SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-23280
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 94-3049219 | |
| (State or other jurisdiction of incorporation | (IRS Employer Identification No.) | |
| or organization) |
3260 Blume Drive, Suite 500
Richmond, California 94806
(Address of principal executive offices)
(510) 262-1730
(Registrant’s telephone number, including area code)
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 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of the common stock, as of the latest practical date. Common Stock, $.001 Par Value: 19,208,670 shares outstanding as of October 31, 2003
NEUROBIOLOGICAL TECHNOLOGIES, INC.
FORM 10-Q
2
PART 1. FINANCIAL INFORMATION
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A development stage company)
CONDENSED BALANCE SHEETS
| September 30, 2003 |
June 30, 2003 |
|||||||
| (unaudited) | (Note 1) | |||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 1,359,114 | $ | 66,138 | ||||
| Short-term investments |
2,122,057 | 4,336,127 | ||||||
| Interest receivable |
18,117 | 50,339 | ||||||
| Prepaid expenses and other |
267,006 | 350,533 | ||||||
| Total current assets |
3,766,294 | 4,803,137 | ||||||
| Property and equipment, net |
8,407 | 10,073 | ||||||
| $ | 3,774,701 | $ | 4,813,210 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued expenses |
$ | 396,345 | $ | 565,595 | ||||
| Total current liabilities |
396,345 | 565,595 | ||||||
| Stockholders’ equity: |
||||||||
| Convertible Series A Preferred stock, $.001 par value, 5,000,000 shares authorized, 2,332,000 issued in series, 754,000 and 1,154,000 outstanding at September 30, 2003 and June 30, 2003, respectively |
377,000 | 577,000 | ||||||
| Common stock, $.001 par value, 35,000,000 shares authorized, 19,183,945 and 18,755,553 outstanding at September 30, 2003 and June 30, 2003, respectively |
44,459,533 | 44,259,534 | ||||||
| Deferred compensation |
(68,438 | ) | (82,126 | ) | ||||
| Deficit accumulated during development stage |
(41,389,640 | ) | (40,516,524 | ) | ||||
| Accumulated other comprehensive income |
(99 | ) | 9,731 | |||||
| Total stockholders’ equity |
3,378,356 | 4,247,615 | ||||||
| $ | 3,774,701 | $ | 4,813,210 | |||||
See accompanying notes.
3
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended September 30, |
Period from August 27, 1987 (inception) through September 30, |
||||||||||
| 2003 |
2002 |
||||||||||
| Revenues: |
|||||||||||
| License |
$ | — | $ | 1,406,230 | $ | 8,849,940 | |||||
| Royalty |
9,784 | — | 20,733 | ||||||||
| Grant |
— | — | 149,444 | ||||||||
| Total revenues |
9,784 | 1,406,230 | 9,020,117 | ||||||||
| Expenses: |
|||||||||||
| Research and development |
327,925 | 906,759 | 32,816,746 | ||||||||
| General and administrative |
576,238 | 488,611 | 21,039,093 | ||||||||
| Total expenses |
904,163 | 1,395,370 | 53,855,839 | ||||||||
| Operating income (loss) |
(894,379 | ) | 10,860 | (44,835,722 | ) | ||||||
| Interest income |
21,263 | 45,243 | 3,446,082 | ||||||||
| Net income (loss) |
$ | (873,116 | ) | $ | 56,103 | $ | (41,389,640 | ) | |||
| Basic net income (loss) per common share |
$ | (0.05 | ) | $ | 0.00 | ||||||
| Weighted average shares used in basic net income (loss) per common share calculation |
18,833,423 | 17,782,288 | |||||||||
| Diluted net income (loss) per common share |
$ | (0.05 | ) | $ | 0.00 | ||||||
| Weighted average shares used in diluted net income (loss) per common share calculation |
18,833,423 | 19,848,357 | |||||||||
See accompanying notes.
4
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended September 30, |
Period from August 27, 1987 September 30, 2003 |
|||||||||||
| 2003 |
2002 |
|||||||||||
| OPERATING ACTIVITIES: |
||||||||||||
| Net income (loss) |
$ | (873,116 | ) | $ | 56,103 | $ | (41,389,640 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||
| Depreciation and amortization |
1,666 | 2,783 | 700,450 | |||||||||
| Gain on sale of property and equipment |
— | — | (1,500 | ) | ||||||||
| Amortization of deferred stock compensation |
13,688 | 13,688 | 205,312 | |||||||||
| Issuance of common stock, options and warrants for license rights and services |
— | — | 209,975 | |||||||||
| Changes in assets and liabilities: |
||||||||||||
| Interest receivable |
32,222 | 92,190 | (18,117 | ) | ||||||||
| Prepaid expenses and other current assets |
83,527 | 54,084 | (267,006 | ) | ||||||||
| Accounts payable and accrued expenses |
(169,250 | ) | 90,667 | 396,345 | ||||||||
| Net cash provided by (used in) operating activities |
(911,263 | ) | 309,514 | (40,164,181 | ) | |||||||
| INVESTING ACTIVITIES: |
||||||||||||
| Purchase of investments |
(1,421,926 | ) | (6,631,766 | ) | (56,197,411 | ) | ||||||
| Maturity of investments |
3,626,165 | 7,300,000 | 54,075,254 | |||||||||
| Purchases of property and equipment, net |
— | — | (425,795 | ) | ||||||||
| Proceeds from sale of property & equipment |
— | — | 1,500 | |||||||||
| Additions to patents and licenses |
— | — | (283,062 | ) | ||||||||
| Net cash provided by (used in) investing activities |
2,204,239 | 668,234 | (2,829,514 | ) | ||||||||
| FINANCING ACTIVITIES: |
||||||||||||
| Payment of note payable |
— | — | (200,000 | ) | ||||||||
| Proceeds from short-term borrowings |
— | — | 435,000 | |||||||||
| Issuance of common stock, net |
— | 10,502 | 36,046,677 | |||||||||
| Repurchase of common stock |
— | (65,625 | ) | (86,950 | ) | |||||||
| Issuance of preferred stock, net |
— | — | 8,158,082 | |||||||||
| Net cash provided by (used in) financing activities |
— | (55,123 | ) | 44,352,809 | ||||||||
| Increase in cash and cash equivalents |
1,292,976 | 922,625 | 1,359,114 | |||||||||
| Cash and equivalents at beginning of period |
66,138 | 277,062 | — | |||||||||
| Cash and equivalents at end of period |
$ | 1,359,114 | $ | 1,199,687 | $ | 1,359,114 | ||||||
| SUPPLEMENTAL DISCLOSURES: |
||||||||||||
| Conversion of short-term borrowings to Series A preferred stock |
$ | — | $ | — | $ | 235,000 | ||||||
| Conversion of preferred stock to common stock |
$ | 200,000 | $ | — | $ | 8,016,082 | ||||||
| Deferred stock compensation related to options granted |
$ | — | $ | — | $ | 273,750 | ||||||
See accompanying notes.
5
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
NOTE 1-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2004.
The balance sheet at June 30, 2003 has been derived from the audited financial statements at that date but does not include all the information and notes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2003.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share is presented under the requirements of Financial Accounting Standards Board (“FAS”) No. 128, “Earnings per Share.” Basic net income (loss) per share is computed based on the weighted average shares of common stock outstanding and excludes any options, warrants, and convertible securities. For the three months ended September 30, 2002, diluted earnings per share is computed in the same manner and also gives effect to all dilutive common equivalent shares consisting of employee stock options, warrants, and the assumed conversion of convertible preferred stock. Potentially dilutive securities, such as options, warrants, and convertible preferred stock, have been excluded from the computation of diluted net loss per share for the three months ended September 30, 2003 as their effect is antidilutive. The following table sets forth the computation of basic and diluted earnings per share.
| Three Months Ended September 30, |
||||||||
| 2003 |
2002 |
|||||||
| Numerator for basic and diluted earnings per share – net income (loss) |
$ | (873,116 | ) | $ | 56,103 | |||
| Denominator for basic earnings per share – weighted average shares |
18,833,423 | 17,782,288 | ||||||
| Effect of dilutive securities: |
||||||||
| Employee stock options |
— | 61,506 | ||||||
| Warrants |
— | 632,563 | ||||||
| Assumed conversion of convertible preferred stock |
— | 1,372,000 | ||||||
| Denominator for diluted earnings per share |
18,833,423 | 19,848,357 | ||||||
| Basic net income (loss) per common share |
$ | (0.05 | ) | $ | 0.00 | |||
| Diluted net income (loss) per common share |
$ | (0.05 | ) | $ | (0.00 | ) | ||
6
REVENUE RECOGNITION
Revenue related to license fees with non-cancelable, non-refundable terms and no future performance obligations are recognized when collection is assured. Such revenues are deferred and recognized over the performance period if future performance obligations exist. Non-refundable up-front payments received in connection with research and development activities are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenue associated with milestones are recognized as earned, based on completion of development milestones, either upon receipt, or when collection is assured.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations because the alternative fair value accounting provided under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of our employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
Stock-based compensation arrangements to non-employees are accounted for in accordance with FAS 123, EITF 96-18, and related Interpretations, using a fair value approach, and the compensation costs of such arrangements are subject to re-measurement over their vesting terms, as earned.
As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” (SFAS 148), the Company elected to continue to apply the provisions of Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations in accounting for its employee stock option and stock purchase plans. The Company is generally not required under APB 25 and related interpretations to recognize compensation expense in connection with its employee stock option and stock purchase plans when exercise prices are not less than fair value.
Pro forma information regarding net income (loss) and net income (loss) per common share is required by SFAS 148 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by the SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates ranging from 1.27% to 1.78% for the three months ended September 30, 2002. There were no new grants for the three months ended September 30, 2003.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the vesting period of the options using the straight-line method. The Company’s pro forma information follows (in thousands).
| Three months ended September 30, |
||||||||
| 2003 |
2002 |
|||||||
| Net income (loss) – as reported |
$ | (873 | ) | $ | 56 | |||
| Add back: |
||||||||
| Stock-based employee compensation expense included in net loss as reported |
14 | 14 | ||||||
| Deduct: |
||||||||
| Stock-based employee expense determined under SFAS 123 |
(117 | ) | (124 | ) | ||||
| Pro forma net income (loss) |
$ | (976 | ) | $ | (54 | ) | ||
| Basic and diluted net income (loss) per share – as reported |
$ | (0.05 | ) | $ | (0.00 | ) | ||
| Basic and diluted pro forma net income (loss) per share |
$ | (0.05 | ) | $ | (0.00 | ) | ||
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that 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
7
employee stock options and employee stock purchase plans have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market 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, nor do they necessarily represent the effects of employee stock options on reported net income (loss) for future years.
NOTE 2-INVESTMENTS
The following is a summary of available-for-sale investments (in thousands).
| September 30, 2003 | |||||||||
| Cost |
Gross Unrealized Gains |
Market Value | |||||||
| Corporate debt obligations |
$ | 1,218 | $ | — | $ | 1,218 | |||
| U.S. Government obligations |
904 | — | 904 | ||||||
| Total investments |
$ | 2,122 | $ | — | $ | 2,122 | |||
| June 30, 2003 | |||||||||
| Cost |
Gross Unrealized Gains |
Market Value | |||||||
| Corporate debt obligations |
$ | 2,826 | $ | 9 | $ | 2,835 | |||
| U.S. Government obligations |
1,500 | 1 | 1,501 | ||||||
| Total investments |
$ | 4,326 | $ | 10 | $ | 4,336 | |||
NOTE 3-EQUITY TRANSACTIONS
In August 2002, our board of directors authorized a stock repurchase program of up to 500,000 shares of our common stock. Depending on market conditions and other factors, repurchases will be made from time to time in the open market and in negotiated transactions, including block transactions and may be discontinued at any time. As of September 30, 2003, we had repurchased 32,000 shares of common stock under this program at an aggregate purchase price of $87,000. All shares repurchased have been retired.
In August 2003, a warrant was exercised through a cashless exercise in accordance with the terms of the warrant and 28,392 shares of common stock were issued to the warrant holder.
In September 2003, 400,000 shares of convertible Series A preferred stock were converted to common stock on a one-for-one basis.
8
NOTE 4-COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and unrealized holding gains and losses on available-for-sale investments.
| Three Months Ended September 30 | |||||||
| 2003 |
2002 | ||||||
| Net income (loss) |
$ | (873,116 | ) | $ | 56,103 | ||
| Other comprehensive income |
(9,830 | ) | 6,247 | ||||
| Comprehensive income (loss) |
$ | (882,946 | ) | $ | 62,350 | ||
NOTE 5-SUBSEQUENT EVENTS
In October 2003, we received a $281,230 payment from Merz Pharmaceuticals GmbH under our 1998 strategic research and marketing cooperation agreement. This payment represents a portion of the payment received by Merz pursuant to Merz’s agreement with H. Lundbeck A/S for the approval of Memantine (Ebixa®) for the treatment of Alzheimer’s disease in France.
In November 2003, we received a $18,658 payment from Merz under our 1998 strategic research and marketing cooperation agreement. This payment represents a portion of the royalties received by Merz on sales of Memantine (Ebixa) by Lundbeck during the quarter ended September 30, 2003.
We are recognizing the payments received from Merz as revenue in the quarter ending December 31, 2003.
9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q are forward-looking statements that involve risks and uncertainties. The factors listed in the section captioned “Risk Factors,” as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
OVERVIEW
Neurobiological Technologies, Inc. (“NTI®”, “we”, “us”, “our” or the “Company”) is an emerging drug development company focused on the clinical evaluation and regulatory approval of neuroscience drugs. We develop neuroprotective and neuromodulatory agents to treat progressive neurological impairments characteristic of various nervous system disorders, including diabetic neuropathy and brain cancer. Our strategy is to in-license and develop early- and later-stage drug candidates that target major medical needs and that can be rapidly commercialized.
In April 1998, we entered into a strategic research and marketing cooperation agreement with Merz Pharmaceuticals GmbH, or Merz, and Children’s Medical Center Corporation to further the clinical development and commercialization of Memantine. Pursuant to this agreement, NTI and Merz share scientific, clinical and regulatory information about Memantine to facilitate regulatory review and marketing approval by the Food and Drug Administration, or FDA, and foreign regulatory authorities. Pursuant to this agreement, we will share in future revenues from sales of Memantine for all indications in certain geographic markets.
In June 2000, Merz entered into an agreement with Forest Laboratories, Inc., or Forest, for the development and marketing of Memantine in the United States for the treatment of Alzheimer’s disease, neuropathic pain and AIDS-related dementia. In August 2000, Merz entered into a strategic license and cooperation agreement with H. Lundbeck A/S of Copenhagen, Denmark, or Lundbeck, for the further development and marketing of Memantine for the treatment of Alzheimer’s disease, neuropathic pain and AIDS-related dementia. Lundbeck acquired exclusive rights to Memantine in certain European markets, Canada, Australia and South Africa, as well as semi-exclusive rights to co-market Memantine with Merz in other markets worldwide, excluding the United States, where Forest has development rights, and Japan, where Merz has granted development rights to Suntory/Dai-Ichi Ltd.
In July 2001, Forest initiated the second of two trials necessary for registration of a New Drug Application, or NDA, to the FDA for diabetic neuropathy. In May 2003, Forest announced that Memantine had failed to demonstrate a statistically significant difference versus placebo with regards to the primary endpoint of this trial. Subsequent to quarter-end and based on recently completed analysis of the clinical trial results, Forest announced that it has decided to proceed with an expanded clinical program with the objective of obtaining approval of Memantine for neuropathic pain. The expanded clinical program will include a new Phase II trial that will examine various neuropathic pain conditions at different dosages. Based on the outcome of this Phase II trial, Forest may initiate additional placebo-controlled Phase III trials, with the goal of generating sufficient clinical data for submission of a NDA for the treatment of neuropathic pain. We conducted the first Phase II trial with an enrollment of over 400 patients and reported positive results in January 2000.
In May 2002, Merz announced that Memantine (Ebixa®) was approved by the regulatory authorities in the European Union for the treatment of Alzheimer’s disease. In July 2002, Merz received a payment from Lundbeck relating to this approval. This triggered a $1.4 million payment to NTI in August 2002 from Merz under our 1998 strategic research and marketing cooperation agreement. We also received payments of $281,000 in January 2003 and $281,000 in May 2003 from Merz, which represented a portion of the payments received by Merz pursuant to Merz’s agreement with H. Lundbeck A/S for the approval of Memantine for the treatment of Alzheimer’s disease. NTI expects to receive royalty payments from Merz on sales in certain European countries and the United States, when these sales commence. In May 2003, we received our first royalty payment of $11,000 on Memantine sales.
In September 2002, Forest completed a placebo-controlled Phase III study in which a significant benefit was observed when Memantine was combined with donepezil in patients with moderately-severe to severe
10
Alzheimer’s disease. Subsequent to quarter-end, Forest announced that it has received FDA approval of Memantine (Namenda) for the treatment of moderate-to-severe Alzheimer’s disease. Forest expects the product to be available for patients in January 2004. Under our strategic research and marketing cooperation agreement with Merz, the approval of Namenda triggers a milestone payment from Merz, which we expect to receive January 31, 2004, and should result in royalty payments from sales of Namenda in the United States beginning in the current fiscal year.
Forest is presently conducting three additional placebo-controlled studies in either mild-to-moderate or moderate-to-severe Alzheimer’s disease. In June 2003, Forest announced that one of these trials did not demonstrate statistically significant effects on cognitive or global outcomes compared to placebo. This trial combined Memantine with Acethl cholinesterase inhibitors for mild-to-moderate Alzheimer’s disease.
We are also developing XERECEPT™, a synthetic preparation of the natural human peptide, Corticorelin Human Acetate, as a treatment for brain swelling due to brain tumors (peritumoral brain edema). In April 1998, XERECEPT received orphan drug designation for this indication from the FDA. Orphan drug designation provides us with seven years market exclusivity and makes us eligible to receive Orphan Drug Grants to fund clinical research. We are currently discussing with the FDA two pivotal trials of XERECEPT for the treatment of peritumoral brain edema and have completed the FDA required long-term animal toxicity studies. We expect to commence the Phase III clinical trials before the end of 2003.
Since our founding in 1987, we have applied a majority of our resources to our research and development programs and have generated only limited operating revenue. Except for fiscal 2001, we have incurred losses in each year since our inception and we expect to continue to incur losses over at least the next twelve months due to ongoing research and development efforts. As of September 30, 2003, our deficit accumulated during the development stage was $41.4 million.
RESULTS OF OPERATIONS
We had approximately $10,000 of royalty revenue from Merz under our 1998 strategic research and marketing cooperation agreement for the three months ended September 30, 2003. Our revenues were $1.4 million for the three months ended September 30, 2002 from license fee payments from Merz under our 1998 strategic research and marketing cooperation agreement.
Our research and development expenses decreased to approximately $328,000 for the three months ended September 30, 2003, from approximately $907,000 for the three months ended September 30, 2002. The decrease was primarily due to the completion of long-term toxicology studies and manufacturing of clinical supplies of XERECEPT™. General and administrative expenses increased to approximately $576,000 for the three months ended September 30, 2003, compared to $489,000 for the same period of the prior year. The increase was primarily due to increased insurance costs and costs related to strategic partnership activities. Interest income decreased to approximately $21,000 for the three months ended September 30, 2003, compared to approximately $45,000 for the same period of the prior year due to lower average interest rates and lower average invested cash, cash equivalent and investment balances.
Our two product candidates, Memantine and XERECEPT™, have completed or are in Phase II or Phase III human clinical testing. To date, we have incurred costs of approximately $8.9 million in the development of Memantine and $16.5 million in the development of XERECEPT. All future costs for the development and commercialization of Memantine will be borne by Merz and its marketing partners, Forest and Lundbeck. We expect to incur ongoing costs primarily for Phase III clinical trials for our development of XERECEPT™ and related administrative support. We are currently unable to estimate the costs of completing human clinical trials for XERECEPT due to the uncertainties inherent in conducting clinical trials and seeking regulatory approval for a drug candidate.
Research and development expenditures are charged to operations as incurred. Research and development expenses, including direct and allocated expenses, consist of independent research and development costs and costs associated with sponsored research and development.
11
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 2003, we have raised a total of approximately $44 million in net proceeds from the sale of common and preferred stock.
We had available cash and cash equivalents and investments of approximately $3.5 million as of September 30, 2003, compared to approximately $4.4 million at June 30, 2003. We believe that our capital resources will be adequate to fund our operations through at least the next twelve months. In the course of our development activities, we have incurred significant losses, and although we were profitable in the fiscal year ended June 30, 2001 and the quarter ended September 30, 2002, we expect to incur additional operating losses over at least the next twelve months as we continue to expand our research and development efforts. We expect to incur substantial costs in fiscal 2004 primarily for Phase III clinical trials of XERECEPT and related administrative support. Merz and Merz’s marketing partners will pay all future development costs of Memantine.
Our future capital requirements will depend on a number of factors, including:
| • | the amount of payments received from marketing agreements for Memantine; |
| • | the amount of royalties received from Merz for future sales of Memantine; |
| • | the progress of our clinical development programs; |
| • | the time and cost involved in obtaining regulatory approvals; |
| • | the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; |
| • | the acquisition or licensing of new drug candidates; |
| • | competing technological and market developments; |
| • | our ability to establish collaborative relationships; and |
| • | the development of commercialization activities and arrangements. |
Our only long-term capital obligation relates to our leased facility in Richmond, California. The minimum payment is approximately $91,000 for the one-year term of the lease, which expires July 2004.
RISK FACTORS
We are dependent on Merz and its marketing partners Forest and Lundbeck for the successful commercialization of Memantine.
All of our revenues to date have been license fees and royalty payments from Merz related to our portion of payments received by Merz pursuant to its agreements with Forest and Lundbeck, its marketing partners. The only revenues that we expect to receive in the foreseeable future are our share of payments received by Merz from Forest and Lundbeck and royalties on sales of Memantine made by Merz or its marketing partners. This depends, among other things, on the continuation of our research and marketing cooperation agreement with Merz and Children’s Medical Center. Although Merz has received approval to market Memantine for Alzheimer’s disease in Europe, we are not entitled to receive royalty payments for Memantine sales for Alzheimer’s disease in many European countries and any commercialization efforts in these countries, or the importation of Memantine into the United States from these countries, would not directly benefit us. Although Forest has received marketing approval for Namenda for Alzheimer’s disease in the United States and expects to launch the product in January 2004, the launch could be delayed and revenue projections for Namenda may not be attained. If Merz or Forest is unable to successfully commercialize Memantine, or if Memantine is not commercialized for indications or in markets where we are entitled to royalty payments, our revenues would be adversely affected.
Under certain circumstances, Merz or Children’s Medical Center can terminate our research and marketing cooperation agreement upon six months’ notice. The termination of this agreement or any failure by Merz or its partners to successfully commercialize Memantine could reduce or terminate our future royalties under the research and marketing cooperation agreement and would have a material adverse effect on our business, financial condition and results of operations.
Under our research and marketing cooperation agreement with Merz, we are entitled to receive a substantially higher royalty rate on sales of Memantine for neuropathic pain and indications other than Alzheimer’s disease. The royalties we receive could be adversely affected if there is significant “off label” usage of Memantine marketed for Alzheimer’s disease.
12
Our product candidates are based on new technologies and therefore are subject to numerous inherent risks of failure.
Our product candidates are based on new and relatively unproven technologies. As a result, these candidates face numerous risks of failure, including the possibility that these candidates may:
| • | be found to be unsafe, ineffective or toxic; |
| • | fail to receive necessary regulatory clearances; |
| • | if approved, be difficult to manufacture on a large scale or uneconomical to market; |
| • | be precluded from marketing by us or our marketing partners due to the proprietary rights of third parties; and |
| • | not be successful because third parties market or may market superior or equivalent products. |
Further, our development activities may not result in any commercially viable products. Although Merz has received approval to market Memantine for the treatment of Alzheimer’s disease in Europe, and Forest has recently received approval to market Namenda for the treatment of Alzheimer’s disease in the United States, Merz and its marketing partners may not receive approval to market Memantine for neuropathic pain or other indications. The failure of Merz or its marketing partners to receive approval to market Memantine for neuropathic pain or indications other than Alzheimer’s disease could adversely affect our rights under our research and marketing cooperation agreement with Merz and Children’s Medical Center.
Other than Memantine, we have one potential product that is in clinical development and we may not develop another candidate product that will receive required regulatory approval or be successfully commercialized.
We are still a development-stage company and, except for Memantine, we have only one product, XERECEPT, in clinical development. The results of our preclinical studies and early-stage clinical trials are not necessarily indicative of those that will be obtained upon further clinical testing in later-stage clinical trials. For example, although our Phase II clinical trials for Memantine for the treatment of neuropathic pain yielded positive results, subsequent clinical trials conducted by Forest did not replicate these results. Similar variations in later-stage clinical trial results may also be seen in XERECEPT as longer trials and larger patient populations are used. Further, although we expect to launch Phase III clinical trials of XERECEPT before the end of 2003, patient enrollment in these trials may be slow, as it was in our clinical trials of XERECEPT for peritumoral brain edema. Any delays in patient enrollment could delay the development of XERECEPT. It is also possible that XERECEPT will not be further developed or successfully commercialized.
Our quarterly operating results may fluctuate significantly in future periods, and, as a result, our stock price may fluctuate or decline.
To date, our revenues have primarily come from licensing fee payments from Merz. Licensing fee payments and, therefore, our results of operations, may vary significantly from quarter to quarter. Accordingly, we believe that quarter-to-quarter comparisons of our historical results of operations are not indicative of our future performance.
We have relied and will continue to rely on others for research, development, manufacture and commercialization of our potential products.
We have entered into various contractual arrangements (which are generally non-exclusive) with consultants, academic collaborators, licensors, licensees and others, and we are dependent upon the level of commitment and subsequent success of these outside parties in performing their responsibilities. Certain of these agreements place significant responsibility for preclinical testing and human clinical trials and for preparing and submitting submissions for regulatory approval for potential products on the collaborator, licensor or contractor. If the collaborator, licensor or contractor fails to perform, our business, financial conditions and results may be adversely affected.
We have also relied on scientific, mechanical, clinical, commercial and other data supplied and disclosed by others in entering into these agreements. We have relied on this data in support of applications for human clinical
13
trials for our potential products. Although we have no reason to believe that this information contains errors or omissions of fact, it is possible that there are errors or omissions of fact that would change materially our view of the future likelihood of FDA approval or commercial viability of these potential products.
We have agreements and licenses with third parties that require us to meet certain due diligence obligations, provide regular reports and make royalty and other payments to such parties. Our failure to satisfy these obligations could cause us to lose rights to technology or data under these agreements.
The FDA and state and local agencies, and comparable agencies and entities in foreign countries impose substantial requirements on the manufacturing and marketing of human therapeutics through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time consuming procedures.
Fulfillment of regulatory requirements for marketing human therapeutics typically takes many years and varies substantially based on the type, complexity, and novelty of the drug for which approval is sought. Government regulation may:
| • | delay for a considerable period of time or prevent marketing of any product that we may develop; and/or |
| • | impose costly procedures upon our activities. |
Either of these effects of government regulation may provide an advantage to our competitors.
There can be no assurance that FDA or other regulatory approval for any products developed by NTI will be granted on a timely basis or at all. Any delay in obtaining, or failure to obtain, required approvals would adversely affect the marketing of our proposed products and our ability to earn product revenues or royalties.
In addition, success in preclinical or early-stage clinical trials does not assure success in later-stage clinical trials. For example, although our Phase II clinical trials for Memantine for the treatment of diabetic neuropathy produces positive results, subsequent clinical trials conducted by Forest did not replicate these results. As with any regulated product, additional government regulations may be instituted which could delay regulatory approval of our potential products. Additional government regulations that might result from future legislation or administrative action cannot be predicted.
Our success will depend, in large part, on our ability to obtain or license patents, protect trade secrets and operate without infringing upon the proprietary rights of others.
The patent position of biotechnology firms generally is highly uncertain because:
| • | patents involve complex legal and factual issues that have recently been the subject of much litigation; |
| • | no consistent policy has emerged from the United States Patent and Trademark Office regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents; and |
| • | others may independently develop similar products, duplicate any of our potential products, or design around the claims of any of our potential patented products. |
In addition, because of the time delay in patent approval and the secrecy afforded United States patent applications, we do not know if other applications, which might have priority over our applications, have been filed. Further, because we have non-exclusive licenses to patent rights covering certain uses of XERECEPT, others may develop, manufacture and market products that could compete with those we develop.
As a result of all of these factors, there can be no assurance that patent applications relating to our potential products or processes will result in patents being issued, or that patents, if issued, will provide protection against competitors who successfully challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or be able to circumvent our patent position.
A number of pharmaceutical and biotechnology companies and research institutions have developed competing technologies and may have patent rights that conflict with our patent rights. If such a conflict were to develop, the scope of our patent rights could be limited and we may be unable to obtain additional patent rights needed to permit the continuing use of the subject technologies.
14
In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information. It is our policy that each employee enter into a confidentiality agreement which contains provisions generally prohibiting the disclosure of confidential information to anyone outside NTI and requiring disclosure to us of ideas, developments, discoveries or inventions conceived during employment and assignment to us of proprietary rights to such matters related to our business and technology. However, it is possible that these agreements could be breached. In addition, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology.
Because we do not have our own manufacturing facilities, we face risks from outsourcing.
Merz and Merz’s marketing partners have the responsibility of supplying Memantine for their clinical trials. Our clinical supply of XERECEPT has been manufactured by established methods using chemical synthesis to our specifications. We performed audits on our contractors who supplied XERECEPT to assess compliance with the current Good Manufacturing Practice, or cGMP, regulations. Alternative cGMP suppliers of the bulk drugs and of finished dosage form products are available to us. We currently have no plans to build or develop an in-house manufacturing capability.
We face certain risks by outsourcing manufacturing, including:
| • | the delay of our preclinical and human clinical testing if our contractors are unable to supply sufficient quantities of product candidates manufactured in accordance with cGMP on acceptable terms; |
| • | the delay of market introduction and subsequent sales if we should encounter difficulties establishing relationships with manufacturers to produce, package and distribute products; and |
| • | adverse effects on FDA pre-market approval of potential products and contract manufacturers if they do not adhere to cGMP regulations. |
Because of these risks, our dependence on third parties for the manufacture of products may adversely affect our results of operations and our ability to develop and deliver products on a timely and competitive basis.
Clinical trials or marketing of any of our potential products may expose us to liability claims from the use of such products which our insurance may not cover.
We currently have a limited amount of product liability insurance that only covers liabilities arising from clinical trials. It is possible that our current insurance may not be adequate to cover liabilities arising from our clinical trials.
Our current product liability insurance does not cover the commercial sales of products. We cannot be sure that we will be able to obtain product liability insurance covering commercial sales or, if such insurance is obtained, that sufficient coverage can be acquired at a reasonable cost. An inability to obtain insurance at acceptable cost or otherwise protect against potential product liability claims could prevent or inhibit commercialization of any products we develop.
Reductions in our staff might delay the achievement of planned development objectives.
Each person currently employed by us serves an essential function. Any reduction in our staff could impair our ability to manage ongoing clinical trials and may have a material adverse effect on our operations.
The market price of our common stock has been, and is likely to continue to be, highly volatile.
The average daily trading volume of our common stock has historically been low compared to that of other biopharmaceutical companies. Because of our relatively low trading volume, our stock price can be highly volatile.
Factors that may cause volatility in our stock price include:
| • | announcements of the results of pre-clinical studies and clinical trials by us, Merz or its marketing partners or our competitors; |
| • | other evidence of the safety or efficacy of our products, or those of Merz or its marketing partners or our competitors; |
| • | announcements of technological innovations or new therapeutic products by us or our competitors; |
| • | developments in patent or other proprietary rights of us or our competitors, including litigation; |
15
| • | fluctuations in our operating results; |
| • | government regulation and health care legislation; and |
| • | market conditions for life science companies’ stocks in general. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.
The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities. As of September 30, 2003, the fair value of our investments was $2.1 million and 100% of our total portfolio will mature in one year or less. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk. We do not use or hold derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of President and Chief Executive Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Company and the President and Chief Executive Officer concluded that the Company’s disclosure controls and procedures were effective.
We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
(b) Reports:
On August 25, 2003, we filed a Current Report on Form 8-K furnishing our press release announcing the results of operations for the quarter and fiscal year ended June 30, 2003.
16
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NEUROBIOLOGICAL TECHNOLOGIES, INC. | ||
| Dated: November 12, 2003 |
/s/ Paul E. Freiman | |
| Paul E. Freiman | ||
| President, Chief Executive Officer | ||
| (Principal Executive and Accounting Officer) and Director | ||
17