SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 1-12584
SHEFFIELD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 13-3808303
(State of Incorporation) (IRS Employee Identification Number)
14528 SOUTH OUTER FORTY ROAD
STE 205 63017 (314) 579-9899
ST. LOUIS, MISSOURI (Zip Code) (Registrant's telephone,
(Address of principal executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Class Name of each exchange on which registered
Common Stock. $.01 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 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. [X]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the 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. [X]
The aggregate market value at March 25, 2002 of the voting
stock of the registrant held by non-affiliates (based upon the closing price of
$2.27 per share of such stock on the American Stock Exchange on such date) was
approximately $48,072,000. Solely for the purposes of this calculation, shares
held by the registrant's directors and executive officers and beneficial owners
of 10% or more of the Company's Common Stock of the registrant have been
excluded. Such exclusion should not be deemed a determination or an admission by
the registrant that such persons are, in fact, affiliates of the registrant.
Indicate the number of shares outstanding of each of the
registrant's classes of common equity, as of the latest practicable date: At
March 25, 2002, there were outstanding 29,068,712 shares of the registrant's
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy
statement to be filed not later than April 30, 2002 pursuant to Regulation 14A
are incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.
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PART I
The following contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. All forward-looking statements
involve risks and uncertainty. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, the
Company's actual results may differ materially from the results anticipated in
the forward-looking statements. See "Business - Certain Risk Factors that May
Affect Future Results, Financial Condition and Market Price of Securities"
included herein for a discussion of factors that could contribute to such
material differences. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 1. BUSINESS
THE COMPANY
Sheffield Pharmaceuticals, Inc. (formerly Sheffield Medical
Technologies Inc.) ("Sheffield" or the "Company") was incorporated under
Canadian law in October 1986. In May 1992, the Company became domesticated as a
Wyoming Corporation pursuant to a "continuance" procedure under Wyoming law. In
January 1995, the Company's shareholders approved the proposal to reincorporate
the Company in Delaware, which was effected on June 13, 1995. The Company
provides innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. The Company is developing a range of products to treat
respiratory and systemic diseases in its proprietary pulmonary delivery systems,
including the Premaire(R) Delivery System ("Premaire") and Tempo(TM) Inhaler
("Tempo"). The Company is in the development stage and, as such, has been
principally engaged in the development of its pulmonary delivery systems.
Sheffield believes these pulmonary delivery technologies will allow the Company
to capitalize on the growing drug delivery market by providing both advanced
respiratory treatments and patient-friendly alternatives for therapies that can
currently be administered only by injection or other inconvenient means.
In 1997, the Company acquired the Premaire, a portable nebulizer-based
pulmonary delivery system, through a worldwide exclusive license and supply
arrangement with Siemens AG ("Siemens"). During the second half of 1998, the
Company acquired the rights to a new generation propellant-based pulmonary
delivery system, Tempo, from a subsidiary of Aeroquip-Vickers, Inc.
("Aeroquip-Vickers"). Additionally, during 1998, Sheffield licensed from Elan
Corporation, plc ("Elan") the Ultrasonic Pulmonary Drug Absorption System
("UPDAS"), a novel disposable unit dose nebulizer system, and Elan's Absorption
Enhancing Technology ("Enhancing Technology"), a therapeutic agent to increase
the systemic absorption of drugs. In October 1999, the Company licensed Elan's
Nanocrystal(TM) technology to be used in developing certain inhaled steroid
products.
BUSINESS STRATEGY
The Company's business strategy is to seek out opportunities to acquire
and develop commercially attractive pharmaceutical products, primarily in the
area of pulmonary drug delivery. The Company recognizes that no single
technology in the area of pulmonary drug delivery will meet the needs of
patients and providers of the wide variety of compounds (both for respiratory
disease and systemic disease therapy) that may benefit therapeutically and
commercially from pulmonary delivery. As a result, it remains the Company's goal
to acquire or in-license a portfolio of pulmonary delivery technologies to meet
the broadest based market opportunity. The Company intends to selectively enter
into joint ventures or other forms of strategic alliances to access technology
and compounds as well as defray or reduce significant development and
manufacturing costs associated with these opportunities that otherwise might be
borne by the Company. The Company will also retain certain commercial rights to
these products.
The Company will continue to be opportunistic in the acquisition and/or
in-licensing of technologies or products that meet the Company's strategic
objectives. Such opportunities include: (1) technologies or products that meet
the needs of healthcare providers and patients that are not currently served,
(2) technologies or products that can effectively be developed when viewed in
light of the commercial opportunity and competitive environment within the U.S.
market, (3) technologies or products that will be of substantive interest to
other companies with regard to co-development and co-marketing with limited
incremental investment by the Company, and (4) products and technologies with
the potential for marketing to a specialty group or limited physician audience.
The Company plans to pay special attention to platform technologies that can be
developed into multiple applications in varying therapeutic categories.
STRATEGIC ALLIANCES
The Company believes a less costly, more predictable path to commercial
development of therapeutics can be achieved through the creative use of
collaborations and alliances, combined with state-of-the-art technology and
experienced management. The Company is applying this strategy to the development
of both respiratory and systemic pharmaceutical products to be delivered through
the Company's proprietary pulmonary delivery systems. Using these pulmonary
delivery systems as platforms, the Company has established strategic alliances
for developing its initial products.
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The Company is developing a range of pharmaceutical products delivered
by the Premaire to treat respiratory diseases. Products initially developed for
respiratory disease therapy delivered through the Premaire include albuterol
sulfate, ipratropium bromide, sodium cromoglycate and inhaled steroids. In June
1998, the Company sublicensed to Zambon Group SpA ("Zambon") worldwide marketing
and development rights to respiratory products to be delivered by the Premaire
in return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the costs for the respiratory compounds
being developed for delivery in the Premaire. In September 2001, the Company
amended its 1998 agreement with Zambon whereby Sheffield regained the rights to
the Premaire previously granted to Zambon. As part of the amended agreement,
Zambon provided a low-interest, $2.5 million loan to Sheffield to progress the
development of the Premaire respiratory program. Upon commercialization, Zambon
will be entitled to certain royalties on payments received by Sheffield for
albuterol sulfate, ipratropium bromide and sodium cromoglycate sales for
specified periods.
As part of a strategic alliance with Elan, a world leader in
pharmaceutical delivery technology, the Company is developing therapies for
systemic diseases to be delivered to the lungs using both the Premaire and
Tempo. In 1998, the systemic applications of the Premaire and Tempo were
licensed to Systemic Pulmonary Delivery, Ltd. ("SPD"), a wholly owned subsidiary
of the Company. In addition, two Elan technologies, UPDAS and the Enhancing
Technology, have also been licensed to SPD. The Company has retained exclusive
rights outside of the strategic alliance to respiratory disease applications
utilizing the Tempo technology and the two Elan technologies.
In addition to the above alliance with Elan, in 1999, the Company and
Elan formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), a 80.1%
owned subsidiary of the Company and 19.9% owned by Elan, to develop certain
inhaled steroid products to treat certain respiratory diseases using Elan's
NanoCrystal(TM) dispersion technology. The inhaled steroid products being
developed include a unit-dose-packaged steroid dispersion formulation for
delivery using a conventional tabletop nebulizer, and a steroid dispersion
formulation for delivery using the Premaire system.
Outside of these alliances, the Company owns the worldwide rights to
respiratory disease applications of all of its technologies.
The Company is also currently in discussions with a number of
pharmaceutical and biotechnology companies concerning potential collaborations
for developing specific compounds (both respiratory and systemic) in the Tempo.
Unlike the Premaire, Tempo is a technology that lends itself to individual
product applications in the respiratory market. While the Tempo technology may
be applicable to a wide range of respiratory products, the Company believes that
a full line of products delivered by Tempo is not necessary for commercial
success. The reverse is true with the Premaire, since one of the Premaire's
primary competitive advantages is the delivery of a range of drugs in
interchangeable cartridges used with the parent nebulizer device.
PULMONARY DELIVERY MARKET ENVIRONMENT
The Company competes in the pulmonary delivery market. The principal
use of pulmonary delivery has been in the treatment of respiratory diseases such
as asthma, chronic obstructive pulmonary disease ("COPD") and cystic fibrosis.
There is significant advantage in aerosol therapy for respiratory disease.
Pulmonary administration delivers the medication directly onto the lung's
epithelial surfaces. In many cases, this means that drugs can be effective in
very low doses -- reducing the side effects often associated with systemic
administration. In 1998, industry sources estimate there were approximately 35.5
million asthma patients and 49.5 million COPD patients worldwide. These sources
indicate that the number of newly diagnosed patients is growing at a rate in
excess of 10% annually due to an increase in worldwide air pollution levels and
the overall aging of the population. By the year 2005, the Company expects that
there will be more than 19 million asthma patients in the United States alone.
In addition, the competitive marketplace has been significantly
affected by the worldwide phase out of clorofluorocarbons ("CFCs") pursuant to
the Montreal Protocol. CFCs are the propellants traditionally used in
pressurized metered dose inhalers ("pMDIs"), which are the most common form of
pulmonary delivery. Companies in the respiratory market have initiated
significant programs to redevelop existing products using alternative
propellants, dry powders or aqueous-based nebulizers.
There is considerable interest in applying pulmonary delivery
technology to systemic therapies that would benefit from the relatively easy
administration to the circulatory system through the lungs. Work on pulmonary
delivery of insulin by other pulmonary delivery companies has received
significant public notice. There is a range of therapies that could provide a
significant market opportunity if available in an inhaled delivered form.
Today, three types of devices are widely used in pulmonary drug
administration: pressurized metered dose inhalers, dry powder inhalers, and
nebulizers.
Pressurized Metered Dose Inhalers. Currently, pMDIs are the most
commonly used pulmonary delivery system. It is estimated that in the
United States over 80% of pulmonary drug delivery is via pMDI, with the
majority of this use coming from adults with asthma and COPD.
The main components of a pMDI include a canister containing the drug
mixed with propellant and surfactant, a mouthpiece that acts as the
delivery conduit and the metering valve for the release of precise
quantities of the drug. The initial velocity of particle
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and propellant droplets as they leave an inhaler is very high --
approximately 2-7 meters per second -- resulting in wasted drug if the
patient is not able to coordinate his/her breath with the delivery of
aerosol into the mouth. A number of studies have demonstrated that as
many as 80% of patients cannot accurately time their inspiration with
the actuation of their inhaler which results in under medication and
lack of compliance. Typically, less than 20% of metered drug actually
reaches the lungs.
The primary advantages of a pMDI include its excellent storage and
metering capability, small size, portability, fast usage time, and its
availability for use with most respiratory drugs. Disadvantages of a
pMDI include patient coordination issues and efficient dose delivery.
Additionally, because the use of CFCs traditionally used in pMDIs are
being phased out by international agreement (Montreal Protocol),
alternative propellants and formulations are being developed. Over
time, all current pMDI users will be required to move to a non-CFC pMDI
or other alternative delivery systems. The majority of U.S. patients
favor aerosol pMDIs although a sizable percentage may not coordinate
them properly.
Dry Powder Inhalers. Dry powder inhalers ("DPIs") were introduced in
the 1960s as single-dose inhalers. In these devices, the drug is loaded
as a unit dose that is mechanically released as a powder for inhalation
prior to each use. To date, these relatively cumbersome systems have
been the primary form of DPI available in the United States, and
account for approximately 1% of the total aerosol delivery market.
The inconvenience of the single dose DPI has been overcome outside of
the U.S. with the development and introduction of multi-dose DPIs that
can deliver up to 200 doses of medication. However, like the single
dose systems, they are inspiratory flow rate dependent; that is, the
amount of drug delivered to the lung depends on the patient's ability
to inhale.
Two of the most significant advantages of DPIs include (1) no
hand-breath coordination is required as with pMDIs; and (2) they
contain no CFCs. However, most require a high inspiratory flow rate,
which can be problematic in younger patients or patients with
compromised lung function. In addition, they often present difficulties
for those with manual disabilities (e.g., arthritis) or limited vision
and, depending upon the powder load delivered, they may induce acute
bronchospasm in sensitive individuals. Additionally, multi-dose powder
inhalers are subject to moisture sensitivity either from the
environment or patient breath and have had difficulty meeting U.S.
regulatory standards for dose-to-dose variation.
Nebulizers. The third widely used aerosol delivery system is the
nebulizer. Jet nebulizers, which are the most commonly used nebulizer,
work on a stream of compressed air or oxygen that is forced through a
narrow tube lying just above the surface of the liquid to be nebulized.
It takes approximately 10 to 15 minutes to nebulize this amount of
liquid. Studies suggest keeping the duration of nebulization short, as
longer durations are associated with poor compliance. During
nebulization only about 10% of the drug is delivered to the lungs;
about 80% gets trapped in the reservoir, tubing, mask or the patients
mouth and throat; the rest is exhaled.
Nebulizers can be used for a wide range of patients, but are especially
useful for those older and younger patients who cannot manage other
inhaler devices. Nebulizers also play a key role in emergency room and
intensive care treatment for patients with acute bronchospasm. Another
feature exclusive to nebulizers is that a mixture of drugs can be
administered in one sitting. However, currently approved nebulizers are
bulky tabletop units that are time consuming, have a high initial cost
(often in excess of the amount reimbursable by managed care) and can be
noisy during operation.
PREMAIRE(R) DELIVERY SYSTEM
The Premaire system has been developed to provide the therapeutic
benefit of nebulization with the convenience of pressurized pMDIs in one system.
The Premaire was developed to meet specific needs within the respiratory market,
particularly for pediatric and geriatric patients suffering from asthma and
COPD.
Description of the Premaire
The Premaire is comprised of two main components: (1) a reusable,
pocket-size inhaler unit developed and manufactured for the Company by Siemens;
and (2) drug cartridges, called Dosators(TM), containing multiple doses of drug
formulation assembled and filled by Chesapeake Biological Laboratories. The
cartridges are an integral part of the total system. The cartridge plus each
drug formulation will be the subject of a separate drug device combination New
Drug Application ("NDA").
The basic technology of the system involves the rapid atomization of
therapeutic agents using ultrasonic energy. This produces a concentrated soft
mist of medication delivered through the mouthpiece over a one to two second
period for inhalation. The key components of the technology are housed in the
inhaler unit. They are the rechargeable battery-operated motor, ultrasonic horn
and drug cartridge. The pocketsize Premaire allows for administration of a range
of drugs in a single, simple-to-use, environmentally friendly delivery system.
Each cartridge contains, depending on formulation, approximately a one-month
supply of the drug.
To use the Premaire system, a patient simply selects the appropriate
color-coded drug cartridge and places it into the chamber of the inhaler unit.
Pressing the "on" button activates a small electrical motor that transports a
precise dose of drug from the cartridge chamber to the ultrasonic horn --
transforming the solution into an aerosolized cloud. The patient's inspiratory
breath carries this cloud of medication directly to the lungs where it is
needed. The dose delivered by the Premaire is very accurate and consistent
because: (1) the Premaire is designed to be inspiratory flow rate independent;
that is, delivery of the drug does not depend upon the patient's ability to
inhale forcefully, and (2) the Premaire does not require a high level of
coordination between inspiration and actuation of the device. The patient's
natural breath carries the medication directly to the lungs, minimizing the
amount of drug deposited in the mouth and throat.
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Premaire Advantages
The Company believes that the Premaire provides significant advantages
over other drug delivery systems. It is particularly suited for younger and
older asthma patients, as well as for older COPD patients who have difficulty
using pMDIs and currently have to depend on larger, more time-consuming tabletop
nebulizers for delivery of their medications. These potential advantages
include:
Accuracy. The superior engineering and patient-friendly design of the
Premaire is intended to provide minimal dose-to-dose variability.
Patients can therefore expect to receive the right therapeutic dose
consistently. Testing of the Premaire delivery system has shown that
dose-to-dose variability with the Premaire is significantly better than
the current FDA requirement.
Enhanced Patient Compliance. The pocketsize, portable Premaire unit is
designed to combine the therapeutic benefits of nebulization with the
convenience of pressurized metered dose inhalers. The drug dose is
precisely measured and delivered in a minute, as compared to 10 to 15
minutes or more for the typical nebulizer. The device is easy to
operate, requiring minimal coordination between actuation and
inhalation for proper drug delivery. These benefits are expected to
improve patient compliance with the proper administration of their
respiratory medication. Another expected factor in enhanced patient
compliance is the broad range of drugs that can be accommodated by the
Premaire, allowing patients on multiple medications to rely on one
simple delivery system.
Inspiratory Flow Rate Independence. Unlike most of the DPIs currently
available (or in development), the Premaire is designed to achieve a
consistent and significant level of drug deposition over a broad range
of inspiratory flow rates. This is especially important in younger
patients or patients with compromised lung function (e.g., during an
asthma attack) that have a difficult time breathing normally.
Versatility. Many asthma and COPD patients are taking multiple
inhalation medications. The Premaire accommodates drug cartridges to
allow for the administration of a broad range of frequently used
respiratory drugs in a single, simple-to-use delivery system. The
system includes an early warning mechanism that signals when the
batteries need recharging or when the dosator is not functioning
properly and a dose counter indicating when a new inhaler unit is
required. These user-friendly features result in a simplified dosing
procedure for both patients and their caregivers.
Pulmonary Targeting. The particle size of the inhaled medication
affects the effectiveness of drug delivery to the lung. Generally, a
drug is "respirable" if the particle size is between two and five
microns. Larger particles tend to deposit in the inhaler or in the
patient's mouth and throat. Smaller particles tend to be exhaled.
Within the respirable range, the Premaire is designed to deliver
particles specifically targeted for certain portions of the lungs; for
example, the central lung for local treatment or the deep lung for
enhanced absorption into the blood stream for systemic therapies.
Environmentally Friendly. CFCs, the most commonly used propellant for
pMDI aerosols, are believed to adversely affect the Earth's ozone
layer. They are subject to worldwide regulations aimed at eliminating
their production and use within the decade under the Montreal Protocol.
The Premaire does not use CFCs or any other type of ozone depleting
propellant.
Economical. The Company believes that the Premaire offers significant
value to the patient because it is designed to allow a single device to
be used with a variety of respiratory medications available in
cost-effective interchangeable cartridges. The inhaler unit itself is
expected to have a life of up to two years. The initial cost of the
inhaler unit is expected to be within the cost range that managed care
providers will reimburse patients. The Company anticipates the combined
cost to the patient of the device plus the drug filled cartridges will
be comparable to the average cost per dose of the standard metered dose
inhaler.
Premaire Product Pipeline in Development
The Company is implementing a broad development strategy for the
Premaire. The Company is developing a range of widely used respiratory drugs for
delivery in the Premaire. Initial drugs being developed for respiratory disease
therapy include albuterol sulfate, ipratropium bromide, sodium cromoglycate, and
budesonide, an inhaled bronchial steroid, each of which is described below.
As previously discussed, in June 1998, the Company sublicensed to
Zambon worldwide marketing and development rights to respiratory products to be
delivered by the Premaire. From June 1998 to September 2001, Zambon developed
and funded the costs for the respiratory compounds being developed for delivery
in the Premaire. In September 2001, the Company amended its 1998 agreement with
Zambon whereby Sheffield regained the rights to the Premaire previously granted
to Zambon. As a result, the sponsorship of the Premaire respiratory development
programs was transferred from Zambon to the Company with the Food and Drug
Administration ("FDA") being notified accordingly. Sheffield has reviewed all of
the development work completed-to-date, identifying a number of deficiencies in
the Zambon development program. To address these issues, Sheffield has made a
number of internal management changes and moved the program to a group of highly
experienced pulmonary clinical and regulatory experts. The Premaire device is
currently in a to-be-marketed form and fully industrialized.
The following details the status of the respiratory applications being developed
in the Premaire system:
ALBUTEROL SULFATE. Albuterol sulfate, a beta agonist, is a
bronchodilator used as rescue therapy for patients with asthma and
COPD. It is the largest selling respiratory compound with U.S. sales of
over $500 million in all dosage forms. It is available in a metered
dose inhaler and nebulizer solution as well as solid and liquid dosage
forms.
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Status: Zambon initiated a Phase II clinical trial in December
1999 that compared the Premaire-albuterol sulfate to a conventional
albuterol-pMDI. Findings from Phase II studies indicated that
Premaire-albuterol and pMDI-albuterol were comparable in improving lung
function in the 24 adult patients. An end of Phase II meeting was held
in February 2002 with the FDA where the results of the development
activities-to-date, specifically the results of the Phase II trial,
were reviewed. The Company is currently reviewing the FDA's comments
and recommendations, integrating the information into the plans for the
Phase III trial and NDA submission. The Company expects to begin
pivotal clinical trials for the albuterol sulfate program by the end of
2002.
BUDESONIDE. Budesonide is a corticosteroid, anti-inflammatory
agent that treats the underlying inflammation in the lungs of asthma
and COPD patients. It is currently available in a DPI, nebulizer
respule and pMDI in Europe. Steroids are the fastest growing category
in the respiratory market, growing at 20% per year.
Status: Preclinical formulation development work is currently
underway. A formulation developed by Nanosystems has proven a feasible
candidate for delivery in the Premaire. The formulation is dependent on
a proprietary nanocrystaline dispersion of budesonide in an aqueous
carrier. Tow other alternative formulation approaches are also under
evaluation. Upon scale-up and production of clinical batches released
under CMC protocol, an IND will be prepared for filing with the FDA,
which is currently planned for the first half of 2003.
IPRATROPIUM BROMIDE. Ipratropium bromide is a bronchodilator
used primarily to treat COPD patients. It is useful because of its
anticholinergic properties, which reduce pulmonary congestion. It is
available in a metered dose inhaler, nebulizer solution and a
combination product with albuterol.
Status: Zambon initiated a Phase I/II clinical trial in Europe
in January 2000 assessing the safety and efficacy compared to a
commercially available ipratropium bromide product delivered by a pMDI
and placebo in patients with COPD. The results of the study indicated
that both Premaire-ipratropium bromide and pMDI-ipratropium were
tolerated and improved lung function in the COPD patients. An
Investigational New Drug Application ("IND") was filed by Zambon with
the FDA in May 2000. During 2001, the IND was transferred to the
Company. The Company does not intend to further develop this product on
its own as the program has progressed to the point where a potential
licensing partner would be in a position to take the product into
clinical studies.
SODIUM CROMOGLYCATE. Sodium cromoglycate is a non-steroidal,
anti-inflammatory drug used to reduce the underlying bronchial
inflammation associated with asthma. It is extremely safe and it is
most commonly used to treat pediatric patients. It is available in a
pMDI and nebulizer solution.
Status: An IND was filed by Zambon with the FDA in July 2000.
No further development work is anticipated to be completed on this
product, as the projected market opportunity for sodium cromoglycate is
currently deemed too small to justify further progression.
OTHER RESPIRATORY THERAPIES. In addition to the drugs listed
above, the Company continues to assess the market potential for certain
other respiratory therapies. These therapies may include a combination
of an anti-inflammatory and beta agonist, an anticholinergic and beta
agonist, as well as antibiotics for cystic fibrosis treatments.
SYSTEMIC APPLICATIONS: Through its development alliance with Elan, the
Company evaluated certain drugs for systemic treatment by pulmonary delivery
through Premaire. By identifying a market opportunity for a rapid-acting,
non-invasive treatment for breakthrough pain, the first drug to be tested for
delivery in Premaire was morphine. The pain management market includes patients
with cancer, post-operative, migraine headache and chronic persistent pain.
Narcotic analgesics for treatment of these severe forms of pain are estimated to
exceed $1.0 billion in worldwide sales in the year 2000.
Status: In July 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing morphine delivered using the
Premaire to subcutaneous injection. The Premaire demonstrated good pulmonary
deposition and very rapid absorption, more rapid peak blood levels vs.
subcutaneous injection and low oral and throat deposition. As part of the
development alliance with Elan, Elan has the first right of refusal on the
development of any product developed by the joint venture. Elan has chosen not
to license this product from the joint venture. As such, the joint venture
continues to seek to attract a partner for the continued development and
commercialization of this product.
TEMPO(TM) INHALER
Tempo, a new generation pMDI, was developed to correct major
deficiencies associated with existing pMDI technology. pMDIs have provided
convenient, safe, self-administered treatment for over 30 years and decreased
the cost of therapy because the patient at home can use them with minimal
medical supervision. However, proper use of current pMDIs requires training and
precise execution of the delivery technique. For these reasons, many patients do
not use their pMDIs in the prescribed manner to coordinate actuation and
inhalation. Incorrect technique has been shown to result in little or no
benefits from pMDI use in half of all adult patients and in a greater proportion
of children. Moreover, because of these coordination issues, most children under
age five cannot use a standard pMDI.
Even with correct technique, current pMDIs typically deliver less than
20% of the drug to the lungs of the patient. The remainder of the drug is wasted
upon deposition on the back of the mouth, or by completely missing the airway.
This results from: (1) the high linear
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velocity (two to seven meters/second) of the aerosol jet as it discharges; (2)
incomplete evaporation of the propellant leading to large size droplets that
deposit in the mouth and larynx rather than reaching the lung; and (3)
inadequate mixing resulting in a non-uniform distribution of drug particles in
the inspiratory flow stream. Drug deposited in the mouth and throat can be
swallowed and absorbed systemically or, in the case of inhaled steroids, may
create a local concentration of the drug that causes immunosuppression response
and the development of fungal infections. In addition, swallowing beta agonist
bronchodilators may result in adverse effects on heart rate, blood pressure,
glucose and potassium.
From a therapeutic view, the most serious problem with pMDIs is
inconsistency of delivery. With existing pMDIs the actual dose can vary from 0%
to 300% of the intended dose. Patients may not receive sufficient drug to
achieve a therapeutic effect, or they may overdose with undesirable side
effects. These conditions can lead to the need for emergency treatment.
A major advantage for the Tempo technology is that it uses the same
aerosol canisters and valves as are currently used in existing pMDIs. As a
result, existing aerosol facilities will be able to produce canisters with
formulations optimized for use in Tempo. The only additional step required is to
place the aerosol canister in the "device" prior to final packaging. This
results in a cost effective product and provides numerous benefits to patients.
The device along with the canister is disposable when the canister is empty.
The Tempo technology features two improvements over existing pMDIs and
dry powder inhalers. Fluid dynamics modeling, in-vitro and human trials indicate
that up to 60% of drug emitted by the Tempo reaches the lungs with oral
deposition reduced to approximately 15%. Because of this increase in efficiency,
Tempo should require less drug per actuation than existing devices to achieve
the same therapeutic effect. This may result in more unit doses per drug
canister than a conventional pMDI, with less potential for adverse reactions.
Tempo also features a unique proprietary triggering mechanism that
actuates at the correct time during inhalation. It is designed to automatically
adjust to the patient's breathing pattern to accommodate differences in age and
disease state. This synchronous trigger is designed to reduce patient
coordination problems and enhance patient compliance.
Description of the Tempo
The Tempo technology utilizes a standard aerosol pMDI canister and
metering valve, encased in a compact device that provides an aerosol
flow-control chamber and a synchronized triggering mechanism. Manipulation of
the discharged drug- containing aerosol cloud is key to optimization of the
efficiency and consistency for pMDIs.
The Tempo design uses fluid dynamics to: (1) reduce the velocity of the
drug relative to the inspiratory breath velocity (less than one meter/second);
(2) increase residence time of the aerosol droplets before exiting the device to
allow near complete evaporation of the propellant; (3) increase droplet
dispersion and mixing, thus increasing evaporation and improving vapor fraction
at every point along the flow path; (4) reduce the diameter of the drug
particles at the exit plane of the device; (5) decrease inertia of droplets to
reduce impaction; and (6) improve timing of dose discharge with inspiratory
breath for increased drug deposition in lungs.
The unique features of Tempo are:
Aerosol Flow-Control Chamber. The aerosol flow-control chamber allows
the patient to inhale through the device at a normal breathing rate,
instead of a forced breath. The inspiratory breath establishes flow
fields within the device that mix and uniformly disperse the drug in
the breath. In the mouthpiece, nearly all the propellant is evaporated
leaving only drug particles to be inspired, allowing a significant
increase in the amount of drug delivered to the lungs. Only small
amounts of drug deposit in the mouth and throat.
Synchronizing Trigger Mechanism. A triggering and timing mechanism that
is synchronized with the patient's inspiratory breath controls the
discharge of the metering valve. Tempo can accommodate different
inspiratory flow rates, so any patient can activate the triggering
device. Similarly, the timing mechanism will automatically adjust to
the flow generated by the patient, delaying or hastening discharge in
proportion to the total volume passing through the flow control
chamber. This feature accommodates differences in inspiratory flow
characteristic of pulmonary disease states in children, adults and the
infirm.
Tempo Advantages
The Company believes that the Tempo technology possesses many potential
competitive advantages over other inhalation systems in both local respiratory
and systemic applications. It is applicable to all age categories, eliminating
the most troublesome problems of aerosol metered dose delivery. Increased
efficiency allows for potential application to proteins and peptides formerly
not considered as candidates for aerosol delivery.
The performance characteristics of the Tempo are expected to translate
into multiple benefits, including:
Improved Drug Delivery Efficiency. A higher percentage of the drug
emitted by the Tempo is delivered to the lungs than current inhalation
systems while approximately 15% is lost through deposition in the mouth
and throat. The improved delivery efficiency enhances efficacy, reduces
side effects and provides greater consistency of dose administration.
Greater Patient Compliance. The Tempo reduces technique dependence for
simple, consistent dose-to-dose delivery, resulting in improved
compliance with prescribed therapy.
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Broader Patient Base. The Tempo can be prescribed for a broader patient
base since it is designed to be self-administered by children and the
elderly as well as adult patients.
Pharmacoeconomic Benefit. The Tempo has increased delivery efficiency
with less waste, so patients can receive more unit doses per standard
canister. This allows for a lower drug cost per day in addition to
reducing prescription and payer costs because fewer pharmacy visits are
required.
Tempo Product Pipeline in Development
TEMPO SYSTEMIC THERAPIES. The development of systemic drugs using Tempo
is being conducted as part of the Company's alliance with Elan. The initial
product developed was targeted to address migraine headaches. The Company
utilized ergotamine tartrate as a proof-of-principle product. Ergotamine, an
alpha adrenergic blocking agent, is a therapy to stop or prevent vascular
headaches such as migraines. Migraine headaches affect up to 30 million
Americans. Worldwide annual drug sales for the migraine therapy market are in
excess of $2.4 billion with many patients unable to get satisfactory relief from
currently available therapies. In fact, it is estimated that absenteeism and
medical expenses resulting from migraine total $50 billion annually. Current
oral drug therapies for the treatment of migraine headaches have slow onset of
action, resulting in a medical need that may be better satisfied through
pulmonary delivery.
Status: In December 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing the Tempo to a conventional pMDI.
The trial showed successful delivery of the drug to all regions of lung with
significantly reduced mouth and throat deposition, and rapid drug absorption. As
part of the development alliance with Elan, Elan has the first right of refusal
on the development of any product developed by the joint venture. Elan has
chosen not to license this product from the joint venture. As such, the joint
venture continues to seek to attract a partner for the continued development and
commercialization of this product.
As a result of the work performed on the ergotamine product noted
above, Sheffield initiated a new development program for a novel formulation of
dyhydroergotamine ("DHE") for pulmonary delivery in the Tempo for the treatment
of specific types of migraines. Formulation work for this program is currently
underway. The Company is also currently in discussions with a pharmaceutical
company for the development and manufacturing of this product.
TEMPO RESPIRATORY THERAPIES. The Tempo has broad applicability across
respiratory disease therapies since it utilizes basic pMDI delivery methods that
are the most popular forms of respiratory delivery. The Tempo technology's
ability to significantly minimize oral deposition makes it especially applicable
to steroids and steroid combinations with which fungal overgrowth side effects
are common. In addition, U.S. patients and physicians have indicated that they
prefer metered dose aerosol delivery. The Tempo technology is positioned to take
advantage of this built-in market preference for pMDIs with its potential for
superior performance, reduced adverse reactions and cost-effectiveness. Inhaled
steroids are the fastest growing segment of the respiratory market and the
largest in Europe. The features of the Tempo directly minimize the aspects of
inhaled steroids that remain a concern to patients and physicians. The market
for inhaled steroids on a worldwide basis is approximately $2.0 billion.
Status: In September 2000, the Company completed a pilot study using
the Tempo to deliver a patented respiratory drug used to treat asthma. The study
measured the distribution of this respiratory drug delivered by Tempo compared
to the distribution of this same drug delivered through a commercially available
pMDI in 12 healthy volunteers. Results of this study demonstrated that Tempo
significantly increased drug deposition in all regions of the lung. Tempo
delivered approximately 200% more drug to the lungs, deposited approximately 75%
less drug in the mouth, and increased dosing consistency by approximately 55%
compared to the currently marketed form of this same drug. The Company is using
the results of this study as a basis for conducting discussions for feasibility
work and/or clinical studies with potential collaboration partners.
As with Premaire, there remain opportunities for developing Tempo for a
range of therapies either directly by the Company or in collaboration with
strategic partners. Unlike the Premaire, it is potentially advantageous for the
Company to partner on a product-by-product basis, concentrating on prime
partners to launch the system commercially and to aid in subsequent development
with products developed specifically for exclusive commercialization by the
Company.
INHALED STEROID PRODUCTS
In October 1999, the Company and Elan formed a separate joint venture
to develop certain inhaled steroid products to treat certain respiratory
diseases that will utilize Elan's Nanocrystal(TM) dispersion technology and
Sheffield's pulmonary delivery systems. Because of the difficulties in
formulating steroids for delivery through a solution-based inhalation system,
only one steroid product is currently available in the United States for
delivery through a nebulizer. The estimated worldwide market for inhaled
steroids is $2 billion annually and growing at 20% per year. The products being
formulated using Elan's Nanocrystal technology and the status of each are as
follows:
Unit-dose nebulizer program - This product is for inhalation delivery in a
standard commercial tabletop device using the steroid budesonide, formulated
using the NanoCrystal technology. A Phase I, double-blind safety and
pharmacokinetic study of nebulized nanobudesonide in 16 healthy volunteers was
satisfactorily completed at Thomas Jefferson University Hospital in February
2002. This study compared single doses of Pulmicort Respules, nanobudesonide and
placebo. Data from the study is currently undergoing final data and statistical
analysis.
Premaire nanobudesonide program - This product is for inhalation delivery using
the Company's Premaire device. The joint venture is currently conducting
formulation work on this product. See "Premaire Delivery System" above for
further discussion of this product.
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OTHER TECHNOLOGIES AND PROJECTS
Ultrasonic Pulmonary Drug Absorption System
The UPDAS(TM) is a novel ultrasonic pulmonary delivery system designed
by Elan as a disposable unit dose nebulizer system. UPDAS was designed primarily
for the delivery of proteins, peptides and other large molecules to the lungs
for absorption into the bloodstream. Elan's preliminary research with UPDAS
demonstrated unique atomization that may prevent denaturing of bioactive
molecules and particle size distribution that meets the targets for local and
systemic delivery. The Company is not conducting any development work related to
this technology.
Absorption Enhancing Technology
As part of the same transaction in which the Company acquired UPDAS,
the Company also acquired a worldwide exclusive license to Elan's Absorption
Enhancing Technology. While not a delivery system itself, the Enhancing
Technology is a therapeutic agent identified by Elan to increase the systemic
absorption of drugs delivered to the lungs. The Enhancing Technology may be
utilized in conjunction with the Company's other pulmonary delivery systems. The
Company is not conducting any development work related to this technology.
Early Stage Research Projects
As part of the Company's focus on later stage pharmaceutical
opportunities, the Company is seeking to out-license its portfolio of early
stage medical research projects to companies that are committed to early stage
biotechnology opportunities. The Company has determined that its early stage
technologies do not fit the Company's pulmonary drug delivery strategy.
Consequently, the Company plans to out-license these technologies while
maintaining an interest in the technologies' promise without incurring the
development costs associated with early stage research and development.
Because the Company is no longer funding these projects, it is at risk
of losing its rights to certain of these technologies. There can be no assurance
that the Company will be able to sell or license its rights to any of its
remaining early stage research projects or realize any milestone payments or
other revenue from those early stage research projects that have been previously
divested.
In November 1997, the Company entered into a license arrangement for
some of its early stage technologies with Lorus Therapeutics, Inc. (formerly
Imutec Pharma Inc.). The arrangement licenses rights to a series of compounds
for the treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly
formed company, NuChem Pharmaceuticals, Inc. ("NuChem") for which Lorus
Therapeutics will provide funding and management of the development program. The
Company holds a 20% equity interest in NuChem.
Work on the lead compounds by NuChem has progressed in the pre-clinical
phase. In 1999, NuChem announced that the U.S. National Cancer Institute has
agreed to undertake additional in vitro screening after initial evaluation of
the compounds. In 2000, NuChem chose NC 381 as its lead anti-cancer drug for
further studies in preparation for clinical trials. Preclinical toxicology
studies are currently underway.
GOVERNMENT REGULATION
The Company's research and development activities and, ultimately, any
production and marketing of its licensed products, are subject to comprehensive
regulation by numerous governmental authorities in the United States and other
countries. Among the applicable regulations in the United States, pharmaceutical
products are subject to the Federal Food, Drug & Cosmetic Act, the Public Health
Services Act, other federal statutes and regulations, and certain state and
local regulations. These regulations and statutes govern the development,
testing, formulation, manufacture, labeling, storage, record keeping, quality
control, advertising, promotion, sale, distribution and approval of such
pharmaceutical products. Failure to comply with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal by the government to approve marketing of the product and
criminal prosecution.
A new drug may not be legally marketed for commercial use in the United
States without FDA approval. In addition, upon approval, a drug may only be
marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable laws and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.
In order to obtain FDA approval of a new product, the Company and its
strategic partners must submit proof of safety, efficacy, purity and stability,
and the Company must demonstrate validation of its manufacturing process. The
testing and application process is expensive and time consuming, often taking
several years to complete. There is no assurance that the FDA will act favorably
or quickly in reviewing such applications. With respect to patented products,
processes or technologies, delays imposed or caused by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them. Such delays could also affect the commercial
advantages derived from proprietary processes. As part of the approval process,
the FDA reviews the Drug Master File (the "DMF") for a description of product
chemistry and characteristics, detailed operational procedures for product
production, quality control, process and methods validation, and quality
assurance. As process development continues to mature, updates and modifications
of the DMF are submitted.
The FDA approval process for a pharmaceutical product includes review
of (i) chemistry and formulations, (ii) preclinical laboratory and animal
studies, (iii) initial IND clinical studies to define safety and dose
parameters, (iv) well-controlled IND clinical trials to demonstrate product
efficacy and safety, followed by submission and FDA approval of a New Drug
Application (the "NDA"). Preclinical studies involve
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laboratory evaluation of the product and animal studies to assess activity and
safety of the product. Products must be formulated in accordance with United
States Good Manufacturing Procedures ("GMP") requirements and preclinical tests
must be conducted by laboratories that comply with FDA regulations governing the
testing of drugs in animals. The results of the preclinical tests are submitted
to the FDA as part of the IND application and are reviewed by the FDA prior to
granting the sponsor permission to conduct clinical studies in human subjects.
Unless the FDA objects to an IND application, the application will become
effective 30 days following its receipt by the FDA. There can be no certainty
that submission of an IND will result in FDA authorization to commence clinical
studies.
Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. Phase I trials normally consist of
testing the product in a small number of normal volunteers for establishing
safety and pharmacokinetics using single and multiple dosing regiments. In Phase
II, the continued safety and initial efficacy of the product are evaluated in a
limited patient population, and appropriate dosage amounts and treatment
intervals are determined. Phase III trials typically involve more definitive
testing of the appropriate dose for safety and clinical efficacy in an expanded
patient population at multiple clinical testing centers. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial phase. Each clinical study must be conducted under the auspices of an
Institutional Review Board (the "IRB") at the institution performing the
clinical study. The IRB is charged with protecting the safety of patients in
trials and may require changes in a protocol, and there can be no assurance that
an IRB will permit any given study to be initiated or completed. In addition,
the FDA may order the temporary or permanent discontinuation of clinical trials
at any time. The Company must rely on independent investigators and institutions
to conduct these clinical studies.
All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. The information contained in the
DMF is also incorporated into the NDA. Submission of an NDA does not assure FDA
approval for marketing. The application review process often requires 12 months
to complete. However, the process may take substantially longer if the FDA has
questions or concerns about a product or studies regarding the product. In
general, the FDA requires two adequate and controlled clinical studies
demonstrating efficacy with sufficient levels of statistical assurance. However,
additional support may be required. The FDA also may request additional
information relating to safety or efficacy, such as long-term toxicity studies.
In responding to an NDA, the FDA may grant marketing approval, require
additional testing and/or information, or deny the application. Accordingly,
there can be no assurance about any specific time frame for approval, if any, of
products by the FDA or foreign regulatory agencies. Continued compliance with
all FDA requirements and conditions relative to an approved application,
including product specifications, manufacturing process, labeling and
promotional material, and record keeping and reporting requirements, is
necessary throughout the life of the product. In addition, failure to comply
with FDA requirements, the occurrence of unanticipated adverse effects during
commercial marketing or the result of future studies, could lead to the need for
product recall or other FDA-initiated actions that could delay further marketing
until the products or processes are brought into compliance.
The facilities of each pharmaceutical manufacturer must be registered
with and approved by the FDA as compliant with GMP. Continued registration
requires compliance with standards for GMP. In complying with GMP, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to ensure technical compliance. In addition, manufacturers must
comply with the United States Department of Health and Human Services and
similar state and local regulatory authorities if they handle controlled
substances, and they must be registered with the United States Drug Enforcement
Administration and similar state and local regulatory authorities if they
generate toxic or dangerous waste streams. Other regulatory agencies such as the
Occupational Safety and Health Administration also monitor a manufacturing
facility for compliance. Each of these organizations conducts periodic
establishment inspections to confirm continued compliance with its regulations.
Failure to comply with any of these regulations could mean fines, interruption
of production and even criminal prosecution.
For foreign markets, a pharmaceutical company is subject to regulatory
requirements, review procedures and product approvals, which, generally, may be
as extensive, if not more extensive, as those in the United States. Although the
technical descriptions of the clinical trials are different, the trials
themselves are often substantially the same as those in the United States.
Approval of a product by regulatory authorities of foreign countries must be
obtained prior to commencing commercial product marketing in those countries,
regardless of whether FDA approval has been obtained. The time and cost required
to obtain market approvals in foreign countries may be longer or shorter than
required for FDA approval and may be subject to delay. There can be no assurance
that regulatory authorities of foreign countries will grant approval. The
Company has no experience in manufacturing or marketing in foreign countries nor
in matters such as currency regulations, import-export controls or other trade
laws.
PATENTS AND TRADEMARKS
Premaire System Patents and Trademark
Under its agreement with Siemens for the technology underlying the
Premaire system, the Company is responsible for jointly financing and
prosecuting the U.S. patent applications for the benefit of the owners and
licensors of this technology. To date, nine U.S. patents have issued, and five
corresponding foreign patents have been published. The issued U.S. patents
provide protection through 2017 for the Premaire device, the dosator cartridges
and their combinations. Also, a U.S. trademark was granted in 2001 registering
the Premaire brand name, as well as Dosator(TM), and Misthaler(TM).
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Tempo System Patents
As of the December 31, 2001, three U.S. patents have issued and one has
been allowed. Three corresponding foreign patents have been published. One U.S.
and three foreign applications are in prosecution. The issued U.S. patents cover
the Tempo flow control and triggering mechanism through 2018. The Company also
received trademark protection in 2001 for the Tempo(TM) brand name.
Early Stage Research Technology Patents
Under its license agreements for its early stage research projects, the
Company has been responsible for financing and prosecuting patent applications
for the benefit of the owners and licensors of these technologies. While the
Company holds, or has held, several U.S. and foreign patents and patent
applications for these early stage technologies, the Company expects to assign
these patents and applications to future acquirers, if any, of these
technologies. Because the Company does not intend to continue to pay for future
patent fees on these early stage technologies, in the event that no acquirers
are found for these technologies, the Company expects that it will allow some or
all of these patents and patent applications to lapse or the rights may be
returned to the licensors.
COMPETITION
The Company competes with approximately 25 other companies involved in
developing and selling respiratory products for the U.S. market. Most of these
companies possess financial and marketing resources and developmental
capabilities substantially greater than the Company. Some of the products in
development by other companies may be demonstrated to be superior to the
Company's current or future products. Furthermore, the pharmaceutical industry
is characterized by rapid technological change and competitors may complete
development and reach the marketplace prior to the Company. The Company believes
that competition in the respiratory category will be based upon several factors,
including product efficacy, safety, reliability, availability, and price, among
others.
SUBSIDIARIES
On January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed as a
wholly owned subsidiary of the Company. At that time, Ion acquired the Company's
rights to certain early stage biomedical technologies.
On April 17, 1997, CP Pharmaceuticals, Inc. ("CP") was formed for the
purpose of acquiring Camelot Pharmacal, LLC ("Camelot"), a privately held
pharmaceutical development company. The Company acquired Camelot on April 25,
1997.
As part of its strategic alliance with Elan, on June 30, 1998, the
Company formed SPD as a wholly owned subsidiary. At that time, SPD acquired the
Company's rights to the systemic applications of the Premaire and the Tempo. In
addition, SPD acquired Elan's rights to the UPDAS and the Enhancing Technology.
SPD is responsible for the development of systemic applications in both the
Premaire and Tempo.
In addition to the above alliance with Elan, on October 18, 1999, the
Company and Elan formed a new joint venture, RSD, to develop certain respiratory
steroid products. The Company and Elan made equity investments in RSD
representing an initial 80.1% and 19.9%, respectively, ownership in the joint
venture. The joint venture is responsible for the development of the inhaled
steroid products.
EMPLOYEES
As of March 25, 2002, the Company employed 16 persons, four of whom are
executive officers.
CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND
MARKET PRICE OF SECURITIES
The following are some of the factors that could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this report and otherwise made by the
Company or on the Company's behalf, because these factors could cause actual
results and conditions to differ materially from those projected in
forward-looking statements.
We have experienced significant operating losses throughout our history and
expect these losses to continue for the foreseeable future.
Our operations to date have consumed substantial amounts of cash and we
have generated to date only limited revenues from contract research and
licensing activities. We have incurred approximately $90.5 million of operating
losses since our inception, including $9.7 million during the year ended
December 31, 2001. Our operating losses and negative cash flow from operations
are expected to continue in the foreseeable future. The Company expects that it
will continue to have a high level of operating expenses, negative cash flow
from operations and will be required to make significant up-front expenditures
in connection with its product development activities. As a result, the Company
anticipates additional operating losses for 2002 and that such losses will
continue thereafter until such time, if ever, as the Company is able to generate
sufficient revenues to sustain its operations. The independent auditors' report
dated February 12, 2002, on the Company's consolidated financial statements
stated that the Company has incurred recurring operating losses and has a
working capital deficiency and that these conditions raise substantial doubt
about its ability to continue as a going concern.
We will need additional financing, which if not available, could prevent us from
funding or expanding our operations.
Cash available for funding our operations as of December 31, 2001 was
$.9 million. As of such date, we had trade payables and accrued liabilities of
$1.3 million, current research obligations of $.2 million and a note payable to
Elan of $4 million. In addition,
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committed and/or anticipated funding of research and development after December
31, 2001 is estimated at approximately $2.4 million, of which $2.0 million has
been committed to be funded by Elan through the issuance of our Series E
cumulative convertible preferred stock, which funds are required to be used by
the Company to fund its portion of RSD's operating and development costs. Since
December 31, 2001 we have received $1.0 million as a borrowing on the Loan and
Security Agreement with Zambon, with an additional $.5 million available on
April 1, 2002. We have also received $1.0 million from the issuance of 1,000
shares of Series E cumulative convertible preferred stock to fund our portion of
RSD's costs. As of March 25, 2002, cash available for funding our operations was
$1.2 million.
We need to raise substantial additional capital to fund our operations.
The development of our technologies and proposed products will require a
commitment of substantial funds to conduct costly and time-consuming research,
preclinical and clinical testing, and to bring any such products to market. Our
future capital requirements will depend on many factors, including continued
progress in developing and out-licensing our pulmonary delivery technologies,
our ability to establish and maintain collaborative arrangements with others and
to comply with the terms thereof, receipt of payments due from partners under
research and development agreements, progress with preclinical and clinical
trials, the time and costs involved in obtaining regulatory approvals, the cost
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, the need to acquire licenses to new technology and the status of
competitive products.
We intend to seek such additional funding through collaborative or
partnering arrangements, the extension of existing arrangements, or through
public or private equity or debt financings. Additional financing may not be
available on acceptable terms or at all. If we raise additional funds by issuing
equity securities, stockholders may be further diluted and such equity
securities might have rights, preferences and privileges senior to those of our
current stockholders. If adequate funds are not available, we may be required to
delay, reduce the scope of, or eliminate one or more of our research or
development programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products that we would otherwise seek to
develop or commercialize. If adequate funds are not available from operations or
additional sources of funding, our business will suffer a material adverse
effect.
If our common stock is delisted from the American Stock Exchange, the price of
our common stock and its liquidity could decline.
Our common stock is listed for trading on the American Stock Exchange,
or AMEX, under the symbol "SHM". We do not satisfy AMEX guidelines for continued
listing, including a guideline that a listed company that has sustained losses
from operations and/or net losses in three of its four most recent fiscal years,
have stockholders' equity of at least $4,000,000. We had a net capital
deficiency of $9.1 million at December 31, 2001. We also do not satisfy a
guideline against continued losses for each of the issuer's five most recent
fiscal years. Our continued failure to meet the listing guidelines has been
regularly reviewed by AMEX and may ultimately result in our common stock being
delisted from AMEX. If our common stock were delisted from AMEX, trading of our
common stock, if any, would thereafter likely be conducted in the
over-the-counter market, unless we were able to list our common stock on The
Nasdaq Stock Market or another national securities exchange, which cannot be
assured. If our common stock were to trade in the over-the-counter market it may
be more difficult for investors to dispose of, or to obtain accurate quotations
as to the market value of our common stock. In addition, it may become more
difficult for us to raise funds through the sale of our securities.
In the event of the delisting of our common stock from the AMEX and our
inability to list our common stock on The Nasdaq Stock Market or another
national securities exchange, the regulations of the SEC under the Securities
Exchange Act of 1934, as amended, require additional disclosure relating to the
market for penny stocks. SEC regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. A disclosure schedule explaining the penny stock market and
the risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If our securities become subject to the regulations
applicable to penny stocks, the market liquidity for our securities could be
severely affected. In such an event, the regulations on penny stocks could limit
the ability of broker-dealers to sell our securities.
Our products are still in development and we may be unable to bring our products
to market.
We have not yet begun to generate revenues from the sale of products.
Our products will require significant additional development, clinical testing
and investment prior to their commercialization. We do not expect regulatory
approval for commercial sales of any of our products in the immediate future.
Potential products that appear to be promising at early stages of development
may not reach the market for a number of reasons. Such reasons include the
possibility that products will not be proven to be safe and efficacious in
clinical trials, that they will not be able to meet applicable regulatory
standards or obtain required regulatory approvals, that they cannot be produced
in commercial quantities at reasonable costs or that they fail to be
successfully commercialized or fail to achieve market acceptance.
If our products are not accepted by the medical community, our business will
suffer.
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Commercial sales of our products will substantially depend upon the
products' efficacy and on their acceptance by the medical community. Widespread
acceptance of our products will require educating the medical community as to
the benefits and reliability of the products. Our products may not be accepted
and, even if accepted, we are unable to estimate the length of time it would
take to gain such acceptance.
We will be required to make royalty payments on products we may develop,
reducing the amount of revenues with which we could fund ongoing operations.
The owners and licensors of the technology rights acquired by us are
entitled to receive a certain percentage of all revenues received by us from
commercialization, if any, of products in respect of which we hold licenses.
Accordingly, in addition to our substantial investment in product development,
we will be required to make substantial payments to others in connection with
revenues derived from commercialization of products, if any, developed under
licenses we hold. Consequently, we will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.
Our dependence on third parties for rights to technology and the development of
our products could harm our business.
Under the terms of existing license agreements, we are obligated to
make certain payments to our licensors. In the event that we default on the
payment of an installment under the terms of an existing licensing agreement,
our rights there under could be forfeited. As a consequence, we could lose all
rights under a license agreement to the related licensed technology,
notwithstanding the total investment made through the date of the default.
Unforeseen obligations or contingencies may deplete our financial resources and,
accordingly, sufficient resources may not be available to fulfill our
commitments. If we were to lose our rights to technology, we may be unable to
replace the licensed technology or be unable to do so on commercially reasonable
terms, which would materially adversely affect our ability to bring products
based on that technology to market. In addition, we depend on our licensors for
assistance in developing products from licensed technology. If these licensors
fail to perform or their performance is not satisfactory, our ability to
successfully bring products to market may be delayed or impeded.
We face intense competition and rapid technological changes and our failure to
successfully compete or adapt to changing technology could make it difficult to
successfully bring products to market.
The medical field is subject to rapid technological change and
innovation. Pharmaceutical and biomedical research and product development are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. Reports of progress and potential breakthroughs are occurring with
increasing frequency. Our success will depend upon our ability to develop and
maintain a competitive position in the research, development and
commercialization of products and technologies in our areas of focus.
Competition from pharmaceutical, chemical, biomedical and medical companies,
universities, research and other institutions is intense and is expected to
increase. All, or substantially all, of these competitors have substantially
greater research and development capabilities, experience, and manufacturing,
marketing, financial and managerial resources. Further, acquisitions of
competing companies by large pharmaceutical or other companies could enhance
such competitors' financial, marketing and other capabilities. Developments by
others may render our products or technologies obsolete or not commercially
viable and we may not be able to keep pace with technological developments.
We are subject to significant government regulation and failure to achieve
regulatory approval for our products would severely harm our business.
Our ongoing research and development projects are subject to rigorous
FDA approval procedures. The preclinical and clinical testing requirements to
demonstrate safety and efficacy in each clinical indication (the specific
condition intended to be treated) and regulatory approval processes of the FDA
can take a number of years and will require us to expend substantial resources.
We may be unable to obtain FDA approval for our products, and even if we do
obtain approval, delays in such approval would adversely affect the marketing of
products to which we have rights and our ability to receive product revenues or
royalties. Moreover, even if FDA approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and a later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Additional government regulation may be established which could prevent or delay
regulatory approval of our products. Sales of pharmaceutical products outside
the United States are subject to foreign regulatory requirements that vary
widely from country to country. Even if FDA approval has been obtained, approval
of a product by comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing the product in those countries.
The time required to obtain such approval may be longer or shorter than that
required for FDA approval. We have no experience in manufacturing or marketing
in foreign countries nor in matters such as currency regulations, import-export
controls or other trade laws. To date, we have not received final regulatory
approval from the FDA or any other comparable foreign regulatory authority for
any of our products or technologies.
Our failure to meet product release schedules would make it difficult to predict
our quarterly results and may cause our operating results to vary significantly.
-13-
Delays in the planned release of our products may adversely affect
forecasted revenues and create operational inefficiencies resulting from
staffing levels designed to support the forecasted revenues. Our failure to
introduce new products on a timely basis could delay or hinder market acceptance
and allow competitors to gain greater market share.
If our intellectual property and proprietary rights are infringed, or infringe
upon the rights of others, our business will suffer.
Our success will depend in part on our ability to obtain patent
protection for our technologies, products and processes and to maintain trade
secret protection and operate without infringing the proprietary rights of
others. The degree of patent protection to be afforded to pharmaceutical,
biomedical or medical inventions is an uncertain area of the law. In addition,
the laws of foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. We may not develop or receive
sublicenses or other rights related to proprietary technology that are
patentable, patents that are pending may be not issued, and any issued patents
may not provide us with any competitive advantages and may be challenged by
third parties. Furthermore, others may independently duplicate or develop
similar products or technologies to those developed by or licensed to us. If we
are required to defend against charges of patent infringement or to protect our
own proprietary rights against third parties, substantial costs will be incurred
and we could lose rights to certain products and technologies or be required to
enter into costly royalty or licensing agreements.
We do not have any marketing or manufacturing capabilities and will likely rely
on third parties for these capabilities in order to bring products to market.
We do not currently have our own sales force or an agreement with
another pharmaceutical company to market all of our products that are in
development. When appropriate, we may build or otherwise acquire the necessary
marketing capabilities to promote our products. However, we may not have the
resources available to build or otherwise acquire our own marketing
capabilities, and we may be unable to reach agreements with other pharmaceutical
companies to market our products on terms acceptable to us, if at all.
In addition, we do not intend to manufacture our own products. While we
have already entered into two manufacturing and supply agreements related to the
Premaire system and one related to the Tempo, these manufacturing and supply
agreements may not be adequate and we may not be able to enter into future
manufacturing and supply agreements on acceptable terms, if at all. Our reliance
on independent manufacturers involves a number of risks, including the absence
of adequate capacity, the unavailability of, or interruptions in, access to
necessary manufacturing processes and reduced control over product quality and
delivery schedules. If our manufacturers are unable or unwilling to continue
manufacturing our products in required volumes, we will have to identify
acceptable alternative manufacturers. The use of a new manufacturer may cause
significant interruptions in supply if the new manufacturer has difficulty
manufacturing products to our specifications. Further, the introduction of a new
manufacturer may increase the variation in the quality of our products.
Healthcare reimbursement policies are uncertain and may adversely impact the
sale of our products.
Our ability to commercialize human therapeutic and diagnostic products
may depend in part on the extent to which costs for such products and
technologies are reimbursed by private health insurance or government health
programs. The uncertainty regarding reimbursement may be especially significant
in the case of newly approved products. Reimbursement price levels may be
insufficient to provide a return to us on our investment in new products and
technologies. In the United States, government and other third-party payers have
sought to contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products approved for marketing by the FDA,
including some cases of refusal to cover such approved products. Healthcare
reform may increase these cost containment efforts. We believe that managed care
organizations may seek to restrict the use of new products, delay authorization
to use new products or limit coverage and the level of reimbursement for new
products. Internationally, where national healthcare systems are prevalent,
little if any funding may be available for new products, and cost containment
and cost reduction efforts can be more pronounced than in the United States.
We may become subject to product liability claims and our product liability
insurance may be inadequate.
The use of our proposed products and processes during testing, and
after approval, may entail inherent risks of adverse effects that could expose
us to product liability claims and associated adverse publicity. Although we
currently maintain general liability insurance, the coverage limits of our
insurance policies may not be adequate. We currently maintain clinical trial
product liability insurance of $2.0 million per event for certain clinical
trials and intend to obtain insurance for future clinical trials of products
under development. However, we may be unable to obtain or maintain insurance for
any future clinical trials. Such insurance is expensive, difficult to obtain and
may not be available in the future on acceptable terms, or at all. A successful
claim brought against us in excess of our insurance coverage would have a
material adverse effect upon us and our financial condition. We intend to
require our licensees to obtain adequate product liability insurance. However,
licensees may be unable to maintain or obtain adequate product liability
insurance on acceptable terms and such insurance may not provide adequate
coverage against all potential claims.
The price of biotechnology/pharmaceutical company stocks has been volatile which
could result in substantial losses to our stockholders.
-14-
The market price of securities of companies in the
biotechnology/pharmaceutical industries has tended to be volatile. Announcements
of technological innovations by us or our competitors, developments concerning
proprietary rights and concerns about safety and other factors may have a
material effect on our business or financial condition. The market price of our
common stock may be significantly affected by announcements of developments in
the medical field generally or our research areas specifically. The stock market
has experienced volatility in market prices of companies similar to us that has
been unrelated to the operating results of such companies. This volatility may
have a material adverse effect on the market price of our common stock.
Our ability to issue "blank check" preferred stock may make it more difficult
for a change in our control.
Our certificate of incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors, without shareholder
approval. In the event of issuance, such preferred stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in our control and preventing shareholders from receiving a premium for
their shares in connection with a change of control. We issued Series A and
Series B cumulative convertible redeemable preferred stock in connection with
private placements in February 1997 and April 1998, respectively. All of the
Series A preferred stock was converted into common stock during 1998. On July
31, 1998, all of the Series B Preferred stock was redeemed for cash. We also
issued shares of our Series C cumulative convertible preferred stock in
connection with the consummation of an agreement with Elan International
Services, Ltd. ("Elan International") in June 1998. In October 1999, in
conjunction with a licensing agreement with Elan International, we issued shares
of our Series D cumulative convertible exchangeable preferred stock and Series F
cumulative convertible preferred stock. In addition, we also have a commitment
from Elan International to purchase shares of Series E cumulative convertible
non-exchangeable preferred stock at our option (subject to satisfaction of
certain conditions). Except for the previously-mentioned purchase commitment for
Series E preferred stock, and additional shares of Series C, D and E preferred
stock that may be payable as dividends to Elan International, as holder of the
outstanding Series C, D and E preferred stock, we have no present intention to
issue any additional shares of our preferred stock. As we are currently
investigating raising additional equity financing, we may issue additional
shares of our preferred stock in the near future.
We have granted anti-dilutions rights to The Tail Wind Fund Ltd. which may
require us to issue additional shares to Tail Wind, make cash payments to Tail
Wind and may hinder our ability to raise additional funds.
Pursuant to our December 2000 private placement with The Tail Wind Fund
Ltd., until at least August 29, 2002, if we sell shares of our common stock or
securities convertible into or exercisable for common stock for less than
$3.5888 per share, we are obligated to issue to Tail Wind additional shares so
that the number of shares purchased by Tail Wind in the December 2000 private
placement plus the additional shares issued to Tail Wind equals the number of
shares that Tail Wind could have purchased for $2,250,000 at the price per share
at which the new shares are sold. The presence of these anti-dilution rights may
negatively affect our ability to obtain additional financing. In addition, in
the event that we are required to issue additional shares to Tail Wind, we may
not issue an aggregate of over 5,630,122 shares of our common stock in total to
Tail Wind in connection with the December 2000 private placement. If we would
otherwise be required to issue more than 5,630,122 shares to Tail Wind, we must
instead pay Tail Wind 105% of the cash value of such shares we do not issue.
We are obligated to issue additional securities in the future diluting our
stockholders.
As of December 31, 2001, we had reserved approximately 6,185,469 shares
of our common stock for issuance upon exercise of outstanding options and
warrants convertible into shares of our common stock, including by our officers
and directors. In addition, as of December 31, 2001, we had $2,000,000 principal
amount of a convertible promissory note, 14,708 shares of our Series C preferred
stock, 13,779 shares of our Series D preferred stock, 2,124 shares of our Series
E preferred stock and 5,000 shares of our Series F preferred stock outstanding.
Except for Series D Preferred Stock, each of the convertible securities provides
for conversion into shares of our common stock at a discount to the market price
at December 31, 2001. Our Series C, D, E and F preferred stock are convertible
into 10,431,206 shares, 2,839,300 shares, 546,015 shares and 1,470,588 shares,
respectively, of common stock. The convertible promissory note, including
accrued interest is convertible into 1,487,291 shares of common stock. The
exercise of options and outstanding warrants, the conversion of such other
securities and sales of common stock issuable thereunder could have a
significant dilutive effect on the market price of our common stock and could
materially impair our ability to raise capital through the future sale of our
equity securities.
-15-
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 14528 South
Outer Forty Road, Suite 205, St. Louis, Missouri 63017. These premises consist
of approximately 6,193 square feet subject to a lease that expires December 14,
2002. The monthly rent for these premises is $10,838. The Company also maintains
a research facility in Ann Arbor, Michigan, and leases a small office in
Rochester, New York. The Company maintains no other laboratory, research or
other facilities, but primarily conducts research and development in outside
laboratories under contracts with universities or research facilities. The
Company believes that its existing office arrangements will be adequate to meet
its reasonably foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company or any of its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sale prices of the
Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.
2001: High Low
------ ------
Fourth Quarter ................................ $4.750 $3.000
Third Quarter ................................. 4.110 2.680
Second Quarter ................................ 4.900 3.500
First Quarter ................................. 4.625 3.000
2000: High Low
------ ------
Fourth Quarter ................................ $6.625 $3.250
Third Quarter ................................. 6.875 4.250
Second Quarter ................................ 5.938 3.000
First Quarter ................................. 7.938 3.375
The closing sale price for the Company's Common Stock on the AMEX on
March 25, 2002 was $2.27 per share. At March 25, 2002, there were approximately
401 holders of record of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock in the foreseeable future. The
terms of the Company's Series C, D and E Preferred Stock generally prohibit the
payment of cash dividends and other distributions on the Company's Common Stock
unless full cumulative stock dividends on shares of such Series C, D and E
Preferred Stock have been paid or declared in full. During 2001, the Company
issued stock dividends totaling 996, 929, and 120 shares and cash dividends for
fractional shares of $3,278, $603, and $1,422 on Series C, D and E Preferred
Stock, respectively.
The following unregistered securities were issued by the Company during
the quarter ended December 31, 2001:
NUMBER OF
SHARES
SOLD/ISSUED/
SUBJECT TO OFFERING/
DATE OF DESCRIPTION OF OPTIONS OR EXERCISE PRICE
SALE/ISSUANCE SECURITIES ISSUED WARRANTS PER SHARES($) PURCHASER OR CLASS
------------- ----------------- -- -------- -------------- ------------------
October 9, 2001 Common Stock, $.01 par value 14,367 $1.1206 Advisors in lieu of
cash consideration
The issuance of these securities are claimed to be exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
-16-
ITEM 6. SELECTED FINANCIAL DATA
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
SELECTED FINANCIAL INFORMATION
(In dollars, except share information)
Years Ended December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Contract research revenue $ 869,095 $ 501,572 $ 399,378 $ -- $ --
Sublicense revenue 5,000 5,000 -- 350,000 500,000
------------ ------------ ------------ ------------ ------------
Total revenues 874,095 506,572 399,378 350,000 500,000
Expenses:
Acquisition of research and
development in-process technology -- -- 15,000,000 13,325,000 1,650,000
Research and development 5,999,693 3,747,437 3,421,734 2,351,301 3,729,193
General and administrative 4,551,661 2,817,535 2,277,136 3,043,070 4,627,567
------------ ------------ ------------ ------------ ------------
Total expenses 10,551,354 6,564,972 20,698,870 18,719,371 10,006,760
------------ ------------ ------------ ------------ ------------
Loss from operations (9,677,259) (6,058,400) (20,299,492) (18,369,371) (9,506,760)
Interest income 58,438 124,908 91,941 60,273 56,914
Interest expense (318,642) (224,360) (162,237) (251,363) (39,292)
Realized gain on sale of marketable
securities 79,706 239,629 -- -- --
Minority interest in loss of subsidiary 378,620 155,072 2,985,000 -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (9,479,137) $ (5,763,151) $(17,384,788) $(18,560,461) $ (9,489,138)
============ ============ ============ ============ ============
Basic and diluted net loss per common share $ (.40) $ (.27)(1) $ (.68)(1) $ (.85) $ (.80)
Basic and diluted weighted average
common shares outstanding 28,963,562 27,956,119 27,236,715 21,931,040 11,976,090
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (net deficiency) $ (4,160,823) $ 3,439,120 $ 3,344,174 $ 1,456,833 $ (837,564)
Total assets 2,056,278 5,450,657 5,048,655 2,862,521 689,937
Long-term debt & redeemable preferred
stock 5,000,000 4,000,000 3,000,000 1,000,000 4,019,263
Accumulated deficit (92,496,964) (80,967,524) (73,409,828) (55,156,763) (36,157,290)
Stockholders' equity (net capital
deficiency) $ (9,086,276) $ (413,720) $ 671,073 $ 655,205 $ (4,716,751)
----------
No cash dividends have been paid on Common Stock for any of the periods
presented.
Basic net loss per share is based on net loss available to common stockholders
divided by the weighted average common stock outstanding during the year.
See consolidated financial statements and accompanying footnotes.
(1) As discussed in Note 1 ("Summary of Significant Accounting Policies - Basic
Net Loss per Share of Common Stock") to the consolidated financial statements,
basic and diluted net loss per share for the years ended December 31, 2000 and
1999 have been restated to properly reflect cumulative preferred stock dividends
payable in kind in calculating the net loss available to common stockholders.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainty, including without limitation, risks
set forth in Part I of the Company's Form 10-K for the year ended December 31,
2001.
The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the related Notes to Financial
Statements included on pages 24-35 in this Form 10-K.
OVERVIEW
Sheffield Pharmaceuticals, Inc. ("Sheffield" or the "Company") provides
innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. The Company is developing a range of products to treat
respiratory and systemic diseases in its proprietary Premaire(R) Delivery System
("Premaire") and Tempo(TM) Inhaler ("Tempo"). The Company is in the development
stage and, as such, has been principally engaged in the development of its
pulmonary delivery systems.
In 1997, the Company acquired the Premaire, a portable nebulizer-based
pulmonary delivery system, through a worldwide exclusive license and supply
arrangement with Siemens AG ("Siemens"). During the second half of 1998, the
Company acquired the rights to an additional pulmonary delivery technology,
Tempo, from a subsidiary of Aeroquip-Vickers, Inc. ("Aeroquip-Vickers"). The
Tempo technology is a new generation propellant-based pulmonary delivery system.
Additionally, during 1998, Sheffield licensed from Elan Corporation, plc
("Elan") the Ultrasonic Pulmonary Drug Absorption System ("UPDAS"), a novel
disposable unit dose nebulizer system, and Elan's Absorption Enhancing
Technology ("Enhancing Technology"), a therapeutic agent to increase the
systemic absorption of drugs. In October 1999, the Company licensed Elan's
Nanocrystal(TM) technology to be used in developing certain inhaled steroid
products.
Sheffield's lead drug delivery technology, the Premaire, is a patented,
multi-dose nebulizer delivery system. The pocket-sized inhaled drug delivery
system features an ultrasonic nebulizer that emits high-frequency sound waves
that turn liquid medication into a fine cloud or soft mist. The Premaire
combines the therapeutic benefits of nebulization with the convenience of
pressurized metered dose inhalers, or pMDIs, in one patient-friendly device. The
Premaire is comprised of a hand-held ultrasonic nebulizer and drug-filled
cartridges that are inserted into the inhaler unit. The cartridges provide
patients who must take multiple respiratory medications with a single,
easy-to-use system. The Company believes the soft mist created by the Premaire
provides multiple drug administration advantages over the high-velocity pMDIs
and dry powder inhalers. Furthermore, the Premaire system is fast and portable
as compared to conventional tabletop nebulizers, which are large, cumbersome and
more time consuming to use. The Premaire system targets younger and older asthma
patients, as well as older chronic obstructive pulmonary disease patients who
have difficulty using pMDIs and currently depend on tabletop nebulizers for
delivery of their medications.
Sheffield's Tempo is a patented, new generation pMDI that the Company
believes has significant efficiency and performance advantages over standard
pMDIs. The Tempo technology utilizes a standard aerosol pMDI canister, encased
in a compact device that provides an aerosol flow-control chamber and a
synchronized triggering mechanism. The aerosol flow-control chamber allows the
patient to inhale through the device at a normal breathing rate, instead of a
forced breath. The inspiratory breath establishes flow fields within the device
that mix and uniformly disperse the drug in the breath. At the mouthpiece,
nearly all the propellant is evaporated leaving only drug particles to be
inspired, allowing a significant increase in the amount of drug delivered to the
lungs. The Tempo system, like the Premaire system, is designed to reduce patient
coordination problems and enhance compliance with the prescribed treatment.
In June 1998, the Company sublicensed to Zambon Group SpA ("Zambon")
worldwide marketing and development rights to respiratory products to be
delivered by the Premaire in return for an equity investment in the Company
(approximately 10%). From June 1998 to September 2001, Zambon funded the
development costs for the respiratory compounds delivered by Premaire. In
September 2001, the Company amended its 1998 agreement with Zambon whereby
Sheffield regained the rights to the Premaire previously granted to Zambon. As
part of the amended agreement, Zambon provided a low-interest, $2.5 million loan
to Sheffield to progress the development of the Premaire respiratory program.
Upon commercialization, Zambon will be entitled to certain royalties on payments
received by Sheffield for albuterol, ipratropium and cromolyn sales for
specified periods.
As part of a strategic alliance with Elan, the Company is developing
therapies for non-respiratory diseases to be delivered to the lungs using both
Tempo and Premaire. In 1998, the systemic applications of Premaire and Tempo
were licensed to Systemic Pulmonary
-18-
Delivery, Ltd. ("SPD"), a wholly owned subsidiary of the Company. In addition,
two Elan technologies, UPDAS(TM) and the Enhancing Technology, were also
licensed to SPD. The Company retained exclusive rights outside of the strategic
alliance to respiratory disease applications utilizing the Tempo technology and
the two Elan technologies.
In addition to the above alliance with Elan, in 1999, the Company and
Elan formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), to
develop certain inhaled steroid products to treat respiratory diseases using
Elan's NanoCrystal technology. Currently, RSD is developing a solution-based
unit-dose-packaged steroid formulation for delivery using a conventional
tabletop nebulizer, and a solution-based steroid formulation for delivery using
the Premaire.
CRITICAL ACCOUNTING POLICIES
Basis of Presentation
The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts. The Company
has generated minimal operating revenue and will require additional capital,
which the Company intends to obtain through out-licensing of rights to its
technology, as well as through equity and debt offerings, to continue to operate
its business. The Company's ability to meet its obligations as they become due
and to continue as a going concern must be considered in light of the expenses,
difficulties and delays frequently encountered in developing a new business,
particularly since the Company will focus on research, development and unproven
technology that may require a lengthy period of time and substantial
expenditures to complete. Even if the Company is able to successfully develop
new products, there can be no assurance that the Company will generate
sufficient revenues from the sale or licensing of such products to be
profitable. Management believes that the Company's ability to meet its
obligations as they become due and to continue as a going concern through
December 2002 is dependent upon obtaining additional funding. The Company's
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business. Should the Company not be
successful in obtaining sufficient funding, some of the assets and liabilities
may not be satisfied at the current carrying values.
The consolidated financial statements include the accounts of Sheffield
and its wholly owned subsidiaries, Systemic Pulmonary Delivery, Ltd. ("SPD"),
Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc., and its 80.1% owned
subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD").
Deferred Tax Assets
As of December 31, 2001, the Company has approximately $21.2 million of
deferred tax assets, the majority of which relates to net operating loss
carryforwards that expire at various dates from 2007 to 2021 if not utilized.
The realization of these assets is dependent upon the Company generating future
taxable income. Due to the uncertainty of the amount, if any, of future taxable
income that may be generated, the Company has recorded a valuation allowance for
the entire deferred tax asset. Should the Company generate sufficient future
taxable income before the net operating loss carryforwards expire, the benefit
of the deferred tax asset will be realized at that time.
RESULTS OF OPERATIONS
Revenue
Contract research revenues primarily represented revenues earned from a
collaborative research agreement with Zambon relating to the development of
respiratory applications of Premaire. Contract research revenue was $869,095,
$501,572 and $399,378 for the years ended December 31, 2001, 2000 and 1999,
respectively. The increase of $367,523, or 73.3% from 2000 to 2001 reflects
higher revenues associated with Premaire device development work and testing as
the Company finalizes the to-be-marketed device prior to the start of Phase III
Premaire-albuterol clinical trials. These higher revenues were partially offset
by the Company no longer performing development work for Zambon in the third and
fourth quarters of 2001, resulting from Sheffield regaining the Premaire
respiratory rights in the third quarter of 2001. The increase of $102,194, or
25.6% from 1999 to 2000 reflects two additional Premaire respiratory programs in
development in 2000 as compared to 1999 and certain nonrecurring Premaire device
development work and testing completed during 2000. Costs of contract research
revenue approximated such revenues and were included in research and development
expenses. Future contract research revenues and expenses are dependent on
obtaining additional collaborative agreements.
The Company's ability to generate material revenues is contingent on
the successful commercialization of its technologies and other technologies and
products that it may acquire, followed by the successful marketing and
commercialization of such technologies through licenses, joint ventures and
other arrangements.
Acquisition of Research & Development In-Process Technology
-19-
In 1999, the Company licensed certain pulmonary NanoCrystal technology
from Elan for $15.0 million. This entire payment was expensed as the license
agreement restricts the Company's use of the NanoCrystal technology to certain
respiratory steroid products that are currently research and development
projects.
Research and Development
Research and development expenses were $6.0 million for the year ended
December 31, 2001 compared to $3.7 million and $3.4 million for the years ended
December 31, 2000 and 1999, respectively. The increase of $2.3 million, or
60.1%, primarily reflects higher expenses associated with the development of the
Company's unit-dose inhaled steroid product reflecting increased formulation
work and the start of a Phase I clinical trial during the fourth quarter ($1.2
million), costs associated with the Company's feasibility work associated with
new product development in the area of polypeptides ($.5 million), higher costs
related to the industrialization of the Tempo Inhaler ($.4 million), and
increased design and development costs associated with finalizing the
to-be-marketed Premaire device prior to the start of a Phase III
albuterol-clinical trial ($.2 million). The increase of $.3 million, or 9.5%,
from 1999 to 2000 primarily represents costs associated with the development by
the Company's subsidiary, RSD, of three steroid products initiated during the
fourth quarter of 1999 ($.7 million), formulation work begun during 2000 on a
respiratory product to be delivered via the Tempo ($.5 million), modifications
made to the Premaire to enhance its commercial appeal prior to the start of
Phase III-albuterol clinical trials ($.3 million), and two additional Premaire
respiratory programs in development in 2000 as compared to 1999 ($.1 million).
These increases were partially offset by lower development costs on the
Company's two systemic programs, a therapy for breakthrough pain delivered
through the Premaire ($.3 million), and a migraine therapy delivered through the
Tempo ($1.0 million).
The following details the status of each of the Company's development
programs as of December 31, 2001:
Premaire Respiratory Program:
As a result of the Company regaining from Zambon the rights to
the respiratory applications to the Premaire in September 2001, the
sponsorship of the Premaire respiratory development programs was
transferred from Zambon to the Company with the Food and Drug
Administration ("FDA") being notified accordingly. In the fourth
quarter of 2001, Sheffield reviewed all of the development work
completed-to-date, identifying a number of deficiencies in the Zambon
development program. To address these issues, Sheffield has made a
number of internal management changes and moved the program to a group
of highly experienced pulmonary clinical and regulatory experts. The
Premaire device is currently in a to-be-marketed form and fully
industrialized. As of December 31, 2001, the Company had spent $3.1
million on developing the respiratory products discussed below.
The Company's strategy is to out license the U.S. rights to
the Premaire respiratory products to a third party which the Company
anticipates concluding in 2003. As a result, the Company estimates a
U.S. commercial launch of its first products in Premaire to occur in
the last half of 2005 or first half of 2006. Sheffield will fund the
continued development work for the Premaire respiratory products up
through the period of outlicensing, currently estimated at
approximately $10 million, after which time the licensee will assume
funding responsibility for further development work.
Albuterol Sulfate. Zambon initiated a Phase II clinical trial
in December 1999 that compared the Premaire-albuterol sulfate to a
conventional albuterol-pMDI. Findings from Phase II studies indicated
that Premaire-albuterol and pMDI-albuterol were comparable in improving
lung function in the 24 adult patients. An end of Phase II meeting was
held in February 2002 with the FDA where the results of the development
activities-to-date, specifically the results of the Phase II trial,
were reviewed. The Company is currently reviewing the FDA's comments
and recommendations, integrating the information into the plans for the
Phase III trial and NDA submission. The Company expects to begin
pivotal clinical trials for the albuterol sulfate program by the end of
2002.
Budesonide. Preclinical formulation development work is
currently underway. A formulation developed by Nanosystems has proven a
feasible candidate for delivery in the Premaire. The formulation is
dependent on a proprietary nanocrystaline dispersion of budesonide in
an aqueous carrier. Two other alternative formulation approaches are
also under evaluation. Upon scale-up and production of clinical batches
released under CMC protocol, an IND will be prepared for filing with
the FDA, which is currently planned for the first half of 2003.
Ipratropium Bromide. Zambon initiated a Phase I/II clinical
trial in Europe in January 2000 assessing the safety and efficacy
compared to a commercially available ipratropium bromide product
delivered by a pMDI and placebo in patients with COPD. The results of
the study indicated that both Premaire-ipratropium bromide and
pMDI-ipratropium were tolerated and improved lung function in the COPD
patients. An Investigational New Drug Application ("IND") was filed by
Zambon with the FDA in May 2000. During 2001, the IND was transferred
to the Company. The Company does not intend to further develop this
product on its own as the program has progressed to the point where a
potential licensing partner would be in a position to take the product
into clinical studies.
Sodium Cromoglycate. An IND was filed by Zambon with the FDA
in July 2000. No further development work is anticipated to be
completed on this product as the projected market opportunity for
sodium cromoglycate is currently deemed too small to justify further
progression.
-20-
Premaire Systemic Program:
Through its development alliance with Elan, SPD, the Company
evaluated certain drugs for systemic treatment by pulmonary delivery
through Premaire. By identifying a market opportunity for a
rapid-acting, non-invasive treatment for breakthrough pain, the first
drug to be tested for delivery in Premaire was morphine. In July 1999,
the Company completed a gamma scintigraphy/pharmacokinetic trial
comparing morphine delivered using the Premaire to subcutaneous
injection. The Premaire demonstrated good pulmonary deposition and very
rapid absorption, more rapid peak blood levels vs. subcutaneous
injection and low oral and throat deposition. As part of the
development alliance with Elan, Elan has the first right of refusal on
the development of any product developed by the joint venture. Elan has
chosen not to license this product from the joint venture. As such, the
joint venture continues to seek to attract a partner for the continued
development and commercialization of this product. The Company has
spent $.4 million to date to develop this product and does not
anticipate incurring any future costs for further development until
such time as a licensing partner is secured.
Tempo Respiratory Program:
In September 2000, the Company completed a pilot study using
the Tempo to deliver an undisclosed, patented respiratory drug used to
treat asthma. The study measured the distribution of this respiratory
drug delivered by Tempo compared to the distribution of this same drug
delivered through a commercially available pMDI in 12 healthy
volunteers. Results of this study demonstrated that Tempo significantly
increased drug deposition in all regions of the lung. Tempo delivered
approximately 200% more drug to the lungs, deposited approximately 75%
less drug in the mouth, and increased dosing consistency by
approximately 55% compared to the currently marketed form of this same
drug. As of December 31, 2001, the Company has incurred approximately
$.9 million to-date on this study. The Company is using the results of
this study as a basis for conducting discussions for feasibility work
and/or clinical studies with potential collaboration partners.
Tempo Systemic Program:
The development of systemic drugs using Tempo is being
conducted as part of the Company's alliance with Elan. The initial
product developed was targeted to address migraine headaches. The
Company utilized ergotamine tartrate as a proof-of-principle product.
In December 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing the Tempo to a
conventional pMDI. The trial showed successful delivery of the drug to
all regions of lung with significantly reduced mouth and throat
deposition, and rapid drug absorption. As part of the development
alliance with Elan, Elan has the first right of refusal on the
development of any product developed by the joint venture. Elan has
chosen not to license this product from the joint venture. As such, the
joint venture continues to seek to attract a partner for the continued
development and commercialization of this product. As of December 31,
2001, the Company has spent $1.0 million to date to develop this
product and does not anticipate incurring any future costs for further
development until such time as a licensing partner is secured.
As a result of the work performed on the ergotamine product
noted above, during 2001 Sheffield initiated a new development program
for a novel formulation of dyhydroergotamine ("DHE") for pulmonary
delivery in the Tempo for the treatment of specific types of migraines.
Formulation work for this program is currently underway. As of December
31, 2001, the Company has incurred approximately $.1 million to-date
related to this project. The Company is currently in discussions with a
pharmaceutical company for the development and manufacturing of this
product. Future costs related to this project are dependent, among
other factors, the timing of securing a development partner. The
Company estimates incurring approximately $3 million in 2002 related to
the development of the DHE project.
Unit Dose Nebulizer Program:
As part of an alliance with Elan, RSD is developing a product
for inhalation delivery in a standard commercial tabletop device using
the steroid budesonide, formulated using the NanoCrystal technology. A
Phase I, double-blind safety and pharmacokinetic study of nebulized
nanobudesonide in 16 healthy volunteers was satisfactorily completed at
Thomas Jefferson University Hospital in February 2002. This study
compared single doses of Pulmicort Respules, nanobudesonide and
placebo. Data from the study is currently undergoing final data and
statistical analysis. After such data has been analyzed, the Company
plans on initiating discussions with potential partners regarding the
outlicensing of this opportunity. As of December 31, 2001, the Company
incurred approximately $2.1 million to-date on this project. Sheffield
will fund the continued development work for this program up through
the period of outlicensing, currently estimated at approximately $2.5
million, after which time it is anticipated that the licensee will
assume funding responsibility for further development work.
General and Administrative Expenses
General and administrative expenses were $4.6 million for the year
ended December 31, 2001 compared to $2.8 million and $2.3 million for the years
ended December 31, 2000 and 1999, respectively. The increase of $1.8 million, or
61.5%, from 2000 to 2001 was primarily due to higher consulting costs and legal
fees associated with expanded business development and merger and acquisition
activities
-21-
in the area of licensing and partnering of the Company's delivery systems, as
well as potential acquisitions of complementary pulmonary delivery technologies
and companies. The increase of $.5 million, or 23.7%, from 1999 to 2000
primarily reflects higher consulting and legal costs associated with expanded
business development activities.
Interest
Interest income was $58,438 for the year ended December 31, 2001 as
compared to $124,908 and $91,941 for the years ended December 31, 2000 and 1999,
respectively. The decrease of $66,470, or 53.2%, from 2000 to 2001 is primarily
due to less cash available for investment and lower yields on those investments.
The $32,967 increase in interest income in 1999 from 1998 was primarily due to
larger balances of cash available for investment and higher average yields on
those investments.
Interest expense was $318,642 for the year ended December 31, 2001 as
compared to $224,360 and $162,237 for the years ended December 31, 2000 and
1999, respectively. The increase of $94,282, or 42.0%, from 2000 to 2001
resulted primarily from higher short-term borrowings reflecting the August 2001
$4.0 million promissory note with Elan Pharma International Ltd. ("Elan
Pharma"). The increase of $62,123 from 2000 to 1999 resulted from a higher
outstanding balance during 2000 on the Company's convertible promissory note
with Elan, as well as a higher average interest rate on the note.
Realized Gain on Sale of Marketable Securities
Realized gain on sale of marketable securities was $79,706 and $239,629
for the years ended December 31, 2001 and 2000, respectively. These gains
resulted from the sale of 283,188 and 300,000 shares for 2001 and 2000,
respectively, of the Company's investment in Lorus Therapeutics, Inc. ("Lorus").
As of December 31, 2001, the Company had no remaining investment in Lorus.
Minority Interest in Subsidiary
Minority interest in loss of subsidiary was $.4 million for the year
ended December 31, 2001 compared to $.2 million and $3.0 million for the years
ended December 31, 2000 and 1999, respectively. RSD, a consolidated and 80.1%
owned subsidiary of the Company, incurred a loss of $1.9 million and $.8 million
in 2001 and 2000, respectively. The $1.1 million increase from 2000 to 2001
resulted primarily from costs associated with initiation of a Phase I/II
clinical study of the inhaled steroid product delivered using a tabletop
nebulizer. RSD's loss of $15.0 million in 1999 resulted from the license of
certain pulmonary NanoCrystal technology from Elan. The minority interest in
loss of subsidiary represents Elan's portion, or 19.9%, of RSD's losses. Elan's
investment in RSD, shown as minority interest in subsidiary on the consolidated
balance sheets, was $0 at both December 31, 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had $.9 million in cash and cash
equivalents compared to $3.0 million at December 31, 2000. The decrease of $2.1
million reflects $9.1 million of cash disbursements used primarily to fund
operating activities and $.6 million to repurchase and retire 214,997 shares of
the Company's Common Stock. These decreases in cash were partially offset by the
receipt of a $1.0 million milestone advance from Zambon, $1.0 million from the
issuance of 1,000 shares of the Company's Series E Cumulative Convertible
Preferred Stock, $4.0 million from the proceeds of an unsecured promissory note
from Elan Pharma, $1.0 million from the proceeds of a secured loan from Zambon,
and $.5 million in net proceeds from the exercise of common stock options and
warrants.
In September 2001, in connection with the amendment of its 1998
agreement with Zambon, the Company entered into a Loan and Security Agreement
("Loan Agreement") with Zambon, pursuant to which Zambon agreed to lend the
Company $2.5 million. The Company received $1.0 million upon signing of the Loan
Agreement, with additional borrowings of $1.0 million and $.5 million to be made
on January 1, 2002 and April 1, 2002, respectively. The Loan Agreement provides
for interest on principal and annually compounded interest at a fixed rate of 2%
per annum and is secured by certain security interests in respiratory products
developed in the Premaire. One third of the principal balance, together with
interest, is payable by the Company upon the Company's execution of an agreement
with one or more third parties to develop, co-promote and/or sell certain
products in North America, with all remaining unpaid principal and interest due
on December 31, 2005. As part of the amendment of its 1998 agreement with
Zambon, on October 17, 2001 the Company repurchased from Zambon 214,997 shares
of common stock for $3.0233 per share ("Repurchase Price"). In addition, the
Company received an option, expiring December 31, 2002, to repurchase the
remaining shares of the Company's common stock held by Zambon at the Repurchase
Price. In the event the Company completes a sublicense for the North American
rights or a sublicense for the non-North American rights to certain Premaire
respiratory products prior to December 31, 2002, the Company will be required to
repurchase from Zambon 882,051 shares of the Company's common stock on each of
the events.
In August 2001, the Company entered into a Note Purchase Agreement with
Elan Pharma, pursuant to which Elan Pharma agreed to lend the Company $4
million. All borrowings under the Note Purchase Agreement are evidenced by an
unsecured promissory note of the Company that provides for interest on principal
and semi-annually compounded interest at a fixed rate of 10% per annum and a
maturity of November 14, 2002, or upon the earlier occurrence of one or more
specified events.
-22-
In October 1999, as part of a licensing agreement with Elan, the
Company received gross proceeds of $17.0 million related to the issuance to Elan
of 12,015 shares of Series D Cumulative Convertible Exchangeable Preferred Stock
and 5,000 shares of Series F Convertible Non-Exchangeable Preferred Stock. In
turn, the Company made an equity investment of $12.0 million in a joint venture,
RSD, representing an initial 80.1% ownership. The remaining proceeds from this
preferred stock issuance were available for general operating purposes. As part
of the agreement, Elan also committed to purchase, on a drawdown basis, up to an
additional $4.0 million of the Company's Series E Preferred Stock, of which $2.0
million of such commitment remains outstanding. The proceeds from the Series E
Preferred Stock are required to be utilized by the Company to fund its portion
of RSD's operating and development costs.
In May 1999, in conjunction with the completion of its Phase I/II
Premaire-albuterol trial, Zambon provided the Company with a $1.0 million
interest-free advance against future milestone payments. In January 2001, the
Company received an additional $1.0 million interest-free milestone advance
resulting from the demonstration of the technical feasibility of delivering an
inhaled steroid formulation in Premaire. The proceeds from these advances were
not restricted as to their use by the Company. As part of the amendment of its
1998 agreement with Zambon, the terms of the milestone advances were modified in
that the Company agreed to repay $1.0 million of the advance milestone payments
upon the earlier of December 31, 2003, or upon the first regulatory approval for
either albuterol or an inhaled steroid delivered in the Premaire. The remaining
$1.0 million advance shall be repaid by the Company on the earlier of December
31, 2005, or the regulatory approval of the second product (albuterol or an
inhaled steroid) delivered in the Premaire. Due to the modification in the
repayment terms, the advances have been reclassified in the Company's balance
sheet as long-term debt.
Since its inception, the Company has financed its operations primarily
through the sale of securities and convertible debentures, from which it has
raised an aggregate of approximately $84.0 million through December 31, 2001, of
which approximately $30.0 million has been spent to acquire certain in-process
research and development technologies, and $34.8 million has been incurred to
fund certain ongoing technology research projects. The Company expects to incur
additional costs in the future, including costs relating to its ongoing research
and development activities, and preclinical and clinical testing of its product
candidates. The Company may also bear considerable costs in connection with
filing, prosecuting, defending and/or enforcing its patent and other
intellectual property claims. Therefore, the Company will need substantial
additional capital before it will recognize significant cash flow from
operations, which is contingent on the successful commercialization of the
Company's technologies. There can be no assurance that any of the technologies
to which the Company currently has or may acquire rights can or will be
commercialized or that any revenues generated from such commercialization will
be sufficient to fund existing and future research and development activities.
As of March 25, 2002, the Company had $1.2 million in cash available to
fund its operations. As stated above, the Company is to receive $.5 million on
April 1, 2002 pursuant to its Loan Agreement with Zambon and the Company has an
agreement to receive $1.0 million from Elan to fund the Company's portion of
RSD's operating and development costs. Because the Company does not currently
have, and does not expect to generate, significant cash flows from operations
for at least the next few years, the Company will require additional funds to
meet the costs of its development programs for 2002 and beyond. In an effort to
meet its capital requirements, the Company is currently pursuing various
financing alternatives including private offerings of its securities, debt
financing, and collaboration and licensing arrangements with other companies.
There can be no assurance that the Company will be able to obtain such
additional funds or enter into such collaborative and licensing arrangements on
terms favorable to the Company, if at all. The Company's development programs
will be curtailed if future financings are not completed.
While the Company does not believe that inflation has had a material
impact on its results of operations, there can be no assurance that inflation in
the future will not impact financial markets which, in turn, may adversely
affect the Company's valuation of its securities and, consequently, its ability
to raise additional capital, either through equity or debt instruments, or any
off-balance sheet refinancing arrangements, such as collaboration and licensing
agreements with other companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no material market risk exposure.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Sheffield
Pharmaceuticals, Inc. and Subsidiaries (a development stage enterprise) as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 2001 and for the period
October 17, 1986 (inception) through December 31, 2001. 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 consolidated financial position of Sheffield
Pharmaceuticals, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 and the period from October
17, 1986 (inception) through December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Sheffield
Pharmaceuticals, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has a working capital deficiency. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Note 1, the computation of basic and diluted net loss per share
of common stock for the years ended December 31, 2000 and 1999 has been
restated.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 12, 2002
-24-
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS December 31,
------------
2001 2000
------------ ------------
Current assets:
Cash and cash equivalents (Note 1) $ 859,298 $ 3,041,948
Marketable equity securities (Notes 1 and 6) -- 327,422
Milestone advance receivable (Note 5) -- 1,000,000
Clinical supplies 427,550 236,000
Prepaid expenses and other current assets 86,080 304,272
------------ ------------
Total current assets 1,372,928 4,909,642
------------ ------------
Property and equipment (Note 1):
Laboratory equipment 431,920 271,748
Office equipment 245,019 211,609
Leasehold improvements 25,309 18,320
------------ ------------
Total at cost 702,248 501,677
Less accumulated depreciation and amortization (355,014) (235,389)
------------ ------------
Property and equipment, net 347,234 266,288
------------ ------------
Patent costs, net of accumulated amortization of
$20,216 and $9,287, respectively (Note 1) 308,203 258,897
Other assets 27,913 15,830
------------ ------------
Total assets $ 2,056,278 $ 5,450,657
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 856,216 $ 791,722
Accrued liabilities 441,778 443,043
Sponsored research payable 235,757 235,757
Note payable (Note 5) 4,000,000 --
------------ ------------
Total current liabilities 5,533,751 1,470,522
Convertible promissory note (Note 5) 2,000,000 2,000,000
Long-term debt (Note 5) 3,000,000 2,000,000
Other long-term liabilities 608,803 393,855
Commitments and contingencies -- --
------------ ------------
Total liabilities 11,142,554 5,864,377
Minority interest in subsidiary (Note 1) -- --
Stockholders' equity (net capital deficiency) (Notes 3 & 4):
Preferred stock, $.01 par value, authorized 3,000,000 shares:
Series C cumulative convertible preferred stock, authorized
23,000 shares; 14,708 and 13,712 shares issued and outstanding
at December 31, 2001 and 2000, respectively 147 137
Series D cumulative convertible exchangeable preferred stock,
authorized 21,000 shares; 13,799 and 12,870 shares
issued and outstanding at December 31, 2001 and 2000, respectively 138 129
Series E cumulative convertible non-exchangeable preferred stock,
authorized 9,000 shares; 2,124 and 1,004 shares issued and
outstanding at December 31, 2001 and 2000, respectively 21 10
Series F convertible non-exchangeable preferred stock, 5,000 shares
authorized; 5,000 shares issued and outstanding at December 31, 2001 and 2000 50 50
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 29,001,602 and 28,791,643 shares at December 31, 2001
and 2000, respectively 290,016 287,916
Additional paid-in capital 83,120,316 80,108,095
Other comprehensive income -- 157,467
Deficit accumulated during development stage (92,496,964) (80,967,524)
------------ ------------
Total stockholders' equity (net capital deficiency) (9,086,276) (413,720)
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) $ 2,056,278 $ 5,450,657
============ ============
See notes to consolidated financial statements.
-25-
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999 and for the Period
from October 17, 1986 (inception) to December 31, 2001
October 17,
1986
Years ended December 31, (inception) to
------------------------ December 31,
2001 2000 1999 2001
------------ ------------ ------------ ------------
Revenues:
Contract research revenue (Note 1) $ 869,095 $ 501,572 $ 399,378 $ 1,770,045
Sublicense revenue (Note 6) 5,000 5,000 -- 1,370,000
------------ ------------ ------------ ------------
Total revenues 874,095 506,572 399,378 3,140,045
Expenses:
Acquisition of research and development in-process
technology (Note 6) -- -- 15,000,000 29,975,000
Research and development 5,999,693 3,747,437 3,421,734 34,772,555
General and administrative 4,551,661 2,817,535 2,277,136 28,886,746
------------ ------------ ------------ ------------
Total expenses 10,551,354 6,564,972 20,698,870 93,634,301
------------ ------------ ------------ ------------
Loss from operations (9,677,259) (6,058,400) (20,299,492) (90,494,256)
Interest income 58,438 124,908 91,941 789,387
Interest expense (318,642) (224,360) (162,237) (1,116,357)
Realized gain (loss) on sale of marketable securities 79,706 239,629 -- (5,580)
Minority interest in loss of subsidiary (Note 1) 378,620 155,072 2,985,000 3,518,693
------------ ------------ ------------ ------------
Loss before extraordinary item (9,479,137) (5,763,151) (17,384,788) (87,308,113)
Extraordinary item -- -- -- 42,787
------------ ------------ ------------ ------------
Net loss $ (9,479,137) $ (5,763,151) $(17,384,788) $(87,265,326)
============ ============ ============ ============
Preferred stock dividends (2,084,392) (1,830,094) (1,036,487) (5,729,520)
Accretion of mandatorily redeemable preferred stock -- -- -- (103,400)
------------ ------------ ------------ ------------
Net loss - attributable to common shares $(11,563,529) $ (7,593,245) $(18,421,275) $(93,098,246)
============ ============ ============ ============
Basic and diluted weighted average common shares
outstanding (Note 1) 28,963,562 27,956,119 27,236,715 10,621,036
Basic and diluted net loss per share of common stock
(Note 1): $ (.40) $ (.27) $ (.68) $ (8.77)
See notes to consolidated financial statements.
-26-
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
For the Period from October 17, 1986 (Inception) to December 31, 2001
Notes receivable
in connection with Additional
Preferred Common sale of paid-in
Stock Stock stock capital
------------ ------------ ------------------ ------------
Balance at October 17, 1986 $ -- $ -- $ -- $ --
Common stock issued -- 11,484,953 100,000 30,539,185
Reincorporation in Delaware at $.01 par value -- (11,220,369) -- 11,220,369
Common stock subscribed -- -- (110,000) --
Common stock options and warrants issued -- -- -- 240,868
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, LLC -- 6,000 -- 1,644,000
Common stock options extended -- -- -- 215,188
Accretion of issuance costs for Series A preferred stock -- -- -- --
Series C preferred stock issued 115 -- -- 11,499,885
Series C preferred stock dividends 4 -- -- 413,996
Comprehensive income (loss):
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 119 270,584 (10,000) 55,773,491
Common stock issued -- 2,504 10,000 89,059
Series C preferred stock dividends 9 -- -- 865,991
Series D preferred stock issued 120 -- -- 12,014,880
Series F preferred stock issued 50 -- -- 4,691,255
Common stock warrants issued -- -- -- 203,452
Comprehensive income (loss):
Unrealized gain on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 298 273,088 -- 73,638,128
Common stock issued -- 15,738 -- 3,796,072
Repurchase and retirement of common stock -- (910) -- (312,279)
Series C preferred stock dividends 9 -- -- 931,991
Series D preferred stock dividends 9 -- -- 854,991
Series E preferred stock issued 10 -- -- 999,990
Series E preferred stock dividends -- -- -- 4,000
Common stock warrants issued -- -- -- 195,202
Comprehensive income (loss):
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 326 287,916 -- 80,108,095
Common stock issued -- 4,251 -- 481,201
Repurchase and retirement of common stock -- (2,151) -- (640,691)
Series C preferred stock dividends 10 -- -- 995,990
Series D preferred stock dividends 9 -- -- 928,991
Series E preferred stock issued 10 -- -- 999,990
Series E preferred stock dividends 1 -- -- 119,999
Common stock warrants issued -- -- -- 126,741
Comprehensive income (loss):
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2001 $ 356 $ 290,016 $ -- $ 83,120,316
============ ============ ============ ============
Deficit Total
accumulated stockholders'
Other during equity (net
comprehensive development capital
income(loss) stage deficiency)
------------- ------------ ------------
Balance at October 17, 1986 $ -- $ -- $ --
Common stock issued -- -- 42,124,138
Reincorporation in Delaware at $.01 par value -- -- --
Common stock subscribed -- -- (110,000)
Common stock options and warrants issued -- -- 240,868
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, LLC -- -- 1,650,000
Common stock options extended -- -- 215,188
Accretion of issuance costs for Series A preferred stock -- (103,400) (103,400)
Series C preferred stock issued -- -- 11,500,000
Series C preferred stock dividends -- (415,112) (1,112)
Comprehensive income (loss):
Unrealized loss on marketable securities (222,226) -- --
Net loss -- (54,638,251) --
Comprehensive income (loss) -- -- (54,860,477)
------------ ------------ ------------
Balance at December 31, 1998 (222,226) (55,156,763) 655,205
Common stock issued -- -- 101,563
Series C preferred stock dividends -- (868,277) (2,277)
Series D preferred stock issued -- -- 12,015,000
Series F preferred stock issued -- -- 4,691,305
Common stock warrants issued -- -- 203,452
Comprehensive income (loss):
Unrealized gain on marketable securities 391,613 -- --
Net loss -- (17,384,788) --
Comprehensive income (loss) -- -- (16,993,175)
------------ ------------ ------------
Balance at December 31, 1999 169,387 (73,409,828) 671,073
Common stock issued -- -- 3,811,810
Repurchase and retirement of common stock -- -- (313,189)
Series C preferred stock dividends -- (934,045) (2,045)
Series D preferred stock dividends -- (855,750) (750)
Series E preferred stock issued -- -- 1,000,000
Series E preferred stock dividends -- (4,750) (750)
Common stock warrants issued -- -- 195,202
Comprehensive income (loss):
Unrealized loss on marketable securities (11,920) -- --
Net loss -- (5,763,151) --
Comprehensive income (loss) -- -- (5,775,071)
------------ ------------ ------------
Balance at December 31, 2000 157,467 (80,967,524) (413,720)
Common stock issued -- -- 485,452
Repurchase and retirement of common stock -- -- (642,842)
Series C preferred stock dividends -- (999,278) (3,278)
Series D preferred stock dividends -- (929,603) (603)
Series E preferred stock issued -- -- 1,000,000
Series E preferred stock dividends -- (121,422) (1,422)
Common stock warrants issued -- -- 126,741
Comprehensive income (loss):
Unrealized loss on marketable securities (157,467) -- --
Net loss -- (9,479,137) --
Comprehensive income (loss) -- -- (9,636,604)
------------ ------------ ------------
Balance at December 31, 2001 $ -- $(92,496,964) $ (9,086,276)
============ ============ ============
See notes to consolidated financial statements.
-27-
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999 and for the Period from
October 17, 1986 (Inception) to December 31, 2001
October 17, 1986
Years ended December 31, (inception) to
------------------------ December 31,
2001 2000 1999 2001
------------ ------------ ------------ ----------------
Cash flows from operating activities:
Net loss $ (9,479,137) $ (5,763,151) $(17,384,788) $(87,265,326)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock
options/warrants for services 126,741 207,202 203,452 2,819,368
Depreciation and amortization 130,554 118,775 86,341 728,890
Non-cash acquisition of research and
development in-process technology -- -- -- 1,650,000
(Gain) loss realized on sale of marketable securities (79,706) (239,629) -- 5,580
Decrease (increase) in clinical supplies, prepaid
expenses & other current assets 26,642 (395,035) (106,202) (572,671)
Decrease (increase) in milestone advance receivable 1,000,000 (1,000,000) -- --
Increase in other assets (72,320) (64,089) (219,925) (297,292)
Increase in accounts payable and accrued liabilities 352,646 615,636 154,418 1,154,148
(Decrease) increase in sponsored research payable -- (185,924) (28,124) 812,827
Other (72,343) 59,973 151,396 225,703
------------ ------------ ------------ ------------
Net cash used by development stage activities (8,066,923) (6,646,242) (17,143,432) (80,738,773)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 249,661 419,674 -- 844,420
Acquisition of laboratory and office equipment,
and leasehold improvements (200,570) (86,107) (136,588) (872,390)
Other -- -- 10,000 (57,087)
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities 49,091 333,567 (126,588) (85,057)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Payments on debt and capital leases (7,428) (6,435) (709,701) (850,036)
Net proceeds from issuance of:
Debt 5,000,000 1,000,000 2,600,000 12,050,000
Common stock -- 2,015,625 -- 23,433,660
Preferred stock 1,000,000 1,000,000 16,706,305 34,741,117
Proceeds from exercise of warrants/stock options 485,452 1,784,185 91,563 13,763,358
Repurchase and retirement of common stock (642,842) (313,189) -- (956,031)
Other -- -- -- (500,024)
------------ ------------ ------------ ------------
Net cash provided by financing activities 5,835,182 5,480,186 18,688,167 81,682,044
Net (decrease) increase in cash and cash equivalents (2,182,650) (832,489) 1,418,147 858,214
Cash and cash equivalents at beginning of period 3,041,948 3,874,437 2,456,290 1,084
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 859,298 $ 3,041,948 $ 3,874,437 $ 859,298
============ ============ ============ ============
Noncash investing and financing activities:
Common stock, stock options and warrants
issued for services $ 126,741 $ 207,202 $ 203,452 $ 2,819,368
Common stock redeemed in payment of notes receivable -- -- -- 10,400
Acquisition of research and development
in-process technology -- -- -- 1,655,216
Common stock issued for intellectual property rights -- -- -- 866,250
Common stock issued to retire debt -- -- -- 600,000
Common stock issued to redeem convertible securities -- -- -- 5,353,368
Securities acquired under sublicense agreement -- -- -- 850,000
Equipment acquired under capital lease -- -- -- 121,684
Notes payable converted to common stock -- -- -- 749,976
Stock dividends 2,050,305 1,794,545 868,277 5,491,674
Supplemental disclosure of cash information: Interest paid $ 7,060 $ 2,940 $ 8,919 $ 286,320
See notes to consolidated financial statements.
-28-
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Sheffield Pharmaceuticals, Inc. ("Sheffield" or the
"Company") a Delaware corporation, is focused on the development and
commercialization of later stage pharmaceutical products that utilize the
Company's unique proprietary pulmonary delivery technologies.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. The Company is in
the development stage and to date has been principally engaged in research,
development and licensing efforts. The Company has generated minimal operating
revenue, sustained significant net operating losses, and requires additional
capital that the Company intends to obtain through out-licensing of rights to
its technology, as well as through equity and debt offerings, to continue to
operate its business. The Company's ability to meet its obligations as they
become due and to continue as a going concern must be considered in light of the
expenses, difficulties and delays frequently encountered in developing a new
business, particularly since the Company will focus on product development that
may require a lengthy period of time and substantial expenditures to complete.
Even if the Company is able to successfully develop new products, there can be
no assurance that the Company will generate sufficient revenues from the sale or
licensing of such products to be profitable. Management believes that the
Company's ability to meet its obligations as they become due and to continue as
a going concern through December 2002 is dependent upon obtaining additional
funding. In an effort to meet its capital requirement, the Company will be
evaluating various financing alternatives including private offerings of its
securities, debt financing, and collaboration and licensing arrangements with
other companies. However, the accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation - The consolidated financial statements include the
accounts of Sheffield and its wholly owned subsidiaries, Systemic Pulmonary
Delivery, Ltd. ("SPD"), Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc.,
and its 80.1% owned subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD"). All
significant intercompany transactions have been eliminated. Investments in
affiliated companies that are 50% owned or less, and where the Company does not
exercise control, are accounted for using the equity method.
Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents - The Company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents include demand deposits held in banks, interest bearing money
market funds, and corporate commercial paper with A1 or P1 short-term ratings.
Marketable Securities - Marketable securities consist of investments that can be
readily purchased or sold using established markets. The Company's securities,
which are classified as available-for-sale, are carried at market with
unrealized gains and losses reported as a separate component of other
comprehensive income within stockholders' equity.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over three or five year periods for
office equipment, and five years for laboratory equipment. Assets under capital
leases, consisting of office equipment and leasehold improvements, are amortized
over the lesser of the useful life or the applicable lease terms.
Patent Costs - Costs associated with obtaining patents, principally legal costs
and filing fees, are capitalized and being amortized on a straight-line basis
over the remaining lives of the respective patents. The Company periodically
evaluates the carrying amount of these assets based on current licensing and
future commercialization efforts, and if warranted, impairment would be
recognized.
Contract Research Revenue - Contract revenue from collaborative research
agreements is recorded when earned and as the related costs are incurred.
Payments received that are related to future performance are deferred and
recognized as revenue in the period in which they are earned.
Research and Development Costs - Research and development costs ("R & D costs")
are expensed as incurred, except for fixed assets to which the Company has
title, which are capitalized and depreciated over their estimated useful lives.
-29-
Income Taxes - The Company utilizes the liability method to account 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 enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, accounts payable, sponsored research payable and notes
payable approximate fair value.
Basic Net Loss per Share of Common Stock - Basic net loss per share is
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. Basic net loss per share is based on net
loss available to common stockholders divided by the weighted average common
stock outstanding during the year. Potentially dilutive securities, such as
stock options, warrants, convertible debt and preferred stock, have not been
included in any years presented as their effect is antidilutive. The net loss
available to common stockholders and basic and diluted net loss per share for
the years ended December 31, 2000 and 1999 have been restated from amounts
previously reported to properly reflect cumulative preferred stock dividends
payable in kind. Such amounts may differ from dividends declared as reflected in
the Statement of Stockholders' Equity. The effect of this restatement was to
increase basic and diluted net loss per share from $.21 to $.27 and from $.64 to
$.68 for the years ended December 31, 2000 and 1999, respectively.
Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, defines a fair value method of accounting for stock options and
similar equity instruments. As permitted by SFAS 123, the Company continues to
account for employee stock options under Accounting Principal Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and has disclosed in a
note to the financial statements pro forma net loss and earnings per share as if
the Company had applied the fair value method of accounting for its stock-based
awards. Under APB 25, no expense is generally recognized at the time of option
grant because the exercise price of the Company's employee stock option equals
or exceeds the fair market value of the underlying common stock on the date of
grant.
Comprehensive Income (Loss) - SFAS No. 130, Reporting Comprehensive Income,
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements and applies
to all enterprises. Other comprehensive income or loss shown in the consolidated
statements of stockholders' equity at December 31, 2001, 2000 and 1999 is solely
comprised of unrealized gains or losses on marketable securities. The unrealized
loss on marketable securities during 2001 and 2000 includes reclassification
adjustments of $79,706 and $239,629, respectively, for gains realized in income
from the sale of the securities.
Segment Information - SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company operates in one reportable segment as defined by SFAS No.
131.
Reclassifications - Certain amounts in the prior year financial statements and
notes have been reclassified to conform to the current year presentation.
2. LEASES
The Company leases its office space and certain equipment under
noncancelable operating and capital leases that expire at various dates through
2003. At December 31, 2001, assets held under capital leases consisting of
office equipment were $11,397, net of accumulated amortization of $37,834.
Future minimum lease payments under capital and operating leases at December 31,
2001 are as follows:
Capital Operating
Leases Leases
-------- --------
2002 .................................................... $ 9,375 $168,478
2003 .................................................... 774 2,463
-------- --------
Total minimum lease payments ............................ 10,149 $170,941
========
Less amount representing interest ....................... (806)
--------
Present value of net minimum lease payments ............. 9,343
Less current maturities of capital lease obligations .... (8,578)
--------
Capital lease obligations ............................... $ 765
========
-30-
Rent expense relating to operating leases for the years ended December
31, 2001, 2000 and 1999 was $226,759, $219,859, and $174,332, respectively.
3. STOCKHOLDERS' EQUITY
Preferred Stock
In June 1998, the Company issued 4,571,428 shares of Common Stock and
11,500 shares of Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock"), convertible into shares of Common Stock of the Company or of
its wholly owned subsidiary, SPD, for $17.5 million pursuant to a definitive
agreement with an affiliate of Elan Corporation, plc ("Elan"), Elan
International Services, Ltd. ("Elan International"). The Series C Preferred
Stock earns cumulative dividends payable in shares of Series C Preferred Stock
at an annual rate of 7.0% on the stated value of each outstanding share of
Series C Preferred Stock on the dividend date. Elan International also received
a warrant to purchase 990,000 shares of Common Stock of the Company exercisable
from December 31, 1998 through January 30, 2005 at an exercise price of $2.00
per share. Under the terms of the agreement, the Company, through SPD, acquired
certain pulmonary delivery technologies for the sum of $12.5 million in cash
(see Note 6). All of the outstanding Common Stock of SPD is pledged to Elan
during the term of the agreement. Subject to certain conditions and the making
of certain payments to the Company, Elan International has the option to acquire
all or a portion of the outstanding stock of SPD. The net book value of SPD is
$.1 million as of December 31, 2001. The Company issued stock dividends totaling
996 and 932 shares of Series C Preferred Stock and cash dividends for fractional
shares of $3,278 and $2,045 for the years ended December 31, 2001 and 2000,
respectively.
In October 1999, pursuant to a definitive agreement, the Company and
Elan International formed RSD to develop certain respiratory steroid products.
Under the terms of the agreement, the Company issued to Elan International
12,015 shares of Series D Cumulative Convertible Exchangeable Preferred Stock
("Series D Preferred Stock"), convertible into shares of Common Stock of the
Company at $4.86 per Common Share or exchangeable for an additional 30.1%
ownership interest in the new joint venture, for $12.0 million. The Series D
Preferred Stock earns cumulative dividends payable in shares of Series D
Preferred Stock at an annual rate of 7.0% on the stated value of each
outstanding share of Series D Preferred Stock on the dividend date. The Company
issued stock dividends totaling 929 and 855 shares of Series D Preferred Stock
and cash dividends for fractional shares of $603 and $750 for the years ended
December 31, 2001 and 2000, respectively. Elan International also has committed
to purchase, on a drawdown basis, up to $4.0 million of the Company's Series E
Cumulative Convertible Preferred Stock ("Series E Preferred Stock"), convertible
into shares of Common Stock of the Company at $3.89 per Common Share. During
2001 and 2000, Elan International purchased a total of $2.0 million of the
Series E Preferred Stock. The Series E Preferred Stock will be utilized by the
Company to fund its portion of RSD's operating and development costs. The Series
E Preferred Stock earns cumulative dividends payable in shares of Series E
Preferred Stock at an annual rate of 9.0% on the stated value of each
outstanding share of Series E Preferred Stock on the dividend date. The Company
issued stock dividends totaling 120 and 4 shares of Series E Preferred Stock and
cash dividends for fractional shares of $1,422 and $750 for the years ended
December 31, 2001 and 2000, respectively. In addition to the above, the Company
issued to Elan International 5,000 shares of Series F Convertible
Non-Exchangeable Preferred Stock ("Series F Preferred Stock"), convertible into
shares of Common Stock of the Company at $3.40 per Common Share, for $5.0
million. The proceeds of the Series F Preferred Stock were utilized by Sheffield
for its own operating purposes. The holders of the Series F Preferred Stock may
be entitled to receive dividends on a pari passu basis with the holders of
Common Stock. As part of the transaction, Elan International also received a
warrant to purchase 150,000 shares of Common Stock of the Company at an exercise
price of $6.00 per share (see Note 6).
Common Stock
During 1998, the Company entered into an agreement with Zambon Group,
SpA ("Zambon") for a sublicense to the Company's proprietary Premaire(R)
Delivery System ("Premaire"), a portable nebulizer-based pulmonary delivery
system (see Note 6). Pursuant to an option agreement dated April 15, 1998, the
Company issued 800,000 shares of Common Stock to Zambon for $650,000 in cash. On
June 15, 1998, the Company entered into the definitive agreement, resulting in
the issuance of an additional 1,846,153 shares of Common Stock to Zambon for
$1.5 million. On October 17, 2001, as part of the September 28, 2001 amendment
of the Company's 1998 agreement with Zambon, the Company repurchased from
Zambon, 214,997 shares of common stock for $3.0233 per share ("Repurchase
Price"). In addition, the Company received an option, expiring December 31,
2002, to repurchase the remaining shares of the Company's common stock held by
Zambon at the Repurchase Price. In the event the Company completes a sublicense
for the North American rights or a sublicense for the non- North American rights
to the Premaire respiratory products prior to December 31, 2002, the Company
will be required to repurchase from Zambon 882,051 shares of the Company's
common stock on each of the events.
In December 2000, the Company entered into a stock purchase agreement
with The Tail Wind Fund Ltd. ("Tail Wind"). Under the agreement, Sheffield
issued and sold 626,950 shares of Common Stock and a warrant to purchase 112,500
shares of Common Stock at an exercise price of $4.9844 per share for total cash
consideration of $2.3 million. The net proceeds from the transaction of $2.0
million
-31-
were available to be used for general corporate purposes. Pursuant to the stock
purchase agreement, until at least August 29, 2002, if Sheffield sells shares of
Common Stock or securities convertible into or exercisable for Common Stock for
less than $3.5888 per share, Sheffield is obligated to issue to Tail Wind
additional shares so that the number of shares purchased by Tail Wind in the
December 2000 private placement plus the additional shares issued to Tail Wind
equals the number of shares that Tail Wind could have purchased for $2.3 million
at the price per share at which the new shares are sold. In addition, in the
event that the Company is required to issue additional shares to Tail Wind,
Sheffield may not issue an aggregate of over 5,630,122 shares of Common Stock in
total to Tail Wind in connection with the December 2000 private placement. If
the Company would otherwise be required to issue more than 5,630,122 shares to
Tail Wind, Sheffield must instead pay Tail Wind 105% of the cash value of such
shares the Company does not issue.
4. STOCK OPTIONS AND WARRANTS
Stock Option Plan - The 1993 Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors in August 1992 and approved by the stockholders at the
annual meeting in December 1993. An amendment to the Option Plan increasing the
number of shares of Common Stock available for issuance thereunder from 3
million shares to 4 million shares received stockholder approval on July 15,
1998. The Option Plan permits the grant to employees and officers of the Company
of both incentive stock options and non-statutory stock options. The Option Plan
is administered by the Board of Directors or a committee of the Board, which
determines the persons to whom options will be granted and the terms thereof,
including the exercise price, the number of shares subject to each option, and
the exercisability of each option. The exercise price of all options for Common
Stock granted under the Option Plan must be at least equal to the fair market
value on the date of grant in the case of incentive stock options, and 85% of
the fair market value on the date of grant in the case of non-statutory stock
options. Options generally expire five to ten years from the date of grant and
vest either over time or upon the Company's Common Stock attaining a set market
price for a certain number of trading days. Certain employment agreements
provide for an immediate vesting of all unvested options held by the employee
upon a change of control of the Company. Upon such a change of control,
recognition of compensation expense may be triggered, the amount of which cannot
be determined at this time. As of December 31, 2001, there are 709,700 shares
available for grant under the Option Plan.
Restricted Stock Plan - The 1993 Restricted Stock Plan (the "Restricted Plan")
was adopted by the Board of Directors in August 1992 and approved by the
stockholders at the annual meeting in December 1993. The Restricted Plan
authorized the grant of a maximum of 150,000 shares of Common Stock to key
employees, consultants, researchers and members of the Company's Scientific
Advisory Board. The Restricted Plan is administered by the Board of Directors or
a committee of the Board, which determines the person to whom shares will be
granted and the terms of such share grants. As of December 31, 2001, no shares
have been granted under the Restricted Plan.
Directors Stock Option Plan - The 1996 Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors and approved by the
stockholders on June 20, 1996. Under the Directors Plan, the maximum aggregate
number of shares that may be optioned and sold is 500,000 shares of Common
Stock. The Directors Plan initially granted each eligible director 15,000 stock
options. To the extent that shares remain available, any new directors shall
receive the grant of an option to purchase 25,000 shares. To the extent that
shares remain available under the Directors Plan, on January 1 of each year
commencing January 1, 1997, each eligible director shall be granted an option to
purchase 15,000 shares. The exercise price of all options granted under the
Directors Plan shall be the fair market value at the date of the grant. Options
generally expire five years from the date of grant. As of December 31, 2001,
there are 170,000 shares available for grant under the Directors Plan.
SFAS No. 123 requires pro forma information regarding net income and
earnings per share as if the Company has accounted for its stock options granted
subsequent to December 31, 1994, under the fair value method of SFAS No. 123.
The fair value of these stock options is estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2001, 2000, and 1999, risk-free interest rate ranging from 4.39%
to 6.36%; expected volatility ranging from 0.628 to 0.874; expected option life
of one to ten years from vesting and an expected dividend yield of 0.0%.
For purposes of pro forma disclosures, the estimated fair value of the
stock options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
2001 2000 1999
-------------- -------------- --------------
Pro forma net loss .......................... $ (12,479,299) $ (10,036,410) $ (18,843,611)
Pro forma basic net loss per share of
common stock .............................. $ (.43) $ (.36) $ (.69)
As discussed in Note 1, the net loss available to common stockholders and basic
and diluted net loss per share for the years ended December 31, 2000 and 1999
have been restated to properly reflect cumulative preferred stock dividends
payable in kind. As a result, the 2000 and 1999 pro forma basic net loss per
share of common stock above have also been restated.
-32-
Transactions involving stock options and warrants are summarized as
follows:
Years Ended December 31,
---------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Common Stock Exercise Common Stock Exercise Common Stock Exercise
Options/Warrants Price Options/Warrants Price Options/Warrants Price
---------------- -------- ---------------- -------- ---------------- --------
Outstanding, January 1 6,921,629 $ 3.02 7,782,954 $ 2.59 7,910,836 $ 2.55
Granted 156,940 4.44 1,041,040 5.34 555,040 2.97
Expired 250,000 2.99 660,820 2.90 315,422 3.92
Exercised 558,100 1.73 1,241,545 2.32 367,500 1.07
Canceled 85,000 3.21 -- -- -- --
--------- -------- --------- -------- --------- --------
Outstanding, December 31 6,185,469 $ 3.18 6,921,629 $ 3.02 7,782,954 $ 2.59
========= ======== ========= ======== ========= ========
Exercisable at end of year 4,525,969 $ 2.77 5,049,613 $ 2.57 6,358,554 $ 2.51
========= ======== ========= ======== ========= ========
During the period January 1, 1999 through December 31, 2001, the exercise prices
and weighted average fair value of options and warrants granted by the Company
were as follows:
Year Number of Options/Warrants Exercise Price Weighted Average Fair Value
---- -------------------------- -------------- ---------------------------
1999 555,040 $0.82 - 6.00 $ 1.34
2000 1,041,040 $3.50 - 7.00 $ 3.37
2001 156,940 $3.58 - 5.25 $ 3.03
At December 31, 2001, outstanding warrants to purchase the Company's Common
Stock are summarized as follows:
Range of Weighted Average Remaining
Exercise Prices Outstanding Warrants Contractual Life (Years) Weighted Average Exercise Price
--------------- -------------------- ------------------------ -------------------------------
$1.38 - $2.00 1,054,910 3.37 $ 1.97
$2.50 - $3.65 521,179 0.30 $ 3.30
$4.00 - $6.13 384,080 4.04 $ 5.46
---------
Total 1,960,169 2.68 $ 3.01
=========
At December 31, 2001, outstanding options to purchase the Company's Common Stock
are summarized as follows:
Range of Weighted Average Remaining
Exercise Prices Outstanding Options Contractual Life (Years) Weighted Average Exercise Price
--------------- ------------------- ------------------------ -------------------------------
$1.24 - $2.69 1,036,000 3.82 $ 1.74
$2.75 - $3.25 1,681,000 4.67 $ 2.80
$3.50 - $7.00 1,508,300 5.24 $ 4.79
---------
Total 4,225,300 4.66 $ 3.25
=========
5. NOTES PAYABLE AND LONG-TERM DEBT
Note Payable
In August 2001, the Company entered into a Note Purchase Agreement
("Note") with Elan Pharma International Ltd. ("Elan Pharma"), pursuant to which
Elan Pharma agreed to lend the Company up to $4 million. All borrowings under
the Note are evidenced by an unsecured promissory note of the Company providing
for interest on principal and semi-annually compounded at a fixed rate of 10%
per annum and a maturity of November 14, 2002, or upon the earlier occurrence of
one or more specified events. The outstanding principal balance of the Note was
$4.0 million at December 31, 2001.
Convertible Promissory Note
As part of the 1998 agreement with Elan, Elan agreed to make available
to the Company a Convertible Promissory Note ("Convertible Note") that provides
the Company the right to borrow up to $2.0 million, subject to satisfying
certain conditions. No more than $500,000 may be drawn under the Convertible
Note in any calendar quarter and at least one-half of the proceeds must be used
to fund SPD's development activities. The principal outstanding under the
Convertible Note bears interest at the prime rate plus 1% and, if not previously
converted, matures on June 30, 2005. Prior to repayment, Elan has the right to
convert all principal and accrued interest into shares of the Company's Common
Stock at a conversion price of $1.75 per share. The outstanding principal
balance of the Convertible
-33-
Note at December 31, 2001 and 2000 was $2.0 million, and accrued interest was
$.6 million and $.4 million at December 31, 2001 and 2000, respectively.
Long-Term Debt
In September 2001, in connection with the amendment of its 1998
agreement with Zambon, the Company entered into a Loan and Security Agreement
(the "Loan") with Zambon, pursuant to which Zambon agreed to lend the Company
$2.5 million. The Company received $1.0 million upon signing of the Loan, with
additional borrowings of $1.0 million and $.5 million to be made on January 1,
2002 and April 1, 2002, respectively. The Loan provides for interest on
principal and annually compounded interest at a fixed rate of 2% per annum and
is secured by certain security interests in respiratory products developed in
the Premaire. One third of the principal balance, together with interest, is
payable by the Company upon the Company's execution of an agreement with one or
more third parties to develop, co-promote and/or sell certain products in North
America, with all remaining unpaid principal and interest due on December 31,
2005. The outstanding principal balance of the Loan was $1.0 million at December
31, 2001. On January 1, 2002, the Company received the additional borrowing of
$1.0 million as provided by the Loan.
In conjunction with the completion of the Phase I/II Premaire albuterol
trial in 1999 and the demonstration of the technical feasibility of delivering
an inhaled steroid formulation in the Premaire in 2000, Zambon provided the
Company with two $1.0 million interest-free advances against future milestone
payments. The second advance was received in January 2001 and was reflected in
the accompanying financial statements as a milestone advance receivable at
December 31, 2000. The proceeds from these advances were not restricted as to
their use by the Company (see Note 6). As part of the amendment of its 1998
agreement with Zambon, the terms of all milestone advances received from Zambon
were modified in that the Company shall repay $1.0 million of the advance
milestone payments upon the earlier of December 31, 2003, or upon the first
regulatory approval for either albuterol or an inhaled steroid delivered in the
Premaire. The remaining $1.0 million advance shall be repaid by the Company on
the earlier of December 31, 2005, or the regulatory approval of the second
product (albuterol or an inhaled steroid) delivered in the Premaire. Due to the
modification in the repayment terms, the advances, totaling $2.0 million at both
December 31, 2001 and 2000, have been reclassified in the Company's balance
sheet as long-term debt.
6. RESEARCH AND DEVELOPMENT AGREEMENTS
Pulmonary Delivery Technologies
In June 1998, the Company sublicensed to Zambon worldwide marketing and
development rights to respiratory products to be delivered by the Premaire in
return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the development costs for the respiratory
compounds delivered by Premaire. In September 2001, the Company amended its 1998
agreement with Zambon whereby Sheffield regained the rights to the Premaire
previously granted to Zambon. Upon commercialization, Zambon will be entitled to
certain royalties on payments received by Sheffield for albuterol, ipratropium
and cromolyn sales for specified periods.
In June 1998, the Company issued certain equity securities pursuant to
an agreement with Elan (see Note 3). Under the terms of the agreement, the
Company, through its wholly owned subsidiary, SPD, acquired certain pulmonary
delivery technologies from Elan for $12.5 million in cash. In July 1998, SPD
acquired from Aeroquip-Vickers, Inc. a new generation propellant-based pulmonary
delivery system called the Tempo(TM) Inhaler for $.9 million. The payments for
these technologies were expensed during 1998 as acquired R&D in-process
technology since the technologies acquired had not demonstrated technological
feasibility and had no alternative future uses. SPD holds the rights to all
systemic disease applications of the Tempo technology while Sheffield retains
the rights to develop the respiratory disease applications of Tempo. The Company
is responsible for the development of these technologies. Pursuant to its
agreement with Elan, at December 31, 2001, the Company was not committed to fund
any additional costs related to SPD's systemic development programs.
In October 1999, the Company issued certain equity securities pursuant
to an agreement with Elan (see Note 3). Under the terms of the agreement, the
Company, through its majority owned subsidiary RSD, licensed certain pulmonary
NanoCrystal(TM) technology from Elan for $15.0 million in cash. This payment was
expensed as acquired R&D in-process technology as the license agreement
restricts the Company's use of the NanoCrystal technology to certain respiratory
steroid products that are currently research and development. The subsidiary is
responsible for the development of certain respiratory steroid products.
Pursuant to its agreement with Elan, at December 31, 2001, the Company was
committed to fund $2.0 million to the subsidiary for the development of these
products, which the Company will fund by the issuance of its Series E Preferred
Stock.
-34-
Early Stage Technologies
The Company also is party to a number of license and research
agreements, primarily with universities, hospitals, and research facilities,
relating to early stage medical research projects that focus on the development
of new compounds for the treatment of cancer, acquired immune deficiency
syndrome and other diseases. As part of the Company's focus on later stage
opportunities, the Company is seeking to out-license these projects. There can
be no assurance that the Company will receive license fees or other payments
related to these technologies. The Company believes these early stage technology
license and research agreements will have no material impact on the financial
position of the Company.
On November 20, 1997, the Company entered into a sublicense agreement
with Lorus Therapeutics, Inc. (formerly Imutec Pharma Inc.) ("Lorus"). The
agreement licenses rights to a series of clotrimazole-related compounds for the
treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly formed
company, NuChem Pharmaceuticals, Inc. ("NuChem"). In exchange, Lorus agreed to
manage and fund the remaining development program. The Company is entitled to
receive payments upon the completion of certain milestones in the development of
these compounds and retains a 20% ownership interest in NuChem.
7. INCOME TAXES
At December 31, 2001, the Company had available net operating loss
carryforwards for regular federal income tax purposes of approximately $50.9
million, of which $27.5 million will expire between 2007 and 2012, and $23.4
million will expire between 2018 and 2021, if not utilized. Utilization of the
Company's net operating loss carryforwards may be subject to an annual
limitation as a result of the "changes in ownership" provisions of the Internal
Revenue Code Section 382. Future changes in ownership may limit net operating
loss carryforwards generated in the year of change.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax asset at December 31, 2001 and 2000, which are
considered noncurrent, are as follows:
DEFERRED TAX ASSETS 2001 2000
------------ ------------
Net operating loss carryforwards ............ $ 19,348,000 $ 16,289,000
Costs capitalized for tax purposes .......... 1,810,000 1,975,000
Deferred tax asset valuation allowance ...... (21,158,000) (18,264,000)
------------ ------------
Net deferred tax asset ................... $ -- $ --
============ ============
The Company has recorded a valuation allowance for the entire deferred
tax asset due to the uncertainty of its realization. The deferred tax asset will
be amortized into taxable income over a useful life of 15 years.
-35-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
Quarterly financial data for 2001 and 2000 is summarized below:
Three Months Ended
------------------
Mar 31 Jun 30 Sep 30 Dec 31
----------- ----------- --------- ---------
2001:
Total revenues $ 180,747 $ 693,348 $ -- $ --
Operating loss (1,623,295) (2,360,545) (2,717,608) (2,975,811)
Net loss (1,580,410) (2,279,410) (2,592,821) (3,026,496)
Basic and diluted net loss per common share (.07) (.10) (.11) (.12)
2000:
Total revenues $ 121,170 $ 124,505 $ 46,109 $ 214,788
Operating loss (1,475,577) (1,449,671) (1,367,362) (1,765,790)
Net loss (1,457,090) (1,383,810) (1,318,141) (1,604,110)
Basic and diluted net loss per common share (.07) (.07) (.06) (.07)
Basic net loss per share is based on net loss available to common stockholders
divided by the weighted average common stock outstanding during the quarter. The
net loss available to common stockholders and basic and diluted net loss per
share for the quarters ended September 30, 2001, June 30, 2001, and March 31,
2001, and for each of the quarters in 2000 have been restated from amounts
previously reported to properly reflect cumulative preferred stock dividends
payable in kind as discussed in Note 1 to the financial statements. The effect
of this restatement was to increase basic and diluted net loss per share from
$.09 to $.11, from $.08 to $.10 and from $.05 to $.07 for the quarters ended
September 30, 2001, June 30, 2001, and March 31, 2001, respectively, and from
$.06 to $.07, from $.05 to $.06, from $.05 to $.07, and from $.05 to $.07 for
the quarters ended December 31, 2000, September 30, 2000, June 30, 2000, and
March 31, 2000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2002,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2002,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2002,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2002,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.
-36-
ITEM14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Financial Statements are included in Item 8 hereto:
Report of Independent Auditors
Consolidated Balance Sheets as of
December 31, 2001 and 2000
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999 and for the
period October 17, 1986 (inception) to December, 31
2001
Consolidated Statements of Stockholders' Equity (net
capital deficiency) for the period from October 17,
1986 (inception) to December 31, 2001
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 and for the
period from October 17, 1986 (inception) to December
31, 2001
Notes to Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the financial statements or notes thereto.
(a)(3) Exhibits:
NO. REFERENCE
3.1 Certificate of Incorporation of the Company, as amended (9)
3.2 By-Laws of the Company (4)
4.1 Form of Common Stock Certificate (2)
4.4 Certificate of Designations defining the powers, (9)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series C
Cumulative Convertible Redeemable Preferred Stock.
4.5 Certificate of Designations defining the powers, (14)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series D
Cumulative Convertible Exchangeable Preferred Stock.
4.6 Certificate of Designations defining the powers, (14)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series E
Convertible Non-Exchangeable Preferred Stock.
4.7 Certificate of Designations defining the powers, (14)
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series F
Convertible Non-Exchangeable Preferred Stock.
10.6 Employment Agreement dated as of June 6, 1996 between the (3)
Company and Thomas M. Fitzgerald*
10.6A Amendment dated October 1, 2002 to Employment Agreement (1)
between the Company and Thomas M. Fitzgerald.*
-37-
NO. REFERENCE
10.6.5 Employment Agreement dated as of November 16, 1998 between (13)
the Company and Scott Hoffmann*
10.6.5A Amendment dated October 1, 2001 to Employment Agreement (1)
between the Company and Scott Hoffmann.*
10.6.6 Employment Agreement dated as of August 3, 1998 between the (1)
Company and Thomas A. Armer*
10.6.6A Amendment dated October 1, 2001 to Employment Agreement (1)
between the Company and Thomas A. Armer.*
10.8 1993 Stock Option Plan, as amended* (17)
10.9 1993 Restricted Stock Plan, as amended* (17)
10.10 1996 Directors Stock Option Plan* (6)
10.11 Agreement and Plan of Merger among the Company, Camelot (5)
Pharmacal, L.L.C., David A. Byron, Loren G. Peterson
and Carl Siekmann dated April 25, 1997*
10.12 Employment Agreement dated as of April 25, 1997 between the (5)
Company and David A. Byron*
10.13 Employment Agreement dated as of April 25, 1997 between the (5)
Company and Loren G. Peterson, as amended*
10.13A Amendment dated October 1, 2001 to Employment Agreement (1)
between the Company and Loren G. Peterson.*
10.14 Employment Agreement dated as of April 25, 1997 between the (5)
Company and Carl Siekmann*
10.19 Form of Sublicense and Development Agreement between (11)
Sheffield Pharmaceuticals, Inc. and Inpharzam
International, S.A. (portions of this exhibit were omitted
and were filed separately with the Securities and Exchange
Commission pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.20 Securities Purchase Agreement, dated as of June 30, 1998, (12)
by and between Sheffield Pharmaceuticals, Inc. and
Elan International Services, Ltd., which includes the
Certificate of Designations of Series C Convertible
Preferred Stock as Exhibit B. The Company agreed to furnish
the disclosure schedules as well as Exhibits A and C, which
were omitted from this filing, to the Commission upon
request (portions of this exhibit were omitted and were
filed separately with the Securities and Exchange
Commission pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.21 Systemic Pulmonary Delivery, Ltd. Joint Development and (12)
Operating Agreement dated as of June 30, 1998 among
Systemic Pulmonary Delivery, Ltd., Sheffield
Pharmaceuticals,
38
NO. REFERENCE
Inc. and Elan International Services, Ltd. (portions of
this exhibit were omitted and were filed separately with
the Securities and Exchange Commission pursuant to the
Company's application requesting confidential treatment in
accordance with Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934, as amended).
10.22 License and Development Agreement dated June 30, 1998 (12)
between Sheffield Pharmaceuticals, Inc. and Systemic
Pulmonary Delivery, Ltd. and Elan Corporation plc.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.23 License and Development Agreement dated June 30, 1998 (12)
between Systemic Pulmonary Delivery, Ltd. and
Sheffield Pharmaceuticals, Inc. and Elan Corporation, plc.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting Rule 24b-2
as promulgated under the Securities Exchange Act of 1934,
as amended).
10.24 License and Development Agreement dated June 30, 1998 (12)
between Elan Corporation, plc and Systemic Pulmonary
Delivery, Ltd. and Sheffield Pharmaceuticals, Inc.
(portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.25 Securities Purchase Agreement, dated as of October 18, (14)
1999, by and between the Company and Elan (portions of
this exhibit were omitted and were filed separately with
the Securities and Exchange Commission pursuant to the
Company's application requesting confidential treatment in
accordance with Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934, as amended).
10.26 Subscription, Joint Development and Operating Agreement (14)
dated as of October 18, 1999 by and among Elan Pharma
International Limited, Elan, the Company and Respiratory
Steroid Delivery, Ltd. (portions of this exhibit were
omitted and were filed separately with the Securities and
Exchange Commission pursuant to the Company's application
requesting confidential treatment in accordance with Rule
24b-2 as promulgated under the Securities Exchange Act of
1934, as amended).
10.27 License Agreement, dated as of October 19, 1999, by and (14)
between the Company and Respiratory Steroid Delivery,
Ltd. (portions of this exhibit were omitted and were filed
separately with the Securities and Exchange Commission
pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
39
NO. REFERENCE
10.28 License Agreement, dated as of October 19, 1999, by and (14)
between Elan Pharma International Limited and
Respiratory Steroid Delivery, Ltd. (portions of this
exhibit were omitted and were filed separately with the
Securities and Exchange Commission pursuant to the
Company's application requesting confidential treatment in
accordance with Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934, as amended).
10.29 Registration Rights Agreement dated as of October 18, 1999 (14)
by and between Elan and the Company.
10.30 Securities Purchase Agreement dated as of December 29, (15)
2000, by and between the Company and The Tail Wind
Fund Ltd
10.31 Registration Rights Agreement dated as of December 29, (15)
2000, by and between the Company and The Tail Wind
Fund Ltd
10.32 Amendment to Sublicense and Development Agreement dated (16)
September 29, 2001, between Sheffield Pharmaceuticals,
Inc. and Inpharzam International S.A.
10.33 Loan and Security Agreement dated September 29, 2001, (16)
between Sheffield Pharmaceuticals, Inc. and Inpharzam
International, S.A.
10.34 Promissory Note dated September 29, 2001 issued to (16)
Inpharzam International, S.A.
10.35 Note Purchase Agreement dated August 14, 2001 between (16)
Sheffield Pharmaceuticals, Inc. and Elan Pharma
International Ltd. (portions of this exhibit are omitted
and were filed separately with the Securities and Exchange
Commission pursuant to the Company's application requesting
confidential treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of 1934, as
amended).
10.36 Promissory Note dated September 29, 2001 issued to Elan (16)
Pharma International Ltd. (portions of this exhibit
are omitted and were filed separately with the Securities
and Exchange Commission pursuant to the Company's
application requesting confidential treatment in accordance
with Rule 24b-2 as promulgated under the Securities
Exchange Act of 1934, as amended).
10.37 Separation Agreement dated as of February 18, 2002 between (1)
the Company and Carl Siekmann*
10.38 Separation Agreement dated as of February 18, 2002 between (1)
the Company and David A. Byron*
10.39 Indemnification Agreement dated January 23, 2002 between
the Company and certain officers and directors. (1)
21 Subsidiaries of Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
24 Power of Attorney (Included on page 42 hereof) (1)
40
* Management contracts or compensatory plans or arrangements.
-----------------------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1995 filed with the Securities
and Exchange Commission.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1996 filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 filed with the Securities and
Exchange Commission.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 filed with the Securities and
Exchange Commission.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-38327) filed with the Securities and Exchange
Commission on October 21, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 17, 1997.
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 filed with the Securities and
Exchange Commission.
(10) Incorporated by reference to Exhibit 3 of the Company's Current Report
on Form 8-K, dated April 17, 1998, filed with the Securities and
Exchange Commission.
(11) Incorporated by reference to Exhibit 2 of the Company's Current Report
on Form 8-K, dated June 22, 1998, filed with the Securities and
Exchange Commission.
(12) Incorporated by reference to exhibits to the Company's Current Report
on Form 8-K, dated July 16, 1998, filed with the Securities and
Exchange Commission.
(13) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 filed with the Securities and
Exchange Commission.
(14) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 2, 1999.
(15) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-54446) filed with the Securities and Exchange
Commission on January 26, 2001.
(16) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001 filed with the Securities
and Exchange Commission.
(17) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed with Securities and Exchange
Commission on October 11, 2001 to announce the filing of a
press release under Item 5, and Current Report on Form 8-K
filed with the Securities and Exchange Commission on December
21, 2001 to announce under Item 5 the filing of exhibits.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SHEFFIELD PHARMACEUTICALS, INC.
Dated: March 28, 2002 /s/ Loren G. Peterson
-----------------------------------------
Loren G. Peterson
President and Chief Executive Officer
POWER OF ATTORNEY
Sheffield Pharmaceuticals, Inc. and each of the undersigned do
hereby appoint Loren G. Peterson and Thomas Fitzgerald and each of them
severally, its or his or her true and lawful attorney to execute on behalf of
Sheffield Pharmaceuticals, Inc. and the undersigned any and all amendments to
this Annual Report and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission;
each of such attorneys shall have the power to act hereunder with or without the
other.
Pursuant to the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas M. Fitzgerald Chairman and Director March 28, 2002
------------------------------------------------------
Thomas M. Fitzgerald
/s/ Loren G. Peterson Director, President and Chief March 28, 2002
------------------------------------------------------ Executive Officer (Principal Executive Officer)
Loren G. Peterson
/s/ John M. Bailey Director March 28, 2002
------------------------------------------------------
John M. Bailey
/s/ Digby W. Barrios Director March 28, 2002
------------------------------------------------------
Digby W. Barrios
/s/ Todd C. Davis Director March 28, 2002
------------------------------------------------------
Todd C. Davis
/s/ Scott A. Hoffmann Vice President, Finance and Administration, March 28, 2002
------------------------------------------------------ Treasurer and Secretary (Principal Financial and
Scott A. Hoffmann Principal Accounting Officer)
42