SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended: December 31, 2003

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from:                               to                               

Commission File Number: 000-23267

DEPOMED, INC.

(Exact Name of Registrant as Specified in its Charter)

California

 

94-3229046

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

1360 O’Brien Drive, Menlo Park, California

 

94025

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (650) 462-5900

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Each Class

 

Common Stock, no par value

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x    No  o

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2003, based upon the closing price of the Common Stock on the Nasdaq National Market for such date, was approximately $80,684,000.

The number of outstanding shares of the registrant’s Common Stock on March 5, 2004 was 34,583,368.

Documents Incorporated by Reference

(1)          Portions of the Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 2004 and to be used in connection with the Annual Meeting of Shareholders expected to be held on or about May 27, 2004 are incorporated by reference in Part III of this Form 10-K.

 



 

DEPOMED, INC.

2003 FORM 10-K REPORT

TABLE OF CONTENTS

 

 

Page

 

PART I

 

 

1

 

 

Item 1.

BUSINESS

 

 

1

 

 

Item 2.

PROPERTIES

 

 

12

 

 

Item 3.

LEGAL PROCEEDINGS

 

 

12

 

 

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

12

 

 

PART II

 

 

14

 

 

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

 

14

 

 

Item 6.

SELECTED FINANCIAL DATA

 

 

14

 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

15

 

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

34

 

 

Item 8.

FINANCIAL STATEMENTS

 

 

35

 

 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

35

 

 

Item 9A.

CONTROLS AND PROCEDURES

 

 

35

 

 

PART III

 

 

36

 

 

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

 

36

 

 

Item 11.

EXECUTIVE COMPENSATION

 

 

36

 

 

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND OTHER SHAREHOLDER MATTERS

 

 

36

 

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

 

36

 

 

Item 14. 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

36

 

 

PART IV

 

 

37

 

 

Item 15.

EXHIBITS AND REPORTS ON FORM 8-K

 

 

37

 

 

 

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Statements made in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

·       results and timing of our clinical trials, including the results of the Metformin GR™, Ciprofloxacin GR™, Furosemide GR™ and Gabapentin GR™ trials and publication of those results;

·       our ability to raise additional capital;

·       our ability to obtain a marketing partner for Ciprofloxacin GR or our other products; and

·       our plans to develop other product candidates.

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS” section and elsewhere in this Annual Report on Form 10-K. We are not obligated to update or revise these forward-looking statements to reflect new events or circumstances.

PART I

Item 1.      Business

Company Overview

We are an emerging specialty pharmaceutical company engaged in the development of pharmaceutical products based on our proprietary oral drug delivery technologies. We have two products that have completed pivotal Phase III clinical trials and for which New Drug Applications (NDAs) are currently being prepared for submission to the Food and Drug Administration (FDA) if the trials are successful. We also have one product in a Phase II clinical trial and one product that has completed a Phase I clinical trial which we intend to advance into a Phase II trial in the fourth quarter of 2004. Our primary oral drug delivery system is our patented Gastric Retention System, or the GR™ System. The GR System is a tablet designed to be retained in the stomach for an extended period of time while it delivers the incorporated drug or drugs on a continuous, controlled-release basis. By incorporation into the GR System, some drugs currently taken two or three times a day may be administered only once a day. We also have a product containing different drug compounds incorporated in the GR System in preclinical development. In January 2002, a patent on our GR System was issued, which expands the coverage of our technology for the controlled delivery of a broad range of drugs from a gastric retained polymer matrix tablet to maximize therapeutic benefits. Our intellectual property position includes eight issued patents and twelve patent applications pending in the United States.

In this Annual Report on Form 10-K, the “company,” “Depomed,” “we,” “us,” and “our,” refer to Depomed, Inc.

We are developing our own proprietary products and are also developing products utilizing our GR technology in collaboration with other pharmaceutical and biotechnology companies. Regarding our collaborative programs, we apply our proprietary technology to the partner’s compound and from these collaborations we generally expect we will receive research and development funding, milestone payments, license fees and royalties. For our internal development programs, we apply our proprietary technology to

1




existing drugs and typically fund development at least through Phase II clinical trials. Upon the completion of Phase II clinical trials, we evaluate, on a case-by-case basis, the feasibility of retaining marketing or co-marketing rights to our product candidates in the United States, taking into account such factors as the marketing and sales efforts required for each of the product candidates, the potential collaborative partners and the proposed terms of any such collaboration. When we license marketing rights to a collaborative partner, we generally expect the partner to fund the completion of the clinical trials and to pay us license fees, milestones and royalties on sales of the product.

We have internally developed a once-daily metformin product for Type II diabetes, Metformin GR, which has completed pivotal Phase III clinical trials and for which we are currently preparing an NDA for submission to the FDA. In May 2002, we entered into an agreement with Biovail Laboratories granting Biovail an exclusive license in the United States and Canada to manufacture and market Metformin GR. Under the agreement, Biovail will file the NDA with the FDA. The agreement provides for a $25.0 million milestone payment to us upon FDA approval and royalties on net sales of Metformin GR. Biovail has an option to reduce certain of the royalties for a one-time payment to us of $35.0 million. We have funded and will continue to fund all costs of developing Metformin GR and some of the related regulatory costs. If we do not continue to fund the development costs of Metformin GR, Biovail has the right to assume those expenses. In that event, our future payments from Biovail under the agreement may be reduced.

In December 2002, our first Phase III clinical trial of Metformin GR was completed and in February 2003 we reported positive results for the trial. The trial compared Metformin GR with Bristol-Myers Squibb Company’s immediate release metformin product marketed as Glucophage®. In the trial, Metformin GR showed clinically meaningful and statistically significant reductions in hemoglobin A1c and other measures of glycemic control. In November 2003, we completed the dosing of patients for the second Phase III clinical trial of Metformin GR and we expect to complete the data analysis for this trial in March 2004. We expect that Biovail will submit the NDA to the FDA in the second quarter of 2004. However, the earliest that we expect to be able to obtain FDA approval to market Metformin GR is in the first half of 2005, if at all.

In June 2003, we initiated a Phase III clinical trial with an internally developed once-daily formulation of the antibiotic drug ciprofloxacin, called Ciprofloxacin GR, for urinary tract infections. In November 2003, we completed the dosing of patients for this trial. We expect to complete the data analysis for the Phase III clinical trial of Ciprofloxacin GR in March 2004. We are preparing the NDA and if the clinical trial is successful, we intend to submit the NDA to the FDA in the second quarter of 2004. However, the earliest that we expect to be able to obtain FDA approval to market Ciprofloxacin GR is in the first half of 2005, if at all. We are seeking potential marketing or co-marketing partners for Ciprofloxacin GR.

In September 2003, we amended or terminated several of the contracts governing the operation of our joint venture arrangements with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together, Elan). Following these modifications, Depomed Development, Ltd., or DDL, our consolidated subsidiary of which we own 80.1%, granted Depomed an exclusive license to Gabapentin GR, a product candidate developed in the joint venture which utilizes Depomed technology and which Depomed had originally licensed to DDL under a royalty-bearing license agreement. Gabapentin is marketed by Pfizer Inc. as an adjunctive therapy for epileptic seizures and postherpetic pain under the label Neurontin®. DDL successfully completed a Phase I clinical trial on Gabapentin GR in the first quarter of 2002. We expect to initiate a Phase II clinical trial on Gabapentin GR in the fourth quarter of 2004 for an indication to be determined.

In December 2003, we initiated a Phase II clinical trial with Furosemide GR which we expect to complete in the third quarter of 2004. Furosemide is a widely prescribed diuretic marketed as an

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immediate release formulation and sold by Aventis as Lasix® as well as by several other pharmaceutical companies as a generic.

In October 2002, we signed an agreement with ActivBiotics, Inc. to conduct feasibility studies to develop a controlled-release oral tablet to deliver ActivBiotics’ broad-spectrum antibiotic, Rifalazil, to the stomach and upper gastrointestinal tract. The target indication is the eradication of H. pylori, the causative agent of most cases of peptic ulcers. Under the agreement, ActivBiotics has funded our research and development expenses related to the preclinical feasibility studies with Rifalazil and has an option to acquire an exclusive license to Rifalazil in combination with the GR System. We have completed preclinical studies and ActivBiotics is currently reviewing its strategy related to Rifalazil.

In addition, we are developing other product candidates expected to benefit from incorporation into our drug delivery system. For example, we are collaborating with AVI BioPharma, Inc. on a project for the delivery of large molecules, such as antisense compounds, from the GR System. We have also completed preclinical studies of a combination product comprising our Metformin GR once-daily formulation with a once-daily sulfonylurea for Type II diabetes. Under our agreement with Biovail, Biovail has an exclusive option to license this product from us. We expect that a Phase I clinical trial for this product will commence only if we enter into a development and licensing agreement with Biovail or another third party.

In May 2003, we received a State of California Drug Manufacturing License for our pharmaceutical laboratories and manufacturing facilities. The license allows us to manufacture clinical supplies of our product candidates for our Phase I and Phase II clinical trials, as well as to provide quality control and quality assurance testing in our laboratories for our Phase I through Phase III clinical supplies. We intend to employ contract manufacturers for any commercial-scale manufacturing of our products.

In April 2003, we sold 9,259,259 shares of our common stock and warrants to purchase 3,240,745 shares of our common stock with net proceeds of approximately $18,668,000. In October 2003, we sold 6,500,000 shares of our common stock in an underwritten public offering at a price of $5.50 per share with net proceeds of approximately $33,187,000. In November 2003, we sold an additional 975,000 shares of our common stock at a price of $5.50 per share with net proceeds of approximately $5,041,000 pursuant to the exercise of the over-allotment option granted to the underwriters in connection with the public offering.

Relationship with Elan

In January 2000, we formed DDL as a joint venture with Elan to develop products using drug delivery technologies and expertise of both Elan and Depomed. DDL is owned 80.1% by us and 19.9% by a subsidiary of Elan. On September 16, 2003, we amended or terminated several contracts governing the operation of DDL. The modifications to the joint venture arrangements included, among other modifications, the termination of Elan’s participation in the management and the board of directors of DDL, the termination of Elan’s license of certain of its technologies to the joint venture and the cancellation of Elan’s right to exchange the Series A preferred shares we issued to Elan in January 2000 for an additional 30.1% equity interest in DDL. As a result of the elimination of this exchange right, our Series A Preferred Stock was reclassified as permanent shareholders’ equity. We continue to own 80.1% of DDL, with the remaining 19.9% held by a subsidiary of Elan. Following the termination of Elan’s participation in the management and the board of directors of DDL, DDL’s five-member board of directors was reconstituted to include three of our executive officers (one of whom serves on our board of directors) and two of DDL’s attorneys. We do not expect DDL to perform any further product development. DDL may receive royalties from product sales if any drugs developed by DDL are successfully commercialized.

In addition to research and development conducted on our own behalf and through collaborations with pharmaceutical partners, our activities since inception (August 7, 1995) have included establishing our

3




offices and research facilities, recruiting personnel, filing patent applications, developing a business strategy and raising capital. To date, we have received only limited revenue, all of which has been from these collaborative research and feasibility arrangements and feasibility studies.

The Drug Delivery Industry

Drug delivery companies apply proprietary technologies to create new pharmaceutical products utilizing drugs developed by others. These products are generally novel, cost-effective dosage forms that provide any of several benefits, including better control of drug concentration in the blood, improved safety and efficacy, improved patient compliance, ease of use and an improved side effect profile. We believe that drug delivery technologies can provide pharmaceutical companies with a means of developing new or improved products as well as extending existing patent franchises.

The increasing need to deliver medication to patients efficiently and with fewer side effects has accelerated the pace of invention of new drug delivery systems and the development and maturation of the drug delivery industry. Medication can be delivered to a patient through many different delivery systems, including transdermal, injection, implant and oral methods. However, these delivery methods continue to have certain limitations. Transdermal patches are often inconvenient to apply, can be irritating to the skin and the rate of release can be difficult to control. Injections are uncomfortable for most patients. In most cases, both injections and implants must be administered in a hospital or physician’s office and, accordingly, are frequently not suitable for home use. Oral administration remains the preferred method of administering medication. However, conventional oral drug administration also has limitations. Because capsules and tablets have limited effectiveness in providing controlled drug delivery, they frequently result in drug release that is initially too rapid, causing incomplete absorption of the drug, irritation to the gastrointestinal tract and other side effects. In addition, they do not provide localized therapy. We believe that the need for frequent dosing of many drugs administered by capsules and tablets also can impede patient compliance with the prescribed regimen.

The Gastric Retention System

The GR System is based on our proprietary oral drug delivery technologies and is designed to include formulations of drug-containing polymeric tablets that allow multi-hour delivery of an incorporated drug. Although our formulations are proprietary, the polymers utilized in the GR System are commonly used in the food and drug industries and are included in the list of inert substances approved by the FDA for use in oral pharmaceuticals. By using different formulations of the polymers, we believe that the GR System is able to provide continuous, controlled delivery of drugs of varying molecular complexity and solubility. With the use of different polymers and polymers of varying molecular weight, our GR tablet technology can deliver drugs by diffusion, tablet erosion, or from a bi-layer matrix. In addition, our technology allows for the delivery of more than one drug from a single tablet. If taken with a meal, these polymeric tablets remain in the stomach for an extended period of time to provide continuous, controlled delivery of an incorporated drug. The GR System’s design is based in part on principles of human gastric emptying and gastrointestinal transit. Following a meal, liquids and small particles flow continuously from the stomach into the intestine, leaving behind the larger undigested particles until the digestive process is complete. As a result, drugs in liquid or dissolved form or those consisting of small particles tend to empty rapidly from the stomach and continue into the small intestine and on into the large intestine, often before the drug has time to act locally or to be absorbed in the stomach and/or upper small intestine. The drug-containing polymeric tablets of the GR System are formulated into easily swallowed shapes and are designed to swell upon ingestion. The tablets attain a size after ingestion sufficient to be retained in the stomach for multiple hours during the digestive process while delivering the drug content at a controlled rate. After drug delivery is complete, the polymeric tablet dissolves and becomes a watery gel, which is eliminated through the intestine.

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The GR System is designed to address certain limitations of drug delivery and to provide for orally administered, conveniently dosed, cost-effective drug therapy that provides continuous, controlled delivery of a drug over a multi-hour period. We believe that the GR System can provide one or more of the following advantages over conventional methods of drug administration:

·       Greater Patient and Caregiver Convenience.   We believe that the GR System may offer once-daily or reduced frequency dosing for certain drugs that are currently required to be administered several times daily. Such less frequent dosing promotes compliance with dosing regimens. Patient noncompliance with dosing regimens has been associated with increased costs of medical therapies by prolonging treatment duration, increasing the likelihood of secondary or tertiary disease manifestation and contributing to over-utilization of medical personnel and facilities. By improving patient compliance, providers and third-party payors may reduce unnecessary expenditures and improve therapeutic outcomes.

·       Enhanced Safety and Efficacy through Controlled Delivery.   We believe that the GR System may improve the ratio of therapeutic effect to toxicity by decreasing the initial peak concentrations of a drug associated with toxicity, while maintaining levels of the drug at therapeutic, subtoxic concentrations for an extended period of time. Many drugs demonstrate optimal efficacy when concentrations are maintained at therapeutic levels over an extended period of time. When a drug is administered intermittently, the therapeutic concentration is often exceeded for some period after which concentrations fall below therapeutic levels. Excessively high concentrations are a major cause of side effects and subtherapeutic concentrations are ineffective.

·       Expansion of Types of Drugs Capable of Oral Delivery.   Some drugs, including certain proteins, peptides and oligonucleotides (antisense molecules), because of their large molecular size and susceptibility to degradation in the gastrointestinal tract, must currently be administered by injection or by continuous infusion, which is typically done in a hospital or other clinical setting. We believe that the GR System may be able to make the oral delivery of some of these drugs therapeutically effective.

·       Proprietary Reformulation of Generic Products.   We believe that the GR System may offer the potential to produce improved formulations of off-patent drugs. These proprietary formulations may be differentiated from existing generic products by virtue of reduced dosing requirements, improved efficacy, decreased toxicity or additional indications.

·       More Efficient Gastrointestinal Drug Absorption.   We believe that the GR System can be used for improved oral administration of drugs that are inadequately absorbed when delivered as conventional tablets or capsules. Many drugs are primarily absorbed in the stomach, duodenum or upper small intestine regions, through which drugs administered in conventional oral dosage forms transit quickly. In contrast, the GR System is designed to be retained in the stomach, allowing for constant multi-hour flow of drugs to these regions of the gastrointestinal tract. Accordingly, for such drugs, we believe that the GR System offers a significantly enhanced opportunity for increased absorption. Unlike some insoluble drug delivery systems, the polymer comprising the GR System dissolves at the end of its useful life and is passed through the gastrointestinal tract and eliminated.

·       Gastric Delivery for Local Therapy and Absorption.   We believe that the GR System can be used to deliver drugs which can efficiently eradicate gastrointestinal-dwelling microorganisms, such as H. pylori, the bacterium which is a cause of most peptic ulcers.

·       Rational Drug Combinations.   We believe that the GR System may allow for rational combinations of drugs with different biological half-lives. Physicians frequently prescribe multiple drugs for treatment of a single medical condition. Single product combinations have not been considered feasible because the different biological half-lives of these combination drugs would result in an overdosage of one drug and/or an underdosage of the other. By appropriately incorporating

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different drugs into a GR System we believe that we can provide for the release of each incorporated drug continuously at a rate and duration (dose) appropriately adjusted for the specific biological half-lives of the drugs. We believe that future rational drug combination products using the GR System have the potential to simplify drug administration, increase patient compliance, and reduce medical costs. Our Metformin GR/sulfonylurea product, currently in development, is an example of such a combination.

·       Potential for Oral Delivery of Peptides, Proteins and Antisense Molecules.   Based on laboratory studies, we believe that the GR System can protect drugs from enzymes and acidity effects prior to their delivery in the stomach. This feature, coupled with gastric retention, could allow for continuous delivery of peptides and proteins (i.e., labile drugs) into the upper portion of the small intestine, the most likely site of possible absorption for many such drugs. We believe that this mechanism will allow effective oral delivery of some drugs that currently require administration by injection. In addition, we believe that the GR System can be formulated to provide for continuous, controlled delivery of insoluble or particulate matter, including protein, antigen-laden vesicles or oligonucleotides such as antisense molecules, liposomes, and microspheres or nanoparticles. We are collaborating with AVI BioPharma, Inc. on a project to develop the GR System for the delivery of large antisense molecules.

Product Development Initiatives

In addition to the products listed in the table below, from time to time we may enter into feasibility studies with collaborative partners that, if successful, may be followed by definitive agreements to advance development of the product. The following table summarizes our principal product development initiatives as of March 2004:

PROGRAM

 

 

 

PARTNER

 

POTENTIAL
INDICATIONS

 

DEVELOPMENT
STATUS(1)

Metformin GR

 

Biovail

 

Type II diabetes

 

1st and 2nd Phase III clinical trials completed, NDA in preparation

Ciprofloxacin GR

 

In-house

 

Various bacterial infections

 

Phase III clinical trial completed, NDA in preparation

Furosemide GR

 

In-house

 

Cardiovascular/ antihypertensive diuretic

 

Phase II clinical trial underway

Gabapentin GR

 

In-house

 

Pain, seizures, epilepsy

 

Phase II clinical trial design in preparation

Metformin GR and sulfonylurea

 

In-house

 

Type II diabetes

 

Preclinical studies completed

Rifalazil™

 

ActivBiotics, Inc.

 

Antibiotic

 

Preclinical studies completed

Undisclosed NEUGENE®  antisense compound

 

AVI BioPharma, Inc.

 

Confidential(2)

 

Preclinical studies underway


(1)          See the section below entitled “Government Regulation” for additional information regarding the phases of drug development.

(2)          The potential indication may not be disclosed pursuant to the terms of the agreement between Depomed and AVI BioPharma, Inc. See “Collaborative Relationships.”

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Collaborative Relationships

Biovail Laboratories, Inc.   In May 2002, we entered into an agreement granting Biovail an exclusive license in the United States and Canada to manufacture and market Metformin GR. Under the terms of the agreement, we are responsible for funding and completing the clinical development program and some related regulatory activities in support of Metformin GR. The agreement provides for a $25.0 million milestone payment to us upon FDA approval of the product and further provides for royalties on net sales of Metformin GR. Biovail has an option to reduce certain of the royalties for a one-time payment to us of $35.0 million. If we do not continue to fund the development costs of Metformin GR, Biovail has the right to assume those expenses. In that event, our future payments from Biovail under the agreement may be reduced. In November 2003, we completed the dosing of patients in the second Phase III clinical trial of Metformin GR and we expect the data analysis for this trial to be completed in March 2004. We expect Biovail will submit NDA to the FDA in the second quarter of 2004.

ActivBiotics, Inc.   In October 2002, we signed an agreement with ActivBiotics, Inc. to begin feasibility studies with ActivBiotics’ antibiotic compound, Rifalazil. The indication for the product under development is the treatment of H. pylori, the causative agent for most cases of peptic ulcers. Under the agreement, ActivBiotics will fund our research and development expenses related to the feasibility studies with Rifalazil. We have completed preclinical studies and ActivBiotics is currently reviewing its strategy related to Rifalazil. For the years ended December 31, 2003 and 2002, revenues received for work performed for ActivBiotics were $476,000 and $230,000, respectively or 48% and 14% of our total revenues, respectively.

AVI BioPharma, Inc.   In June 2000, we entered into a joint collaboration to investigate the feasibility of controlled oral delivery of AVI’s proprietary NEUGENE antisense agents. The purpose of the collaboration is to study the feasibility of oral drug formulations based on our GR system. We have developed candidate dosage forms incorporating one of AVI’s antisense agents and preclinical testing is underway. The indication for this product has not been disclosed. No revenues have been received under this agreement.

Elan Corporation, plc.   In January 2000, we formed a joint venture with Elan to develop a series of undisclosed proprietary products using drug delivery technologies and expertise of both companies. We performed development work for DDL from January 2000 until August 2002. For the year ended December 31, 2002, revenues received for work performed for DDL were $1,221,000, or 73% of our total revenues in 2002. No revenues were received from DDL in 2003. As the joint venture arrangements governing DDL were terminated in September 2003, we do not expect any future revenues from DDL.

Other Collaborative Partner.   In June 2003, we signed an agreement with an undisclosed collaborative partner to conduct feasibility studies for the partner. We recognized revenue of approximately $408,000, or 42% of our revenues in 2003, which approximated the costs recognized under the agreement. The loss of this collaborative partner would not have a material adverse impact on us.

Competition

Other companies that have oral drug delivery technologies competitive with the GR System include Bristol-Myers Squibb, ALZA Corporation (a subsidiary of Johnson & Johnson), SkyePharma plc, Biovail Corporation, Flamel Technologies S.A. and Andrx Corporation, all of which are developing oral tablet products designed to release the incorporated drugs over time. Each of these companies has patented technologies with attributes different from ours, and in some cases with different sites of delivery to the gastrointestinal tract.

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Bristol-Myers Squibb is currently marketing a sustained release formulation of metformin, Glucophage XR, with which Metformin GR will compete. The limited license that Bristol-Myers Squibb obtained from us under our November 2002 settlement agreement extends to certain current and internally-developed future compounds, which may increase the likelihood that we will face competition from Bristol-Myers Squibb in the future on products in addition to Metformin GR. Andrx Corporation, IVAX Corporation, Ranbaxy Laboratories Ltd., Par Pharmaceutical, Inc. and Alpharma, Inc. have announced that they have received or are seeking FDA approval for a controlled-release metformin product, and Flamel Technologies has a controlled-release metformin product in clinical trials.

Bayer Corporation is currently marketing a once-daily ciprofloxacin product for the treatment of urinary tract infections. There may be other companies developing products competitive with Metformin GR and Ciprofloxacin GR of which we are unaware.

The competitive situation with respect to Gabapentin GR is complex and uncertain given the current regulatory and intellectual property status of gabapentin, which is currently marketed by Pfizer as Neurontin for adjunctive therapy for epileptic seizures and for postherpetic pain. Pfizer’s basic United States patents relating to Neurontin have expired, and at least seven companies are seeking or have received FDA approval for generic versions of the drug. However, Pfizer has initiated several lawsuits against companies seeking to market formulations of gabapentin that compete with Neurontin, claiming that these formulations of gabapentin infringe Pfizer’s patents. In addition, Pfizer is developing a new product, Pregabalin, which will be marketed as an improved version of Neurontin. It is currently pending FDA approval.

To our knowledge, we are the only company currently developing a sustained release formulation of furosemide for the United States market, but other companies have published research data indicating that products may be developed that are competitive with Furosemide GR.

Competition in pharmaceutical products and drug delivery systems is intense. We expect competition to increase. Competing technologies or products developed in the future may prove superior to the GR System or products using the GR System, either generally or in particular market segments. These developments could make the GR System or products using the GR System noncompetitive or obsolete.

Most of our principal competitors have substantially greater financial, marketing, personnel and research and development resources than we do. In addition, many of our potential collaborative partners have devoted, and continue to devote, significant resources to the development of their own drug delivery systems and technologies.

Patents and Proprietary Rights

Our success will depend in part on our ability to obtain and maintain patent protection for our technologies and to preserve our trade secrets. Our policy is to file patent applications in the United States and foreign jurisdictions. We currently hold eight issued United States patents and twelve United States patent applications are pending. In addition, we are preparing patent applications relating to our expanding technology for filing in the United States and abroad. We have also applied for patents in numerous foreign countries. Some of those countries have granted our applications and other applications are still pending. Our pending patent applications may lack priority over others’ applications or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented.

We also rely on trade secrets and proprietary know-how, which are difficult to protect. We seek to protect such information, in part, through entering into confidentiality agreements with employees, consultants, collaborative partners and others before such persons or entities have access to our

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proprietary trade secrets and know-how. These confidentiality agreements may not be effective in certain cases, due to, among other things, the lack of an adequate remedy for breach of an agreement or a finding that an agreement is unenforceable. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Our ability to develop our technologies and to make commercial sales of products using our technologies also depends on not infringing others’ patents or other intellectual property rights. We are not aware of any intellectual property claims against us. However, the pharmaceutical industry has experienced extensive litigation regarding patents and other intellectual property rights. For example, Pfizer has initiated several suits against companies seeking to market formulations of gabapentin that compete with Neurontin, claiming that these formulations of gabapentin infringe Pfizer’s patents. The results of this litigation could adversely impact our ability to commercialize Gabapentin GR. Further, if claims concerning any of our products were to arise and it was determined that these products infringe a third party’s proprietary rights, we could be subject to substantial damages for past infringement. Further, any public announcements related to litigation or interference proceedings initiated or threatened against us, even if such claims are without merit, could cause our stock price to decline.

We may need to engage in litigation in the future to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Our issued or licensed patents may not be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to us, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. We may also be required to participate in interference proceedings declared by the United States Patent and Trademark Office for the purpose of determining the priority of inventions in connection with our patent applications or other parties’ patent applications. Adverse determinations in litigation or interference proceedings could require us to seek licenses which may not be available on commercially reasonable terms, or at all, or subject us to significant liabilities to third parties.

Manufacturing, Marketing and Sales

Although we have established internal manufacturing facilities to manufacture supplies for our Phase I and Phase II clinical trials, we do not have, and we do not intend to establish in the foreseeable future, internal commercial scale manufacturing capabilities. Rather, we intend to use the facilities of third parties to manufacture products for Phase III clinical trials and commercialization. Our dependence on third parties for the manufacture of products using the GR System may adversely affect our ability to deliver such products on a timely or competitive basis. Although we have made arrangements for the third party manufacture of Metformin GR, there may not be sufficient manufacturing capacity available to us when, if ever, we are ready to seek commercial sales of other products using the GR System. The manufacturing processes of our third party manufacturers may be found to violate the proprietary rights of others. If we are unable to contract for a sufficient supply of required products on acceptable terms, or if we encounter delays and difficulties in our relationships with manufacturers, the market introduction and commercial sales of our products will be delayed, and our revenue will suffer.

Applicable cGMP requirements and other rules and regulations prescribed by foreign regulatory authorities will apply to the manufacture of products using the GR System. We will depend on the manufacturers of products using the GR System to comply with cGMP and applicable foreign standards. Any failure by a manufacturer of products using the GR System to maintain cGMP or comply with applicable foreign standards could delay or prevent their initial or continued commercial sale.

Government Regulation

Numerous governmental authorities in the United States and other countries regulate our research and development activities and those of our collaborative partners. Governmental approval is required of

9




all potential pharmaceutical products using the GR System and the manufacture and marketing of products using the GR System prior to the commercial use of those products. The regulatory process will take several years and require substantial funds. If products using the GR System do not receive the required regulatory approvals or if such approvals are delayed, our business would be materially adversely affected. There can be no assurance that the requisite regulatory approvals will be obtained without lengthy delays, if at all.

In the United States, the FDA rigorously regulates pharmaceutical products, including any drugs using the GR System. If a company fails to comply with applicable requirements, the FDA or the courts may impose sanctions. These sanctions may include civil penalties, criminal prosecution of the company or its officers and employees, injunctions, product seizure or detention, product recalls, total or partial suspension of production. The FDA may withdraw approved applications or refuse to approve pending new drug applications, premarket approval applications, or supplements to approved applications.

We generally must conduct preclinical testing on laboratory animals of new pharmaceutical products prior to commencement of clinical studies involving human beings. These studies evaluate the potential efficacy and safety of the product. We then submit the results of these studies to the FDA as part of an Investigational New Drug application, which must become effective before beginning clinical testing in humans.

Typically, human clinical evaluation involves a time-consuming and costly three-phase process:

·       In Phase I, we conduct clinical trials with a small number of subjects to determine a drug’s early safety profile and its pharmacokinetic pattern.

·       In Phase II, we conduct limited clinical trials with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and further evidence of safety.

·       In Phase III, we conduct large-scale, multi-center, comparative trials with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA prior to commercialization.

The FDA closely monitors the progress of each phase of clinical testing. The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to patients.

The results of the preclinical and clinical testing are submitted to the FDA in the form of a New Drug Application (NDA) for approval prior to commercialization. An NDA requires that our products are compliant with cGMP. Failure to achieve or maintain cGMP standards for products using the GR System would adversely impact their marketability. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application. Failure to receive approval for any products using the GR System would have a material adverse effect on the company.

The FDA regulates not only prescription and over-the-counter drugs approved by NDAs, but also over-the-counter products that comply with monographs issued by the FDA. These regulations include:

·       cGMP requirements;

·       general and specific over-the-counter labeling requirements (including warning statements);

·       advertising restrictions; and

·       requirements regarding the safety and suitability of inactive ingredients.

In addition, the FDA may inspect over-the-counter products and manufacturing facilities. A failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties.

10




If an over-the-counter product differs from the terms of a monograph, it will, in most cases, require FDA approval of an NDA for the product to be marketed.

Foreign regulatory approval of a product must also be obtained prior to marketing the product internationally. Foreign approval procedures vary from country to country. The time required for approval may delay or prevent marketing in certain countries. In certain instances we or our collaborative partners may seek approval to market and sell certain products outside of the United States before submitting an application for United States approval to the FDA. The clinical testing requirements and the time required to obtain foreign regulatory approvals may differ from that required for FDA approval. Although there is now a centralized European Union (EU) approval mechanism in place, each EU country may nonetheless impose its own procedures and requirements. Many of these procedures and requirements are time-consuming and expensive. Some EU countries require price approval as part of the regulatory process. These constraints can cause substantial delays in obtaining required approval from both the FDA and foreign regulatory authorities after the relevant applications are filed, and approval in any single country may not meaningfully indicate that another country will approve the product.

Product Liability

Our business involves exposure to potential product liability risks that are inherent in the production and manufacture of pharmaceutical products. We have obtained product liability insurance for clinical trials currently underway, but:

·       we may not be able to obtain product liability insurance for future trials;

·       we may not be able to maintain product liability insurance on acceptable terms;

·       we may not be able to secure increased coverage as the commercialization of the GR System proceeds; or

·       our insurance may not provide adequate protection against potential liabilities.

Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of our products. Defending a lawsuit would be costly and significantly divert management’s attention from conducting our business. If third parties were to bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liability limits, our business, financial condition and results of operations could be materially harmed.

Employees

As of December 31, 2003, we had 74 full-time employees. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We believe that our relations with our employees are good.

Our success is dependent in large part upon the continued services of John W. Fara, Ph.D., our Chairman, President and Chief Executive Officer, and other members of our executive management team, and on our ability to attract and retain key management and operating personnel. We do not have agreements with Dr. Fara or any of our other executive officers that provide for their continued employment with us. Management, scientific and operating personnel are in high demand in our industry and are often subject to competing offers. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed could result in delays in the research, development and commercialization of our potential product candidates.

11




Additional Information

The address of our Internet website is http://www.depomedinc.com. We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other periodic SEC reports, along with amendments to all of those reports, as soon as reasonably practicable after we file the reports with the SEC.

Item 2.                  Properties

In February 2000, we entered into a five-year non-cancelable lease of approximately 21,000 square feet of laboratory and office facilities in Menlo Park, California. In May 2003, we renegotiated certain terms of our lease agreement including the lease term, which will now expire in April 2008 with an option to extend the lease for an additional five years. We also entered into a non-cancelable lease agreement to lease a 25,000 square foot facility adjacent to our existing facility in Menlo Park. This agreement also expires in April 2008 with an option to extend the lease for an additional five years. We expect that these facilities will accommodate our growth for at least the next two years.

Item 3.                  Legal Proceedings

Not applicable.

Item 4.                  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.

Executive and Other Officers

Our executive and other officers of the company and their ages as of December 31, 2003 are as follows:

Name

 

 

 

Age

 

Position

 

Executive Officers

 

 

 

 

 

John W. Fara, Ph.D.

 

61

 

Chairman, President and Chief Executive Officer

 

Bret Berner, Ph.D.

 

51

 

Vice President, Product Development

 

John F. Hamilton

 

59

 

Vice President, Finance and Chief Financial Officer

 

John N. Shell

 

50

 

Vice President, Operations

 

Other Officers

 

 

 

 

 

Daniel M. Dye

 

56

 

Vice President, Quality Systems

 

Thadd M. Vargas

 

38

 

Vice President, Business Development

 

 

John W. Fara, Ph.D. has served as a director of the company since November 1995 and as its President and Chief Executive Officer since December 1996. In April 2000, he became Chairman of the Board of Directors of the company succeeding Dr. John W. Shell, the founder of the company. From February 1990 to June 1996 Dr. Fara was President and Chief Executive Officer of Anergen, Inc., a biotechnology company. Prior to February 1990 he was President of Prototek, Inc., a biotechnology company. Prior to Prototek, he was Director of Biomedical Research and then Vice President of Business Development during ten years with ALZA. Dr. Fara received a B.S. from the University of Wisconsin and a Ph.D. degree from the University of California, Los Angeles. He is also a member of the board of directors of AVI BioPharma, Inc. and Iomed, Inc., both of which are publicly held companies.

12



Bret Berner, Ph.D. has served as the company’s Vice President, Product Development since December 1998. Before joining the company, Dr. Berner served as Vice President of Development at Cygnus, Inc. for four years, where he was responsible for formulation, analytical chemistry, toxicology, project management, and new drug delivery technology. From 1984 through 1994, Dr. Berner acted as the director of Basic Pharmaceutics Research at Ciba-Geigy. Prior to 1984, he also held the position of staff scientist at The Procter & Gamble Company. Dr. Berner holds 18 patents, has authored more than 70 publications and edited two books on controlled drug delivery. He received his B.A. degree from the University of Rochester and a Ph.D. degree from the University of California, Los Angeles.

John F. Hamilton has served as the company’s Vice President of Finance and Chief Financial Officer since January 1997. Prior to joining the company, Mr. Hamilton was Vice President and Chief Financial Officer of Glyko, Inc. and Glyko Biomedical Ltd., a carbohydrate instrument and reagents company from May 1992 to September 1996. He was President and Chief Financial Officer of Protos Corporation, a drug design subsidiary of Chiron Corporation, from June 1988 to May 1992 and held various positions with Chiron Corporation, including Treasurer, from September 1987 to May 1992. Mr. Hamilton received a B.A. degree from the University of Pennsylvania and an M.B.A. degree from the University of Chicago.

John N. Shell served as Director of Operations for the company from its inception in August 1995 until December 1996, when he was named Vice President, Operations. From May 1994 to August 1995, Mr. Shell served in a similar capacity at the Depomed Division of M6. Mr. Shell served as a director of the company from its inception until November 2003. Prior to 1994, Mr. Shell served as Materials Manager for Ebara International Corporation, a multi-national semiconductor equipment manufacturer, and as Materials Manager for ILC Technology, an electro-optics and electronics manufacturer. Mr. Shell received his B.A. degree from the University of California, Berkeley.

Daniel M. Dye has served as the company’s Vice President of Quality Systems since December 2002 after serving as the company’s Director of Analytical Chemistry since 1998. Mr. Dye has held scientific management positions in several pharmaceutical companies, most recently Scios, Inc., Centaur Pharmaceutical, Inc. and, for 17 years, ALZA Corporation. Mr. Dye holds a B.A. degree in Chemistry from San Jose State University and an M.S. degree in Biochemistry from the University of California at Davis.

Thadd M. Vargas has served as the company’s Vice President of Business Development since December 2002. Before joining the company, Mr. Vargas was Vice President of Finance at Worldres.com, Inc., Director of Finance at Kosan Biosciences, Inc. and Director of Business Development at Anergen, Inc. Prior to Anergen, Mr. Vargas was a member of Ernst & Young’s life sciences audit practice. Mr. Vargas holds a B.A. degree in Business Economics from the University of California at Santa Barbara.

13




PART II

Item 5.                  Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock commenced trading on the Nasdaq SmallCap Market under the symbol “DPMD” on December 1, 1997. On November 9, 1998, our common stock ceased trading on the Nasdaq SmallCap Market and began trading on the American Stock Exchange (AMEX) under the symbol “DMI”. On December 17, 2003 our common stock ceased trading on the AMEX and began trading on the Nasdaq National Market (Nasdaq) under the symbol “DEPO”. The following table sets forth the high and low closing prices of our common stock as reported by the AMEX from January 1, 2002 to December 16, 2003 and as reported by the Nasdaq from December 17, 2003 to December 31, 2003.

 

 

2003

 

2002

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

3.05

 

$

2.00

 

$

7.65

 

$

4.45

 

Second Quarter

 

$

5.15

 

$

2.01

 

$

5.35

 

$

2.40

 

Third Quarter

 

$

7.88

 

$

4.83

 

$

3.40

 

$

2.15

 

Fourth Quarter

 

$

7.60

 

$

5.65

 

$

2.90

 

$

1.07

 

 

As of March 11, 2003, the number of holders of record of our common stock was 82. We believe that there are approximately 3,000 beneficial holders of our common stock.

We have never paid a cash dividend on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Further, our equipment financing credit facility precludes us from declaring or paying dividends on our common stock.

Recent Sales of Unregistered Securities

In April 2003, we sold to institutional and other accredited investors 9,259,259 shares of common stock and warrants to purchase 3,240,745 shares of common stock with net proceeds of approximately $18,668,000. This transaction did not involve a public offering and therefore was exempt from registration under Section 4(2) of the Securities Act of 1933. We filed a registration statement on Form S-3 in May 2003 covering the resale of shares sold in this offering and the shares issuable upon exercise of the warrants. The proceeds of this offering were used to fund ongoing operations.

Item 6.                  Selected Financial Data

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001
(Restated)

 

2000(1)
(Restated)

 

1999
(Restated)

 

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

981,990

 

$

1,661,186

 

$

3,673,326

 

$

1,776,218

 

$

115,327

 

Operating expenses

 

30,380,445

 

30,088,624

 

17,994,753

 

9,514,415

 

5,605,792

 

Loss from operations

 

(29,398,455

)

(28,427,438

)

(14,321,427

)

(7,738,197

)

(5,490,465

)

Equity in loss of joint venture (restated)(2)

 

(5,359

)

(2,435,667

)

(3,173,409

)

(14,202,627

)

 

Gain from Bristol-Myers Squibb legal settlement

 

 

18,000,000

 

 

 

 

Net loss (restated)(2)(3)

 

(30,015,098

)

(13,494,565

)

(17,600,039

)

(21,717,870

)

(5,193,800

)

Basic and diluted net loss per share (restated)(2)(3)(4)

 

$

(1.23

)

$

(0.92

)

$

(1.72

)

$

(2.96

)

$

(0.80

)

Shares used in computing basic and diluted net loss per share

 

24,458,259

 

14,642,745

 

10,220,223

 

7,329,876

 

6,474,538

 

 

14




 

 

 

December 31,

 

 

 

2003

 

2002

 

2001
(Restated)

 

2000(1)
(Restated)

 

1999
(Restated)

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and securities available-for-sale

 

$

44,255,260

 

$

20,217,973

 

$

5,150,088

 

$

6,498,879

 

$

4,466,382

 

Total assets

 

47,692,649

 

23,179,277

 

8,746,846

 

8,732,538

 

5,419,865

 

Long-term obligations, less current portion

 

9,497,845

 

9,003,937

 

5,566,686

 

1,769,009

 

410,601

 

Series A preferred stock (restated)(5)

 

12,015,000

 

12,015,000

 

12,015,000

 

12,015,000

 

 

Accumulated deficit

 

(93,110,988

)

(63,095,890

)

(49,601,325

)

(32,001,286

)

(10,283,416

)

Shareholders’ equity (net capital deficiency)

 

34,576,154

 

(6,413,866

)

(13,492,201

)

(7,428,835

)

4,218,480

 


(1)          Expenses increased in 2000 due to our 80.1% share of the losses in our joint venture with Elan, as described in Item 7 in the subsections entitled “Overview” and “Results of Operations.”

(2)          Equity in net loss of joint venture has been restated to record $12,015,000, originally expensed in the year ended December 31, 1999 to the year ended December 31, 2000. See Note 1 of the Notes to Consolidated Financial Statements.

(3)          Net loss and net loss per share decreased in 2002 due to an $18.0 million payment we received in December 2002 from Bristol-Myers Squibb related to the settlement of the patent infringement lawsuit we filed against Bristol-Myers Squibb in January 2002. See Note 8 of the Notes to Consolidated Financial Statements.

(4)          The net loss per common share for 2001 and 2000 has been restated to eliminate the 7% dividend previously accrued on the Series A Preferred Stock. See Note 1 of the Notes to Consolidated Financial Statements.

(5)          Shareholders’ equity for 2001, 2000 and 1999 has been restated to classify the Series A Preferred Stock outside of permanent equity. In September 2003, the joint venture agreements were amended and the exchange right associated with the Series A Preferred Stock was terminated and the Series A Preferred Stock was reclassified to permanent shareholders’ equity. See Note 7 of the Notes to Consolidated Financial Statements.

Item 7.                  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2003, we made substantial progress in the clinic, expanded our patent portfolio and strengthened our balance sheet. Because of our accomplishments in 2003, we are well positioned for growth as a company with a multi-product, late-stage pipeline. We believe our platform technologies can be further leveraged to create additional new, proprietary pharmaceuticals from approved drugs that can be more efficiently delivered to maximize therapeutic benefit.

Highlights for the year include:

·       Completion of pivotal Phase III trial for Metformin GR;

·       Initiation of and completion of pivotal Phase III trial for Ciprofloxacin GR;

·       Initiation of Phase II clinical trial for Furosemide GR;

·       Acquisition of exclusive rights to Gabapentin GR;

15




·       Equity financing raising gross proceeds of nearly $61 million; and

·       Addition of two new board members with expertise in building pharmaceutical and biopharmaceutical businesses.

In 2003, we reported a net loss of $30.0 million or $1.23 per share, compared to a net loss of $13.5 million or $0.92 per share for the year ended December 31, 2002. The net loss in 2002 was partially offset by a one-time payment of $18.0 million to us from Bristol-Myers Squibb as a patent litigation settlement. Cash and investment balances at December 31, 2003 were $44.3 million.

Revenues for the year ended December 31, 2003 totaled $1.0 million compared with $1.7 million for the year ended December 31, 2002. Revenues from collaborative agreements increased to $1.0 million in 2003 from $0.4 million in 2002 as a result of development services provided for two collaborative partners. Revenue from DDL ended with the termination of DDL’s development activities as of August 2002.

Research and development expenses for the year ended December 31, 2003 were $26.9 million compared to $24.7 million for the year ended December 31, 2002. The increase was primarily due to expenses related to the hiring of additional research and development personnel to support our New Drug Applications with the FDA to gain approval of Metformin GR and Ciprofloxacin GR.

Shareholders’ equity as of December 31, 2003 was $34.6 million and increased from a deficit of $6.4 million for the year ended December 31, 2002. Our net loss of $30.0 million in 2003 was offset by total net proceeds of $56.9 million received from our private placement in the second quarter of 2003 and our public offering in the fourth quarter of 2003. In addition, as a result of modifying our joint venture agreements with Elan Corporation, plc, our Series A Preferred Stock was reclassified into permanent shareholders’ equity.

We have four products in clinical testing or being prepared for submission to the FDA. The current status of each is described below.

Metformin GR

In December 2002, our first Phase III clinical trial of Metformin GR was completed and in February 2003 we reported positive results for the trial. The trial compared Metformin GR with Bristol-Myers Squibb’s immediate release metformin product marketed as Glucophage®. In the trial, Metformin GR showed clinically meaningful and statistically significant reductions in hemoglobin A1c and other measures of glycemic control. In November 2003, we completed the dosing of patients for the second Phase III clinical trial of Metformin GR and we expect to complete the data analysis for this trial in March 2004. We expect that Biovail will submit the NDA to the FDA in the second quarter of 2004. However, the earliest that we expect to be able to obtain FDA approval to market Metformin GR is in the first half of 2005, if at all. In May 2002, we entered into an agreement with Biovail Laboratories granting Biovail an exclusive license in the United States and Canada to manufacture and market Metformin GR.

Ciprofloxacin GR

In June 2003, we initiated a Phase III clinical trial with an internally developed once-daily formulation of the antibiotic drug ciprofloxacin, called Ciprofloxacin GR, for urinary tract infections. In November 2003, we completed the dosing of patients for this trial. We expect to complete the data analysis for the Phase III clinical trial of Ciprofloxacin GR in March 2004. We have begun preparing the NDA and we intend to submit the NDA to the FDA in the second quarter of 2004 if the trial is successful. However, the earliest that we expect to be able to obtain FDA approval to market Ciprofloxacin GR is in the first half of 2005, if at all. We are seeking potential marketing or co-marketing partners for Ciprofloxacin GR.

16




Gabapentin GR

In September 2003, we amended or terminated several of the contracts governing the operation of our joint venture arrangements with Elan. Following these modifications, DDL, our consolidated subsidiary of which we own 80.1%, granted Depomed an exclusive license to Gabapentin GR, a product candidate developed in the joint venture which utilizes Depomed technology and which Depomed had originally licensed to DDL under a royalty-bearing license agreement. Gabapentin is marketed by Pfizer Inc. for adjunctive therapy for epileptic seizures and postherpetic pain under the label Neurontin®. DDL successfully completed a Phase I clinical trial on Gabapentin GR in the first quarter of 2002. We expect to initiate a Phase II clinical trial on Gabapentin GR in fourth quarter of 2004 for an indication to be determined.

Furosemide GR

In December 2003, we initiated a Phase II clinical trial with Furosemide GR, which we expect to complete in the third quarter of 2004. Furosemide is a widely prescribed diuretic marketed as an immediate release formulation, and is sold by Aventis as Lasix® as well as by several other pharmaceutical companies as a generic.

Other Research and Development Activities

In October 2002, we signed an agreement with ActivBiotics, Inc. to conduct feasibility studies to develop a controlled-release oral tablet to deliver ActivBiotics’ broad-spectrum antibiotic, Rifalazil, to the stomach and upper gastrointestinal tract. The target indication is the eradication of H. pylori, the causative agent of most cases of peptic ulcers. Under the agreement, ActivBiotics has funded our research and development expenses related to the preclinical feasibility studies with Rifalazil and has an option to acquire an exclusive license to Rifalazil in combination with the GR System.

In addition, we are developing other product candidates expected to benefit from incorporation into our drug delivery system. For example, we are collaborating with AVI BioPharma, Inc. on a project for the delivery of large molecules, such as antisense compounds, from the GR System. We have also completed preclinical studies of a combination product comprising our Metformin GR once-daily formulation of metformin with a once-daily sulfonylurea for Type II diabetes. Under our agreement with Biovail, Biovail has an exclusive option to license this product from us. We expect that a Phase I clinical trial for this product will commence only if we enter into a development and licensing agreement with Biovail or another third party.

Manufacturing Capabilities

In May 2003, we received a State of California Drug Manufacturing License for our pharmaceutical laboratories and manufacturing facilities. The license allows us to manufacture clinical supplies of our product candidates for our Phase I and Phase II clinical trials, as well as to provide quality control and quality assurance testing in our laboratories for our Phase I through Phase III clinical supplies. We intend to employ contract manufacturers for any commercial-scale manufacturing of our products.

2003 Equity Financings

In April 2003, we sold 9,259,259 shares of our common stock and warrants to purchase 3,240,745 shares of our common stock with net proceeds of approximately $18,668,000. In October 2003, we sold 6,500,000 shares of our common stock in an underwritten public offering at a public offering price of $5.50 per share with net proceeds of approximately $33,187,000. In November 2003, we sold an additional 975,000 shares of our common stock at a public offering price of $5.50 per share with net proceeds of

17




approximately $5,041,000 pursuant to the exercise of the over-allotment option granted to the underwriters in connection with the public offering.

Relationship with Elan

In January 2000, we formed DDL as a joint venture with Elan to develop products using drug delivery technologies and expertise of both Elan and Depomed. DDL is owned 80.1% by us and 19.9% by a subsidiary of Elan. On September 16, 2003, we amended or terminated several contracts governing the operation of DDL. The modifications to the joint venture arrangements included among other modifications, the termination of Elan’s participation in the management and the board of directors of DDL, the termination of Elan’s license of certain of its technologies to the joint venture and the cancellation of Elan’s right to exchange the Series A preferred shares we issued to Elan in January 2000 for an additional 30.1% equity interest in DDL. As a result of the elimination of this exchange right, our Series A Preferred Stock was reclassified as permanent shareholders’ equity. We continue to own 80.1% of DDL, with the remaining 19.9% held by a subsidiary of Elan. Following the termination of Elan’s participation in the management and the board of directors of DDL, DDL’s five-member board of directors was reconstituted to include three of our executive officers (one of whom serves on our board of directors) and two of DDL’s attorneys. We do not expect DDL to perform any further product development. DDL may receive royalties from product sales if any drugs developed by DDL, such as Gabapentin GR, are successfully commercialized.

Critical Accounting Policies and Estimates

A detailed discussion of our significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements, and the impact and risks associated with our accounting policies are discussed throughout this Annual Report on Form 10-K and in the footnotes to the consolidated financial statements. Critical accounting policies are those that require significant judgment and/or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made. We consider certain accounting policies related to revenue recognition and use of estimates to be critical policies. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

Revenue Recognition

Revenue related to collaborative research agreements with corporate partners is recognized as the expenses are incurred for each contract. We are required to perform research activities as specified in each respective agreement on a best efforts basis, and we are reimbursed based on the costs associated with supplies, other outsourced activities and the hours worked by employees on each specific contract. Our business strategy includes performing additional development work for our partners, which we expect will include milestone payments and license fees. We will recognize nonrefundable milestone payments pursuant to collaborative agreements upon the achievement of specified milestones where no further obligation to perform exists under that provision of the arrangement. License fees will be recognized over the period of continuing involvement of a specific contract or, if no continuing involvement exists, such license fees will be recognized upon receipt.

18




Accrued Liabilities

We record accrued liabilities for certain contract research activities, including clinical trials, preclinical studies and other external development activities. Some of those accrued liabilities are based on estimates because billings for these activities may not occur on a timely basis consistent with the performance of the services. If possible, we obtain information regarding the unbilled services directly from the service provider. However, we may be required to estimate these services based on information available to our product development staff. If we underestimate the research activity associated with a study at a given point in time, it would result in understated research and development expense in the period presented and overstated research and development expense in subsequent periods.

Change in Accounting Principle

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), which requires a variable interest entity (VIE) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interest in the VIE. Prior to the adoption of FIN 46, VIEs were generally consolidated by companies owning a majority voting interest in the VIE. The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003. However, the FASB deferred the effective date for VIEs created before February 1, 2003 to the quarter ended March 31, 2004 for calendar year companies. Adoption of the provisions of FIN 46 prior to the deferred effective date was permitted.

We adopted FIN 46 on July 1, 2003, and consolidated DDL, as of that date, as we determined that DDL was a VIE, as defined by FIN 46, and that we absorb a majority of its expected losses. Accordingly, we were required to consolidate the assets and liabilities of DDL on July 1, 2003, which did not have a material impact on our financial position or results of operations. Also, as we had been responsible for 80% of DDL’s losses under the terms of our agreements with Elan, we had been recognizing 80% of DDL’s losses under the equity method of accounting prior to July 1, 2003. Since the inception of DDL through June 30, 2003, we had recognized approximately $19.8 million, or 80% of DDL’s expenses. Upon the adoption of FIN 46, we calculated what the impact would have been on our operations had we consolidated 100% of DDL’s expenses and recorded an offsetting “noncontrolling interest” equal to 20% of DDL’s expenses (the amounts funded by Elan under the arrangement) for the period from DDL’s inception through June 30, 2003, or $19.8 million, there was no cumulative catch-up charge to record upon the adoption of FIN 46.

Our results of operations include 100% of the operating results of DDL for the six months ended December 31, 2003. The noncontrolling interest for the quarter was not material, and it has been included as an offset to general and administrative expenses in the consolidated statement of operations. As DDL does not have any revenue, its accounts are reflected entirely in our consolidated operating expenses.

In addition, in September 2003, we modified our agreements with Elan that govern the terms of the joint venture and as a result of such modifications, we are now responsible for 100% of the funding requirements of DDL. Accordingly, we no longer allocate any portion of DDL’s results of operations to the noncontrolling interest.

RESULTS OF OPERATIONS

Years Ended December 31, 2003, 2002 and 2001

Revenues

Revenues for the years ended December 31, 2003, 2002 and 2001 were approximately $982,000, $1,661,000, and $3,673,000, respectively. In 2003, revenues consisted of $476,000 earned from our

19




collaboration with ActivBiotics and $506,000 from small collaborations with undisclosed partners. ActivBiotics is currently reviewing its strategy related to Rifalazil. We do not know whether we will provide additional product development services to ActivBiotics in 2004. In 2002, revenues consisted of $1,221,000 earned for development work performed for DDL and $440,000 earned from ActivBiotics and several small collaborations with undisclosed partners. Development work performed for DDL was funded by the joint venture partners at the partners’ pro rata ownership percentage through September 2002, when the funding period terminated. We have no plans to perform development work for DDL in the future. In 2001, revenues consisted of $2,126,000 earned for development work performed for DDL and $1,547,000 earned from a collaboration arrangement with an undisclosed partner.

Research and Development Expense

Research and development expense for the year ended December 31, 2003 was approximately $26,900,000, compared to approximately $24,714,000 and $15,461,000 during the years ended December 31, 2002 and 2001, respectively. The increase of $1,676,000 in 2003 was due primarily to expense related to the hiring of additional personnel to support the FDA filings for Metformin GR and Ciprofloxacin GR. Other increases were $405,000 in internal research and development as a result of our internal manufacturing and testing of clinical materials for our Phase I and II clinical trials. Rent expense also increased $219,000 due to the additional space we leased in May 2003. These increases were partially offset by decreased expense of $499,000 for external research and development expense, including manufacturing expense due to the completion in 2002 of manufacturing of clinical trial supplies or drugs for our Metformin GR and Ciprofloxacin GR Phase III trials. The increase in 2002 was due to an increase in clinical trial expense of $7,166,000 due primarily to two Phase III trials with Metformin GR. Increased expense related to the hiring of additional employees of $1,360,000 also contributed to the total increase in 2002. Although we expect the data analysis for our Phase III clinical trials to be concluded in the March 2004, we believe that our research and development expenses will remain relatively flat or increase during 2004 due to anticipated increased expenditures on clinical trials and research and development for our other product candidates.

Our research and development expenses currently include costs for scientific personnel, supplies, equipment, outsourced clinical and other research activities, consultants, depreciation, facilities, utilities and an allocation of corporate and administrative costs. The scope and magnitude of future research and development expenses cannot be predicted at this time for our product candidates in research and in development as it is not possible to determine the nature, timing and extent of clinical trials and studies, the FDA’s requirements for a particular drug and the requirements and level of participation, if any, by potential partners. As potential products proceed through the development process, each step is typically more extensive, and therefore more expensive, than the previous step. Success in development therefore results, generally, in increasing expenditures. Furthermore, our business strategy involves licensing certain of our drug candidates to collaborative partners. Depending upon when such collaborative arrangements are executed, the amount of costs incurred solely by us will be impacted.

Our largest cumulative research and development expense over the last three years has been related to the clinical trials of Metformin GR. In 2003, 2002 and 2001, our most advanced project, Metformin GR, accounted for approximately 40%, 70% and 60%, respectively, of our total research and development costs for that year. In 2003, Ciprofloxacin GR accounted for 50% of our 2003 research and development cost. In 2002 and 2001, Metformin GR was the only project to exceed 20% of our total research and development costs.

We expect expenses related to Metformin GR will decrease in 2004 since we expect to complete all clinical trial and regulatory activities in the second quarter of 2004. Since Metformin GR has been licensed to Biovail, we can be reasonably certain of our remaining development and regulatory responsibilities and the associated expenses. Therefore, we are able to estimate that, as of December 2003, the costs to

20




complete our activities related to Metformin GR will not exceed $5.5 million, including costs for internal project management and support.

Since 2001, we have incurred research and development expenses of approximately $2.1 million and $1.1 million in 2001 and 2002, respectively, and none in 2003, related to conducting research and development activities on behalf of our joint venture, DDL. As of August 2002, DDL has terminated all product development activities and DDL will not perform any future product development. We will not incur any additional associated expenses and no additional associated revenues will be earned related to research services performed on behalf of DDL.

Our research and development activities can be divided into preclinical stage programs, which include analytical testing, process development, pilot-scale production and preclinical testing, and later stage programs, which include clinical testing, regulatory affairs and manufacturing clinical supplies. The costs associated with these programs approximate the following:

 

 

2003

 

2002

 

2001

 

Preclinical programs

 

$

2,501,000

 

$

2,304,000

 

$

3,618,000

 

Later stage programs

 

24,399,000

 

22,410,000

 

11,843,000

 

 

 

$

26,900,000

 

$

24,714,000

 

$

15,461,000

 

 

Our research and development activities can be divided into those related to our internal projects and those related to collaboration arrangements. The costs related to internal projects versus collaboration arrangements approximate the following:

 

 

2003

 

2002

 

2001

 

Internal projects

 

$

16,201,000

 

$

9,099,000

 

$

12,250,000

 

Collaborative arrangements funded by partners

 

1,048,000

 

1,712,000

 

3,195,000

 

Collaborative arrangements not funded by partners

 

9,651,000

 

13,903,000

 

1,663,000

 

 

 

$

26,900,000

 

$

24,714,000

 

$

15,461,000

 

 

 

21




The following table summarizes our principal product development initiatives and the related stages of development for each product in development. The information in the column labeled “Estimated Completion Date of Current Phase” contains forward-looking statements regarding timing of completion of product development phases. The actual timing of completion of those phases could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the timing of completing a product development phase, see “Additional Factors that May Affect Future Results” and elsewhere in this Form 10-K. In addition to the products listed below, from time to time we may enter into feasibility studies with collaborative partners that, if successful, may be followed by definitive agreements to advance development of the product.

Program

 

 

 

Partner

 

Potential
Indications

 

Development
Status

 

Estimated
Completion Date
of Current Phase

Metformin GR

 

Biovail

 

Type II diabetes

 

2 Phase III clinical trials completed, NDA in preparation

 

NDA filing expected in the 2nd quarter of 2004

Ciprofloxacin GR

 

In-house

 

Various bacterial infections

 

Phase III clinical trial completed, NDA in preparation

 

NDA filing expected in the 2nd quarter of 2004

Furosemide GR

 

In-house

 

Cardiovascular/ antihypertensive

 

Phase II clinical trial underway

 

Expected completion in the 3rd quarter of 2004

Gabapentin GR

 

In-house

 

Pain, seizures, epilepsy

 

Phase II clinical trial design in preparation

 

Expected completion in the 4th quarter of 2004

Metformin GR and sulfonylurea

 

In-house

 

Type II diabetes

 

Preclinical studies completed

 

 

Rifalazil

 

ActivBiotics, Inc.

 

Antibiotic

 

Preclinical studies completed

 

 

Undisclosed NeuGene® antisense compound

 

AVI BioPharma, Inc.

 

Confidential(1)

 

Preclinical studies underway

 

Unknown


(1)          The potential indication may not be disclosed pursuant to the terms of the agreement between the company and AVI BioPharma, Inc. See “Collaborative Relationships.”

We expect that the pharmaceutical products that we develop internally will take, on average, from four to eight years to research, develop and obtain FDA approval in the United States. We generally must conduct preclinical testing on laboratory animals of new pharmaceutical products prior to commencement of clinical studies involving human beings. These studies evaluate the potential efficacy and safety of the product. We then submit the results of these studies to the FDA as part of an Investigational New Drug Application (or IND) which, if successful, allows the opportunity for clinical study of the potential new medicine.

Typically, human clinical evaluation involves a time-consuming and costly three-phase process:

·       In Phase I, we conduct clinical trials with a small number of subjects to determine a drug’s early safety profile and its blood concentration profile over time. A Phase I trial for our average potential product may take 6 to 12 months to plan and complete.

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·       In Phase II, we conduct limited clinical trials with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and further evidence of safety. A Phase II trial for our average potential product may take 9 to 18 months to plan and complete.

·       In Phase III, we conduct large-scale, multi-center, comparative trials with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA prior to commercialization of the product. A Phase III trial for our average potential product may take 1 to 3 years to plan and complete.

The most significant costs associated with clinical development are the Phase III trials as they tend to be the longest and largest studies conducted during the drug development process. We currently have two products that have completed Phase III.

The successful development of pharmaceutical products is highly uncertain. The FDA closely monitors the progress of each phase of clinical testing. The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to patients. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage and record keeping for each product. The lengthy process of seeking FDA approvals, and the subsequent compliance with applicable statutes and regulation, require the expenditure of substantial resources.

General and Administrative Expense

General and administrative expense for the year ended December 31, 2003 was approximately $3,480,000, compared to approximately $5,374,000 and $2,534,000 for the years ended December 31, 2002 and 2001, respectively. The decrease in 2003 compared to 2002 was due to a decrease of $2,717,000 in legal expense resulting from the settlement of our lawsuit with Bristol-Myers Squibb in November 2002. The decrease in 2003 was partially offset by an increase of $334,000 related to increased salaries and the hiring of a Vice President of Business Development in December 2002, a newly created position at that time. Other increases in 2003 included $193,000 for increased insurance rates and $125,000 in listing fees related to our move to the Nasdaq National Market from the American Stock Exchange in December 2003. The increase in 2002 over 2001 was primarily due to an increase of $2,816,000 in legal expense related to our lawsuit against Bristol-Myers Squibb. In 2004, we expect general and administrative expense will increase moderately over 2003 levels.

Equity in Loss of Joint Venture

Pursuant to our adoption of FIN 46 on July 1, 2003, we have consolidated the accounts of DDL on July 1, 2003, and have consolidated DDL’s operating results, net of noncontrolling interest, for the period from July 1, 2003 through September 15, 2003. As we are responsible for 100% of the expenses incurred by DDL beginning September 16, 2003 as a result of the modifications to our contracts with Elan governing the operation of DDL, we have recognized 100% of DDL’s operating results for the period from September 16, 2003 through December 31, 2003.

For the period from July 1, 2003 to September 15, 2003 we consolidated approximately $2,000 of DDL expenses, net of noncontrolling interest, included in general and administrative expenses in the consolidated statement of operations. For the period from September 16, 2003 to December 31, 2003, we consolidated general and administrative expense of approximately $7,000 related to DDL. We expect to consolidate general and administrative expense of approximately $10,000 annually until DDL is dissolved. DDL does not have any fixed assets, liabilities or employees and will not perform any further product development.

23




For the year ended December 31, 2003, DDL recognized general and administrative expense and net loss of $16,000. For the year ended December 31, 2002, DDL recognized a loss of $3,041,000, which included $3,027,000 in research and development expense and $14,000 in general and administrative expense. For the year ended December 31, 2001, DDL recognized a loss of $3,962,000, which included $3,927,000 in research and development expense and $34,000 in general and administrative expense. The decrease in research and development expense was due to decreased development work conducted in 2002 on behalf of DDL. In August 2002, all research and development work for DDL ceased. In 2003 and thereafter, we expect DDL will recognize annual general and administrative expense of approximately $10,000 related to legal fees until DDL is dissolved.

For the period from inception (January 7, 2000) to December 31, 2003, DDL recognized a net loss of approximately $24,750,000. The net loss from inception to December 31, 2003 includes a $15,000,000 payment by DDL to Elan for the acquisition of in-process research and development rights related to certain Elan drug delivery technologies. To date, DDL has not recognized any revenue. Prior to the adoption of FIN 46 on July 1, 2003, our equity in the loss of DDL was based on 100% of DDL’s losses (since we own 100% of the DDL voting common stock), less the amounts funded by Elan. For the period from inception to June 30, 2003, we recognized approximately 80.1% of DDL’s loss, or approximately $19,817,000 as equity in the loss of the joint venture in our statement of operations. For the years ended December 31, 2001 and 2002, we recognized approximately $3,173,000 and $2,436,000 of DDL’s net loss, respectively. In 2003, we recognized approximately $5,000 of DDL’s net loss prior to the adoption of FIN 46 on July 1, 2003.

Elan made available to us a convertible loan facility to assist us in funding our portion of the joint venture’s losses up to a principal maximum of $8,010,000. The funding term of the loan expired in September 2002. See “Contractual Obligations” below for additional information on this loan facility.

Interest Expense and Interest Income

Interest expense was approximately $910,000 for the year ended December 31, 2003 compared to interest expense of approximately $733,000 and $336,000 for the years ended December 31, 2002 and 2001, respectively. In 2003, interest expense increased due to compounding of accrued interest on the Elan convertible loan facility and also from $3.3 million in final loan draws which increased the Elan loan balance in 2002. In 2002, the increase in interest expense was also primarily due to higher Elan convertible loan balances and as well as higher equipment loan balances.

For the year ended December 31, 2003, interest and other income increased to $299,000 from $101,000 and $231,000 in the years ended December 31, 2002 and 2001, respectively. In 2003, the increase was due to our increased investment balances as a result of our April 2003 private placement and our public offering in the fourth quarter of 2003 which was partially offset by decreasing average interest rates earned in 2003 compared to 2002 and 2001. In 2002, the decrease from 2001 was due to declining cash and investment balances and declining interest rates. Net interest income also includes immaterial gains realized on the sale of some of our marketable securities.

Gain from Bristol-Myers Legal Settlement

In January 2002, we filed a complaint against Bristol-Myers Squibb in the United States District Court for the Northern District of California for infringement of our U.S. Patent No. 6,340,475.

In November 2002, we signed a definitive settlement agreement and release with Bristol-Myers Squibb related to the litigation. Under the terms of the agreement, Bristol-Myers Squibb made a one-time payment of $18.0 million to us. We and Bristol-Myers Squibb released all claims in the lawsuit against each other and granted each other a limited non-exclusive royalty free license. The license that Bristol-Myers Squibb obtained from us extends to certain current and future compounds that Bristol-Myers may develop internally.

24




Series A Preferred Stock Dividend

In January 2000, we issued 12,015 shares of Series A Preferred Stock at a price of $1,000 per share to fund our 80.1% share of the initial capitalization of DDL. The Series A Preferred Stock accrues a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock dividends are convertible at anytime after January 2002 into our common stock. The original conversion price of the Series A Preferred Stock was $12.00. However, as a result of our March 2002 financing, the conversion price has been adjusted to $10.66 per share. As the dividends are only convertible into our common shares, the dividends represent adjustments to the conversion price that are accounted for under EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Since the commitment date fair market value of the maximum number of common shares that could be issued pursuant to conversion of the Series A Preferred Stock is less than the proceeds of issuance of the Series A Preferred Stock, the Series A Preferred Stock does not contain a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5.

Stock-based Compensation Expense

In December 2002, our Board of Directors authorized an increase in the number of shares authorized for issuance under our 1995 Stock Option Plan (the Plan) by 1,306,811 shares. On May 29, 2003, at the 2003 Annual Meeting of Shareholders, our shareholders approved the increase to the Plan. In December 2002 and March 2003, we granted options to purchase approximately 585,000 shares of common stock out of the 1,306,811 share increase of common stock at exercise prices of $1.71 and $2.70, respectively, which represented the fair market values of our common stock on the respective dates of grant. However, as the options were not deemed authorized for grant until the shareholders approved the increase in the number of shares authorized under the Plan, the applicable measurement date for accounting purposes was on the date such approval was obtained. Since the fair market value of the underlying common stock on May 29, 2003 was $3.50, which was greater than the exercise prices of the stock options granted, we were required to record the difference of approximately $1,015,000 as deferred stock-based compensation expense to be recognized ratably over the vesting period of the related stock options. In the year ended December 31, 2003, we recognized approximately $151,000 in stock-based compensation expense related to the stock options. We expect to recognize approximately $63,000 in stock-based compensation expense related to these stock options per quarter through the second quarter of 2007.

In July 2003, our Board of Directors approved an amendment to all stock options granted to non-employee members of our Board of Directors. In the case of the death of a non-employee director, the amendment provides for the director’s beneficiary to exercise the director’s stock options at anytime over the remaining life of the stock option. A non-cash compensation expense related to the amended stock options will be recognized if and when a director’s beneficiary benefits from this modified provision. The maximum stock-based compensation expense would be $369,000 if all non-employee directors benefit from this provision with respect to outstanding options. To date, no expense has been recognized related to these options.

Net Operating Losses

We have not generated any taxable income to date. At December 31, 2003, the net operating losses available to offset future taxable income for federal income tax purposes were approximately $79,000,000. Future utilization of carryforwards may be limited in any fiscal year pursuant to Internal Revenue Code regulations. The carryforwards expire at various dates beginning in 2010 through 2023 if not utilized. As a result of the annual limitation, anticipated and future losses or changes in ownership of the company, all or a portion of these carryforwards may expire before becoming available to reduce our federal income tax liabilities.

25




Related Party Transactions

Consulting Agreement

In September 1998, we entered into a consulting agreement with Burrill & Co., whereby we were required to pay a monthly retainer of $5,000 and other fees related to partnering arrangements. The principal of Burrill & Co., G. Steven Burrill, is a member of our Board of Directors. For the years ended December 31, 2003, 2002 and 2001, we paid a total of $55,000, $60,000 and $60,000, respectively, in connection with this agreement. We terminated the agreement as of November 30, 2003.

Elan Corporation, plc

In January 2000, DDL was formed to develop a series of undisclosed proprietary products using drug delivery technologies and expertise of both companies. DDL is owned 80.1% by Depomed and 19.9% by Elan (See Note 3 of the Notes to Consolidated Financial Statements, Collaborative Arrangements and Contracts, Elan Corporation, plc).

AVI BioPharma, Inc.

In June 2000, we entered into a joint collaboration to investigate the feasibility of controlled oral delivery of AVI’s proprietary NEUGENE® antisense agents. Our Chairman, President and Chief Executive Officer, John W. Fara, is currently serving as a director of AVI BioPharma, Inc. No revenues have been received under this agreement.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2003, we had approximately $44,255,000 in cash, cash equivalents and marketable securities, working capital of $41,607,000, and accumulated net losses of $93,111,000. We expect to continue to incur operating losses until at least 2005. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least September 2005. However, we base this expectation on our current operating plan, which may change as a result of many factors. Our cash needs may also vary materially from our current expectations because of numerous factors, including:

·       results of research and development;

·       results of license negotiations;

·       relationships with collaborative partners;

·       changes in the focus and direction of our research and development programs;

·       technological advances;

·       results of clinical testing, requirements of the FDA and comparable foreign regulatory agencies; and

·       acquisitions or investment in complimentary business, products or technologies.

We will need substantial funds of our own or from third parties to:

·       conduct research and development programs;

·       conduct preclinical and clinical testing; and

·       manufacture (or have manufactured) and market (or have marketed) potential products using the GR System.

26




Our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations. We have limited credit facilities and no other committed source of capital. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds to continue our development programs. We may not be able to raise such additional capital on favorable terms, or at all. If the company raises additional capital by selling its equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equity positions. If adequate funds are not available the company may have to:

·       delay, postpone or terminate clinical trials;

·       curtail other operations significantly; and/or

·       obtain funds through entering into collaboration agreements on unattractive terms.

The inability to raise capital would have a material adverse effect on the company.

Operating Activities

Cash used in operations in the year ended December 31, 2003 was approximately $33,148,000, compared to approximately $4,437,000 and $12,398,000 for the years ended December 31, 2002 and 2001, respectively. In 2003, the change in cash used in operations was due primarily to the net loss and decreases in accounts payable due to decreased clinical trial activity by the end of 2003. In 2002 and 2001, the change in cash used in operations was due primarily to our net loss partially offset by our share of the loss of the joint venture (a non-cash charge in operating activities) and increases in accounts payable due to increased clinical trials activity.

Investing Activities

Cash used in investing activities in the year ended December 31, 2003 totaled approximately $16,718,000 and consisted primarily of a net increase in marketable securities of $15,589,000 and $1,123,000 of purchases of lab equipment, furniture, computers and leasehold improvements. Marketable securities were increased in 2003 after the completion of our public offering in the fourth quarter. Cash used in investing activities in the year ended December 31, 2002 totaled approximately $12,437,000 and consisted of an increase in marketable securities of $8,691,000 and approximately $3,282,000 related to the investment in our joint venture and $464,000 related to purchases of lab equipment, furniture and computers. Marketable securities were increased in 2002 after we received the $18,000,000 payment from Bristol-Myers related to the settlement of our patent infringement lawsuit in November 2002. Cash used in investing activities in the year ended December 31, 2001 totaled approximately $1,722,000 and consisted of approximately $3,012,000 related to the investment in our joint venture and $1,325,000 related to purchases of lab equipment, leasehold improvements, furniture and computers, partially offset by a net decrease in marketable securities of $2,615,000. We expect that future capital expenditures will include approximately $2 million for leasehold improvements to our facilities including the additional space we leased in May 2003. We also expect we will purchase additional product development and quality control laboratory equipment to maintain current Good Manufacturing Practices (cGMP) in our laboratories.

Financing Activities

Cash provided by financing activities for the year ended December 31, 2003 was $58,377,000 and consisted primarily of net proceeds of $18,668,000 received in April 2003 from a private placement of common stock and net proceeds of $38,227,000 received from our public offering of common stock in the fourth quarter. (See Note 7 of the Notes to Consolidated Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Private Placements and Public Offering) Proceeds received were partially

27




offset by $441,000 in payments on equipment loans and capital leases. Cash provided by financing activities for the year ended December 31, 2002 was $23,257,000 and consisted primarily of net proceeds of $8,078,000 received in March 2002 and $12,263,000 received in July 2002 in private placements of common stock. Proceeds of $3,282,000 were received on the convertible loan facility provided by Elan to fund our share of DDL’s expenses (See Note 5 of the Notes to Consolidated Financial Statements, Commitments and Contingencies). Proceeds received were partially offset by $563,000 in payments on the equipment loans and capital lease obligations. Cash provided by financing activities in the year ended December 31, 2001 was $15,392,000 and consisted primarily of net proceeds of $11,331,000 received in June in a private placement of a combination of common stock and warrants. Proceeds of $3,012,000 were received on the convertible loan facility provided by Elan and $1,347,000 was received on our equipment loan facility. Proceeds from financing activities were partially offset by $305,000 in payments on our equipment loan and capital lease obligations.

Contractual Obligations

As of December 31, 2003 and 2002, there was $9,412,000 and $8,619,000, respectively, outstanding related to the convertible loan facility provided by Elan. The outstanding amounts include accrued interest of $1,615,000 and $822,000 at December 31, 2003 and 2002, respectively. The funding term of the loan expired on September 30, 2002. The loan and accrued interest are payable in January 2006 in cash or shares of our common stock at the rate of $9.07 per share, with the form of payment at Elan’s option.

Through December 31, 2003, we have invested approximately $4,941,000 in equipment, furniture and leasehold improvements, of which approximately $1,947,000 was financed through long-term debt equipment financing arrangements. As of December 31, 2002, there were no further borrowings available under the financing arrangements. If we do not obtain additional credit arrangements, we will need to spend our own resources for future equipment purchases.

As of December 31, 2003, our aggregate contractual obligations are as follows:

 

 

 

 

 

 

Payments due by period

 

Contractual Obligations

 

 

 

Total

 

Less than
1 year

 

1 to 3
years

 

3 to 5
years

 

Operating leases

 

$

4,341,312

 

$

1,060,052

 

$

2,947,302

 

$

333,958

 

Capital leases

 

46,089

 

32,533

 

13,556

 

 

Long-term debt

 

432,004

 

343,352

 

88,652

 

 

Elan convertible loan and accrued interest

 

11,283,300

 

 

11,283,300

 

 

 

 

$

16,102,705

 

$

1,435,937

 

$

14,332,810

 

$

333,958

 

 

Recently Issued Accounting Standards

In November 2002, the Financial Accounting Standards Board (or FASB) issued Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (or Issue No. 00-21). Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of account. Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting arrangement. The provisions of Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003.

28




Our adoption of Issue No. 00-21 did not have a material effect on our financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (or FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after March 31, 2004. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Our adoption of FIN 46 did not have a material impact on our results of operations and financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (or FAS 150), establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of FAS 150 has not had an impact on our financial condition or results of operation.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to other information in this report, the following factors should be considered carefully in evaluating the company. We believe the following risks, along with the risks described elsewhere in this Form 10-K, are the material risks we face at the present time. If any of the risks or uncertainties described in this Form 10-K actually occurs, our business, results of operations or financial condition could be materially adversely affected. The risks and uncertainties described in this Form 10-K are not the only ones facing the company. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business.

We are at an early stage of development and are expecting operating losses in the future.

To date, we have had no revenues from product sales and only minimal revenues from our collaborative research and development arrangements and feasibility studies. For the years ended December 31, 2001, 2002 and 2003, we had total revenues of $3.7 million in 2001, $1.7 million in 2002 and $1.0 million in 2003. For the years ended December 31, 2001, 2002 and 2003, we incurred losses of $17.6 million in 2001, $13.5 million in 2002 and $30.0 million in 2003. As we continue our research and development efforts, we anticipate that we will continue to incur substantial operating losses for at least the next two years. Therefore, we expect our cumulative losses to increase.

We will receive future payments from Biovail related to Metformin GR only if Metformin GR is approved by the FDA.

In May 2002, we entered into an exclusive license agreement with Biovail to manufacture and market Metformin GR, our most advanced product candidate, in the United States and Canada. We are responsible for completing the clinical development of Metformin GR. Biovail will not reimburse us for any of our expenses incurred in connection with the clinical development of Metformin GR. We will not receive any payments from Biovail unless the FDA approves Metformin GR for marketing in the United

29




States, which we do not expect to occur prior to the first half of 2005, if at all. Only if we receive FDA approval of Metformin GR will Biovail be required to make a $25.0 million payment to us. As of December 31, 2003, we expected that our total remaining development and regulatory costs for Metformin GR would be approximately $5.5 million. If we do not continue funding development costs of Metformin GR, Biovail will have the right to assume development of Metformin GR. In that event, our future payments from Biovail may be reduced.

We will need additional capital to support our operations, which may be unavailable or costly.

As of December 31, 2003, our capital resources consisted of approximately $44.3 million in cash, cash equivalents and marketable securities. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least September 2005. We base this expectation on our current operating plan, which may change as a result of many factors, including the following:

·       Greater than expected clinical development costs associated with Ciprofloxacin GR or with our exclusive license with Biovail described above under “We will receive future payments from Biovail related to Metformin GR only if Metformin GR is approved by the FDA.”;

·       Changes in the focus and direction of our research and development programs that could result in costly additional research and delay the eventual sale of our products;

·       Results of clinical testing and the regulatory requirements of the FDA and comparable foreign regulatory agencies that may lead to cash outlays greater than currently expected;

·       Results of our product licensing activities; and

·       Acquisitions of or investment in complementary businesses, products or technologies.

Further, our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds through the sale of our equity securities or from development and licensing agreements to continue our development programs. We may not be able to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in significant dilution of our shareholders’ equity positions. If adequate funds are not available, we may have to curtail operations significantly, or obtain funds through entering into collaboration agreements on unattractive terms.

Our quarterly operating results may fluctuate and affect our stock price.

The following factors will affect our quarterly operating results and may result in a material adverse effect on our stock price:

·       variations in revenues obtained from collaborative agreements, including milestone payments, royalties, license fees and other contract revenues;

·       our success or failure in entering into further collaborative relationships;

·       decisions by collaborative partners to proceed or not to proceed with subsequent phases of the collaboration or program;

·       the timing of any future product introductions by us or our collaborative partners;

·       market acceptance of the GR System;

·       regulatory actions;

30




·       adoption of new technologies;

·       developments concerning proprietary rights, including patents, infringement allegations and litigation matters;

·       the introduction of new products by our competitors;

·       manufacturing costs and difficulties;

·       results of clinical trials for our products;

·       changes in government funding; and

·       third-party reimbursement policies.

Our collaborative arrangements may give rise to disputes over ownership of our intellectual property and may adversely affect the commercial success of our products.

We currently have a collaboration agreement with Biovail to develop Metformin GR. In addition, we have entered into other collaborative arrangements, some of which have been based on less definitive agreements, such as memoranda of understanding, material transfer agreements, options or feasibility agreements and we may not execute definitive agreements formalizing these arrangements. Collaborative relationships are generally complex and may give rise to disputes regarding the relative rights, obligations and revenues of the parties, including the ownership of intellectual property and associated rights and obligations, especially when the applicable provisions have not been fully negotiated. Such disputes can delay collaborative research, development or commercialization of potential products, or can lead to lengthy, expensive litigation or arbitration. The terms of collaborative arrangements may also limit or preclude us from developing products or technologies developed pursuant to such collaborations. Moreover, collaborative arrangements often take considerably longer to conclude than the parties initially anticipate, which could cause us to agree to less favorable agreement terms that delay or defer recovery of our development costs and reduce the funding available to support key programs.

We may not be able to enter into future collaborative arrangements on acceptable terms, which would harm our ability to commercialize our products. Further, even if we do enter into collaboration arrangements, it is possible that our collaborative partners may not choose to develop and commercialize products using the GR System technologies. Other factors relating to collaborations that may adversely affect the commercial success of our products include:

·       any parallel development by a collaborative partner of competitive technologies or products;

·       arrangements with collaborative partners that limit or preclude us from developing products or technologies;

·       premature termination of a collaboration agreement; or

·       failure by a collaborative partner to devote sufficient resources to the development and commercial sales of products using the GR System.

Generally, our collaborative arrangements do not restrict our collaborative partners from competing with us or restrict their ability to market or sell competitive products. Our current and any future collaborative partners may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Our collaborative partners may also terminate their collaborative relationships with us or otherwise decide not to proceed with development and commercialization of our products.

31




It is difficult to develop a successful product. If we do not develop a successful product we may not be able to raise additional funds.

The drug development process is costly, time-consuming and subject to unpredictable delays and failures. Before we or others make commercial sales of products using the GR System, we, our current and any future collaborative partners will need to:

·       conduct clinical tests showing that these products are safe and effective; and

·       obtain regulatory approval from the FDA and foreign regulatory authorities.

We will have to curtail, redirect or eliminate our product development programs if we or our collaborative partners find that:

·       the GR System has unintended or undesirable side effects; or

·       products that appear promising in preclinical studies do not demonstrate efficacy in larger scale clinical trials.

Even if our products obtain regulatory approval, successful commercialization would require:

·       market acceptance;

·       cost-effective commercial scale production; and

·       reimbursement under private or governmental health plans.

Any material delay or failure in the development and commercialization of our potential products, particularly Metformin GR or Ciprofloxacin GR, would adversely impact our financial position and liquidity and would make it difficult for us to raise financing on favorable terms, if at all.

If we are unable to obtain or maintain regulatory approval, we will be limited in our ability to commercialize our products, and our business will be harmed.

Our lead product candidate, Metformin GR, has completed two pivotal Phase III clinical trials. We expect to complete the data analysis for the second Phase III trial in March 2004 and we expect Biovail will submit the New Drug Application (NDA) to the FDA for Metformin GR in the second quarter of 2004. The earliest that we expect to be able to obtain FDA approval to market Metformin GR is in the first half of 2005, if at all.

In June 2002, we completed a Phase II clinical trial with an internally developed once-daily formulation of the antibiotic drug ciprofloxacin for uncomplicated urinary tract infection, called Ciprofloxacin GR. In November 2003, we completed a Phase III clinical trial for this product. We expect to complete the data analysis for this trial in the March 2004 and submit the NDA to the FDA in the second quarter of 2004, if the clinical trial is successful. The earliest that we expect to be able to obtain FDA approval to market Ciprofloxacin GR is in the first half of 2005, if at all.

The regulatory process is expensive and time consuming. Even after investing significant time and expenditures on clinical trials, we may not obtain regulatory approval of our products. Data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Significant clinical trial delays would impair our ability to commercialize our products and could allow our competitors to bring products to market before we do. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application may cause delays or rejections. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product.

32



Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review. The discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. Manufacturers of approved products are also subject to ongoing regulation, including compliance with FDA regulations governing current good manufacturing practices, or cGMP. Failure to comply with manufacturing regulations can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution.

The approval process outside the United States is uncertain and may limit our ability to develop, manufacture and sell our products internationally.

To market any of our products outside of the United States, we and our collaborative partners are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for drug products. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA.

If we are unable to obtain acceptable prices or adequate reimbursement for our products from third-party payors, we will be unable to generate significant revenues.

In both domestic and foreign markets, sales of our product candidates will depend in part on the availability of adequate reimbursement from third-party payors such as:

·       government health administration authorities;

·       private health insurers;

·       health maintenance organizations;

·       pharmacy benefit management companies; and

·       other healthcare-related organizations.

If reimbursement is not available for our product candidates, demand for these products may be limited. Further, any delay in receiving approval for reimbursement from third-party payors would have an adverse effect on our revenues. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, including pharmaceuticals. Our product candidates may not be considered cost effective, and adequate third-party reimbursement may be unavailable to enable us to maintain price levels sufficient to realize an acceptable return on our investment.

Federal and state governments in the United States and foreign governments continue to propose and pass new legislation designed to contain or reduce the cost of healthcare. Existing regulations affecting pricing may also change before any of our product candidates are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we may develop in the future.

We depend on third parties for manufacturing of our products. Failure by these third parties would result in lost revenue.

Although we have established internal manufacturing facilities to manufacture supplies for our Phase I and Phase II clinical trials, we do not have, and we do not intend to establish in the foreseeable

33




future, internal commercial scale manufacturing capabilities. Rather, we intend to use the facilities of third parties to manufacture products for Phase III clinical trials and commercialization. Our dependence on third parties for the manufacture of products using the GR System may adversely affect our ability to deliver such products on a timely or competitive basis. Although we have made arrangements for the third party manufacture of Metformin GR, there may not be sufficient manufacturing capacity available to us when, if ever, we are ready to seek commercial sales of other products using the GR System. The manufacturing processes of our third party manufacturers may be found to violate the proprietary rights of others. If we are unable to contract for a sufficient supply of required products on acceptable terms, or if we encounter delays and difficulties in our relationships with manufacturers, the market introduction and commercial sales of our products will be delayed, and our revenue will suffer.

Applicable cGMP requirements and other rules and regulations prescribed by foreign regulatory authorities will apply to the manufacture of products using the GR System. We will depend on the manufacturers of products using the GR System to comply with cGMP and applicable foreign standards. Any failure by a manufacturer of products using the GR System to maintain cGMP or comply with applicable foreign standards could delay or prevent their initial or continued commercial sale.

Business interruptions could limit our ability to operate our business.

Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events. In particular, our corporate headquarters are located in the San Francisco Bay area, which is known for seismic activity. We have not established a formal disaster recovery plan, and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses that occur. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

Our advisors may have conflicting obligations to other entities that could result in intellectual property disputes between us and those entities.

Two groups (the Policy Advisory Board and Development Advisory Board) and various individuals advise us on business and scientific issues and future opportunities. Certain of these individuals work full-time for academic or research institutions. Others act as consultants to other companies. In addition, except for work performed specifically for us and at our direction, any inventions or processes discovered by such persons will be their own intellectual property or that of their institutions or other companies. Further, invention assignment agreements signed by such persons in connection with their relationships with us may be subject to the rights of their primary employers or other third parties with whom they have consulting relationships. If we desire access to inventions that are not our property, we will have to obtain licenses to such inventions from these institutions or companies. We may not be able to obtain these licenses on commercially reasonable terms, if at all.

Item 7A.          Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

Our operating results have not been sensitive to changes in the general level of U.S. interest rates, particularly because most of our cash equivalents and marketable securities are invested in short-term debt instruments. If market interest rates were to change immediately and uniformly by 10% from levels at December 31, 2003, the fair value of our cash equivalents and marketable securities would not change by a significant amount.

34




Foreign Currency Fluctuations

We have not had any significant transactions in foreign currencies, nor did we have any significant balances that were due or payable in foreign currencies at December 31, 2003. Therefore, a hypothetical 10% change in foreign currency rates would not have an impact on our financial position and results of operations. We do not hedge any of our foreign currency exposure.

Item 8.                  Financial Statements and Supplementary Data

The financial statements and supplementary data required by Item 8 are set forth below on pages F-1 through F-29.

Item 9.                  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.          Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the President and Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, the company’s management, including the President and Chief Executive Officer along with the Chief Financial Officer, concluded that the company’s disclosure controls and procedures were effective.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

35




PART III

Item 10.           Directors and Executive Officers of the Registrant

The information required by this Item with respect to executive officers is set forth in Part I of this report and the information with respect to directors, code of ethics, audit committee and audit committee financial experts of the company is incorporated by reference to the information set forth under the caption “Election of Directors” in the company’s Proxy Statement for the 2004 Annual Meeting of Shareholders.

The section entitled “Compliance Under Section 16(a) of the Securities Exchange Act of 1934” appearing in the Proxy Statement for the 2004 Annual Meeting of Shareholders sets forth the information concerning compliance by officers, directors and 10% shareholders of the company with Section 16 of the Exchange Act of 1934 and is incorporated herein by reference.

Item 11.           Executive Compensation

The information required by this Item is incorporated herein by reference to the information set forth under the caption “Executive Compensation” in the Proxy Statement for the 2004 Annual Meeting of Shareholders.

Item 12.           Security Ownership of Certain Beneficial Owners and Management and Other Shareholder Matters

The information required by this Item is incorporated herein by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for the 2004 Annual Meeting of Shareholders.

Item 13.           Certain Relationships and Related Transactions

The information required by this Item is incorporated herein by reference to the information set forth under the caption “Certain Relationships and Related Transactions” in the Proxy Statement for the 2004 Annual Meeting of Shareholders.

Item 14.           Principal Accountants Fees and Services

The information required by this Item is incorporated herein by reference to the information set forth under the caption “Principal Accountants Fees and Services” in the Proxy Statement for the 2004 Annual Meeting of Shareholders.

36




PART IV

Item 15.           Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1.   Financial Statements

Included in Part II of this report.

(a) 2.   Financial Statement Schedules

All schedules have been omitted because the required information is not present or because the information required is included in the financial statements, including the notes thereto.

(a) 3.   Exhibits:

3.1(1)

 

Amended and Restated Articles of Incorporation

3.2(11)

 

Certificate of Amendment to Amended and Restated Articles of Incorporation

3.3(2)

 

Certificate of Determination of Rights and Preferences of Series A Preferred Stock filed with the State of California on January 14, 2000

3.4(1)

 

Bylaws, as amended

4.1(1)

 

Specimen Common Stock Certificate

4.1(2)

 

Company Registration Rights Agreement dated January 21, 2000 between the company and Elan International Services, Ltd.

4.2(2)

 

Newco Registration Rights Agreement dated January 21, 2000 among the company Newco and Elan International Services, Ltd.

4.3(2)

 

Convertible Promissory Note dated January 21, 2000 issued by the company to Elan International Services, Ltd.

4.4(3)

 

Form of Subscription Agreement dated as of November 2, 2000

4.5(3)

 

Form of Class A Warrant dated as of November 2, 2000

4.6(3)

 

Form of Class B Warrant dated as of November 2, 2000

4.7(4)

 

Form of Subscription Agreement dated as of May 2, 2001

4.8(4)

 

Supplement to Form of Subscription Agreement dated as of May 29, 2001

4.9(4)

 

Form of Warrant dated as of June 13, 2001

4.10(6)

 

Form of Subscription Agreement dated as of March 14, 2002

4.11(6)

 

Placement Agent Warrant dated as of March 14, 2002

4.12(12)

 

Form of Warrant dated as of April 21, 2003

10.1(8)

 

1995 Stock Option Plan, as amended

10.2(1)

 

Agreement re: Settlement of Lawsuit, Conveyance of Assets and Assumption of Liabilities dated August 28, 1995 by and among Depomed Systems, Inc., Dr. John W. Shell and M6 Pharmaceuticals, Inc.

10.3(1)

 

Form of Indemnification Agreement between the company and its directors and executive officers

37




 

+10.4(2)

 

Securities Purchase Agreement dated January 21, 2000 between the company and Elan International Services, Ltd.

+10.5(2)

 

Subscription, Joint Development Operating Agreement dated January 21, 2000 among the company, Newco, Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd.

+10.6(2)

 

Company License Agreement dated January 21, 2000 among the company, Newco and Elan Corporation, plc.

10.7(5)

 

Loan agreement dated March 29, 2001 between the company and GATX Ventures, Inc.

+10.8(11)

 

Waiver and Termination Agreement dated November 8, 2002 among the company, Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd.

10.9(7)

 

License and Development Agreement, dated as of May 28, 2002, between the company and Biovail Laboratories Incorporated

+10.10(9)

 

Stock Purchase Agreement, dated as of May 28, 2002, between the company and Biovail Laboratories Incorporated

10.11(10)

 

Settlement and Release Agreement, dated as of November 22, 2002, between the company and Bristol-Myers Squibb Company

10.12(12)

 

Depomed, Inc. Securities Purchase Agreement, dated as of April 21, 2003

10.13(13)

 

Lease extension agreement dated April 30, 2003 between the company and Menlo Business Park LLC

10.14(13)

 

Lease agreement dated April 30, 2003 between the company and Menlo Park Business Park LLC

10.15(14)

 

Termination Agreement, dated as of September 16, 2003 among the company, Elan Corporation, plc, Elan Pharma International Limited, Ltd. and Depomed Development, Ltd.

10.16(14)

 

Exclusive License Agreement, dated as of September 18, 2003, between the company and Depomed Development, Ltd.

23.1

 

Consent of Ernst & Young LLP, Independent Auditors

24.1

 

Power of Attorney (See Page 40)

31.1

 

Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of John W. Fara, Ph.D.

31.2

 

Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of John F. Hamilton

32.1

 

Certification pursuant to 18 U.S.C. Section 1350 of John W. Fara, Ph.D.

32.2

 

Certification pursuant to 18 U.S.C. Section 1350 of John F. Hamilton


  (1)    Incorporated by reference to the company’s registration statement on Form SB-2 (File No. 333-25445)

  (2)    Incorporated by reference to the company’s Form 8-K filed on February 18, 2000

  (3)    Incorporated by reference to the company’s registration statement on Form S-3 (File No. 333-53486) filed on January 10, 2001

38




  (4)    Incorporated by reference to the company’s registration statement on Form S-3 (File No. 333-66688) filed on August 3, 2001

  (5)    Incorporated by reference to the company’s Form 10-Q filed on November 14, 2001

  (6)    Incorporated by reference to the company’s registration statement on Form S-3 (File No. 333-86542) filed on April 18, 2002

  (7)    Incorporated by reference to the company’s Form 8-K filed on July 10, 2002

  (8)    Incorporated by reference to the company’s registration statement on Form S-8 (File No. 333-101796) filed on December 12, 2002

  (9)    Incorporated by reference to the company’s Form 8-K/A dated May 28, 2002 and filed on December 23, 2002

(10)   Incorporated by reference to the company’s Form 8-K/A dated November 22, 2002 and filed on December 23, 2002

(11)   Incorporated by reference to the company’s Form 10-K filed on March 31, 2003

(12)   Incorporated by reference to the company’s Form 8-K filed on April 25, 2003

(13)   Incorporated by reference to the company’s Form 10-Q filed on August 14, 2003

(14)   Incorporated by reference to the company’s Form 10-Q filed on November 14, 2003

         +  Confidential treatment granted

(b)   Reports on Form 8-K:

On October 22, 2003, we filed a Form 8-K with respect to an Underwriting Agreement with Thomas Weisel Partners LLC, CIBC World Markets Corp. and Punk, Ziegel & Company, L.P. relating to a public offering of our common stock.

39



 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the issuer, a corporation organized and existing under the laws of the State of California, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Menlo Park, State of California, on the 15th day of March, 2004.

 

Depomed, Inc.

 

By

/s/ John W. Fara, Ph.D.

 

 

 

John W. Fara, Ph.D.
Chairman, President and Chief Executive Officer

 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John W. Fara and John F. Hamilton, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

 

 

 

 

 

/s/ John W. Fara, Ph.D.

 

Chairman, President and Chief Executive

 

March 15, 2004

John W. Fara, Ph.D.

 

Officer (Principal Executive Officer)

 

 

/s/ John F. Hamilton

 

Vice President, Finance and Chief

 

March 15, 2004

John F. Hamilton

 

Financial Officer (Principal Financial Officer)

 

 

/s/ G. Steven Burrill

 

Director

 

March 15, 2004

G. Steven Burrill

 

 

 

 

/s/ Michael J. Callaghan

 

Director

 

March 15, 2004

Michael J. Callaghan

 

 

 

 

/s/ John W. Shell, Ph.D.

 

Director

 

March 15, 2004

John W. Shell, Ph.D.

 

 

 

 

/s/ Peter D. Staple

 

Director

 

March 15, 2004

Peter D. Staple

 

 

 

 

/s/ Julian N. Stern

 

Director and Secretary

 

March 15, 2004

Julian N. Stern

 

 

 

 

/s/ W. Leigh Thompson, M.D., Ph.D.

 

Director

 

March 15, 2004

W. Leigh Thompson, M. D., Ph.D.

 

 

 

 

 

40



 

DEPOMED, INC.
(A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

DEPOMED, INC. CONSOLIDATED FINANCIAL STATEMENTS

Report of Ernst & Young LLP, Independent Auditors

F-2

Consolidated Balance Sheets

F-3

Consolidated Statements of Operations

F-4

Consolidated Statement of Shareholders’ Equity

F-5

Consolidated Statements of Cash Flows

F-10

Notes to Consolidated Financial Statements

F-11

 

F-1



 

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Depomed, Inc.

We have audited the accompanying consolidated balance sheets of Depomed, Inc. (a development stage company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, redeemable preferred stock and shareholders’ equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 2003 and for the period from inception (August 7, 1995) to December 31, 2003. 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 Depomed, Inc. (a development stage company) at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 and for the period from inception (August 7, 1995) to December 31, 2003, in conformity with accounting principles generally accepted in the United States.

As described in Note 2 of the consolidated financial statement, in 2003 the Company changed its method of accounting for variable interest entities. As described in Note 1 of the consolidated financial statements, the Company has restated its statement of operations for the year in the period ended December 31, 2001 and its statement of redeemable preferred stock and shareholders’ equity for each of the three years in the period ended December 31, 2001.

/s/ ERNST & YOUNG LLP

Palo Alto, California
February 20, 2004

F-2



DEPOMED, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS

 

 

December 31,

 

 

 

2003

 

2002

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

20,044,698

 

$

11,533,326

 

Marketable securities

 

24,210,562

 

8,684,647

 

Accounts receivable

 

278,452

 

301,869

 

Prepaid and other current assets

 

692,191

 

534,351

 

Total current assets

 

45,225,903

 

21,054,193

 

Property and equipment, net

 

2,140,610

 

1,833,208

 

Other assets

 

326,136

 

291,876

 

 

 

$

47,692,649

 

$

23,179,277

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,024,221

 

$

4,803,672

 

Accrued compensation

 

809,509

 

429,491

 

Accrued clinical trial expense

 

94,598

 

2,381,609

 

Other accrued liabilities

 

374,383

 

218,548

 

Capital lease obligation, current portion

 

26,384

 

14,870

 

Long-term debt, current portion

 

289,555

 

420,850

 

Other current liabilities

 

 

305,166

 

Total current liabilities

 

3,618,650

 

8,574,206

 

Capital lease obligation, non-current portion

 

12,808

 

22,653

 

Long-term debt, non-current portion

 

73,012

 

362,567

 

Promissory note from related party, non-current portion

 

9,412,025

 

8,618,717

 

Series A convertible exchangeable preferred stock, no par value; 25,000 shares designated, zero and 12,015 shares issued and outstanding at December 31, 2003 and 2002, respectively, with an aggregate liquidation preference of $15,762,829

 

 

12,015,000

 

Commitments

 

 

 

 

 

Shareholders’ equity (deficit):

 

 

 

 

 

Preferred stock, no par value; 5,000,000 shares authorized; Series A convertible preferred stock; 25,000 shares designated, 12,015 and zero shares issued and outstanding at December 31, 2003 and 2002, respectively, with an aggregate liquidation preference of $15,762,829

 

12,015,000

 

 

Common stock, no par value, 100,000,000 shares authorized; 34,569,212 and 16,460,566 shares issued and outstanding at December 31, 2003 and 2002, respectively

 

116,540,841

 

56,679,288

 

Deferred compensation

 

(863,872

)

 

Deficit accumulated during the development stage

 

(93,110,988

)

(63,095,890

)

Accumulated other comprehensive income

 

(4,827

)

2,736

 

Total shareholders’ equity (deficit)

 

34,576,154

 

(6,413,866

)

 

 

$

47,692,649

 

$

23,179,277

 

 

See accompanying notes.

F-3



 

DEPOMED, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Year Ended December 31,

 

Period From
Inception

 

 

 

2003

 

2002

 

2001
(Restated)

 

(August 7, 1995) to
December 31, 2003

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Collaborative agreements

 

$

981,990

 

$

440,659

 

$

1,547,277

 

 

$

4,793,013

 

 

Contract revenue from joint venture

 

 

1,220,527

 

2,126,049

 

 

5,101,019

 

 

Total revenue

 

981,990

 

1,661,186

 

3,673,326

 

 

9,894,032

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

26,900,214

 

24,714,134

 

15,461,113

 

 

81,742,303

 

 

General and administrative

 

3,480,231

 

5,374,490

 

2,533,640

 

 

18,761,495

 

 

Purchase of in-process research and development

 

 

 

 

 

298,154

 

 

Total operating expenses

 

30,380,445

 

30,088,624

 

17,994,753

 

 

100,801,952

 

 

Loss from operations

 

(29,398,455

)

(28,427,438

)

(14,321,427

)

 

(90,907,920

)

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

Equity in loss of joint venture (restated)

 

(5,359

)

(2,435,667

)

(3,173,409

)

 

(19,817,062

)

 

Gain from Bristol-Myers legal
settlement

 

 

18,000,000

 

 

 

18,000,000

 

 

Interest and other income

 

299,140

 

101,106

 

231,146

 

 

1,905,763

 

 

Interest expense

 

(910,424

)

(732,566

)

(336,349

)

 

(2,291,769

)

 

Total other income (expenses) (restated)

 

(616,643

)

14,932,873

 

(3,278,612

)

 

(2,203,068

)

 

Net loss (restated)

 

$

(30,015,098

)

$

(13,494,565

)

$

(17,600,039

)

 

$

(93,110,988

)

 

Basic and diluted net loss per share (restated)

 

$

(1.23

)

$

(0.92

)

$

(1.72

)

 

 

 

 

Shares used in computing basic and diluted net loss per common share

 

24,458,259

 

14,642,745

 

10,220,223

 

 

 

 

 

 

See accompanying notes.

F-4



DEPOMED, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS’ EQUITY (NET CAPITAL DEFICIENCY)
Period from inception (August 7, 1995) to December 31, 2003
(Restated)

 

 

Convertible
Exchangeable
Preferred Stock

 

Preferred Stock

 

Common Stock

 

Deferred
Stock-Based

 

Deficit
Accumulated
During
Development

 

Accumulated
Other
Comp-
rehensive
Income

 

Shareholders’
Equity
(Net
Capital

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Compensation

 

Stage

 

(Loss)

 

Deficiency)

 

Balances at inception (Aug. 7, 1995)

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

$

 

 

Issuance of common stock to founders on Aug. 7, 1995 in exchange for shares held by them in M6 Pharmaceuticals

 

 

 

 

 

 

 

2,066,666

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash to investors at approx. $0.0009 per share on Nov. 15, 1995

 

 

 

 

 

 

 

1,196,491

 

1,000

 

 

 

 

 

 

 

 

 

1,000

 

 

Issuance of Series A convertible preferred stock for cash to investors at approx. $0.31 per share on Nov. 15, 1995, net of issuance costs of $67,241

 

 

 

 

 

2,447,368

 

682,759

 

 

 

 

 

 

 

 

 

 

 

682,759

 

 

Comprehensive loss and net loss

 

 

 

 

 

 

 

 

 

 

 

 

(600,668

)

 

 

 

 

(600,668

)

 

Balances at Dec. 31, 1995

 

 

 

2,447,368

 

682,759

 

3,263,157

 

1,000

 

 

 

 

(600,668

)

 

 

 

 

83,091

 

 

Issuance of common stock for cash at various dates at $0.09 per share to employees and pursuant to stock option agreements

 

 

 

 

 

 

 

91,666

 

8,250

 

 

 

 

 

 

 

 

 

8,250

 

 

Deferred stock-based compensation related to grants of certain stock options

 

 

 

 

 

 

 

 

275,000

 

 

(275,000

)

 

 

 

 

 

 

 

 

Comprehensive loss and net loss

 

 

 

 

 

 

 

 

 

 

 

 

(472,773

)

 

 

 

 

(472,773

)

 

Balances at Dec. 31, 1996

 

 

 

2,447,368

 

682,759

 

3,354,823

 

284,250

 

 

(275,000

)

 

(1,073,441

)

 

 

 

 

(381,432

)

 

Issuance of Series B convertible preferred stock for cash at $1.00 per share

 

 

 

 

 

278,500

 

278,500

 

 

 

 

 

 

 

 

 

 

 

278,500

 

 

Conversion of preferred stock to common stock on Nov. 5, 1997 at a ratio of one share of common for three shares of preferred

 

 

 

 

 

(2,725,868

)

(961,259

)

908,615

 

961,259

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants for $6.10 per unit on Nov. 5, 1997 in connection with the initial public offering, net of issuance costs of $1,963,889

 

 

 

 

 

 

 

1,200,000

 

5,356,111

 

 

 

 

 

 

 

 

 

5,356,111

 

 

Deferred stock-based compensation related to grants of certain stock options

 

 

 

 

 

 

 

 

242,050

 

 

(242,050

)

 

 

 

 

 

 

 

 

Amortization of deferred stock-based compensation

 

 

 

 

 

 

 

 

 

 

116,336

 

 

 

 

 

 

 

116,336

 

 

Comprehensive loss and net loss

 

 

 

 

 

 

 

 

 

 

 

 

(1,236,452

)

 

 

 

 

(1,236,452

)

 

Balances at Dec. 31, 1997

 

 

 

 

 

5,463,438

 

6,843,670

 

 

(400,714

)

 

(2,309,893

)

 

 

 

 

4,133,063

 

 

Issuance of common stock to investors for $8.00 per share on Feb. 23, 1998, net of issuance costs of $507,846

 

 

 

 

 

 

 

1,000,000

 

7,492,154

 

 

 

 

 

 

 

 

 

7,492,154

 

 

Deferred stock-based compensation related to grants of certain stock options

 

 

 

 

 

 

 

 

430,200

 

 

(430,200

)

 

 

 

 

 

 

 

 

Amortization of deferred stock-based compensation

 

 

 

 

 

 

 

 

 

 

320,582

 

 

 

 

 

 

 

320,582

 

 

F-5

 




DEPOMED, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS’ EQUITY (NET CAPITAL DEFICIENCY)
Period from inception (August 7, 1995) to December 31, 2003 (Continued)
(Restated)

 

Issuance of common stock options to a consultant for services with an exercise price of $11.25 per share on Jun. 18, 1998

 

 

 

 

 

 

 

 

26,050

 

 

 

 

 

 

 

 

 

26,050

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,779,723

)

 

 

 

 

(2,779,723

)

 

Unrealized gains on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,887

 

 

 

13,887

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,765,836

)

 

Balances at Dec. 31, 1998

 

 

 

 

 

6,463,438

 

14,792,074

 

 

(510,332

)

 

(5,089,616

)

 

13,887

 

 

 

9,206,013

 

 

Issuance of common stock for cash on Feb. 16, 1999 for $3.00 per share to a consultant pursuant to a stock option agreement

 

 

 

 

 

 

 

1,666

 

4,998

 

 

 

 

 

 

 

 

 

4,998

 

 

Net exercise of common stock warrants at $7.63 per share in Jan. and Apr. 1999

 

 

 

 

 

 

 

9,973

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred stock-based compensation

 

 

 

 

 

 

 

 

 

 

228,148

 

 

 

 

 

 

 

228,148

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, restated

 

 

 

 

 

 

 

 

 

 

 

 

(5,193,800

)

 

 

 

 

(5,193,800

)

 

Unrealized losses on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,879

)

 

 

(26,879

)

 

Comprehensive loss, restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,220,679

)

 

Balances at Dec. 31, 1999, as restated

 

 

 

 

 

6,475,077

 

14,797,072

 

 

(282,184

)

 

(10,283,416

)

 

(12,992

)

 

 

4,218,480

 

 

Issuance of Series A convertible exchangeable preferred stock to Elan Corp. on Jan. 21, 2000 for $1,000 per share net proceeds, restated

 

12,015

 

12,015,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to Elan Corp. for $7.00 per share on Jan. 21, 2000, net of issuance costs of $84,817, restated

 

 

 

 

 

 

 

714,286

 

4,915,183

 

 

 

 

 

 

 

 

 

4,915,183

 

 

Issuance of common stock options to consultants for services with various exercise prices from $3.31 to $4.75 per share on various dates from Feb. 4 to
Dec. 8, 2000

 

 

 

 

 

 

 

 

117,692

 

 

 

 

 

 

 

 

 

117,692

 

 

Common stock and warrants issued to investors for $100,000 per unit on Nov. 15, 2000, net of issuance costs of $237,668

 

 

 

 

 

 

 

1,428,550

 

4,762,332

 

 

 

 

 

 

 

 

 

4,762,332

 

 

Revaluation of common stock option issued to a consultant on Dec. 9, 1999

 

 

 

 

 

 

 

 

8,288

 

 

 

 

 

 

 

 

 

8,288

 

 

Amortization of deferred stock-based compensation

 

 

 

 

 

 

 

 

 

 

257,440

 

 

 

 

 

 

 

257,440

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, restated

 

 

 

 

 

 

 

 

 

 

 

 

(21,717,870

)

 

 

 

 

(21,717,870

)

 

Unrealized gains on available- for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,620

 

 

 

9,620

 

 

Comprehensive loss, restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,708,250

)

 

F-6

 




DEPOMED, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS’ EQUITY (NET CAPITAL DEFICIENCY)
Period from inception (August 7, 1995) to December 31, 2003 (Continued)
(Restated)

 

Balances at Dec. 31, 2000, as restated

 

12,015

 

12,015,000

 

 

 

8,617,913

 

24,600,567

 

 

(24,744

)

 

(32,001,286

)

 

(3,372

)

 

 

(7,428,835

)

 

Issuance of warrants in connection with a credit facility with an exercise price of $3.98 per share on Mar. 29, 2001

 

 

 

 

 

 

 

 

112,400

 

 

 

 

 

 

 

 

 

112,400

 

 

Common stock and warrants issued to investors for $8.43 per unit on Jun. 13, 2001, net of issuance costs of $953,715

 

 

 

 

 

 

 

2,908,922

 

11,328,401

 

 

 

 

 

 

 

 

 

11,328,401

 

 

Issuance of common stock options to consultants for services with various exercise prices from $3.40 to $5.80 per share on various dates from Apr. 6 to
Dec. 17, 2001

 

 

 

 

 

 

 

 

57,757

 

 

 

 

 

 

 

 

 

57,757

 

 

Issuance of common stock for $3.00 per share on Nov. 16, 2001 to a consultant pursuant to a stock option agreement