company 72,981 104,390 --
Allstate Life Insurance Company 21,894 31,316 --
American Samoa Government 2,714 3,882 --
Arbitex Master Fund, L.P. 306,520 438,440 --
Argent Classic Convertible Arbitrage Fund (Bermuda)
Ltd. 487,513 697,329 --
Aristria International Limited 96,568 138,129 --
Aristria Partners, LP 34,797 49,772 --
Ascend Offshore Fund Ltd. 7,032 10,058 --
Ascend Partners L.P. 1,666 2,383 --
Ascend Partners Sapient L.P. 934 1,335 --
Associated Electric & Gas Insurance Services Limited
20,434 29,228 --
Bancroft Convertible Fund, Inc. 29,192 41,755 --
Bank Austria Cayman Islands Ltd. 175,154 250,536 --
Bankgesellschaft Berlin AG 182,452 260,975 --
Bear Stearns & Co. Inc. 29,192 41,755 --
Bear Stearns Securities Corp. 59,231 84,722 --
BNP Paribas Equity Strategies SNC 364,759 521,744 --
Bon Ernst Global Portfolio/Convertible Bond 11,676 16,701 --
BP Amoco PLC, Master Trust 83,081 118,837 --
BTES -- Convertible ARB 43,788 62,633 --
BTPO Growth Vs Value 175,154 250,536 --
CALAMOS(R) Market Neutral Fund CALAMOS(R) Investment
Trust 286,085 409,210 --
Canyon Capital Arbitrage Master Hedge Fund, Ltd. 87,577 125,268 --
Canyon MAC 18 LTD (RMF) 29,192 41,755 --
Canyon Value Realization Fund (Cayman), Ltd. 204,346 292,292 --
Carls Foundation 5,838 8,350 --
Chrysler Corporation Master Retirement Trust 174,570 249,701 --
Coastal Convertibles Ltd. 29,192 41,755 --
Commonfund Event-Driven Company c/o IBT Fund
Services (Cayman) 17,515 25,053 --
Consulting Group Capital Market Funds 15,763 22,547 --
Cooper Neff Convertible Strategies Fund, L.P. 62,617 89,566 --
Credit Suisse First Boston Corp 1,342 1,919 --
CSFB Convertible and Quantitative Strategies 90,496 129,443 --
DeAm Convertible Arbitrage FD 58,384 83,511 --
Delta Air Lines Master Trust 44,518 63,677 --
Delta Pilots D & S Trust 20,434 29,228 --
Deutsche Banc Alex Brown Inc. 627,636 897,758 --
Ellsworth Convertible Growth and Income Fund, Inc. 29,192 41,755 --
Elser & Co. 7,298 10,438 --
First Union International Capital Markets 233,539 334,049 --
First Union National Bank 875,772 1,252,687 --
First Union Securities Inc. 4,378 6,262 --
Franklin Custodial Funds - Franklin Income Series 364,905 521,953 --
Forest Alternative Strategies II 1,459 2,086 --
Forest Fulcrum Fund L.L.P. 18,683 26,723 --
Forest Global Convertible Fund Series A-5 86,117 123,180 --
Franklin Income Series 656,829 939,515 --
Franklin Investors Securities Trust - Franklin
Convertible Secs 131,365 187,901 --
Franklin Investors Securities Trust - Franklin
Equity Income Fund 134,285 192,078 --
Franklin Templeton Variable Insurance Products Trust
- Franklin 210,185 300,644 --
Growth and Income Fund
Franklin Growth and Income Fund 233,539 334,049 --
Franklin Strategic Series -- Franklin California 280,247 400,859 --
Growth Fund
Franklin Templeton Variable Insurance Products Trust
- Franklin 33,571 48,019 --
Income Securities Fund
FTIF - Franklin Income Fund 2,919 4,175 --
GLG Global Convertible Fund 73,564 105,224 --
GLG Global Convertible Ucits Fund 14,012 20,042 --
Goldman Sachs and Company 6,860 9,812 --
Global Bermuda Limited Partnership 14,596 20,877 --
HBK Master Fund L.P. 145,962 208,781 --
Herrick Foundation 5,838 8,350 --
HFR CA Select Fund 14,596 20,877 --
HFR Master Fund, LTD 1,459 2,086 --
Highbridge International LLC 948,753 1,357,078 --
Hotel Union & Hotel Industry of Hawaii Pension Plan 29,046 41,546 --
James Campbell Corporation 11,881 16,994 --
Janus Capital Corporation 87,577 125,268 --
Jefferies & Co. 11,676 16,701 --
Jefferies & Company Inc. 642 918 --
KBC Financial Products USA Inc. 60,428 86,435 --
Lakeshore International Ltd. 72,981 104,390 --
LDG Limited 5,838 8,350 --
Levo Alternative Fund, Ltd. 496,767 710,566 --
Lexington Vantage Fund, Ltd. 5,838 8,350 --
Lincoln National Global Asset Allocation Fund, Inc. 4,670 6,679 --
LLT Limited 4,524 6,471 --
Lyxor Master Fund 66,033 94,452 --
Mainstay Convertible Fund 78,527 112,323 --
Mainstay VP Convertible Portfolio 22,186 31,734 --
McMahan Securities Co. L.P. 93,415 133,619 --
Merrill Lynch Pierce Fenner & Smith Inc. 46,707 66,808 --
Microsoft Corporation 26,419 37,789 --
Morgan Stanley & Co. 197,048 281,853 --
Motion Picture Industry Health Plan - Active Member
Fund 13,866 19,833 --
Motion Picture Industry Health Plan - Retiree
Member Fund 5,984 8,559 --
MSD Portfolio L.P. - Investments 298,375 426,789 --
Museum of Fine Arts, Boston 875 1,251 --
New York Life Insurance and Annuity Company 23,353 33,403 --
New York Life Insurance Company 210,185 300,644 --
New York Life Separate Account #7 10,509 15,031 --
North Pole Capital Investments Ltd. 52,546 75,160 --
OCM Convertible Limited Partnership 5,838 8,350 --
OCM Convertible Trust 107,573 153,870 --
Onex Industrial Partners Limited 57,509 82,259 --
Pacific Life Insurance Company 14,596 20,877 --
Palladin Securities 29,192 41,755 --
Parker-Hannifin Corporation 7,444 10,647 --
Partner Reinsurance Company Ltd. 24,083 34,447 --
Pebble Capital Inc. 22,186 31,734 --
Polar Hedge Enhanced Income Trust 5,838 8,350 --
Prime Corp Convertible Fund 29,192 41,755 --
Purchase Associates L.P. 134,898 192,955 --
Putnam Asset Allocation Funds - Balanced Portfolio 44,080 63,051 --
Putnam Asset Allocation Funds - Conservative 35,906 51,359 --
Portfolio
Putnam Convertible Income - Growth Trust 320,824 458,900 --
Putnam Convertible Opportunities and Income Trust 12,552 17,954 --
Putnam Variable Trust - Putnam VT Global Asset
Allocation 11,822 16,909 --
Quattro Fund, LLC 175,154 250,536 --
RCG Latitude Master Fund Ltd. 58,384 83,511 --
R(2) Investments, LDC 408,693 584,586 --
RBC Capital Services, Inc. 437 667 --
Salomon Brothers Asset Management 566,332 810,070 --
San Diego County Employees Retirement Association 49,627 70,985 --
Silvercreek II Limited 66,266 94,785 --
Silvercreek Limited Partnership 29,192 41,755 --
St. Albans Partners Inc. 40,869 58,458 --
State Employees' Retirement Fund of the State of
Delaware 60,136 86,017 --
State of Connecticut Combined Investment Funds 128,446 183,726 --
Sturgeon Limited 10,509 15,031 --
Sylvin (IMA) Ltd. 7,590 10,856 --
The Bank of New York & E. Mac Gregor Strauss 729 1,042 --
The Class 1C Company, Ltd. 58,384 83,511 --
The Estate of James Campbell 9,166 13,110 --
TQA Master Fund, Ltd. 109,471 156,585 --
TQA Master Plus Fund, Ltd. 109,471 156,585 --
Tribeca Investments, L.L.C. 350,308 501,073 --
Triborough Partners QP, L.L.C. 29,192 41,755 --
UBS AG London Branch 336,442 481,240 --
UBS Warburg LLC 773,832 1,106,874 --
Value Realization Fund, L.P. 116,769 167,024 --
Vanguard Convertible Securities Fund, Inc. 190,918 273,085 --
Van Kampen Harbor Fund 145,962 208,781 --
Viacom Inc. Pension Plan Master Trust 3,094 4,425 --
Victory Capital Management 10,363 14,823 --
White Box Convertible Arbitrage Partners LP. 145,962 208,781 --
White River Securities L.L.C. 29,192 41,755 --
Yield Strategies Fund, I, L.P. 75,900 108,565 --
Zazove Hedged Convertible Fund L.P. 72,981 104,390 --
Zazove Income Fund L.P. 72,981 104,390 --
ZCM Asset Holding Company (Bermuda) Ltd. 5,838 8,350 --
Zurich Institutional Benchmarks Master Fund Limited 10,129 14,488 --
Zurich Master Hedge Fund 3,795 5,428
----------- ---------- ---------------
TOTAL 16,642,640 23,805,277 --
-------------------
(1) Amounts indicated may be in excess of the total amount registered due
to sales or transfers exempt from the registration requirements of the
Securities Act since the date upon which selling securityholders
provided information to us.
(2) Assumes that all shares covered by this prospectus will be sold by the
selling securityholders and that no additional shares of common stock
are bought or sold by any selling securityholder since the date that
it provided us with the information for the table.
None of the selling securityholders nor any of their affiliates, officers,
directors or principal equity holders has held any position or office or
has had any material relationship with us within the past three years,
except UBS Warburg LLC and UBS AG London Branch, an affiliate of UBS
Warburg. The selling securityholders purchased all of the notes in private
transactions on or after July 18, 2001. All of the notes were "restricted
securities" under the Securities Act.
Information concerning the selling holders may change from time to time and
any changed information will be set forth in amendments or supplements to
this prospectus if and when necessary. In addition, the conversion rate and
therefore, the number of shares of common stock issuable upon conversion of
the notes, is subject to adjustment under certain circumstances.
Accordingly, the aggregate principal amount of notes and the number of
shares of common stock into which the notes are convertible may increase or
decrease.
Description of capital stock
Our certificate of incorporation provides for authorized capital stock of
410,000,000 shares, including 400,000,000 shares of common stock, $.01 par
value per share, and 10,000,000 shares of preferred stock, $.01 par value
per share. No preferred stock is outstanding. 150,000,000 shares of common
stock are outstanding.
COMMON STOCK
VOTING
Holders of common stock have one vote per share on all matters submitted to
a vote of our stockholders, including the election of directors. Except as
otherwise required by law or provided in any resolution adopted by the
board of directors with respect to any series of preferred stock, the
holders of common stock will possess all voting power. Generally, all
matters voted on by stockholders must be approved by a majority or, in the
case of election of directors, by a plurality of the votes entitled to be
cast by all shares of common stock that are present in person or
represented by proxy, voting together as a single class, subject to any
voting rights granted to holders of any preferred stock. However, in the
case of amendments to our certificate of incorporation, the requisite
approval percentage will be 66 2/3% of the votes entitled to be cast by all
outstanding shares of common stock. Special voting rights may be granted to
holders of any preferred stock that we issue in the future. Our certificate
of incorporation will not provide for cumulative voting in the election of
directors.
DIVIDENDS
Subject to any preferential rights of any outstanding series of preferred
stock created by our board of directors from time to time, the holders of
shares of common stock will be entitled to cash dividends as may be
declared from time to time by the board of directors from funds available
therefor.
LIQUIDATION
Subject to any preferential rights of any outstanding series of preferred
stock created from time to time by our board of directors, upon our
liquidation, dissolution or winding up, the holders of shares of common
stock will be entitled to receive pro rata all our assets available for
distribution to these holders.
PREFERRED STOCK
Pursuant to our certificate of incorporation, our board of directors will
have the authority, without further action by our stockholders, to issue up
to 10,000,000 shares of preferred stock, in one or more series. Our board
shall determine the rights, preferences, privileges and restrictions of the
preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms
and the number of shares constituting any series or the designation of any
series. The issuance of preferred stock could adversely affect the voting
power of holders of common stock, and the likelihood that holders of
preferred stock will receive dividend payments and payments upon
liquidation may have the effect of delaying, deferring or preventing a
change in control of us, which could depress the market price of our common
stock. We have no present plan to issue any shares of preferred stock.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
A number of provisions in Delaware law and our certificate of incorporation
and bylaws may make it more difficult to acquire control of us. These
provisions could deprive our stockholders of opportunities to realize a
premium on the shares of common stock owned by them. Amendments to our
certificate of incorporation require approval of the holders of at least
66 2/3% of our outstanding common stock. In addition, these provisions may
adversely affect the prevailing market price of the common stock. These
provisions may:
o enhance the likelihood of continuity and stability in the composition
of the board and in the policies formulated by the board;
o discourage specified types of transactions which may involve an actual
or threatened change in control of us;
o discourage tactics that may be used in proxy fights; and
o encourage persons seeking to acquire control of us to consult first
with the board of directors to negotiate the terms of any proposed
business combination or offer.
BOARD OF DIRECTORS
Our certificate of incorporation and bylaws will provide that the number of
our directors shall be fixed from time to time by a resolution of a
majority of our board of directors. Our directors may be removed with or
without cause by holders of at least 66 2/3% of our outstanding common stock.
Subject to the rights of the holders of any outstanding series of preferred
stock, vacancies on the board of directors may be filled only by a majority
of the remaining directors, or by the sole remaining director, or by the
stockholders if the vacancy was caused by removal of the director by the
stockholders. This provision could prevent a stockholder from obtaining
majority representation on the board by enlarging the board of directors
and filling the new directorships with its own nominees.
ADVANCE NOTICE PROCEDURES FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our bylaws will provide that stockholders seeking to bring business before
an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice generally
must be delivered to or mailed and received at our principal executive
offices not less than 45 or more than 75 days prior to the first
anniversary of the date on which we first mailed our proxy materials for
the preceding year's annual meeting of stockholders. However, if the date
of the annual meeting is advanced more than 30 days prior to or delayed by
more than 30 days after the anniversary of the preceding year's annual
meeting, to be timely, notice by the stockholder may be delivered not later
than the close of business on the later of the 90th day prior to the annual
meeting or the 10th day following the day on which public announcement of
the date of the meeting is first made. The bylaws will also specify
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
Our certificate of incorporation provides that stockholders may not take
action by written consent.
PREFERRED STOCK
The ability of our board to establish the rights and issue substantial
amounts of preferred stock without the need for stockholder approval, while
providing desirable flexibility in connection with possible acquisitions,
financing, and other corporate transactions, may discourage, delay, defer,
or prevent a change in control of us.
AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK
The authorized but unissued shares of common stock are available for future
issuance without stockholder approval. These additional shares may be
utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions, and employee
benefit plans. The existence of authorized but unissued shares of common
stock could render more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or
otherwise.
DELAWARE GENERAL CORPORATION LAW SECTION 203
Our certificate of incorporation provides that we have opted out of the
provisions of Section 203 of the Delaware General Corporation Law. In
general, Section 203 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. Because we have opted out in the manner
permitted under Delaware law, the restrictions of this provision will not
apply to us.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company.
Plan of distribution
The selling securityholders and their successors, including their
transferees, pledgees or donees or their successors, may sell our common
stock into which the notes are convertible directly to purchasers or
through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
selling securityholders or the purchasers. These discounts, concessions or
commissions as to any particular underwriter, broker-dealer or agent may be
in excess of those customary in the types of transactions involved.
Our common stock into which the notes are convertible may be sold in one or
more transactions at fixed prices, at prevailing market prices at the time
of sale, at prices related to the prevailing market prices, at varying
prices determined at the time of sale, or at negotiated prices. These sales
may be effected in transactions, which may involve crosses or block
transactions:
o on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the common stock
may be listed or quoted at the time of sale;
o in the over-the-counter market;
o in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
o through the writing of options, whether the options are listed on an
options exchange or otherwise; or
o through the settlement of short sales.
In connection with the sale of our common stock into which the notes are
convertible or otherwise, the selling securityholders may enter into
hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of our common stock into which the
notes are convertible in the course of hedging the positions they assume.
The selling securityholders may also sell our common stock into which the
notes are convertible short and deliver these securities to close out their
short positions, or loan or pledge our common stock into which the notes
are convertible to broker-dealers that in turn may sell these securities.
The aggregate proceeds to the selling securityholders from the sale of our
common stock into which the notes are convertible offered by them will be
the purchase price of the common stock less discounts and commissions, if
any. Each of the selling securityholders reserves the right to accept and,
together with their agents from time to time, to reject, in whole or in
part, any proposed purchase of our common stock to be made directly or
through agents. We will not receive any of the proceeds from sale of the
common stock offered in this prospectus.
Our outstanding common stock is listed for trading on the New York Stock
Exchange.
In order to comply with the securities laws of some states, if applicable,
our common stock into which the notes are convertible may be sold in these
jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states our common stock into which the notes are
convertible may not be sold unless they have been registered or qualified
for sale or an exemption from registration or qualification requirements is
available and is complied with.
The selling securityholders and any underwriters, broker-dealers or agents
that participate in the sale of our common stock into which the notes are
convertible may be "underwriters" within the meaning of Section 2(11) of
the Securities Act. Any discounts, commissions, concessions or profit they
earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling securityholders who are
"underwriters" within the meaning of Section 2(11) of the Securities Act
will be subject to the prospectus delivery requirements of the Securities
Act. The selling securityholders have acknowledged that they understand
their obligations to comply with the provisions of the Exchange Act and the
rules thereunder relating to stock manipulation, particularly Regulation M.
In addition, any securities covered by this prospectus that qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold
under Rule 144 or Rule 144A rather than pursuant to this prospectus. A
selling securityholder may not sell any common stock described in this
prospectus and may not transfer, devise or gift these securities by other
means not described in this prospectus.
To the extent required, the common stock to be sold, the names of the
selling securityholders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set
forth in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement of which this
prospectus is a part.
We entered into a registration rights agreement for the benefit of holders
of the notes to register our common stock into which the notes are
convertible under applicable federal and state securities laws under
specific circumstances and at specific times. The registration rights
agreement provides for cross-indemnification of the selling securityholders
and us and their and our respective directors, officers and controlling
persons against specific liabilities in connection with the offer and sale
of the notes and the common stock, including liabilities under the
Securities Act. We will pay substantially all of the expenses incurred by
the selling securityholders incident to the offering and sale of the notes
and the common stock.
Legal matters
Fried, Frank, Harris, Shriver & Jacobson, a partnership including
professional corporations, New York, New York, will pass upon the validity
of the common stock offered under this prospectus. Fried, Frank, Harris,
Shriver & Jacobson has in the past provided, and may continue to provide,
legal services to ICN and its affiliates.
Experts
The financial statements as of December 31, 2000 and 2001 and for each of
the three years in the period ended December 31, 2001 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered under
this prospectus. This prospectus does not contain all of the information in
the registration statement and the exhibits and schedule to the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and to the
exhibits and schedule to registration statement. Statements contained in
this prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, we refer
you to the copy of the contract or other document filed as an exhibit to
the registration statement. Each of these statements is qualified in all
respects by this reference. You may inspect a copy of the registration
statement without charge at the SEC's principal office in Washington, D.C.,
and copies of all or any part of the registration statement may be obtained
from the public reference facilities of the SEC, located at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and 175 W. Jackson Blvd., Suite
900, Chicago, IL 60604, upon payment of fees prescribed by the SEC. The SEC
maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that
file electronically with the SEC. The address of the Web site is
http://www.sec.gov. The SEC's toll free investor information service can be
reached at 1-800-SEC-0330. Our registration statement, of which this
prospectus constitutes a part, can be downloaded from the SEC's web site
and can also be inspected and copied at the offices of The New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, and we file annual, quarterly and current reports,
proxy statements and other information with the SEC. You can inspect, read
and copy these reports, proxy statement sand other information at the
public facilities the SEC maintains at the locations described above.
Our telephone number is (714) 545-0100.
--------------------------------------
You should rely only on the information contained in this prospectus.
Neither we nor ICN has authorized anyone to provide you with information
different from that contained in this prospectus. Offers to sell the common
stock are being made, and offers to buy the common stock are being sought,
only in jurisdictions that permit offers and sales. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of the prospectus or of any
sale of the common stock.
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants..................... F-2
Balance Sheets at December 31, 2000 and 2001.......... F-3
Statements of Income for the years ended December 31,
1999, 2000 and 2001................................... F-4
Statements of Stockholder's Equity for the years ended
December 31, 1999, 2000 and 2001.................... F-5
Statements of Cash Flows for the years ended December
31,1999, 2000 and 2001................................ F-6
Notes to Financial Statements......................... F-7
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Ribapharm Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Ribapharm Inc. (the
"Company"), formerly a division of ICN Pharmaceuticals, Inc., at December
31, 2000 and 2001, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted 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 auditing standards generally accepted 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Orange County, California March 8, 2002, except for Note 1 as it relates to
the recapitalization, as to which the date is April 10, 2002
F-2
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 2001 Pro Forma
2000 2001 December 31, 2001
------------------------- ------------------
(unaudited)
ASSETS
Current assets:
Receivable from Schering-Plough.......... $ 3,600 $ 16,228 $ 16,228
---------- ---------- ----------
Total current assets....................... 3,600 16,228 16,228
Property, plant and equipment, net......... 6,253 10,406 10,406
---------- ---------- ----------
Total assets............................... $ 9,853 $ 26,634 $ 26,634
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT):
Current liabilities:
Trade payables........................... $ 1,210 $ 1,069 $ 1,069
Accrued liabilities...................... 1,863 4,346 4,346
---------- ---------- ----------
Total current liabilities.................. 3,073 5,415 5,415
6 1/2% subordinated notes due 2008......... -- -- 525,000
Commitments and contingencies Stockholder's equity (deficit):
Preferred stock, $0.01 par value; 10,000
shares authorized; none issued and outstanding -- -- --
Common stock, $0.01 par value; 400,000 shares authorized,
150,000 shares issued and outstanding at December 31, 2000
and
2001.................................. 1,500 1,500 1,500
Advances due from ICN.................... (130,478) (188,017) (188,017)
Receivable from ICN...................... -- -- (525,000)
Retained earnings........................ 135,758 207,736 207,736
---------- ---------- ----------
Total stockholder's equity (deficit).. 6,780 21,219 (503,781)
---------- ---------- ----------
Total liabilities and stockholder's equity
(deficit)................................ $ 9,853 $ 26,634 $ 26,634
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (IN THOUSANDS, EXCEPT
PER SHARE DATA)
Year Ended December 31,
1999 2000 2001
------------------------------------
Revenues......................... $109,592 $154,818 $143,622
-------- -------- --------
Costs and expenses:
Research and development....... 5,523 13,015 25,212
General and administrative..... 5,608 11,103 5,945
-------- -------- --------
Total costs and expenses.... 11,131 24,118 31,157
-------- -------- --------
Income from operations........... 98,461 130,700 112,465
Interest expense................. -- -- --
-------- -------- --------
Income before income taxes....... 98,461 130,700 112,465
Provision for income taxes....... 35,446 48,717 40,487
-------- -------- --------
Net income....................... $ 63,015 $ 81,983 $ 71,978
======== ======== ========
Basic and diluted earnings per $ 0.42 $ 0.55 $ 0.48
======== ======== ========
share............................
Shares used in computation..... 150,000 150,000 150,000
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Advances Retained
Common Stock due to earnings Stockholder's
Shares Amount (from) ICN (deficit) equity (deficit)
------------ ------------ ------------ ------------ ----------------
Balances at December 31, 1998 150,000 $1,500 $ 5,645 $ (9,240) $ (2,095)
Net income................ -- -- -- 63,015 63,015
Advances due from ICN, net -- -- (60,984) -- (60,984)
------ ------ ---------- -------- --------
Balances at December 31, 1999 150,000 1,500 (55,339) 53,775 (64)
Net income................ -- -- -- 81,983 81,983
Advances due from ICN, net -- -- (75,139) -- (75,139)
------ ------ ---------- -------- --------
Balances at December 31, 2000 150,000 1,500 (130,478) 135,758 6,780
Net income................ -- -- -- 71,978 71,978
Advances due from ICN, net -- -- (57,539) -- (57,539)
------ ------ ---------- -------- --------
Balances at December 31, 2001 150,000 $1,500 $ (188,017) $207,736 $ 21,219
======= ====== ========== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)
Year Ended December 31,
1999 2000 2001
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 63,015 $ 81,983 $ 71,978
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 303 684 2,205
Deferred income................................... (4,323) -- --
Deferred income taxes............................. 1,556 -- --
Schering-Plough receivable........................ -- (3,600) (12,628)
Increase in royalty receivable transferred to ICN. (26,119) (614) (19,351)
Change in trade payables and accrued liabilities.... 486 1,961 2,342
-------- -------- --------
Net cash provided by operating activities........... 34,918 80,414 44,546
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (53) (5,889) (6,358)
-------- -------- --------
Net cash used in investing activities............... (53) (5,889) (6,358)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash payments to ICN, net........................... (34,865) (74,525) (38,188)
-------- -------- --------
Net cash used in financing activities............... (34,865) (74,525) (38,188)
-------- -------- --------
Net change in cash and cash equivalents............. -- -- --
-------- -------- --------
Cash and cash equivalents at beginning of period.... -- -- --
-------- -------- --------
Cash and cash equivalents at end of period.......... $ -- $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
RIBAPHARM INC.
(FORMERLY A DIVISION OF ICN PHARMACEUTICALS, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Ribapharm Inc. (the "Company" or "Ribapharm") is a wholly-owned subsidiary
of ICN Pharmaceuticals, Inc. ("ICN") and seeks to discover, develop,
acquire and commercialize innovative products for the treatment of
significant unmet medical needs, principally in the antiviral and
anticancer areas. The Company's primary product, ribavirin, is an antiviral
drug that was licensed to Schering-Plough Ltd. ("Schering-Plough") for the
treatment of chronic hepatitis C ("HCV") in combination with
Schering-Plough's interferon alfa-2b and pegylated interferon alpha-2b.
Substantially all of the Company's revenue is currently derived from this
licensing agreement. The accompanying financial statements are derived from
the historical books and records of ICN and present the assets and
liabilities, results of operations and cash flows applicable to the
Company. The financial statements of the Company have been prepared for
inclusion in a registration statement relating to the public offering of a
portion of the common stock of Ribapharm (the "Offering"). The Company was
incorporated in April 2000. Prior to the Offering, the Company was operated
as a division of ICN. On August 7, 2000, substantially all of the assets
and liabilities of the former division of ICN were contributed to
Ribapharm. Upon this contribution, these assets were restated on
Ribapharm's books at the then historical book value of these assets on
ICN's books. Subsequent to the contribution, only the 100 shares of
Ribapharm common stock originally purchased by ICN were outstanding.
On April 10, 2002, Ribapharm effected a recapitalization of its capital
stock in the form of a 1,500,000 for 1.0 stock split. Additionally, the
certificate of incorporation provides for authorized capital stock of
410,000,000 shares, including 400,000,000 shares of Common Stock, $.01 par
value per share, and 10,000,000 shares of preferred stock, $.01 par value
per share. Upon completion of the Offering, no preferred stock will be
outstanding. The financial statements give effect to the recapitalization
and stock split, applied retroactively as if the recapitalization and stock
split occurred on December 31, 1996. Additionally, upon consummation of the
Offering the advances due from ICN will be transferred as a component of
permanent equity. Ribapharm will not be repaid any of the advances due from
ICN upon completion of the Offering.
The balance sheets have been prepared using the historical basis of
accounting and include all of the assets and liabilities specifically
identifiable to the Company. The statements of income include all revenue
and costs attributable to the Company, including a corporate allocation of
costs of shared services (including legal, finance, corporate development,
information systems and corporate office expenses). These costs are
allocated to the Company on a basis that is considered by management to
reflect most fairly or reasonably the utilization of services provided to
or the benefit obtained by the Company, such as the square footage,
headcount, or actual utilization. It is not practicable to determine the
costs specifically attributable to either ICN or Ribapharm with respect to
the US Attorney investigation or the SEC litigation, see Note 9.
Additionally, allocation methods based upon revenue, net income, assets,
equity or headcount are not reflective of the nature of the costs incurred.
Therefore, ICN and Ribapharm used a joint responsibility approach in
allocating these charges such that 50% of the costs and expenses, including
any reserve for settlement, are allocated to each of ICN and Ribapharm.
Management believes the methods used to allocate these amounts are
reasonable. However, the financial information included herein does not
necessarily reflect what the financial position or results of operation
would have been had the Company operated as a stand-alone public entity
during the periods covered, and may not be indicative of future results of
operations or financial position. For the years ended December 31, 1999,
2000 and 2001, such allocated costs amounted to $4,852,000, $10,098,000 and
$3,594,000, respectively, and are included in operating expenses. The
details of the allocation for the years ended December 31, 1999, 2000 and
2001, were as follows (in thousands):
Year ended December 31,
1999 2000 2001
------------------------------------
Legal expenses and professional fees...... $ 2,844 $ 7,637 $ 876
Facility and central service costs........ 1,963 2,425 1,967
Corporate development..................... -- -- 635
Information systems....................... 45 36 116
------- ------- -------
$ 4,852 $10,098 $ 3,594
======= ======= =======
For the years ended December 31, 1999, 2000 and 2001, the legal expenses
and professional fees allocation includes amounts related to the United
F-7
States Attorney investigation and SEC litigation of $2,728,000, $6,190,000
and $323,000, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property, Plant and Equipment: Property, plant and equipment is stated at
cost. The Company primarily uses the straight-line method for depreciating
property, plant and equipment over their estimated useful lives, which is 3
-- 10 years.
The Company follows the policy of capitalizing expenditures that materially
increase the lives of the related assets and charges maintenance and
repairs to expense. Upon sale or retirement, the costs and related
accumulated depreciation or amortization are eliminated from the respective
accounts and the resulting gain or loss is included in income.
Revenue Recognition: The Company earns royalties as a result of the sale of
product rights and technology to third parties. Royalty revenue is earned
at the time the products subject to the royalty are sold by the third
party. The Company recognizes as revenue up-front nonrefundable fees
associated with royalty and license agreements when all performance
obligations under the agreements are completed. Milestone payments
received, if any, related to scientific achievement are recognized as
revenue when the milestone is accomplished by the third party.
Research and Development: Research and development costs are expensed as
incurred.
Income Taxes: The Company's operations are included in the consolidated ICN
tax returns. Income tax provisions and benefits have been calculated on a
separate return basis for federal income tax purposes and based upon ICN's
worldwide apportionment California State rate of 1%. Prior to the
consummation of the Offering, the Company intends to enter into a tax
sharing agreement.
Deferred income taxes are calculated using the estimated future tax effects
or difference between financial statement carrying amounts and the tax
bases of assets and liabilities.
Concentration of Credit Risk: Financial instruments that subject the
Company to concentrations of credit risk consist principally of accounts
receivable. The Company performs an ongoing credit evaluation of its
customers' financial condition and generally does not require collateral to
secure accounts receivable. The Company's exposure to credit risk
associated with nonpayment is affected principally by conditions or
occurrences within its primary customer. The Company historically has not
experienced losses relating to accounts receivable from its primary
customer. All revenues for the years ended December 31, 1999 and 2000 and
97% for the year ended December 31, 2001 were derived from one customer.
Stock-Based Compensation: The Company participates in ICN's stock-based
compensation plans. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", the Company has elected to account for
stock-based compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), and related interpretations. The Company discloses the summary of pro
forma effects to reported net income for fiscal 1999, 2000 and 2001, as if
the Company had elected to recognize compensation cost based on the fair
value of the options granted by ICN to employees of the Company as
prescribed by SFAS No. 123.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Comprehensive Income: The Company has adopted the provisions of SFAS No.
130, Reporting Comprehensive Income, which establishes standards for the
reporting and display of comprehensive income and its components. For all
periods presented, there were no differences between comprehensive and net
income.
Earnings Per Share: Earnings per share has been calculated for all periods
presented using the 150,000,000 shares outstanding after the completion of
the recapitalization and stock split, which occurred on April 10, 2002.
New Accounting Pronouncements: In July 2001, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS No. 142 goodwill
will no longer be amortized but will be subject to annual impairment tests
in accordance with the statement. Other intangible assets will continue to
be amortized over their useful lives. In August 2001, the FASB issued SFAS
F-8
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed
of. The adoption of these standards will not have a material effect on the
Company's results of operations, financial position or cashflows.
3. AGREEMENT WITH SCHERING-PLOUGH:
On July 28, 1995, ICN entered into an Exclusive License and Supply
Agreement (the "License Agreement") with Schering-Plough. Under the License
Agreement, Schering-Plough licensed all oral forms of ribavirin for the
treatment of HCV in combination with Schering-Plough's interferon alfa-2b.
The License Agreement provided ICN an initial non-refundable payment and
future royalty payments from sales of ribavirin by Schering-Plough,
including certain minimum royalty rates. As part of the initial License
Agreement, ICN retained the right to co-market ribavirin capsules in the
European Union under its trademark Virazole. In 1998, ICN and the Company
received a one-time payment of $16,500,000 from Schering-Plough of which
the Company received $13,467,000 for settlement of past royalties due on
samples and free product distributed by Schering-Plough ($8,467,000) and
forgiveness of a $5,000,000 obligation to them. In addition, the Company
gave up the right to co-market in the European Union in exchange for an
increase in worldwide royalty rates.
In conjunction with the License Agreement, Schering-Plough entered into a
stock purchase agreement under which Schering-Plough purchased $42,000,000
of ICN's common stock upon the achievement of certain regulatory
milestones.
As part of ICN's contribution of Ribapharm's assets, on August 7, 2000, ICN
contributed to Ribapharm its rights under the License Agreement. In order
to facilitate the Offering, ICN commenced a tender offer and consent
solicitation with respect to its outstanding 8 3/4% senior notes due 2008
(the "Senior Notes"). As presently in effect, the covenants governing the
Senior Notes would prohibit ICN from contributing the Schering-Plough
license agreement to the Company. On March 7, 2002, ICN announced that it
had received the requisite consents necessary to remove these covenants and
entered into a supplemental indenture to this effect. However, the removal
of the covenants will not become operative until the tendered Senior Notes
are purchased by ICN. The purchase of the Senior Notes is expected to occur
concurrently with the completion of the Offering. It is a condition to the
completion of the Offering that the Senior Notes are purchased pursuant to
the tender offer.
Schering-Plough has informed ICN that it believes royalties paid under the
ribavirin license agreement should not include royalties on products
distributed as part of an indigent patient marketing program.
Schering-Plough claims that because it receives no revenue from products
given to indigent patients, it is not required to pay royalties on these
products under the ribavirin license agreement. The Company and ICN do not
agree with Schering-Plough's interpretation of the agreement. However, in
August 2001, Schering-Plough withheld approximately $11,628,000 from its
royalty payment relating to the second quarter of 2001. The amount withheld
was purportedly intended by Schering-Plough to be a retroactive adjustment
of royalties previously paid to ICN through the third quarter of 2000 on
products distributed as part of this indigent patient marketing program.
Since the beginning of the fourth quarter of 2000, Schering-Plough is
withholding on a current basis all royalty payments purportedly related to
this indigent patient marketing program. The Company recognized the
$11,628,000 of withheld royalty payments for the retroactive adjustment and
$3,050,000 of royalty payments withheld for the fourth quarter of 2000 and
the first quarter of 2001 as income. ICN has allocated this portion and
other amounts of the royalty receivable to Ribapharm. As of December 31,
2001, the Company has not established a reserve for this receivable because
in the opinion of the Company's management collectibility is reasonably
assured. Since the second quarter of 2001, the Company no longer recognizes
any of these withheld royalty payments as income as the Company can no
longer determine such amounts due to a lack of information from
Schering-Plough. ICN has given Schering-Plough written notice of its
intention to arbitrate this royalty payment dispute to collect these
royalties and prevent Schering-Plough from withholding royalty payments on
sales under the indigent patient marketing program in the future. The
parties expect to select an arbitrator and set an arbitration schedule
during April 2002. If ICN does not succeed in this alternative dispute
resolution process, we may have to write off all or a portion of this
receivable. If ICN does succeed, we will be entitled to receive the royalty
payments on these indigent sales withheld by Schering-Plough.
In November 2000, the Company and ICN entered into an agreement to provide
Schering-Plough with certain rights to license various products the Company
may develop. Under the terms of the agreement, Schering-Plough has the
option to exclusively license on a worldwide basis up to three compounds
that the Company may develop for the treatment of hepatitis C on terms
specified in the agreement. The option does not apply to Levovirin or
Viramidine. The option is exercisable as to a particular compound at any
time prior to the start of Phase II clinical studies for that compound.
Once it exercises the option with respect to a compound, Schering-Plough is
required to take over all developmental costs and responsibility for
regulatory approval for that compound. Under the agreement, Ribapharm will
receive royalty revenues based on the sales of licensed products. These
rates will increase upon the achievement of different milestones and may be
reduced upon the expiration of some of our patent rights.
Under the terms of the agreement, ICN also granted Schering-Plough rights
of first/last refusal to license compounds relating to the treatment of
infectious diseases (other than hepatitis C) or cancer or other oncology
indications as well as rights of first/last refusal with respect to
Viramidine (collectively, the "Refusal Rights"). Under the terms of the
Refusal Rights, if the Company intends to offer a license or other rights
with respect to any of these compounds to a third party, the Company is
required to notify Schering-Plough. At Schering-Plough's request, the
F-9
Company is required to negotiate in good faith with Schering-Plough on an
exclusive basis the terms of a mutually acceptable exclusive worldwide
license or other form of agreement on commercial terms to be mutually
agreed upon. If the Company cannot reach an agreement with Schering-Plough,
the Company is permitted to negotiate a license agreement or other
arrangement with a third party. Prior to entering into any final
arrangement with the third party, the Company is required to offer
substantially similar terms to Schering-Plough, which terms Schering-Plough
has the right to match.
If Schering-Plough does not exercise its option or Refusal Rights as to a
particular compound, the Company may continue to develop that compound or
license that compound to other third parties. The agreement with
Schering-Plough will terminate on the later of November 14, 2012 or the
termination of the 1995 license agreement with Schering-Plough. The
agreement was entered into as part of the resolution of claims asserted by
Schering-Plough against the Company, including claims regarding the
Company's alleged improper hiring of former Schering-Plough research and
development personnel and claims that the Company was not permitted to
conduct hepatitis C research.
4. OTHER LICENSE AGREEMENTS:
In June 2001, the Company licensed Levovirin(TM), a compound that is
currently in Phase I clinical trials for the treatment of hepatitis C, to
F. Hoffmann-La Roche ("Roche"). The Company received a one time licensing
fee and will be eligible to receive future payments based upon Roche
achieving certain milestones. The one time licensing fee was recognized as
revenue as the Company had completed all performance obligations under the
agreement. Roche will be responsible for all future development costs of
Levovirin. If Levovirin is successfully developed and receives regulatory
approval, the Company will be entitled to receive royalty payments.
Roche licensed IL-12, a developmental compound for the treatment of cancer
and allergies, to the Company. The Company will be responsible for the
development costs of this compound, milestone payments and royalties if the
compound is successfully developed.
In October 2001, ICN licensed Hepavir B from Metabasis Therapeutics, Inc.
Hepavir B is a compound being developed for the treatment of hepatitis B.
ICN contributed the Hepavir B license to Ribapharm. If the Company
successfully develops Hepavir B and receive regulatory approval, Metabasis
will be entitled to receive royalty payments upon commercialization of the
product. Under the terms of the license agreement, a $2,000,000
nonrefundable license fee was due of which $1,000,000 was paid in October
2001. The Company will pay the remaining $1,000,000 in equal installments
in April 2002 and October 2002. The $2,000,000 represents the valuation of
acquired in-process research and development for which no alternative use
exists and has been charged to operations as research and development
expense.
5. RELATED PARTY TRANSACTIONS:
These financial statements have been prepared for inclusion in a
registration statement relating to the planned initial public offering of a
portion of the common stock of Ribapharm. ICN will continue to beneficially
own at least 80% of the outstanding shares of common stock after the
Offering.
Ribapharm and ICN entered into an affiliation and distribution agreement,
which places restrictions on Ribapharm's ability to issue capital stock to
ensure that Ribapharm remains part of ICN's consolidated group for tax
purposes; a management services and facilities agreement, which details
ICN's agreement to provide Ribapharm with interim administrative and
corporate services; a lease agreement, which provides Ribapharm a long-term
lease in ICN's Costa Mesa facility; a confidentiality agreement, which
provides that Ribapharm and ICN will not disclose to third parties
confidential and proprietary information concerning each other; a
registration rights agreement, which grants ICN rights to require Ribapharm
to register shares of Ribapharm common stock owned by ICN; and a tax
sharing agreement, which will govern Ribapharm's commitment to remain part
of ICN's consolidated tax group.
The lease agreement with ICN provides for a lease payment of $5,000,000 per
year, plus consumer price index increases, for five years, with a five year
option to renew. The lease will be accounted for as an operating lease by
Ribapharm. In connection with the lease agreement, Ribapharm will pay, in
addition to the lease payment, ICN for its pro rata portion of common
charges for the building.
At the end of each quarter, all amounts receivable from Schering-Plough
relating to the License Agreement are transferred to ICN. Additionally, all
excess cash remaining after payment by Ribapharm of its costs is
transferred to ICN. ICN will retain all royalty payments from 2001,
including the royalty payment scheduled to be received in early March 2002.
Royalty payments that relate to fiscal years after 2001 will be divided
between Ribapharm and ICN on a pro-rata basis based on the closing date of
the Offering.
F-10
Following is a summary of transactions between Ribapharm and ICN for each
of the years ended December 31, 1999, 2000 and 2001 (in thousands):
December 31,
1999 2000 2001
--------------------------------
Allocation of costs of shared services
(Note 1).................................. $ 4,852 $ 10,098 $ 3,594
Allocation of current income tax expense.. 33,890 48,717 40,487
Increase in royalty receivable transferred
to ICN.................................... (26,119) (614) (19,351)
Cash transferred to ICN................... (73,607) (133,340) (82,269)
-------- ---------- --------
Total..................................... $(60,984) $ (75,139) $(57,539)
======== ========== ========
6. INCOME TAXES:
The income tax provision for each of the years ended December 31, 1999,
2000 and 2001, consists of the following (in thousands):
December 31,
1999 2000 2001
-------------------------------
Current...... $ 33,890 $ 48,717 $ 40,487
Deferred..... 1,556 -- --
-------- -------- --------
$ 35,446 $ 48,717 $ 40,487
======== ======== ========
The Company's operations are included in the consolidated ICN tax returns.
Income tax provisions and benefits have been calculated on a separate
return basis for federal income tax purposes and based upon ICN's worldwide
apportionment California State rate of 1%. Prior to the consummation of the
Offering, the Company intends to enter into a tax sharing agreement with
ICN.
The Company's effective tax rate for the years ended 1999 and 2001 was 36%.
This rate is equal to the federal statutory rate and ICN's worldwide
apportionment California State rate of 1%. The Company's effective tax rate
for 2000 was 37% and reflects $4,625,000 of expenses which are not tax
deductible.
7. DETAIL OF CERTAIN ACCOUNTS (IN THOUSANDS):
December 31,
2000 2001
-------------------
PROPERTY, PLANT AND EQUIPMENT, NET:
Equipment....................... $ 9,288 $ 15,646
Accumulated depreciation........ (3,035) (5,240)
------- --------
$ 6,253 $ 10,406
======= ========
ACCRUED LIABILITIES:
Payroll and related items....... $ 422 $ 311
Accrued consulting fees......... 1,441 4,035
------- --------
$ 1,863 $ 4,346
======= ========
8. COMMON STOCK PLANS:
ICN 1998 Stock Option Plan: During 2000, the Board of Directors and the
stockholders of ICN approved ICN's Amended and Restated 1998 Stock Option
Plan (the "Stock Option Plan"). The Stock Option Plan, as amended, provides
for the granting of options to purchase a maximum of 11,604,000 shares
(including 3,000,000 shares authorized in 1998) of ICN's common stock to
key employees, officers, directors, consultants and advisors of ICN.
Options granted under the Stock Option Plan must have an exercise price not
less than 85% of the fair market value of ICN's common stock at the date of
the grant, except non-employee director options which must have an exercise
price of 100% of the fair market value of ICN's common stock at the date of
the grant, and a term not exceeding 10 years. The options previously
granted under the Stock Option Plan vest ratably over a four-year period
from the date of the grant. Certain ICN employees who are employees of
Ribapharm were granted options under the Stock Option Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for options granted
under the Stock Option Plan. Had compensation cost for ICN's Stock Option
Plan been determined based on the fair value at the grant date for awards
in 1999, 2000 and 2001 consistent with the provisions of SFAS No. 123, the
Company's unaudited pro forma net income would have been $62,484,000,
$81,379,000 and $70,852,000 for the years ended December 31, 1999, 2000 and
2001, respectively.
F-11
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
1999 2000 2001
--------- --------- --------
Weighted-average life (years)............ 4.4 4.8 5.4
Volatility............................... 54% 55% 44%
Expected dividend per share.............. $ 0.36 $ 0.36 $ 0.36
Risk-free interest rate.................. 5.4% 5.8% 4.6%
Weighted-average fair value of options
granted.................................. $ 11.01 $12.07 $11.15
The following table sets forth information relating to ICN stock option
plans for the Company's employees during the years ended December 31, 1999,
2000 and 2001 (in thousands, except per share data):
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
Shares under option, December 31,
1998................................ 366 $ 24.81
Granted........................... 39 26.88
Exercised......................... (77) 11.63
Canceled.......................... (9) 45.24
--- -------
Shares under option, December 31,
1999................................ 319 27.67
Granted........................... 129 23.52
Exercised......................... (58) 15.76
Canceled.......................... -- --
--- -------
Shares under option, December 31,
2000................................ 390 28.07
Granted........................... 456 24.91
Exercised......................... (30) 10.72
Canceled.......................... (57) 37.18
--- -------
Shares under option, December 31,
2001................................ 759 $ 26.17
=== =======
Exercisable at December 31, 1999.... 192 $ 21.84
=== =======
Exercisable at December 31, 2000.... 179 $ 26.95
=== =======
Exercisable at December 31, 2001.... 184 $ 27.89
=== =======
The schedule below reflects the number of outstanding and exercisable
options for employees of the Company as of December 31, 2001 segregated by
price range (in thousands, except per share data):
Outstanding Exercisable
Weighted
Range of Weighted Weighted Average
Exercise Number of Average Number of Average Remaining
Prices Shares Exercise Price Shares Exercise Price Life (years)
----------------- -------------- -------------- -------------- --------------- ------------
$5.77 to $17.99 63 $ 11.31 63 $ 11.31 3.39
$18.25 to $26.88 401 $ 23.54 43 $ 23.99 8.92
$26.98 to $46.25 295 $ 32.90 78 $ 43.42 8.55
--- ---
759 184
=== ===
Ribapharm 2002 Stock Option and Award Plan: The 2002 Stock Option and Award
Plan (the "2002 Plan") was adopted by Ribapharm's Board of Directors and
approved by ICN as the sole shareholder. The 2002 Plan provides for the
granting of options to purchase a maximum of 22,500,000 shares of
Ribapharm's common stock to directors, officers, employees and consultants
of Ribapharm, ICN and ICN's other affiliates. Options granted under the
2002 Plan will have an exercise price not less than the fair market value
of Ribapharm's Common Stock at the date of grant and a term not exceeding
10 years. Options granted to Ribapharm's employees, officers, directors and
consultants will vest ratably over a four year period from the date of the
grant. Options granted to officers and employees of ICN will all vest
immediately upon being granted. No options will be exercisable until the
earlier of the completion of a spin-off of the Company, a change of control
of Ribapharm, or such other date as to be determined. The Stock Option and
Award Plan provides that the adoption of this plan is not to be construed
as amending, modifying or rescinding any previously approved incentive
arrangement. To date no options have been granted under the 2002 Plan.
F-12
At the completion of the Offering, the Company intends to grant stock
options to various employees, including its executive officers, under this
plan. An aggregate of up to 3,000,000 shares of common stock would be
issuable upon exercise of these options. In addition, the Company intends
to grant options to acquire 15,000 shares to each non-management director
at the time of the completion of the Offering. The exercise price of these
options will be the initial public offering price. The options will have a
term of 10 years. The vesting schedule of the options for our employees,
officers, directors and consultants will be 25% each year, commencing on
the first anniversary of grant. However, these options, even when vested,
will not be exercisable until the earlier of the completion of the spin-off
or September 30, 2003. This limitation on exercisability of options will
not apply if, prior to September 30, 2003, ICN becomes ineligible under US
tax laws from being able to effect the spin-off on a tax-free basis.
Ribapharm Employee Stock Purchase Program: The Employee Stock Purchase
Program was adopted by Ribapharm's Board of Directors. The Stock Purchase
Program allows Ribapharm's employees to purchase shares of the Ribapharm's
Common Stock on the New York Stock Exchange at the then current market
price. Employees electing to participate in this program will pay for these
purchases through payroll deductions.
9. COMMITMENTS AND CONTINGENCIES:
Contingencies: On August 11, 1999, the United States Securities and
Exchange Commission filed a civil complaint in the United States District
Court for the Central District of California captioned Securities and
Exchange Commission v. ICN Pharmaceuticals, Inc., Milan Panic, Nils O.
Johannesson, and David C. Watt, Civil Action No. SACV 99-1016 DOC (ANx)
(the "SEC Complaint"). The SEC Complaint alleges that ICN and the
individual named defendants made untrue statements of material fact or
omitted to state material facts necessary in order to make the statements
made, in the light of the circumstances under which they were made, not
misleading and engaged in acts, practices, and courses of business which
operated as a fraud and deceit upon other persons in violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The SEC Complaint concerns the status and disposition of ICN's
1994 New Drug Application for ribavirin as a monotherapy treatment for
chronic hepatitis C (the "NDA"). The FDA did not approve this new drug
application. The SEC Complaint seeks injunctive relief, unspecified civil
penalties, and an order barring Mr. Panic from acting as an officer or
director of any publicly-traded company, which would include the Company. A
pre-trial schedule has been set which requires the end of discovery by
August 1, 2002 and the commencement of trial on May 6, 2003. ICN has
advised the Company that ICN and the SEC appeared before a settlement
judge, for the purpose of settlement negotiations. ICN has advised the
Company that pending completion of these negotiations, the courts have
stayed discovery for 90 days. ICN has advised the Company that there can be
no assurance that the SEC litigation will be settled by mutual agreement or
what the amount of any settlement may ultimately be. ICN has advised the
Company that in the event a settlement is not reached, ICN will vigorously
defend any litigation.
Beginning in 1996, the Company received subpoenas from a Grand Jury in the
United States District Court for the Central District of California
requesting the production of documents covering a broad range of matters
over various time periods. The Company understood that the Company, Mr.
Panic, two current senior executive officers, a former senior officer, a
current employee, and a former employee of the Company were targets of the
investigation. The Company also understood that a senior executive officer
and a director were subjects of the investigation. The United States
Attorney for the Central District of California (the "Office") advised
counsel for the Company that the areas of its investigation included
disclosures made and not made concerning the 1994 hepatitis C monotherapy
NDA to the public and other third parties; stock sales for the benefit of
Mr. Panic following receipt on November 28, 1994 of a letter from the FDA
informing the Company that the 1994 hepatitis C monotherapy NDA had been
found not approvable; possible violations of the economic embargo imposed
by the United States upon the Federal Republic of Yugoslavia, based upon
alleged sales by the Company and Mr. Panic of stock belonging to Company
employees; and, with respect to Mr. Panic, personal disposition of assets
of entities associated with Yugoslavia, including possible misstatements
and/or omissions in federal tax filings. The Company has cooperated, and
continues to cooperate, in the Grand Jury investigation. A number of
current and former officers and employees of the Company were interviewed
by the government in connection with the investigation. The Office had
issued subpoenas requiring various current and former officers and
employees of the Company to testify before the Grand Jury. Certain current
and former officers and employees testified before the Grand Jury beginning
in July 1998. On March 15, 2001, the Company was notified by the Office
that a decision had been made to decline prosecution of all of the
individual targets and subjects of the Grand Jury investigation.
On December 17, 2001, ICN plead guilty in the United States District Court
for the Central District of California to a single felony count for
securities fraud for omitting to disclose until February 17, 1995, the
F-13
existence and content of the NDA. This guilty plea was entered pursuant to
a plea agreement with the Office to settle a six-year investigation. ICN
paid a fine of $5,600,000 and became subject to a three-year term of
probation. The plea agreement provides that the Office will not further
prosecute ICN and will not bring any further criminal charges against ICN
or any individuals, except one non-officer employee of ICN who will not
become an employee of the Company, relating to any matters that have been
the subject of the investigation and will close its investigation of these
matters.
The conditions of the probation require ICN to create a compliance program
to ensure no future violations of the federal securities laws and to
pre-clear with the FDA any public communication by ICN concerning any
matter subject to FDA regulation. The terms of the compliance program
include ICN retaining an expert to review its procedures for public
communications regarding matters subject to FDA regulation and to develop
written procedures for these communications. The compliance program also
requires preparation of an annual report by the expert on ICN's compliance
with the written procedures and annual certification by ICN management that
ICN is complying with the expert's recommendations. ICN has advised the
Company that these conditions of probation also apply to the Company
unless, after a spin-off or other change in control of the Company occurs,
the District Court grants the Company, upon application, early termination
of the probation. The Office may oppose any application the Company may
make and the District Court may not grant early termination of the
probation.
In connection with the US Attorney investigation and SEC litigation, ICN
recorded a reserve in the fourth quarter of 2000 of $9,250,000 to cover the
potential combined settlement liability and all other related costs, of
which $4,625,000 was allocated to Ribapharm. The $5,600,000 fine to be paid
by ICN is included in that reserve. There can, of course, be no assurance
that the SEC litigation will be settled by mutual agreement or what the
amount of any settlement may ultimately be. In the event that a settlement
is not reached, ICN will vigorously defend any litigation.
As a subsidiary controlled by ICN, any adverse judgment or settlement of
the pending SEC civil litigation against ICN could impose restrictions on
the conduct of the Company's business. Furthermore, the pending SEC civil
litigation seeks to bar ICN's chairman from acting as an officer or
director of any publicly traded company, which would include Ribapharm.
Benefit Plans: ICN has a defined contribution plan that provides all US
employees the opportunity to defer a portion of their compensation for pay
out at a subsequent date. ICN can voluntarily make matching contributions
on behalf of participating and eligible employees. Certain of the employees
of ICN who will become employees of Ribapharm participate in this plan. The
Company's expense related to such defined contribution plan was not
material in 1999, 2000 and 2001.
Product Liability Insurance: The Company is currently self-insured with
respect to product liability claims and could be exposed to possible claims
for personal injury resulting from allegedly defective products. While to
date no material adverse claim for personal injury resulting from allegedly
defective products has been successfully maintained against the Company, a
substantial claim, if successful, could have a negative impact on the
Company's results of operations and cash flows.
Long-term Incentive Plan: ICN has a long-term incentive plan, which
provides for the issuance of shares of ICN's common stock to senior
executives, certain of whom are employees of the Company. Shares issued
under the long-term incentive plan are restricted and vest over a four-year
period. Although certain current employees of the Company may be eligible
for grants under the plan, no such grants have been made.
Other: The Company has employment agreements with several key executives
which contain "change in control" benefits. Under the provisions of these
employment agreements, the Company may be obligated to pay the executive
officers approximately $3,000,000, based on present compensation, if these
executive officers were to terminate their services with the Company after
a "change in control". In addition, the vesting of options granted to the
executives would be accelerated.
10. DEBT:
In July 2001, ICN completed an offering of $525,000,000 of 6 1/2%
subordinated notes due 2008 (the "Notes"). The Notes, as they relate
specifically to ICN's obligation, are convertible into ICN's common stock
at a conversion rate of 29.1924 shares per $1,000 principal amount of
Notes. Upon completion of the Offering, Ribapharm will become jointly and
severally liable for the principal and interest obligations under the
Notes. Under an agreement between Ribapharm and ICN entered into on July
18, 2001, ICN has agreed to make all interest and principal payments
related to the Notes. However, Ribapharm will be responsible for these
payments to the extent ICN defaults under that agreement and does not make
these payments. In that event, the Company would have a claim against ICN
for any payments ICN does not make. The Company can only amend this
agreement, in a manner adverse to it, with the approval of holders of a
majority of its outstanding shares of common stock, excluding shares held
F-14
by ICN. In the event of a spin-off of Ribapharm, the Notes will be
convertible into common stock of both the Company and ICN. The converting
note holders would receive ICN's common stock and the number of shares of
Ribapharm common stock the note holders would have received had the Notes
been converted immediately prior to the spin-off. If the spin-off had
occurred as of December 31, 2001, the Notes would have been convertible
into the equivalent of approximately 23,264,000 shares of Ribapharm common
stock, which would be issuable by Ribapharm.
The pro forma balance sheet gives effect to the joint and several
obligation under the Notes to which the Company becomes liable upon
completion of the Offering. The Company will record the obligation under
the Notes as a receivable from ICN within stockholder's equity. This
receivable from ICN will remain as a component of the Company's equity to
the extent that an obligation for principal and interest for the Notes
remains outstanding or until ICN can no longer make principal and interest
payments as discussed above. The amount of the receivable from ICN will
increase as the Company accrues interest on the Notes. Correspondingly, the
amount of the receivable and the accrued interest will decrease as interest
payments are made by ICN. If the Company is required to make a principal or
interest payment because of a default by ICN and the Company is not
reimbursed for this payment, the Company will record a provision for
doubtful accounts against the receivable from ICN with an offsetting charge
to bad debt expense. To the extent ICN defaults on an interest payment
before the Notes become due, the Company would assess the overall
collectibility of the receivable from ICN, which may result in an
additional charge to bad debt expense.
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by us expected to be
incurred in connection with the issuance and distribution of the common
stock registered hereby, all of which expenses, except for the SEC
registration fee are estimated.
Securities and Exchange Commission registration fee........... $ 21,681
Legal fees and expenses....................................... 150,000
Accounting fees and expenses.................................. 10,000
Miscellaneous expenses........................................ 18,319
----------
Total.............................................. $ 200,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or
our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
o for any breach of duty of loyalty to us or to our stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; and
o for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law
or for any transaction from which the director derived an improper
personal benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors to the fullest extent permitted by Delaware
law. In addition, our amended and restated bylaws provide that:
o we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
o we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by
law, our amended and restated certificate of incorporation, our amended
and restated bylaws or agreements;
o we are required to advance expenses to our directors and executive
officers as incurred in connection with legal proceedings against them
for which they may be indemnified; and
o the rights conferred in the amended and restated bylaws are not
exclusive.
We intend to enter into indemnification agreements with each of our
directors and officers that would require us to indemnify them against
liabilities that may arise by reason of their status or service as
directors or officers and to advance their expenses incurred as a result of
any proceeding against them. However, we will not indemnify directors or
officers with respect to liabilities arising from willful misconduct of a
culpable nature.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the filing of this registration statement,
Ribapharm has not sold any of its securities without registration under the
Securities Act of 1933, except for the issuance of 100 shares of common
stock to ICN on May 1, 2000 for $1.00 per share pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following exhibits are filed with this registration statement.
EXHIBIT
NUMBER DESCRIPTION
------------------------------------------------------------
3.1 Amended and Restated Certificate of
Incorporation of Ribapharm Inc.
3.2 Amended and Restated Bylaws of Ribapharm Inc.
4.1 Specimen Common Stock Certificate
4.2 Indenture, dated as of July 18, 2001, by and
among ICN Pharmaceuticals, Inc., Ribapharm Inc.
and The Bank of New York, as trustee, relating
to the 61/2% Convertible Subordinated Notes due
2008. Previously filed as Exhibit 4.1 to ICN
Pharmaceuticals, Inc.'s Registration Statement
No. 333-67376 on Form S-3 and incorporated
herein by reference.
4.3 Registration Rights Agreement, dated as of July
18, 2001, by and among ICN Pharmaceuticals,
Inc., Ribapharm Inc. and UBS Warburg LLC.
Previously filed as Exhibit 4.2 to ICN
Pharmaceuticals, Inc.'s Registration Statement
No. 333-67376 on Form S-3 and incorporated
herein by reference.
5.1 Form of Opinion of Fried, Frank, Harris,
Shriver & Jacobson.
10.1 Form of Ribapharm Inc. 2002 Stock Option and
Award Plan. Previously filed as Exhibit 10.1
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.2 Form of Ribapharm Inc. Employee Stock Purchase
Program. Previously filed as Exhibit 10.2 to
Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.3 Form of Affiliation and Distribution Agreement
between ICN Pharmaceuticals, Inc. and Ribapharm
Inc. Previously filed as Exhibit 10.3 to
Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.4 Form of Management Services Agreement between
ICN Pharmaceuticals, Inc. and Ribapharm Inc.
Previously filed as Exhibit 10.4 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on
Form S-1 and incorporated herein by reference.
10.5 Form of Confidentiality Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc.
Previously filed as Exhibit 10.5 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on
Form S-1 and incorporated herein by reference.
10.6 Form of Registration Rights Agreement between
ICN Pharmaceuticals, Inc. and Ribapharm Inc.
Previously filed as Exhibit 10.6 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on
Form S-1 and incorporated herein by reference.
10.7 Form of Tax Sharing Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc.
Previously filed as Exhibit 10.7 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on
Form S-1 and incorporated herein by reference.
10.8 Form of Indemnification Agreement between
Ribapharm Inc. and its directors and executive
officers. Previously filed as Exhibit 10.8 to
Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.9 Form of Lease between ICN Pharmaceuticals, Inc.
and Ribapharm Inc. Previously filed as Exhibit
10.9 to Ribapharm Inc.'s Registration Statement
No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.10 Exclusive License and Supply Agreement between
ICN Pharmaceuticals, Inc. and Schering-Plough
Ltd. dated July 28, 1995. Portions of this
exhibit have been omitted pursuant to an
application for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933,
as amended. Previously filed as Exhibit 10.10
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.11 Amendment to Exclusive License and Supply
Agreement between ICN Pharmaceuticals, Inc. and
Schering-Plough Ltd. dated January 20, 1998.
Portions of this exhibit have been omitted
pursuant to an application for confidential
treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended. Previously
filed as Exhibit 10.11 to Ribapharm Inc.'s
Registration Statement No. 333-39350 on Form
S-1 and incorporated herein by reference.
10.12 Amendment to Exclusive License and Supply
Agreement between ICN Pharmaceuticals, Inc. and
Schering-Plough Ltd. dated July 16, 1998.
Portions of this exhibit have been omitted
pursuant to an application for confidential
treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended. Previously
filed as Exhibit 10.12 to Ribapharm Inc.'s
Registration Statement No. 333-39350 on Form
S-1 and incorporated herein by reference.
10.13 Agreement among Schering Corporation, ICN
Pharmaceuticals, Inc. and Ribapharm Inc. dated
as of November 14, 2000. Portions of this
exhibit have been omitted pursuant to an
application for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933,
as amended. Previously filed as Exhibit 10.13
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.14 Form of Interdebtor Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc. with
respect to the 6 1/2% Convertible Subordinated
Notes, due 2008. Previously filed as Exhibit
10.14 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and
incorporated herein by reference.
10.15 Exchange Agreement among Hoffmann-La Roche,
Inc., F. Hoffmann-La Roche Ltd., Ribapharm Inc.
and ICN Puerto Rico, a division of ICN Dutch
Holdings, B.V., dated as of June 29, 2001.
Portions of this exhibit have been omitted
pursuant to an application for confidential
treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended. Previously
filed as Exhibit 10.15 to Ribapharm Inc.'s
Registration Statement No. 333-39350 on Form
S-1 and incorporated herein by reference.
10.16 Transfer Agreement among F. Hoffmann-La Roche
Ltd., Hoffmann-La Roche, Inc., and ICN Puerto
Rico, dated as of June 29, 2001. Portions of
this exhibit have been omitted pursuant to an
application for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933,
as amended. Previously filed as Exhibit 10.16
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein
by reference.
10.17 License Agreement among Ribapharm Inc.,
Hoffmann-La Roche, Inc., F. Hoffmann-La Roche
Ltd., and as to certain provisions, ICN
Pharmaceuticals, Inc., dated as of June 29,
2001. Portions of this exhibit have been
omitted pursuant to an application for
confidential treatment pursuant to Rule 406
under the Securities Act of 1933, as amended.
Previously filed as Exhibit 10.17 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on
Form S-1 and incorporated herein by reference.
10.18 Development and License Agreement between
Metabasis Therapeutics, Inc. and ICN
Pharmaceuticals, Inc., dated as of October 1,
2001. Portions of this exhibit have been
omitted pursuant to an application for
confidential treatment pursuant to Rule 406
under the Securities Act of 1933, as amended.
Previously filed as Exhibit 10.18 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on
Form S-1 and incorporated herein by reference.
10.19 Employment Agreement between Ribapharm Inc. and
Johnson Yiu-Nam Lau dated as of April 17, 2002.
10.20 Employment Agreement between Ribapharm Inc. and
Thomas Stankovich dated as of April 17, 2002.
10.21 Employment Agreement between Ribapharm Inc. and
Roger D. Loomis, Jr. dated as of April 17, 2002.
10.22 Ribapharm Inc. 2002 Nonemployee Director
Retainer Fee Plan. Previously filed as Exhibit
10.20 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and
incorporated herein by reference.
10.23 Form of Underwriting Agreement, by and among
ICN Pharmaceuticals, Inc., Ribapharm Inc. and
the Underwriters named therein. Previously
filed as Exhibit 1.1 to Ribapharm Inc.'s
Registration Statement No. 333-39350 on Form
S-1 and incorporated herein by reference.
23.1 Form of Consent of Fried, Frank,
Harris, Shriver & Jacobson (included
in the opinion filed as Exhibit
5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on the signature
page hereto).
(b) FINANCIAL STATEMENT SCHEDULES
All the schedules are omitted because they are not required, are not
applicable or the information is included in the selected consolidated
financial data or notes contained in this Registration Statement.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement.
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any acts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high
and of the estimated maximum offering range may be reflected in the
form f prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of he offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against these liabilities (other
than the payment by the registrant of expenses incurred or paid by the
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by any director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether this indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of this issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Costa Mesa, State of
California, on the [13] th day of May, 2002.
RIBAPHARM INC.
By: /s/ Johnson Y.N. Lau, MD, PhD
-----------------------------------------
Name: Johnson Y. N. Lau, MD, PhD
Title: President and Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Roger D. Loomis, Jr. and Thomas Stankovich and each of them acting
individually, as his or her attorney-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be
signed by our said attorney to any and all amendments to said Registration
Statement, or any related registration statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in
the capacities indicated.
SIGNATURE TITLE DATE
------------------------------------ ------------------------------------------ ----------------------
/s/ Johnson Y.N. Lau, MD, PhD
------------------------------------ Chief Executive Officer May 9 2002
Johnson Y. N. Lau, MD, PhD (Principal Executive Officer)
/s/ Thomas Stankovich Senior Vice President and Chief Financial May 9 2002
------------------------------------ Officer (Principal Financial Officer and
Thomas Stankovich Principal Accounting Officer)
/s/ Hans Thierstein
------------------------------------
Hans Thierstein Chairman of the Board and Director May 9, 2002
/s/ Kim Campbell PC, QC
------------------------------------
Kim Campbell PC, QC Director May 9, 2002
/s/ Roger Guillemin, MD, PhD
------------------------------------
Roger Guillemin, MD, PhD Director May 9, 2002
/s/ Arnold Kroll
------------------------------------
Arnold Kroll Director May 9, 2002
/s/ Roberts A. Smith, PhD
------------------------------------
Roberts A. Smith, PhD Director May 9, 2002
/s/ John Vierling, MD
------------------------------------
John Vierling, MD Director May 9, 2002
EXHIBIT
NUMBER DESCRIPTION
--------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of
Ribapharm Inc.
3.2 Amended and Restated Bylaws of Ribapharm Inc.
4.1 Specimen Common Stock Certificate
4.2 Indenture, dated as of July 18, 2001, by and among ICN
Pharmaceuticals, Inc., Ribapharm Inc. and The Bank of
New York, as trustee, relating to the 61/2% Convertible
Subordinated Notes due 2008. Previously filed as
Exhibit 4.1 to ICN Pharmaceuticals, Inc.'s Registration
Statement No. 333-67376 on Form S-3 and incorporated
herein by reference.
4.3 Registration Rights Agreement, dated as of July 18,
2001, by and among ICN Pharmaceuticals, Inc., Ribapharm
Inc. and UBS Warburg LLC. Previously filed as Exhibit
4.2 to ICN Pharmaceuticals, Inc.'s Registration
Statement No. 333-67376 on Form S-3 and incorporated
herein by reference.
5.1 Form of Opinion of Fried, Frank, Harris, Shriver &
Jacobson.
10.1 Form of Ribapharm Inc. 2002 Stock Option and Award
Plan. Previously filed as Exhibit 10.1 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on Form S-1
and incorporated herein by reference.
10.2 Form of Ribapharm Inc. Employee Stock Purchase
Program. Previously filed as Exhibit 10.2 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on Form S-1
and incorporated herein by reference.
10.3 Form of Affiliation and Distribution Agreement between
ICN Pharmaceuticals, Inc. and Ribapharm Inc.
Previously filed as Exhibit 10.3 to Ribapharm Inc.'s
Registration Statement No. 333-39350 on Form S-1 and
incorporated herein by reference.
10.4 Form of Management Services Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc. Previously
filed as Exhibit 10.4 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.5 Form of Confidentiality Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc. Previously
filed as Exhibit 10.5 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.6 Form of Registration Rights Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc. Previously
filed as Exhibit 10.6 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.7 Form of Tax Sharing Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc. Previously
filed as Exhibit 10.7 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.8 Form of Indemnification Agreement between Ribapharm
Inc. and its directors and executive officers.
Previously filed as Exhibit 10.8 to Ribapharm Inc.'s
Registration Statement No. 333-39350 on Form S-1 and
incorporated herein by reference.
10.9 Form of Lease between ICN Pharmaceuticals, Inc. and
Ribapharm Inc. Previously filed as Exhibit 10.9 to
Ribapharm Inc.'s Registration Statement No. 333-39350
on Form S-1 and incorporated herein by reference.
10.10 Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering-Plough Ltd. dated
July 28, 1995. Portions of this exhibit have been
omitted pursuant to an application for confidential
treatment pursuant to Rule 406 under the Securities Act
of 1933, as amended. Previously filed as Exhibit 10.10
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein by
reference.
10.11 Amendment to Exclusive License and Supply Agreement
between ICN Pharmaceuticals, Inc. and Schering-Plough
Ltd. dated January 20, 1998. Portions of this exhibit
have been omitted pursuant to an application for
confidential treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended. Previously filed
as Exhibit 10.11 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.12 Amendment to Exclusive License and Supply Agreement
between ICN Pharmaceuticals, Inc. and Schering-Plough
Ltd. dated July 16, 1998. Portions of this exhibit have
been omitted pursuant to an application for
confidential treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended. Previously filed
as Exhibit 10.12 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.13 Agreement among Schering Corporation, ICN
Pharmaceuticals, Inc. and Ribapharm Inc. dated as of
November 14, 2000. Portions of this exhibit have been
omitted pursuant to an application for confidential
treatment pursuant to Rule 406 under the Securities Act
of 1933, as amended. Previously filed as Exhibit 10.13
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein by
reference.
10.14 Form of Interdebtor Agreement between ICN
Pharmaceuticals, Inc. and Ribapharm Inc. with respect
to the 6 1/2% Convertible Subordinated Notes, due
2008. Previously filed as Exhibit 10.14 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on Form S-1
and incorporated herein by reference.
10.15 Exchange Agreement among Hoffmann-La Roche, Inc., F.
Hoffmann-La Roche Ltd., Ribapharm Inc. and ICN Puerto
Rico, a division of ICN Dutch Holdings, B.V., dated as
of June 29, 2001. Portions of this exhibit have been
omitted pursuant to an application for confidential
treatment pursuant to Rule 406 under the Securities Act
of 1933, as amended. Previously filed as Exhibit 10.15
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein by
reference.
10.16 Transfer Agreement among F. Hoffmann-La Roche Ltd.,
Hoffmann-La Roche, Inc., and ICN Puerto Rico, dated as
of June 29, 2001. Portions of this exhibit have been
omitted pursuant to an application for confidential
treatment pursuant to Rule 406 under the Securities Act
of 1933, as amended. Previously filed as Exhibit 10.16
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein by
reference.
10.17 License Agreement among Ribapharm Inc., Hoffmann-La
Roche, Inc., F. Hoffmann-La Roche Ltd., and as to
certain provisions, ICN Pharmaceuticals, Inc., dated as
of June 29, 2001. Portions of this exhibit have been
omitted pursuant to an application for confidential
treatment pursuant to Rule 406 under the Securities Act
of 1933, as amended. Previously filed as Exhibit 10.17
to Ribapharm Inc.'s Registration Statement No.
333-39350 on Form S-1 and incorporated herein by
reference.
10.18 Development and License Agreement between Metabasis
Therapeutics, Inc. and ICN Pharmaceuticals, Inc., dated
as of October 1, 2001. Portions of this exhibit have
been omitted pursuant to an application for
confidential treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended. Previously filed
as Exhibit 10.18 to Ribapharm Inc.'s Registration
Statement No. 333-39350 on Form S-1 and incorporated
herein by reference.
10.19 Employment Agreement between Ribapharm Inc. and Johnson
Yiu-Nam Lau dated as of April 17, 2002.
10.20 Employment Agreement between Ribapharm Inc. and Thomas
Stankovich dated as of April 17, 2002.
10.21 Employment Agreement between Ribapharm Inc. and Roger
D. Loomis, Jr. dated as of April 17, 2002.
10.22 Ribapharm Inc. 2002 Nonemployee Director Retainer Fee
Plan. Previously filed as Exhibit 10.20 to Ribapharm
Inc.'s Registration Statement No. 333-39350 on Form S-1
and incorporated herein by reference.
10.23 Form of Underwriting Agreement, by and among ICN
Pharmaceuticals, Inc., Ribapharm Inc. and the
Underwriters named therein. Previously filed as
Exhibit 1.1 to Ribapharm Inc.'s Registration Statement
No. 333-39350 on Form S-1 and incorporated herein by
reference.
23.1 Form of Consent of Fried, Frank,
Harris, Shriver & Jacobson (included
in the opinion filed as Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on the signature page
hereto).