SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Mark One:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-27324
SYNAPTIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
215 College Road
Paramus, NJ
(Address of principal executive offices)
22-2859704
(I.R.S. Employer Identification No.)
07652
(Zip Code)
(201) 261-1331
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Rights to Purchase Series A Junior Convertible Preferred Stock,
par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting and non voting common
equity held by non-affiliates of the registrant was approximately $35,400,000 as
of February 16, 2001, based upon the closing price of the Common Stock as
reported on The Nasdaq Stock Market on such date. For purposes of this
calculation, shares of Common Stock held by directors, officers and stockholders
whose ownership in the registrant is known by the registrant to exceed five
percent have been excluded. This number is provided only for purposes of this
report and does not represent an admission by either the registrant or any such
person as to the status of such person.
As of February 16, 2001, there were 10,938,497 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Synaptic Pharmaceutical Corporation Proxy Statement, to be
filed not later than 120 days after December 31, 2000, in connection with the
registrant's 2001 Annual Meeting of Stockholders, referred to herein as the
"Proxy Statement," are incorporated by reference into Part III of this Report on
Form 10-K.
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000
Part I
Page
----
Item 1. Business............................................... 1
Item 2. Properties............................................. 20
Item 3. Legal Proceedings...................................... 20
Item 4. Submission of Matters to a Vote of Securityholders..... 21
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................ 23
Item 6. Selected Financial Data............................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results.......................... 24
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................... 33
Item 8. Financial Statements.................................. 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures........... 51
Part III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation................................ 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................. 51
Item 13. Certain Relationships and Related Transactions........ 51
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................... 52
(i)
Part I
Item 1. Business
Overview
Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a
drug discovery company utilizing G protein-coupled receptors ("GPCRs") as
targets for novel therapeutics. The Company is utilizing its large portfolio of
patented GPCR targets as a basis for the creation of improved drugs that act
through these targets. The Company and its licensees are first utilizing these
receptor targets to discover their function in the body and thus specific
physiological disorders with which they may be associated, and secondly, to
design compounds that can potentially be developed as drugs.
Since the Company's inception in 1988, it has developed significant
expertise in the molecular biology, pharmacology and medicinal chemistry of the
GPCR family. The Company selected this receptor family because GPCRs have been
shown to be attractive drug targets, as evidenced by the commercial availability
of drugs for a wide variety of therapeutic indications that work by means of
their interactions with GPCRs. The GPCR family is estimated to include
approximately 1,000 distinct receptors. Of these, approximately 500 receptors,
mostly from the groupings that include rhodopsin and secretin, are thought to be
useful targets for drug discovery. Accordingly, the Company believes that there
are substantial opportunities to use many receptors within the GPCR family as
targets for novel drugs. Today, the Company has been awarded over 110 patents
relating to its GPCR efforts.
For more than 12 years, we have based our drug discovery efforts on a
genomics program that discovers the genes that code for GPCRs. At the same time
that we initiated our genomics program we initiated a program in functional
genomics, a term which describes the technologies that are involved in
identifying the physiological function of a given receptor. Synaptic initiated
its functional genomics program in order to help prioritize which targets the
Company wanted to pursue in its drug discovery programs. Synaptic utilizes the
biological method, as opposed to the chemical method, in its functional genomics
efforts to identify the physiological functions of receptors. The biological
method involves first identifying the specific natural ligand with which the
receptor preferentially interacts. We have created a Universal Functional Assay
(UFA(TM)) which significantly reduces the time and the cost, compared to
traditional methods, for the identification of endogenous ligands. We believe
that knowing the endogenous ligand for the receptor provides a wealth of
pharmacological insights that are extremely important in determining whether a
given receptor will be a valuable drug discovery target.
We believe that our competitive advantage derives from being the first
Company to be involved in genomics and functional genomics, and from our ability
to identify endogenous ligands for newly discovered receptors. Being the first
Company in these areas has allowed us to accumulate a significant patent estate
around the more valuable parts of the GPCR family. Also by being one of the
pioneers of functional genomics, Synaptic has been able to discover the function
in humans of a number of GPCRs. We call the identification of the function of a
receptor in humans "target validation". To date we have validated the function
for the Alpha 1a adrenergic receptor and the serotonin 1F receptor in human
Phase II trials.
Once a GPCR has been identified as a valuable drug discovery target and
the endogenous ligand has been identified, the next step in the drug discovery
process is to identify compounds that interact with the chosen GPCR. The Company
has created a GPCR-biased chemical library of approximately 40,000 distinct
structures that can be used in high throughput screening. The "hits" from this
screening process become the
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starting points for chemical lead optimization
programs aimed at the discovery of potent, selective tool compounds. These
compounds can than be tested in animals in order to attempt to obtain
information as to the possible function of the GPCR. We call the step in the
process that leads to identification of the role of a GPCR in an animal model,
"proof of concept". To date our GPCR-biased chemical library and our licensees
libraries have yielded tool compounds that have allowed for proof of concept for
six GPCRs.
Gene discovery, functional genomics, high throughput screening and
chemical lead optimization are only a few of the steps in the multi-step process
of drug discovery. The Company has created and is utilizing a platform of
technologies that it calls SNAP Discovery in order to facilitate the creation of
new drugs. Synaptic has varying levels of expertise in the many steps of the
drug discovery and development process. In order to gain access to expertise
required to effect steps where it has limited capabilities, we utilize contract
research organizations, academic laboratories and pharmaceutical companies to
move our programs forward into the late preclinical, as well as the clinical
phases of the drug development process.
Over the first twelve years of the Company's existence we have entered
into a number of collaborative or licensing arrangements with pharmaceutical
companies. These arrangements include milestone payments and royalties to
Synaptic as compounds being developed by the collaborator or licensee move
through clinical development and into the market. The Company's business model
contemplates a combination of licensed programs being developed by others and a
number of internal programs that the Company is developing on its own as the
best means of creating value for its shareholders.
Certain discussions in this Report refer to various phases of
preclinical testing and clinical trials. For a description of these phases, see
"Government Regulation" below.
2
Business Model
Synaptic's business model involves the discovery and development,
together with its collaborative partners and licensees, of a broad array of
drugs based upon the Company's proprietary GPCR targets, and the licensing of
certain of its technologies to third parties who will use the technology in
their drug development efforts. In order to achieve its objectives we employ the
following strategies:
Business Strategy: To develop compounds initially through Phase II and
eventually take a product to the market.
The Company's business strategy is to integrate complementary drug
discovery and development functions into its existing SNAP Discovery platform
with the goal of eventually moving drugs through the clinical development
process and into the market.
Research Strategy: To discover and design potential drugs utilizing
Synaptic's large portfolio of patented GPCR targets and its small molecule
chemical library.
The principal research strategy of the Company is to discover and
design, or to have collaborative partners and other licensees discover and
design, potential drugs through the use of our GPCR technologies and expertise.
The Company and its licensees are using these technologies to identify and
optimize drug-like chemical series for further development.
Research Strategy: To develop a broad array of functional genomics
technologies.
The Company's second research strategy is to attempt to obtain "proof
of concept" in animal models of individual GPCRs. We have discovered, and will
continue to attempt to discover and integrate, technologies that will facilitate
an understanding of the various functions of specific GPCRs in the body.
Financial Strategy: To utilize the Company's patent estate, its
developed technologies and the capital markets as the basis for funding the
Company's drug discovery and development programs.
The Company's financial strategy is to create revenues from the
nonexclusive licensing to others of portions of its broad GPCR patent estate and
certain of the drug discovery technologies that it has created. Exclusive
licensing of our drug discovery programs or compounds may be used from time to
time and is determined on a project-by-project basis. The capital markets will
be utilized, when appropriate, in order to provide a greater source of funds to
help defray the costs of drug development.
Background
The Role of Receptors in Controlling Cellular Function
Most drugs work by binding to a particular target in the body, thereby
altering communications between cells or otherwise regulating cellular activity.
Therefore, the traditional path to discovering small molecule drugs typically
begins with the identification of a biological target that is believed to
regulate cellular communications or activities which could be altered to treat a
given disorder. A test or assay is then developed in order to discover compounds
with biological activity at this target. Such an assay facilitates the screening
of the target against a library of many compounds that have been synthesized in
the laboratory. Compounds that bind to the target protein and alter its activity
are referred to as "hits." Medicinal chemists
3
then optimize these hits until
they have sufficient potency to become lead candidates and then improve their
"drug-like" properties, such as absorption, stability, freedom from unwanted
activities, etc., with the goal of producing a successful drug development
candidate.
Chemists typically try to streamline the process by copying chemical
structures from known active compounds. Even taking this approach, however, the
number of possible compounds that could be made is too large to actually test
against even a single target using any available technology. Generally, the
search is further narrowed either by educated guessing or by in silico
methodologies. As a result of the uncertainty of this approach, traditional
methods can take many years or may fail entirely.
If it were possible to predict in advance which compounds would result
in a hit at a novel target, and which chemical changes would help optimize hits
into drug candidates, the drug discovery process would be vastly simplified.
Unfortunately, the traditional drug discovery process has had to rely on a trial
and error approach that has proven extremely expensive, inefficient and
unreliable. Further, making all of the trillions upon trillions of possible
small organic compounds, much less testing them all against even a single
target, would be impossible. Optimization of hits to achieve the delicate
balance of properties necessary for a successful drug is still a daunting task.
Most hits are never optimized into successful drugs despite years of effort.
Receptor-Based Drug Therapy
Many illnesses arise because of abnormalities in intercellular
communication, and the concept of receptor-based drug therapy was developed to
address this problem. The goal of receptor-based drug therapy is to develop
drugs that will interact with the receptor believed to be associated with the
targeted abnormality, thereby inhibiting or enhancing the cascade of events that
is mediated by the receptor. A number of receptor-based drugs have been
developed and are currently being marketed. During the past several years it has
been discovered that a single ligand, for instance serotonin, reacts with not
one but several receptors. The members of a group of receptors that interact
with the same ligand are called receptor subtypes. A major problem with
currently available receptor-based drugs is that they do not differentiate among
receptor subtypes and, while they may indeed interact with the targeted receptor
subtypes, thereby having some therapeutic effect, they may also interact with
other receptor subtypes within the same family as the targeted receptor
subtypes. These other receptor subtypes may be associated with other
physiological functions, and interactions of these drugs with them often result
in undesirable side effects. In addition, many of these drugs have limited
therapeutic utility because they must be used in sub-optimal doses in order to
minimize these side effects.
The Post-Genomics Era (Functional Genomics)
Over the past decade, most of the major pharmaceutical companies have
developed an interest in using cloned receptors in at least some of their drug
discovery efforts. This interest coincides with, and may in part be responsible
for, the sequencing of the entire human genome. While worldwide genomics efforts
have resulted in the development of new technologies which greatly accelerate
the pace at which new receptors are discovered, most of these discoveries to
date have been "orphan receptors," i.e., sequences without known natural
ligands. Without information regarding the natural ligands for these receptors,
it is difficult to hypothesize about their role in specific physiological
functions.
Over the next several decades, a principal focus of the biotechnology
and pharmaceutical industries will be to utilize the vast body of data being
generated with respect to cloned receptors to better understand
4
these receptors,
their physiological functions and their potential as targets for the design and
development of drugs that are safer and more efficacious than existing drugs. We
believe that our SNAP Discovery platform will play an important role in (i) the
discovery of new GPCRs, (ii) the elucidation of the functions of newly
discovered GPCRs and their potential as drug targets, and (iii) the design of
compounds that interact with these GPCRs.
Synaptic's GPCR SNAP Discovery Platform
The Company believes that its success in the discovery of GPCRs and
subsequently their function in the body, will enable it to further refine the
understanding of many disease processes. There is increasing evidence to suggest
that some disorders may actually involve the malfunctioning of one or more of a
variety of receptors included within different receptor families. For example,
in the case of obesity, there is pharmacological data indicating that NPY, MCH,
galanin and serotonin receptors are involved in controlling food intake. As a
result, more than one drug could be developed to treat obesity, but these drugs
would work through different biological mechanisms by exerting their therapeutic
effects by interacting with receptors belonging to different families. We
believe that our drug discovery and design technologies make it possible to
discover two or more separate drugs that could benefit distinct patient
populations whose symptoms (for example, obesity), while identical, stem from
different physiological disorders and therefore require different treatments.
Overview -- The Three Principal Steps
The Company's GPCR drug discovery and design technologies are employed
in three separate steps of the drug discovery process.
(i) Genomics. Genomics is the discovery and cloning of the genes.
Our genomics efforts are focused on genes for GPCRs. In this step, we employ
molecular biology technologies, such as genetic engineering, automated gene
sequencing and bioinformatics to discover and clone receptor genes. Many of the
component technologies in this step are proprietary to Synaptic.
(ii) Functional Genomics. The term "functional genomics" refers to
the technologies involved in the process of target validation. For example,
certain functional genomics technologies facilitate the discovery of the
endogenous ligands for receptors and, thus, the biological roles of these
receptors in the body. Others involve mapping the distribution of the receptor
gene or gene product in the body in both normal and diseased tissues. Others
involve assays that facilitate both the search for compounds that are selective
for the receptors of interest and the use of selective compounds in various
animal models of behavior and physiology in an attempt to provoke a response in
an animal model system that might indicate the role of these receptors in the
body. Observation of a response in an animal model constitutes a confirmation,
or "proof of concept," of a role of the receptor targeted by the selective
compounds and provides an opportunity to develop hypotheses concerning the
possible therapeutic utility of drugs that act at the receptors of interest.
There is no guarantee, however, that effects seen in animals will also occur in
humans. The downstream steps in the process of `target validation' include
preclinical testing and Phase I and Phase II clinical trials.
(iii) Chemistry: Compound Design and Optimization. Chemistry, as it
relates to Synaptic's GPCR drug discovery and design technology, involves two
principal activities: the design and synthesis of compounds that are selective
for the receptor of interest and that can thus be used in "proof of concept"
studies; and, following "proof of concept", the optimization of selective
chemical series to arrive at a
5
compound which has the desired pharmacological
profile and which can thus proceed through preclinical testing and clinical
trials.
Research and Drug Discovery Programs: Focus on G Protein-Coupled Receptor Family
The family of receptors to which we have chosen to apply our drug
discovery technologies is the G protein-coupled receptor family, so called
because the cascade of events that ensues within the receiving cell following
the occurrence of the ligand-receptor interaction is mediated by a class of
proteins called "GTP-binding regulatory proteins," or "G proteins," found within
the cell.
The Company chose to focus on the GPCR family because it believes that
this family provides the optimum opportunity for the exploitation of its drug
design technology. First, it is known that G protein-coupled receptors play a
major role in intercellular communication and that drugs that block
("antagonists") or enhance ("agonists") their activity have therapeutic utility.
Examples of these drugs include: Zantac(R), a histamine receptor antagonist for
the treatment of ulcers; Claritin(R), a histamine receptor antagonist for the
treatment of allergy; Imitrex(R), a serotonin receptor agonist for the treatment
of migraine headache; and Hytrin(R), an adrenergic receptor antagonist for the
treatment of hypertension and urinary retention resulting from benign prostatic
hyperplasia ("BPH"). Second, there is a large body of knowledge about some of
the basic structural elements of drugs that interact with these receptors that
has accumulated over the years from which the Company and its collaborative
partners and licensees can draw in beginning their drug discovery programs.
Third, the GPCR family is extremely large and, based on several estimates,
exceeds 1,000 receptor subtypes belonging to more than 45 known families and an
unknown number of additional families the natural ligands of which either have
not yet been identified or have been identified but have not been publicly
disclosed.
The Company's SNAP Discovery platform is being utilized or has been
utilized in a number of different research and drug discovery programs. Some of
these programs are currently being conducted by the Company independently.
Others have been conducted by the Company independently or in collaboration
with pharmaceutical companies but are currently inactive and available for
licensing by the Company. Finally, some of the programs are being conducted by
the Company in joint research programs with its collaborative partners or by the
Company's licensees.
Total operating expenses incurred by Synaptic for each of the fiscal
years 2000, 1999 and 1998 were $20,212,000, $19,652,000 and $19,576,000,
respectively, of which approximately $1,021,000, $1,759,000 and $7,182,000,
respectively, was funded by our collaborative partners during these years.
6
Current programs in which the Company's human receptor-targeted drug
design technology is being utilized include the following:
Summary of Research and Drug Discovery Programs
-------------------------------------------------------------------------------
Company Programs:
GPCR Targets Primary Indications Status
-------------------------------------------------------------------------------
MCH Obesity Preclinical
SUT - 4 Incontinence Preclinical
SCT - 11 Depression Preclinical
Trace Amines CNS Disorders Discovery
SMT - 3 Diabetes Discovery
-------------------------------------------------------------------------------
Research and Drug Discovery Programs
The Company is currently focusing its efforts on five drug discovery
programs. These drug discovery programs have been chosen because the Company
believes it has a competitive advantage in its intellectual property position,
its identification of the endogenous ligand or its identification of a novel
function for the GPCR target.
MCH
Current research in obesity indicates that the brain controls a
person's appetite through a complex network of signals that are exchanged
between the body and the brain. For over a decade, scientists at Synaptic have
been working with GPCRs, key components involved in this complex network of
signals. A number of receptors in the GPCR family have been hypothesized to be
potential targets for drug discovery programs. Included within these GPCRs are
the serotonin 2C receptor, the neuropeptide Y5 receptor, the galanin GPCR family
and the melanin concentrating hormone ("MCH") receptor(s), among others.
The medications most often used in the management of obesity are
commonly known as "appetite suppressant" medications. Appetite suppressant
medications promote weight loss by decreasing appetite or increasing the feeling
of satiety. These medications decrease appetite by increasing serotonin or
catecholamines--brain chemicals that affect appetite, as well as mood. Most
currently available appetite suppressant medications are approved by the U.S.
Food and Drug Administration (FDA) for short-term use, meaning a few weeks or
months. Sibutramine(R) is the only appetite suppressant medication approved for
longer-term use in significantly obese patients, although its safety and
effectiveness have not been established for use beyond one year.
Among the GPCR targets for obesity on which the Company is working is
the MCH receptor. The natural ligand, MCH, stimulates feeding in rats, and rats
lacking the MCH gene are lean. Synaptic identified the gene for the MCH receptor
by means of its SNAP Discovery platform through which it discovered the
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gene and
natural ligand. Synaptic's chemists have designed compounds that have allowed
proof of concept in animal feeding models. Preclinical development activities in
this program are being carried out.
Incontinence
A recent estimate of the prevalence of incontinence in the United
States reveals that it affects approximately 35 percent of women over the age of
50. Of the women who experience incontinence, 40-50 percent have symptoms of
urgency and frequency of urination or "urge incontinence." These symptoms are
often associated with a condition that is described as "overactive bladder."
Drugs that are currently used to treat urge incontinence such as the
anticholinergics Ditropan(R) and Detrol(R) are aimed at reducing bladder
activity by blocking muscarinic receptors in the bladder. These drugs are
associated with side effects such as dry mouth, dry skin, visual blurring,
nausea and constipation. The increasing prevalence of urge incontinence,
together with the side effect profile and limited efficacy of these drugs has
spurred the search for new mechanisms of action that may be useful targets for
the treatment of this disorder.
Scientists at Synaptic, utilizing their expertise in GPCRs, have
identified a novel receptor, the SUT-4 or Synaptic Urinary Target 4 receptor,
that is localized in the central nervous system. Using the Company's UFA(TM)
technology, the natural ligand for this receptor was then determined. Next, our
scientists were able to identify tool compounds using the SNAP Discovery
platform. These tool compounds, when studied in an in vivo rat model, inhibit
the sensory signals from the bladder that give rise to bladder contractions.
These studies indicate that we have identified a novel mechanism of action that
may be useful in the treatment of urge incontinence. Small molecule compounds
that act at SUT-4 are now being evaluated in several models of incontinence.
Depression
More than 19 million American adults (9.5% of the population) suffer
from depression. Treatment includes medication, short-term psychotherapy, or a
combination of both. Untreated depression is costly. A RAND Corporation study
found that patients with depressive symptoms spend more days in bed than those
with diabetes, arthritis, back problems, lung problems or gastrointestinal
disorders. Estimates of the total annual cost of untreated depression in 1990
ranged from $30-$44 billion in the United States alone. Of the $44 billion
figure, lost workdays account for close to $12 billion of this cost.
Additionally, more than $11 billion in other costs accrue from decreased
productivity due to symptoms that sap energy, affect work habits or cause
problems with concentration, memory and decision-making.
A number of different pharmacological approaches have been developed to
treat depression. The first generation of drugs shown to be effective in the
treatment of depression, such as the tricyclic antidepressants, lithium and the
monoamine oxidase inhibitors, have side effects that limit their effectiveness.
More recently, selective serotonin reuptake inhibitors (SSRIs), such as
Prozac(R), Zoloft(R), Paxil(R) and Celexa(R), have been shown to be highly
effective in the treatment of many forms of depression. A number of SSRI
compounds are now approved for marketing, and these drugs have captured a
significant market share. However, all of these currently available drugs have
deleterious side effects that may limit their use in many patients. In addition,
these drugs are effective only after a lag period of days to weeks following
initial administration. This lag time can be a serious problem, especially in
the depressed suicidal patient. Furthermore, there are a significant number of
patients who do not adequately respond to any of the currently available drug
therapies.
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Synaptic, utilizing its genomics and functional genomics expertise,
believes that it has identified a function in the body for one of its
proprietary GPCRs. Compounds that interact with this receptor, which we call
SCT- 11, when tested in vivo show similar effects to the SSRIs. Since this novel
approach targets a GPCR, we believe that compounds acting through this mechanism
may have a rapid onset of action and may be safer and more efficacious than
existing antidepressants. Our lead compound is in preclinical development.
Trace Amines
Scientists at Synaptic have discovered and cloned a new class of
receptors that are sensitive to "Trace Amines," a family of chemical messengers
thought to play a role in a variety of illnesses including depression,
psychosis, migraine, asthma, and hypertension. The Company is expanding its drug
discovery efforts to include this new class of GPCRs. Over the last 20 years,
several lines of evidence have pointed to trace amines as neurotransmitters and
neuromodulators, however, researchers had been unable to find Trace Amine
receptors in mammalian systems, until our discovery.
Trace Amines that act on the newly discovered receptors include
Tyramine, Tryptamine and (beta)-Phenylamine. Trace Amines are closely related to
biogenic amines, which include the classical neurotransmitters serotonin,
dopamine and norepinephrine. The receptors and transporters for biogenic amines
are the targets for a number of drugs for the treatment of depression, heart
disease, migraine headache, ulcers and allergy. We believe that the similarities
between Trace Amines and biogenic amines make Trace Amine receptors attractive
targets for discovering drugs and developing treatments for a wide variety of
disorders.
Using the SNAP Discovery platform, Synaptic has advanced several Trace
Amine receptors, and is using the small molecule selective leads it has
identified, into proof of concept studies for a variety of disorders.
Diabetes
Diabetes Mellitus is a significant health problem characterized by
hyperglycemia resulting from impairment in insulin secretion and/or insulin
action. Type II diabetes affects more than 16 million adults in the United
States and places these individuals at high risk for serious complications of
the eyes, nerves, kidneys and cardiovascular system. As obesity rates worldwide
are increasing, so too is the prevalence of diabetes. Points for possible
intervention in diabetes include the stimulation of insulin release from the
pancreas, either directly or through the central nervous system, inhibition of
glucose production in the liver, blockade of cholesterol absorption in the
intestines and alterations in the sensitivity of insulin receptors. Current
therapies for diabetes include insulin replacement via injections which must be
timed and dosed very carefully, insulin sensitizers such as Rezulin(R), which
can cause liver toxicity, and Avandia(R) and Actos(R), which are very new to the
market. Sulfonylureas and meglitinides such as Prandin(R) can cause hypoglycemia
and are contraindicated in kidney disease. Glucose production blockers such as
Glucophage(R) can cause GI irritation and are not recommended if liver, kidney
or heart disease are present and alpha glucosidase blockers such as Acarbose(R)
can cause GI cramping and flatulence.
Scientists at Synaptic, utilizing their expertise in GPCRs, have
identified a novel receptor that is localized predominantly in the human
pancreas. Using the Company's UFA(TM) technology, the natural ligand for this
receptor was identified. Taken together, the localization of this GPCR in the
human pancreas, as well
9
as the biology that is known about the endogenous
ligand, make this receptor a candidate for the discovery and development of a
drug that will stimulate glucose-dependent insulin release. Preliminary studies
at Synaptic have verified that the ligand for this receptor stimulates the
secretion of insulin from isolated rat pancreatic islets. We are currently
applying our SNAP Discovery platform to perform high throughput screening of the
Company's GPCR-biased compound library to identify small molecule tools that
will be useful in exploiting this novel mechanism of action.
Summary of Joint Research Programs
-------------------------------------------------------------------------------
Company Program Primary Indication
-------------------------------------------------------------------------------
Grunenthal Drug Discovery Pain
Kissei Gene Discovery, Cloning
and Proof of Concept Undisclosed
-------------------------------------------------------------------------------
Joint Research Programs
A key element of Synaptic's business strategy is to leverage resources
and to attempt to generate royalty-based revenues through collaborative and
licensing arrangements with pharmaceutical companies. The Company is currently
collaborating with two pharmaceutical companies pursuant to: (i) the Cooperation
Agreement dated January 12, 1998, as amended (the "Grunenthal Agreement"), with
Grunenthal GmbH ("Grunenthal") and (ii) the Collaborative Research and License
Agreement dated January 24, 2000 (the "Kissei Agreement"), with Kissei
Pharmaceutical Co., Ltd. ("Kissei"). Concurrently with the establishment of
these collaborative arrangements, Synaptic granted certain rights with respect
to its technology and patent rights to Grunenthal and Kissei. Set forth below is
a brief summary of these collaborative arrangements.
Grunenthal Collaboration
In January 1998, the Company and Grunenthal entered into the Grunenthal
Agreement pursuant to which they agreed to collaborate in the identification and
development of drugs for the alleviation of pain. The basis of the collaboration
has been the complementary technologies of the two companies. Synaptic has
cloned the genes for many receptors whose biological functions are not known.
Grunenthal has a broad expertise in various animal models of pain. The work of
the collaboration involves the coupling of the Company's human receptor-targeted
drug design technology with Grunenthal's expertise in pain-related technology in
an attempt first to identify receptors that could be targets of drugs that
alleviate pain and then to design and develop drugs targeted to these receptors.
Under the terms of the Grunenthal Agreement, Synaptic agreed to make
available to Grunenthal for evaluation all receptors (to the extent not already
licensed exclusively to a third party) cloned by Synaptic for which there is
evidence of a role in the mediation of pain or whose function has not yet been
elucidated but which were first cloned by Synaptic from tissues known to be so
implicated. Synaptic further agreed not to pursue these receptors, independently
or with any third party, as targets of potential drugs for the alleviation of
pain during the evaluation period applicable to the receptors or during the
period over which activities involving any such receptor are being jointly
conducted with Grunenthal.
10
The terms of the Grunenthal Agreement provide that the companies are
responsible for their own expenses incurred during the research stage of any
project undertaken as part of the collaboration but will each be responsible for
50% of all development costs incurred as part of the project with respect to any
resulting drug candidates up to the commencement of Phase III clinical trials.
Synaptic will retain manufacturing and marketing rights in the United States,
Canada and Mexico with respect to any drug candidates resulting from the
collaboration, while Grunenthal will retain manufacturing and marketing rights
in Europe, Central America (other than Mexico) and South America with respect to
any of these drug candidates. The two companies will share these rights in all
other countries. With respect to each country in its own territories and in the
shared territories in which it desires to market a drug candidate, each of
Synaptic and Grunenthal will be responsible for conducting Phase III clinical
trials, if required, for obtaining any necessary regulatory approval, and for
all associated costs.
Kissei Collaboration
In January 2000, the Company and Kissei entered into the Kissei
Agreement. Under the agreement Synaptic will conduct both a genomics and
functional genomics program on behalf of Kissei. As part of this program,
scientists at Synaptic are attempting to clone genes that code for G
protein-coupled receptors from tissues selected by Kissei and to identify the
ligands for these receptors. Kissei will attempt to discover and develop
compounds that act at these receptors. The term of the collaboration is three
years.
Under the terms of the Kissei Agreement, Kissei will provide the
Company with funding to support Synaptic's research. Kissei will have the
opportunity to select up to a specified number of receptors that are discovered
by Synaptic during the course of the collaboration and to receive an exclusive
worldwide license to use the selected receptors to develop, manufacture and
market drugs that act through those receptors. Kissei's license will convert to
a nonexclusive license in all countries except Japan following its achievement
of certain milestones. In consideration for this license, Kissei will be
required to pay the Company license fees, milestone payments and royalty
payments on any drug that reaches the marketplace.
Kissei has the right to terminate the Kissei Agreement effective in
January 2001, 2002 or 2003 upon at least three months' prior written notice. In
the event of this kind of termination, Kissei will not be required to provide
the Company with research funding that has not come due prior to termination.
11
Summary of Other Licensees' Programs
-------------------------------------------------------------------------------
Types and Numbers
of Synaptic's
Primary Issued U.S. and
Licensee Program Indications Foreign Patents
-------------------------------------------------------------------------------
Lilly Serotonin Various Receptor 41
Functional Use 1
Novartis NPY Obesity and
Cardiovascular
Disorders Receptor 23
Glaxo (1) Alpha 1a, 1b, 1d Unknown Receptor 7
PRI Alpha 1a, 1b, 1d BPH Receptor 7
Functional Use 9
-------------------------------------------------------------------------------
(1) Glaxo has a nonexclusive license to use Synaptic's alpha 1 receptors for
certain purposes, but is not required to provide Synaptic with any
information regarding such use unless it files an NDA for a
royalty-bearing compound under its agreement with Synaptic. Glaxo has not
notified Synaptic of an NDA filing.
Other Licensees' Programs
In addition to the licenses granted in connection with the Company's
ongoing collaborative arrangements, licenses to certain of the Company's
technology and patent rights have been granted to three other pharmaceutical
companies pursuant to: (A) the Research, Option and License Agreement dated
January 25, 1991, as amended (the "Lilly Agreement"), with Eli Lilly and Company
("Lilly"); (B) the Research and License Agreement dated August 4, 1994, as
amended (the "First Novartis Agreement") and the Research and License Agreement
dated May 31, 1996 (the "Second Novartis Agreement," and together with the First
Novartis Agreement, the "Novartis Agreements"), with Novartis Pharma AG
("Novartis"); and (C) the Option and License Agreement dated March 2, 1998 (the
"Glaxo Agreement"), with Glaxo Group Limited ("Glaxo"). The Lilly and Novartis
licenses were granted concurrently with the establishment by Synaptic of
collaborative arrangements with these companies. While the Novartis
collaboration and the Lilly collaboration ended in August 1998 and July 1999,
respectively, the associated licenses continue for the respective periods
provided in the Novartis Agreements and the Lilly Agreement.
Lilly Programs
Serotonin is one of the major neurotransmitters of the body. It affects
mood, sleep rhythms, sexual functions, appetite, temperature control,
gastro-intestinal movement and the cardiovascular, pulmonary and genito-urinary
systems. Drugs that inhibit or enhance the actions of serotonin have proven to
be effective in the treatment of an array of disorders, such as migraine
headache, depression and anxiety. However, many of the serotonergic drugs
currently available were designed without the use of cloned serotonin receptor
subtype genes and some of these drugs have unacceptable side effect profiles. It
is generally believed that the poor
12
side effect profiles stem from the
interaction of these drugs with multiple serotonin receptor subtypes. The
serotonin family is extremely large, comprising at least 14 receptor subtypes.
While each of these receptor subtypes may be implicated in a physiological
function distinct from the other subtypes, all of the receptor subtypes respond
to the neurotransmitter serotonin--and may be responding to nonsubtype-selective
drugs. As a consequence, a nonsubtype-selective drug intended to exert its
effects on one physiological function may in fact have the unintended
consequence of exerting its effects on other physiological functions, thereby
causing the undesirable side effects.
During the course of the collaboration, one of the serotonin receptors,
the serotonin 1F receptor, was validated as a target for the treatment of
migraine headaches. In addition to migraine headache, there are a wide variety
of additional applications for serotonin-based drugs, including potential
therapies for the treatment of obesity and novel receptor-based therapies for
the treatment of depression. Although many years of research have been committed
to the serotonin receptor system by dozens of research teams around the world,
the understanding of the biological role of most of the serotonin receptors is
still in a very early stage. Considerable work must be done in order to validate
many of the serotonin receptors as drug targets.
Under the terms of the Lilly Agreement, Lilly received an exclusive
worldwide license to use all but two of the Company's existing serotonin drug
discovery systems for the development and commercialization of drugs that affect
serotonergic transmission. The Company retained the unlimited right to use two
of its existing serotonin drug discovery systems and a limited right to use all
of its other serotonin drug discovery systems for cross-reactivity screening of
compounds in nonserotonin drug discovery programs.
The terms of the Lilly Agreement provide that Lilly is responsible for
all development, manufacturing, marketing and sales of drugs resulting from the
use of Synaptic's technology. The Company will be entitled to receive from Lilly
payments upon the achievement of certain drug development milestones and
royalties on sales of any drugs developed through the use of the Company's
technology. Royalties will be payable in respect of sales in any country over
the period commencing with the date of the first commercial sale of a drug and
ending with the expiration of related patent rights in that country. Lilly's
milestone and royalty payment obligations under the Lilly Agreement continue,
notwithstanding the expiration of the term of the collaboration.
Novartis Programs
From August 1994 to August 1998, the Company and Novartis engaged in a
collaboration directed primarily to the identification and development of NPY
drugs for the treatment of obesity and eating disorders. As part of its
collaboration with the Company, Novartis received an exclusive worldwide license
to use the Company's NPY receptor subtype drug discovery systems for the limited
purpose of developing and commercializing Y5 antagonists, as well as any other
NPY drugs, for the treatment of obesity and eating disorders, as well as
cardiovascular disorders. Novartis also received rights under several of the
Company's patents and patent applications. The license and rights remain
exclusive until August 2001, following which time they become nonexclusive.
The Y5 receptor was initially isolated by the Company's scientists from
rat hypothalamus. In laboratory tests, the activity of NPY and related peptides
on the Y5 receptor correlates with the ability of these peptides to stimulate
feeding in animals. As part of its collaboration with the Company, Novartis then
showed in proof of concept studies that several peptides that activated the Y5
receptor preferentially over other known NPY receptors increased food intake in
rats. Additional proof of concept studies by Synaptic and Novartis showed that
small molecules that selectively block the Y5 receptor significantly reduce food
13
intake in rats and reduce body weight after chronic administration. The
Company's collaboration with Novartis focused on discovering and developing a
potent and selective Y5 antagonist for the treatment of obesity. To our
knowledge Novartis is continuing its efforts to identify a Y5 antagonist as a
development candidate for this obesity program.
Under the license agreement Novartis will be required to make payments
to the Company upon the achievement by Novartis of certain drug development
milestones and, subject to certain limitations, to pay the Company royalties on
the sale of any drugs developed through the use of the Company's technology.
Glaxo Agreement
In March 1998, the Company and Glaxo entered into the Glaxo Agreement
pursuant to which the Company granted Glaxo a nonexclusive license under the
Company's alpha 1 adrenergic receptor patents to develop and sell alpha-1a
selective compounds for therapeutic applications other than the treatment of
BPH. Synaptic will be entitled to receive royalties on sales of any alpha-1a
selective drugs sold by Glaxo so long as Synaptic has an issued patent relating
to an alpha 1 adrenergic receptor subtype in at least one major market country
at that time.
The R.W. Johnson Pharmaceutical Research Institute
In September 2000, Synaptic and The R.W. Johnson Pharmaceutical
Research Institute, a Division of Ortho-McNeil Pharmaceutical, Inc. (PRI),
entered into an agreement in which Synaptic granted nonexclusive licenses
covering Synaptic's alpha-1 adrenergic receptors and benign prostatic
hypertrophy (BPH) patents. The license agreement between Synaptic and PRI
provides PRI the freedom to operate under Synaptic's functional use patents for
BPH and Synaptic's alpha-1 adrenergic receptor patents for all therapeutic
indications. In exchange for the nonexclusive licenses, PRI paid provide and
up-front licensing fee. PRI is required to make payments to Synaptic upon the
achievement of certain drug development milestones and to pay royalties on the
sales of any drugs developed, if any.
Other Agreements
It is the Company's practice to meet with pharmaceutical and
biotechnology companies on an on-going basis to discuss possible collaborations
on projects of mutual interest and/or out-licensing of Synaptic's technology on
a non-collaborative basis. At present, the Company is in the early stages of
discussing a number of possible arrangements. There can be no assurance,
however, that these discussions will result in the consummation of collaborative
or licensing arrangements.
Patents, Proprietary Technology and Trade Secrets
The Company's success depends, in part, on its ability to establish,
protect and enforce its proprietary rights relating to its technology. The
Company's policy is to seek, when appropriate, protection for its gene
discoveries, compound discoveries and other proprietary technology by filing
patent applications in the United States and other countries. The Company has
filed numerous patent applications both in the United States and in other
countries covering its inventions.
14
As of February 28, 2001, the Company had been issued a total of 76
patents worldwide relating to the genes that code for various G protein-coupled
receptors. These patents expire between 2008 and 2019. In addition, as of that
date additional patent applications relating to the Company's receptor gene
discoveries had been filed in the United States and in other countries.
In April 1995, the Company was issued its first functional use patent
in the United States. This patent covers the use of selective alpha-1a
antagonists for the treatment of BPH. As of February 28, 2001, the Company had
been issued a total of nine patents relating to the same subject matter in the
United States and in other countries. These patents expire between 2012 and
2015. Additional related or corresponding patent applications of the Company are
on file in the United States and in other countries.
In August 1999, the Company received a functional use patent in the
United States covering the use of selective serotonin 1D agonists for the
treatment of migraine headache. Additional patent applications relating to the
same subject matter have been filed in other countries.
The Company has also filed patent applications in the United States and
in other countries covering its neurotransmitter transporter discoveries.
Whereas receptors are protein molecules that bind to and are activated by
certain ligands, transporters are protein molecules that serve to terminate the
action of certain ligands by carrying them back into the cells from which they
are released. As of February 28, 2001, the Company had been issued nine patents
relating to six of these transporter discoveries in the United States and in
another country. Additional related or corresponding applications have been
filed by the Company in the United States and abroad. The Company is no longer
actively working on its transporter program. However, the Company is seeking to
license its transporter technology to others.
Additional patent applications covering the Company's compound
discoveries and other inventions have been filed in the United States and in
other countries and the Company expects to file additional patent applications
in the future.
The Company has granted certain rights under several of its patents and
patent applications to Lilly, Novartis, Grunenthal, Glaxo and Kissei.
Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, there can be no assurance
that patents will be granted with respect to any of the Company's patent
applications currently pending in the United States or in other countries, or
with respect to applications filed by the Company in the future. The failure by
the Company to receive patents pursuant to the applications referred to herein
and any future applications could have a material adverse effect on the Company.
There is no clear policy involving the breadth of claims allowed in
patents or the degree of protection afforded thereunder. Accordingly, no firm
predictions can be made regarding the breadth or enforceability of claims
allowed in the patents that have been issued to the Company or in patents that
may be issued to the Company in the future, and there can be no assurance that
claims in the Company's patents, either as initially allowed by the United
States Patent and Trademark Office or any of its non-United States counterparts
or as subsequently interpreted by courts inside or outside the United States,
will be sufficiently broad to protect the Company's proprietary rights.
On June 5, 2000, the Company filed suit in the United States District
Court for the District of New Jersey against M.D.S. Panlabs, Inc., a Washington
corporation, and Panlabs Taiwan Ltd., a Taiwanese corporation (collectively,
"Panlabs"). The suit alleges that Panlabs has infringed several issued U.S.
Patents
15
owned by the Company that relate to cloned human receptors and their use
in binding assays. The suit also alleges that Panlabs has been importing,
selling and offering to sell products of the Company's patented binding assay
processes to pharmaceutical companies and others in the United States and
particularly in New Jersey. See "Legal Proceedings" in PART I, Item 3, hereof.
Also, there can be no assurance that the Company's patents or patent
applications will not be challenged by way of interference proceedings or
opposed by third parties or that the Company will not be required to participate
in interference proceedings or oppose the patents or patent applications of
third parties in order to protect its rights. Interference and opposition
proceedings can be expensive to prosecute and defend. As of February 28,
2001, the Company was seeking to provoke an interference by the United States
Patent and Trademark Office between one of its patent applications and an issued
patent of a third party. There can be no assurance that the outcome of the
anticipated interference proceeding will be favorable to the Company. In the
event that the outcome of the interference proceeding were unfavorable to the
Company, the Company might not be able to practice the subject matter of the
relevant patent application in the United States. Accordingly, an unfavorable
outcome in an interference proceeding would have an adverse effect on the
Company. Even if the ultimate outcome of the interference proceeding is
favorable to the Company, the Company's participation could result in
substantial cost.
Further, no assurance can be given that patents issued to the Company
will not be infringed, invalidated or circumvented by others, or that the rights
granted thereunder will be commercially valuable or will provide competitive
advantages to the Company and its present or future collaborative partners or
licensees. Moreover, because patent applications in the United States are
maintained in secrecy until patents issue, because patent applications in
certain other countries generally are not published until more than eighteen
months after they are filed and because publication of technological
developments in the scientific or patent literature often lags behind the date
of these developments, the Company cannot be certain that it was the first to
invent the subject matter covered by its patents or patent applications or that
it was the first to file patent applications for these inventions.
The commercial success of the Company depends in part on the Company's
ability to operate without infringing patents and proprietary rights of third
parties. The Company is aware of a large number of patents and patent
applications of third parties that contain claims to genes that code for G
protein-coupled receptors, and/or compounds that interact with GPCRs. Patents
issued to others may preclude the Company from using or licensing certain of its
receptor discoveries or may preclude the Company or its collaborative partners
and other licensees from commercializing drugs developed with the use of the
Company's technology. The Company has acquired a license to use certain
technologies covered by a patent owned by Columbia University. The Columbia
University license is a worldwide nonexclusive license to manufacture, use, sell
and sublicense drugs derived from the use of certain recombinant DNA technology.
In consideration for this license, the Company has agreed to pay royalties on
sales of drugs developed through the use of the license. The term of the license
extends until the expiration of the last to expire of the patent rights covered
by the license. The Company has procured licenses to several technologies that
are used in several of its programs. The Company may be required to obtain
additional licenses to patents or other proprietary rights of other parties in
order to pursue its own technologies. No assurance can be given that any
additional licenses would be made available on terms acceptable to the Company,
if at all. The failure to obtain licenses could result in delays in the
Company's or its collaborative partners' or licensees' activities, including the
development, manufacture or sale of drugs requiring these licenses, or preclude
their development, manufacture or sale.
16
In some cases, litigation or other proceedings may be necessary to
assert infringement claims against others, to defend against claims of
infringement, to enforce patents issued to the Company, to protect trade
secrets, know-how or other intellectual property rights owned by the Company, or
to determine the scope and validity of the proprietary rights of third parties.
Such litigation could result in substantial costs to and diversion of resources
by the Company and could have a material adverse effect on the Company. There
can be no assurance that any of the Company's patents would ultimately be held
valid or that efforts to defend any of its patents, trade secrets, know-how or
other intellectual property rights would be successful. An adverse outcome in
litigation or in a proceeding could subject the Company to significant
liabilities, require the Company to cease using the subject technology or
require the Company to license the subject technology from the third party, all
of which could have a material adverse effect on the Company's business.
In addition to patent protection, the Company relies upon trade
secrets, proprietary know-how and continuing technological advances to develop
and maintain its competitive position. To maintain the confidentiality of its
trade secrets and proprietary information, the Company requires its employees,
consultants and collaborative partners to execute confidentiality agreements
upon the commencement of their relationships with the Company. In the case of
employees, the agreements also provide that all inventions resulting from work
performed by them while in the employ of the Company will be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will not be breached, that the Company would have adequate remedies
in the event of a breach or that the Company's trade secrets or proprietary
information will not otherwise become known or developed independently by
others.
Competition
Synaptic and its collaborators and licensees are pursuing areas of drug
discovery and development in which we believe there is a potential for extensive
technological innovation in relatively short periods of time. We operate in a
field in which new discoveries occur at a rapid pace. Competitors may succeed in
developing technologies or products that are more effective than ours or in
obtaining regulatory approvals for their drugs more rapidly than we are able to,
which could render our products obsolete or noncompetitive. Competition in the
pharmaceutical industry is intense and is expected to continue to increase. Many
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in research and development in the areas of obesity, depression, urology
and CNS disorders. Many of our competitors have substantially greater financial,
technical, marketing, and personnel resources. In addition, some of them have
considerable experience in preclinical testing, human clinical trials, and other
regulatory approval procedures. Moreover, certain academic institutions,
governmental agencies, and other research organizations are conducting research
in the same areas in which we are working. These institutions are becoming
increasingly aware of the commercial value of their findings and are more
actively seeking patent protection and licensing arrangements to collect
royalties for the technology that they have developed. These institutions may
also market competitive commercial products on their own or through joint
ventures and will compete with us in recruiting highly qualified scientific
personnel. There can be no assurance that a pharmacological method of treatment
for certain disorders, such as obesity or depression, will prove to be superior
to existing or newly discovered approaches to the treatment of those disorders.
Government Regulation
The development, manufacturing and marketing of drugs developed through
the use of the Company's technology are subject to regulation by numerous
Federal, state and local governmental authorities in the United States, the
principal one of which is the FDA, and by similar agencies in other
17
countries
(each of such Federal, state, local and other authorities and agencies, a
"Regulatory Agency"). Regulatory Agencies impose mandatory procedures and
standards for the conduct of certain preclinical testing and clinical trials and
the production and marketing of drugs for human therapeutic use. Product
development and approval of a new drug are likely to take many years and involve
the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include: (i) preclinical studies; (ii) the submission to the FDA
of a request for authorization to conduct clinical trials on an investigational
new drug (an "IND"); (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug for its intended use; (iv)
submission to the FDA of a new drug application (an "NDA"); and (v) review and
approval of the NDA by the FDA.
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
Clinical trials, which involve the administration of the
investigational drug to healthy volunteers or to patients under the supervision
of a qualified principal investigator, are typically conducted in three
sequential phases, although the phases may overlap with one another. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
"IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and may seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range
and/or to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all package
labeling. The results of the research and product development, manufacturing,
preclinical testing, clinical trials and related information are submitted to
the FDA in the form of an NDA for approval of the marketing and shipment of the
drug.
18
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company, its collaborative partners
or other licensees or the FDA may suspend clinical trials at any time if it is
believed that individuals participating in trials are being exposed to
unacceptable health risks. Even assuming that clinical trials are completed and
that an NDA is submitted to the FDA, there can be no assurance that the NDA will
be reviewed by the FDA in a timely manner or that once reviewed, the NDA will be
approved. The approval process is affected by a number of factors, including the
severity of the targeted indications, the availability of alternative treatments
and the risks and benefits demonstrated in clinical trials. The FDA may deny an
NDA if applicable regulatory criteria are not satisfied, or may require
additional testing or information with respect to the investigational drug. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations that could also delay, limit or prevent Regulatory Agency
approval. Even if initial FDA approval is obtained, further studies, including
post-market studies, may be required in order to provide additional data on
safety and will be required in order to gain approval for the use of a product
as a treatment for clinical indications other than those for which the product
was initially tested. The FDA will also require post-market reporting and may
require surveillance programs to monitor the side effects of the drug. Results
of post-marketing programs may limit or expand the further marketing of the
drug. Further, if there are any modifications to the drug, including changes in
indication, manufacturing process or labeling, an NDA supplement may be required
to be submitted to the FDA. Finally, delays or rejections may be encountered
based upon changes in Regulatory Agency policy during the period of drug
development and/or the period of review of any application for Regulatory Agency
approval for a compound. Moreover, because most of the Company's collaborative
partners and other licensees are generally responsible for preclinical testing,
clinical trials, regulatory approvals, manufacturing and commercialization of
drugs, the ability to obtain and the timing of regulatory approvals are not
within the control of the Company. There can be no assurance that the regulatory
framework described above will not change or that additional regulations will
not arise that may affect approval of a potential drug.
Each manufacturing establishment for new drugs is required to receive
some form of approval by the FDA. Among the conditions for approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
Prior to the commencement of marketing a product in other countries,
approval by the regulatory agencies is required, regardless of whether FDA
approval has been obtained for such product. The requirements governing the
conduct of clinical trials and product approvals vary widely from country to
country, and the time required for approval may be longer or shorter than the
time required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country has its own
procedures and requirements.
Delays in obtaining Regulatory Agency approvals could adversely affect
the marketing of any drugs developed by the Company or its collaborative
partners or other licensees, impose costly procedures upon the Company's or its
collaborative partners' or other licensees' activities, diminish any competitive
advantages that the Company or its collaborative partners or other licensees may
attain and adversely affect the Company's ability to receive revenues or
royalties. There can be no assurance that, even after these delays and
expenditures, Regulatory Agency approvals will be obtained for any compounds
developed by, in collaboration with or pursuant to licenses from the Company.
Moreover, even if Regulatory Agency approval for a compound is granted, this
approval may entail limitations on the indicated uses for which it may be
marketed. Further, approved drugs and their manufacturers are subject to
continual review, and discovery of
19
previously unknown problems with a drug or
its manufacturer may result in restrictions on such drug or manufacturer,
including withdrawal of the drug from the market. Regulatory Agency approval of
prices is required in many countries and may be required for the marketing of
any drug developed by the Company or its collaborative partners or other
licensees.
As with many biotechnology and pharmaceutical companies, the Company's
activities involve the use of radioactive compounds and hazardous materials. The
Company is subject to local, state and Federal laws and regulations relating to
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control.
Although the Company believes that its safety procedures for handling and
disposing of radioactive compounds and other hazardous materials used in its
research and development activities comply with the standards prescribed by
Federal, state and local regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
Employees
As of February 28, 2001, the Company had 97 full-time employees, 25 of
who hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 80 were
engaged directly in scientific research and 17 were engaged in general and
administrative functions. The Company's scientific staff members have
diversified experience and expertise in molecular and cell biology,
biochemistry, molecular pharmacology, medicinal, structural, combinatorial and
computer-assisted chemistry and information systems.
All employees have entered into agreements with the Company pursuant to
which they are prohibited from disclosing to third parties the Company's
proprietary information and assign to the Company all rights to inventions made
by them during their employment with the Company.
The Company's employees are not covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees is
good.
Item 2. Properties
The Company leases laboratory and office space in a facility at 215
College Road in Paramus, New Jersey. The total square footage currently leased
by the Company is 83,843. The lease will expire on December 31, 2015. The
Company is subleasing 5,000 square feet and 23,008 square feet of its premises
to two non-affiliated third parties under agreements expiring in 2001 and 2010,
respectively. The Company believes that the 55,835 square feet of space that it
currently occupies is adequate to accommodate the anticipated research and
administrative needs of the Company for the foreseeable future.
Item 3. Legal Proceedings
On June 5, 2000, the Company filed suit in the United States District
Court for the District of New Jersey against M.D.S. Panlabs, Inc., a Washington
corporation, and Panlabs Taiwan Ltd., a Taiwanese corporation (collectively,
"Panlabs"). The suit alleges that Panlabs has infringed several issued U.S.
Patents owned by the Company which relate to cloned human receptors and their
use in binding assays. The suit also alleges that Panlabs has been importing,
selling and offering to sell products of the Company's patented
20
binding assay
processes to pharmaceutical companies and others in the United States and
particularly in New Jersey.
In the suit, the Company seeks an injunction against Panlabs'
infringing activities, an award of damages for the Company's lost profits, the
destruction of data obtained by the infringement of its patents, and other
relief.
Company management believes that its complaint against Panlabs is well
founded and necessary to protect the value of its intellectual property
portfolio.
Management believes that the ultimate resolution of the above matter
could have a material impact on the Company's financial position, results of
operations and cash flows.
Item 4. Submission of Matters to a Vote of Securityholders
None
21
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22
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company trades on The Nasdaq Stock Market under
the symbol SNAP. As of February 20, 2001, there were approximately 2,850 holders
of record of the Company's Common Stock. No dividends have been paid on the
Common Stock to date, and the Company does not currently intend to declare or
pay dividends for the foreseeable future.
The following tables set forth the high and low last trade prices for
the Common Stock as reported by The Nasdaq Stock Market for the periods
indicated below.
2000 Fiscal Year
High Low
---- ----
1st Quarter 2000 16 1/2 5 13/16
2nd Quarter 2000 8 4 1/2
3rd Quarter 2000 7 3/8 5 3/32
4th Quarter 2000 7 3/8 5
1999 Fiscal Year
High Low
---- ----
1st Quarter 1999 19 1/4 6 1/16
2nd Quarter 1999 7 1/2 4 1/2
3rd Quarter 1999 9 4 1/2
4th Quarter 1999 7 1/4 4
23
Item 6. Selected Financial Data
The following table presents selected information relating to the
financial condition and results of operations of the Company for the past five
years. The following data should be read in conjunction with the Company's
financial statements.
(In thousands, except per share information)
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
Total revenues $ 3,836 $ 1,855 $ 9,352 $ 10,307 $ 9,481
Total expenses $ 20,212 $ 19,652 $ 19,576 $ 17,853 $ 14,319
Other income, net $ 2,110 $ 2,676 $ 3,731 $ 2,200 $ 2,205
Net loss $(13,859) $(15,121) $ (6,493) $ (5,346) $ (2,633)
Basic and diluted net
loss per share $ (1.28) $ (1.41) $ (0.61) $ (0.66) $ (0.35)
Total assets $ 37,571 $ 48,750 $ 64,696 $ 69,402 $ 40,355
Accumulated deficit $(64,789) $(50,930) $(35,809) $(29,316) $(23,970)
Stockholders' equity $ 34,529 $ 47,106 $ 62,676 $ 67,704 $ 39,040
-------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a
drug discovery company utilizing G protein-coupled receptors ("GPCRs") as
targets for novel therapeutics. The Company is utilizing its large portfolio of
patented GPCR targets as a basis for the creation of improved drugs that act
through these targets. The Company and its licensees are first utilizing these
receptor targets to discover their function in the body and thus specific
physiological disorders with which they may be associated, and secondly, to
design compounds that can potentially be developed as drugs.
The Company is currently collaborating with Grunenthal GmbH
("Grunenthal") and Kissei Pharmaceutical Co., Ltd. ("Kissei"). Concurrently with
the establishment of the collaborative arrangement, Synaptic granted Grunenthal
a license to certain of its technology and patent rights.
In addition to its ongoing collaborative arrangements, other
pharmaceutical companies have licenses to certain of our technology and patent
rights. For convenience of reference, the agreements pursuant to which the
licenses referred to in this paragraph and the preceding paragraph have been
granted are collectively referred to as the "License Agreements."
Since inception, the Company has financed its operations primarily
through the sale of its stock, through contract and license revenue under
certain of its License Agreements, and through interest income and capital gains
resulting from its investments. We also have received monies through government
grants under the Small Business Innovative Research ("SBIR") program of the
National Institutes of Health and through the sale of a portion of New Jersey
State net operating losses carryforwards.
24
Under the License Agreements, the Company may receive one or more of
the following types of revenue: license revenue, contract revenue, royalty
revenue or revenue from the sales of drugs. License revenue represents
non-refundable payments for a license to one or more of our patents and/or a
license to our technology. Payments for licenses are recognized as they are
received or, if earlier, when they become guaranteed, provided they are
independent of any continuing research activity, otherwise, they are recognized
pro-rata during the term of the related research agreement in accordance with
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".
Contract revenue includes research funding to support a specified number of
Synaptic's scientists and payments upon the achievement of specified research
and development milestones. Research funding revenue is recognized ratably over
the period of the collaboration to which it relates and is based upon
predetermined funding requirements. Research and development milestone payment
revenue is recognized when the related research or development milestone is
achieved. Under each of the License Agreements (other than the Grunenthal
Agreement), we are entitled to receive royalty payments based upon the sales of
drugs that may be developed using our technology or that may be covered by our
patents. Under the Grunenthal Agreement, Synaptic has development and marketing
rights in certain geographical areas with respect to drugs, if any, that are
jointly identified as part of the collaboration with Grunenthal. Accordingly, we
may receive revenue from sales in our geographical areas (as defined) of drugs
if we market them independently, or we may receive royalty payments if we
license our marketing rights to a third party. To date, we have not received
either royalty revenue or revenue from the sales of drugs and we do not expect
to receive such revenues for a number of years, if at all.
To date, the Company's expenditures have been for research and
development related expenses, general and administrative related expenses, fixed
asset purchases and various patent related expenditures incurred in protecting
our technologies. Synaptic has been historically unprofitable and had an
accumulated deficit of $64,789,000 at December 31, 2000. We expect to continue
to incur operating losses for a number of years and may not become profitable,
unless and until we receive royalty revenue or revenue from sales of drugs that
may be developed with the use of our technology or patent rights.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2000, 1999 and 1998
Revenues. The Company recognized revenue of $3,836,000, $1,855,000 and
$9,352,000 for the fiscal years of 2000, 1999 and 1998, respectively. The
increase of $1,981,000 from 1999 to 2000 was attributable to an increase in
license revenue of $2,750,000 resulting primarily from the grant of a
non-exclusive license to certain of Synaptic's technology and patent rights,
offset by a reduction in contract revenue of $769,000 resulting from the net
reduction in the number of scientists being funded under collaborative
arrangements.
The decrease of $7,497,000 from 1999 to 1998 was attributable primarily
to the following: a net decrease in contract revenue of $5,347,000 resulting
from the contractual termination of three of our collaborative arrangements and
the receipt in 1998 of $2,000,000 of non-recurring license revenue under the
Glaxo Agreement.
Research and Development Expenses. The Company incurred research and
development expenses of $14,360,000, $14,592,000 and $15,274,000 for the fiscal
years of 2000, 1999 and 1998, respectively. The decrease of $232,000, or 2%,
from 1999 to 2000 was attributable primarily to a net decrease in headcount and
a corresponding decrease in supplies which were partially offset by an
increase in preclinical testing costs.
25
The decrease of $682,000, or 4%, from 1998 to 1999 was attributable
primarily to a reduction in compensation and fringe benefit expenses due to a
net decrease in headcount as well as corresponding reductions in travel and
supply costs, which were partially offset by increased rent expense for
facilities resulting from previously contracted increases in square footage.
General and Administrative Expenses. The Company incurred general and
administrative expenses of $5,852,000, $5,060,000 and $4,302,000 for the fiscal
years of 2000, 1999 and 1998, respectively. The increase of $792,000, or 16%,
from 1999 to 2000 was attributable primarily to the following: an increase in
rent expense; an increase in consulting and finder's fees associated with
business development activities; and an increase in legal and patent costs.
The increase of $758,000, or 18%, from 1998 to 1999 was attributable
primarily to increases in rent expense resulting from previously contracted
increases in square footage and compensation and fringe benefit expenses.
Other Income, Net. The Company recorded other income of $2,110,000,
$2,676,000 and $3,731,000 for the fiscal years of 2000, 1999 and 1998,
respectively. The decrease of $566,000 from 1999 to 2000 in other income was
primarily due to lower average cash, cash equivalent and marketable securities
balances during 2000 as a result of the utilization of these resources to fund
Synaptic's operations.
The decrease of $1,055,000 from 1998 to 1999 in other income was
primarily due to lower interest income as a result of lower average cash, cash
equivalent and marketable securities balances during 1999.
Income Tax Benefit. In November 2000, the Company recognized $407,000
from the sale of a portion of its state net operating loss carryforwards.
Net Loss and Basic and Diluted Net Loss Per Share. The net loss
incurred by the Company was $13,859,000 ($1.28 per share), $15,121,000 ($1.41
per share) and $6,493,000 ($0.61 per share) for the fiscal years of 2000, 1999
and 1998, respectively. The decrease in net loss per share of $0.13 resulted
primarily from higher revenues and an income tax benefit, which were partially
offset by higher total operating expenses and lower other income during the year
ended December 31, 2000, as described above.
The increase in net loss per share of $0.80 from 1998 to 1999 resulted
primarily from the recognition of lower total revenue and of higher total
expenses.
Operating Trends. Revenues may vary from period to period depending on
numerous factors including the timing of revenue earned under the License
Agreements and revenue that may be earned under future collaborative and/or
license agreements. Synaptic will recognize revenue under its research and
licensing agreement with Kissei Pharmaceutical Co., Ltd. during 2001 and expects
to recognize additional revenues under this agreement during 2002. Under the
terms of certain of the License Agreements, revenues may be recognized if
certain milestones are achieved. We continue to assess the opportunity for
obtaining additional funding under new collaborative and/or license agreements
as well as obtaining financing through equity transactions. We continue to
monitor our spending level in order to insure that we have enough cash to last
through the year 2002.
Preclinical expenses are expected to increase as Synaptic moves its own
drug discovery projects forward.
26
Legal expenses are expected to increase as a result of a suit filed by
the Company. See "Legal Proceedings" in PART I, Item 3, hereof.
Other income, net is expected to decline in 2001 and 2002 as existing
funds are utilized to support the Company's operations. This decline will be
partially offset by rental income that we expect to recognize under our sublease
agreements.
The Company is pursuing further sales of its State net operating loss
("NOL") carryforwards and its State research and development credits under the
State of New Jersey's Technology Business Tax Certificate Transfer Program (the
"Program"). No assurance can be given, however, as to the amount of NOL
carryforwards that may be sold under the Program in any one year. External
factors that may have an effect on future NOL sales are such items as:
limitations imposed by State law, the availability of buyers and related demand.
Property and equipment spending may vary from period to period
depending on numerous factors, including the number of collaborations in which
we are involved at any given time and replacement due to normal wear and
obsolescence. Equipment spending in 2001 is expected to increase from that of
2000.
At December 31, 2000, Synaptic held marketable securities with an
estimated fair value of $29,565,000. Synaptic's primary interest rate exposure
results from changes in short-term interest rates. We do not purchase financial
instruments for trading or speculative purposes. All of the marketable
securities held by Synaptic are classified as available-for-sale securities. The
following table provides information about marketable securities held by
Synaptic at December 31, 2000:
Estimated
Principal Amount and Weighted Average Stated Rate Fair
by Expected Maturity Value
---------------------------------------------------- ---------
(000's) 2001 2002 2003 Total (000's)
---------------------------------------------------- ---------
Principal $20,440 $2,500 $6,500 $29,440 $29,565
Weighted
Average
Stated
Rates 7.91% 6.50% 5.77% 7.31% --
---------------------------------------------------- ---------
The stated rates of interest expressed in the above table may not
approximate the actual yield of the securities which Synaptic currently holds
since we have purchased some marketable securities at other than face value.
Additionally, some of the securities represented in the above table may be
called or redeemed, at the option of the issuer, prior to their expected due
dates. If early redemptions occur, we may reinvest the proceeds realized on such
calls or redemptions in marketable securities with stated rates of interest or
yields that are lower than those of current holdings, affecting both future cash
interest streams and future earnings.
In addition to investments in marketable securities, the Company places
some of its cash in money market funds in order to keep cash available to fund
operations and to hold cash pending investments in marketable securities.
Fluctuations in short term interest rates will affect the yield on monies
invested in money market funds. These fluctuations can have an impact on future
cash interest streams and future earnings of the Company, but the impact of such
fluctuations are not expected to be material.
The Company does not believe that inflation has had a material impact
on its results of operations.
27
Liquidity and Capital Resources
At December 31, 2000 and December 31, 1999, cash, cash equivalents and
marketable securities aggregated $31,602,000 and $42,143,000, respectively. This
decrease was a result of the utilization of these resources to fund the
Company's operations.
To date, Synaptic has met its cash requirements through the sale of its
stock, through contract and license revenue, through interest income and gains
resulting from its investments, through SBIR grants and through the sale of a
portion of its State NOL carryforwards. If the current biotechnology financing
environment remains unfavorable, raising additional capital may be difficult.
Synaptic leases laboratory and office facilities under an agreement
expiring on December 31, 2015. The minimum annual payment under the lease is
currently $2,074,000. The lease provides for fixed escalations in rent payments
in the years 2005 and 2010.
At December 31, 2000, the Company had $31,602,000 in cash, cash
equivalents and marketable securities. The Company currently intends to utilize
these funds primarily to conduct certain of its research programs, for patent
related expenditures, for general corporate purposes, to make leasehold
improvements to its facilities and to purchase property and equipment. We expect
to continue to incur operating losses for a number of years. We believe that
cash on hand and cash that we expect to receive through interest payments on
investments, will be sufficient to fund operations, as well as our share of
certain development costs under the Grunenthal Agreement, through the year 2002.
As of December 31, 2000, the Company had NOL carryforwards of
approximately $57,000,000 for Federal income tax purposes that will expire
principally in the years 2002 through 2020. In addition, the Company had
research and development credit carryforwards of approximately $1,610,000, which
will expire principally in 2002 through 2018. Also at December 31, 2000,
Synaptic had NOL carryforwards of approximately $41,637,000 for State income tax
purposes and State research and development credit carryforwards of $475,000.
For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to these carryforwards. Due to the
limitations imposed by the Tax Reform Act of 1986, and as a result of
significant changes in the Company's ownership in 1993 and 1997, the utilization
of $25,000,000 of Federal NOL carryforwards is subject to annual limitation. The
utilization of the research and development credits is similarly limited.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS 133, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. As we do not currently intend to
engage in derivatives or in hedging transactions, we do not anticipate any
effect on Synaptic's results of operations, financial position or cash flows
upon the adoption of SFAS 133.
Disclosure Regarding Forward-Looking Statements
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
forward-looking statements include, but are not
28
limited to, those relating to
future cash and spending plans, amounts of future research funding,
patent-related plans, additional drug discovery programs, the effectiveness,
efficacy, or other results of any of Synaptic's technology or drugs, any other
statements regarding future growth, future cash needs, future operations,
business plans and financial results, and any other statements which are not
historical facts. When used in this document, the words "anticipate,"
"estimate," "expect," "may," "project," and similar expressions are intended to
be among the statements that identify forward-looking statements. These
statements involve risks and uncertainties, including, but not limited to, those
risks and uncertainties relating to those described below, as well as other
factors detailed elsewhere in this Report, including in Item 1 of this Report
under the captions "Patents, Proprietary Technology and Trade Secrets,"
"Competition" and "Government Regulation" ("Cautionary Statements"). These
Cautionary Statements qualify the forward-looking statements included in this
Report. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written and oral forward-looking
statements attributable to Synaptic or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
Early Stage of Product Development; Technological Uncertainty
Since its inception in January 1987, Synaptic has focused its
activities on the discovery and cloning of receptor genes and the use of these
genes as tools in the design of precisely targeted compounds for a broad range
of therapeutic applications. To date, neither Synaptic nor any of its
collaborative partners or any of its other licensees has completed the
development of drugs designed with the use of Company technology and we do not
expect that any drugs resulting from our or our collaborative partners' or other
licensees' research and development efforts will be commercially available for a
number of years, if at all. All compounds discovered by Synaptic and its
collaborative partners and other licensees will require extensive preclinical
and clinical testing prior to submission of any regulatory application for
commercial use. Extensive preclinical and clinical testing required to establish
safety and efficacy will take several years, and the time required to
commercialize new drugs cannot be predicted with accuracy. Moreover, potential
products that appear to be promising at early stages of development may never
reach the market for a number of reasons. These reasons include, but are not
limited to, the possibilities that potential products are found during
preclinical testing or clinical trials to be ineffective or to cause harmful
side effects, that they fail to receive necessary regulatory approvals, that
they are difficult or uneconomical to manufacture on a large scale, that they
fail to achieve market acceptance or that they are precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's approach to drug discovery, its research and
development efforts or the efforts of Grunenthal, Kissei, Lilly, Novartis or
Glaxo, or any future collaborative partner or other licensee of the Company,
will result in the development of any drugs, or that any drugs, if successfully
developed, will be proven to be safe and effective in clinical trials, receive
required regulatory approvals, be capable of being manufactured in commercial
quantities at reasonable costs or be successfully commercialized. Product
development of new pharmaceuticals is highly uncertain, and unanticipated
developments, including clinical or regulatory delays, unexpected adverse
effects and inadequate therapeutic efficacy, would slow or prevent product
development efforts of the Company and its collaborative partners and other
licensees and have a material adverse effect on the Company's operations.
Dependence on Collaborative Partners and Licensees for Development,
Regulatory Approvals, Manufacturing, Marketing and Other Resources
A key element of Synaptic's business strategy is to leverage resources
by entering into collaborative and licensing arrangements with pharmaceutical
companies. Under the agreements with Kissei, Lilly and
29
Novartis, the Company's
collaborative partners and licensees are each responsible for conducting
preclinical testing and clinical trials of compounds developed through the use
of the Company's technology, obtaining regulatory approvals and manufacturing
and commercializing any resulting drugs. Under the Grunenthal Agreement,
Grunenthal is responsible for conducting certain preclinical testing and
clinical trials of compounds developed through the use of the Company's
technology. Synaptic has no involvement in the research and development
activities of Glaxo under the Glaxo Agreement. As a result, the Company's
receipt of revenues (whether in the form of drug development milestones,
royalties on sales or net sales proceeds) in respect of drugs resulting from its
collaborative and licensing arrangements is dependent upon the activities of its
collaborative partners and other licensees. The amount and timing of resources
dedicated by our collaborative partners and other licensees to the development
of drugs that would be subject to royalties payable to Synaptic are not within
our control. Moreover, there can be no assurance that the interests of Synaptic
will continue to coincide with those of its collaborative partners or other
licensees, that one or more of Synaptic's collaborative partners or other
licensees will not develop independently or with third parties drugs that could
compete with drugs of the types covered by their arrangements with Synaptic, or
that disagreements over rights or technology or other proprietary interests will
not occur.
If any of Synaptic's collaborative partners or other licensees breaches
its agreement with the Company, or fails to devote adequate resources to or
conduct in a timely manner its collaborative or licensed activities, the related
research programs or the development and commercialization of drug candidates
subject to such arrangement could be materially adversely affected. There can be
no assurance that the Company's collaborative or licensing arrangements will be
successful. Further, there can be no assurance that Synaptic will be able to
enter into acceptable collaborative or licensing arrangements with other
pharmaceutical companies in the future, or that, if negotiated, such
arrangements will be successful.
History of Operating Losses and Accumulated Deficit
The Company has incurred significant operating losses since its
inception in January 1987. At December 31, 2000, Synaptic's accumulated deficit
was $64,789,000. Losses have resulted principally from costs incurred in
connection with the Company's research and development activities and from
general and administrative costs associated with operations. We expect to
continue to incur substantial operating losses at least over the next several
years and expect losses to increase as research funding under collaborative
arrangements diminish. As of December 31, 2000, the only revenues generated by
the Company had resulted from payments under collaborative and license
agreements, and government grants under the SBIR program of the National
Institutes of Health. The Company's revenues, expenses and losses may fluctuate
from quarter to quarter and year to year. Research payments under the Novartis
Agreements expired in 1998, research payments under the Merck Agreement expired
in February 1999, and research payments under the Lilly Agreement expired in
July 1999. We anticipate that there will initially be little, if any, biological
knowledge regarding many of Synaptic's future gene discoveries and, as a result,
Synaptic may have fewer opportunities to enter into collaborative arrangements
focused on these discoveries. We do not expect to achieve revenues or royalties
from sales of drugs for a number of years, if at all. The Company will not
achieve revenues or royalties from drug sales unless it or one of its
collaborative partners or other licensees successfully completes clinical trials
with respect to a drug candidate, obtains regulatory approvals for that drug
candidate and commercializes the resulting drug. Failure to achieve significant
revenue or profitable operations could impair the Company's ability to sustain
operations and there can be no assurance that the Company will ever achieve
significant revenues or profitable operations.
30
Future Capital Needs; Uncertainty of Additional Funding
The operation of Synaptic's business requires substantial capital
resources and this requirement is likely to increase in the future. The
Company's future financial requirements will depend on many factors, including
the continued progress of its research and development programs, the timing and
results of preclinical testing and clinical trials, if any, of its or its
collaborative partners' or other licensees' drug candidates, the timing of
regulatory approvals, if any, technological advances, determinations as to the
commercial potential of its or its collaborative partners' or other licensees'
proposed products and the status of competitive products. Synaptic's capital
requirements will also depend on its ability to establish and maintain
collaborative or licensing arrangements with others and on whether its future
collaborative partners provide research funding and are responsible for all
development activities, preclinical testing and regulatory approvals and, if
these approvals are obtained, the manufacturing and marketing of products. In
addition, these capital requirements will depend on the time and expense
associated with filing and, if necessary, prosecuting and enforcing patent
claims.
The Company entered into the Grunenthal Agreement in January 1998.
Under this agreement, Synaptic will retain certain ownership rights to products
that result from the collaboration. In addition, Synaptic will be significantly
involved in the development of any potential products but may also be required
to contribute substantial financial resources towards such development.
Accordingly, the cost to Synaptic of this arrangement may be significantly
greater than the cost to it of participating in a royalty-based collaboration.
No assurance can be given that the Company's existing cash on hand and
marketable securities and funds it will receive under its collaborative and
license agreements, together with interest income, will be sufficient. We expect
that Synaptic will, in the future, seek to raise additional funding from other
sources, including other collaborative partners and licensees, and through
public or private financings, including sales of equity or debt securities. Any
collaborative or licensing arrangement could result in limitations on the
Company's ability to control the research and development of potential drugs and
the commercialization of resulting drugs, if any, as well as its profits
therefrom. Any equity financing could result in dilution to Synaptic's then
existing stockholders. There can be no assurance that additional funds will be
available on favorable terms or at all, or that these funds, if raised, would be
sufficient to permit the Company to continue to conduct its operations. If
adequate funds are not available, Synaptic may be required to curtail
significantly or eliminate one or more of its receptor or drug discovery
programs.
Uncertainties Related to Clinical Trials
Before obtaining required regulatory approvals for the commercial sale
of each product under development, the Company or its collaborators and other
licensees must demonstrate through preclinical studies and clinical trials that
such product is safe and efficacious for use. The results of preclinical studies
and initial clinical trials are not necessarily predictive of results that will
be obtained from large-scale clinical trials, and there can be no assurance that
clinical trials of any product under development will demonstrate the safety and
efficacy of such product or will result in a marketable product. The safety and
efficacy of a therapeutic product under development by Synaptic or its
collaborative partners or other licensees must be supported by extensive data
from clinical trials. A number of companies have suffered significant setbacks
in advanced clinical trials, despite promising results in earlier trials. The
failure to demonstrate adequately the safety and efficacy of a therapeutic drug
under development would delay or prevent regulatory approval of the product that
could have a material adverse effect on the Company. In addition, the FDA or
other
31
regulatory agency may require additional clinical trials, which could
result in increased costs and significant development delays.
The rate of completion of clinical trials of the Company's or its
collaborative partners' and other licensees' products is dependent upon, among
other factors, obtaining adequate clinical supplies and the rate of patient
accrual. Patient accrual is a function of many factors, including the size of
the patient population, the proximity of patients to clinical sites and the
eligibility criteria for the trial. Delays in planned patient enrollment in
clinical trials may result in increased costs, program delays or both, which
could have a material adverse effect on the Company. In addition, Synaptic's
collaborative partners and other licensees generally have the right to control
the planning and execution of product development and clinical programs, and
there can be no assurance that partners and licensees will conduct programs in
accordance with schedules that are satisfactory to the Company. There can be no
assurance that, if clinical trials are completed, Synaptic or its collaborative
partners and other licensees will submit NDAs with respect to any potential
products or that any application will be reviewed and approved by the FDA in a
timely manner, if at all.
Lack of Manufacturing Experience; Reliance on Contract Manufacturers
The Company currently has no manufacturing facilities and relies on its
collaborative partners and other licensees or other manufacturers to produce its
compounds for research and development, preclinical and clinical purposes. The
products under development by Synaptic and its collaborative partners and other
licensees have never been manufactured on a commercial scale and there can be no
assurance that products can be manufactured at a cost or in quantities necessary
to make them commercially viable. If Synaptic were unable to contract for a
sufficient supply of its compounds on acceptable terms, or if it should
encounter delays or difficulties in its relationships with manufacturers, any
preclinical or clinical testing schedule of the Company would be delayed,
resulting in delay in the submission of products for regulatory approval or the
market introduction and subsequent sales of products, which could have a
material adverse effect on the Company. Moreover, manufacturers that Synaptic
may use must adhere to current GMP regulations enforced by the FDA through its
facilities inspection program. If these facilities cannot pass a pre-approval
plant inspection, the FDA pre-market approval of the products will not be
granted.
Lack of Sales and Marketing Capability
The creation of infrastructure to commercialize pharmaceutical products
is a difficult, expensive and time-consuming process. Synaptic currently has no
sales or marketing capability. To market directly any product it may develop,
the Company would need to establish a marketing and sales force with technical
expertise and distribution capability or contract with other pharmaceutical
and/or health care companies with distribution systems and direct sales forces.
There can be no assurance that the Company would be able to establish direct or
indirect sales and distribution capabilities or be successful in gaining market
acceptance for licensing arrangements. To the extent that the Company enters
into co-promotion or licensing arrangements, any revenues received by the
Company will be dependent on the efforts of third parties, and there can be no
assurance that these efforts will be successful.
Dependence on Key Personnel
The Company is highly dependent on its management and scientific staff.
Loss of the services of any key individual could have an adverse effect on the
Company. We believe that our future success will depend,
32
in part, on our ability
to attract and retain highly talented managerial, scientific, software and
bioinformatics personnel and consultants. Synaptic faces intense competition for
personnel from, among others, biotechnology and pharmaceutical companies, as
well as academic and other research institutions. There can be no assurance that
it will be able to attract and retain the personnel it requires on acceptable
terms. Failure to attract and retain such personnel could have a material
adverse effect on the Company.
External Environment
Over the past several years, there has been a significant reduction in
the number of investors who are willing to commit capital to the biotechnology
industry. With over 300 public biotechnology companies and over 1,000 private
biotechnology companies, the lack of capital is severely impairing the ability
of many of these companies to carry out their research. Additionally, many
pharmaceutical companies are now routinely performing many of the types of
research and services that have historically been performed by biotechnology
companies. As a consequence, many pharmaceutical companies are less interested
than in the past both in engaging in collaborations with biotechnology companies
in a number of areas and in providing them with research funding and other
sources of revenue.
Over time, Synaptic could be materially and adversely affected by a
lack of available capital and/or a lack of interest on the part of the
pharmaceutical industry in its services or products. This unfavorable external
environment could result in the Company's inability to complete certain of its
research projects and/or in the need for Synaptic to downsize until it begins to
receive royalty income pursuant to outstanding licensing arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk (i.e.,
interest rate risk) are included in Item 7 of this Report.
33
Item 8. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors...............................................35
Balance Sheets at December 31, 2000 and 1999.................................36
Statements of Operations and Comprehensive Income (Loss) for the years ended
December 31, 2000, 1999 and 1998............................................37
Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998............................................38
Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................................39
Notes to Financial Statements................................................40
34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SYNAPTIC PHARMACEUTICAL CORPORATION
We have audited the accompanying balance sheets of Synaptic
Pharmaceutical Corporation as of December 31, 2000 and 1999, and the related
statements of operations and comprehensive income (loss), stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Synaptic
Pharmaceutical Corporation at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
MetroPark, New Jersey
February 2, 2001
35
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(in thousands, except share and per share information)
December 31, 2000 and 1999
Assets 2000 1999
--------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 2,037 $ 6,236
Marketable securities--current maturities 20,627 6,471
Other current assets 814 847
--------------------------------------------------------------------------------
Total current assets 23,478 13,554
Property and equipment, net 4,781 5,186
Marketable securities 8,938 29,436
Patent and patent application costs, net of 227 574
accumulated amortization (2000--$2,148; 1999--$1,801)
Other assets 147 -
--------------------------------------------------------------------------------
$ 37,571 $ 48,750
================================================================================
Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,128 $ 486
Accrued liabilities 648 525
Accrued compensation 348 386
Deferred revenue 354 -
--------------------------------------------------------------------------------
Total current liabilities 2,478 1,397
Deferred rent obligation 564 247
Stockholders' equity:
Preferred Stock, $.01 par value; authorized--1,000,000 shares - -
Common Stock, $.01 par value; authorized--25,000,000 shares
issued and outstanding--10,935,772 shares in 2000 and
10,764,661 shares in 1999 109 108
Additional paid-in capital 99,392 98,719
Accumulated other comprehensive income--net unrealized (183) (791)
losses on securities
Accumulated deficit (64,789) (50,930)
--------------------------------------------------------------------------------
Total stockholders' equity 34,529 47,106
--------------------------------------------------------------------------------
$ 37,571 $ 48,750
================================================================================
See notes to financial statements.
36
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share information)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------------------------------------------------------------------------
Revenues:
Contract revenue $ 1,086 $ 1,855 $ 7,202
License revenue 2,750 - 2,000
Grant revenue - - 150
-------------------------------------------------------------------------------
Total revenues 3,836 1,855 9,352
Expenses:
Research and development 14,360 14,592 15,274
General and administrative 5,852 5,060 4,302
-------------------------------------------------------------------------------
Total expenses 20,212 19,652 19,576
-------------------------------------------------------------------------------
Loss from operations (16,376) (17,797) (10,224)
Other income, net:
Interest income 2,106 2,674 3,603
Gain on sale of securities - 2 128
Other 4 - -
-------------------------------------------------------------------------------
Other income, net 2,110 2,676 3,731
-------------------------------------------------------------------------------
Net loss before benefit from income taxes (14,266) (15,121) (6,493)
Income tax benefit 407 - -
-------------------------------------------------------------------------------
Net loss $(13,859) $(15,121) $ (6,493)
===============================================================================
Comprehensive loss:
Net loss $(13,859) $(15,121) $ (6,493)
Unrealized gains (losses) arising
during period 608 (702) (82)
Less: reclassification adjustment for gains - (12) (21)
included in net income
-------------------------------------------------------------------------------
Comprehensive loss $ (13,251) $(15,835) $ (6,596)
===============================================================================
Basic and diluted net loss per share $ (1.28) $ (1.41) $ (0.61)
===============================================================================
Shares used in computation of
net loss per share 10,850,262 10,742,296 10,684,892
===============================================================================
See notes to financial statements.
37
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share information)
Net
Unrealized
Gains Total
Additional (Losses) Deferred Accumu- Stock-
Common Stock Paid-In on Compen- lated Treasury holders'
Shares Amount Capital Securities sation Deficit Stock Equity
------ ------ ------- ---------- ------ ------- ----- ------------
Balance at January 1, 1998 10,526,585 $ 105 $ 97,049 $ 26 $ (160) $ (29,316) $ -- $ 67,704
Purchase of 375 shares of
Treasury Stock at cost -- -- -- -- -- -- (1) (1)
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (20) -- 20 -- -- --
Amortization of Deferred
Compensation -- -- -- -- 79 -- -- 79
Issuance of 47,516, shares
of common stock pursuant 47,141 1 127 -- -- -- 1 129
to exercise of stock options
Issuance of 137,648 shares of
common stock pursuant to
exercise of stock warrants 137,648 1 1,307 -- -- -- -- 1,308
Adjustment to reflect net
unrealized loss on
securities -- -- -- (103) -- -- -- (103)
Adjustment to reflect
recognition of short-swing
profits realized on sale of
stock by stockholder -- -- 53 -- -- -- -- 53
Net loss for the year ended
December 31, 1998 -- -- -- -- -- (6,493) -- (6,493)
---------- ------- -------- ---------- --------- ------------ ----- ------------
Balance at December 31, 1998 10,711,374 $ 107 $ 98,516 $ (77) $ (61) $ (35,809) $ -- $ 62,676
Forfeiture of Deferred
Compensation related to
Stock Incentive Plan -- -- (11) -- 11 -- -- --
Amortization of Deferred
Compensation -- -- -- -- 50 -- -- 50
Issuance of 53,287, shares
of common stock pursuant
to exercise of stock options 53,287 1 214 -- -- -- -- 215
Adjustment to reflect net
unrealized loss on
securities -- -- -- (714) -- -- -- (714)
Net loss for the year ended
December 31, 1999 -- -- -- -- -- (15,121) -- (15,121)
---------- ----- --------- ---------- -------- --------- ----- -----------
Balance at December 31, 1999 10,764,661 $ 108 $ 98,719 $ (791) $ (--) $ (50,930) $ -- $ 47,106
Issuance of 171,111, shares
of common stock pursuant
to exercise of stock options 171,111 1 673 -- -- -- -- 674
Adjustment to reflect net
unrealized gain on
securities -- -- -- 608 -- -- -- 608
Net loss for the year ended
December 31, 2000 -- -- -- -- -- (13,859) -- (13,859)
---------- ----- --------- ---------- -------- --------- ----- -----------
Balance at December 31, 2000 10,935,772 $ 109 $ 99,392 $ (183) $ (--) $ (64,789) $ -- $ 34,529
========== ===== ========= ========== ======== ========== ===== ===========
See notes to financial statements.
38
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------------------------------------------------------------------------
Operating activities:
Net loss $ (13,859) $ (15,121) $ (6,493)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and patent amortization 1,626 1,609 1,505
Amortization of premiums (discounts) on
securities 463 479 226
Amortization of deferred compensation - 50 79
Gains on sales of securities - (2) (128)
Loss on sale of equipment 100 32 -
Deferred rent, net 270 247 -
Changes in operating assets and liabilties:
Decrease (increase) in other current assets 33 817 (390)
Increase (decrease) in accounts payable,
accrued liabilities and accrued compensation 727 (540) 239
Decrease in license agreement revenue
receivable - - 40
Increase in other assets (100) - -
Increase (decrease) in deferred revenue 354 (83) 83
-------------------------------------------------------------------------------
Net cash (used in) operating activities (10,386) (12,512) (4,839)
Investing activities:
Proceeds from sale or maturity of investments 6,487 19,039 70,797
Purchases of investments - (16,349) (71,799)
Proceeds from sales of equipment 70 80 -
Reimbursement for leasehold improvements 129 - -
Purchases of property and equipment (1,173) (827) (2,171)
-------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 5,513 1,943 (3,173)
Financing activities:
Issuance of common stock, net of purchases 674 215 1,436
Short-swing profits realized on sale of stock
by stockholder - - 53
-------------------------------------------------------------------------------
Net cash provided by financing activities 674 215 1,489
-------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,199) (10,354) (6,523)
Cash and cash equivalents at
beginning of period 6,236 16,590 23,113
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,037 $ 6,236 $ 16,590
===============================================================================
See notes to financial statements.
39
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
Note 1 -- Summary of Significant Accounting Policies
Organization. Synaptic Pharmaceutical Corporation ("Synaptic" or the
"Company") is a drug discovery company utilizing G protein-coupled receptors
("GPCRs") as targets for novel therapeutics. The Company is utilizing its large
portfolio of patented GPCR targets as a basis for the creation of improved drugs
that act through these targets. The Company and its licensees are first
utilizing these receptor targets to discover their function in the body and thus
specific physiological disorders with which they may be associated, and
secondly, to design compounds that can potentially be developed as drugs.
Basic and Diluted Net Loss Per Share. Net loss per share is computed
using the weighted average number of shares of common stock outstanding. As a
result of the Company's operating losses and the anti-dilutive effect from stock
options and warrants, these instruments are excluded from the computation of
diluted net loss per share.
Revenue Recognition. License revenue represents non-refundable payments
for a license to one or more of the Company's patents and/or a license to the
Company's technology. Payments for licenses are recognized as they are received
or, if earlier, when they become guaranteed, provided they are independent of
any continuing research activity, otherwise, they are recognized pro-rata during
the term of the related research agreement. Contract revenue includes research
funding to support a specified number of the Company's scientists and payments
upon the achievement of specified research and development milestones. Research
funding revenue is recognized ratably over the period of the collaboration to
which it relates. Payments received in advance under the related contracts are
recorded as deferred revenue until the research is performed. Research milestone
payment revenue is recognized at the time the related research milestone is
achieved. Government grant receipts are recorded as revenue in the period in
which the related research is performed.
Cash Equivalents. Cash equivalents consist of highly liquid investments
with maturities of three months or less when purchased. Included in cash
equivalents at December 31, 2000, is approximately $1,651,000 related to
investments in money market funds. At December 31, 1999, this amount totaled
$6,234,000.
Marketable Securities. All of Synaptic's marketable securities are
classified as available-for-sale securities and are carried at fair value, with
the unrealized gains and losses reported as a separate component of
stockholders' equity. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. This amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other than temporary, if any, are included in other income. The
cost of securities sold is based on the specific identification method.
Investments held as of December 31, 2000 consist primarily of U.S. Government
and Federal Agency obligations, U.S. corporate debt securities and
mortgage-backed securities. The maturities range from January 15, 2001, through
November 17, 2003.
The Company has established guidelines relative to diversification,
credit ratings and maturities to maintain safety and liquidity. The guidelines
are periodically reviewed and modified to take advantage of trends in yields and
interest rates.
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Scientific equipment, office equipment and
40
furniture
and fixtures are depreciated over a life of 7 years. Leasehold improvements are
depreciated principally over the life of the facility lease, which is currently
15 years. Software is depreciated over a life of 3 years.
Patents. Prior to October 1, 1996, patent and patent application costs
were capitalized and amortized over 7 years or the estimated life of the patent,
if less, using the straight-line method. Capitalized costs through October 1,
1996 will continue to be amortized over the remaining portions of their
seven-year lives. Effective October 1, 1996, patent and patent application costs
are expensed as incurred. The Company periodically reviews capitalized costs to
assess ongoing recoverability.
Accrued Liabilities. Included in accrued liabilities at December 31,
2000 and 1999 are accrued professional fees totaling $340,000 and $270,000,
respectively.
Stock-Based Compensation. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), in accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized only when the exercise price of options is
below the market price of the underlying stock on the date of grant. This
expense is recognized ratably over the vesting period.
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 and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these
estimates.
Comprehensive Income (Loss). Comprehensive income (loss) is defined as
the change in equity of a business enterprise during a period resulting from
transactions and other events and circumstances from nonowner sources.
Comprehensive loss for Synaptic, in addition to net loss, includes unrealized
gains and losses on marketable securities held for sale, currently recorded in
stockholders' equity.
Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133,
as amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. As the Company does not currently intend to engage in derivatives
or in hedging transactions, the Company does not anticipate any effect on its
results of operations, financial position or cash flows upon the adoption of
SFAS 133.
Reclassifications. Certain prior year amounts have been reclassified to
conform with the current year presentation.
41
Note 2 -- Marketable Securities
The following is a summary of all of Synaptic's marketable securities.
All of these securities are classified as available-for-sale securities.
Determination of estimated fair value is based on quoted market prices:
Gross Gross
Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
--------------------------------------------------------------------------------
December 31, 2000:
U.S. Treasury obligations and
obligations of U.S.
government agencies $ 8,000,000 $ -- $ (57,000) $ 7,943,000
U.S. corporate debt securities 21,748,000 -- (126,000) 21,622,000
--------------------------------------------------------------------------------
$29,748,000 $ -- $(183,000) $29,565,000
================================================================================
December 31, 1999:
U.S. Treasury obligations and
obligations of U.S.
government agencies $ 8,000,000 $ -- $(279,000) $ 7,721,000
U.S. corporate debt securities 28,698,000 -- (512,000) 28,186,000
--------------------------------------------------------------------------------
$36,698,000 $ -- $(791,000) $35,907,000
================================================================================
The gross realized gains on sale of available-for-sale securities for
the years ending December 31, 2000, 1999 and 1998 totaled $0, $2,000 and
$128,000, respectively. There were no gross realized losses during 2000, 1999
and 1998. The net adjustment to unrealized gains (losses) on available-for-sale
securities included as a separate component of stockholders' equity totaled
$608,000 in 2000, $(714,000) in 1999 and $(103,000) in 1998.
Note 3 -- Collaborative and Licensing Arrangements
At December 31, 2000, Synaptic was engaged in collaborations with
Kissei Pharmaceutical Co., Ltd. ("Kissei") and Grunenthal GmbH ("Grunenthal").
In addition to these ongoing collaborative arrangements, at December 31, 2000,
four other pharmaceutical companies have licenses to certain of the Company's
technology and patent rights. Details of these arrangements are set forth below:
Kissei Pharmaceutical Co., Ltd. Synaptic and Kissei are parties to a
research and licensing agreement to identify novel receptors, which will be
identified utilizing the Company's genomics and functional genomics discovery
technologies. Under the term of the three-year agreement, Kissei will provide
funding to Synaptic to support research that is aimed at discovering novel
receptors through the use of the Company's proprietary technologies. In addition
to the research funding, the agreement provides for a license fee, milestone
payments and royalty payments to the Company on sales of any products. In
return, Synaptic granted Kissei worldwide exclusive rights to use selected
receptors resulting from the collaboration to discover, develop, manufacture and
market drugs that act through these receptors.
42
During 2000, the Company recognized $1,271,000 in revenue under this
agreement. Revenues that have been recognized are not subject to repayment.
At December 31, 2000, the Company had recorded $354,000 in deferred
revenue representing advance funding for research and license revenue, both of
which will be recognized in 2001.
Grunenthal GmbH. Synaptic and Grunenthal are parties to a collaborative
and licensing agreement pursuant to which they are collaborating to discover and
develop drugs for the treatment of pain. Synaptic is using its receptor-targeted
drug design technology to identify compounds of interest and Grunenthal is using
its expertise to evaluate the compounds in pain model systems and conduct
preclinical studies. Grunenthal will conduct clinical studies with promising
compounds. The companies will each be responsible for their own research costs
and equally share the development costs through Phase IIa clinical trials.
Synaptic will retain manufacturing and marketing rights in the U.S., Canada and
Mexico and share these rights in countries outside of Europe, South and Central
America where Grunenthal retains these rights. To date, the Company has not
recognized any revenue under this collaboration.
The R.W. Johnson Research Pharmaceutical Research Institute. Synaptic
and The R.W. Johnson Pharmaceutical Research Institute ("PRI") are parties to a
licensing agreement under which PRI was granted nonexclusive licenses under the
Company's alpha 1 adrenergic receptor patents and benign prostatic hyperplasia
functional use patent to develop and sell alpha-1a selective compounds for all
therapeutic applications. PRI is required to make payments upon the achievement
of certain milestones and pay royalties to Synaptic on sales of products, if
any.
During 2000, the Company recognized $2,500,000 in revenue under this
licensing arrangement. Revenue that has been recognized is not subject to
repayment.
Eli Lilly and Company. Synaptic and Eli Lilly and Company ("Lilly") are
parties to a collaborative and licensing agreement under which the Company
granted Lilly an exclusive license to use all but two of the Company's serotonin
drug discovery systems to promote the discovery and development of receptor
subtype-selective drugs for the treatment of serotonin-related disorders.
Through July 1999, Lilly provided funding to Synaptic to support a specified
number of Company scientists who conducted research as part of the
collaboration. Under the terms of the agreement, the collaboration and
associated research funding ended on July 30, 1999. Lilly is required to pay
royalties on sales of any products developed through the use of the Company's
technology and is required to make payments upon the achievement of certain
milestones.
During 1999 and 1998, the Company recognized $1,676,000 and $4,659,000,
respectively, in revenue under this agreement. Revenues that have been
recognized are not subject to repayment.
Novartis Pharma AG. Synaptic and Novartis Pharma AG ("Novartis") are
parties to two collaborative and licensing agreements under which the Company
granted Novartis an exclusive worldwide license to use the Company's
neuropeptide Y technology to develop, manufacture and sell compounds that work
through neuropeptide Y receptor subtypes for the treatment of obesity and eating
disorders. Through August 4, 1998, Novartis provided funding to Synaptic to
support a specified number of the Company's scientists who conducted research as
part of the collaboration. Under the terms of the agreements, the collaboration
and associated research funding ended on August 4, 1998. After August 4, 2001,
all of these licenses and rights become nonexclusive. Novartis is required to
pay royalties on certain product sales and is required to make payments upon the
achievement of certain milestones.
During 1998 the Company recognized $2,041,000 in revenue under this
agreement. Revenues that have been recognized are not subject to repayment.
43
At December 31, 2000, Novartis held 695,715 shares of the Company's
common stock, which represents 6.36% of the outstanding shares of the Company.
Glaxo Group Limited. Synaptic and Glaxo Group Limited of the United
Kingdom ("Glaxo") are parties to a licensing agreement under which Glaxo
currently holds a nonexclusive license under the Company's alpha 1 adrenergic
receptor patents to develop and sell alpha-1a selective compounds for
therapeutic applications other than the treatment of BPH. Synaptic is entitled
to receive royalties on sales of all alpha-1a selective drugs sold by Glaxo so
long as Synaptic has an issued patent relating to an alpha 1 adrenergic receptor
subtype in at least one major market country.
During 1998, the Company recognized $2,000,000 in revenue under this
licensing arrangement. Revenue that has been recognized is not subject to
repayment.
Merck & Co., Inc. Synaptic and Merck & Co., Inc. ("Merck") were parties
to a collaborative and licensing agreement. Synaptic had granted Merck licenses
that were subsequently relinquished.
During 1999 and 1998, the Company recognized $83,000 and $482,000,
respectively, in revenue under this agreement. Revenues that have been
recognized are not subject to repayment.
Note 4 -- Property and Equipment
Property and equipment consists of the following as of December 31,
2000 and 1999:
2000 1999
-----------------------------------------------------------------------------
Scientific equipment $ 7,943,000 $ 7,169,000
Furniture and fixtures 192,000 192,000
Office equipment 533,000 521,000
Leasehold improvements 2,352,000 2,452,000
Software 1,035,000 967,000
-----------------------------------------------------------------------------
12,055,000 11,301,000
Accumulated depreciation and amortization (7,274,000) (6,115,000)
-----------------------------------------------------------------------------
$ 4,781,000 $ 5,186,000
=============================================================================
Note 5 -- Stockholders' Equity
Common Stock. In January 1998, warrants to purchase 137,648 shares of
the Company's Common Stock were exercised at $9.50 per share. There are
currently no common stock warrants outstanding.
Stockholders' Rights Plan. In November 1995, Synaptic's Board of
Directors approved the adoption of a stockholders' rights plan (the "Rights
Plan"). The Rights Plan provides for the distribution of one right (a "Right")
with respect to each share of outstanding common stock and any new issuances of
common stock. Upon completion of the initial public offering in December 1995,
the Board of Directors designated Series A Junior Participating Preferred Stock
and declared a dividend of one Right with respect to each share of common stock
outstanding. Each Right will become exercisable to purchase from the Company, at
an exercise price of $160.00, 1/1000th of a share of Series A Junior
Participating Preferred Stock or that number of shares of common stock having a
market value equal to two times the exercise price of the Right. The Rights
generally become exercisable for the Series A Junior Participating Preferred
Stock ten days following the announcement by any person or group of an intention
to make a tender offer or exchange offer, the consummation of which would cause
any person or group to become the owner of 15% or more of the outstanding common
stock, and generally become exercisable for common stock ten days
44
following the
acquisition by any person or group of more than 15% of the outstanding common
stock. The Rights will expire in the year 2005. The Rights Plan may discourage
certain types of transactions involving an actual or potential change in control
of the Company.
Each 1/1000th of a share of Series A Junior Participating Preferred
Stock will have one vote. Each share of Series A Junior Participating Preferred
Stock will be entitled to a preferential quarterly dividend per share equal to
the larger of (i) an amount equal to any dividend declared on the common stock
and (ii) $.00025. Additionally, in the event of a liquidation, each 1/1000th of
a share of the Series A Junior Participating Preferred Stock would be entitled
to a preferential liquidation payment equal to $0.01 plus an amount equal to the
amount that would be distributed with respect to each share of common stock.
Preferred Stock. Synaptic is authorized to issue up to 1,000,000 shares
of preferred stock, 200,000 of which is designated as Series A Junior
Participating and 800,000 of which is undesignated. The Board of Directors is
authorized to provide for the issuance of preferred stock in one or more classes
or series and to fix the number of shares constituting any such class or series,
and the voting powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, including the dividend rights, dividend rate, terms of redemption,
redemption price or prices, conversion rights and liquidation preferences of the
shares constituting any class or series, without any further vote or action by
the shareholders of the Company.
Note 6 -- Incentive/Stock Plans
Synaptic currently has three stock incentive plans: the 1996 Incentive
Plan (the "1996 Plan"), the 1988 Amended and Restated Incentive Plan (the "1988
Plan" and, together with the 1996 Plan, the "Incentive Plans") and the 1996
Nonemployee Director Stock Option Plan (the "Director Plan").
The Company has elected to follow APB No. 25 in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement No.
123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, compensation expense is required to be
recognized when the exercise price of the Company's employee stock options is at
a price below the market price of the underlying stock on the date of grant.
Incentive Plans. The 1996 Plan and the 1988 Plan were adopted in
October 1995 and June 1988, respectively. In May 1998, the Company's
stockholders approved an amendment to the 1996 Plan that increased the maximum
number of shares available for awards under the 1996 Plan from 1,100,000 to
2,100,000. Effective as of January 1, 1996, the 1996 Plan replaced the 1988 Plan
with respect to all future stock and option awards by the Company to its
employees and consultants. A committee of the Company's Board of Directors (the
"Committee") approves the sale of shares and the granting of nonstatutory or
incentive stock options. In addition, under the 1996 Plan, the Committee may
grant stock appreciation rights to employees and consultants of the Company. The
purchase price for shares and the exercise price of options are determined by
the Committee (although, the exercise price of incentive stock options may be no
less than the fair market value of the common stock on the date of grant).
In general, options granted under the Incentive Plans vest over a
four-year period. Unvested options are forfeited upon termination of the
employee or consulting relationship. Vested options, if not exercised within a
specified period of time following the termination of the employment or
consulting relationship, are also forfeited. Options generally expire 10 years
from the date of grant. Shares of common stock sold under the Incentive Plans
are also generally subject to vesting. Options granted and shares sold to
employees under the Incentive Plans generally become fully vested upon the
occurrence of a change in control of the
45
Company (as defined) if the holders
thereof are terminated in connection with such change in control other than for
cause (as defined). At December 31, 2000, 713,945 shares remain available for
future awards under the 1996 Plan. As of December 31, 2000, no stock
appreciation rights had been awarded under the 1996 Plan.
Director Plan. The Director Plan was adopted by the Board of Directors
in March 1996 and approved by the stockholders in June 1996. In general, under
the Director Plan, each nonemployee director of the Company is automatically
granted an option on the date that he or she first becomes a member of the Board
of Directors. In addition, on June 1 of each year, commencing in 1997, each
nonemployee director is granted an additional option to purchase 2,500 shares of
common stock at an exercise price equal to the fair market value on the date of
grant. The maximum number of shares subject to the Director Plan is 250,000. In
general, options granted under the Director Plan become exercisable as to 1/24th
of the total number of shares subject to the option for each calendar month
elapsed after the date of the option grant. In the event of a change in control
of the Company (as defined) or the death or disability of the optionee, any
unvested portion of the options will become exercisable in full. Options granted
under the Director Plan will expire upon the earliest to occur of the following:
(a) the expiration of ten years from the date of grant of the option, (b) one
year after the optionee ceases to be a director of the Company by reason of
death or disability of the optionee, or (c) three months after the date the
optionee ceases to be a director of the Company for any reason other than death
or disability.
46
Option activities under the Incentive Plans and the Director Plan are
detailed in the following table:
Weighted
Average
Option
1996 1988 Director Price
Plan Plan Plan Per Share
-------------------------------------------------------------------------------
Outstanding at January 1, 1998 851,063 265,302 30,000 $10.47
Granted 339,543 - 15,000 $13.36
Exercised (4,453) (43,063) - $ 2.70
Canceled/Forfeited (60,918) (4,375) - $12.36
-------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,125,235 217,864 45,000 $11.39
Granted 432,100 - 20,000 $ 4.92
Exercised (22,542) (30,745) - $ 4.03
Canceled/Forfeited (158,516) (625) - $12.86
-------------------------------------------------------------------------------
Outstanding at December 31, 1999 1,376,277 186,494 65,000 $ 9.69
Granted 145,750 - 15,000 $ 5.79
Exercised (36,363) (134,748) - $ 3.94
Canceled/Forfeited (166,092) - (22,500) $10.74
-------------------------------------------------------------------------------
Outstanding at December 31, 2000 1,319,572 51,746 57,500 $ 9.80
===============================================================================
Exercisable at December 31, 2000 487,699 51,746 44,687 $12.32
===============================================================================
Exercisable at December 31, 1999 345,592 186,494 46,562 $ 9.90
===============================================================================
Exercisable at December 31, 1998 202,195 211,276 30,000 $ 8.10
===============================================================================
The following table discloses at December 31, 2000, for each of the
following classes of options as determined by range of exercise price, the
information regarding weighted-average exercise price and weighted-average
remaining contractual life of each said class:
Weighted Weighted
Weighted Average Average
Average Remaining Exercise
Exercise Contractual Number Of Price of
Number Of Price of Life Of Options Options
Options Outstanding Outstanding Currently Currently
Option Class Outstanding Options Options Exercisable Exercisable
------------ ----------- ------- ------- ----------- -----------
Prices ranging
from
$1.76-$2.00 51,746 $ 1.80 2.8 years 51,746 $ 1.80
Prices ranging
from
$4.25-$8.4375 543,500 $ 5.03 9.2 years 20,937 $ 5.74
Prices ranging
from
$10.125-$15.25 730,072 $12.95 7.0 years 410,574 $12.93
Prices ranging
from
$16.50-$17.75 103,500 $16.61 5.4 years 100,875 $16.58
Other Disclosures. During 2000, 1999 and 1998, all options were granted
with an exercise price equal to the market price of the common stock on the date
of grant. Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had been
accounting for its employee stock options under the fair value method of SFAS
No. 123. The weighted-average fair value of options granted during 2000, 1999
and 1998 approximated $4.07, $3.19 and $7.66, respectively. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions for 2000, 1999 and 1998,
respectively: weighted average risk-free interest rates of 5.43%, 6.13% and
4.70%; no dividends; and a weighted-average expected life of the
47
options of 5
years. Weighted average volatility factors of the expected market price of the
Company's common stock of .852, .741 and .628, were used for 2000, 1999 and
1998, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma net loss disclosures, the estimated fair
value of options granted subsequent to 1994 is amortized to expense over the
options' vesting period. The Company's pro forma net loss information is as
follows:
2000 1999 1998
-------------------------------------------------------------------------------
Pro forma net loss $ (15,814,000) $ (16,801,000) $ (7,863,000)
Pro forma net loss per share $ (1.46) $ (1.56) $ (0.74)
-------------------------------------------------------------------------------
For certain options granted prior to 1997, the Company recorded
pursuant to APB No. 25 deferred compensation expense representing the difference
between the exercise price thereof and the market value of the common stock as
of the date of grant. This compensation expense was being amortized over the
vesting period of each option granted. Amortization of deferred compensation
under the Incentive Plans amounted to approximately $50,000 and $79,000 during
1999 and 1998, respectively. In addition, approximately $11,000 and $20,000 of
deferred compensation, as it relates to the Incentive Plans was reversed during
1999 and 1998, respectively, due to the forfeiture of the unvested options. At
December 31, 1999, this deferred compensation had been amortized.
Note 7 -- Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
At December 31, 2000 and 1999, the Company had net operating loss
("NOL") carryforwards of $57,000,000 and $45,000,000, respectively, for Federal
income tax purposes that will expire principally in the years 2002 through 2020.
In addition, Synaptic had research and development credit carryforwards of
approximately $1,610,000, which will expire principally in 2002 through 2018.
For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to these carryforwards. Due to the
limitations imposed by the Tax Reform Act of 1986, and as a result of
significant changes in the Company's ownership in 1993 and 1997, the utilization
of $25,000,000 of net operating loss carryforwards is subject to annual
limitation. The utilization of the research and development credits is similarly
limited.
At December 31, 2000, the Company had NOL carryforwards of $41,637,000
and research and development credits of $475,000 for State income tax purposes.
In November 2000, $5,650,000 in gross State NOL carryforwards was sold under the
State of New Jersey's Technology Business Tax Certificate Transfer Program (the
"Program"). The Program allows qualified technology and biotechnology businesses
48
in New Jersey to sell unused amounts of NOL carryforwards and defined research
and development credits for cash. The tax value sold was $509,000 and the
proceeds received by the Company were $407,000, which was recorded as an income
tax benefit in the statement of operations.
A reconciliation of the Company's income tax expense (benefit) at U.S.
federal statutory tax rates to recorded income tax provision is as follows:
2000 1999 1998
-------------------------------------------------------------------------------
Tax at U.S. statutory rates $(4,713,000) $(5,141,000) $(2,208,000)
State income taxes (823,000) (898,000) (386,000)
Research and development credit - - (110,000)
Expiration/sale of state NOLs (71,000) 248,000 2,000
Other (30,000) (16,000) 50,000
Valuation allowance recorded 5,230,000 5,807,000 2,652,000
-------------------------------------------------------------------------------
Recorded tax provision (benefit) (407,000) - -
===============================================================================
Significant components of the Company's federal deferred tax assets as
of December 31, 2000 and 1999 are as follows:
2000 1999
-------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 21,930,000 $ 17,233,000
Research and development credit carryforwards 1,610,000 1,610,000
Book over tax amortization 2,171,000 1,638,000
------------------------------------------------------------------------------
Total deferred tax assets 25,711,000 20,481,000
Valuation allowance (25,711,000) (20,481,000)
-------------------------------------------------------------------------------
Net deferred tax assets - -
===============================================================================
Note 8 -- Commitments
Synaptic leases facilities under an agreement expiring on December 31,
2015 (the "lease").
Rent expense for the years ended December 31, 2000, 1999 and 1998
approximated $1,895,000, $1,749,000, and $693,000, respectively, and included
executory costs of $524,000, $579,000 and $120,000, respectively.
As of December 31, 2000, future minimum annual payments under the
lease, inclusive of executory costs, are as follows:
2001 2,074,000
2002 1,634,000
2003 1,634,000
2004 1,634,000
2005 1,886,000
Thereafter 20,872,000
------------
Total $ 29,734,000
============
The Company is subleasing 5,000 square feet and 23,008 square feet of
its premises to two non-affiliated third parties under agreements expiring in
2001 and 2010, respectively. During 2000, the Company
49
recognized $104,000 in
rental income under these agreements, which is included in other income.
Additionally, under the non-cancelable portions of these sublease agreements,
the Company expects to recognize an aggregate of $2,146,000 in rental income,
inclusive of executory costs.
The Company is party to a license agreement with a major research
university. Under the terms of this agreement, the Company received a worldwide
nonexclusive license under a patent issued in January 1991, which patent expires
in 2008. The Company is committed under this agreement to pay royalties on
future net sales of products employing the technology or falling under claims of
the patents covered by this agreement.
Synaptic has an employment agreement with its Chairman, President and
Chief Executive Officer which provides for severance payments of up to one year
of base salary upon the occurrence of certain events, including early
termination and termination upon a change in control, as defined. In addition to
severance payments, under certain circumstances, the agreement calls for
immediate vesting of any unvested shares of common stock and stock options.
At December 31, 2000, the Company had entered into agreements with its
Senior Vice President and Chief Financial Officer, its Vice President for
Research and its Vice President of Business Development which provide for
severance payments in amounts equal to 50% of annual base salary, on
substantially the same terms as stated above. In addition to severance, under
certain circumstances, the agreements call for immediate vesting of any unvested
shares of common stock and stock options.
Note 9 -- Employee Benefit Plans
The Company established a defined contribution employee retirement plan
(the "Plan") effective January 1, 1990, conforming to Section 401(k) of the
Internal Revenue Code ("IRC"). All eligible employees with six months service
may elect to have a portion of their salary deducted and contributed to the Plan
up to the maximum allowable limitations of the IRC. Synaptic matches 50% of each
participant's contribution up to the first 5% of annual compensation (as
defined) with a maximum employer contribution of 2.5% of a participant's
compensation. The Company's matching portion, which amounted to approximately
$117,000, $133,000 and $117,000 for the years ended December 31, 2000, 1999 and
1998, respectively, vests over a six-year period.
The Company currently provides medical, dental, long-term disability
and life insurance benefits for its full-time employees. The Company does not
presently provide any post-retirement health benefits.
Note 10 -- Quarterly Data (Unaudited)
The following tables present selected unaudited information relating to the
results of operations of the Company for the past eight quarters.
(in thousands, except per share information)
2000
------------------------------------------------
1st 2nd 3rd 4th Year
------------------------------------------------
Total revenues $ 214 $ 354 $ 2,903 $ 365 $ 3,836
Total expenses 4,503 5,014 5,306 5,389 20,212
Net loss (3,704) (4,094) (1,998) (4,063) (13,859)
Basic and diluted
Net loss per share (.34) (.38) (.18) (.37) (1.28)
================================================
1999
------------------------------------------------
1st 2nd 3rd 4th Year
------------------------------------------------
Total revenues $ 644 $ 843 $ 314 $ 54 $ 1,855
Total expenses 5,192 5,106 4,823 4,531 19,652
Net loss (3,811) (3,568) (3,887) (3,855) (15,121)
Basic and diluted
Net loss per share (.36) (.33) (.36) (.36) (1.41)
================================================
50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by
reference from the information under the captions "ELECTION OF DIRECTORS" and
"COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN
STOCKHOLDERS" contained in the Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by
reference from the information under the caption "COMPENSATION AND OTHER
INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained
in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by
reference from the information under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference from the information under the caption "COMPENSATION AND OTHER
INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained
in the Proxy Statement.
51
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Reference is made to the Index to Financial Statements under Item 8,
Part II hereof.
(2) Financial Statement Schedules
The Financial Statement Schedules have been intentionally omitted
either because they are not required or because the information has been
included in the notes to the Financial Statements included in this Report on
Form 10-K.
(3) Exhibits
Exhibit
No. Description
--------- --------------------------------------------------------------
3.1(a) Amended and Restated Certificate of Incorporation of the
Company, filed December 19, 1995 (incorporated by reference to
Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q
filed for the quarter ended June 30, 1996, Commission File
Number 0-27324)
3.1(b) Certificate of Designations of Series A Junior Participating
Preferred Stock filed December 19, 1995 (incorporated by
reference to Exhibit 3.1(b) to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended December 31, 1995,
Commission File Number 0-27324)
3.1(c) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, filed June 5,
1996 (incorporated by reference to Exhibit 3.1(c) to the
Company's Quarterly Report on Form 10-Q filed for the quarter
ended June 30, 1996, Commission File Number 0-27324)
3.2 Amended and Restated By-Laws of the Company, as amended on
March 24, 1999 (incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 1999, Commission File Number 0-27324)
4.1 Specimen of Certificate of Common Stock of the Company
(incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
52
4.2 Rights Agreement dated as of December 11, 1995, between the
Company and Chase Mellon Shareholder Services, as Rights Agent
(incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1995, Commission File Number 0-27324)
*10.1 Research, Option and License Agreement dated as of January 25,
1991, between the Company and Eli Lilly and Company, as
amended by Addendum dated as of January 1, 1995 (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
*10.2 Research Collaboration and License Agreement dated as of
November 30, 1993, between the Company and Merck & Co., Inc.,
as amended by Amendment No. 1 dated as of February 15, 1995,
and as modified by the Letter Agreement dated August 25, 1995
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
*10.3 Research and License Agreement dated as of August 4, 1994,
between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis AG, the parent of
Novartis Pharma AG) (incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, as
amended (File Number 33-98366), which became effective on
December 13, 1995)
+10.4 1988 Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.5 Form of Restricted Stock Purchase Agreement under the 1988
Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.6 Form of Incentive Stock Option Agreement under the 1988
Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.7 Form of Nonqualified Stock Option Agreement under the 1988
Amended and Restated Incentive Plan of the Company
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
53
10.8 Third Amended and Restated Registration Rights Agreement dated
as of January 19, 1993, as amended by Amendment No. 1 dated as
of August 4, 1994 (incorporated by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1, as
amended (File Number 33-98366), which became effective on
December 13, 1995)
10.9 Form of Common Stock Purchase Warrant dated as of January 1993
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
10.10 License Agreement dated June 3, 1991, between the Company and
the Trustees of Columbia University in the City of New York
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, as amended (File Number
33-98366), which became effective on December 13, 1995)
+10.11 Employment Agreement dated as of February 14, 1994, between
the Company and Robert I. Taber (incorporated by reference to
Exhibit 10.21 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
+10.12 Employment Agreement dated as of April 6, 1995, between the
Company and Richard L. Weinshank (incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form
S-1, as amended (File Number 33-98366), which became effective
on December 13, 1995)
10.13 Form of Indemnification Agreement between the Company and each
of its executive officers and directors (incorporated by
reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.14 1996 Incentive Plan of the Company, as amended on May 12, 1998
(incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1998, Commission File Number 0-27324)
+10.15 Incentive Stock Option Agreement dated October 1, 1993,
between the Company and Kathleen P. Mullinix (incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.16 Incentive Stock Option Agreement dated February 14, 1994,
between the Company and Robert I. Taber (incorporated by
reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
54
+10.17 Incentive Stock Option Agreement dated February 7, 1994,
between the Company and Lisa L. Reiter (incorporated by
reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1, as amended (File Number 33-98366),
which became effective on December 13, 1995)
+10.18 Incentive Stock Option Agreement dated as of March 21, 1996,
between the Company and Kathleen P. Mullinix (incorporated by
reference to Exhibit 10.25 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 1996,
Commission File Number 0-27324)
+10.19 Incentive Stock Option Agreement dated as of March 21, 1996,
between the Company and Robert L. Spence (incorporated by
reference to Exhibit 10.26 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 1996,
Commission File Number 0-27324)
+10.20 Incentive Stock Option Agreement dated as of March 21, 1996,
between the Company and Lisa L. Reiter (incorporated by
reference to Exhibit 10.27 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended March 31, 1996,
Commission File Number 0-27324)
+10.21 Nonqualified Stock Option Agreement dated as of March 21,
1996, between the Company and Richard L. Weinshank
(incorporated by reference to Exhibit 10.28 to the Company's
Quarterly Report on Form 10-Q filed for the quarter ended
March 31, 1996, Commission File Number 0-27324)
+10.22 Form of Incentive Stock Option Agreement under the 1996
Incentive Plan (incorporated by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 1996, Commission File Number 0-27324)
+10.23 Form of Nonqualified Stock Option Agreement under the 1996
Incentive Plan (incorporated by reference to Exhibit 10.30 to
the Company's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 1996, Commission File Number 0-27324)
***10.24 Research and License Agreement dated as of May 31, 1996,
between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis AG, parent of Novartis
Pharma AG) (incorporated by reference to Exhibit 10.31 to the
Company's Quarterly Report on Form 10-Q/A filed for the
quarter ended June 30, 1996, Commission File Number 0-27324)
***10.25 Supplement No. 1 to Research and License Agreement dated as of
August 4, 1994, between the Company and Ciba-Geigy Limited
(predecessor-in-interest of Novartis AG, parent of Novartis
Pharma AG) (incorporated by reference to Exhibit 10.32 to the
Company's Quarterly Report on Form 10-Q/A filed for the
quarter ended June 30, 1996, Commission File Number 0-27324)
55
10.26 1996 Nonemployee Director Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q filed for the quarter ended June
30, 1996, Commission File Number 0- 27324)
10.27 Form of Stock Option Agreement under the 1996 Nonemployee
Director Stock Option Plan of the Company (incorporated by
reference to Exhibit A attached to Exhibit 10.33 to the
Company's Quarterly Report on Form 10-Q filed for the quarter
ended June 30, 1996, Commission File Number 0-27324)
**10.28 Addendum No. 2 to Research, Option and License Agreement dated
as of October 31, 1996, between the Company and Eli Lilly and
Company (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1996, Commission File No. 0-27324)
***10.29 Amendment No.2 to Research Collaboration and License Agreement
dated as of October 9, 1996, between the Company and Merck &
Co., Inc. (incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1996, Commission File No. 0-27324)
+10.30 Incentive Stock Option Agreement dated as of December 13,
1996, between the Company and Kathleen P. Mullinix
(incorporated by reference to Exhibit 10.37 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1996, Commission File No. 0-27324)
+10.31 Form of Incentive Stock Option Agreement dated as of December
13, 1996, entered into between the Company and each of Robert
L. Spence, Robert I. Taber, Lisa L. Reiter and Richard L.
Weinshank (incorporated by reference to Exhibit 10.38 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1996, Commission File No. 0-27324)
***10.32 Collaborative Research and License Agreement dated as of July
28, 1997, between the Company and the Warner-Lambert Company
(incorporated by reference to Exhibit 10.39 to the Company's
Quarterly Report on Form 10-Q filed for the quarter ended
September 30, 1997, Commission File Number 0- 27324)
+10.33 Executive Employment Agreement effective as of October 1,1997,
between the Company and Dr. Kathleen P. Mullinix (incorporated
by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K filed for the fiscal year ended December 31,
1997, Commission File No. 0-27324)
10.34 Lease Agreement dated November 19, 1997, between the Company
and Century Associates, which becomes effective January 1,
1998 (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1997, Commission File No. 0-27324)
56
10.35 Amendment No. 3 to Research Collaboration and License
Agreement dated as of December 1, 1997, between the Company
and Merck & Co., Inc. (incorporated by reference to Exhibit
10.36 to the Company's Annual Report on Form 10-K filed for
the fiscal year ended December 31, 1997, Commission File No.
0-27324)
+10.36 Amended and Restated Employment Agreement dated as of January
1, 1998, between the Company and Robert L. Spence
(incorporated by reference to Exhibit 10.37 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1997, Commission File No. 0-27324)
***10.37 Cooperation Agreement dated as of January 12, 1998, between
the Company and Grunenthal GmbH (incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K
filed for the fiscal year ended December 31, 1997, Commission
File No. 0-27324)
+10.38 Amended and Restated Employment Agreement dated as of February
7, 1998, between the Company and Lisa L. Reiter (incorporated
by reference to Exhibit 10.39 to the Company's Annual Report
on Form 10-K filed for the fiscal year ended December 31,
1997, Commission File No. 0-27324)
10.39 Amendment No.4 to Research Collaboration and License Agreement
dated as of March 2,1998, between the Company and Merck & Co.,
Inc. (incorporated by reference to Exhibit 10.40 to the
Company's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 1997, Commission File No. 0-27324)
***10.40 Option and License Agreement dated as of March 2, 1998,
between the Company and Glaxo Group Limited (incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on
Form 10-K filed for the fiscal year ended December 31, 1997,
Commission File No. 0-27324)
+10.41 Employment Agreement dated as of April 1, 1998, between the
Company and Theresa A. Branchek (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
filed for the quarter ended March 31, 1998, Commission File
Number 0-27324)
+10.42 Incentive Stock Option Agreement dated as of May 12, 1998,
between the Company and Theresa A. Branchek (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed for the quarter ended June 30, 1998,
Commission File Number 0-27324)
+10.43 Nonqualified Stock Option Agreement dated as of May 12, 1998,
between the Company and Theresa A. Branchek (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q filed for the quarter ended June 30, 1998,
Commission File Number 0-27324)
57
10.44 Amendment No. 1 to Cooperation Agreement between the Company
and Grunenthal GmbH (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q filed for the
quarter ended September 30, 1998, Commission File Number
0-27324)
10.45 First Amendment to Lease dated as of November 25, 1998,
between ARE-215 College Road, LLC, and the Company
(incorporated by reference to Exhibit 10.45 to the Company's
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 1998, Commission File No. 0-27324)
10.46 Amendment No. 5 to Research Collaboration and License
Agreement dated as of December 1, 1998, between the Company
and Merck & Co., Inc. (incorporated by reference to Exhibit
10.46 to the Company's Annual Report on Form 10-K filed for
the fiscal year ended December 31, 1998, Commission File No.
0-27324)
10.47 Addendum No. 3 to Research, Option and License Agreement
effective as of January 1, 1999, between the Company and Eli
Lilly and Company (incorporated by reference to Exhibit 10.47
to the Company's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 1998, Commission File No.
0-27324)
23.1 Consent of Independent Auditors, Ernst & Young LLP
24 Powers of Attorney
* Portions of this Exhibit were omitted and confidential treatment thereof
has been granted by the Secretary of the Securities and Exchange
Commission in response to the Registrant's Application Requesting
Confidential Treatment under Rule 406 under the Securities Act of 1933, as
amended.
** Portions of this Exhibit have been omitted and filed separately with the
Secretary of the Securities and Exchange Commission pursuant to the
Registrant's Application Requesting Confidential Treatment under Rule
24b-2 under the Securities Exchange Act of 1934, as amended.
*** Portions of this Exhibit were omitted and confidential treatment thereof
has been granted by the Secretary of the Securities and Exchange
Commission in response to the Registrant's Application Requesting
Confidential Treatment under Rule 246-2 under the Securities Act of 1933,
as amended.
+ Management contracts and compensatory plans or arrangements
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 2000.
58
Supplemental Information
Copies of the Registrant's Proxy Statement and copies of the form of proxy
to be used at the Annual Meeting of Stockholders to be held on May 10, 2001,
will be furnished to the Securities and Exchange Commission at the time they are
distributed to the Registrant's stockholders.
Imitrex(R) and Zantac(R) are registered trademarks of Glaxo Wellcome
Inc. Hytrin(R) is the registered trademark of Abbott Laboratories. Claritin(R)
is the registered trademark of Schering Corporation. Propulsid(R) is the
registered trademark of Johnson & Johnson. All other brand names or trademarks
appearing in this Report are the property of their respective owners.
59
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNAPTIC PHARMACEUTICAL CORPORATION
Date: March 23, 2001 By: /s/ Kathleen P. Mullinix
---------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Title Date
--------------------------- -------------------------------- --------------
/s/ Kathleen P. Mullinix Chairman, President and
--------------------------- Chief Executive Officer March 23, 2001
Kathleen P. Mullinix, Ph.D.
/s/ Robert L. Spence Senior Vice President and
--------------------------- Chief Financial Officer
Robert L. Spence (Principal Accounting Officer) March 23, 2001
* Director March 23, 2001
---------------------------
Zola P. Horovitz, Ph.D.
* Director March 23, 2001
---------------------------
John E. Lyons
* Director March 23, 2001
---------------------------
Patrick J. McDonald
* Director March 23, 2001
---------------------------
Sandra Panem, Ph.D.
* Director March 23, 2001
---------------------------
Alison Taunton-Rigby, Ph.D.
* By: /s/ Kathleen P. Mullinix
-------------------------------
Name: Kathleen P. Mullinix, Ph.D.
Title: Attorney-in-Fact
60