e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number:
001-33609
SUCAMPO PHARMACEUTICALS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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13-3929237
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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4520 East-West Highway, Suite 300
Bethesda, MD 20814
(Address of principal
executive offices,
including zip code)
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(301) 961-3400
(Registrants telephone
number,
including area code)
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Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A common stock, par value $0.01
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Exchange Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated
Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer þ
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Smaller Reporting
Company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
There was no active trading market for the registrants
common equity as of June 30, 2007. As of August 2,
2007 (the date that the registrants class A common
stock, par value $0.01 per share, began trading on the NASDAQ
Global Market), the aggregate market value of the voting and
non-voting common equity of the registrant held by
non-affiliates was approximately $190.0 million, based on
the closing price of the registrants class A common
stock reported on the NASDAQ Global Market on such date of
$12.20 per share.
As of March 20, 2008, there were outstanding
15,542,768 shares of the registrants class A
common stock, par value $0.01 per share, and 26,191,050 of the
registrants class B common stock, par value $0.01 per
share.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants Proxy Statement for its 2008
Annual Meeting of Stockholders to be held on June 5, 2008,
which Proxy Statement is to be filed within 120 days after
the end of the registrants fiscal year ended
December 31, 2007, are incorporated by reference in
Part III of this Annual Report on
Form 10-K.
Sucampo
Pharmaceuticals, Inc.
Form 10-K
Table of
Contents
2
PART I
This Annual Report on
Form 10-K,
including the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding
us and our business, financial condition, results of operations
and prospects within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be
identified by the words project,
believe, anticipate, plan,
expect, estimate, intend,
should, would, could,
will, may or other similar expressions.
In addition, any statements that refer to projections of our
future financial performance, our anticipated growth and trends
in our business, and other characterizations of future events or
circumstances are forward-looking statements. We cannot
guarantee that we will achieve the plans, intentions or
expectations expressed or implied in our forward-looking
statements. There are a number of important factors that could
cause actual results, levels of activity, performance or events
to differ materially from those expressed or implied in the
forward-looking statements we make. These important factors are
described under Risk Factors set forth below. In
addition, any forward-looking statements we make in this
document speak only as of the date of this document, and we do
not intend to update any such forward-looking statements to
reflect events or circumstances that occur after that date.
Overview
We are a specialty biopharmaceutical company focused on the
discovery, development and commercialization of proprietary
drugs based on prostones, a class of compounds derived from
functional fatty acids that occur naturally in the human body.
The therapeutic potential of prostones was first identified by
one of our founders, Dr. Ryuji Ueno. We believe that most
prostones function as activators of cellular ion channels and,
as a result, may be effective at promoting fluid secretion and
enhancing cell protection, which may give them wide-ranging
therapeutic potential, particularly for age-related diseases. We
are focused on developing prostones with novel mechanisms of
action for the treatment of gastrointestinal, respiratory,
vascular and central nervous system diseases and disorders for
which there are unmet or underserved medical needs and
significant commercial potential.
In January 2006, we received marketing approval from the
U.S. Food and Drug Administration, or FDA, for our first
product, AMITIZA
®
(lubiprostone), for the treatment of chronic idiopathic
constipation in adults of all ages. AMITIZA is the only
prescription product for the treatment of chronic idiopathic
constipation that has been approved by the FDA for use by adults
of all ages, including those over 65 years of age, and that
has demonstrated effectiveness for use beyond 12 weeks.
Constipation becomes chronic when a patient suffers specified
symptoms for more than 12 non-consecutive weeks within a
12-month
period and is idiopathic if it is not caused by other diseases
or by use of medications. Studies published in The American
Journal of Gastroenterology estimate that approximately
42 million people in the United States suffer from
constipation. Based on these studies, we estimate that
approximately 12 million people can be characterized as
suffering from chronic idiopathic constipation. In an additional
study published in The American Journal of
Gastroenterology, 91% of physicians expressed a desire for
better treatment options for constipation.
AMITIZA increases fluid secretion into the intestinal tract by
activating specific chloride channels in cells lining the small
intestine. This increased fluid level softens the stool,
facilitating intestinal motility and bowel movements. In
addition, AMITIZA improves symptoms associated with chronic
idiopathic constipation, including straining, hard stools,
bloating and abdominal pain or discomfort.
We are party to a collaboration and license agreement with
Takeda Pharmaceutical Company Limited, or Takeda, to jointly
develop and commercialize AMITIZA for chronic idiopathic
constipation, irritable bowel syndrome with constipation,
opioid-induced bowel dysfunction and other gastrointestinal
indications in the United States and Canada. We have the right
to co-promote AMITIZA along with Takeda in these markets. We and
Takeda initiated commercial sales of AMITIZA in the United
States for the treatment of chronic idiopathic constipation in
April 2006. Takeda is marketing AMITIZA broadly to office-based
specialty physicians and primary care physicians. We are
complementing Takedas marketing efforts by promoting
AMITIZA through a specialty sales force in the institutional
marketplace, including specialist physicians based in academic
medical centers and long-term care facilities. This
institutional market is characterized by a concentration of
elderly patients, who we believe
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will be a key market for AMITIZA to treat gastrointestinal
indications, and by physicians who are key opinion leaders in
the gastrointestinal field. We have performed all of the
development activities with respect to AMITIZA and Takeda has
funded a portion of the cost for these activities. We have
retained the rights to develop and commercialize AMITIZA outside
the United States and Canada and to develop and commercialize it
in the United States and Canada for indications other than
gastrointestinal indications.
We also plan to pursue marketing approval for AMITIZA for
additional constipation-related gastrointestinal indications
with large, underserved markets. We recently completed two
pivotal Phase III clinical trials and a long-term safety
trial of AMITIZA for the treatment of irritable bowel syndrome
with constipation. In these trials, AMITIZA improved overall
relief from symptoms associated with irritable bowel syndrome
with constipation with statistical significance and was well
tolerated. Based upon the results of these trials, we submitted
a supplement to our existing new drug application, or NDA, for
AMITIZA to the FDA in June 2007 seeking marketing approval for
AMITIZA for the treatment of this indication. Under the
Prescription Drug User Fee Act of 1992, or PDUFA, we expect the
FDA to announce a decision regarding our application, or a PDUFA
action, on or about April 29, 2008. According to the
American College of Gastroenterology, irritable bowel syndrome
affects approximately 58 million people in the United
States, with irritable bowel syndrome with constipation
accounting for approximately one-third of these cases. In
addition, we commenced Phase III pivotal clinical trials of
AMITIZA for the treatment of opioid-induced bowel dysfunction in
September 2007.
We also plan to pursue marketing approval for AMITIZA in Europe
and the Asia-Pacific region for appropriate gastrointestinal
indications based on local market disease definitions and the
reimbursement environment. In February 2008, we submitted a
marketing authorization application, or MAA, for lubiprostone,
24 micrograms, for the indication of chronic idiopathic
constipation in adults in the United Kingdom. The MAA has been
filed using the decentralized procedure with the United Kingdom,
through its Medicines and Healthcare Products Regulatory Agency,
serving as the reference member state, with additional
applications subsequently filed with the member states of
Belgium, Denmark, France, Germany, Ireland, the Netherlands,
Spain and Sweden.
In November 2007, we initiated a multi-center Phase IIb
dose-ranging study in Japan to evaluate the safety and efficacy
of lubiprostone for treating chronic idiopathic constipation in
adults.
In addition, we are developing other prostone compounds for the
treatment of a broad range of diseases. The most advanced of
these programs are:
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Cobiprostone (formerly SPI-8811) for the treatment of ulcers
induced by non-steroidal anti-inflammatory drugs, or NSAIDs,
portal hypertension, non-alcoholic fatty liver disease,
disorders associated with cystic fibrosis and chronic
obstructive pulmonary disease. We have completed Phase I
clinical trials of cobiprostone in healthy volunteers and
commenced a Phase II clinical trial of this product
candidate for the treatment of NSAID-induced ulcers in the third
quarter of 2007. We also submitted an investigation new drug
application, or IND, to the FDA in December 2007 for a
Phase II
proof-of-concept
study of cobiprostone in patients with portal hypertension.
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SPI-017 for the treatment of peripheral arterial and vascular
disease and central nervous system disorders. Initially, we are
working on the development of an intravenous formulation of
SPI-017 for the treatment of peripheral arterial disease. We
also are developing an oral formulation of SPI-017 for the
treatment of Alzheimers disease. We plan to commence Phase
I clinical trials of the intravenous formulation of SPI-017 in
2008 and Phase I clinical trials of the oral formulation in 2009.
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We hold an exclusive worldwide royalty-bearing license from
Sucampo AG, a Swiss patent-holding company, to develop and
commercialize AMITIZA and other prostone compounds covered by
patents and patent applications held by Sucampo AG. We are
obligated to assign to Sucampo AG all patentable improvements
that we make in the field of prostones, which Sucampo AG will in
turn license back to us on an exclusive basis. AMITIZA,
cobiprostone and SPI-017 are covered by perpetual licenses that
cannot be terminated unless we default in our payment
obligations to Sucampo AG. If we have not committed specified
development efforts to any prostone compound other than AMITIZA,
cobiprostone and SPI-017 by the end of a specified period, which
ends on the later of June 30, 2011 or the date upon which
Drs. Ryuji Ueno and Sachiko Kuno, our founders and
controlling stockholders, no longer control our company, then
the commercial rights to that compound will revert to Sucampo
AG, subject to a
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15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
For this purpose, Drs. Ueno and Kuno will be deemed to
control our company as long as either they together own a
majority of the voting power of our stock or at least one of
them is a member of our board of directors.
We are party to exclusive supply arrangements with R-Tech Ueno,
Ltd., or R-Tech, a Japanese pharmaceutical manufacturer, to
provide us with clinical and commercial supplies of AMITIZA and
clinical supplies of our product candidates cobiprostone and
SPI-017. These arrangements include provisions requiring R-Tech
to assist us in connection with applications for marketing
approval for these compounds in the United States and elsewhere,
including assistance with regulatory compliance for chemistry,
manufacturing and controls.
In August 2007, we completed our initial public offering of
3,125,000 shares of class A common stock at a public
offering price of $11.50 per share, resulting in gross proceeds
of approximately $35.9 million. After deducting
underwriters discounts and commissions and expenses of the
offering, we raised net proceeds of $28.2 million. An
additional 625,000 shares of class A common stock were
sold by a selling stockholder and 562,500 shares were sold
under an overallotment option by S&R Technology Holdings,
LLC, or S&R, which is wholly-owned by our founders,
Drs. Ueno and Kuno. We did not receive any proceeds from
the sale of the shares by the selling stockholder or S&R.
Our two founders, Drs. Ueno and Kuno, together, directly or
indirectly, own all of the stock of Sucampo AG and a majority of
the stock of R-Tech. Drs. Ueno and Kuno also are
controlling stockholders of our company and are married to each
other. Dr. Ueno is our chief executive officer and the
chairman of our board of directors and Dr. Kuno was, until
June 2007, also an executive officer and director of our
company. Dr. Kuno currently serves as our advisor of
international business development.
Product
Pipeline
The table below summarizes the development status of AMITIZA and
our key product candidates. We currently hold all of the
commercialization rights to the prostone compounds in our
product pipeline, other than for commercialization of AMITIZA in
the United States and Canada, which is covered by our
collaboration and license agreement with Takeda.
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Product/
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Product Candidate
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Target Indication
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Development Phase
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Next Milestone
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AMITIZA
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Chronic idiopathic constipation (adult)
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Marketed in the U.S.
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Marketing Authorization Application submitted in nine European
countries
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Regulatory action by the European countries
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Phase IIb dose-ranging study in Japan ongoing
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Phase III program in Japan
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Chronic idiopathic constipation (pediatric, patients with renal
impairment and patients with hepatic impairment)
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Phase IV pediatric, renal impairment and hepatic impairment
trials ongoing
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Irritable bowel syndrome with constipation
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Supplemental NDA filed
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FDA action on the supplemental NDA (PDUFA action expected in
late April 2008)
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Opioid-induced bowel dysfunction
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Phase III pivotal trials ongoing
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Filing of NDA or supplemental NDA with FDA
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Product/
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Product Candidate
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Target Indication
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Development Phase
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Next Milestone
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Cobiprostone
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Gastrointestinal
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Non-steroidal anti-inflammatory drug (NSAID) induced ulcers
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Phase II trial ongoing
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Phase II dose-ranging trial planned to commence in 2009
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Cystic fibrosis - gastrointestinal disorders (oral formulation)
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Phase II trial completed
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Phase II dose-ranging trial planned to commence in 2009
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Liver
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Portal hypertension
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Phase II proof-of-concept study ongoing
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Phase II dose-ranging trial planned to commence in 2009
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Non-alcoholic fatty liver disease
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Phase II trial completed
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Pending availability of new diagnostic tool
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Pulmonary
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Cystic fibrosis - respiratory symptoms (inhaled formulation)
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Preclinical
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Finalize inhaled formulation
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Chronic obstructive pulmonary disease
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Preclinical
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Finalize inhaled formulation
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SPI-017
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Peripheral arterial and vascular disease
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Preclinical
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Phase I trials of intravenous formulation planned to commence in
2008*
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Stroke
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Preclinical
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Phase I trials of intravenous formulation planned to commence in
2008*
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Alzheimers disease
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Preclinical
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Phase I trials of oral formulation planned to commence in 2009*
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Results from Phase I trials of both intravenous and oral
formulations may be useful in development of any of these
indications. |
Additionally, we have recently initiated pharmacologic studies
on six additional preclinical prostone compounds, including two
combination candidates, as we focus on development and
commercialization of therapies for age-related diseases.
Scientific
Background of Prostones
Prostones are a class of compounds derived from functional fatty
acids that occur naturally in the human body. The therapeutic
potential of prostones was first identified by Dr. Ueno.
Fatty acids serve as fuel for energy production in cells in many
organisms and are intermediates in the synthesis of other
important chemical compounds. To date, two prostone products
have received marketing approval: AMITIZA for the treatment of
chronic idiopathic constipation and
RESCULA®
(unoprostone isopropyl) for the treatment of glaucoma. RESCULA,
which was developed by R-Tech under the leadership of
Drs. Ueno and Kuno, was the first commercially available
prostone drug. RESCULA was first sold in Japan beginning in 1994
and is currently marketed in more than 40 countries worldwide.
Although we do not hold any rights to RESCULA, we believe that
the successful development of AMITIZA and RESCULA demonstrates
the initial therapeutic potential of prostones.
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Ion
Channel Activation
Based on our preclinical and clinical studies, we believe that
most prostones work as selective ion channel activators, which
means that they promote the movement of specific ions into or
out of cells. Ions are charged particles, such as sodium,
potassium, calcium and chloride. The concentration of specific
ions within particular types of cells is important to many vital
physiological functions in the human body. Because ions cannot
move freely across cell membranes, they must enter or exit a
cell through protein structures known as ion channels. Ion
channels, which are found in every cell in the body, span the
cell membrane and regulate the flow of ions into and out of
cells by opening and closing in response to particular stimuli.
Each kind of ion moves through its own specific ion channel.
Some molecular compounds, including some prostones, have been
shown to activate or inhibit ion channels, thereby controlling
the concentration of specific ions within cells. We believe that
these prostones work selectively on specific ion channels and,
as a result, can be targeted to induce very specific
pharmacological activities without triggering other cellular
activity that could lead to undesirable side effects.
In preclinical in vitro tests on human cell lines
with the three prostones that we are currently developing,
AMITIZA, cobiprostone and SPI-017, all three compounds
selectively activated a specific ion channel known as the type-2
chloride channel, or ClC-2 channel. The ClC-2 channel is
expressed in cells throughout the body and is one of the
channels through which chloride ions move into and out of cells.
Chloride channels regulate many essential physiological
functions within cells, including cell volume, intracellular pH,
cellular water and ion balance and regulation of cellular
voltage and energy levels. We believe that AMITIZA is the first
selective chloride channel activator approved by the FDA for
therapeutic use in humans.
Potential
Beneficial Effects of Prostones
We believe that the method of action of prostones that serve as
selective ion channel activators may result in the following
beneficial effects:
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Enhancement of Fluid Secretion. Activating the
movement of specific ions into and out of cells can promote the
secretion of fluid into neighboring areas. For example, AMITIZA
promotes fluid secretion into the small intestine by activating
the ClC-2 channel in the cells lining the small intestine.
Likewise, RESCULA is a potassium channel activator that works to
treat glaucoma by increasing aqueous humor outflow in ocular
cells in the eyes.
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Recovery of Barrier Function. Disruption of
the barrier function in human cells can trigger cell damage by
increasing the permeability of cells and tissue, thereby
diminishing the bodys first line of defense. Recently,
protein complexes occurring between cells known as tight
junctions have been found to play a critical role in the
regulation of barrier function in the body. The ClC-2 channel
plays an important role in the restoration of these tight
junction complexes and in the recovery of barrier function in
the body. In preclinical studies, AMITIZA appeared to accelerate
the recovery of the disrupted barrier function through the
restoration of the tight junction structure. We believe that
this may be a result of AMITIZAs specific effects on the
ClC-2 channel. We believe that other prostones that act as ClC-2
channel activators may have a similar barrier recovery function.
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Localized Activity. Because most prostones act
through contact with cells, their pharmacological activity is
localized in those areas where the compound is physically
present in its active form. Because some prostones metabolize
relatively quickly to an inactive form, we believe their
pharmacological effects are not spread to other parts of the
body. These properties allow some prostones to be targeted to
specific types of cells in specific organs through different
routes of administration. For example, when AMITIZA is taken
orally, it arrives in the small intestine and liver while it is
still active and begins to act on the cells lining those organs.
By the time it is passed through to the large intestine, it
appears to have been largely metabolized and is no longer
active. Similarly, we believe that inhaled formulations of some
prostones would act principally in the lungs and that
intravenous formulations would act principally in the vascular
system, in each case without having systemic effects.
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7
Our
Strategy
Our goal is to become a leading specialty biopharmaceutical
company focused on discovering, developing and commercializing
proprietary drugs based on prostones to treat diseases and
disorders for which there are unmet or underserved medical needs
and significant commercial potential. Our strategy to achieve
this objective includes the following key elements:
Focus on commercial sales of AMITIZA in the United States for
the treatment of chronic idiopathic constipation in
adults. We initiated commercial sales of AMITIZA
in the United States for the treatment of chronic idiopathic
constipation in collaboration with Takeda in April 2006. Takeda
is marketing AMITIZA broadly to office-based specialty
physicians and primary care physicians. Pursuant to the terms of
our collaboration and license agreement with Takeda, Takeda is
obligated to provide a dedicated sales force of at least
200 people to promote AMITIZA and a supplemental sales
force of at least 500 people to promote AMITIZA together
with one other drug product, although Takeda has advised us that
their total sales force promoting AMITIZA consists of
approximately 950 people. We are complementing
Takedas marketing efforts by promoting AMITIZA in the
institutional marketplace through a specialty sales force
consisting of 38 field sales representatives. This institutional
market is characterized by a concentration of elderly patients,
who we believe will be a key market for AMITIZA to treat
gastrointestinal indications, and by physicians who are key
opinion leaders in the gastrointestinal field. In connection
with the commercial launch of AMITIZA, we have recruited
experienced internal sales and marketing leadership and
developed a marketing strategy and promotional materials for the
commercialization of AMITIZA in our targeted institutional
market.
Develop AMITIZA for the treatment of additional indications
and discover, develop and commercialize other prostone product
candidates. We are concentrating our development
efforts on expanding the approved indications for AMITIZA and
developing our product candidates cobiprostone and SPI-017. We
hold an exclusive worldwide royalty-bearing license from Sucampo
AG to develop and commercialize each of these prostone
compounds. In the future, we also expect to develop other
proprietary prostones. We believe that our focus on prostones
may offer several potential advantages, including:
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Novel mechanisms of action. We believe that
AMITIZA, cobiprostone and SPI-017 have, and that additional
product candidates that we may develop in the future based on
prostones may have, novel mechanisms of action, such as
selective ClC-2 chloride channel activation, that offer
physicians a new approach to treat targeted indications.
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Wide-ranging therapeutic potential of
prostones. We believe that many prostones promote
fluid secretion, enhance cell barrier protection and can be
developed to target particular organs or systems of the body. As
a result, we believe that we will be able to develop prostone
drugs to treat multiple diseases and disorders of the
gastrointestinal, respiratory, vascular and central nervous
systems.
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Our discovery and development experience with
prostones. We expect that our considerable
experience with AMITIZA, as well as the knowledge gained by
Drs. Ueno and Kuno in the development of RESCULA, will
facilitate our discovery and clinical development of additional
prostone compounds.
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Patent protection. AMITIZA, cobiprostone and
SPI-017 each are covered by
composition-of-matter,
method of use and other issued patents or patent applications in
the United States, Europe and Japan.
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Target large and underserved markets, with a particular focus
on treating indications in the elderly
population. We believe that drugs based on
prostones may be able to address a variety of large markets
characterized either by treatments with limited effectiveness
or, in some cases, no treatment. In addition to AMITIZA for the
treatment of chronic idiopathic constipation in adults, the
indication for which it has been approved by the FDA, we are
targeting:
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AMITIZA for the treatment of chronic idiopathic constipation in
pediatric patients and for the treatment of irritable bowel
syndrome with constipation and opioid-induced bowel dysfunction;
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Cobiprostone for the treatment of NSAID-induced ulcers, portal
hypertension, non-alcoholic fatty liver disease, disorders
associated with cystic fibrosis and chronic obstructive
pulmonary disease; and
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SPI-017 for the treatment of peripheral arterial disease, stroke
and Alzheimers disease.
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Seek marketing approval for AMITIZA and our other product
candidates outside the United States. We plan to
pursue marketing approval for AMITIZA and our other product
candidates in markets outside the United States, including
Europe, the Asia Pacific region and Latin America. To the extent
possible, we intend to use the data from our U.S. clinical
trials and the experience gained from the U.S. approval
process to expedite the approval process in other countries. If
we receive marketing approval for our products outside the
United States, we plan to retain co-commercialization rights and
work with third-party pharmaceutical companies with marketing,
sales and distribution capabilities in the relevant regions to
commercialize these products. In February 2008, we filed a MAA
for lubiprostone, 24 micrograms, for the indication of chronic
idiopathic constipation in adults in the United Kingdom. This
application was filed using the decentralized procedure, with
the United Kingdom, through its Medicines and Healthcare
Products Regulatory Agency, serving as the reference member
state, with additional applications subsequently filed with the
member states of Belgium, Denmark, France, Germany, Ireland, the
Netherlands, Spain and Sweden.
Focus on our core discovery and clinical development and
commercialization activities. Our business model
is to devote our resources and efforts to discovering,
developing and commercializing product candidates based on
prostones, while outsourcing other, non-core business functions
to third parties. Following this approach, we selectively
collaborate with a number of third parties to assist us with
these non-core business functions. These collaborators include:
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Our affiliate R-Tech, which manufacturers commercial and
clinical supplies of AMITIZA and other prostone compounds for us;
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Takeda, with whom we are collaborating to market AMITIZA for the
treatment of chronic idiopathic constipation in adults and other
gastrointestinal indications in the United States and
Canada; and
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Contract research organizations, which we engage to perform
preclinical and clinical trials of our product candidates.
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We believe that applying our resources in this way allows us to
concentrate on our core strengths while benefiting from the
specialized expertise of our third-party collaborators. In
addition, we may decide to outsource clinical development
activities for some of the compounds and indications in our
product pipeline if we determine it would be more cost-effective
to do so. For example, we may conclude that it is more
economical to license cobiprostone for pulmonary indications,
such as respiratory symptoms of cystic fibrosis and chronic
obstructive pulmonary disease, to a third party who would
conduct the necessary clinical development activities in support
of those indications.
Grow through strategic acquisitions and in-licensing
opportunities. We intend to pursue strategic
acquisitions and in-licensing opportunities to complement our
existing product pipeline. We have a specialty sales and
marketing function focused on the institutional market and we
have significant experience in pharmaceutical research and
product development, including clinical trials and regulatory
affairs. We believe that the institutional focus of our
specialty sales force would facilitate our ability to sell
additional products targeted at a variety of indications in
several therapeutic fields that are concentrated in the
institutional setting. This institutional market is
characterized by a concentration of elderly patients. We believe
that these capabilities will help us to identify attractive
acquisition, in-licensing and co-promotion opportunities to
build upon our core clinical development and commercialization
capabilities.
Products
and Product Candidates
AMITIZA®
(lubiprostone)
Overview
We are developing AMITIZA for the treatment of multiple
constipation-related gastrointestinal disorders. AMITIZA
functions as a selective activator of the ClC-2 chloride channel
through which negatively charged chloride ions flow out of the
cells lining the small intestine and into the intestinal cavity.
As these negatively charged chloride ions enter the intestine,
positively charged sodium ions move through spaces between the
cells into the
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intestine to balance the negative charge of the chloride ions.
As these sodium ions move into the intestine, water is also
allowed to pass into the intestine through these spaces between
the cells. We believe that this movement of water into the small
intestine promotes increased fluid content, which in turn
softens the stool and facilitates its movement, or motility,
through the intestine.
Chronic
Idiopathic Constipation
On January 31, 2006, after a
10-month
review, the FDA approved our NDA for AMITIZA for the treatment
of chronic idiopathic constipation in adults of both genders and
all ages, including those over 65 years of age, without
restriction as to duration of use. In collaboration with Takeda,
we initiated commercial sales of AMITIZA in the United States
for the treatment of chronic idiopathic constipation in April
2006. When used for this indication, AMITIZA gelatin capsules
are taken orally twice daily in doses of 24 micrograms each.
Disease Overview. Constipation is
characterized by infrequent and difficult passage of stool and
becomes chronic when a patient suffers specified symptoms for
over 12 non-consecutive weeks within a
12-month
period. Chronic constipation is idiopathic if it is not caused
by other diseases or by use of medications. Symptoms of chronic
idiopathic constipation include straining, hard stools, bloating
and abdominal pain or discomfort. Factors contributing to the
development of chronic idiopathic constipation include a diet
low in soluble and insoluble fiber, inadequate exercise, bowel
disorders and poor abdominal pressure and muscular weakness.
Current Treatment. Some patients suffering
from chronic idiopathic constipation can be successfully treated
with lifestyle modification, dietary changes and increased fluid
and fiber intake, and these treatments are generally tried
first. For patients who fail to respond to these approaches,
physicians typically recommend laxatives, most of which are
available
over-the-counter.
The most commonly used laxatives can be categorized as
stimulants, stool softeners, bulk-forming agents, osmotics or
lubricants. Though somewhat effective in treating chronic
idiopathic constipation, stimulants and stool softeners can be
habit forming, while bulk-forming agents are often ineffective
in patients with
moderate-to-severe
constipation. Osmotics, such as
MiraLaxtm
(polyethylene glycol 3350) and lactulose are labeled for
use only for treating occasional constipation, not chronic
idiopathic constipation, and they may cause fluid and
electrolyte imbalance, which, if left untreated, can impair
normal function of the nerves and muscles. MiraLax was recently
approved for sale as an
over-the-counter
treatment. In addition, lubricants, such as orally administered
mineral oil, can be inconvenient and unpleasant for patients to
ingest. For those patients who fail to respond to laxatives,
Zelnorm®
(tegaserod maleate), a partial serotonin-receptor agonist, was
often prescribed. In March 2007, at the request of the FDA,
Zelnorm was withdrawn from the U.S. market by Novartis
Pharmaceuticals Corporation, or Novartis. The FDA requested that
Novartis discontinue marketing Zelnorm based on an identified
finding of an increased risk of serious cardiovascular adverse
events associated with use of the drug. Following a public
advisory committee meeting, the FDA announced in July 2007 that
it is permitting the restricted use of Zelnorm under a treatment
IND protocol for patients whose physicians determine the drug is
medically necessary. Even before its withdrawal, however,
Zelnorm was not approved for administration to patients over
65 years of age and has been linked with incidents of
ischemic colitis, a life-threatening inflammation of the large
intestine caused by restricted blood flow, and other forms of
intestinal ischemia. In addition, the effectiveness of Zelnorm
for the treatment of chronic idiopathic constipation has not
been studied beyond 12 weeks.
Market Opportunity. Studies published in
The American Journal of Gastroenterology estimate that
approximately 42 million people in the United States suffer
from constipation. Based on these studies, we estimate that
approximately 12 million people can be characterized as
suffering from chronic idiopathic constipation. In an additional
study published in The American Journal of
Gastroenterology, 91% of physicians expressed a desire for
better treatment options for constipation.
We believe that AMITIZA has a number of advantages over existing
treatment options that could help it capture a significant
portion of, and potentially expand, the existing market for
chronic idiopathic constipation therapies. These advantages
include the following:
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AMITIZA has been approved for administration to adults of all
ages, including those over 65 years of age;
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AMITIZA has been approved without limitation on duration of
use; and
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AMITIZA has not been associated with the serious side effects
observed with some other treatment options, such as ischemic
colitis, electrolyte imbalance and cardiovascular ischemic
events.
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Clinical Trial Results. In connection with
obtaining FDA marketing approval of AMITIZA, we conducted a
comprehensive program of clinical trials of this drug for use in
treating chronic idiopathic constipation. This clinical program
included two Phase III pivotal trials and three long-term
safety and efficacy trials.
Efficacy Results in Two Pivotal Clinical
Trials. In August 2002 and September 2003, we
completed two multi-center, double-blind, randomized,
placebo-controlled, four-week, Phase III clinical trials of
substantially identical design to assess the safety and efficacy
of AMITIZA for the treatment of chronic idiopathic constipation.
In each of these trials, we enrolled approximately 240
participants aged 18 or older with a history of chronic
idiopathic constipation. The primary efficacy endpoint in these
trials was the frequency of spontaneous bowel movements during
the first week of treatment. Secondary efficacy endpoints
included the frequency of spontaneous bowel movements during the
second, third and fourth weeks of treatment, the percentage of
participants with a spontaneous bowel movement within
24 hours after administration, the time to first
spontaneous bowel movement and weekly subjective assessments by
participants of average stool consistency, degree of straining,
severity of constipation, overall treatment effectiveness and
prevalence of other related symptoms, such as bloating and
discomfort.
In these trials, AMITIZA met its primary efficacy endpoint with
statistical significance, increasing the frequency of
spontaneous bowel movements from baseline during the first week
of treatment by 75% in one pivotal trial and 78% in the second
pivotal trial, in each case with a p-value less than 0.0001. In
addition, on the basis of combined data from both pivotal
trials, AMITIZA met all but one of the secondary efficacy
endpoints with statistical significance for all treatment weeks.
That one secondary efficacy endpoint, abdominal discomfort,
showed statistically significant improvements only during the
last two weeks of treatment with AMITIZA compared to placebo.
The results of these trials were consistent in subpopulation
analyses for gender, race and patients 65 years of age or
older. We determined statistical significance based on a widely
used, conventional statistical method that establishes the
p-value of clinical results. Under this method, a p-value of
0.05 or less represents statistical significance, meaning that
there is a less than
one-in-twenty
likelihood that the observed results occurred by chance.
Efficacy Results in Long-term Safety
Trials. Between November 2001 and January 2005,
we conducted three multi-center, open-label, long-term clinical
safety and efficacy trials of AMITIZA in patients with a history
of chronic idiopathic constipation. The trials consisted of one
six-month trial and two twelve-month trials and enrolled a total
of 881 patients age 18 or older. The primary objective
of these trials was to demonstrate the safety of AMITIZA when
administered to participants in twice-daily doses of 24
micrograms each. A secondary objective was to provide further
evidence of the long-term efficacy of AMITIZA in treating the
symptoms of chronic idiopathic constipation. In these trials,
AMITIZA produced statistically significant improvements from
baseline in subjective assessments of constipation severity,
abdominal bloating and abdominal discomfort over both the
six-month and the twelve-month treatment periods with a p-value
less than or equal to 0.0001. Subjective assessment of
constipation severity was improved by an average of 1.47 points
on a five-point scale in the six-month trial and
1.38 points in the twelve-month trial; subjective
assessment of abdominal bloating was improved by an average of
0.98 points in the six-month trial and 1.00 points in the
twelve-month trial; and subjective assessment of abdominal
discomfort was improved by an average of 0.91 points in the
six-week trial and 0.87 points in the twelve-month trial.
Safety Profile and Withdrawal Effects. AMITIZA
was well tolerated in twice-daily doses of 24 micrograms each in
an earlier Phase II trial, the two Phase III pivotal
trials and the three long-term clinical safety and efficacy
trials. These trials revealed no apparent increased risk of
serious adverse events as a result of treatment with AMITIZA.
The most common adverse events reported by participants in these
six trials were nausea, which was reported by 31% of all trial
participants, and diarrhea and headache, which were each
reported by 13% of all trial participants. The incidence of
nausea was lower among participants 65 years of age or
older, with only 18.6% of those participants reporting this side
effect. In addition, because AMITIZA demonstrated a potential to
cause fetal loss in guinea pigs in preclinical studies, its
label provides that it should be used during pregnancy only if
the potential benefit justifies the potential risk to the fetus.
The label further states that women who could become
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pregnant should have a negative pregnancy test prior to
beginning therapy with the drug and should be capable of
complying with effective contraceptive measures.
Post-marketing Studies. In connection with our
marketing approval for AMITIZA for the treatment of chronic
idiopathic constipation in adults, we committed to the FDA to
conduct post-marketing studies to evaluate the safety of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. We initiated the
studies in January 2007.
Japanese Studies. In November 2007, we
commenced a multi-center Phase IIb does-ranging study in Japan
to evaluate the safety and efficacy of lubiprostone for chronic
idiopathic constipation in adults. This randomized, parallel
group, double-blind, placebo-controlled study will compare the
dose response of oral lubiprostone with that of placebo in
Japanese patients diagnosed with chronic idiopathic
constipation. Approximately 160 patients are expected to be
enrolled at 13 sites. Patients are being randomized to one of
three twice-daily doses of lubiprostone (8, 16 or 24 micrograms)
or placebo. The primary endpoint of the study is the number of
spontaneous bowel movements after one week on treatment.
Irritable
Bowel Syndrome with Constipation
On June 29, 2007 we submitted a supplemental NDA, or sNDA,
to our existing NDA for AMITIZA. The sNDA is for the addition of
irritable bowel syndrome with constipation as a new indication
using a twice daily 8 microgram dose. We expect a PDUFA
action for our sNDA on or about April 29, 2008.
Disease Overview. Irritable bowel syndrome is
a disorder of the intestines with symptoms that include severe
cramping, pain, bloating and extreme changes of bowel habits,
such as diarrhea or constipation. Patients diagnosed with
irritable bowel syndrome are commonly classified as having one
of three forms: irritable bowel syndrome with constipation,
irritable bowel syndrome with diarrhea, or mixed-pattern
irritable bowel syndrome alternating between constipation and
diarrhea. Currently, irritable bowel syndrome in all its forms
is considered to be one of the most common gastrointestinal
disorders.
Current Treatment. Most treatment options for
irritable bowel syndrome with constipation focus on separately
addressing symptoms, such as pain or infrequent bowel movements.
Some patients suffering from irritable bowel syndrome with
constipation can be successfully treated with dietary measures,
such as increasing fiber and fluid intake, and these treatments
are generally tried first. If these measures prove ineffective,
laxatives are frequently used for the management of this
condition. Zelnorm is currently the only FDA-approved drug
indicated for the treatment of irritable bowel syndrome with
constipation, although its label limits its indication to
short-term treatment of women. In March 2007, however, at the
request of the FDA, Zelnorm was withdrawn from the
U.S. market by Novartis. The FDA requested that Novartis
discontinue marketing Zelnorm based on a finding of an increased
risk of serious cardiovascular adverse events associated with
use of the drug. Following a public advisory committee meeting,
the FDA announced that is it permitting the restricted use of
Zelnorm under a treatment IND protocol for patients whose
physicians determine the drug is medically necessary. Zelnorm
remains off the market for general use. In December 2005, the
European Medicines Agency refused marketing approval for Zelnorm
for the treatment of irritable bowel syndrome with constipation
in women, citing the inconclusiveness of clinical studies in
demonstrating its effectiveness. In March 2006, the Agency
denied an appeal of that decision.
Market Opportunity. According to the American
College of Gastroenterology, irritable bowel syndrome affects
approximately 58 million people in the United States, and
irritable bowel syndrome with constipation accounts for
approximately one-third of these cases.
Development Status. In June 2004, we completed
a multi-center, double-blind, randomized, placebo-controlled,
dose-response, 12-week Phase II clinical trial to assess
the safety and efficacy of AMITIZA for the treatment of
irritable bowel syndrome with constipation in daily doses of 16,
32 and 48 micrograms. In this trial, we enrolled approximately
200 participants meeting the International Congress of
Gastroenterologys working criteria for the diagnosis of
irritable bowel syndrome with constipation, referred to as the
Rome II criteria. The objective of this trial was to
evaluate the safety and efficacy of multiple dose levels of
AMITIZA in this patient population in order to select the
appropriate dose for Phase III pivotal studies.
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The primary efficacy endpoint for this trial was a subjective
assessment of changes in abdominal discomfort and pain during
the first month of treatment. Secondary efficacy endpoints
included subjective assessments of changes in abdominal
discomfort and pain during the second and third months of
treatment, frequency of spontaneous bowel movements, subjective
assessments of average stool consistency, degree of straining,
abdominal bloating, severity of constipation and overall
treatment effectiveness and subjective assessment of quality of
life.
In this trial, AMITIZA demonstrated a statistically significant,
dose-dependent trend in improvement in mean change from baseline
abdominal discomfort and pain during the first month of
treatment with a p-value of 0.0431. The term mean change from
baseline refers to differences in patients condition after
treatment with the drug or the placebo compared to their
condition before treatment. This dose-dependent trend in
improvement in mean change from baseline also was statistically
significant during the second month of treatment with a p-value
of 0.0336. During the third month of treatment, the trend in
favor of AMITIZA continued, but was not statistically
significant. Several secondary efficacy endpoints, including
frequency of spontaneous bowel movements, subjective assessments
of average stool consistency, degree of straining, abdominal
bloating and severity of constipation, also showed overall
dose-dependent trends that were statistically significant for at
least two of the three months of treatment.
Although AMITIZA was effective and well tolerated at all doses
in this trial, the 16 microgram daily dose produced the best
overall balance of safety and efficacy, with participants in the
32 and 48 microgram treatment groups generally more likely to
discontinue treatment due to adverse events. Adverse events
appeared to be dose-dependent between the 16 and 48 microgram
AMITIZA treatment groups and occurred more frequently in the
AMITIZA treatment group than in the placebo treatment group.
Based on the results of this Phase II trial, we initiated
two pivotal Phase III clinical trials of AMITIZA in men and
women for irritable bowel syndrome with constipation in May
2005, each involving 570 or more participants meeting the
Rome II criteria for irritable bowel syndrome with
constipation at 65 investigative study sites in the United
States. These Phase III pivotal trials were designed as
double-blind, randomized, 12-week clinical trials to demonstrate
the efficacy and safety of AMITIZA for the treatment of symptoms
of irritable bowel syndrome with constipation using twice daily
doses of 8 micrograms each, or 16 micrograms total. The primary
efficacy endpoint for these trials was a subjective assessment
of the participants overall relief from the symptoms of
irritable bowel syndrome with constipation determined by the
question How would you rate your relief of irritable bowel
syndrome symptoms (abdominal discomfort/pain, bowel habits, and
other irritable bowel syndrome symptoms) over the past week
compared to how you felt before you entered the study?
Patient responses were recorded using a seven-point balanced
scale. Treatment responders were defined in each month as those
reporting at least significantly relieved, which was
the highest scale category, for two out of four weeks or
moderately relieved, the second highest category,
for four out of four weeks. To qualify as an overall treatment
responder, and count toward the primary efficacy endpoint,
patients had to be a monthly treatment responder for at least
two out of three months. The secondary efficacy endpoints were
similar to those for our Phase II clinical trials of
AMITIZA for this indication and involved subjective assessments
of such factors as abdominal discomfort and pain, bloating,
straining, stool consistency, severity of constipation and
quality of life components. The first of the two pivotal studies
was followed by a randomized withdrawal period to assess the
effects, if any, associated with withdrawal of AMITIZA over a
four-week period. We also initiated an additional follow-on
open-label safety and efficacy study to assess the long-term use
of AMITIZA as a treatment for this indication. This study
included 476 patients who were treated for an additional
36 weeks following the initial 12 or 16 week treatment
period.
In the two pivotal phase III trials, participants receiving
AMITIZA at a dose of 8 micrograms twice daily were more likely
to achieve overall relief from symptoms compared to those
receiving the placebo, with 17.9% of the AMITIZA group achieving
overall relief compared to 10.1% for the placebo group, with a
p-value of 0.001. In both trials individually, participants
receiving AMITIZA experienced overall relief from symptoms at
higher rates than those receiving the placebo, 18.2% compared to
9.8% with a p-value of 0.009 in one trial and 17.7% compared to
10.4% with a p-value of 0.031 in the other.
In the combined phase III trials, the secondary endpoints,
which were measured on a five-point scale, were improved with
statistical significance in participants receiving AMITIZA
compared to those receiving the placebo. At the end of the
three-month treatment period, subjective assessments of
abdominal discomfort and pain by
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participants receiving AMITIZA improved from baseline by an
average of 0.45 points, compared to average improvements in
participants receiving the placebo of 0.35 points; subjective
assessments of stool consistency improved by an average of 0.51
points compared to 0.38 points; subjective assessments of
straining improved by an average of 0.60 points compared to 0.47
points; subjective assessments of constipation severity improved
by an average of 0.52 points compared to 0.40 points; and
subjective assessments of abdominal bloating improved by an
average of 0.45 points compared to 0.36 points. At the end of
the three-month treatment period, the overall composite score
for subjective assessments of quality of life improved from
baseline an average of 17.1 points on a 100-point scale for
participants receiving AMITIZA compared to an average
improvement of 14.4 points for those receiving the placebo.
Statistical significance was seen for each of these secondary
endpoints, with the subjective assessments of abdominal
discomfort and pain having a p-value of 0.013, stool consistency
having a p-value of 0.006, straining having a p-value of 0.020,
constipation severity having a p-value of 0.005, abdominal
bloating having a p-value of 0.024 and quality of life having a
p-value of 0.021.
The first of the two phase III trials also assessed the
rebound effect from the withdrawal of AMITIZA following
12 weeks of treatment with an 8 microgram dose twice daily.
In this trial, withdrawal of AMITIZA did not result in a rebound
effect. AMITIZA was well-tolerated in the phase II, phase III,
and long-term safety studies. In the combined phase II and
phase III studies and at the recommended dose, there was a
similar incidence of serious adverse events, 1% in both the
AMITIZA group and the placebo group, and treatment-related
adverse events, with 26% in the AMITIZA groups compared to 21%
in the placebo groups. The most common treatment-related adverse
events were nausea, which was reported by 8% of participants
receiving AMITIZA and 4% of those receiving the placebo, and
diarrhea, which was reported by 7% of the AMITIZA groups and 4%
of the placebo groups. Abdominal pain occurred at a similar rate
in the placebo groups and the AMITIZA groups, with 5% reporting
this adverse event.
Opioid-Induced
Bowel Dysfunction
We commenced Phase III pivotal clinical trials of orally
administered AMITIZA gelatin capsules for the treatment of
opioid-induced bowel dysfunction in September 2007.
Disease Overview. Opioid-induced bowel
dysfunction comprises a variety of gastrointestinal side effects
stemming from the use of narcotic medications such as morphine
and codeine, which are referred to as opioids. Physicians
prescribe opioids for patients with advanced medical illnesses,
such as cancer and AIDS, patients undergoing surgery and
patients who experience chronic pain. Despite their
pain-relieving effectiveness, opioids are known to produce
gastrointestinal effects that lead to opioid-induced
constipation, including inhibition of large intestine motility,
decreased gastric emptying and hard stools.
Current Treatment. There are currently no
FDA-approved products that are specifically indicated for
treatment of opioid-induced bowel dysfunction. Current treatment
options for opioid-induced bowel dysfunction include the use of
stool softeners, enemas, suppositories and peristaltic
stimulants such as senna, which stimulate muscle contractions in
the bowel. The effectiveness of these products for the treatment
of opioid-induced bowel dysfunction is limited due to the
severity of the constipation caused by opioids. In addition,
physicians often cannot prescribe peristaltic stimulants for the
duration of narcotic treatment because of the potential for
dependence upon these stimulants. As a result, patients
frequently must discontinue opioid therapy and endure pain in
order to obtain relief from opioid-induced bowel dysfunction.
Market Opportunity. According to the American
Pain Foundation, over 50 million Americans suffer from
chronic pain, and nearly 25 million Americans experience
acute pain each year due to injuries or surgery. Opioid pain
relievers are widely prescribed for these patients, many of whom
also develop opioid-induced bowel dysfunction. We believe over
three million people in the United States currently suffer from
opioid-induced bowel dysfunction.
Opioid drugs are known to increase absorption of electrolytes,
including chloride, in the small intestine, contributing to the
constipating effects of these analgesics. We believe that
AMITIZA, as a chloride channel activator, may directly
counteract this side effect without interfering with the
analgesic benefits of opioids. As a result, we believe that
AMITIZA, if approved for the treatment of opioid-induced bowel
dysfunction, could hold a competitive advantage over drugs that
do not work through this mechanism of action.
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Development Status. We have completed
preclinical studies of AMITIZA as a potential therapy for
opioid-induced bowel dysfunction in a model of morphine-induced
constipation in mice. In these studies, AMITIZA was shown to
improve intestinal transit time and did not result in any
reduction of the analgesic effect of morphine. Based on these
preclinical results, we determined to pursue development of
AMITIZA as a treatment for opioid-induced bowel dysfunction.
Cobiprostone
Overview
We are developing the prostone compound cobiprostone for oral
administration to treat various gastrointestinal and liver
disorders, including NSAID-induced ulcers, non-alcoholic fatty
liver disease, portal hypertension and gastrointestinal
disorders associated with cystic fibrosis. We also plan to
develop an inhaled formulation of cobiprostone for the treatment
of respiratory symptoms of cystic fibrosis and chronic
obstructive pulmonary disease. We believe that cobiprostone,
like AMITIZA, is an activator of the chloride ion channel ClC-2,
which is known to be present in gastrointestinal, liver and lung
cells.
We completed two Phase I clinical trials of cobiprostone in
healthy volunteers in Japan in 1997. In these trials, orally
administered cobiprostone was generally well tolerated both when
it was administered three times daily for a period of seven days
at doses we expect to be clinically relevant and when it was
administered in single doses that were significantly higher than
those we expect to be clinically relevant. Several incidents of
loose or watery stools were reported, but at doses higher than
those we expect to use in planned additional clinical trials. No
serious adverse events were experienced by any participants in
these trials, and no participants withdrew from these trials due
to adverse events, even at dose levels several times higher than
what we expect to be clinically-relevant doses of cobiprostone.
Non-Steroidal
Anti-Inflammatory Drug-Induced Ulcers
We commenced a Phase II clinical trial of cobiprostone for
the prevention and treatment of NSAID-induced ulcers in
September 2007.
Disease Overview. NSAIDs, such as aspirin and
ibuprofen, are among the most commonly prescribed drugs
worldwide. They are used to treat common medical conditions,
such as arthritis, headaches and fever. In addition, with the
recent withdrawal from the marketplace of the COX-2 inhibitors
Vioxx®
(rofecoxib) and
Bextra®
(valdecoxib), which were widely prescribed for arthritis
patients, an increased number of these patients are returning to
NSAID therapy. However, gastrointestinal symptoms, such as
gastric, or stomach, ulcers and bleeding, are major limiting
side effects of long-term NSAID use.
Current Treatment. Current treatment options
for NSAID-induced ulcers include products designed to prevent
the formation of gastric ulcers during NSAID use and products
that help to repair the damage of ulcers after they have
developed.
Cytotec®
(misoprostol) is currently the only FDA approved product for the
prevention of NSAID-induced gastric ulcers. It is sometimes
marketed as a combination product with NSAIDs under the brand
name
Arthrotec®.
However, Cytotec has been associated with severe diarrhea,
particularly in higher doses, and its label restricts its use in
women of childbearing potential, except in very limited
circumstances, because it can cause abortion, premature birth
and birth defects.
After NSAID-induced ulcers have developed, proton pump
inhibitors, such as
Nexium®
(esomeprazole magnesium) and
Prevacid®
(lansoprazole), are prescribed to treat most gastric ulcer
patients, either alone or in combination with other treatments.
H2 blockers, such as
Pepcid®
(famotidine),
Tagamet®
(cimetidine) and
Zantac®
(ranitidine hydrochloride), help to reduce stomach acid and are
typically prescribed as a second line of therapy for gastric
ulcers, when proton pump inhibitors are not effective, or are
used in conjunction with proton pump inhibitors. Although both
proton pump inhibitors and H2 blockers can aid in the repair of
existing gastric ulcers, neither of these drug categories has
been shown to be effective in preventing ulcer development.
Furthermore the therapeutic effects of these products are only
observed at high doses and in some types of at-risk patients,
such as those with a prior history of ulcers or those
65 years of age or older.
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Market Opportunity. According to a study
published in Postgraduate Medicine, approximately
13 million patients in the United States are regular users
of NSAIDs. According to the American Chronic Pain Association,
as many as 20% of patients who take NSAIDs daily may develop
gastric ulcers. We believe that many patients treated with
NSAIDs are not prescribed preventative treatment for gastric
ulcers due to a combination of high cost, side effects and lack
of a well established standard of care. We believe that these
factors also limit the use of prescription products for the
repair of gastric ulcers after they have developed. Based on
cobiprostones novel mechanism of action and protective
activity in animal models, we believe that it may be effective
at both preventing and treating NSAID-induced ulcers, but
without the safety concerns and restrictions on use associated
with existing treatment options.
Development Status. We have completed
preclinical studies of cobiprostone as a potential therapy for
NSAID-induced ulcers. In preclinical tests in rats, cobiprostone
protected against formation of ulcers induced by indomethacin,
an NSAID, and ulcers induced by stress and demonstrated an
acceptable safety profile at what we believe are clinically
relevant doses. In the third quarter of 2007, we commenced a
Phase II clinical trial for cobiprostone. This
Phase II trial is a multi-center, randomized,
placebo-controlled study to evaluate the effects of multiple
doses of cobiprostone for the treatment and prevention of ulcer
formation following treatment with NSAIDs. We believe that
cobiprostone may have utility in preventing other gastric injury
in addition to NSAID-induced ulcers. Accordingly, as we progress
through our clinical program for cobiprostone, we may seek to
broaden our indication for this compound by exploring other
gastrointestinal lesions, including hemorrhages, erosions and
ulcerations.
Other
Potential Indications
Portal Hypertension. Portal hypertension is
the build-up
of pressure in the portal vein connecting the intestines and the
liver and is caused by a narrowing of the blood vessel as a
result of liver cirrhosis. Increased pressure in the portal vein
can lead to the development of large, swollen veins in the
esophagus, stomach and rectum which, if ruptured, can result in
potentially life-threatening blood loss. According to a
physician survey conducted by MEDACorp, an independent strategic
consulting firm focused on the health care sector, approximately
4.0 million Americans suffer from liver cirrhosis, with
approximately 1.5 million of those individuals also
diagnosed with portal hypertension. Beta-adrenergic receptor
blocking agents, or beta blockers, such as propranolol are the
most common treatment for portal hypertension. Beta blockers
help to relieve the effects of portal hypertension by lowering
blood pressure throughout the body. However, these products are
associated with increased risk of stroke and a number of other
side effects, including, nausea, diarrhea, hypotension, heart
failure, dizziness, fatigue, insomnia and depression, which may
limit their use, particularly among elderly patients. In
contrast to beta blockers, we believe that cobiprostone may be
effective at reducing portal hypertension without exhibiting
many of the serious side effects associated with beta blockers.
In preclinical tests, cobiprostone:
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decreased portal pressure in two rodent models of portal
hypertension disease;
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increased cutaneous blood flow in two additional animal models
in the presence of chemical agents known to constrict the
peripheral vasculature; and
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reduced vascular resistance in the liver induced by a chemical
agent in an isolated rat model.
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We also submitted an IND to the FDA in December 2007 for a
Phase II
proof-of-concept
study of cobiprostone in patients with portal hypertension.
Non-Alcoholic Fatty Liver
Disease. Non-alcoholic fatty liver disease is
characterized by elevations of specific liver enzymes in the
absence of excessive alcohol intake or other chronic liver
diseases. Although all levels of non-alcoholic fatty liver
disease lead to fat accumulation in the liver, the more advanced
versions of this disease, known as Type 3 and Type 4
non-alcoholic fatty liver disease, also involve fibrosis and
greatly increase the risk of progressive liver disease,
cirrhosis and liver-related death. There is currently no
treatment available for non-alcoholic fatty liver disease and
the market size is unknown. According to the National Institute
of Diabetes and Digestive and Kidney Diseases, a division of the
National Institutes of Health, approximately 10% to 20% of
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Americans are affected by fat in the liver, and this condition
is becoming more common, possibly due to the greater number of
Americans with obesity.
In preclinical studies of cobiprostone as a potential treatment
for non-alcoholic fatty liver disease in rodent models of liver
damage, cobiprostone was found to favorably alter various serum
indicators of liver function and to reduce the severity of liver
injury caused by hepatitis.
In June 2003, we completed a limited,
28-day
Phase II trial to assess the safety and efficacy of orally
administered cobiprostone for the treatment of non-alcoholic
fatty liver disease. The efficacy results of this trial were
inconclusive, which we believe was likely the result of the
trials short treatment period and the fact that all but
one of the participants in this trial suffered from Type 4
non-alcoholic fatty liver disease, the most severe form of the
disease. Although we believe that further investigation of the
role of cobiprostone in the prevention or delay of non-alcoholic
fatty liver disease progression is warranted, current techniques
for studying this condition require a biopsy of the liver. As a
result, we do not plan to pursue human clinical trials of
cobiprostone for the treatment of non-alcoholic fatty liver
disease until such time as less invasive methods or alternative
diagnostic endpoints are developed for diagnosing the disease
and evaluating its progress.
Cystic Fibrosis. Cystic fibrosis is a
congenital disease that usually develops during childhood and
causes pancreatic insufficiency and pulmonary disorder. The gene
product responsible for cystic fibrosis is a protein called the
cystic fibrosis transmembrane conductance regulator, or CFTR.
CFTR is found in cells lining the internal surfaces of the
lungs, salivary glands, pancreas, sweat glands, intestine and
reproductive organs and acts as a channel transporting chloride
ions out of the cell. Cystic fibrosis is caused by a defect in
the CFTR protein, which prevents the transport of chloride ions
between cells, causing the body to develop thick, sticky mucus
in the lungs, pancreas and liver. According to the Cystic
Fibrosis Foundation, cystic fibrosis currently affects
approximately 30,000 people in the United States and is
usually diagnosed in infants and children.
In preclinical in vitro tests on human cell lines,
cobiprostone acted as an ion transport modulator, facilitating
transport of chloride ions across cell membranes through the
ClC-2 chloride channel, a transport process different from that
which is defective in cystic fibrosis patients. We believe that
the ability of cobiprostone to activate chloride transport using
an alternate chloride channel could potentially reverse the
effects caused by the defective CFTR, reducing mucus viscosity
and allowing increased clearance of mucus in the lungs, pancreas
and liver.
In 2003, we conducted an open-label, dose-escalating
Phase II trial of orally administered cobiprostone in
24 participants with documented cystic fibrosis. These
participants were assigned to one of three dose cohorts at four
sites in the United States and treated with cobiprostone for
seven days. cobiprostone was generally well tolerated by trial
participants, although one participant experienced a serious
adverse event and was hospitalized for exacerbation, or
short-term worsening, of the disease, possibly as a result of
treatment with cobiprostone. Although this trial focused
primarily on safety, we also examined the effect of cobiprostone
on chloride secretion in cells lining the nose and salivary
glands as well as overall quality of life as measured by a
questionnaire published by the Cystic Fibrosis Foundation. The
results for chloride secretion were inconclusive, which we
believe was likely due to the rapid metabolization of the drug
in the gastrointestinal tract, the short duration of the trial
and the limited number of participants enrolled in the trial.
However, we did observe improvements in baseline
gastrointestinal disorders associated with cystic fibrosis as
measured by the questionnaire. As a result, we have determined
to focus our initial development efforts on the treatment of
gastrointestinal disorders associated with cystic fibrosis and
plan to commence a Phase II dose-ranging trial of orally
administered cobiprostone for the treatment of these disorders
by 2009. In the future, we also plan to develop an inhaled
formulation of cobiprostone for the treatment of respiratory
symptoms of cystic fibrosis.
Chronic Obstructive Pulmonary Disease. Chronic
obstructive pulmonary disease is characterized by the
progressive development of airflow limitation in the lungs that
is not fully reversible and encompasses chronic bronchitis and
emphysema. According to the National Heart, Lung and Blood
Institute, or the NHLBI, a division of the National Institutes
of Health, approximately 12 million adults 25 years of
age or older in the United States are diagnosed with chronic
obstructive pulmonary disease. The NHLBI further estimates that
approximately 24 million adults in the United States have
evidence of impaired lung function, indicating in their view
that this disease is underdiagnosed. Anticholinergics, smooth
muscle relaxers that can help to widen air passageways to the
lungs, have been the primary therapy to treat chronic
obstructive pulmonary disease. Recently, combination agents,
such as
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steroid/Beta-2 agonists, have enjoyed increased use as chronic
obstructive pulmonary disease treatments. However, these
treatments relieve only the symptoms of chronic obstructive
pulmonary disease, such as chronic cough or shortness of breath,
and have limited effect on reducing the incidence of
exacerbation of the disease.
Because we believe that the method of action of cobiprostone
involves a barrier protection function resulting from chloride
channel activation, we believe that it may be able to address
multiple respiratory treatment needs, including treatment of
exacerbations, chronic excessive mucus secretion and the mucus
component of chronic bronchitis. In pharmacological testing
using an inhaled formulation of cobiprostone in a guinea pig
model to assess changes in respiratory and pulmonary function,
cobiprostone reduced cigarette smoke-induced airway resistance
and restored forced expiratory volume. We plan to conduct
additional preclinical testing of this inhaled formulation of
cobiprostone as a potential treatment for chronic obstructive
pulmonary disease.
SPI-017
Overview
We are conducting preclinical development of SPI-017 for the
treatment of peripheral arterial and vascular disease and
central nervous system disorders. Initially, we are working on
the development of an intravenous formulation of SPI-017 for the
treatment of peripheral arterial disease and stroke. We also are
developing an oral formulation of SPI-017 for the treatment of
Alzheimers disease. We plan to commence Phase I clinical
trials of the intravenous formulation of SPI-017 in 2008 and
Phase I clinical trials of the oral formulation in 2009. Results
from the Phase I trials of both the intravenous and the oral
formulations may be useful in the development of any of these
indications.
In preclinical in vitro tests on human cell lines,
SPI-017 activated chloride channels in very low concentrations
on a variety of cells found in the central nervous system and
peripheral blood vessels. We are currently evaluating the safety
profile of SPI-017 in preclinical toxicology studies.
Potential
Indications
Peripheral Arterial and Vascular
Disease. Peripheral arterial disease, which also
is sometimes referred to as peripheral vascular disease, is a
chronic condition that results from narrowing of the vessels
that supply blood to the stomach, kidneys, arms, legs and feet.
Peripheral arterial disease is caused by the
build-up of
fatty deposits, or plaque, in the inner walls of the arteries as
a result of a vascular condition known as atherosclerosis. This
build-up of
plaque restricts the flow of blood throughout the body,
particularly in the arms and legs, and can lead to painful
cramping and fatigue after exercise. The American Heart
Association estimates that peripheral arterial disease affects
as many as 8 million to 12 million people in the
United States.
Anti-platelet medications, vasodilators and prostaglandins
represent the most frequently prescribed treatments for
peripheral arterial disease, but they have little or no impact
on symptoms or the underlying atherosclerotic process.
Palux®
(alprostadil) and
Liple®
(alprostadil) are used for the treatment of chronic arterial
occlusion in Japan, but are not currently available in the
United States. In addition, Palux and other prostaglandin E1
drug products should not be administered to patients with
bleeding disorders or patients being treated with chronic
anti-platelet medications, such as aspirin, due to the
detrimental effect of these products on platelet aggregation.
Despite the need for additional treatments, we believe that few
novel therapies are being explored.
In preclinical animal studies, intravenously administered
SPI-017 counteracted blood vessel constriction induced by a
chemical agent without significantly affecting blood pressure.
In addition, in preclinical animal studies, SPI-017 had no
effect on platelet aggregation. We believe that this may suggest
that SPI-017, unlike Palux and other prostaglandin E1 drugs,
could be used to treat patients with bleeding disorders or
patients being treated with chronic anti-platelet medications.
We are planning additional experiments to further test the
activity of SPI-017 in animal models of peripheral arterial
disease.
Stroke. Ischemic stroke occurs when an artery
that supplies blood to the brain becomes blocked due to a blood
clot or other blockage or when blood flow is otherwise reduced
as a result of a heart condition. During ischemic stroke, a high
rate of damage of neuronal cells in the brain usually leads to
permanent functional loss. The
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American Heart Association estimates that approximately
700,000 patients in the Unites States suffer strokes
annually, 88% of which are ischemic strokes.
The thrombolytic
Activase®
(alteplase, recombinant) is the principal drug currently used to
treat acute ischemic stroke in the United States. To be
effective, treatment with Activase must be initiated within
three hours after the onset of stroke symptoms. In addition,
because Activase is contraindicated in patients with
intracranial hemorrhaging or active internal bleeding, treatment
should be initiated only after exclusion of these conditions.
In animal studies, intravenously administered SPI-017 reduced
the extent of cerebral tissue damage in experimentally induced
ischemic stroke in rats. In these studies, intravenous SPI-017
administered shortly after the restoration of blood flow also
significantly reduced the extent of tissue damage. We are
planning additional animal tests to further define the time
window for administration of SPI-017 and the concentration range.
Alzheimers Disease. Alzheimers
disease is a chronic debilitating disease, with patients
suffering from a progressive dementia over a number of years,
ultimately resulting in severe incapacitation and a shortened
lifespan. According to the Alzheimers Association, there
are approximately 4.5 million Alzheimers disease
patients in the United States.
While the causes of Alzheimers disease are currently not
well understood, it is widely recognized that particular regions
of the brain may play a central role in memory. The brain
comprises a complex network of neurons that enable memory,
sensation, emotion and other cognitive functions. Neurons are
highly specialized cells that are capable of communicating with
each other through biochemical transmission across junctions
called synapses. For this communication to occur, neurons
secrete chemicals, known as neurotransmitters, that bind to
receptors on neighboring neurons. Coordinated communication
across synapses is essential for the formation of memories.
Several classes of ion channels play a critical role in both the
activation of neurons and in the secretion of neurotransmitters
across synapses. In particular, some classes of potassium ion
channels, sodium ion channels and calcium ion channels have been
shown to be critical in the cascade of events that leads to the
secretion of neurotransmitters in key regions of the brain
associated with memory. We believe that some of these channels
may be important in the process of memory formation and
retention.
Preliminary data from a preclinical study of SPI-017 in a rat
model of Alzheimers disease suggests that orally
administered SPI-017 may restore cognitive behavior. We are
planning additional studies to further define the activity of
SPI-017 in this animal model.
Marketing
and Sales
We are co-promoting AMITIZA in the United States with Takeda. We
plan to market other product candidates that we may bring to
market through a combination of our own sales capabilities and
co-marketing, co-promotion, licensing and distribution
arrangements with third-party collaborators.
As we develop other products for commercialization, we intend to
evaluate the merits of retaining commercialization rights for
ourselves, entering into similar collaborative arrangements with
leading pharmaceutical companies to help further develop and
commercialize our product candidates or a combination of both.
Our decision whether to enter into collaborative arrangements
will be based on such factors as anticipated development costs,
therapeutic expertise and the commercial infrastructure required
to access a particular market. We expect that in many of these
arrangements, we will seek to co-promote our products in the
United States and, in some cases, other markets as part of our
ongoing effort to build our internal sales and marketing
capabilities.
As part of this strategy, we entered into a
16-year
collaboration and license agreement with Takeda in October 2004
for the joint development and commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada. In
early 2006, we exercised the co-promotion rights under our
collaboration and license agreement with Takeda in order to
begin developing a specialized sales force to market AMITIZA and
other gastrointestinal-related products to complement
Takedas sales efforts. Our initial strategy is to focus
our marketing and sales efforts on promoting AMITIZA in the
institutional marketplace, including specialist physicians based
in academic medical centers and long-term care facilities. This
institutional market is characterized by a concentration
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of elderly patients, who we believe will be a key market for
AMITIZA to treat gastrointestinal indications, and by physicians
who are key opinion leaders in the gastrointestinal field.
Takeda is marketing AMITIZA more broadly to office-based
specialty physicians and primary care physicians. Pursuant to
the terms of the collaboration and license agreement, Takeda is
required to provide a dedicated sales force of at least
200 people to promote AMITIZA and a supplemental sales
force of at least 500 people to promote AMITIZA together
with one other drug product. Takeda is currently utilizing TAP
Pharmaceutical Products, Inc., or TAP, a joint venture between
an affiliate of Takeda and Abbot Laboratories, to provide this
supplemental sales force. Takeda has advised us that the
supplemental sales force being supplied by TAP consists of
approximately 750 people and is marketing AMITIZA together
with
Prevacid®
(lansoprazole), a product for the treatment of gastroesophageal
reflux disease, ulcers and a variety of other gastrointestinal
indications.
In late 2005 and early 2006, in anticipation of the launch of
AMITIZA, we recruited an experienced sales and marketing
management team comprising an executive vice president of
commercial operations, a vice president of national sales, a
director of medical marketing, a national sales director and
four regional sales managers.
Effective July 1, 2007, we amended our contract sales
agreement with Ventiv Commercial Services, LLC, or Ventiv, under
which Ventiv provided us with a contract specialty sales force
of 38 field sales representatives to market AMITIZA in our
targeted institutional market. Pursuant to the amendment, we no
longer use Ventiv to provide our specialty sales force and we
hired a significant portion of Ventivs sales staff
dedicated to AMITIZA as employees of our company. Although these
sales representatives became employees of our company, we are
continuing to outsource most of the operational infrastructure
associated with this sales force from Ventiv and, in some cases,
through other vendors. In connection with this internalization
of our specialty sales force, we incurred approximately $250,000
of transition expenses, primarily recruiting and training
expenses.
We believe that the institutional focus of our specialty sales
force, which targets academic medical centers and long-term care
providers, would facilitate our ability to sell other products
for the treatment of a variety of indications in several
therapeutic fields that are concentrated in the institutional
setting, as well as additional products in our own pipeline that
might be approved. In particular, we expect that our specialty
sales force will develop expertise over time that could be
useful in marketing additional products for the treatment of
gastrointestinal indications and for the treatment of the
elderly. We intend to pursue strategic acquisitions,
in-licensing or co-promotion opportunities to supplement our
existing product pipeline, especially those that would add
products complementary to the focus of our specialty sales force.
Takeda
Collaboration
In October 2004, we entered into a
16-year
collaboration and license agreement with Takeda to jointly
develop and commercialize AMITIZA for gastrointestinal
indications in the United States and Canada. This agreement
provides Takeda with exclusive rights within these two countries
to develop and commercialize AMITIZA for these indications under
all relevant patents, know-how and trademarks. Takeda does not
have the right to manufacture AMITIZA. Instead, Takeda is
required to purchase all supplies of the product from R-Tech
under a supply and purchase agreement between Takeda and R-Tech.
Development Costs. The agreement provides for
development cost-sharing arrangements in which Takeda funds all
development costs for the development of AMITIZA as a treatment
for chronic idiopathic constipation and irritable bowel syndrome
with constipation up to $30.0 million, of which we received
the full amount in 2005. We are required to fund the next
$20.0 million in development costs for these two
indications, and all development costs in excess of
$50.0 million are shared equally between Takeda and us. In
addition, Takeda and we share equally in all external costs of
regulatory-required studies up to $20.0 million, with
Takeda funding any remaining costs related to such studies. For
any additional indications beyond chronic idiopathic
constipation and irritable bowel syndrome with constipation and
for new formulations of AMITIZA, Takeda has agreed to fund all
development costs, including regulatory-required studies, to a
maximum of $50.0 million for each new indication and
$20.0 million for each new formulation. Takeda and we have
agreed to share equally all costs in excess of these amounts.
With respect to any studies required to modify or expand the
label for AMITIZA for the treatment of chronic idiopathic
constipation or irritable bowel syndrome with constipation,
Takeda has agreed to fund 70% of the costs of such studies
and we have agreed to fund the remainder. With respect to the
development costs for AMITIZA for the
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treatment of chronic idiopathic constipation in pediatric
patients, the Joint Commercialization Committee described below
has determined that such costs will be funded entirely by Takeda.
Commercialization Funding Commitment. Takeda
is obliged to maintain a specific level of funding for
activities in relation to the commercialization of AMITIZA. This
funding obligation is $10.0 million per year so long as
marketing approval for the product in the United States is
limited to the treatment of chronic idiopathic constipation. If
we receive marketing approval in the United States for the
treatment of irritable bowel syndrome with constipation and we
and Takeda jointly determine to conduct a full-scale
direct-to-consumer
television advertising campaign for AMITIZA, Takedas
funding obligation for commercialization activities will
increase to $80.0 million per year for three years.
Promotion and Marketing. Takeda is required to
provide a dedicated sales force of at least 200 people to
promote AMITIZA and a supplemental sales force of
500 people to promote AMITIZA together with one other drug
product. In addition, Takeda is required to perform specified
minimum numbers of product detail meetings with health care
professionals throughout the term of the agreement depending
upon the indications for which AMITIZA has been approved.
Co-Promotion Rights. Under the agreement, we
retained co-promotion rights, which we exercised in February
2006, resulting in a related supplemental agreement. In
connection with our exercise of these rights, we agreed to
establish our own specialty sales force consisting of a team of
approximately 38 field sales representatives. The supplemental
agreement provides that Takeda will fund a portion of our sales
force costs, for a period of five years from the date we first
deploy our sales representatives. We may increase the total
number of our sales representatives and receive additional
funding from Takeda for any related costs up to a specified
annual amount, subject to the unanimous approval of the Joint
Commercialization Committee described below.
Medical and Scientific Activities. We also are
entitled to receive cost reimbursement from Takeda on a
case-by-case
negotiated basis for a part of our commercialization efforts
after launch with respect to specific medical and scientific
activities undertaken by us. Takeda is to retain overall
responsibility for managing these medical and scientific
activities. We were responsible for the development of all
publications directed at a scientific audience until
January 31, 2007, with this work being reimbursed by Takeda
up to a specified limit. We retain all intellectual property
rights over the material in these publications. After
January 31, 2007, Takeda is primarily responsible for the
development of these publications.
Licensing Fees, Milestone Payments and
Royalties. Takeda made an up-front payment of
$20.0 million in 2004 and has paid total development
milestone payments of $80.0 million through
December 31, 2007, which includes a $30.0 million
milestone payment as a result of our submission to the FDA in
June 2007 of a supplement to our existing NDA for AMITIZA
seeking marketing approval for AMITIZA for the treatment of
irritable bowel syndrome with constipation. Subject to reaching
future development and commercial milestones, we are entitled to
receive $50.0 million upon FDA approval of our sNDA, and,
thereafter, up to $10.0 million in additional development
milestone payments and up to $50.0 million in commercial
milestone payments. We expect a PDUFA action in late April 2008
relating to this sNDA. In addition, upon commercialization of
any product covered by the agreement, Takeda is required to pay
us a quarterly royalty on net sales revenue on sales of the
commercialized product.
Governance. Our collaboration with Takeda is
governed by several committees consisting of an equal number of
representatives from both companies. These consist of a joint
steering committee, which resolves any conflicts arising within
the other committees, a joint development committee, a joint
commercialization committee and a joint manufacturing committee.
In the case of a deadlock within the joint steering committee,
our chief executive officer has the determining vote on matters
arising from the Joint Development and Manufacturing Committees,
while Takedas representative has the determining vote on
matters arising from the Joint Commercialization Committee.
New Indications and Additional
Territories. Under the agreement, Takeda has a
right of first refusal to obtain a license to develop and
commercialize AMITIZA in the United States and Canada for any
new indications that we may develop. In addition, the agreement
granted Takeda an option to exclusively negotiate with our
affiliated European and Asian operating companies, Sucampo
Pharma Europe Ltd., or Sucampo Europe, and Sucampo
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Pharma Ltd., or Sucampo Japan, to jointly develop and
commercialize AMITIZA in two additional territories: Europe, the
Middle East, and Africa; and Asia. With respect to the
negotiation rights for Europe, the Middle East and Africa,
Takeda was required to pay Sucampo Europe an option fee of
$3.0 million. In the event that these negotiations failed
to produce a definitive agreement before we received marketing
approval in the United States for AMITIZA for the treatment of
chronic idiopathic constipation in adults, Sucampo Europe was
required to repay Takeda $1.5 million of the original
option fee. With respect to the negotiation rights for Asia,
Takeda was required to pay Sucampo Japan an option fee of
$2.0 million. In the event that these negotiations failed
to produce a definitive agreement within twelve months, Sucampo
Japan was required to repay Takeda $1.0 million of the
original option fee. By the first quarter of 2006, the option
rights for both territories had expired without agreement and,
accordingly, we repaid Takeda an aggregate of $2.5 million
of the original option fees. The amounts we retained were
recorded as contract revenue in the statements of operations
when the negotiations failed and agreements expired.
Under the agreement, if we wish to use data or information
developed under the collaboration with Takeda outside the United
States or Canada, for example in support of a regulatory filing
in Europe or Asia, we are obligated to pay to Takeda a one-time
fee the first time such data or information is used in specified
territories. The amount of the fee for each territory is to be
agreed between us and Takeda. In February 2008, in connection
with our MAA for lubiprostone in Europe, we agreed with Takeda
to make a one-time payment of $1.8 million, which will
permit us to use in Europe, the Middle East and Africa all data
and information developed under the agreement relating to the
use of lubiprostone to treat chronic idiopathic constipation.
Term. The Takeda agreement continues until
2020 unless earlier terminated. We may terminate the agreement
if Takeda fails to achieve specific levels of net sales revenue,
or if Takeda comes under the control of another party and
launches a product competitive with AMITIZA. Alternatively,
either party has the right to terminate the agreement in the
following circumstances:
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a breach of the agreement by the other party that is not cured
within 90 days, or 30 days in the case of a breach of
payment obligations;
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a change of control of the other party in which the new
controlling party does not expressly affirm its continuing
obligations under the agreement;
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insolvency of the other party; or
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a failure to receive marketing approval from the FDA for AMITIZA
for the treatment of irritable bowel syndrome with constipation
and subsequent failure of the parties to agree on an alternative
development and commercialization strategy.
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Intellectual
Property
Our success depends in part on our ability, and that of Sucampo
AG, to obtain and maintain proprietary protection for the
technology and know-how upon which our products are based, to
operate without infringing on the proprietary rights of others
and to prevent others from infringing on our proprietary rights.
We hold an exclusive worldwide royalty-bearing license from
Sucampo AG to develop and commercialize AMITIZA and other
prostone compounds covered by patents and patent applications
held by Sucampo AG. We are obligated to assign to Sucampo AG all
patentable improvements that we make in the field of prostones,
which Sucampo AG will in turn license back to us on an exclusive
basis. If we have not committed specified development efforts to
any prostone compound other than AMITIZA, cobiprostone and
SPI-017 by the end of a specified period, which ends on the
later of June 30, 2011 or the date upon which
Drs. Ueno and Kuno no longer control our company, then the
commercial rights to that compound will revert to Sucampo AG,
subject to a
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
Sucampo AG, based in Zug, Switzerland, is the patent holding
company that maintains the patent portfolio derived from
Dr. Uenos research with prostone technology.
As of December 31, 2007, we had licensed from Sucampo AG
rights to a total of 52 U.S. patents, 21 U.S. patent
applications, 28 European patents, 17 European patent
applications, 35 Japanese patents and 21 Japanese patent
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applications. Many of these patents and patent applications are
counterparts of each other. Our portfolio of licensed patents
includes patents or patent applications with claims directed to
the composition of matter, including both compound and
pharmaceutical formulation, or method of use, or a combination
of these claims, for AMITIZA, cobiprostone and SPI-017.
Depending upon the timing, duration and specifics of FDA
approval of the use of a compound for a specific indication,
some of our U.S. patents may be eligible for limited patent
term extension under the Drug Price Competition and Patent Term
Restoration Act of 1984, referred to as the Hatch-Waxman Act.
The patent rights relating to AMITIZA licensed by us consist of
seven issued U.S. patents, five issued European patents and
two issued Japanese patents relating to composition of matter
and methods of use. These patent rights also include various
U.S., European and Japanese patent applications relating to
dosing, pharmaceutical formulation and other claims. The
U.S. patents relating to composition of matter expire
between 2011 and 2020. The other U.S. and foreign patents
expire between 2008 and 2022.
The patent rights relating to cobiprostone licensed by us
consist of nine issued U.S. patents, six issued European
patents, and six issued Japanese patents relating to composition
of matter and methods of use. These patent rights also include
various U.S., European and Japanese patent applications relating
to dosing regimes, pharmaceutical formulation and other claims.
The U.S. patents relating to composition of matter expire
between 2011 and 2020. The other U.S. and foreign patents
expire between 2008 and 2022.
The patent rights relating to SPI-017 licensed by us consist of
ten issued U.S. patents, six issued European patents and
five issued Japanese patents relating to methods of use. These
patent rights also include various U.S., European and Japanese
patent applications relating to composition of matter and
methods of use. If the application for a U.S. patent
relating to composition of matter were granted, this patent
would expire in 2020. The U.S. patents relating to methods
of use and the other U.S. and foreign patents expire
between 2010 and 2022.
We are actively seeking to augment the patent protection of our
licensed compounds by focusing on the development of new
chemical entities, or NCEs, such as AMITIZA, cobiprostone and
SPI-017, which have not previously received FDA approval. Upon
approval by the FDA, NCEs are entitled to market exclusivity in
the United States with respect to generic drug products for a
period of five years from the date of FDA approval, even if the
related patents have expired.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our technology will depend on our success, in conjunction with
Sucampo AG, in obtaining effective claims and enforcing those
claims once granted. In some cases, we license patent
applications instead of issued patents, and we do not know
whether any of the patent applications will result in the
issuance of any patents. Our licensed patents may be challenged,
invalidated or circumvented, which could limit our ability to
stop competitors from marketing related products or the length
of term of patent protection that we may have for our products.
In addition, our competitors may independently develop similar
technologies or duplicate any technology developed by us, and
the rights granted under any issued patents may not provide us
with any meaningful competitive advantages against these
competitors. Furthermore, because of the extensive time required
for development, testing and regulatory review of a potential
product, it is possible that, before any of our product
candidates can be commercialized, any related patent may expire
or remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.
We may rely, in some circumstances, on trade secrets to protect
our technology. However, trade secrets can be difficult to
protect. We seek to protect our proprietary technology and
processes, in part, by confidentiality agreements with our
employees, consultants, scientific advisors and contractors. We
also seek to preserve the integrity and confidentiality of our
data and trade secrets by maintaining physical security of our
premises and physical and electronic security of our information
technology systems. While we have confidence in these
individuals, organizations and systems, agreements or security
measures may be breached, and we may not have adequate remedies
for any breach. In addition, our trade secrets may otherwise
become known or be independently discovered by competitors. To
the extent that our consultants or contractors use intellectual
property owned by others in their work for us, disputes may
arise as to the rights in related or resulting know-how and
inventions.
23
License
from Sucampo AG
On June 30, 2006, we entered into a restated license
agreement with Sucampo AG. Under this agreement, Sucampo AG has
granted to us a royalty-bearing, exclusive, worldwide license,
with the right to sublicense, to develop and commercialize
AMITIZA, cobiprostone and SPI-017 and any other prostone
compounds, other than RESCULA, subject to Sucampo AGs
patents. Under the terms of the license, which became effective
upon our initial public offering, we are obligated to assign to
Sucampo AG any patentable improvements derived or discovered by
us relating to AMITIZA, cobiprostone and SPI-017 through the
term of the license. In addition, we are obligated to assign to
Sucampo AG any patentable improvements derived or discovered by
us relating to other licensed prostone compounds prior to the
date which is the later of June 30, 2011 or the date on
which Drs. Ueno and Kuno cease to control our company. For
purposes of this agreement, Drs. Ueno and Kuno will be
deemed to control our company as long as either they together
own a majority of the voting power of our stock or at least one
of them is a member or our board of directors. All compounds
assigned to Sucampo AG under this agreement will be immediately
licensed back to us on an exclusive basis.
In consideration of the license, we are required to make
milestone and royalty payments to Sucampo AG. The milestone
payments include:
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a payment of $500,000 upon the initiation of the first
Phase II clinical trial for each compound in each of three
territories covered by the license: North, Central and South
America (including the Caribbean), Asia and the rest of the
world; and
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a payment of $1.0 million for the first NDA filing or
comparable foreign regulatory filing for each compound in each
of the same three territories.
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Upon payment of the above milestones, no further payments will
be required either for new indications or formulations or for
further regulatory filings for the same compound in additional
countries within the same territory. In November 2007, when we
initiated a Phase II trial in Japan, we became obligated to
pay Sucampo AG $500,000. Subsequent to December 31, 2007,
when we filed a MAA with the Medicines and Healthcare Products
Regulatory Agency of the United Kingdom, we became obligated to
pay Sucampo AG $1.0 million.
In addition, we are required to pay Sucampo AG 5% of any
up-front or milestone payments that we receive from sublicensees.
Under the license, we also are required to pay Sucampo AG, on a
country-by-country
basis, ongoing patent royalties as follows:
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With respect to sales of AMITIZA in North, Central and South
America, including the Caribbean, this royalty is set at 2.2% of
net sales. With respect to sales of AMITIZA in other countries
and to sales of other licensed compounds covered by patents
existing as of the date of the restated license agreement, we
are required to pay a royalty of 4.5% of net sales until the
last existing patent covering each relevant compound has expired.
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Thereafter, if we have assigned any relevant improvement patents
to Sucampo AG with respect to AMITIZA in North, Central and
South America, including the Caribbean, we are required to pay
1.1% of net sales. With respect to sales of AMITIZA in other
countries and other licensed compounds, we are required to pay a
royalty of 2.25% of net sales, until the last improvement patent
covering each relevant compound has expired.
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With respect to sales of licensed compounds covered by new
patents derived by us and assigned to Sucampo AG after the date
of the restated license agreement, we are required to pay a
royalty of 2.25% of net sales until the terms of the last new
patent covering each relevant compound have expired.
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In addition, we are required to pay Sucampo AG, on a
country-by-country
basis, a know-how royalty of 2% of net sales, or 1% of net sales
in the case of sales of AMITIZA in North, Central and South
America, including the Caribbean, until the fifteenth
anniversary of the first sale of the respective compound. All
product royalties required to be paid under the license are
based on total product net sales, whether by us or a
sublicensee, and not on amounts actually received by us.
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The license from Sucampo AG is perpetual as to AMITIZA,
cobiprostone and SPI-017 and cannot be terminated unless we
default in our payment obligations to Sucampo AG. With respect
to any other licensed prostone compounds, we are required to
perform preclinical testing over a specified period on those
compounds and to generate specified pharmacological and toxicity
data. The specified period ends on the later of June 30,
2011 or the date upon which Drs. Ueno and Kuno no longer
control our company. Following the end of the specified period,
Sucampo AG can terminate our license with respect to any
compounds as to which we have not performed the required
testing, except for any compounds we designate as compounds for
which we intend in good faith to perform the required testing
within the 15 months following the end of the specified
period. At the end of the
15-month
extension period, Sucampo AG may terminate our license as to any
of the designated compounds for which we have not performed the
required testing.
We will need to focus our development resources and funding on a
limited number of compounds during the specified period. The
decision whether to commit development resources to a particular
compound will require us to determine which compounds have the
greatest likelihood of commercial success. Dr. Ueno and his
staff will be instrumental in making these decisions on our
behalf, although to assist in this determination, we have formed
a selection committee consisting of certain members of
management other than Drs. Ueno and Kuno.
We retain the rights to any improvements, know-how or other
intellectual property we develop that is not related to
prostones. We also retain the rights to any improvements,
know-how or other intellectual property we develop after the end
of the specified period, even if they are related to prostones.
The agreement provides that, until the later to occur of
June 30, 2011 or until Drs. Ueno and Kuno cease to
control our company, Sucampo AG may not develop or commercialize:
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any products with a primary mode of action substantially the
same as that of any licensed compound; or
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any products licensed or approved for an indication for which a
licensed compound is approved or under development.
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Thereafter, Sucampo AG may undertake development of competing
products but may not commercialize these products for an
additional two years.
As part of this license, we have assumed the responsibility to
pay the patent filing and maintenance costs related to the
licensed rights. In return, we have control over patent filing
and maintenance decisions. The license agreement also specifies
how we and Sucampo AG will allocate costs to defend patent
infringement litigation brought by third parties and costs to
enforce patents against third parties.
Manufacturing
We do not own or operate manufacturing facilities for the
production of commercial quantities of AMITIZA or preclinical or
clinical supplies of the other prostone compounds that we are
testing in our development programs. Instead, we rely, and
expect to continue to rely, exclusively on our affiliate R-Tech
to supply us with AMITIZA, cobiprostone and SPI-017 and any
future prostone compounds that we determine to develop or
commercialize. Drs. Ueno and Kuno own, directly and
indirectly, a majority of the stock of R-Tech.
We, together with our subsidiary, Sucampo Europe, have entered
into an exclusive supply arrangement with
R-Tech.
Under the terms of this arrangement, we have granted to R-Tech
the exclusive right to manufacture and supply AMITIZA to meet
our commercial and clinical requirements in the Americas,
Europe, the Middle East and Africa until 2026. In the future, we
intend to expand this arrangement to include our subsidiary,
Sucampo Japan, in order to meet our commercial and clinical
requirements for AMITIZA in Asia. With the exception of the
exclusive supply agreements with Takeda described below, R-Tech
is prohibited from supplying AMITIZA to anyone other than us
during this period. Our supply arrangement with R-Tech also
provides that R-Tech will assist us in connection with
applications for marketing approval for AMITIZA in the United
States and elsewhere, including assistance with regulatory
compliance for chemistry, manufacturing and controls. In
consideration of these exclusive rights, R-Tech has paid to us
$8.0 million in up-front and milestone payments. Either we
or R-Tech may terminate the supply arrangement with respect to
us or Sucampo Europe in the event of the other partys
uncured breach or insolvency.
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In anticipation of the commercial development of AMITIZA,
Takeda, R-Tech and we entered into a
16-year
supply agreement in October 2004, which was supplemented by a
definitive supply and purchase agreement in January 2006. Under
these agreements, R-Tech agreed to supply and Takeda agreed to
purchase all of Takedas commercial requirements, including
product samples, for AMITIZA in the United States and Canada.
Pursuant to the terms of these agreements, Takeda is required to
provide R-Tech with a rolling
24-month
forecast of its product and sample requirements and R-Tech is
required to keep adequate levels of inventory in line with this
forecast. In addition, these agreements require R-Tech to
maintain a six-month supply of the active ingredient used in
manufacturing AMITIZA and a six-month supply of AMITIZA in bulk
form as backup inventory. Upon a termination of the
collaboration and license agreement between Takeda and us,
either Takeda or we may terminate these supply agreements by
notice to R-Tech.
R-Tech is Takedas and our sole supplier of AMITIZA. In the
event that R-Tech cannot meet some or all of Takedas or
our demand, neither Takeda nor we have alternative manufacturing
arrangements in place. However,
R-Tech has
agreed to maintain at least a six-month supply of AMITIZA and a
six-month supply of the active ingredient used in manufacturing
AMITIZA as a backup inventory. R-Tech may draw down this backup
inventory to supply AMITIZA to us in the event that R-Tech is
unable or unwilling to produce AMITIZA to meet our demand. We
also have the right to qualify a
back-up
supplier for AMITIZA. In the event that R-Tech is unwilling or
unable to meet our demand, R-Tech will grant to that
back-up
supplier a royalty-free license to use any patents or know-how
owned by R-Tech relating to the manufacturing process for
AMITIZA and will provide, upon our reasonable request and at our
expense, consulting services to the
back-up
supplier to enable it to establish an alternative manufacturing
capability for AMITIZA. We may purchase AMITIZA from the
back-up
supplier until R-Tech is able and willing to meet our demand for
AMITIZA.
R-Tech operates a manufacturing facility near Osaka, Japan that
we believe is compliant with current good manufacturing
practices, or cGMP. In October 2005, R-Tech received approval
from the FDA to manufacture AMITIZA at this facility. In
addition, R-Tech manufactures its own prostone product RESCULA
at this facility and has been the sole supplier of this product
to the marketplace since 1994 without interruption.
We have also entered into an exclusive supply arrangement with
R-Tech to provide us with clinical supplies of our product
candidates cobiprostone and SPI-017, as well as any other
prostone compound we may designate, and to assist us in
connection with applications for marketing approval for these
compounds in the United States and elsewhere, including
assistance with regulatory compliance for chemistry,
manufacturing and controls. This clinical supply arrangement has
a two year term which renews automatically for one-year periods
unless we and R-Tech agree not to renew it. Either we or R-Tech
may terminate the clinical supply arrangement with respect to us
or one of our operating subsidiaries in the event of the other
partys uncured breach or insolvency.
Competition
The biotechnology and pharmaceutical industries are
characterized by rapidly advancing technologies, intense
competition and a strong emphasis on proprietary products. While
we believe that our technologies, knowledge, experience, and
resources provide us with competitive advantages, we face
potential competition from many different sources, including
commercial pharmaceutical and biotechnology enterprises,
academic institutions, government agencies, and private and
public research institutions. AMITIZA and any other product
candidates that we successfully develop and commercialize will
compete with existing therapies and new therapies that may
become available in the future.
Many of our competitors may have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals, and marketing approved products
than we do. These competitors also compete with us in recruiting
and retaining qualified scientific and management personnel, as
well as in acquiring technologies complementary to, or necessary
for, our programs. Smaller or early stage companies may also
prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
Our commercial opportunity could be reduced or eliminated if our
competitors develop and commercialize products that are safer,
more effective, have fewer side effects, are more convenient or
are less expensive than AMITIZA or the other product candidates
that we are developing. A competitive product might become more
26
popular if it is approved for sale over the counter. In
addition, our ability to compete may be affected because in some
cases insurers or other third-party payors seek to encourage the
use of generic products. This may have the effect of making
branded products less attractive, from a cost perspective, to
buyers.
There are currently approved therapies for the diseases and
conditions addressed by AMITIZA. For example, the osmotic
laxatives MiraLax, which is marketed by Braintree Laboratories,
Inc., and lactulose, which is produced by Solvay S.A., have each
been approved for the short-term treatment of occasional
constipation. MiraLax was recently approved for sale as an
over-the-counter
treatment.
Zelnorm, a partial serotonin-receptor agonist, which is marketed
by Novartis, has been approved both for the treatment of chronic
idiopathic constipation in adults under 65 years of age and
for the short-term treatment of irritable bowel syndrome with
constipation in women. In March 2007, however, at the request of
the FDA, Zelnorm was withdrawn from the U.S. market by
Novartis. The FDA requested that Novartis discontinue marketing
Zelnorm based on an identified finding of an increased risk of
serious cardiovascular adverse events associated with use of the
drug. Since July 2007, the FDA has permitted restricted use of
Zelnorm under a treatment IND protocol for patients whose
physicians determine the drug is medically necessary. Zelnorm
remains off the market for general use.
Several companies also are working to develop new drugs and
other therapies for these same diseases and conditions. Some of
these potential competitive drug products include:
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Drugs targeting serotonin receptors for the treatment of
irritable bowel syndrome with constipation, such as Renzapride,
being developed by Alizyme plc and currently in Phase III
clinical trials, DDP733, being developed by Dynogen
Pharmaceuticals, Inc. and currently in Phase II clinical
trials, and Linaclotide, being developed by Microbia, Inc. and
currently in Phase II clinical trials;
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Opioid antagonists such as methylnaltrexone, being developed by
Progenics Pharmaceuticals, Inc., for the treatment of
opioid-induced bowel dysfunction. Progenics and its
collaboration partner Wyeth Pharmaceuticals recently filed an
NDA with the FDA for a subcutaneous formulation of this drug for
the treatment of opioid-induced bowel dysfunction in patients
receiving palliative care. Adolor Corporation, the developer of
another opioid antagonist, Entereg
®
(alvimopan), recently announced that it was withdrawing its
protocol for an additional Phase III clinical trial of
Entereg to treat opioid-induced bowel dysfunction, which had
previously been filed with the FDA, based upon preliminary
Phase III trial safety results that suggest potential links
between use of Entereg and adverse cardiovascular events, tumor
development and bone fractures; and
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TD-5108, being developed by Theravance, Inc. for the treatment
of chronic constipation, and linaclotide, being developed by
Microbia, Inc. for the treatment of irritable bowel syndrome
with constipation, both of which have recently completed
phase II clinical trials.
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We face similar competition from approved therapies and
potential drug products for the diseases and conditions to be
addressed by cobiprostone, SPI-017 and our other product
candidates.
The key competitive factors affecting the success of all of our
product candidates are likely to be their efficacy, safety,
price and convenience.
Government
Regulation
Government authorities in the United States, at the federal,
state and local level, and in other countries extensively
regulate, among other things, the research, development,
testing, approval, manufacturing, labeling, post-approval
monitoring and reporting, packaging, promotion, storage,
advertising, distribution, marketing and export and import of
pharmaceutical products such as those we are developing. The
process of obtaining regulatory approvals and the subsequent
substantial compliance with appropriate federal, state, local
and foreign statutes and regulations require the expenditure of
substantial time and financial resources.
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United
States Government Regulation
In the United States, the information that must be submitted to
the FDA in order to obtain approval to market a new drug varies
depending upon whether the drug is a new product whose safety
and efficacy have not previously been demonstrated in humans or
a drug whose active ingredients and certain other properties are
the same as those of a previously approved drug. A product whose
safety and efficacy have not previously been demonstrated in
humans will follow the NDA route.
The
NDA Approval Process
In the United States, the FDA regulates drugs under the Federal
Food, Drug, and Cosmetic Act, as amended, and implements
regulations. Failures to comply with the applicable FDA
requirements at any time during the product development process,
approval process or after approval may result in administrative
or judicial sanctions. These sanctions could include the
FDAs imposition of a hold on clinical trials, refusal to
approve pending applications, withdrawal of an approval, warning
letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines,
civil penalties or criminal prosecution. Any agency or judicial
enforcement action could have a material adverse effect on us.
The steps required before a drug may be marketed in the United
States include:
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completion of preclinical laboratory tests, animal studies and
formulation studies under the FDAs good laboratory
practices regulations;
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submission to the FDA of an IND for human clinical testing,
which must become effective before human clinical trials may
begin and which must include a commitment that an independent
Institutional Review Board, or IRB, will be responsible for the
review and approval of each proposed study and that the
investigator will report to the IRB proposed changes in research
activity;
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performance of adequate and well-controlled clinical trials in
accordance with good clinical practices to establish the safety
and efficacy of the product for each indication;
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submission to the FDA of an NDA;
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satisfactory completion of an FDA Advisory Committee review, if
applicable;
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satisfactory completion of an FDA inspection of the
manufacturing facility or facilities at which the product is
produced to assess compliance with cGMP to assure that the
facilities, methods and controls are adequate to preserve the
products identity, strength, quality and purity; and
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FDA review and approval of the NDA.
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Preclinical tests include laboratory evaluations of product
chemistry, toxicology and formulation, as well as animal
studies. An IND sponsor must submit the results of the
preclinical tests, together with manufacturing information and
analytical data, to the FDA as part of the IND. Preclinical
testing generally continues after the IND is submitted. The IND
must become effective before human clinical trials may begin. An
IND will automatically become effective 30 days after
receipt by the FDA, unless before that time the FDA raises
concerns or questions about issues such as the conduct of the
trials as outlined in the IND. In that case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. In other words, submission
of an IND does not guarantee that the FDA will allow clinical
trials to commence.
Clinical trials involve the administration of the
investigational product to human subjects under the supervision
of qualified investigators. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the
study, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. A protocol for each
clinical trial and any subsequent protocol amendments must be
submitted to the FDA as part of the IND. In addition, an IRB at
each site at which the study is conducted must approve the
protocol, any amendments to the protocol and related materials
such as informed consent documents and investigator brochures.
All research subjects must provide their informed consent in
writing.
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Clinical trials typically are conducted in three sequential
phases, but the phases may overlap or be combined. Phase I
trials usually involve the initial introduction of the
investigational drug into healthy volunteers to evaluate the
products safety, dosage tolerance and pharmacokinetics, or
the process by which the product is absorbed, distributed,
metabolized and eliminated by the body, and, if possible, to
gain an early indication of its effectiveness.
Phase II trials usually involve trials in a limited patient
population to:
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evaluate dosage tolerance and appropriate dosage;
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identify possible adverse effects and safety risks; and
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provide a preliminary evaluation of the efficacy of the drug for
specific indications.
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Phase II trials are sometimes denoted as Phase IIa or Phase
IIb trials. Phase IIa trials typically represent the first human
clinical trial of a drug candidate in a smaller patient
population and are designed to provide earlier information on
drug safety and efficacy. Phase IIb trials typically involve
larger numbers of patients and may involve comparison with
placebo, standard treatments or other active comparators.
Phase III trials usually further evaluate clinical efficacy
and test further for safety in an expanded patient population.
Phase III trials usually involve comparison with placebo,
standard treatments or other active comparators. These trials
are intended to establish the overall risk-benefit profile of
the product and provide an adequate basis for physician labeling.
Phase I, Phase II and Phase III testing may not
be completed successfully within any specified period, if at
all. Furthermore, the FDA or we may suspend or terminate
clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an
unacceptable health risk. Similarly, an IRB can suspend or
terminate approval of research if the research is not being
conducted in accordance with the IRBs requirements or if
the research has been associated with unexpected serious harm to
patients.
Assuming successful completion of the required clinical testing,
the results of the preclinical studies and of the clinical
trials, together with other detailed information, including
information on the chemistry, manufacture and composition of the
product, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more
indications. In most cases, a substantial user fee must
accompany the NDA. The FDA will initially review the NDA for
completeness before it accepts the NDA for filing. After the NDA
submission is accepted for filing, the FDA reviews the NDA to
determine, among other things, whether a product is safe and
effective for its intended use and whether the product is being
manufactured in accordance with cGMP to assure and preserve the
products identity, strength, quality and purity.
Under the Pediatric Research Equity Act of 2003, or PREA, all
NDAs or supplements to NDAs relating to a new active ingredient,
new indication, new dosage form, new dosing regimen or new route
of administration must contain data to assess the safety and
effectiveness of the drug for the claimed indications in all
relevant pediatric subpopulations and to support dosing and
administration for each pediatric subpopulation for which the
drug is determined to be safe and effective. The FDA may grant
deferrals for submission of data or full or partial waivers, as
it did in connection with our NDA for AMITIZA for the treatment
of chronic idiopathic constipation. Unless otherwise required by
regulation, PREA does not apply to any drug for an indication
for which orphan designation has been granted.
Before approving an NDA, the FDA will inspect the facility or
the facilities at which the product is manufactured. The FDA
will not approve the product unless cGMP compliance is
satisfactory. If the FDA determines the application,
manufacturing process or manufacturing facilities are not
acceptable, it will outline the deficiencies in the submission
and often will request additional testing or information.
Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application
does not satisfy the regulatory criteria for approval.
With respect to approval for a new indication where the product
candidate is already approved for another indication, the
results of product development, pre-clinical studies and
clinical trials are submitted to the FDA as part of an NDA
supplement. The FDA may deny approval of an NDA supplement if
the applicable regulatory criteria are not satisfied, or it may
require additional clinical data or an additional pivotal
Phase III clinical trial.
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Even if such data are submitted, the FDA may ultimately decide
that the NDA supplement does not satisfy the criteria for
approval.
The testing and approval process requires substantial time,
effort and financial resources, and each may take several years
to complete. Data obtained from clinical activities are not
always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent regulatory
approval. The FDA may not grant approval on a timely basis, or
at all. We may encounter difficulties or unanticipated costs in
our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products. The FDA
may limit the indications for use or place other conditions on
any approvals that could restrict the commercial application of
the products. After approval, some types of changes to the
approved product, such as manufacturing changes and additional
labeling claims, are subject to further FDA review and approval.
Post-Approval
Requirements
After regulatory approval of a product is obtained, we are
required to comply with a number of post-approval requirements.
For example, as a condition of approval of an NDA, the FDA may
require post marketing, or Phase IV, trials to assess the
products long-term safety or efficacy. In addition,
holders of an approved NDA are required to report certain
adverse reactions and production problems to the FDA, to provide
updated safety and efficacy information and to comply with
requirements concerning advertising and promotional labeling for
their products. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval. The
FDA periodically inspects manufacturing facilities to assess
compliance with cGMP, which imposes certain procedural,
substantive and recordkeeping requirements. Accordingly,
manufacturers must continue to expend time, money and effort in
the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
We rely, and expect to continue to rely, on third parties for
the production of clinical and commercial quantities of our
product candidates. Future FDA inspections may identify
compliance issues at our facilities or at the facilities of our
contract manufacturers that may disrupt production or
distribution, or require substantial resources to correct. In
addition, discovery of problems with a product or the failure to
comply with applicable requirements may result in restrictions
on a product, manufacturer or holder of an approved NDA,
including withdrawal or recall of the product from the market or
other voluntary, FDA-initiated or judicial action that could
delay or prohibit further marketing. Newly discovered or
developed safety or effectiveness data may require changes to a
products approved labeling, including the addition of new
warnings and contraindications. Also, new government
requirements, including those resulting from new legislation,
may be established that could delay or prevent regulatory
approval of our products under development.
Orphan
Drug Designation
We have received an orphan drug designation from the FDA for our
product candidate cobiprostone for the treatment of disorders
associated with cystic fibrosis and may pursue orphan drug
designation for additional product candidates, as appropriate.
The FDA may grant orphan drug designation to drugs intended to
treat a rare disease or condition that affects fewer
than 200,000 individuals in the United States, or more than
200,000 individuals in the United States and for which there is
no reasonable expectation that the cost of developing and making
available in the United States a drug for this type of disease
or condition will be recovered from sales in the United States
for that drug. Orphan drug designation must be requested before
submitting an application for marketing approval. Orphan drug
designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process. Orphan
drug designation can provide opportunities for grant funding
towards clinical trial costs, tax advantages and FDA user-fee
benefits. In addition, if a product which has an orphan drug
designation subsequently receives the first FDA approval for the
indication for which it has such designation, the product is
entitled to orphan drug exclusivity, which means the FDA may not
approve any other application to market the same drug for the
same indication for a period of seven years, except in limited
circumstances, such as a showing of clinical superiority to the
product with orphan exclusivity. Competitors may receive
approval of different drugs or biologics for the indications for
which the orphan product has exclusivity or may receive approval
of the same drug as the orphan drug product for a different
indication.
30
Regulation Outside
the United States
In addition to regulations in the United States, we will be
subject to a variety of regulations in other jurisdictions
governing clinical trials and commercial sales and distribution
of our products. Whether or not we obtain FDA approval for a
product, we must obtain approval of a product by the comparable
regulatory authorities of countries outside the United States
before we can commence clinical trials or marketing of the
product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than
that required for FDA approval. The requirements governing the
conduct of clinical trials, product licensing, pricing and
reimbursement vary greatly from country to country.
Europe
To obtain regulatory approval of a drug under European Union
regulatory systems, we may submit marketing authorizations
either under a centralized or decentralized procedure. The
centralized procedure, which is compulsory for medicines
produced by certain biotechnological processes and optional for
those which are highly innovative, provides for the grant of a
single marketing authorization that is valid for all European
Union member states. All marketing authorizations for products
designated as orphan drugs must be granted in accordance with
the centralized procedure. The decentralized procedure provides
for a member state, known as the reference member state, to
assess an application, with one or more other, or concerned,
member states subsequently approving that assessment. Under this
procedure, an applicant submits an application, or dossier, and
related materials including a draft summary of product
characteristics, and draft labeling and package leaflet, to the
reference member state and concerned member states. The
reference member state prepares a draft assessment and related
materials within 120 days after receipt of a valid
application. Within 90 days of receiving the reference
member states assessment report, each concerned member
state must decide whether to approve the assessment report and
related materials. If a member state cannot approve the
assessment report and related materials on the grounds of
potential serious risk to the public health, any disputed points
may be referred to the European Commission, whose decision is
binding on all member states.
The European Medicines Agency, or EMEA, grants orphan drug
designation to promote the development of products that may
offer therapeutic benefits for life-threatening or chronically
debilitating conditions affecting not more than five in
10,000 people in the European Union. In addition, orphan
drug designation can be granted if the drug is intended for a
life threatening, seriously debilitating or serious and chronic
condition in the European Union and that without incentives it
is unlikely that sales of the drug in the European Union would
be sufficient to justify developing the drug. Orphan drug
designation is only available if there is no other satisfactory
method approved in the European Union of diagnosing, preventing
or treating the condition, or if such a method exists, the
proposed orphan drug will be of significant benefit to patients.
Orphan drug designation provides opportunities for free protocol
assistance, fee reductions for access to the centralized
regulatory procedures before and during the first year after
marketing authorization and 10 years of market exclusivity
following drug approval. Fee reductions are not limited to the
first year after authorization for small and medium enterprises.
The exclusivity period may be reduced to six years if the
designation criteria are no longer met, including where it is
shown that the product is sufficiently profitable that
maintaining market exclusivity is not justified. In addition,
European regulations establish that a competitors
marketing authorization for a similar product with the same
indication may be granted if there is an insufficient supply of
the product or if the competitor can establish that its product
is safer, more effective or otherwise clinically superior.
Japan
In Japan, pre-marketing approval and clinical studies are
required for all pharmaceutical products. The regulatory regime
for pharmaceuticals in Japan has in the past been so lengthy and
costly that it has been cost-prohibitive for many pharmaceutical
companies. Historically, Japan has required that all clinical
data submitted in support of a new drug application be performed
on Japanese patients. Recently, however, as a part of the global
drug harmonization process, Japan has signaled a willingness to
accept United States or European Union patient data when
submitted along with a bridging study, which demonstrates that
Japanese and non-Japanese subjects react comparably to the
product. This approach, which is executed on a
case-by-case
basis, may reduce the time required for approval and
introduction of new products into the Japanese market.
31
Amendments to Japans drug regulatory legislation went into
effect in April 2005.
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Under the revised legislation, Japan adopted a marketing
authorization process comparable to the European Union
authorization and United States NDA. This is expected to allow
greater flexibility on the part of Japanese manufacturers to
efficiently organize their production/marketing activities.
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The amended legislation requires worldwide compliance with good
manufacturing practice requirements by exporters of
pharmaceutical products to Japan and detailed disclosure of the
manufacturing process to the Japanese authorities, as well as to
the importer in Japan.
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The Japanese government has also announced that it will consider
introducing a new proprietary data exclusivity period of up to
eight years in order to protect the value of clinical data.
Regulation
of the Health Care Industry
In addition to the regulatory approval requirements described
above, we are or will be directly, or indirectly through our
customers, subject to extensive regulation of the health care
industry by the federal government and the states and foreign
countries in which we may conduct our business. The laws that
directly or indirectly affect our ability to operate our
business include the following:
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the federal Medicare and Medicaid Anti-Kickback law, which
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce either the referral of
an individual, or furnishing or arranging for a good or service,
for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid Programs;
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other Medicare laws, regulations, rules, manual provisions and
policies that prescribe the requirements for coverage and
payment for services performed by our customers, including the
amount of such payment;
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the federal False Claims Act, which imposes civil and criminal
liability on individuals and entities who submit, or cause to be
submitted, false or fraudulent claims for payment to the
government;
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the federal False Statements Act, which prohibits knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false statement in connection with the
delivery of or payment for healthcare benefits, items or
services; and
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state and foreign law equivalents of the foregoing and state
laws regarding pharmaceutical company marketing compliance,
reporting and disclosure obligations.
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If our operations are found to be in violation of any of these
laws, regulations, rules or policies or any other law or
governmental regulation to which we or our customers are or will
be subject, or if interpretations of the foregoing change, we
may be subject to civil and criminal penalties, damages, fines,
exclusion from the Medicare and Medicaid programs and the
curtailment or restructuring of our operations. Similarly, if
our customers are found non-compliant with applicable laws, they
may be subject to sanctions.
Pharmaceutical
Pricing and Reimbursement
In the United States and markets in other countries, sales of
any products for which we receive regulatory approval for
commercial sale will depend in part on the availability of
reimbursement from third-party payors. Third-party payors
include government health administrative authorities, managed
care providers, private health insurers and other organizations.
These third-party payors are increasingly challenging the price
and examining the cost-effectiveness of medical products and
services. In addition, significant uncertainty exists as to the
reimbursement status of newly approved healthcare product
candidates. We may need to conduct expensive pharmacoeconomic
studies in order to demonstrate the cost-effectiveness of our
products. Our product candidates may not be considered
cost-effective. Adequate third-party reimbursement may not be
available to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in product
development.
In 2003, the United States government enacted legislation
providing a partial prescription drug benefit for Medicare
recipients, which became effective at the beginning of 2006.
Government payment for some of the costs of prescription drugs
may increase demand for any products for which we receive
marketing approval. However, to
32
obtain payments under this program, we would be required to sell
products to Medicare recipients through drug procurement
organizations operating pursuant to this legislation. These
organizations would negotiate prices for our products, which are
likely to be lower than the prices we might otherwise obtain.
Federal, state and local governments in the United States
continue to consider legislation to limit the growth of
healthcare costs, including the cost of prescription drugs.
Future legislation could limit payments for pharmaceuticals,
including AMITIZA and the drug candidates that we are developing.
The marketability of any products for which we receive
regulatory approval for commercial sale may suffer if the
government and third-party payors fail to provide adequate
coverage and reimbursement. In addition, an increasing emphasis
on managed care in the United States has increased and will
continue to increase the pressure on pharmaceutical pricing.
Another development that may affect the pricing of drugs is
proposed Congressional action regarding drug reimportation into
the United States. Proposed legislation would allow the
reimportation of approved drugs originally manufactured in the
United States back into the United States from other countries
where the drugs are sold at a lower price. If such legislation
or similar regulatory changes were enacted, they could reduce
the price we receive for any approved products, which, in turn,
could adversely affect our revenues. Even without legislation
authorizing reimportation, patients have been purchasing
prescription drugs from Canadian and other
non-United
States sources, which have reduced the price received by
pharmaceutical companies for their products.
Different pricing and reimbursement schemes exist in other
countries. In the European Community, governments influence the
price of pharmaceutical products through their pricing and
reimbursement rules and control of national health care systems
that fund a large part of the cost of such products to
consumers. The approach taken varies from member state to member
state. Some jurisdictions permit products to be marketed only
after a reimbursement price has been agreed. Other member states
allow companies to fix their own prices for medicines, but
monitor and control company profits.
In Japan, the National Health Ministry biannually reviews the
pharmaceutical prices of individual products. In the past, these
reviews have resulted in price reductions. In the 2006 biannual
review, the Japanese government reduced the overall drug
reimbursement rates. We expect similar price reviews in the
future, in line with the governments previously announced
plan for controlling health care costs. It is not possible to
predict the outcome of these reviews, and it is possible that
Japanese authorities will again reduce drug reimbursement rates,
which could adversely affect the reimbursement levels for our
products or product candidates.
Executive
Officers
The following table lists our executive officers and their ages
as of March 1, 2008.
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Name
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Age
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Position
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Ryuji Ueno, M.D., Ph.D., Ph.D.
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Chief Executive Officer, Chief Scientific Officer and Director,
Chairman of the Board of Directors
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Mariam E. Morris
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Chief Financial Officer and Treasurer
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Brad E. Fackler
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54
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Executive Vice President of Commercial Operations
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Gayle R. Dolecek
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65
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Senior Vice President of Research and Development
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Kei S. Tolliver
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Vice President of Business Development and Company Operations
and Secretary
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Ryuji
Ueno, M.D., Ph.D., Ph.D. Dr. Ueno
is a founder of our company and has been our Chief Executive
Officer since September 2006 and our Chief Scientific Officer
since August 2004. Dr. Ueno also became the Chairman of our
Board of Directors effective June 1, 2007 following the
resignation of Dr. Kuno from that position. Dr. Ueno
also served as Chief Operating Officer from December 1996 to
November 2000 and again from March 2006 to September 2006 and as
Chief Executive Officer from December 2000 to September 2003.
Dr. Ueno has been a director since 1996 and served as
Chairman of our Board of Directors from December 2000 to
September 2006. Dr. Ueno co-founded our affiliate R-Tech in
September 1989 and served as its President from 1989 to March
2003. Dr. Ueno also co-founded Sucampo AG in December 1997
and served as its Chairman of the Board or Vice Chairman of the
Board since its inception. Dr. Ueno received his M.D. and a
Ph.D. in medical chemistry from Keio
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University in Japan, and he received a Ph.D. in Pharmacology
from Osaka University. Dr. Ueno is married to Dr. Kuno.
Mariam E. Morris. Ms. Morris has been our
Chief Financial Officer and Treasurer since January 2008 and
served as our Chief Accounting Officer and Treasurer from
January 2007 to December 2007. Ms. Morris served as our
Chief Financial Officer from March 2006 to December 2006 and as
our Director of Finance from February 2004 to March 2006. From
January 2003 to February 2004, she worked as an independent
consultant for AuditWatch, Inc., a training and consultancy firm
for the audit profession. Ms. Morris was a supervising
auditor with the public accounting firm of Snyder, Cohn,
Collyer, Hamilton & Associates, P.C. from
November 2001 to December 2002. Ms. Morris also was a
senior auditor with the public accounting firm of
PricewaterhouseCoopers LLP from September 2000 to October 2001.
Ms. Morris is a certified public accountant and holds a
B.B.A. degree in Accounting from Texas Tech University and a
Masters degree in Taxation from Old Dominion University.
Brad E. Fackler. Mr. Fackler has been our
Executive Vice President of Commercial Operations since
September 2005. From January 2005 to September 2005,
Mr. Fackler was Vice President of The Collaborative Group,
a specialty consultancy firm servicing the pharmaceutical
industry. From September 2004 until January 2005, he was
self-employed. From 1978 to September 2004, Mr. Fackler was
a senior sales executive for Novartis Pharmaceuticals
Corporation. Mr. Fackler holds a Bachelors degree in Life
Science from Otterbein College and an M.B.A. degree from New
York University, Leonard Stern School of Business.
Gayle R. Dolecek. Dr. Dolecek has been
our Senior Vice President of Research and Development since May
2006. From August 1995 to April 2006, he was a Senior Consultant
at AAC Consulting Group, Inc., a provider of regulatory
consulting services to the pharmaceutical industry. Prior to
1995, Dr. Dolecek was an officer with the U.S. Public
Health Service where he served in pharmacy and health service
related positions. He completed his career with the government
in the Food and Drug Administration as Director of Compendial
Operations in the Center for Drug Evaluation and Research.
Dr. Dolecek received his B.S./P.D. in Pharmacy from the
University of Maryland and a M.P.H. in Health Services and
Planning from the University of Hawaii.
Kei S. Tolliver. Ms. Tolliver has been
our Vice President of Business Development and Company
Operations and Secretary since March 2006. From October 2004 to
March 2006, Ms. Tolliver was our Director of Business
Development. Since joining our company in May 1998,
Ms. Tolliver has held a number of positions within the
Sucampo group of affiliated companies, including Director of
Business Development for S&R, a position she has held since
May 2002, supplemental director for Sucampo AG, a position she
has held since September 2004, director of Sucampo Pharma, Ltd.,
a position she has held since July 2004, and General Manager and
director of Sucampo Pharma Europe Ltd., a position she has held
since January 2003. Ms. Tolliver holds a Bachelors degree
in Political Science from West Virginia University.
Employees
As of December 31, 2007, we had 104 full-time
employees, including 32 with doctoral or other advanced degrees.
Of our workforce, 27 employees are engaged in research and
development, 50 are engaged in sales and marketing and 27 are
engaged in business development, legal, finance and
administration. None of our employees are represented by a labor
union or covered by collective bargaining agreements. We have
never experienced a work stoppage and believe our relationship
with our employees is good.
Our Dual
Class Capital Structure
We have two classes of common stock authorized, class A
common stock and class B common stock. Holders of
class A common stock and class B common stock have
identical rights, except that holders of class A common
stock are entitled to one vote per share and holders of
class B common stock are entitled to ten votes per share on
all matters on which stockholders are entitled to vote.
As of March 20, 2008, we have outstanding
15,542,768 shares of class A common stock and
26,191,050 shares of class B common stock. The
class B common stock represents approximately 95% of the
combined voting power of our outstanding common stock. All of
the shares of class B common stock are owned by S&R.
As a result, Drs. Ueno and Kuno will be able to control the
outcome of all matters upon which our stockholders vote,
including
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the election of directors, amendments to our certificate of
incorporation and mergers or other business combinations.
We are not authorized to issue additional shares of class B
common stock except in limited circumstances, such as a stock
split of both classes of common stock or a stock dividend made
in respect of both classes of common stock. Shares of
class B common stock will automatically be converted into
shares of class A common stock upon transfer, with limited
exceptions for transfers to family trusts. In addition, all
remaining outstanding shares of class B common stock will
automatically be converted into shares of class A common
stock upon the death, legal incompetence or retirement from our
company of both Drs. Ueno and Kuno or at such time as the
number of outstanding shares of class B common stock is
less than 20% of the number of outstanding shares of
class A and class B common stock together.
In this report, we refer to our authorized class A common
stock and class B common stock together as our common stock.
Our
Corporate Information
We were incorporated under the laws of Delaware in December
1996. Our principal executive offices are located at 4520
East-West Highway, Suite 300, Bethesda, Maryland 20814, and
our telephone number is
(301) 961-3400.
In September 2006, we acquired all of the capital stock of two
affiliated European and Asian operating companies, Sucampo
Pharma Europe Ltd., or Sucampo Europe, and Sucampo Pharma, Ltd.,
or Sucampo Japan, that were previously under common control with
us.
Website
Access to U.S. Securities and Exchange Commission
Reports
Our Internet address is
http://www.sucampo.com.
Through our website, we make available, free of charge, access
to all reports filed with the U.S. Securities and Exchange
Commission including our Annual Reports on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and amendments to these reports, as filed with or furnished to
the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Copies of any
materials we file with, or furnish to, the SEC can also be
obtained free of charge through the SECs website at
http://www.sec.gov
or at the SECs Public Reference Room at
100 F Street, N.E.,Room 1580, Washington, DC
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
In addition to the other information set forth in this report,
the following factors should be considered carefully in
evaluating our business and our company.
Risks
Related to Our Limited Commercial Operations
Although
we had net income in 2007 and 2006, we have historically
incurred operating losses and we might not achieve or maintain
operating profitability.
We initiated commercial sales of our first product, AMITIZA, for
the treatment of chronic idiopathic constipation in adults in
April 2006, and we first generated product royalty revenue in
the quarter ended June 30, 2006. We have historically
incurred operating losses and, as of December 31, 2007, we
had an accumulated deficit of $10.2 million. Although we
had net income of $13.2 million in 2007 and
$21.8 million in 2006, this was primarily attributable to
our development milestones of $30.0 million and
$20.0 million earned in 2007 and 2006, respectively, which
we recognized as revenue over the development period for
AMITIZA, which was completed in June 2007. Our historical losses
have resulted principally from costs incurred in our research
and development programs and from our general and administrative
expenses. We expect to continue to incur significant and
increasing expenses for at least the next several years as we
continue our research activities and conduct development of, and
seek regulatory approvals for, additional indications for
AMITIZA and for other drug candidates. Whether we are able to
achieve operating profitability in the future will depend upon
our ability to
35
generate revenues that exceed our expenses. Changes in market
conditions, including the failure or approval of competing
products, may require us to incur more expenses or change the
timing of expenses such that we may incur unexpected losses.
Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual
basis. If we are unable to achieve and maintain profitability,
the market value of our class A common stock will decline.
If we
are unable to successfully commercialize our first product,
AMITIZA, for the treatment of chronic idiopathic constipation in
adults or other indications for which we are developing this
drug, including irritable bowel syndrome with constipation, or
experience significant delays in doing so, our ability to
generate product-based revenues and achieve profitability will
be jeopardized.
In the near term, our ability to generate product-based revenues
will depend on the successful commercialization and continued
development of AMITIZA. We recorded our first product royalty
revenue from AMITIZA in the quarter ended June 30, 2006.
The commercial success of AMITIZA will depend on several
factors, including the following:
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the effectiveness of Takedas sales force, as supplemented
by our internal specialty sales force, in marketing and selling
AMITIZA in the United States for the treatment of chronic
idiopathic constipation in adults;
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the ability of R-Tech, which has the exclusive right to
manufacture and supply AMITIZA, or any substitute manufacturer
to supply quantities sufficient to meet market demand and at
acceptable levels of quality and price;
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acceptance of the product within the medical community and by
third-party payors;
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successful completion of clinical trials of AMITIZA for the
treatment of other constipation-related gastrointestinal
indications beyond chronic idiopathic constipation and irritable
bowel syndrome with constipation, and acceptance of the results
of these trials by regulatory authorities; and
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receipt of marketing approvals from the FDA and similar foreign
regulatory authorities for the treatment of other indications,
including marketing approval in the United States for AMITIZA to
treat irritable bowel syndrome with constipation.
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If we are not successful in commercializing AMITIZA for the
treatment of chronic idiopathic constipation or other
indications, or are significantly delayed in doing so, our
business will be materially harmed.
We
have limited experience commercializing drug products. If we are
not successful in making the transition from a pre-commercial
stage company to a commercial company, our ability to become
profitable will be compromised.
For most of our operating history, we have been a pre-commercial
stage company. We are in the process of transitioning to a
company capable of supporting commercial activities, and we may
not be successful in accomplishing this transition. Our
operations to date have been limited largely to organizing and
staffing our company, developing prostone technology,
undertaking preclinical and clinical trials of our product
candidates and coordinating the U.S. regulatory approval
process for AMITIZA for the treatment of chronic idiopathic
constipation in adults. To make the transition to a commercial
company, we will need to continue to develop internally, or
contract with third parties to provide us with, the capabilities
to manufacture a commercial scale product and to conduct the
sales and marketing activities necessary for successful product
commercialization. While we are currently utilizing R-Tech to
perform these manufacturing functions and Takeda to perform many
of these sales and marketing functions with respect to the sale
of AMITIZA in the United States, we may nevertheless encounter
unforeseen expenses, difficulties, complications and delays as
we establish these commercial functions for AMITIZA and for
other products for which we may receive regulatory marketing
approval. As we continue to develop and seek regulatory approval
of additional product candidates and additional indications for
AMITIZA, and to pursue regulatory approvals for AMITIZA and
other products outside the United States, it could be difficult
for us to obtain and devote the resources necessary to
successfully manage our commercialization efforts. If we are not
successful in completing our transition to a commercial company,
our ability to become profitable will be jeopardized and the
market price of our class A common stock is likely to
decline.
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Risks
Related to Employees and Managing Growth
If we
are unable to retain our chief executive and chief scientific
officer and other key executives, we may not be able to
successfully develop and commercialize our
products.
We are highly dependent on Dr. Ryuji Ueno, our chief
executive officer and chief scientific officer, and the other
principal members of our executive and scientific teams,
including Mariam Morris, our chief financial officer, Brad
Fackler, our executive vice president of commercial operations,
Gayle Dolecek, our senior vice president of research and
development, and Kei Tolliver, our vice president of business
development and company operations. The loss of the services of
any of these persons might impede the achievement of our product
development and commercialization objectives and it might be
difficult to recruit a replacement executive for any of their
positions. We have employment agreements with these executives,
but these agreements are terminable by the employees on short or
no notice at any time without penalty to the employee. We do not
maintain key-man life insurance on any of our executives.
If we
fail to attract, retain and motivate qualified personnel, we may
not be able to pursue our product development and
commercialization programs.
Recruiting and retaining qualified scientific and commercial
personnel, including clinical development, regulatory, and
marketing and sales executives and field personnel, will be
critical to our success. If we fail to recruit and then retain
these personnel, our ability to pursue our clinical development
and product commercialization programs will be compromised. We
may not be able to attract and retain these personnel on
acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar
personnel. We also experience competition for the hiring of
scientific personnel from universities and research institutions.
We
expect to expand our development, regulatory, sales and
marketing, and finance and accounting capabilities, and as a
result, we may encounter difficulties in managing our growth,
which could disrupt our operations.
We expect to experience significant growth in the number of our
employees and the scope of our operations, particularly in the
areas of drug development, regulatory affairs, sales and
marketing and finance and accounting. To manage our anticipated
future growth, we must continue to implement and improve our
managerial, operational and financial systems, expand our
facilities, and continue to recruit and train additional
qualified personnel. Due to our limited resources, we may not be
able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The expansion
of our operations may lead to significant costs and may divert
our management and business development resources. The
challenges of managing our growth will become more significant
as we expand the operations of Sucampo Europe and Sucampo Japan.
Any inability to manage growth could delay the execution of our
business plans or disrupt our operations.
The
requirements of being a public company may strain our resources
and distract management.
We completed our initial public offering in August 2007. As a
public company, we will incur significant legal, accounting,
corporate governance and other expenses that we did not incur as
a private company. We are subject to the requirements of the
Exchange Act, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley,
The NASDAQ Global Market, and other rules and regulations. These
rules and regulations may place a strain on our systems and
resources. The Exchange Act requires, among other things, that
we file annual, quarterly and current reports with respect to
our business and financial condition. Sarbanes-Oxley requires,
among other things, that we maintain effective disclosure
controls and procedures and internal control over financial
reporting. The first time that we and our external auditors will
be required to issue a report on the design and operating
effectiveness of our internal controls over financial reporting
will be as of December 31, 2008. We currently do not have
an internal audit group. In order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal controls over financial reporting, we will need to
devote significant resources and management oversight. As a
result, managements attention may be diverted from other
business concerns. In addition, we will need to hire additional
accounting staff with appropriate public company experience and
technical accounting knowledge and we cannot assure you that we
will be able to do so in a timely fashion.
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The rules and regulations applicable to us as a public company
may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required
to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board
of directors or as executive officers.
We may
experience material weaknesses in our internal controls over
financial reporting, which could result in delays of our public
filings and be costly to correct.
We have in the past identified material weaknesses in our
internal controls over financial reporting. Although we have
remediated these material weaknesses, if we identify other
material weaknesses in the future and are unable to remediate
them, we may not be able to accurately and timely report our
financial position, results of operations or cash flows as a
public company. Becoming subject to the public reporting
requirements of the Securities Exchange Act upon the completion
of the initial public offering intensified the need for us to
report our financial position, results of operations and cash
flows on an accurate and timely basis. If we are not able to
prepare complete and accurate financial statements on a timely
basis, this could result in delays in our public filings and
ultimately delisting of our class A common stock from its
principal trading market.
Risks
Related to Product Development and Commercialization
Commercial
rights to some prostone compounds will revert back to Sucampo AG
in the future unless we devote sufficient development resources
to those compounds during the next several years; if any of the
compounds that revert back to Sucampo AG subsequently become
valuable compounds, we will have lost the commercial rights to
those compounds and will not be able to develop or market them,
and the reverted compounds could ultimately compete with
compounds we are developing or marketing.
Sucampo AG has granted to us an exclusive worldwide license to
develop and commercialize products based upon Sucampo AGs
extensive portfolio of U.S. and foreign patents and patent
applications relating to prostone technology. To retain our
license rights to any prostone compounds other than AMITIZA,
cobiprostone and
SPI-017,
which are perpetual, we are required to perform preclinical
testing over a specified period on those compounds and to
generate specified pharmacological and toxicity data. The
specified period ends on the later of June 30, 2011 or the
date upon which Drs. Ueno and Kuno no longer control our
company. For purposes of this agreement, Drs. Ueno and Kuno
will be deemed to control our company as long as either they
together own a majority of the voting power of our stock or at
least one of them is a member of our board of directors.
Following the end of the specified period, Sucampo AG can
terminate our license with respect to any compounds as to which
we have not performed the required testing, except for any
compounds we designate as compounds for which we intend in good
faith to perform the required testing within 15 months
following the expiration of the specified period. At the end of
that
15-month
period, Sucampo AG may terminate our license as to any of the
designated compounds for which we have not performed the
required testing. Dr. Ueno and his wife, Dr. Kuno,
indirectly own all the stock of Sucampo AG.
We will need to focus our development resources and funding on a
limited number of compounds during the specified period. The
decision whether to commit development resources to a particular
compound will require us to determine which compounds have the
greatest likelihood of commercial success. Dr. Ueno and his
staff will be instrumental in making these decisions on our
behalf, although to assist in this determination, we have formed
a selection committee consisting of certain members of
management that exclude Drs. Ueno and Kuno. In this
process, we will likely commit resources to some compounds that
do not prove to be commercially feasible and we may overlook
other compounds that later prove to have significant commercial
potential. If we do not identify and commit resources to one of
these valuable compounds, the commercial rights with respect to
the compound will eventually revert back to Sucampo AG. After
the reversion of these rights to Sucampo AG, we will have no
ability to develop or commercialize the compound. Although
Sucampo AG will be prohibited from developing products that
compete with our products prior to the end of the specified
period, thereafter they will be free to develop competitive
products. In addition, although Sucampo AG will be prohibited
from marketing products that compete with our products for
24 months after the end of the specified period, after that
date Sucampo AG will be permitted to market products, including
products covered by the reverted license rights, in competition
with us.
38
If our
preclinical studies do not produce successful results or if our
clinical trials do not demonstrate safety and efficacy in
humans, our ability to develop additional indications for
AMITIZA and to develop and commercialize other product
candidates will be impaired.
Before obtaining regulatory approval for the sale of our product
candidates, we must conduct extensive preclinical tests and
clinical trials to demonstrate the safety and efficacy in humans
of our product candidates. Preclinical and clinical testing is
expensive, is difficult to design and implement, can take many
years to complete and is uncertain as to outcome. Success in
preclinical testing and early clinical trials does not ensure
that later clinical trials will be successful, and interim
results of a clinical trial do not necessarily predict final
results. A failure of one or more of our clinical trials can
occur at any stage of testing. We may experience numerous
unforeseen events during, or as a result of, preclinical testing
and the clinical trial process that could delay or prevent our
ability to receive regulatory approval or commercialize our
product candidates, including:
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regulators or institutional review boards may not authorize us
to commence a clinical trial or conduct a clinical trial at a
prospective trial site;
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our preclinical tests or clinical trials may produce negative or
inconclusive results, and as a result we may decide, or
regulators may require us, to conduct additional preclinical
testing or clinical trials or we may abandon projects that we
consider to be promising. For example, the efficacy results in
two of our Phase II trials of cobiprostone, specifically
the trials for the treatment of non-alcoholic fatty liver
disease and for the treatment of symptoms associated with cystic
fibrosis, were inconclusive. Therefore, further clinical testing
will be required in connection with the development of this
compound for these indications;
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design of or enrollment in our clinical trials may be slower
than we currently anticipate, resulting in significant delays,
or participants may drop out of our clinical trials at rates
that are higher than we currently anticipate;
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we might have to suspend or terminate our clinical trials, or
perform additional trials, if we discover that the participating
patients are being exposed to unacceptable health risks;
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regulators or institutional review boards may require that we
hold, suspend or terminate clinical research for various
reasons, including noncompliance with regulatory requirements;
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the cost of our clinical trials may be greater than we currently
anticipate;
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we might have difficulty obtaining sufficient quantities of the
product candidate being tested to complete our clinical trials;
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any regulatory approval we ultimately obtain may be limited or
subject to restrictions or post-approval commitments that render
the product not commercially viable; and
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the effects of our product candidates may not be the desired or
anticipated effects or may include undesirable side effects, or
the product candidates may have other unexpected
characteristics. For example, in preclinical tests of AMITIZA,
the drug demonstrated a potential to cause fetal loss in guinea
pigs and, as a result, its label includes cautionary language as
to its use by pregnant women.
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If we are required to conduct additional clinical trials or
other testing of our product candidates beyond those that we
currently contemplate, if we are unable to successfully complete
our clinical trials or other testing or if the results of these
trials or tests are not positive or are only modestly positive,
we may:
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be delayed in obtaining marketing approval for our product
candidates;
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not be able to obtain marketing approval; or
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obtain approval for indications that are not as broad as those
for which we apply.
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Our product development costs will also increase if we
experience delays in testing or approvals. We do not know
whether our clinical trials will begin as planned, will need to
be restructured or will be completed on schedule, if at all.
Significant clinical trial delays also could allow our
competitors to bring products to market before we do and impair
our ability to commercialize our products or product candidates.
39
We are
required to conduct supplemental post-marketing clinical trials
of AMITIZA and we may elect to perform additional clinical
trials for other indications or in support of applications for
regulatory marketing approval in jurisdictions outside the
United States. These supplemental trials could be costly and
could result in findings inconsistent with or contrary to our
historic U.S. clinical trials.
In connection with our marketing approval for AMITIZA for the
treatment of chronic idiopathic constipation in adults, we
committed to the FDA to conduct post-marketing studies of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. In the future, we may
be required, or we may elect, to conduct additional clinical
trials of AMITIZA. In addition, if we seek marketing approval
from regulatory authorities in jurisdictions outside the United
States, such as the European Medicines Agency, or EMEA, they may
require us to submit data from supplemental clinical trials in
addition to data from the clinical trials that supported our
U.S. filings with the FDA. Any requirements to conduct
supplemental trials would add to the cost of developing our
product candidates. Additional or supplemental trials could also
produce findings that are inconsistent with the trial results we
have previously submitted to the FDA, in which case we would be
obligated to report those findings to the FDA. This could result
in new restrictions on AMITIZAs existing marketing
approval for chronic idiopathic constipation in adults or could
force us to stop selling AMITIZA altogether. Inconsistent trial
results could also lead to delays in obtaining marketing
approval in the United States for other indications for AMITIZA
or for other product candidates, could cause regulators to
impose restrictive conditions on marketing approvals and could
even make it impossible for us to obtain marketing approval. Any
of these results could materially impair our ability to generate
revenues and to achieve or maintain profitability.
If we
are unable to establish sales and marketing capabilities or
successfully use third parties to market and sell our products,
we may be unable to generate sufficient product revenues to
become profitable.
We currently have limited sales and distribution capabilities
and little experience in marketing and selling pharmaceutical
products. To achieve commercial success for AMITIZA and any
other approved products, we must either further develop our
internal sales and marketing organization or continue to
outsource these functions to third parties. There are risks
associated with either of these alternatives. For example,
expanding a sales force would be expensive and time consuming
and could delay any product launch. If the commercial launch of
a product for which we recruit a sales force and establish
marketing capabilities were delayed, we would incur related
expenses too early relative to the product launch. This may be
costly, and our investment would be lost if we could not retain
our sales and marketing personnel.
We have entered into a joint collaboration and license agreement
with Takeda for the commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada.
Takeda will broadly market AMITIZA for the treatment of chronic
idiopathic constipation in adults and for other
constipation-related gastrointestinal indications, if approved,
to office-based specialty physicians and primary care physicians
in the United States. The Takeda sales force dedicated to
selling AMITIZA will be significantly larger than our internal
sales force, and we will therefore be heavily dependent on the
marketing and sales efforts of Takeda. If our internal sales
force is not effective, or if Takeda is less successful in
selling AMITIZA than we anticipate, our ability to generate
revenues and achieve profitability will be significantly
compromised.
We
face substantial competition which may result in others
discovering, developing or commercializing products earlier or
more successfully than we do.
The development and commercialization of pharmaceutical products
is highly competitive. We expect to face intense competition
with respect to AMITIZA and our other product candidates from
major pharmaceutical companies, specialty pharmaceutical
companies and biotechnology companies worldwide. Potential
competitors also include academic institutions, government
agencies, and other public and private research organizations
that conduct research, seek patent protection and establish
collaborative arrangements for research, development,
manufacturing and commercialization. Our competitors may develop
products that are safer, more effective, have fewer side
effects, are more convenient or are less costly than AMITIZA or
the other product candidates that we are developing or that
would render AMITIZA or our other product candidates obsolete or
uncompetitive. Our competitors may also obtain FDA or other
regulatory approval for their products more rapidly than we may
obtain approval for ours or achieve product commercialization
before we do. A competitive product might become more
40
popular if it is approved for sale over the counter. If any of
our competitors develops a product that is more effective, safer
or more convenient for patients, or is able to obtain FDA
approval for commercialization before we do, we may not be able
to achieve market acceptance for our products, which would
impair our ability to generate revenues and recover the
substantial developments costs we have incurred and will
continue to incur.
There are currently approved therapies for the diseases and
conditions addressed by AMITIZA. For example,
Zelnorm®,
which is marketed by Novartis, has been approved both for the
treatment of chronic idiopathic constipation in adults under
65 years of age and for the short-term treatment of
irritable bowel syndrome with constipation in women. In March
2007, Zelnorm was withdrawn from the U.S. market by
Novartis at the request of the FDA, but may continue to be sold
in other countries and may be acquired for use by individuals in
the United States and in other markets. In July 2007, the FDA
granted Zelnorm a limited treatment IND, allowing for restricted
use of Zelnorm for patients whose physicians determine the drug
is medically necessary. Zelnorm remains off the market for
general use. In addition, the osmotic laxatives
MiraLaxtm
(polyethylene glycol 3350), which is marketed by Braintree
Laboratories, Inc., and lactulose, which is produced by Solvay
S.A., have each been approved for the short-term treatment of
occasional constipation. Miralax was recently approved for sale
as an
over-the-counter
treatment.
Several companies also are working to develop new drugs and
other therapies for these same diseases and conditions. Some of
these potential competitive drug products include:
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Drugs targeting serotonin receptors for the treatment of
irritable bowel syndrome with constipation, such as Renzapride,
being developed by Alizyme plc and currently in Phase III
clinical trials, DDP733, being developed by Dynogen
Pharmaceuticals, Inc. and currently in Phase II clinical
trials, and Linaclotide, being developed by Microbia, Inc. and
currently in Phase II clinical trials;
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Opioid antagonists such as methylnaltrexone, being developed by
Progenics Pharmaceuticals, Inc., for the treatment of
opioid-induced bowel dysfunction. Progenics and its partner
Wyeth Pharmaceuticals recently filed an NDA with the FDA for a
subcutaneous formulation of this drug for the treatment of
opioid-induced bowel dysfunction in patients receiving
palliative care; and
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TD-5108, being developed by Theravance, Inc. for the treatment
of chronic constipation, and linaclotide, being developed by
Microbia, Inc. for the treatment of irritable bowel syndrome
with constipation, both of which have recently completed
phase II clinical trials.
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Many patients are treated for chronic idiopathic constipation
with competing
over-the-counter
products that are sold for occasional or infrequent use or for
recurring use and that are directly competitive with our
products.
We face similar competition from approved therapies and
potential drug products for the diseases and conditions
addressed by cobiprostone and SPI-017, and are likely to face
significant competition for any other product candidates we may
elect to develop in the future.
Many of our competitors may have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals, and marketing approved products
than we do. Smaller or early stage companies may also prove to
be significant competitors, particularly through collaborative
arrangements with large and established companies.
The
commercial success of AMITIZA and any other products that we may
develop will depend upon the degree of market acceptance by
physicians, patients, healthcare payors and others in the
medical community.
AMITIZA and any other products that we bring to the market may
not gain acceptance by physicians, patients, healthcare payors
and others in the medical community. If these products do not
achieve an adequate level of acceptance, we may not generate
sufficient product revenues to become profitable. The degree of
market acceptance of AMITIZA and any other products approved for
commercial sale will depend on a number of factors, including:
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the prevalence and severity of any side effects. For example,
the most common side effects reported by participants in our
clinical trials of AMITIZA for the treatment of chronic
idiopathic constipation were
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nausea, which was reported by 31% of trial participants, and
diarrhea and headache, both of which were reported by 13% of
trial participants;
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the efficacy and potential advantages over alternative
treatments;
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the competitiveness of the pricing of our products;
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relative convenience and ease of administration of our products
compared to other alternatives;
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the timing of the release of our products to the public compared
to alternative products or treatments;
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the willingness of the target patient population to try new
therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support; and
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the level of third-party coverage or reimbursement.
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The recent withdrawal of Zelnorm from the U.S. market might
adversely affect market acceptance of AMITIZA. The FDA requested
that Novartis discontinue marketing Zelnorm based on an
identified finding of an increased risk of serious
cardiovascular adverse events associated with use of the drug.
Although the mechanism of action of AMITIZA is different from
that of Zelnorm, and although AMITIZA has not been associated
with serious adverse cardiovascular events, nonetheless the
withdrawal of Zelnorm may result in heightened concerns in the
minds of some patients or physicians about the safety of using
alternative treatments such as AMITIZA.
In addition, Adolor Corporation, the developer of an opioid
antagonist,
Entereg®
(alvimopan), for the treatment of opioid-induced bowel
dysfunction, recently announced that it was withdrawing its
protocol for an additional Phase III clinical trial of
Entereg to treat this condition, which had previously been filed
with the FDA. This decision was reportedly based upon
preliminary Phase III trial safety results that suggest
potential links between use of Entereg and adverse
cardiovascular events, tumor development and bone fractures. It
is possible that this development, coming so shortly after the
withdrawal of Zelnorm, could further confuse patients and
physicians and lead to reluctance on their part to use and to
prescribe new drugs to treat gastrointestinal conditions, even
those with different mechanisms of action such as AMITIZA.
If we
are unable to obtain adequate reimbursement from third-party
payors for AMITIZA and any other products that we may develop,
or acceptable prices for those products, our revenues and
prospects for profitability will suffer.
Our revenues and ability to become profitable will depend
heavily upon the availability of adequate reimbursement for the
use of our products from governmental and other third party
payors, both in the United States and in foreign markets.
Reimbursement by a third-party payor may depend upon a number of
factors, including the third-party payors determination
that use of a product is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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appropriate for the specific patient;
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cost effective; and
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neither experimental nor investigational.
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Obtaining reimbursement approval for a product from each
government or other third-party payor is a time-consuming and
costly process that could require us to provide supporting
scientific, clinical and cost-effectiveness data for the use of
our products to each payor. We may not be able to provide data
sufficient to gain acceptance with respect to reimbursement.
Even when a payor determines that a product is eligible for
reimbursement, the payor may impose coverage limitations that
preclude payment for some product uses that are approved by the
FDA or comparable authorities. Moreover, eligibility for
coverage does not imply that any product will be reimbursed in
all cases or at a rate that allows us to make a profit or even
cover our costs. If we are not able to obtain coverage and
42
profitable reimbursement promptly from government-funded and
private third-party payors for our products, our ability to
generate revenues and become profitable will be compromised.
Recent
federal legislation will increase the pressure to reduce prices
of prescription drugs paid for by Medicare, which could limit
our ability to generate revenues.
In 2003, the United States government enacted legislation
providing a partial prescription drug benefit for Medicare
recipients, which became effective at the beginning of 2006.
Government payment for some of the costs of prescription drugs
may increase demand for any products for which we receive
marketing approval. However, to obtain payments under this
program, we will be required to sell products to Medicare
recipients through drug procurement organizations operating
pursuant to this legislation. These organizations will negotiate
prices for our products, which are likely to be lower than those
we might otherwise obtain. Federal, state and local governments
in the United States continue to consider legislation to limit
the growth of healthcare costs, including the cost of
prescription drugs. Future legislation could limit payments for
pharmaceuticals such as AMITIZA and the other product candidates
that we are developing.
Legislation
has been proposed from time to time that would permit
re-importation of drugs from foreign countries into the United
States, including foreign countries where the drugs are sold at
lower prices than in the United States, which could force us to
lower the prices at which we sell our products and impair our
ability to derive revenues from these products.
Legislation has been introduced from time to time in the
U.S. Congress that would permit more widespread
re-importation of drugs from foreign countries into the United
States. This could include re-importation from foreign countries
where the drugs are sold at lower prices than in the United
States. Such legislation, or similar regulatory changes, could
lead to a decrease in the price we receive for any approved
products, which, in turn, could impair our ability to generate
revenues. Alternatively, in response to legislation such as
this, we might elect not to seek approval for or market our
products in foreign jurisdictions in order to minimize the risk
of re-importation, which could also reduce the revenue we
generate from our product sales.
Foreign
governments tend to impose strict price controls, which may
limit our ability to generate revenues.
In some foreign countries, particularly Japan and the countries
of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take considerable time after the receipt of marketing
approval for a product. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a
clinical trial that compares the cost-effectiveness of our
products to other available therapies. If reimbursement of our
products is unavailable in particular countries or limited in
scope or amount, or if pricing is set at unsatisfactory levels,
our ability to generate revenue and profitably distribute
products in these countries could be compromised.
If
product liability lawsuits are brought against us, we may incur
substantial liabilities and may be required to limit
commercialization of any products that we may
develop.
We face an inherent risk of product liability exposure, both
from the testing of our product candidates in human clinical
trials and from the sale of AMITIZA and any other drugs we may
sell in the future. If we cannot successfully defend ourselves
against claims that our products or product candidates caused
injuries, we will incur substantial liabilities. Regardless of
merit or eventual outcome, product liability claims may result
in:
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decreased demand for AMITIZA or any other product that we may
develop;
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injury to our reputation;
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withdrawal of clinical trial participants;
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costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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loss of revenue; and
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the inability to continue to commercialize AMITIZA or to
commercialize any other product that we may develop.
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We currently have product liability insurance that covers our
clinical trials in adult patients and our commercial sales of
AMITIZA up to an annual aggregate limit of $20.0 million
and that covers our clinical trials of AMITIZA in pediatric
patients up to an annual aggregate limit of $5.0 million,
in each case subject to a per claim deductible. The amount or
scope of our product liability insurance may not be adequate to
cover all liabilities that we may incur. Insurance coverage is
increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost, and we may not be able to obtain
insurance coverage that will be adequate to cover any liability
that may arise. We may not have sufficient resources to pay for
any liabilities resulting from a claim beyond the limits of our
insurance coverage. If we cannot protect against product
liability claims, we or our collaborators may find it difficult
or impossible to commercialize our products.
Our
strategy of generating growth through acquisitions and
in-licenses may not be successful if we are not able to identify
suitable acquisition or licensing candidates, to negotiate the
terms of any such transaction or to successfully manage the
integration of any acquisition.
As part of our business strategy, we intend to pursue strategic
acquisitions and in-licensing opportunities with third parties
to complement our existing product pipeline. We have no
experience in completing acquisitions with third parties to date
and we may not be able to identify appropriate acquisition or
licensing candidates or to successfully negotiate the terms of
any such transaction. The licensing and acquisition of
pharmaceutical and biological products is a competitive area. A
number of more established companies are also pursuing
strategies to license or acquire products in the pharmaceutical
field, and they may have a competitive advantage over us due to
their size, cash resources and greater clinical development and
commercialization capabilities. If we are unable to successfully
complete acquisitions or in-licensing transactions for suitable
products and product candidates, our prospects for growth could
suffer.
Even if we are successful in completing one or more
acquisitions, the failure to adequately address the financial,
operational or legal risks of these transactions could harm our
business. To finance an acquisition, we could be required to use
our cash resources, issue potentially dilutive equity securities
or incur or assume debt or contingent liabilities. Accounting
for acquisitions can require impairment losses or restructuring
charges, large write-offs of in-process research and development
expense and ongoing amortization expenses related to other
intangible assets. In addition, integrating acquisitions can be
difficult, and could disrupt our business and divert management
resources. If we are unable to manage the integration of any
acquisitions successfully, our ability to develop new products
and continue to expand our product pipeline may be impaired.
We may
need substantial additional funding and be unable to raise
capital when needed, which could force us to delay, reduce or
abandon our commercialization efforts or product development
programs.
We expect to incur significant commercialization expenses for
product sales, marketing, manufacturing and distribution of
AMITIZA. In addition, we expect our research and development
expenses to increase in connection with our ongoing activities.
We may need substantial additional funding and be unable to
raise capital when needed or on attractive terms, which would
force us to delay, reduce or abandon our commercialization
efforts or development programs.
We have financed our operations and internal growth principally
through private placements and a public offering of equity
securities, payments received under our collaboration agreement
with Takeda and milestone and other payments from Sucampo AG and
R-Tech. We believe that our existing cash and cash equivalents
and internally generated funds that we anticipate from AMITIZA
product sales, will be sufficient to enable us to fund our
operating expenses for the foreseeable future. Our future
funding requirements, however, will depend on many factors,
including:
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actual levels of AMITIZA product sales;
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the cost of commercialization activities, including product
marketing, sales and distribution;
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the scope and results of our research, preclinical and clinical
development activities;
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the timing of, and the costs involved in, obtaining regulatory
approvals;
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the costs involved in obtaining and maintaining proprietary
protection for our products, technology and know-how, including
litigation costs and the results of such litigation;
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our ability to recruit and retain internal staff resources to
conduct these activities;
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the extent to which we acquire or invest in businesses, products
and technologies;
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the success of our collaboration with Takeda; and
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our ability to establish and maintain additional collaborations.
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If we are required to raise additional funds from external
sources, we might accomplish this through public or private
equity offerings, debt financings or corporate collaboration and
licensing arrangements. If we raise additional funds by issuing
equity securities, current stockholders may experience dilution.
Debt financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt, making
capital expenditures or declaring dividends. If we raise
additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to
relinquish valuable rights and related intellectual property to
our technologies, research programs, products or product
candidates.
Risks
Related to Our Dependence on Third Parties, Including Related
Parties
We
have no manufacturing capabilities and are dependent upon R-Tech
to manufacture and supply us with our product and product
candidates. If R-Tech does not manufacture AMITIZA or our other
product candidates in sufficient quantities, at acceptable
quality levels and at acceptable cost and if we are unable to
identify a suitable replacement manufacturer, our sales of
AMITIZA and our further clinical development and
commercialization of other products could be delayed, prevented
or impaired.
We do not own or operate manufacturing facilities and have
little experience in manufacturing pharmaceutical products. We
currently rely, and expect to continue to rely, exclusively on
R-Tech to supply Takeda and us with AMITIZA, cobiprostone and
SPI-017 and any future prostone compounds that we may determine
to develop or commercialize. We have granted R-Tech the
exclusive right to manufacture and supply AMITIZA to meet our
commercial and clinical requirements in the Americas, Europe,
the Middle East and Africa until 2026, and we do not have an
alternative source of supply for AMITIZA in these or any other
territories. We also do not have an alternative source of supply
for cobiprostone or SPI-017, which R-Tech manufactures and
supplies to us. If R-Tech is not able to supply AMITIZA or these
other compounds on a timely basis, in sufficient quantities and
at acceptable levels of quality and price and if we are unable
to identify a replacement manufacturer to perform these
functions on acceptable terms, sales of AMITIZA would be
significantly impaired and our development programs could be
seriously jeopardized. In addition, we currently do not have a
manufacture or supply arrangement for the supply of AMITIZA in
Asia. Our ability to market and sell AMITIZA in Asia also would
be significantly impaired if we are unable to enter into a
supply and manufacture arrangement with R-Tech or another
suitable manufacturer for the supply of AMITIZA in that
territory.
The risks of relying solely on R-Tech for the manufacture of our
products include:
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we rely solely on R-Tech for quality assurance and their
continued compliance with regulations relating to the
manufacture of pharmaceuticals;
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R-Techs manufacturing capacity may not be sufficient to
produce commercial quantities of our product, or to keep up with
subsequent increases in the quantities necessary to meet
potentially growing demand;
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R-Tech may not have access to the capital necessary to expand
its manufacturing facilities in response to our needs;
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in light of the complexity of the manufacturing process for
prostones, if R-Tech were to cease conducting business, or if
its operations were to be interrupted, it would be difficult and
time consuming for us to find a replacement supplier and the
change would need to be submitted to and approved by the FDA;
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R-Tech has substantial proprietary know-how relating to the
manufacture of prostones and, in the event we must find a
replacement or supplemental manufacturer or we elect to contract
with another manufacturer to supply us with products other than
AMITIZA, we would need to transfer this know-how to the new
manufacturer, a process that could be both time consuming and
expensive to complete;
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R-Tech may experience events, such as a fire or natural
disaster, that force it to stop or curtail production for an
extended period; and
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R-Tech could encounter significant increases in labor, capital
or other costs that would make it difficult for R-Tech to
produce our products cost-effectively.
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In addition, R-Tech currently uses one supplier for the primary
ingredient used in the manufacture of prostones. R-Tech could
experience delays in production should it become necessary to
switch its source of supply for this ingredient to another
supplier or to manufacture the ingredient itself.
Our current and anticipated future dependence upon R-Tech for
the manufacture of our products and product candidates may
adversely affect our future revenues, our cost structure and our
ability to develop product candidates and commercialize any
approved products on a timely and competitive basis. In
addition, if R-Tech should cease to manufacture prostones for
our clinical trials for any reason, we likely would experience
delays in advancing these trials while we seek to identify and
qualify replacement suppliers. We may be unable to obtain
replacement supplies on a timely basis, on terms that are
favorable to us or at all.
We and
R-Tech are dependent upon a single contract manufacturer to
complete the final stage of manufacture of
AMITIZA.
R-Tech has subcontracted with a single contract manufacturer to
encapsulate the bulk form AMITIZA supplied by R-Tech into
gelatin capsules and to package the final product for
distribution in the United States. If this subcontractor
experiences difficulties or delays in performing these services
for any reason, our ability to deliver adequate supplies of
finished product to physicians and patients will be impaired
during the period in which R-Tech seeks a replacement
manufacturer, which could cause us to lose revenues. In
addition, any change in the party providing encapsulation of
AMITIZA would need to be approved by the FDA, and any change in
the party packaging the product would need to be submitted to
and reviewed by the FDA, which could increase the time required
to replace this subcontractor should that become necessary.
R-Tech
and any other third-party manufacturer of our products and
product candidates are subject to significant regulations
governing manufacturing facilities and procedures.
R-Tech, R-Techs subcontractors and suppliers and any other
potential manufacturer of our products or product candidates may
not be able to comply with the FDAs cGMP regulations,
other U.S. regulations or similar regulatory requirements
in force outside the United States. These regulations govern
manufacturing processes and procedures and the implementation
and operation of systems to control and assure the quality of
products approved for sale. In addition, the FDA or other
regulatory agencies outside the United States may at any time
audit or inspect a manufacturing facility to ensure compliance
with cGMP or similar regulations. Our failure, or the failure of
R-Tech, R-Techs subcontractors and suppliers or any other
third-party manufacturer we use, to comply with applicable
manufacturing regulations could result in sanctions being
imposed on us, including fines, injunctions, civil penalties,
failure of regulatory authorities to grant marketing approval of
our product candidates, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product
candidates or products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely
affect supplies of our products and product candidates.
If it were to become necessary for us to replace R-Tech as
contract manufacturer of our product and product candidates, we
would compete with other products for access to appropriate
manufacturing facilities and the change
46
would need to be submitted to and approved by the FDA. Among
manufacturers that operate under cGMP regulations, there are a
limited number that would be both capable of manufacturing for
us and willing to do so.
We
depend significantly on our collaboration with Takeda, and may
depend in the future on collaborations with other third parties,
to develop and commercialize our product
candidates.
A key element of our business strategy is to collaborate where
appropriate with third parties, particularly leading
pharmaceutical companies, to develop, commercialize and market
our products and product candidates. We are currently party to a
16-year
joint collaboration and license agreement with Takeda for the
development and commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada.
Our agreement with Takeda provides that it may be terminated by
either party if we fail to receive marketing approval from the
FDA for AMITIZA for the treatment of irritable bowel syndrome
with constipation and if we and Takeda do not thereafter agree
on an alternative development and commercialization strategy. If
Takeda were to terminate the agreement under these conditions,
we would likely realize significantly lower revenues from sales
of AMITIZA for the treatment of chronic idiopathic constipation
until we could find a replacement marketing organization or
develop our own, and our ability to continue our development
program for AMITIZA for other gastrointestinal indications could
be seriously compromised. In addition, if we fail to receive
marketing approval from the FDA for this indication, we might
not receive up to $60.0 million of development milestone
payments that Takeda is obligated to pay us upon our achievement
of future regulatory milestones relating to AMITIZA. We also
might not receive up to $50.0 million of commercial
milestone payments that Takeda is obligated to pay us upon the
achievement of specified targets for annual net sales revenue
from AMITIZA in the United States and Canada.
The success of our collaboration arrangement will depend heavily
on the efforts and activities of Takeda. The risks that we face
in connection with this collaboration, and that we anticipate
being subject to in any future collaborations, include the
following:
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our joint collaboration agreement with Takeda is, and any future
collaboration agreements that we may enter into are likely to
be, subject to termination under various circumstances;
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Takeda and other future collaborators may develop and
commercialize, either alone or with others, products and
services that are similar to or competitive with the products
that are the subject of the collaboration with us;
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Takeda and other future collaborators may underfund or not
commit sufficient resources to the testing, marketing,
distribution or other development of our products or may use
committed resources inefficiently;
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Takeda and other future collaborators may not properly maintain
or defend our intellectual property rights or may utilize our
proprietary information in such a way as to invite litigation
that could jeopardize or invalidate our proprietary information
or expose us to potential liability; and
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Takeda and other future collaborators may change the focus of
their development and commercialization efforts. Pharmaceutical
and biotechnology companies historically have re-evaluated their
priorities from time to time, including following mergers and
consolidations, which have been common in recent years in these
industries.
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The ability of our products and product candidates to reach
their potential could be limited if Takeda or any other future
collaborators decrease or fail to increase spending relating to
such products, fail to dedicate sufficient resources to
promoting our products or change their business focus.
Because
we rely upon third parties to provide the sales representatives
marketing AMITIZA, we may face increased risks arising from
their misconduct or improper activities, which would harm our
business.
Because we will have only limited capacity to monitor the sales
efforts of Takedas sales force, we may be exposed to
increased risks arising from any misconduct or improper
activities of these sales representatives, including the
potential off-label promotion of our products or their failure
to adhere to standard requirements in connection with product
promotion. In addition, we will be exposed to similar risks
arising from our previous use of Ventivs employees to
market AMITIZA. Although we amended our agreement with Ventiv
and ceased to use Ventivs employees effective July 1,
2007, any misconduct or inappropriate activities by Ventiv
employees prior to
47
termination could create future liabilities for us, and any
misconduct or inappropriate activities might not come to light
for an extended period after the termination. Any such improper
activities could hurt our reputation, cause us to become subject
to significant liabilities and otherwise harm our business.
We may
not be successful in establishing additional collaborations,
which could compromise our ability to develop and commercialize
products.
If we are unable to reach new agreements with suitable
collaborators, we may fail to meet our business objectives for
the affected product or program. We face significant competition
in seeking appropriate collaborators. Moreover, these
collaboration arrangements are complex and time-consuming to
negotiate and document. We may not be successful in our efforts
to establish additional collaborations or other alternative
arrangements. The terms of any additional collaborations or
other arrangements that we establish may not be as favorable to
us as we anticipate. Moreover, these collaborations or other
arrangements may not be successful.
We
rely on third parties to conduct our clinical trials and those
third parties may not perform satisfactorily or may fail to meet
established deadlines for the completion of these
trials.
We generally do not have the independent ability to conduct
clinical trials for our product candidates. We rely on third
parties, such as contract research organizations, clinical data
management organizations, medical institutions, and clinical
investigators, to perform this function. For example,
approximately 130 separate clinical investigators participated
in our trials for irritable bowel syndrome with constipation. We
use multiple contract research organizations to coordinate the
efforts of our clinical investigators and to accumulate the
results of our trials. Our reliance on these third parties for
clinical development activities reduces our control over these
activities. Furthermore, these third parties may also have
relationships with other entities, some of which may be our
competitors. If these third parties do not carry out their
contractual duties or meet expected deadlines, we will be
delayed in obtaining, or may not be able to obtain, regulatory
approvals for our product candidates and will be delayed in our
efforts to, or may not be able to, successfully commercialize
our product candidates.
In addition, we are responsible for ensuring that each of our
clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. The FDA
requires us to comply with standards, commonly referred to as
good clinical practices, for conducting and recording and
reporting the results of clinical trials to assure that data and
reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are
protected. Our reliance on third parties that we do not control
does not relieve us of these responsibilities and requirements.
Conflicts
of interest may arise between Sucampo AG or R-Tech and us, and
these conflicts might ultimately be resolved in a manner
unfavorable to us.
Our founders, Dr. Sachiko Kuno and Dr. Ryuji Ueno,
together wholly own Sucampo AG and own a majority of the stock
of R-Tech. Drs. Kuno and Ueno are married to each other.
Ownership interests of our founders in the stock of R-Tech or
Sucampo AG, and Dr. Uenos service as a director and
executive officer of our company, could give rise to conflicts
of interest when faced with a decision that could favor the
interests of one of the affiliated companies over another. In
addition, conflicts of interest may arise with respect to
existing or possible future commercial arrangements between us
and R-Tech or Sucampo AG in which the terms and conditions of
the arrangements are subject to negotiation or dispute. For
example, conflicts of interest could arise over matters such as:
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disputes over the cost or quality of the manufacturing services
provided to us by R-Tech with respect to AMITIZA, cobiprostone
and SPI-017;
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a decision whether to engage R-Tech in the future to manufacture
and supply compounds other than AMITIZA, cobiprostone and SPI-017
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decisions as to which particular prostone compounds, other than
AMITIZA, cobiprostone or SPI-017, we will commit sufficient
development efforts to so that commercial rights to those
compounds will not revert back to Sucampo AG at the end of the
specified period; or
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business opportunities unrelated to prostones that may be
attractive both to us and to the other company.
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If
United States or foreign tax authorities disagree with our
transfer pricing policies, we could become subject to
significant tax liabilities.
We are a member of an affiliated group of entities, including
Sucampo AG and R-Tech, each of which is directly or indirectly
controlled by Drs. Ueno and Kuno. We have had and will
continue to have significant commercial transactions with these
entities. Furthermore, we operate two foreign subsidiaries,
Sucampo Japan and Sucampo Europe. We expect to enter into
commercial transactions with each of these entities on an
ongoing basis. As a result of these transactions, we will be
subject to complex transfer pricing regulations in both the
United States and the other countries in which we and our
affiliates operate. Transfer pricing regulations generally
require that, for tax purposes, transactions between our
subsidiaries and affiliates and us be priced on a basis that
would be comparable to an arms length transaction and that
contemporaneous documentation be maintained to support the
related party agreements. To the extent that United States or
any foreign tax authorities disagree with our transfer pricing
policies, we could become subject to significant tax liabilities
and penalties related to prior, existing and future related
party agreements.
Risks
Related to Our Intellectual Property
If we
are unable to obtain and maintain proprietary protection for the
intellectual property relating to our technology and products,
the value of our technology and products will be adversely
affected and our ability to derive revenue from our products
would be impaired.
Our success depends in part on our ability, and that of Sucampo
AG, to obtain and maintain proprietary protection for the
technology and know-how upon which our products are based, to
operate without infringing on the proprietary rights of others
and to prevent others from infringing on our proprietary rights.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our intellectual property will depend on our success, in
conjunction with Sucampo AG, in obtaining effective claims and
enforcing those claims once granted. The scope of protection
afforded by a set of patent claims is subject to inherent
uncertainty unless the patent has already been litigated and a
court has ruled on the meaning of the claim language and other
issues affecting how broadly a patent claim can be enforced. In
some cases, we license patent applications from Sucampo AG
instead of issued patents, and we do not know whether these
patent applications will result in the issuance of any patents.
Our licensed patents may be challenged, invalidated or
circumvented, which could limit the term of patent protection
for our products or diminish our ability to stop competitors
from marketing related products. In addition, changes in either
patent laws or in interpretations of patent laws in the United
States and other countries may diminish the value of Sucampo
AGs patents and our intellectual property or narrow the
scope of the protection provided by these patents. Accordingly,
we cannot determine the degree of future protection for our
proprietary rights in the licensed patents and patent
applications. Furthermore, because of the extensive time
required for development, testing and regulatory review of a
potential product, it is possible that, before any of our
product candidates can be commercialized, a related patent may
expire or may remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.
The patents we license from Sucampo AG also may not afford us
protection against competitors with similar technology. Because
patent applications in the United States and many foreign
jurisdictions are typically not published until 18 months
after filing, or in some cases not at all, and because
publications of discoveries in the scientific literature often
lag behind actual discoveries, neither we nor Sucampo AG can be
certain that we or they were the first to make the inventions
claimed in issued patents or pending patent applications, or
that we or they were the first to file for protection of the
inventions set forth in these patent applications.
Confidentiality
agreements with our employees and other precautions may not be
adequate to prevent disclosure of our proprietary information
and know-how.
In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how developed both by
Sucampo AG and by us. We and Sucampo AG seek to protect our
respective proprietary technology and processes, in part, by
confidentiality agreements with our respective employees,
consultants, scientific advisors and contractors. We also seek
to preserve the integrity and confidentiality of our data and
trade
49
secrets by maintaining physical security of our premises and
physical and electronic security of our information technology
systems. These agreements or security measures may be breached,
and we and Sucampo AG may not have adequate remedies for any
such breach. In addition, our trade secrets may otherwise become
known or be independently developed by competitors. If we or
Sucampo AG are unable to protect the confidentiality of our
proprietary information and know-how, competitors may be able to
use this information to develop products that compete with our
products, which could compromise our ability to produce revenue
and achieve profitability.
If we
infringe or are alleged to infringe intellectual property rights
of third parties, our business could be harmed.
There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in the
pharmaceutical and biotechnology industries. Our research,
development and commercialization activities and those of
Sucampo AG, as well as any products or product candidates
resulting from these activities, may infringe or be alleged to
infringe patents or patent applications owned or controlled by
other parties. These third parties could bring claims against us
or one of our collaborators that would require us to incur
substantial expenses and, if successful against us, could cause
us to pay substantial damages. Further, if a patent infringement
suit were brought against us or one of our collaborators, we or
they could be forced to stop or delay research, development,
manufacturing or sales of the product or product candidate that
is the subject of the suit.
As a result of patent infringement claims, or in order to avoid
potential claims, we or one of our collaborators may choose or
be required to seek a license from a third party and be required
to pay license fees or royalties or both. These licenses may not
be available on acceptable terms, or at all. Even if we or a
collaborator were able to obtain a license, the rights may be
nonexclusive, which could result in our competitors gaining
access to the same intellectual property. Ultimately, we could
be prevented from commercializing a product, or be forced to
cease some aspect of our business operations, if, as a result of
actual or threatened patent infringement claims, we or one of
our collaborators are unable to enter into licenses on
acceptable terms. This could harm our business significantly.
We may
be subject to other patent related litigation or proceedings
that could be costly to defend and uncertain in their
outcome.
In addition to infringement claims against us, we may become a
party to other patent litigation and proceedings, including
interference proceedings declared by the United States Patent
and Trademark Office or opposition proceedings in the European
Patent Office regarding intellectual property rights with
respect to our products and technology, as well as other
disputes with licensees, licensors or others with whom we have
contractual or other business relationships for intellectual
property. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively than we can because
of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of
patent litigation or other proceedings could negatively affect
our ability to compete in the marketplace. Patent litigation and
other proceedings may also absorb significant management
resources.
Risks
Related to Regulatory Approval and Oversight
If we
are not able to obtain required regulatory approvals, we will
not be able to commercialize our product candidates and our
ability to generate revenue will be materially
impaired.
Our product candidates and the activities associated with their
development and commercialization, including testing,
manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertising, promotion, sale and distribution, are
subject to comprehensive regulation by the FDA and other
regulatory agencies in the United States and by authorities in
other countries. Failure to obtain regulatory approval for a
product candidate will prevent us from commercializing the
product candidate.
Securing FDA approval requires the submission of extensive
preclinical and clinical data, information about product
manufacturing processes and inspection of facilities and
supporting information to the FDA for each therapeutic
indication to establish the product candidates safety and
efficacy. Our future products may not be
50
effective, may be only moderately effective or may prove to have
undesirable side effects, toxicities or other characteristics
that may preclude our obtaining regulatory approval or prevent
or limit commercial use.
The process of obtaining regulatory approvals is expensive,
often takes many years, if approval is obtained at all, and can
vary substantially based upon the type, complexity and novelty
of the product candidates involved. Changes in the regulatory
approval policy during the development period, changes in or the
enactment of additional statutes or regulations, or changes in
regulatory review for each submitted product application, may
cause delays in the approval or rejection of an application. The
FDA has substantial discretion in the approval process and may
refuse to accept any application or may decide that our data are
insufficient for approval and require additional preclinical,
clinical or other studies. In addition, varying interpretations
of the data obtained from preclinical and clinical testing could
delay, limit or prevent regulatory approval of a product
candidate. Any regulatory approval we ultimately obtain may be
limited in scope or subject to restrictions or post-approval
commitments that render the product not commercially viable. If
any regulatory approval that we obtain is delayed or is limited,
we may decide not to commercialize the product candidate after
receiving the approval.
Even
if we receive regulatory approval for a product, the product
could be subject to regulatory restrictions or withdrawal from
the market, and we may be subject to penalties if we fail to
comply with ongoing regulatory requirements.
AMITIZA and any other product for which we obtain marketing
approval, along with the manufacturing processes, post-approval
clinical data, labeling, advertising and promotional activities
for such product, will be subject to continual requirements of
and review by the FDA and other regulatory bodies. These
requirements include submissions of safety and other
post-marketing information and reports, registration
requirements, cGMP requirements relating to quality control,
quality assurance and corresponding maintenance of records and
documents, requirements regarding the distribution of samples to
physicians and recordkeeping. Even if regulatory approval of a
product is granted, the approval may be subject to limitations
on the indicated uses for which the product may be marketed or
to the conditions of approval, or contain requirements for
costly post-marketing testing and surveillance to monitor the
safety or efficacy of the product. If we fail to comply with
applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and
criminal prosecution.
We may
experience unanticipated safety issues with our products after
they are approved for marketing, which could harm our business
and our reputation.
Because AMITIZA and our other product candidates are based on
newly discovered prostone technology with novel mechanisms of
action, there may be long-term safety risks associated with
these products that are not identifiable or well-understood at
early stages of development and commercialization. Later
discovery of previously unknown problems with our products,
manufacturers or manufacturing processes may result in:
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restrictions on such products, manufacturers or manufacturing
processes;
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warning letters;
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withdrawal of the products from the market;
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refusal to approve pending applications or supplements to
approved applications that we submit; and
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voluntary or mandatory product recalls.
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Because we rely on Takeda to provide a significant portion of
the sales force that is selling AMITIZA, we are dependent to
some degree on Takeda to promptly and properly report any safety
issues encountered in the field. If Takeda or their sales
representatives fail to provide timely and accurate reporting of
any safety issues that arise in connection with AMITIZA, our
business and reputation could be harmed.
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Failure
to obtain regulatory approval in international jurisdictions
would prevent us from marketing our products outside the United
States and could adversely affect our reputation and our product
marketing activities within the United States.
We intend to market our products both domestically and outside
the United States. In order to market our products in the
European Union, Japan and many other foreign jurisdictions, we
must obtain separate regulatory approvals and comply with
numerous and varying regulatory requirements. The approval
procedure varies among countries and can involve additional
testing. The time required to obtain approval may differ from
that required to obtain FDA approval. The foreign regulatory
approval process may include all of the risks associated with
obtaining FDA approval. We may not obtain foreign regulatory
approvals on a timely basis, if at all. Approval by the FDA does
not ensure approval by regulatory authorities in other countries
or jurisdictions, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries or jurisdictions or by the FDA. We may
not be able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
We may
not be able to obtain orphan drug exclusivity for our product
candidates. If our competitors are able to obtain orphan drug
exclusivity for a product that is competitive with one or more
of our product candidates and we cannot show that our product
candidate is clinically superior, we may not be able to have
competing products approved by the applicable regulatory
authority for a significant period of time.
Regulatory authorities in some jurisdictions, including Europe
and the United States, may designate drugs that target
relatively small patient populations as orphan drugs. We have
received an orphan drug designation from the FDA for our product
candidate cobiprostone for the treatment of disorders associated
with cystic fibrosis and we may pursue orphan drug designation
for additional product candidates. Generally, if a product with
an orphan drug designation subsequently receives the first
marketing approval for the indication for which it has such
designation, the product is entitled to a period of marketing
exclusivity. The exclusivity applies only to the indication for
which the drug has been designated and approved. The applicable
exclusivity period is seven years in the United States, but this
period may be interrupted if a sponsor of a competitive product
that is otherwise the same drug for the same use can show that
its drug is clinically superior to our orphan drug candidate.
The European exclusivity period is ten years, but may be reduced
to six years if a drug no longer meets the criteria for orphan
drug designation, including where it is shown that the drug is
sufficiently profitable so that market exclusivity is no longer
justified. In addition, European regulations establish that a
competitors marketing authorization for a similar product
with the same indication may be granted if there is an
insufficient supply of the product or if another applicant can
establish that its product is safer, more effective or otherwise
clinically superior. If a competitor obtains orphan drug
exclusivity for a product competitive with cobiprostone before
we do and if the competitors product is the same drug with
the same indication as ours, we would be excluded from the
market, unless we can show that our drug is safer, more
effective or otherwise clinically superior. Even if we obtain
orphan drug exclusivity for cobiprostone for these indications,
we may not be able to maintain it if a competitor with a product
that is otherwise the same drug can establish that its product
is clinically superior.
We
must comply with federal, state and foreign laws, regulations,
and other rules relating to the health care business, and, if we
are unable to fully comply with such laws, regulations and other
rules, we could face substantial penalties.
We are or will be directly, or indirectly through our customers,
subject to extensive regulation by the federal government, the
states and foreign countries in which we may conduct our
business. The laws that directly or indirectly affect our
ability to operate our business include the following:
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the federal Medicare and Medicaid Anti-Kickback law, which
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce either the referral of
an individual, or furnishing or arranging for a good or service,
for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid Programs;
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other Medicare laws, regulations, rules, manual provisions and
policies that prescribe the requirements for coverage and
payment for services performed by our customers, including the
amount of such payment;
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the federal False Claims Act, which imposes civil and criminal
liability on individuals and entities who submit, or cause to be
submitted, false or fraudulent claims for payment to the
government;
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the federal False Statements Act, which prohibits knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false statement in connection with the
delivery of or payment for healthcare benefits, items or
services; and
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state and foreign law equivalents of the foregoing and state
laws regarding pharmaceutical company marketing compliance,
reporting and disclosure obligations.
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If our operations are found to be in violation of any of the
laws, regulations, rules or policies described above or any
other law or governmental regulation to which we or our
customers are or will be subject, or if the interpretation of
the foregoing changes, we may be subject to civil and criminal
penalties, damages, fines, exclusion from the Medicare and
Medicaid programs and the curtailment or restructuring of our
operations. Similarly, if our customers are found non-compliant
with applicable laws, they may be subject to sanctions, which
could also have a negative impact on us. Any penalties, damages,
fines, curtailment or restructuring of our operations would harm
our ability to operate our business and our financial results.
The risk of our being found in violation of these laws is
increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and
their provisions may be open to a variety of interpretations.
Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur
significant legal expenses, divert management resources from the
operation of our business and damage our reputation.
Risks
Related to Our Common Stock
Our
founders maintain the ability to control all matters submitted
to stockholders for approval, which could result in actions of
which you or other stockholders do not approve.
Dr. Sachiko Kuno, who was an executive officer and director
of our company until May 31, 2007, and Dr. Ryuji Ueno,
our chief executive officer, chief scientific officer and a
director, together beneficially own 2,426,385 shares of
class A common stock and 26,191,050 shares of
class B common stock, representing approximately 95% of the
combined voting power of our outstanding common stock. As a
result, Drs. Ueno and Kuno, who are married, acting by
themselves will be able to control the outcome of all matters
that our stockholders vote upon, including the election of
directors, amendments to our certificate of incorporation, and
mergers or other business combinations. The concentration of
ownership and voting power also may have the effect of delaying
or preventing a change in control of our company and could
prevent stockholders from receiving a premium over the market
price if a change in control is proposed.
Provisions
in our corporate charter documents and under Delaware law may
prevent or frustrate attempts by our stockholders to change our
management and hinder efforts to acquire a controlling interest
in us, and the market price of our class A common stock may
be lower as a result.
There are provisions in our certificate of incorporation and
by-laws that may make it difficult for a third party to acquire,
or attempt to acquire, control of our company, even if a change
in control was considered favorable by you and other
stockholders. For example, our board of directors has the
authority to issue up to 5,000,000 shares of preferred
stock. The board of directors can fix the price, rights,
preferences, privileges, and restrictions of the preferred stock
without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a
change in control transaction. As a result, the market price of
our class A common stock and the voting and other rights of
our stockholders may be adversely affected. An issuance of
shares of preferred stock may result in the loss of voting
control to other stockholders.
Our charter documents contain other provisions that could have
an anti-takeover effect, including:
|
|
|
|
|
the high-vote nature of our class B common stock;
|
|
|
|
following the conversion of all shares of class B common
stock into class A common stock, only one of our three
classes of directors will be elected each year;
|
53
|
|
|
|
|
following the conversion of all shares of class B common
stock into class A common stock, stockholders will not be
entitled to remove directors other than by a 75% vote and for
cause;
|
|
|
|
following the conversion of all shares of class B common
stock into class A common stock, stockholders will not be
permitted to take actions by written consent;
|
|
|
|
stockholders cannot call a special meeting of
stockholders; and
|
|
|
|
stockholders must give advance notice to nominate directors or
submit proposals for consideration at stockholder meetings.
|
In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. These provisions could
discourage potential acquisition proposals and could delay or
prevent a change in control transaction. They could also have
the effect of discouraging others from making tender offers for
our class A common stock. These provisions may also prevent
changes in our management.
Our
class A common stock is thinly traded and our stock price
is volatile; investors in our class A common stock could
incur substantial losses.
The public trading market for our class A common stock is
characterized by small trading volumes and a highly volatile
stock price. The stock market in general and the market for
pharmaceutical and biotechnology companies in particular have
experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. As a result
of this volatility, investors may not be able to sell their
class A common stock at or above the price they paid, and
may have difficulty selling their shares at any price. The
market price for our class A common stock may be influenced
by many factors, including:
|
|
|
|
|
failure of AMITIZA or other approved products, if any, to
achieve commercial success;
|
|
|
|
results of clinical trials of our product candidates or those of
our competitors;
|
|
|
|
the regulatory status of our product candidates;
|
|
|
|
the success of competitive products or technologies;
|
|
|
|
regulatory developments in the United States and foreign
countries;
|
|
|
|
developments or disputes concerning patents or other proprietary
rights;
|
|
|
|
the ability of R-Tech to manufacture our products to commercial
standards in sufficient quantities;
|
|
|
|
actual or anticipated fluctuations in our quarterly financial
results;
|
|
|
|
variations in the financial results of companies that are
perceived to be similar to us;
|
|
|
|
changes in the structure of healthcare payment systems;
|
|
|
|
market conditions in the pharmaceutical and biotechnology
sectors and issuance of new or changed securities analysts
reports or recommendations; and
|
|
|
|
general economic, industry and market conditions.
|
We
have never paid cash dividends on our capital stock, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have paid no cash dividends on our capital stock to date. We
currently intend to retain our future earnings, if any, to fund
the development and growth of our business. In addition, the
terms of any existing or future debt agreements may preclude us
from paying dividends. As a result, capital appreciation, if
any, of our class A common stock will be your sole source
of gain for the foreseeable future.
54
A
significant portion of our total outstanding shares are eligible
to be sold into the market. This could cause the market price of
our class A common stock to drop significantly, even if our
business is doing well.
Sales of a substantial number of shares of our class A
common stock in the public market could occur at any time. If
our stockholders sell, or the market perceives that our
stockholders intend to sell, substantial amounts of our
class A common stock in the public market, the market price
of our class A common stock could decline significantly.
Virtually all of our outstanding shares of common stock are
eligible to be resold in the public markets, including
approximately 37.5 million shares that first became
available for sale in the public market in February 2008
following the expiration of
lock-up
agreements between our stockholders and the underwriters of our
public offering, subject in some cases to volume limitations
imposed by federal securities laws. Moreover, holders of an
aggregate of 6,751,609 shares of our common stock have
rights, subject to some conditions, to require us to file
registration statements covering their shares or to include
their shares in registration statements that we may file for
ourselves or other stockholders. We also registered the
13,900,900 shares of class A common stock that we may
issue in the future under our equity compensation plans, and
they can be freely sold in the public market upon issuance.
Due to
recent uncertainties in the credit markets, we may be unable to
liquidate some holdings of our auction rate securities and as a
result, may suffer losses from these investments. In addition,
given the complexity of auction rate securities and their
valuations, our estimates of their fair value may differ from
the actual amount we would be able to collect in an ultimate
sale.
As of December 31, 2007, we had $60.9 million invested
in auction rate securities. Auction rate securities are
long-term debt instruments that provide liquidity through a
Dutch auction process that resets the applicable interest rate
at pre-determined calendar intervals, generally every seven to
49 days. This mechanism generally allows existing investors
to roll-over their holdings and continue to own their respective
securities or liquidate their holdings by selling their
securities at par value and therefore are usually classified
within current assets.
We generally invest in auction rate securities for short periods
of time as part of our cash management program. Recent
uncertainties in the credit markets have prevented us from
liquidating some of our holdings of auction rate securities
subsequent to December 31, 2007 because the amount of
securities submitted for sale during the auction exceeded the
amount of purchase orders. In one instance, the first auction
after year-end failed as to one security we hold in the amount
of $9.4 million. In other instances, we experienced
successful auctions shortly after December 31, 2007, but
then encountered subsequent failed auctions in February and
March 2008 in an aggregate amount of $18.3 million.
As of March 20, 2008, we had reduced our investment in
auction rate securities by selling $33.2 million of
investments at par value. We continue to hold the remaining
securities and are due interest at a higher rate on those
securities as to which the auctions have failed than similar
securities for which auctions have cleared. These investments
consist of AAA-rated non-mortgage related auction rate
securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. If
the credit ratings of the issuer, the bond insurer or the
collateral deteriorate or the carrying value of the investments
decline for any other reason, we may need to adjust the carrying
value of these investments.
It is uncertain as to when the liquidity issues relating to
these investments will improve. Although we do not currently
anticipate having to sell these securities in order to operate
our business, if that were to change, or if the liquidity issues
continue over a prolonged period, we might be unable to
liquidate some holdings of our auction rate securities and as a
result, might suffer losses from these investments. In addition,
given the complexity of auction rate securities and their
valuations, our estimates of their fair value may differ from
the actual amount we would be able to collect in an ultimate
sale.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
55
Our corporate headquarters, including our principal executive
officers, and some of our commercial, administrative and
research and development activities, are located in Bethesda,
Maryland. Our lease for this facility, which comprises
approximately 25,000 square feet of office space, expires
in February 2017. In addition, we have a short-term lease in
Fuquay-Varina, North Carolina to house our national sales office.
In July 2007, we vacated our previous headquarters in Bethesda,
Maryland. We were able to sublease 1,600 square feet of
space under a lease that expires in December 2010 and are
seeking to sublease 11,166 square feet of space under a
lease that expires in November 2009. We remain obligated to make
rent payments under both leases.
We lease our Asian and European headquarters, located in Tokyo
and Osaka, Japan and Oxford, England, under short-term leases.
We believe that our current facilities are sufficient to meet
our needs for at least the next 12 months.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are not currently a party to any legal proceedings of which
the ultimate outcome, in our judgment, would have a material
adverse effect on our business, financial condition or results
of operations.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2007.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our class A common stock is traded on The NASDAQ Global
Market under the symbol SCMP. The following table
sets forth, for the periods indicated, the range of high and low
sale prices of our class A common stock as reported on The
NASDAQ Global Market since our initial public offering on
August 2, 2007.
|
|
|
|
|
|
|
|
|
2007
|
|
High
|
|
|
Low
|
|
|
Third quarter (beginning August 2, 2007, our initial public
offering date)
|
|
$
|
14.50
|
|
|
$
|
10.75
|
|
Fourth quarter
|
|
$
|
19.75
|
|
|
$
|
10.16
|
|
As of March 20, 2008, we had 15,542,768 shares of
class A common stock outstanding held by approximately 19
stockholders of record. The number of holders of record of our
class A common stock is not representative of the number of
beneficial holders because many shares are held by depositories,
brokers or nominees. As of March 20, 2008, the closing
price of our class A common stock was $9.74. As of
March 20, 2008, we had 26,191,050 shares of
class B common stock outstanding held by one stockholder of
record.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain earnings, if any, to
support our growth strategy and do not anticipate paying cash
dividends in the foreseeable future.
We did not repurchase any of our equity securities in 2007.
The equity compensation plan information required under this
Item is incorporated by reference to the information provided
under the heading Equity Compensation Plan
Information in our proxy statement to be filed within
120 days after the fiscal year end of December 31,
2007.
56
Stock
Performance Graph
The information included under this heading Stock
Performance Graph is furnished and not
filed and shall not be deemed to be soliciting
material or subject to Regulation 14A, shall not be
deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, or otherwise subject to the liabilities of that section,
nor shall it be deemed incorporated by reference in any filing
under the Securities Act of 1933, as amended, or the Exchange
Act.
The following graph compares the cumulative total return,
assuming the investment of $100 on August 2, 2007, the date
on which our class A common stock began trading on The
NASDAQ Global Market, in each of (1) our class A
common stock, (2) The NASDAQ Composite Index (U.S. and
Foreign) and (3) the NASDAQ Pharmaceutical Index, assuming
reinvestment of any dividends. These comparisons are required by
the SEC and are not intended to forecast or be indicative of
possible future performance of our class A common stock.
Use of
Proceeds from Initial Public Offering of Class A Common
Stock
In August 2007, we completed an initial public offering of
class A common stock pursuant to a registration statement
on
Form S-1
(Registration
No. 333-135133)
which the SEC declared effective on August 2, 2007.
Pursuant to the registration statement, we registered the
offering and sale of an aggregate of 4,312,500 shares of
our class A common stock, of which 3,125,000 shares
were sold by us and 625,000 shares were sold by a selling
stockholder, at a price of $11.50 per share. S&R, which is
wholly-owned by our founders, Drs. Kuno and Ueno, granted
to the underwriters an option to purchase an additional
562,500 shares of our class A common stock at the
initial public offering price of $11.50 per share to cover
over-allotments, if any. The initial closing of the offering
occurred on August 2, 2007. The underwriters exercised
their over-allotment option and purchased an additional
562,500 shares of class A common stock from S&R
on August 29, 2007. We did not receive any proceeds from
the sale of these shares by S&R. The managing underwriters
for the offering were Cowen and Company, LLC, CIBC World Markets
Corp. and Leerink Swann & Co., Inc.
57
We raised a total of $35.9 million in gross proceeds from
the initial public offering, or approximately $28.2 million
in net proceeds after deducting underwriting discounts and
commissions of $3.0 million and other offering expenses of
approximately $4.7 million. The selling stockholder
received a total of approximately $7.2 million in gross
proceeds from the initial public offering, or approximately
$6.7 million of net proceeds after deducting the
underwriting discounts. S&R received a total of
approximately $6.5 million in gross proceeds from the
initial public offering, or approximately $6.0 million of
net proceeds after deducting the underwriting discounts.
We have not used any of the net proceeds from the offering to
make payments, directly or indirectly, to any director or
officer of ours, or any of their associates, to any person
owning 10% or more of our common stock or to any affiliate of
ours, and none of the expenses we incurred in connection with
the offering or the underwriting discounts and commissions were
paid, directly or indirectly, to any such persons. We did,
however, contemporaneously with the closing of our initial
public offering, make payments of approximately
$3.1 million in the aggregate to Ryuji Ueno, a director,
officer and 10% stockholder, and Sachiko Kuno, a 10%
stockholder, in settlement of special stock and cash awards that
had been made to them in June 2007.
We have invested the net proceeds from the offering in
short-term, investment grade, interest-bearing instruments.
There has been no material change in our planned use of the
balance of the net proceeds from the offering as described in
our final prospectus filed with the SEC pursuant to
Rule 424(b) under the Securities Act.
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
We have derived the following consolidated financial data as of
December 31, 2005, 2006 and 2007 from audited balance
sheets and for the five years ended December 31, 2007 from
audited consolidated statements of operations. Consolidated
balance sheets as of December 31, 2006 and 2007 and the
related consolidated statements of operations and comprehensive
income (loss), of changes in stockholders equity (deficit)
and of cash flows for each of the three years in the period
ended December 31, 2007 and notes thereto appear elsewhere
in this Annual Report. We have derived the following
consolidated financial data as of and for the years ended
December 31, 2003 and 2004 from unaudited consolidated
balance sheets and audited consolidated statements of
operations, which are not included in this Annual Report. The
information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction
with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and related footnotes
appearing elsewhere in this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,125
|
|
|
$
|
3,839
|
|
|
$
|
40,205
|
|
|
$
|
59,266
|
|
|
$
|
91,891
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18,445
|
|
|
|
14,036
|
|
|
|
31,167
|
|
|
|
16,392
|
|
|
|
28,334
|
|
General and administrative
|
|
|
7,447
|
|
|
|
8,216
|
|
|
|
7,760
|
|
|
|
14,587
|
|
|
|
25,031
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
11,103
|
|
|
|
13,229
|
|
Product royalties related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,171
|
|
|
|
4,890
|
|
Milestone royalties related parties
|
|
|
|
|
|
|
1,000
|
|
|
|
1,500
|
|
|
|
1,250
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
25,892
|
|
|
|
23,252
|
|
|
|
40,722
|
|
|
|
44,503
|
|
|
|
73,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(21,767
|
)
|
|
|
(19,413
|
)
|
|
|
(517
|
)
|
|
|
14,763
|
|
|
|
18,407
|
|
Total non-operating (expense) income, net
|
|
|
(250
|
)
|
|
|
(56
|
)
|
|
|
990
|
|
|
|
2,141
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(22,017
|
)
|
|
|
(19,469
|
)
|
|
|
473
|
|
|
|
16,904
|
|
|
|
21,023
|
|
Income tax (provision) benefit
|
|
|
|
|
|
|
|
|
|
|
(789
|
)
|
|
|
4,897
|
|
|
|
(7,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(22,017
|
)
|
|
$
|
(19,469
|
)
|
|
$
|
(316
|
)
|
|
$
|
21,801
|
|
|
$
|
13,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.68
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.63
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.68
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.63
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
32,564
|
|
|
|
32,600
|
|
|
|
32,601
|
|
|
|
34,383
|
|
|
|
37,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
32,564
|
|
|
|
32,600
|
|
|
|
32,601
|
|
|
|
34,690
|
|
|
|
38,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,070
|
|
|
$
|
21,918
|
|
|
$
|
17,436
|
|
|
$
|
22,481
|
|
|
$
|
25,559
|
|
Short-term investments
|
|
|
|
|
|
|
3,000
|
|
|
|
28,435
|
|
|
|
29,399
|
|
|
|
51,552
|
|
Working capital
|
|
|
14,834
|
|
|
|
7,850
|
|
|
|
10,051
|
|
|
|
40,623
|
|
|
|
84,313
|
|
Total assets
|
|
|
20,072
|
|
|
|
25,837
|
|
|
|
47,985
|
|
|
|
67,084
|
|
|
|
110,027
|
|
Notes payable related parties, current
|
|
|
271
|
|
|
|
4,040
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
Notes payable related parties, net of current portion
|
|
|
3,352
|
|
|
|
2,326
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,196
|
|
|
|
39,375
|
|
|
|
58,225
|
|
|
|
28,551
|
|
|
|
23,499
|
|
Convertible preferred stock
|
|
|
20,288
|
|
|
|
20,288
|
|
|
|
20,288
|
|
|
|
20,288
|
|
|
|
|
|
Accumulated deficit
|
|
|
(25,382
|
)
|
|
|
(44,852
|
)
|
|
|
(45,167
|
)
|
|
|
(23,366
|
)
|
|
|
(10,176
|
)
|
Total stockholders equity (deficit)
|
|
|
5,876
|
|
|
|
(13,538
|
)
|
|
|
(10,240
|
)
|
|
|
38,533
|
|
|
|
86,528
|
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis
together with our consolidated financial statements and the
related notes included elsewhere in this Annual Report on
Form 10-K.
This discussion contains forward-looking statements that are
based on our current expectations, estimates and projections
about our business and operations. Our actual results may differ
materially from those currently anticipated and expressed in
such forward-looking statements as a result of a number of
factors, including those we discuss under
Item 1A Risk Factors and elsewhere
in this Annual Report.
Overview
We are a specialty biopharmaceutical company focused on the
discovery, development and commercialization of proprietary
drugs based on prostones, a class of compounds derived from
functional fatty acids that occur naturally in the human body.
In January 2006, we received marketing approval from the FDA for
our first product, AMITIZA, for the treatment of chronic
idiopathic constipation in adults.
We are party to a collaboration and license agreement and a
related supplemental agreement with Takeda, or, collectively,
the Takeda Agreements, to jointly develop and commercialize
AMITIZA for chronic idiopathic constipation, irritable bowel
syndrome with constipation, opioid-induced bowel dysfunction and
other gastrointestinal indications in the United States and
Canada. We have the right to co-promote AMITIZA along with
Takeda in these markets. We and Takeda initiated commercial
sales of AMITIZA in the United States for the treatment of
59
chronic idiopathic constipation in adults in April 2006. Under
the Takeda Agreements, Takeda records all product revenue and we
receive a royalty on product revenue for such sales.
We first generated product royalty revenue for commercial sales
of AMITIZA in the second quarter of 2006. We have historically
incurred operating losses and, as of December 31, 2007, we
had an accumulated deficit of $10.2 million. We recognized
net income of $13.2 million and $21.8 million in 2007
and 2006, respectively, and net losses of $316,000 in 2005.
Historically, we have generated losses resulting principally
from costs incurred in our research and development programs and
from our general and administrative expenses. We expect to
continue to incur significant and increasing expenses for the
next several years as we continue to expand our research and
development activities, seek regulatory approvals for additional
indications for AMITIZA and for other compounds as they are
developed and augment our sales and marketing capabilities.
Whether we are able to sustain profitability will depend upon
our ability to generate revenues and receive payments under our
contracts with Takeda or similar arrangements in the future that
exceed these expenses. In the near term, our ability to generate
product revenues will depend primarily on the successful
commercialization and continued development of additional
indications for AMITIZA.
We hold an exclusive worldwide royalty-bearing license from
Sucampo AG to develop and commercialize AMITIZA and all other
prostone compounds covered by patents and patent applications
held by Sucampo AG. We are obligated to assign to Sucampo AG all
patentable improvements that we make in the field of prostones,
which Sucampo AG is obligated in turn to license back to us on
an exclusive basis. AMITIZA, cobiprostone and SPI-017 are
covered by perpetual licenses that cannot be terminated unless
we default in our payment obligations to Sucampo AG. If we have
not committed specified development efforts to any prostone
compound other than AMITIZA, cobiprostone and SPI-017 by the end
of a specified period, which ends on the later of June 30,
2011 or the date upon which Drs. Ryuji Ueno and Sachiko
Kuno, our founders and controlling stockholders, no longer
control our company, then the commercial rights to that compound
will revert to Sucampo AG, subject to a
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
In August 2007, we completed our initial public offering,
consisting of 3,125,000 shares of class A common stock
sold by us, 625,000 shares of class A common stock
sold by a stockholder and 562,500 shares of class A
common stock sold under an overallotment option by S&R, at
a public offering price of $11.50 per share, resulting in gross
proceeds to us of approximately $35.9 million. After
deducting underwriters discounts and commissions and
expenses of the offering, including costs of $3.1 million
incurred in 2006, we raised net proceeds of $28.2 million.
Our
Clinical Development Programs
We are developing AMITIZA and our other prostone compounds for
the treatment of a broad range of diseases. The most advanced of
these programs are:
|
|
|
|
|
AMITIZA (lubiprostone). In connection with our
marketing approval for AMITIZA for the treatment of chronic
idiopathic constipation in adults, we committed to the FDA to
conduct post-marketing studies to evaluate the safety of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. We initiated these
studies in January 2007. In addition, we are developing AMITIZA
to treat irritable bowel syndrome with constipation and
opioid-induced bowel dysfunction. We recently completed two
pivotal Phase III clinical trials of AMITIZA for the
treatment of irritable bowel syndrome with constipation and a
follow-on safety study to assess the long-term use of AMITIZA as
a treatment for this indication. Based on the results of these
trials, we are seeking marketing approval for AMITIZA for the
treatment of this indication and submitted a supplement to our
existing new drug application for AMITIZA in June 2007 and we
expect a PDUFA action in late April 2008. In addition, we
commenced Phase III pivotal clinical trials of AMITIZA for
the treatment of opioid-induced bowel dysfunction in September
2007. Our collaboration and co-promotion arrangement with Takeda
also covers these additional indications for AMITIZA.
|
In February 2008, we submitted an MAA for lubiprostone, 24
micrograms, for the indication of chronic idiopathic
constipation in adults in the United Kingdom. The MAA has been
filed using the decentralized procedure with the United Kingdom,
through its Medicines and Healthcare Products Regulatory Agency,
60
serving as the reference member state, with additional
applications subsequently filed with the member states of
Belgium, Denmark, France, Germany, Ireland, the Netherlands,
Spain and Sweden.
In November 2007, we initiated a multi-center Phase IIb
dose-ranging study in Japan to evaluate the safety and efficacy
of lubiprostone for treating chronic idiopathic constipation in
adults.
|
|
|
|
|
Cobiprostone. We are developing orally
administered cobiprostone to treat various gastrointestinal and
liver disorders, including NSAID-induced ulcers, portal
hypertension, non-alcoholic fatty liver disease and
gastrointestinal disorders associated with cystic fibrosis. We
also are planning to develop an inhaled formulation of
cobiprostone for the treatment of respiratory symptoms of cystic
fibrosis and chronic obstructive pulmonary disease. Our near
term focus is on the development of cobiprostone as a treatment
for NSAID-induced ulcers. We have completed Phase I clinical
trials of cobiprostone in healthy volunteers and commenced a
Phase II clinical trial of this product candidate for the
treatment of NSAID-induced ulcers in the third quarter of 2007.
We also submitted an IND to the FDA in December 2007 for a
Phase II
proof-of-concept
study of cobiprostone in patients with portal hypertension.
|
|
|
|
SPI-017. We are developing SPI-017 to treat
vascular disease and central nervous system disorders. We are
initially focused on developing an intravenous formulation of
this product candidate for the treatment of peripheral arterial
disease. We also are developing an oral formulation of SPI-017
for the treatment of Alzheimers disease. We plan to
commence Phase I clinical trials of the intravenous formulation
of SPI-017 in 2008.
|
Financial
Terms of our Collaboration with Takeda
We entered into a
16-year
collaboration agreement with Takeda in October 2004 to jointly
develop and commercialize AMITIZA for gastrointestinal
indications in the United States and Canada. We also entered
into a related supplemental agreement with Takeda in February
2006. Under the terms of these agreements, we have received a
variety of payments and will have the opportunity to receive
additional payments in the future.
Up-front
Payment
Upon signing the original collaboration agreement with Takeda,
we received a non-refundable up-front payment of
$20.0 million. We deferred $2.4 million of this
up-front payment associated with our obligation to participate
in joint committees with Takeda and we are recognizing this
amount as collaboration revenue ratably over the
16-year life
of the agreement. We recognized the remaining $17.6 million
as research and development revenue ratably over the estimated
development period associated with the chronic idiopathic
constipation and irritable bowel syndrome with constipation
indications, which was completed in June 2007 as evidenced by
the filing with the FDA of a supplement to our existing NDA for
AMITIZA relating to the treatment of irritable bowel syndrome
with constipation.
Product
Development Milestone Payments
We have also received the following non-refundable payments from
Takeda reflecting our achievement of specific product
development milestones:
|
|
|
|
|
$10.0 million upon the filing of the NDA for AMITIZA to
treat chronic idiopathic constipation in March 2005;
|
|
|
|
$20.0 million upon the initiation of our Phase III
clinical trial related to AMITIZA for the treatment of irritable
bowel syndrome with constipation in May 2005; and
|
|
|
|
$20.0 million upon the receipt of approval from the FDA for
AMITIZA for the treatment of chronic idiopathic constipation in
adults in January 2006.
|
We recognized each of these payments as research and development
revenue ratably over the estimated development period associated
with the chronic idiopathic constipation and irritable bowel
syndrome with constipation indications, which was completed in
June 2007.
61
In June 2007, we submitted a supplement to our existing NDA for
AMITIZA to the FDA seeking marketing approval for AMITIZA for
the treatment of irritable bowel syndrome with constipation. As
a result of this submission, Takeda was required by the terms of
our collaboration agreement to make a $30.0 million
milestone payment to us. We recognized the entire amount of this
payment as research and development revenue in the quarter ended
June 30, 2007, reflecting the end of the development period
for AMITIZA to treat chronic idiopathic constipation and
irritable bowel syndrome with constipation.
In addition, our collaboration agreement requires that Takeda
pay us up to a further aggregate of $60.0 million
conditioned upon our achievement of future regulatory milestones
relating to AMITIZA. We would recognize these payments as
research and development revenue ratably over the respective
performance periods.
Research
and Development Cost-Sharing for AMITIZA
Our collaboration agreement and related supplemental agreement
with Takeda provides for the sharing between Takeda and us of
the costs of our research and development activities for AMITIZA
in the United States and Canada as follows:
|
|
|
|
|
Takeda was responsible for the first $30.0 million in
research and development expenses we incurred after October 2004
related to AMITIZA for the treatment of chronic idiopathic
constipation and irritable bowel syndrome with constipation. We
received reimbursement payments from Takeda of
$28.5 million in 2005 and $1.5 million in 2004. We
recognized each of these payments as research and development
revenue ratably over the development period associated with the
chronic idiopathic constipation and irritable bowel syndrome
with constipation indications, which was completed in June 2007.
We did not recognize revenue in any period to the extent that it
resulted in cumulative recognized revenue exceeding cumulative
reimbursable expenses incurred.
|
We were responsible for the next $20.0 million in research
and development expenses we incurred related to AMITIZA for the
treatment of chronic idiopathic constipation and irritable bowel
syndrome with constipation. Thereafter, any expenses in excess
of $50.0 million were shared equally between Takeda and us.
Because we had received reimbursements of $30.0 million
from Takeda, we were responsible for the next $20.0 million
of these expenses. Of this next $20.0 million, we incurred
$14.0 million through December 31, 2007 to complete
the research and development activities for AMITIZA.
|
|
|
|
|
For research and development expenses relating to changing or
expanding the labeling of AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation,
Takeda is responsible for 70% of these expenses and we are
responsible for 30%. In connection with our marketing approval
for AMITIZA for the treatment of chronic idiopathic constipation
in adults, we committed to the FDA to conduct post-marketing
studies to evaluate the safety of the product in patients with
renal impairment and patients with hepatic impairment. We
initiated these studies in January 2007. The expenses of these
studies, which we began to incur in the quarter ended
September 30, 2006, are being shared 70% by Takeda and 30%
by us. Through December 31, 2007, we had incurred
$1.5 million of these expenses, of which we have been or
will be reimbursed $1.0 million.
|
|
|
|
The expense of Phase IV clinical trials of AMITIZA for the
treatment of chronic idiopathic constipation in pediatric
patients that we initiated in January 2007 will be borne by
Takeda in full. As of December 31, 2007, we had incurred
$4.7 million of these expenses, all of which have been or
will be reimbursed by Takeda.
|
|
|
|
For expenses in connection with additional clinical trials
required by regulatory authorities relating to AMITIZA to treat
chronic idiopathic constipation or irritable bowel syndrome with
constipation, Takeda and we are responsible to share these
expenses equally. We have not incurred any expenses of this
nature to date.
|
|
|
|
Takeda is responsible for the first $50.0 million in
expenses we incur related to the development of AMITIZA for each
gastrointestinal indication other than chronic idiopathic
constipation and irritable bowel syndrome with constipation, and
any expenses in excess of $50.0 million are shared equally
between Takeda and us. We initiated clinical trials of AMITIZA
for the treatment of opioid-induced bowel dysfunction in
September 2007. We began incurring expenses for these trials in
the third quarter of 2006. Currently, we anticipate the
aggregate expenses necessary to complete our development of
AMITIZA for this indication
|
62
|
|
|
|
|
will be approximately $54.0 million, of which Takeda will
be responsible for $52.0 million and we will be responsible
for $2.0 million. As of December 31, 2007, we had
incurred $10.8 million of these expenses, all of which we
have been or will be reimbursed by Takeda.
|
|
|
|
|
|
Takeda is responsible for the first $20.0 million in
expenses we incur related to the development of each new
formulation of AMITIZA, and any expenses in excess of
$20.0 million are shared equally between Takeda and us. We
have not incurred any expenses of this nature to date.
|
Co-Promotion
Expense Reimbursements
In connection with our exercise of our co-promotion rights under
the collaboration agreement and our entry into the related
supplemental agreement in February 2006, Takeda agreed to
reimburse us for a portion of our expenses related to our
specialty sales force. We estimate that these reimbursements
will cover approximately 70% of the direct costs for our current
sales force of 38 sales representatives. We began to receive
monthly reimbursement for these expenses during the quarter
ended June 30, 2006, reflecting the commencement by our
sales representatives of their activities in April 2006, and we
had recognized $4.3 million and $3.4 million of
co-promotion
revenue reflecting these reimbursements for the years ended
December 31, 2007 and 2006, respectively.
Takeda also agreed in the supplemental agreement to reimburse us
for all of the costs we incur in connection with specified
miscellaneous marketing activities related to the promotion of
AMITIZA. During the years ended December 31, 2007 and 2006,
we recognized $158,000 and $779,000, respectively, as
co-promotion revenue reflecting these reimbursements. We
completed the miscellaneous marketing activities, to which these
reimbursements relate, in the quarter ended March 31, 2007
and, accordingly, we do not expect to recognize additional
co-promotion revenue related to these activities.
Product
Royalty Revenue
Takeda is obligated to pay us a varying royalty based on a
percentage of the net sales revenue from the sale of AMITIZA in
the United States and Canada. The actual percentage will depend
on the level of net sales revenue during each calendar year. All
sales of AMITIZA in the United States and Canada, including
those arranged by our specialty sales force, will be made
through Takeda. We began to recognize product royalty revenue in
the quarter ended June 30, 2006, reflecting the
commencement of commercial sales of AMITIZA in April 2006.
During the years ended December 31, 2007 and 2006, we
recognized a total of $27.5 million and $6.6 million,
respectively, as product royalty revenue.
Commercialization
Milestone Payments
Our collaboration agreement also requires Takeda to pay us up to
an additional aggregate of $50.0 million conditioned upon
the achievement of specified targets for annual net sales
revenue from AMITIZA in the United States and Canada. We had not
met these targets as of December 31, 2007.
Option
Payment
In November 2004, we received $5.0 million from Takeda as
an option payment to continue negotiations for the joint
development and commercialization of AMITIZA for
gastrointestinal indications in additional territories. In the
event that these negotiations failed to produce a definitive
agreement by specified dates, the terms of the option required
us to repay $2.5 million of the original $5.0 million
option payment to Takeda. The option right for Asia expired
during 2005, at which time we repaid $1.0 million to Takeda
and recognized the remaining $1.0 million as contract
revenue. The option right for Europe, the Middle East and Africa
expired during the first quarter of 2006, at which time we
repaid $1.5 million to Takeda and recognized the remaining
$1.5 million as contract revenue.
63
Takeda
Cash Flows and Revenue
The following table summarizes the cash streams and related
collaboration and research and development revenue recognized
under the Takeda Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
Amount
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable at
|
|
|
Deferred at
|
|
|
|
December 31,
|
|
|
Revenue Recognized for the Year Ended December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007*
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment associated with our obligation to participate
in joint committees with Takeda
|
|
$
|
2,375
|
|
|
$
|
23
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
|
|
|
$
|
1,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment remainder
|
|
$
|
17,624
|
|
|
$
|
1,356
|
|
|
$
|
8,134
|
|
|
$
|
6,157
|
|
|
$
|
1,977
|
|
|
$
|
|
|
|
$
|
|
|
Development milestones
|
|
|
80,000
|
|
|
|
|
|
|
|
16,154
|
|
|
|
28,237
|
|
|
|
35,609
|
|
|
|
|
|
|
|
|
|
Reimbursement of research and development expenses
|
|
|
43,048
|
|
|
|
1,482
|
|
|
|
14,672
|
|
|
|
11,988
|
|
|
|
21,793
|
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,672
|
|
|
$
|
2,838
|
|
|
$
|
38,960
|
|
|
$
|
46,382
|
|
|
$
|
59,379
|
|
|
$
|
6,887
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes billed and unbilled accounts receivable. |
Financial
Terms of our License from Sucampo AG
Under our license agreement with our affiliate, Sucampo AG, we
are required to pay Sucampo AG 5% of every milestone payment we
receive from a sublicensee, such as Takeda. We also are
obligated to make the following milestone payments to Sucampo AG:
|
|
|
|
|
$500,000 upon initiation of the first Phase II clinical
trial for each compound in each of three territories covered by
the license: North, Central and South America (including the
Caribbean), Asia and the rest of the world; and
|
|
|
|
$1.0 million for the first NDA filing or comparable foreign
regulatory filing for each compound in each of these three
territories.
|
In addition, we are required to pay Sucampo AG, on a
country-by-country
basis, royalty payments of 6.5% of net sales for every product
covered by existing patents and, if applicable, thereafter 4.25%
of net sales for every product candidate covered by new or
improvement patents assigned by us to Sucampo AG. With respect
to sales of AMITIZA in North, Central and South America,
including the Caribbean, the rates for these royalty payments
are set at 3.2% and 2.1% of net sales, respectively. The product
royalties that we pay to Sucampo AG are based on total product
net sales, whether by us or a sublicensee, and not on amounts
actually received by us. We expensed $4.9 million and
$1.2 million in product royalties to Sucampo AG during the
years ended December 31, 2007 and 2006, respectively,
reflecting 3.2% of AMITIZA net sales during each of these years,
which we recorded as product royalties related
parties on the consolidated statements of operations and
comprehensive income (loss).
We paid Sucampo AG the following milestone royalty payments that
were expensed as incurred and recorded as milestone
royalties related parties in the respective periods:
|
|
|
|
|
$1.5 million, reflecting 5% of $30.0 million of
development milestone payments that we received from Takeda in
2005;
|
64
|
|
|
|
|
$1.0 million, reflecting 5% of a $20.0 million
development milestone payment that we received from Takeda, and
$250,000 upon marketing approval of AMITIZA by the FDA for the
treatment chronic idiopathic constipation in adults in 2006;
|
|
|
|
$1.5 million, reflecting 5% of a $30.0 million
milestone payment received from Takeda as a result of our
submission to the FDA in June 2007 of the supplement to our
existing NDA for AMITIZA seeking marketing approval for AMITIZA
for the treatment of irritable bowel syndrome with
constipation; and
|
|
|
|
$500,000 upon the initiation of the first Phase IIb dose-ranging
study in Japan in 2007.
|
We are required to make a $1.0 million payment to Sucampo
AG for our first NDA filing, or comparable foreign regulatory
filing, in each of the three following territories covered by
the license agreement: North, Central and South America
(including the Caribbean), Asia and the rest of the world. In
February 2008, we filed an MAA in the United Kingdom, which
triggered our obligation to make a $1.0 million payment to
Sucampo AG for the
rest-of-world
territory in March 2008.
Supply
Agreement with R-Tech
We entered into an exclusive supply arrangement with our
affiliate, R-Tech, in March 2003. In return for the exclusive
right to manufacture and supply clinical and commercial supplies
of AMITIZA and a second prostone compound that we are no longer
developing in North, Central and South America, including the
Caribbean, R-Tech agreed to make the following milestone
payments to us:
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$1.0 million upon entry into the arrangement, which we
received in March 2003;
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$2.0 million upon commencement of a first Phase II
clinical trial relating to AMITIZA to treat irritable bowel
syndrome with constipation, which we received in April
2003; and
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$3.0 million upon commencement of a first Phase II
clinical trial for the other compound, which we received in
2003. On March 31, 2005, after evaluating the Phase II
study results, we determined to discontinue any further research
and development related to this compound and will not receive
any further payments in respect of this compound.
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We evaluated the $6.0 million in cash receipts from R-Tech
and determined these payments were made for the exclusive right
to supply inventory to us and, accordingly, should be deferred
until commercialization of the drugs begins. We also were unable
to accurately apportion value between AMITIZA and the other
compound based on the information available to us and determined
that the full $6.0 million deferred amount should be
amortized over the contractual life of the relationship, which
we concluded was equivalent to the commercialization period of
AMITIZA and the other compound. Accordingly, we began
recognizing this revenue during the quarter ended June 30,
2006 and will continue recognizing it ratably on a straight-line
basis over the remaining life of our supply agreement with
R-Tech through 2026. As of December 31, 2007, we had
recognized a total of $418,000 as contract revenue
related parties under this exclusive supply arrangement with
R-Tech.
The supply agreement also requires payment of a specified
transfer price in respect of supplies of AMITIZA. Takeda is
obligated to make such payment, without reimbursement from us,
in respect of commercial supplies of AMITIZA for the territory
covered by our collaboration with Takeda.
In June 2005, Sucampo Europe entered into an exclusive supply
agreement with R-Tech. In return for the exclusive right to
manufacture and supply clinical and commercial supplies of
AMITIZA in Europe, the Middle East and Africa, R-Tech agreed to
pay us $2.0 million in anticipation of entering into this
agreement, which we received in March 2005. We determined that
this payment should be deferred until commercialization of
AMITIZA begins within the specified territory and, accordingly,
the entire $2.0 million is reflected as deferred revenue at
December 31, 2007.
Critical
Accounting Policies and Estimates
This discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the
65
United States of America. The preparation of our consolidated
financial statements requires us to make estimates and judgments
that affect our reported assets, liabilities, revenues and
expenses. Actual results may differ significantly from those
estimates under different assumptions and conditions.
We regard an accounting estimate or assumption underlying our
financial statements as a critical accounting estimate if:
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the nature of the estimate or assumption is material due to the
level of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters
to change; and
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the impact of the estimates and assumptions on financial
condition or operating performance is material.
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Our significant accounting policies are described in more detail
in note 2 of our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Short-
and Long-Term Investments
Short- and long-term investments consist entirely of auction
rate securities and a money market account. Our investments in
these securities are accounted for as
available-for-sale
securities under the guidance of Statement of Financial
Accounting Standards, or SFAS, No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
Although the auction rate securities have variable interest
rates which typically reset every seven to 49 days through
a competitive bidding process known as a Dutch
auction, they have long-term contractual maturities
usually exceeding ten years, and therefore are not classified as
cash equivalents. These investments are generally classified
within current assets because we have the ability and the intent
to liquidate these securities if needed within a short time
frame, usually at the next auction.
The
available-for-sale
securities are accounted for at fair market value and unrealized
gains and losses on these securities, if any, are included in
accumulated other comprehensive income (loss) in
stockholders equity. We assess the recoverability of our
available-for-sale
securities and, if impairment is indicated, we measure the
amount of such impairment by comparing the fair value to the
carrying value.
Other-than-temporary
impairments are included in our statement of operations and
comprehensive income (loss).
Interest and dividend income is recorded when earned and
included in interest income. Premiums and discounts, if any, on
short- and long-term investments are amortized or accreted to
maturity and included in interest income. During the years ended
December 31, 2007, 2006 and 2005, there were no short- and
long-term investments that were purchased at a premium or
discount. We use the specific identification method in computing
realized gains and losses on sale of our securities. During the
years ended December 31, 2007, 2006 and 2005, there were no
gains or losses realized on the sale of these investments.
Recent uncertainties in the credit markets have prevented us
from liquidating some of our holdings of auction rate securities
subsequent to December 31, 2007 as the amount of securities
submitted for sale during the auction has exceeded the amount of
purchase orders. Although an event of an auction failure does
not necessarily mean that a security is impaired, we considered
various factors to assess the fair value and the classification
of the securities as short-term or long-term assets. Such
factors include, but are not necessarily limited to, timing of
the failed auction, specific security auction history,
likelihood of redemptions, restructurings and other similar
liquidity events, quality of underlying collateral, rating of
the security and the bond insurer and other factors. Such
considerations involve a considerable amount of judgment. As a
result of our assessment of the market conditions and related
facts, including an instance in which the first auction after
year-end failed, one security in an amount of $9.4 million
was classified as a long-term investment as of December 31,
2007. In other instances, we experienced successful auctions
shortly after December 31, 2007, but then encountered
subsequent failed auctions in February and March 2008 in an
aggregate amount of $18.3 million.
At December 31, 2007 and 2006, we determined the fair
market values of these securities to be the carrying values and
we recorded no unrealized gains and losses or
other-than-temporary
impairments. We assessed the fair value of the auction rate
securities as of December 31, 2007 through either an
independent valuation for securities which we felt were subject
to credit risk at December 31, 2007, including an
assessment of all key underlying data and assumptions, or
through our own internal assessment of the carrying value and
reasonableness of fair values.
66
Considerable judgment was involved in reaching these
determinations. We will continue to monitor the fair value and
balance sheet classification of the securities and future
adjustments may be necessary.
As of December 31, 2007, all of our auction rate securities
consisted of AAA rated non-mortgage related auction rate
securities which are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. As
of March 20, 2008, we had reduced our investment in auction
rate securities by selling $33.2 million of investments at
par value. It is uncertain as to when the liquidity issues
relating to these investments will improve, although we believe
as of December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. We do not anticipate having to sell the remaining
securities in order to operate our business. If this changes,
however, we may be unable to liquidate some holdings of the
auction rate securities and as a result, may suffer losses from
these investments. Although a limited secondary market exists
for these securities, we do not at this time intend to use the
secondary market to dispose of the auction rate securities. In
addition, given the complexity of auction rate securities and
their valuations, our estimates of their fair value may differ
from the actual amount we would be able to collect in an
ultimate sale.
Revenue
Recognition
Collaboration
and License Agreements
Our primary sources of revenue include up-front payments,
product development milestone payments, reimbursements of
research and development expenses, reimbursement of co-promotion
costs related to our specialty sales force and miscellaneous
marketing activities, and product royalties. We recognize
revenue from these sources in accordance with Staff Accounting
Bulletin, or SAB, 104, Revenue Recognition,
Emerging Issues Task Force, or EITF, Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, and EITF Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables, or
EITF 00-21.
The application of
EITF 00-21
requires subjective analysis and requires us to make estimates
and assumptions about whether deliverables within
multiple-element arrangements are separable from the other
aspects of the contractual arrangement into separate units of
accounting and, if so, to determine the fair value to be
allocated to each unit of accounting.
We evaluated the multiple deliverables within our joint
collaboration and license agreement and the related supplemental
agreement with Takeda in accordance with the provisions of
EITF 00-21
to determine whether our deliverables have value to Takeda on a
stand-alone basis and whether objective reliable evidence of
fair value of the undelivered items exists. We separately
evaluate deliverables that meet these criteria for the purposes
of revenue recognition. We combine deliverables that do not meet
these criteria and account for them as a single unit of
accounting.
In accordance with
EITF 00-21,
we recognized the cash flows associated with the individual
units of accounting from the joint collaboration and license
agreement as revenue using a time-based model that recognizes
the revenue ratably over the period in which we complete our
performance requirements. However, revenue is limited to amounts
that are non-refundable and that Takeda is contractually
obligated to pay. With respect to the portion of the up-front
payment we attributed to our obligation to participate in joint
committees with Takeda, which we present as collaboration
revenue, the performance period is the
16-year term
of the collaboration agreement. With respect to the remainder of
the up-front payment, as well as the product development
milestone payments and the reimbursement of research and
development expenses, all of which we present as research and
development revenue, the performance period is the estimated
development period for AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation. The
performance period was completed in June 2007 as evidenced by
the filing with the FDA of a supplement to our existing NDA for
AMITIZA relating to the treatment of irritable bowel syndrome
with constipation. We have determined that we are acting as a
principal under the collaboration agreement and, as such, we
record these amounts on a gross basis as collaboration revenue
and as research and development revenue.
We have other obligations with Takeda to perform research and
development activities, for which Takeda reimburses us after the
services have been performed. We recognize these reimbursable
costs as research and development revenue using a similar
time-based model over the estimated performance period. The
research and
67
development revenue for these obligations is limited to the
lesser of the actual reimbursable costs incurred or the
straight-line amount of revenue recognized over the estimated
performance period. Revenues are recognized for reimbursable
costs only if those costs are supported by an invoice or final
contract with a vendor.
Reimbursements of co-promotion costs under the supplemental
agreement with Takeda, including costs associated with our
specialty sales force and miscellaneous marketing activities,
are recognized as co-promotion revenue as the related costs are
incurred and Takeda becomes contractually obligated to pay the
amounts. We have determined that we are acting as a principal
under the supplemental agreement and, as such, we record
reimbursements of these amounts on a gross basis as co-promotion
revenue.
Product royalty revenue is based on third-party sales of
licensed products. We record these amounts on the accrual basis
when earned in accordance with contractual terms when
third-party results are reliably measurable, collectability is
reasonably assured and all other revenue recognition criteria
are met.
We do not immediately recognize as revenue option fees received
for other potential joint collaboration and license agreements
with Takeda because the transactions do not represent a separate
earnings process. Our policy is to recognize revenue immediately
upon expiration of the option or to commence revenue recognition
upon exercise of the option and continue recognition over the
estimated performance period because we will have contingent
performance obligations if and when the options are exercised.
We record option fees as contract revenue when they are
recognized.
We recognize contract revenue related to development activities
with related parties under the time-based method and we
recognize contract revenue related to consulting activities with
related parties as performance is rendered. We record
cost-sharing payments received in advance as deferred revenue
and recognize these payments as revenue over the applicable
clinical trial period.
Accrued
Expenses
As part of our process of preparing our consolidated financial
statements, we are required to estimate accrued expenses. This
process involves reviewing and identifying services which have
been performed by third parties on our behalf and determining
the value of these services. Examples of these services are
payments to clinical investigators, professional fees, such as
accountants and attorneys fees, and payments to
contracted service organizations. In addition, we make estimates
of costs incurred to date but not yet invoiced to us in relation
to external contract research organizations and clinical site
costs. We analyze the progress of clinical trials, including
levels of patient enrollment, invoices received and contracted
costs, when evaluating the adequacy of the accrued liabilities.
We must make significant judgments and estimates in determining
the accrued balance in any accounting period.
In connection with these service fees, our estimates are most
affected by our understanding of the status and timing of
services provided relative to the actual levels of services
incurred by the service providers. The majority of our service
providers invoice us monthly in arrears for services performed.
In the event we do not identify costs that have begun to be
incurred or we under-estimate or over-estimate the level of
services performed or the costs of such services, our reported
expenses for the relevant period would be too low or too high.
We must also sometimes make judgments about the date on which
services commence, the level of services performed on or before
a given date and the cost of such services. We make these
judgments based upon the facts and circumstances known to us in
accordance with generally accepted accounting principles.
Stock-Based
Compensation
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123R, Share-Based
Payment, or SFAS 123R, a revision of
SFAS 123. SFAS 123R requires companies to recognize
expense associated with share-based compensation arrangements,
including employee stock options, using a fair value-based
option-pricing model, and eliminates the alternative to use
Accounting Principles Board, or APB, Opinion No. 25s,
Accounting for Stock Issued to Employees, or
APB 25, intrinsic-value method of accounting for share-based
payments to employees. The standard generally allows two
alternative transition methods in the year of
adoption prospective application and retroactive
application with restatement of prior financial statements to
68
include the same amounts that were previously included in the
SFAS 123 pro forma disclosures. On January 1, 2006, we
adopted SFAS 123R using the prospective method of
implementation. According to the modified prospective method, we
have been recognizing compensation expense for all share-based
payment awards granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R.
For recording our stock-based compensation expense under
SFAS 123R, we have chosen to use:
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the straight-line method of allocating compensation cost under
SFAS 123R;
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the Black-Scholes-Merton Option Pricing Formula as our chosen
option-pricing model;
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the simplified method to calculate the expected term for options
as discussed under SAB No. 107, Share-Based
Payment; and
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an estimate of expected volatility based on the historical
volatility of similar entities whose share prices are publicly
available.
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In accordance with the modified prospective method, our
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R, as all outstanding stock options as of
January 1, 2006 were fully vested.
Through December 31, 2005, we had elected to account for
stock-based compensation attributable to stock options awarded
to employees, directors and officers using the intrinsic value
method prescribed in APB 25. Under APB 25 guidance, stock-based
compensation expense was based on the intrinsic value of awarded
stock options, which is measured as the excess, if any, of the
fair market value of our class A common stock at the date
of grant over the exercise price of the option granted.
Stock-based compensation, if any, is recognized over the related
vesting period. Accordingly, we have not recorded stock-based
compensation expense for stock options issued to employees in
fixed amounts with exercise prices at least equal to the fair
value of the underlying common stock on the date of grant,
including those granted in 2004. We did not award stock options
to employees in 2005, although we did award options to
non-employees. In note 2 to our consolidated financial
statements included later in this Annual Report on
Form 10-K,
we provide pro forma disclosures for the year ended
December 31, 2005 in accordance with SFAS 123 and
related pronouncements.
We account for transactions with non-employees in which services
are received in exchange for equity instruments under
EITF 96-18,
Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring or in Conjunction with
Selling Goods or Services. Under this guidance, the
transactions are based on the fair value of the services
received from the non-employees or the fair value of the equity
instruments issued, whichever is more reliably measured. The
fair value of the equity instruments is calculated based on the
guidance of SFAS 123. The three factors which most affect
stock-based compensation are the fair value of the common stock
underlying stock options for which stock-based compensation is
recorded, the vesting term of the options and the volatility of
such fair value of common stock. Accounting for these equity
instruments requires us to determine the fair value of the
equity instrument granted or sold. If our estimates of the fair
value of these equity instruments are too high or too low, it
would have the effect of overstating or understating stock-based
compensation expenses.
Prior to the completion of our initial public offering in August
2007, our board of directors determined the fair value of our
class A common stock for stock option awards given the lack
of an active market for our class A common stock. In
establishing the estimates of fair value, our board of directors
considered the guidance set forth in the AICPA Practice Guide,
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, and made retrospective
determinations of fair value. The board of directors gave
significant consideration to the price of the class A
common stock sold to unrelated third parties in the first half
of 2006 in determining fair value for purposes of the stock
options granted to employees shortly after the sales occurred.
Determining the fair value of our class A common stock
required making complex and subjective judgments. Our approach
to valuation was based on a discounted future cash flow approach
that used our estimates of revenue, driven by assumed market
growth rates, and estimated costs as well as appropriate
discount rates. These estimates were consistent with the plans
and estimates that we used to manage our business. There was
inherent uncertainty in making these estimates.
69
Income
Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. We follow
SFAS No. 109, Accounting for Income
Taxes. This process requires us to estimate our actual
current tax exposure while assessing our temporary differences
resulting from the differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences have resulted in deferred tax assets and
liabilities, which are included in our consolidated balance
sheets. We record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be
realized. We consider forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we
operate, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. Considerable
judgment is involved in developing such estimates. In the event
we were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, we would
charge an adjustment to earnings for the deferred tax assets in
the period in which we make that determination. Likewise, if we
later determine that it is more likely than not that the net
deferred tax assets would be realized, we would reverse the
applicable portion of the previously provided valuation
allowance. In order for us to realize our deferred tax assets we
must be able to generate sufficient taxable income in the tax
jurisdictions in which our deferred tax assets are located.
Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against our deferred tax assets. We have recorded a
partial valuation allowance of $10.8 million as of
December 31, 2007, which resulted in a net deferred tax
asset of $639,000 as of December 31, 2007, due to
uncertainties related to our ability to utilize a portion of the
deferred tax assets in years beyond 2008. Significant future
events, including marketing approval by the FDA of AMITIZA for
the treatment of irritable bowel syndrome with constipation, are
not in our control and could affect our future earnings
potential and consequently the amount of deferred tax assets
that will be utilized. We determined the amount of the valuation
allowance based on our estimates of income in the jurisdictions
in which we operate over the periods in which the related
deferred tax assets are recoverable.
As of December 31, 2007, we had foreign net operating loss
carryforwards of $1.9 million. The foreign net operating
loss carryforwards will begin to expire on December 31,
2010. As of December 31, 2007, we had U.S. general
business tax credits of $3.1 million, which also may be
available to offset future income tax liabilities and will
expire if not utilized at various dates beginning
December 31, 2022. The Tax Reform Act of 1986 contains
provisions that may limit our ability to use our credits
available in any given year in which there has been a
substantial change in ownership interest, as defined. The
realization of the benefits of the tax credits is dependent on
sufficient taxable income in future years. Lack of earnings, a
change in the ownership of our company, or the application of
the alternative minimum tax rules could adversely affect our
ability to utilize these tax credits.
Related
Party Transactions
As part of our operations, we enter into transactions with our
affiliates. At the time of the transaction, we estimate the fair
market value of the transaction based upon estimates of net
present value or comparable third party information. For
material transactions with our foreign subsidiaries and
affiliates, we have evaluated the terms of transactions similar
to those that would have prevailed had the entities not been
affiliated.
Founders
Awards
On June 19, 2007, the Compensation Committee of our board
of directors authorized a one-time stock and cash award to each
of our founders, Drs. Ueno and Kuno. These awards were
granted on June 29, 2007 when the founders agreed to their
terms and were settled on August 2, 2007 upon the
effectiveness of our initial public offering. The Compensation
Committee intended for these awards to compensate the founders
for the lost value of stock options that had been granted to
them in 2001 and 2002 and had been understood by them to have
ten-year terms, but which had expired in 2006 and early 2007 as
a result of the terms of our 2001 stock incentive plan. The
expired options would have entitled the founders to purchase an
aggregate of 578,000 shares of class A common stock at
a price of $0.21 per share and 136,000 shares at a price of
$2.95 per share. These awards were fully vested at the grant
date.
70
Upon the completion of the initial public offering, these stock
and cash awards had an aggregate value equal to the difference
between the value of the shares that could have been purchased
under each of the expired options, determined on the basis of
the public offering price per share of $11.50 in the initial
public offering, and the respective aggregate exercise prices
for such shares as provided in the option agreements.
These awards consisted of a combination of cash and shares of
class A common stock. Of the aggregate value of each award,
40% was payable in cash and 60% in stock. For purposes of
determining the number of shares of class A common stock to
be issued in connection with each award, the stock was valued on
the basis of the public offering price per share in the initial
public offering.
The estimated fair value of these founders awards,
totaling $10.2 million on grant date, was determined using
the Black-Scholes-Merton Option Pricing Formula, as allowed
under SFAS 123R. For the six months ended June 30,
2007, we recorded $10.2 million of general and
administrative expense for these awards, of which
$4.1 million was recorded as other liabilities
related parties for the cash settlement portion and
$6.1 million as Additional paid-in capital for
the stock settlement portion. The liability portion of the
awards would then be adjusted based upon the final cash
settlement amount, but the equity portion was fixed upon the
grant date.
When the initial public offering was completed in August 2007,
the awards were settled and 401,133 shares of class A
common stock were issued to the founders. In addition, as a
result of the lower public offering price compared to the
estimated public offering price at June 30, 2007, we
recorded an adjustment of $1.0 million to reduce the amount
of expense and related cash portion of the awards, which was
paid to the founders.
Results
of Operations
Comparison
of years ended December 31, 2007 and December 31,
2006
Revenues
The following table summarizes our revenues for the years ended
December 31, 2007 and 2006:
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Year Ended December 31,
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(In thousands)
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2007
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2006
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Research and development revenue
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$
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59,379
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$
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46,382
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Product royalty revenue
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27,536
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6,590
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Co-promotion revenue
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4,411
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4,243
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Contract revenue related parties
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418
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404
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Collaboration revenue
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147
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147
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Contract revenue
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1,500
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Total
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$
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91,891
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$
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59,266
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Total revenues were $91.9 million in 2007 compared to
$59.3 million in 2006, an increase of $32.6 million.
This increase was primarily due to an increase in payments
received from Takeda for research and development services
performed by us and product royalties from AMITIZA sales.
Research and development revenue was $59.4 million in 2007
compared to $46.4 million in 2006, an increase of
$13.0 million. This increase was due to the recognition of
the $30.0 million research and development milestone
payment for the completion of our development of AMITIZA to
treat chronic idiopathic constipation and irritable bowel
syndrome with constipation and the recognition of payments
previously received from Takeda, offset in part by a decline of
$17.0 million of research and development revenue
reflecting the recognition of AMITIZA-related deferred revenue
previously received from Takeda for only six months in 2007
compared with twelve months in 2006. We recognized revenue for
this development work ratably over the estimated performance
period associated with the development of AMITIZA, which was
completed in June 2007.
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The specific revenue streams associated with research and
development revenue for the years ended December 31, 2007
and 2006 were as follows:
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In October 2004, we received an up-front payment of
$20.0 million from Takeda, of which $17.6 million was
associated with the development of AMITIZA. This amount was
recognized ratably over the estimated performance period,
resulting in $2.0 million and $6.2 million of research
and development revenue in 2007 and 2006, respectively. The
smaller amount of revenue recognized in 2007 is a result of the
inclusion in 2006 of a full year of revenue recognition compared
to 2007, which only included revenue recognition through the
first six months. It also reflects our determination in June
2006 to extend the estimated completion of the development
period to June 2007, which had the effect of spreading out the
remaining revenue over a longer period of time with a smaller
amount thus being recognized after that point in each reporting
period.
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In March and May 2005, we received development milestone
payments from Takeda totaling $30.0 million related to our
efforts to develop AMITIZA. We recognized these payments as
research and development revenue ratably over the performance
period, resulting in $3.4 million of research and
development revenue in 2007 and $10.5 million in 2006. The
smaller amount of revenue recognized in 2007 is a result of a
full year of revenue recognized in 2006 compared to a partial
year of revenue recognized in 2007, reflecting the completion of
the development period in June 2007.
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In January 2006, we received a $20.0 million development
milestone payment from Takeda related to our efforts to develop
AMITIZA, which we recognized as research and development revenue
ratably over the performance period, resulting in
$2.2 million of research and development revenue in 2007
and $17.8 million in 2006. We recognized a significant
portion of this milestone payment in the three months ended
March 31, 2006, the quarter in which it was received,
reflecting the fact that we were then well into the estimated
development period. The smaller amount of revenue recognized in
2007 is a result of a full year of revenue recognized in 2006
compared to a partial year of revenue recognized in 2007,
reflecting the completion of the development period in June 2007.
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|
|
Since inception of our agreement with Takeda, we have received a
total of $30.0 million of reimbursement payments for
research and development costs from Takeda related to our
efforts to develop AMITIZA, which we recognized as research and
development revenue ratably over the performance period,
resulting in $3.4 million of research and development
revenue in 2007 and $10.5 million in 2006. The smaller
amount of revenue recognized in 2007 is a result of the full
year of revenue recognition in 2006 and also reflects our
determination in June 2006 to extend the estimated completion of
the development period to June 2007.
|
|
|
|
We also began to perform services and receive payments from
Takeda during the third quarter of 2006 for the following three
deliverables: post-marketing studies to evaluate the safety of
AMITIZA in patients with renal impairment and patients with
hepatic impairment, Phase IV clinical trials of AMITIZA for
the treatment of chronic idiopathic constipation in pediatric
patients and clinical trials of AMITIZA for the treatment of
opioid-induced bowel dysfunction. Total research and development
revenue associated with these three deliverables in 2007 and
2006 was $18.3 million and $1.1 million, respectively.
|
Product royalty revenue represents payments received from Takeda
relating to net sales of AMITIZA. We began to recognize product
royalty payments from Takeda as revenue in the second quarter of
2006 following the product launch of AMITIZA. In 2007, we
recognized $27.5 million of product royalty revenue
compared to $6.6 million in 2006, reflecting increased
sales of AMITIZA.
Co-promotion revenues represent reimbursement by Takeda of
co-promotion costs for our specialty sales force and costs
associated with miscellaneous marketing activities in connection
with the commercialization of AMITIZA. We began to receive
reimbursement of costs for our sales force in the second quarter
of 2006 following the product launch of AMITIZA. In 2007, we
recognized $4.4 million of co-promotion revenues, of which
approximately $158,000 was for reimbursement of costs for
miscellaneous marketing activities and approximately
$4.3 million was for reimbursement of sales force costs. In
2006, we recognized $4.2 million as co-promotion revenues,
of which approximately $291,000 was for reimbursement of costs
for miscellaneous marketing activities and $3.5 million was
for reimbursement of sales force costs.
72
Contract revenue related parties represents
reimbursement of costs incurred by us on behalf of affiliated
companies for research and development consulting, patent
maintenance and certain administrative costs. These revenues are
recognized in accordance with the terms of the contract or
project to which they relate. We had no contract revenue in 2007
compared to $1.5 million in 2006. Contract revenue
represents amounts released from previously deferred revenue
that we recognized upon the expiration in January 2006 of the
option we had previously granted to Takeda for joint development
and commercialization rights for AMITIZA in Europe, Africa and
the Middle East.
Research
and Development Expenses
Total research and development expenses in 2007 were
$28.3 million compared to $16.4 million in 2006, an
increase of $11.9 million. The higher costs in 2007 reflect
the significant research and development expenses incurred by us
during that period in connection with the filing of the sNDA for
the treatment of irritable bowel syndrome with constipation; the
initiation of post-marketing safety studies in pediatric
patients, in patients with renal impairment and in patients with
hepatic impairment; the initiation of Phase III studies for
opioid-induced bowel dysfunction; and the initiation of a
Phase II study of NSAID-induced ulcers. In 2006, our
research and development expenses were primarily those
associated with the ongoing Phase III clinical trials of
AMITIZA for the treatment of irritable bowel syndrome with
constipation. In September 2007, we enrolled our first patient
in a Phase III study for opioid-induced bowel dysfunction
and our first patient in a multi-center Phase II study of
NSAID-induced ulcers.
General
and Administrative Expenses
The following summarizes our general and administrative expenses
for years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Salaries, benefits and related costs
|
|
$
|
6,472
|
|
|
$
|
5,342
|
|
Legal and consulting expenses
|
|
|
2,968
|
|
|
|
3,356
|
|
Stock-based compensation
|
|
|
237
|
|
|
|
2,708
|
|
Founders stock-based awards
|
|
|
9,188
|
|
|
|
|
|
Lease loss
|
|
|
432
|
|
|
|
|
|
Other operating expenses
|
|
|
5,734
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,031
|
|
|
$
|
14,587
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses were $25.0 million in
2007 compared to $14.6 million in 2006, an increase of
$10.4 million. This increase was due primarily to the
founders stock-based award of $9.2 million granted in
June 2007, comprising of $6.1 million non-cash compensation
expense and $3.1 million cash settlement expense, offset in
part by the decline in stock-based compensation expenses from
the $2.7 million recorded in the prior year. This increase
also reflected increases in operational headcount, rent for
additional leased office space, lease loss related to the
abandonment of our former office in Bethesda, Maryland in 2007
and additional costs associated with being a publicly-traded
company.
We recorded a cumulative out-of-period adjustment of
approximately $358,000 in 2007 to reduce an overstatement of
additional paid-in capital and general administrative expenses
that had been recorded as of and for the year ended
December 31, 2006 in connection with certain employee stock
options awarded in 2006. The error resulted from applying the
incorrect contractual term for to the employee stock options.
The impacts of this adjustment were not material to the
consolidated financial statements for the year ended
December 31, 2006, for the corresponding interim periods or
for the period in which it was recorded, as the adjustment
consisted of insignificant amounts related to each of the
quarterly reporting periods dating back to the quarter ended
September 30, 2006.
73
Selling
and Marketing Expenses
Selling and marketing expenses were $13.2 million in 2007
compared to $11.1 million in 2006, an increase of
$2.1 million. This increase was due to increased costs for
market research and analysis, marketing and promotional
materials and other costs, reflecting the operation of our sales
and marketing function for twelve months in 2007 compared to
only nine months in 2006.
Product
Royalties Related Parties
We began to incur product royalty expenses for net sales of
AMITIZA in the second quarter of 2006 following the product
launch of AMITIZA. In 2007, we expensed $4.9 million in
product royalties related parties compared to
$1.2 million in 2006, reflecting higher product sales in
2007.
Milestone
Royalties Related Parties
Milestone royalties related parties were
$2.0 million and $1.3 million in 2007 and 2006,
respectively. These royalties were paid to Sucampo AG,
reflecting the 5% we owed them for the $30.0 million
development milestone earned from Takeda during that period and
a $500,000 milestone for the initiation of a Phase II
trial in Japan. The milestone royalties related
parties of $1.3 million for the year ended
December 31, 2006 were paid to Sucampo AG, reflecting the
5% we owed them for the $20.0 million development milestone
payment we received from Takeda during that period, and a
$250,000 milestone payment for regulatory approval of
AMITIZA.
Non-Operating
Income and Expense
The following table summarizes our non-operating income and
expense for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,465
|
|
|
$
|
1,976
|
|
Interest expense
|
|
|
|
|
|
|
(90
|
)
|
Other (expense) income, net
|
|
|
151
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net
|
|
$
|
2,616
|
|
|
$
|
2,141
|
|
|
|
|
|
|
|
|
|
|
Interest income was $2.5 million in 2007 compared to
$2.0 million in 2006, an increase of $489,000. The increase
was primarily due to an increase in the funds available for
investment as a result of our receipt of development milestone
payments from Takeda in June 2007 and the closing of our initial
public offering in August 2007. Interest expense was $0 in 2007
compared to $90,000 in 2006, a decrease of $90,000. This
decrease reflected our repayment in full in June 2006 of related
party debt instruments.
Income
Taxes
For the years ended December 31, 2007 and 2006, our
consolidated effective tax rate was 37.3% and (29.0%),
respectively. The increase in the effective tax rate in 2007
from 2006 was due to a partial release of the valuation
allowance on the U.S. deferred tax assets in 2006 that did
not recur in 2007. As of December 31, 2007, our remaining
valuation allowance against our deferred tax assets was
$10.8 million.
74
Comparison
of years ended December 31, 2006 and December 31,
2005
Revenues
The following table summarizes our revenues for the years ended
December 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
46,382
|
|
|
$
|
38,960
|
|
Product royalty revenue
|
|
|
6,590
|
|
|
|
|
|
Co-promotion revenue
|
|
|
4,243
|
|
|
|
|
|
Contract revenue related parties
|
|
|
404
|
|
|
|
98
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
147
|
|
Contract revenue
|
|
|
1,500
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,266
|
|
|
$
|
40,205
|
|
|
|
|
|
|
|
|
|
|
Total revenues were $59.3 million in 2006 compared to
$40.2 million in 2005, an increase of $19.1 million.
This increase was primarily due to an increase in payments
received from Takeda for research and development services
performed by us, product royalties from AMITIZA sales, and
reimbursements of co-promotion efforts performed by us to market
and sell AMITIZA.
Research and development revenue was $46.4 million for the
year ended December 31, 2006 compared to $39.0 million
for the year ended December 31, 2005, an increase of
$7.4 million. The specific revenue streams associated with
research and development revenue for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
In October 2004, we received the up-front payment of
$20.0 million from Takeda, of which $17.6 million was
associated with the development of AMITIZA. This amount was
recognized ratably over the estimated performance period,
resulting in $6.2 million and $8.1 million of research
and development revenue in 2006 and 2005, respectively. The
smaller amount of revenue recognized in 2006 was a result of our
determination in June 2006 to extend the estimated completion of
the development period to mid 2007.
|
|
|
|
In March and May 2005, we received development milestone
payments from Takeda totaling $30.0 million related to our
efforts to develop AMITIZA. We recognized these payments as
research and development revenue ratably over the performance
period, resulting in $10.5 million of research and
development revenue in 2006 and $16.2 million in 2005. The
smaller amount of revenue recognized in 2006 was a result of our
determinations in June 2006 to extend the estimated completion
of the development period to mid 2007.
|
|
|
|
In January 2006, we received a $20.0 million development
milestone payment from Takeda related to our efforts to develop
AMITIZA, which we recognized as research and development revenue
ratably over the performance period, resulting in
$17.8 million of research and development revenue in 2006.
|
|
|
|
Since inception of our agreement with Takeda, we have received a
total of $30.0 million of reimbursement payments for
research and development costs from Takeda related to our
efforts to develop AMITIZA, which we recognized as research and
development revenue ratably over the performance period,
resulting in $10.5 million of research and development
revenue in 2006 and $14.7 million in 2005. The smaller
amount of revenue recognized in 2006 was a result of our
determination in June 2006 to extend the estimated completion of
the development period to mid 2007.
|
|
|
|
We also began to perform services and receive payments from
Takeda during the third quarter of 2006 for the following three
deliverables: post-marketing studies to evaluate the safety of
AMITIZA in patients with renal impairment and patients with
hepatic impairment, Phase IV clinical trials of AMITIZA for
the treatment of chronic idiopathic constipation in pediatric
patients and clinical trials of AMITIZA for the treatment of
opioid-induced bowel dysfunction. Total research and development
revenue associated with these three deliverables in 2006 was
$1.1 million.
|
75
Product royalty revenue represents payments received from Takeda
relating to net sales of AMITIZA. We began to recognize the
royalty payments from Takeda as revenue in the second quarter of
2006 following the product launch of AMITIZA. In 2006, we
recognized $6.6 million of product royalty revenue. Of this
product royalty revenue, we recognized $4.5 million in the
quarter ended June 30, 2006, which reflected stocking
purchases by drug wholesalers to establish their initial
inventory levels, and therefore these revenues may not be
indicative of product royalty revenue levels that we may achieve
in future periods.
Co-promotion revenues represent reimbursement by Takeda of
co-promotion costs for our specialty sales force and costs
associated with miscellaneous marketing activities in connection
with the commercialization of AMITIZA. We began to receive
reimbursement of costs for our sales force in the second quarter
of 2006 following the product launch of AMITIZA. In 2006, we
recognized $4.2 million as co-promotion revenues, of which
approximately $291,000 was for reimbursement of costs for
miscellaneous marketing activities and $3.5 million was for
reimbursement of sales force costs.
Contract revenue related parties represents
reimbursement of costs incurred by us on behalf of affiliated
companies for research and development consulting, patent
maintenance and certain administrative costs. These revenues are
recognized in accordance with the terms of the contract or
project to which they relate. Contract revenue
related parties was $404,000 for the year ended
December 31, 2006 compared to $98,000 for the year ended
December 31, 2005, an increase of $306,000.
Upon receipt of the $20.0 million up-front payment, we
deferred $2.4 million to be recognized using the time-based
model over the
16-year
performance period of our participation in the committee
meetings. During each of the years ended December 31, 2006
and 2005, we recognized $147,000 of this deferred amount as
collaboration revenue.
Contract revenue was $1.5 million for the year ended
December 31, 2006 compared to $1.0 million for the
year ended December 31, 2005, an increase of $500,000.
Contract revenue represents amounts released from previously
deferred revenue that we recognized upon the expiration of the
option granted to Takeda for joint development and
commercialization rights for AMITIZA in Europe, Africa and the
Middle East.
Research
and Development Expenses
Total research and development expenses in 2006 were
$16.4 million compared to $31.2 million in 2005, a
decrease of $14.8 million. The higher costs in 2005 reflect
the significant research and development expenses incurred by us
during that period in connection with the filing of the NDA for
AMITIZA to treat chronic idiopathic constipation in adults and
the initiation of Phase III clinical trials of AMITIZA for
the treatment of irritable bowel syndrome with constipation. In
2006, our research and development expenses were primarily those
associated with the ongoing Phase III clinical trials of
AMITIZA for the treatment of irritable bowel syndrome with
constipation.
General
and Administrative Expenses
The following summarizes our general and administrative expenses
for years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
Salaries, benefits and related costs
|
|
$
|
5,342
|
|
|
$
|
3,843
|
|
Legal and consulting expenses
|
|
|
3,356
|
|
|
|
1,565
|
|
Stock-based compensation
|
|
|
2,708
|
|
|
|
138
|
|
Other operating expenses
|
|
|
3,181
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,587
|
|
|
$
|
7,760
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses were $14.6 million in
2006 compared to $7.8 million in 2005, an increase of
$6.8 million. This increase was due primarily to
recognition of $2.7 million in stock-based compensation
expenses following our adoption of SFAS 123R in January
2006, increases in operational headcount, rent for
76
additional leased office space and a one-time bonus payment to
our employees upon receipt of marketing approval for AMITIZA to
treat chronic idiopathic constipation in adults, as well as
professional fees in connection with our acquisition of the
capital stock of Sucampo Europe and Sucampo Japan.
Selling
and Marketing Expenses
Selling and marketing expenses were $11.1 million in 2006
compared to $295,000 in 2005, an increase of $10.8 million.
This increase was due to costs we incurred to launch AMITIZA in
April 2006 and other selling and marketing expenses through the
remainder of 2006, including costs for market research and
analysis, marketing and promotional materials, product samples
and other costs.
Milestone
Royalties Related Parties
Milestone royalties related parties were
$1.3 million in 2006 compared to $1.5 million in 2005,
a decrease of $200,000. In the year ended December 31,
2006, we paid Sucampo AG $1.0 million, reflecting the 5% we
owed them in respect of the $20.0 million development
milestone payment we received from Takeda during that period,
and a $250,000 milestone payment for regulatory approval of
AMITIZA. In the year ended December 31, 2005, we paid
Sucampo AG $1.5 million, reflecting the 5% we owed them in
respect of the $30.0 million development milestone payments
we received from Takeda during that period.
Product
Royalties Related Parties
We began to incur product royalty expenses for net sales of
AMITIZA in the second quarter of 2006 following the product
launch of AMITIZA. In 2006, we expensed $1.2 million in
product royalties related parties.
Non-Operating
Income and Expense
The following table summarizes our non-operating income and
expense for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
1,976
|
|
|
$
|
1,046
|
|
Interest expense
|
|
|
(90
|
)
|
|
|
(311
|
)
|
Other income, net
|
|
|
255
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net
|
|
$
|
2,141
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
|
Interest income was $2.0 million in 2006 compared to
$1.0 million in 2005, an increase of $1.0 million. The
increase was primarily due to an increase in the funds available
for investment as a result of our receipt of development
milestone payments from Takeda in March 2005, May 2005 and
January 2006. Interest expense was $90,000 in 2006 compared to
$311,000 in 2005, a decrease of $221,000. This decrease
reflected our repayment in full in December 2005 and June 2006
of related party debt.
Income
Taxes
For the years ended December 31, 2006 and 2005, our
consolidated effective tax rate was (29.0)% and 166.7%,
respectively. The decrease in the effective tax rate in 2006
from 2005 was due primarily to the release of $4.9 million
from the valuation allowance in 2006 on a portion of the
U.S. deferred tax assets.
77
Reportable
Geographic Segments
We have determined that we have three reportable geographic
segments based on our method of internal reporting, which
disaggregates business by geographic location. These segments
are the United States, Europe and Japan. We evaluate the
performance of these segments on the basis of income from
operations. The following is a summary of financial information
by reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
United States
|
|
|
Europe
|
|
|
Japan
|
|
|
Eliminations
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
91,891
|
|
|
$
|
|
|
|
$
|
840
|
|
|
$
|
(840
|
)
|
|
$
|
91,891
|
|
Income (loss) from operations
|
|
|
21,681
|
|
|
|
(1,127
|
)
|
|
|
(2,155
|
)
|
|
|
8
|
|
|
|
18,407
|
|
Identifiable assets
|
|
|
114,490
|
|
|
|
2,381
|
|
|
|
1,987
|
|
|
|
(8,831
|
)
|
|
|
110,027
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
57,676
|
|
|
$
|
1,500
|
|
|
$
|
161
|
|
|
$
|
(71
|
)
|
|
$
|
59,266
|
|
Income (loss) from operations
|
|
|
13,974
|
|
|
|
980
|
|
|
|
(190
|
)
|
|
|
(1
|
)
|
|
|
14,763
|
|
Identifiable assets
|
|
|
68,943
|
|
|
|
496
|
|
|
|
2,556
|
|
|
|
(4,899
|
)
|
|
|
67,084
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
39,107
|
|
|
$
|
|
|
|
$
|
1,098
|
|
|
$
|
|
|
|
$
|
40,205
|
|
Income (loss) from operations
|
|
|
115
|
|
|
|
(1,475
|
)
|
|
|
843
|
|
|
|
|
|
|
|
(517
|
)
|
Liquidity
and Capital Resources
Sources
of Liquidity
We require cash principally to meet our operating expenses. We
have financed our operations since inception with a combination
of private placements of equity securities, our initial public
offering, up-front payment, milestone and royalty payments
received from Takeda and R-Tech, and research and development
expense reimbursements from Takeda. From inception through
December 31, 2007, we had raised net proceeds of
$55.3 million from private equity financings and net
proceeds of $28.2 million from our initial public offering
in August 2007. From inception through December 31, 2007,
we had also received an aggregate of $140.5 million in
up-front, milestone, option and expense reimbursement payments
from third parties. We operated profitably in 2007 and 2006,
principally as a result of the development milestones and
product royalties that we earned from Takeda. We are entitled to
receive $50.0 million upon FDA approval of our sNDA for
AMITIZA for the treatment of irritable bowel syndrome with
constipation. We expect a PDUFA action in late April 2008
relating to this sNDA.
As of December 31, 2007, we had cash and cash equivalents
of $25.6 million, short-term investments of
$51.6 million and long-term investments of
$9.4 million compared to cash and cash equivalents of
$22.5 million and short-term investments of
$29.4 million at December 31, 2006. Our cash and cash
equivalents are deposits in operating accounts and highly liquid
investments with the original maturity at time of purchase of
90 days or less.
As of December 31, 2007, our short- and long-term
investments consist of investments in auction rate securities.
Auction rate securities are generally long-term debt instruments
that provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined calendar
intervals, generally every seven to 49 days. This mechanism
generally allows existing investors to roll-over their holdings
and continue to own their respective securities or liquidate
their holdings by selling their securities at par value.
We generally invest in auction rate securities for short periods
of time as part of our cash management program. Recent
uncertainties in the credit markets have prevented us from
liquidating certain holdings of auction rate securities
subsequent to December 31, 2007 as the amount of securities
submitted for sale during the auction has exceeded the amount of
purchase orders. Although an event of an auction failure does
not necessarily mean that a security is impaired, we considered
various factors to assess the fair value and the classification
of the securities as short-term or long-term assets. Such
factors include, but are not necessarily limited to, timing of
the failed auction, specific security auction history,
likelihood of redemptions, restructurings and other similar
liquidity events, quality
78
of underlying collateral, rating of the security and the bond
insurer and other factors. Such considerations involve a
considerable amount of judgment. As a result of our assessment
of the market conditions and related facts, including an
instance in which the first auction after year-end failed, one
security in the amount of $9.4 million was classified as a
long-term investment as of December 31, 2007. In other
instances, we experienced successful auctions shortly after
December 31, 2007, but then encountered subsequent failed
auctions in February and March 2008 in an aggregate amount of
$18.3 million.
As of March 20, 2008, we had reduced our investment in
auction rate securities by selling $33.2 million of
investments at par value. We continue to hold the remaining
securities and are due interest at a higher rate on those
securities as to which the auctions have failed than similar
securities for which auctions have cleared. These investments
consist of AAA-rated non-mortgage related auction rate
securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. At
December 31, 2007 and 2006, the fair market values of these
securities were determined to be the carrying values and no
unrealized gains and losses or other-than-temporary impairments
were recorded. We assessed the fair value of the auction rate
securities as of December 31, 2007 through either an
independent valuation for securities which we felt were subject
to credit risk at December 31, 2007, including an
assessment of all key underlying data and assumptions, or
through our own internal assessment of the carrying value and
reasonableness of fair values. Considerable judgment was
involved in reaching these determinations. If the credit ratings
of the issuer, the bond insurer or the collateral deteriorate or
the carrying value of the investments decline for any other
reason, we may need to adjust the carrying value of these
investments. Although a limited secondary market exists for
these securities, we do not intend at this time to use the
secondary market to dispose of the auction rate securities.
It is uncertain as to when the liquidity issues relating to
these investments will improve, although we believe as of
December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. Although we do not currently anticipate having to sell
these securities in order to operate our business, if that were
to change, or if the liquidity issues continue over a prolonged
period, we might be unable to liquidate some holdings of our
auction rate securities and as a result, might suffer losses
from these investments or find that ultimate liquidity for these
securities is further reduced. In addition, given the complexity
of auction rate securities and their valuations, our estimates
of their fair value may differ from the actual amount we would
be able to collect in an ultimate sale.
On March 5, 2008, we entered into a line of credit
providing for uncommitted borrowings of up to
$30.0 million. The lender has no obligation to make
advances under this line of credit but may do so in its sole
discretion. The line of credit is collateralized by our short-
and long-term investments. Advances made under this line of
credit will bear an interest rate based on LIBOR plus a
predetermined percentage based on the amount of the advance and
other conditions. Borrowings under this line of credit are due
upon the demand of the lender and the lender can make a
repayment demand at its sole option at any time for any or no
reason. As of March 20, 2008, we had not drawn down any
funds under this line of credit.
Cash
Flows
The following table summarizes our cash flows for the years
ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
5,649
|
|
|
$
|
(10,914
|
)
|
|
$
|
23,815
|
|
Investing activities
|
|
|
(33,784
|
)
|
|
|
(1,413
|
)
|
|
|
(25,474
|
)
|
Financing activities
|
|
|
31,341
|
|
|
|
17,421
|
|
|
|
(2,278
|
)
|
Effect of exchange rates
|
|
|
(128
|
)
|
|
|
(49
|
)
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
3,078
|
|
|
$
|
5,045
|
|
|
$
|
(4,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Year
ended December 31, 2007
Net cash provided by operating activities was $5.6 million
for the year ended December 31, 2007. This reflected net
income of $13.2 million, which included non-cash deferred
tax provision of $4.3 million and non-cash stock-based
compensation of $6.7 million, offset by an increase in
product royalties receivable of $6.6 million and in
accounts receivable of $5.9 million and a decrease in
deferred revenue of $11.0 million. The decrease in deferred
revenue primarily related to the amortization of deferred
research and development revenue over the performance period of
the development of AMITIZA.
Net cash used in investing activities was $33.8 million for
the year ended December 31, 2007. This primarily reflected
our purchases of short-term investments and of property and
equipment associated with the move of our offices in the United
States in July 2007 offset by proceeds from the sale of
short-term investments.
Net cash provided by financing activities was $31.3 million
for the year ended December 31, 2007. This reflected the
net proceeds from the issuance of class A common stock in
our initial public offering, which was consummated in August
2007. We had prepaid $3.1 million of offering expenses
prior to 2007.
Year
ended December 31, 2006
Net cash used in operating activities was $10.9 million for
the year ended December 31, 2006. This reflected net income
of $21.8 million, which included a non-cash charge of
$3.3 million of stock-based compensation expense. We also
had a decrease in deferred tax provision of $4.0 million
and a decrease in deferred revenue of $26.8 million. The
decrease in deferred revenue primarily related to the
amortization of deferred research and development revenue over
the performance period of the development of AMITIZA.
Net cash used in investing activities was $1.4 million for
the year ended December 31, 2006. This reflected our
purchases of short-term investments and property and equipment
of $2.5 million, offset in part by proceeds received from
sales and maturities of short-term investments of
$1.3 million.
Net cash provided by financing activities was $17.4 million
for the year ended December 31, 2006. This reflected
$23.9 million in net proceeds raised in a private placement
sale of 2,398,759 shares of class A common stock,
$1.2 million in funds received from borrowings under
related party debt instruments, $2.9 million of payments
incurred for our completed initial public offering and
$4.8 million of repayments under related party debt
instruments.
Year
ended December 31, 2005
Net cash provided by operating activities was $23.8 million
for the year ended December 31, 2005. This reflected a net
loss of $316,000, an increase in our deferred revenue of
$20.4 million from research and development payments from
Takeda to be amortized over the performance period of the
development of AMITIZA and $3.6 million of non-cash
stock-based compensation charges.
Net cash used in investing activities was $25.5 million for
the year ended December 31, 2005, reflecting our net
purchases of $25.4 million in short-term investments.
Net cash provided by financing activities was $2.3 million
for the year ended December 31, 2005, reflecting our
repayment of related party debt.
Commitments
and Contingencies
As of December 31, 2007, our principal outstanding
contractual obligations related to our office leases in
Bethesda, Maryland, England and Japan. The following table
summarizes these significant contractual obligations at December
31 for the indicated year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 and
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,555
|
|
|
$
|
1,325
|
|
|
$
|
969
|
|
|
$
|
937
|
|
|
$
|
963
|
|
|
$
|
4,243
|
|
|
$
|
9,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
The above table does not include:
|
|
|
|
|
Contingent milestone and royalty obligations under our license
agreement with Sucampo AG. These obligations are described in
more detail above, and include obligations to pay Sucampo AG:
|
|
|
|
|
|
5% of every milestone payment we receive from a sublicensee;
|
|
|
|
$500,000 upon initiation of the first Phase II clinical
trial for each compound in each of the three territories covered
by the license;
|
|
|
|
$1.0 million for the first NDA filing or comparable foreign
regulatory filing for each compound in each of these three
territories; and
|
|
|
|
royalty payments ranging from 2.1% to 6.5% of net sales of
products covered by patents licensed to us by Sucampo AG.
|
|
|
|
|
|
Our share of research and development costs for AMITIZA. As of
December 31, 2007, we had incurred $14.0 million of
these costs. In June 2007, we submitted an sNDA for the addition
of irritable bowel syndrome with constipation as a new
indication using a twice daily 8 microgram dose. We expect to
incur approximately $2.0 million of additional costs in
connection with the development of AMITIZA for other
indications, such as the treatment of opioid-induced bowel
dysfunction, which will not be reimbursed by Takeda.
|
|
|
|
Expenses under agreements with contract research organizations
for clinical trials of our product candidates. The timing and
amount of these disbursements are based on a variety of factors,
such as the achievement of specified milestones, patient
enrollment, services rendered or the incurrence of expenses by
the contract research organization. As a result, we reasonably
estimate that as of December 31, 2007, our current
commitments to contract research organizations to be
$24.2 million during 2008 and 2009.
|
In addition, the FDA has required us to perform two
post-marketing studies to evaluate the safety of AMITIZA in
patients with renal impairment and patients with hepatic
impairment. Under our collaboration agreement with Takeda, the
costs for these studies will be shared 70% by Takeda and 30% by
us. We do not anticipate our portion of these expenses will
exceed $5.0 million.
Funding
Requirements
We will need substantial amounts of capital to continue growing
our business. We will require this capital to:
|
|
|
|
|
fund our 30% share of the two post-marketing studies of AMITIZA
to evaluate its safety in patients with renal impairment and
patients with hepatic impairment;
|
|
|
|
fund regulatory efforts by Sucampo Europe and Sucampo Japan for
AMITIZA and cobiprostone;
|
|
|
|
fund development and regulatory activities for cobiprostone and
SPI-017;
|
|
|
|
fund research and development activities for prostone compounds
other than AMITIZA, cobiprostone and SPI-017;
|
|
|
|
fund the expansion of our commercialization activities in the
United States and the initiation of commercialization efforts in
non-U.S. markets; and
|
|
|
|
fund costs for capital expenditures to support the growth of our
business.
|
The timing of these funding requirements is difficult to predict
due to many factors, including the outcomes of our research and
development programs and when those outcomes are determined, the
timing of obtaining regulatory approvals and the presence and
status of competing products. Our capital needs may exceed the
capital available from our future operations, collaborative and
licensing arrangements and existing liquid assets. Our future
capital requirements and liquidity will depend on many factors,
including, but not limited to:
|
|
|
|
|
the revenue from AMITIZA;
|
|
|
|
the future expenditures we may incur to increase revenue from
AMITIZA;
|
81
|
|
|
|
|
the cost and time involved to progress our research and
development programs;
|
|
|
|
our ability to establish collaborative arrangements and to enter
into licensing agreements and contractual arrangements with
others; and
|
|
|
|
any future change in our business strategy.
|
To the extent that our capital resources may be insufficient to
meet our future capital requirements, we may need to finance our
future cash needs through public or private equity offerings,
debt financings or corporate collaboration and licensing
arrangements. Except for research and development funding and
potential future milestone payments of up to $110.0 million
from Takeda, we do not currently have any commitments for future
external funding.
Additional equity or debt financing, grants or corporate
collaboration and licensing arrangements may not be available on
acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, reduce the scope of or
eliminate our research and development programs, reduce our
planned commercialization efforts or obtain funds through
arrangements with collaborators or others that may require us to
relinquish rights to certain product candidates that we might
otherwise seek to develop or commercialize independently. In
addition, any future equity funding may dilute the ownership of
our equity investors.
Related
Party Transactions
Under our license agreement with our affiliate Sucampo AG, we
are required to make specified milestone and royalty payments.
We estimated the fair value of this arrangement based upon
like-kind third-party evidentiary matter for the transaction.
When we entered into this agreement, we performed an economic
analysis of the transaction to ensure that we were receiving a
return on our investment equivalent to that of other
pharmaceutical companies. In addition, we performed a transfer
pricing study and economic analysis to provide evidence that the
agreement did not conflict with taxing guidelines.
Under our exclusive supply agreement with R-Tech, R-Tech made
milestone payments to us totaling $6.0 million during 2004
and we recorded the full amount as deferred revenue. We first
began to recognize these payments as revenue during the quarter
ended June 30, 2006 and will continue to recognize them
ratably through 2020. When we entered into this agreement, we
evaluated the net present value of the supply agreement, based
upon anticipated cash flows from the successful development and
commercialization of the compounds it covers, to determine the
current value of the transaction. Additionally, we performed a
transfer pricing study and economic analysis to provide evidence
the agreement did not conflict with taxing guidelines.
For information regarding additional related party transactions,
see note 9 to our consolidated financial statements
included in this Annual Report on
Form 10-K.
Changes in the application of domestic or foreign taxing
regulations and interpretation of related party transactions
with foreign entities could affect the extent to which taxing
authorities agree that these transactions are on an arms
length basis.
Effects
of Inflation
Our most liquid assets are cash, cash equivalents and short-term
investments. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheets. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract
services, which could increase our level of expenses and the
rate at which we use our resources.
82
Effects
of Foreign Currency
We currently incur a portion of our operating expenses in the
United Kingdom and Japan. The reporting currency for our
consolidated financial statements is U.S. Dollars. As such,
our results of operations could be adversely effected by changes
in exchange rates either due to transaction losses, which are
recognized in the statement of operations, or translation
losses, which are recognized in comprehensive income. We
currently do not hedge foreign exchange rate exposure.
Off
Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities.
Accounting
Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157,
which addresses how companies should measure fair value when
they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting
principles. SFAS 157 outlines a common definition of fair
value and the new standard intends to make the measurement of
fair value more consistent and comparable and improve
disclosures about those measures. We will need to adopt
SFAS 157 for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008, the
FASB agreed to delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after
November 15, 2008. We are assessing SFAS 157 and its
impact on our consolidated financial statements upon adoption.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement
No. 115, or SFAS 159. Under this standard,
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are assessing SFAS 159 in
connection with SFAS 157 and its impact on our consolidated
financial statements upon adoption.
In June 2007, the EITF issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities, or
EITF 07-3,
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. We will be
required to adopt
EITF 07-3
for the year beginning after December 15, 2007. We are
assessing
EITF 07-3
and do not expect a material impact on our future consolidated
financial statements upon adoption.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS 141R, and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51, or SFAS 160.
SFAS 141R will change how business acquisitions are
accounted for and will affect financial statements both on the
acquisition date and in subsequent periods. SFAS 160 will
change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141R and
SFAS 160 will be applied to acquisitions that close in
years beginning after December 15, 2008. Early adoption is
not permitted. SFAS 141R and SFAS 160 will not have
any impact our future consolidated financial statements unless
we undertake an acquisition in the future.
In December 2007, the FASB ratified EITF Issue
07-1,
Accounting for Collaborative Arrangements, or
EITF 07-1.
The consensus prohibits the equity method of accounting for
collaborative arrangements under APB 18, The Equity
Method of Accounting for Investments in Common Stock,
unless a legal entity exists. Payments between the collaborative
partners will be evaluated and reported in the income statement
based on applicable accounting principles generally accepted in
the United States of America, or GAAP. Absent specific GAAP, the
participants to the arrangement will apply other existing GAAP
by analogy or apply a reasonable and rational accounting policy
consistently. The guidance in Issue
07-1 is
effective for periods that begin after December 15,
83
2008 and will apply to arrangements in existence as of the
effective date. The effect of the new consensus will be
accounted for as a change in accounting principle through
retrospective application. We are assessing
EITF 07-1
and its impact on our consolidated financial statements upon
adoption.
In December 2007, the SEC issued SAB No. 110,
Share-Based Payment, or SAB 110, which
expresses the views of the SEC regarding the use of a simplified
method, as discussed in SAB 107, in developing an estimate
of the expected term of plain vanilla share options in
accordance with SFAS 123R. In SAB 110, the SEC stated
that it understood that the detailed information necessary to
calculate an expected term for plain vanilla options may not be
widely available by December 31, 2007, as previously
discussed within SAB 107. Accordingly, the SEC will
continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. As allowed
under SAB 110, we will continue to use the simplified
method in estimating the expected term of our stock options
until such time as more relevant detailed information becomes
available.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our international sales generally are denominated in United
States Dollars, and are, therefore, not exposed to changes in
foreign currency exchange rates.
We do not use derivative financial instruments for trading or
speculative purposes. However, we regularly invest excess cash
in overnight repurchase agreements that are subject to changes
in short-term interest rates. We believe that the market risk
arising from holding these financial instruments is minimal.
Our exposure to market risks associated with changes in interest
rates relates primarily to the increase or decrease in the
amount of interest income earned on our investment portfolio. We
ensure the safety and preservation of invested funds by limiting
default risks, market risk and reinvestment risk. We mitigate
default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not have
materially affected the fair value of our interest sensitive
financial instruments as of December 31, 2007.
Our exposure to credit risk consist of cash and cash
equivalents, restricted cash, investments and receivables. We
place our cash and case equivalents, restricted cash and
investments with highly rated financial institutions. As of
December 31, 2007 we had approximately $85.9 million
of cash and cash equivalents, restricted cash and investments in
excess of federally insured limits. We have not experienced any
losses on these accounts in excess of insured limits.
As of December 31, 2007, we had $60.9 million invested
in auction rate securities. Auction rate securities are
long-term debt instruments that provide liquidity through a
Dutch auction process that resets the applicable interest rate
at pre-determined calendar intervals, generally every seven to
49 days. This mechanism generally allows existing investors
to roll-over their holdings and continue to own their respective
securities or liquidate their holdings by selling their
securities at par value and therefore are usually classified
within current assets.
We generally invest in auction rate securities for short periods
of time as part of our cash management program. Recent
uncertainties in the credit markets have prevented us from
liquidating certain holdings of auction rate securities
subsequent to December 31, 2007 as the amount of securities
submitted for sale during the auction has exceeded the amount of
purchase orders. Although an event of an auction failure does
not necessarily mean that a security is impaired, we considered
various factors to assess the fair value and the classification
of the securities as short-term or long-term assets. Such
factors include, but are not necessarily limited to, timing of
the failed auction, specific security auction history,
likelihood of redemptions, restructurings and other similar
liquidity events, quality of underlying collateral, rating of
the security and the bond insurer and other factors. Such
considerations involve a considerable amount of judgment. As a
result of our assessment of the market conditions and related
facts, including an instance in which the first auction after
year-end failed, one security in the amount of $9.4 million
was classified as a long-term investment as of December 31,
2007. In other instances, we experienced successful auctions
shortly after December 31, 2007, but then encountered
subsequent failed auctions in February and March 2008 in an
aggregate amount of $18.3 million.
As of March 20, 2008, we had reduced our investment in
auction rate securities by selling $33.2 million of
investments at par value. We continue to hold the remaining
securities and are due interest at a higher rate on those
84
securities as to which the auctions have failed than similar
securities for which auctions have cleared. These investments
consist of AAA-rated non-mortgage related auction rate
securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. At
December 31, 2007 and 2006, the fair market values of these
securities were determined to be the carrying values and no
unrealized gains and losses or other-than-temporary impairments
were recorded. We assessed the fair value of the auction rate
securities as of December 31, 2007 through either an
independent valuation for securities which we felt were subject
to credit risk at December 31, 2007, including an
assessment of all key underlying data and assumptions, or
through our own internal assessment of the carrying value and
reasonableness of fair values. Considerable judgment was
involved in reaching these determinations. If the credit ratings
of the issuer, the bond insurer or the collateral deteriorate or
the carrying value of the investments decline for any other
reason, we may need to adjust the carrying value of these
investments. Although a limited secondary market exists for
these securities, we do not intend at this time to use the
secondary market to dispose of the auction rate securities.
It is uncertain as to when the liquidity issues relating to
these investments will improve, although we believe as of
December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. Although we do not currently anticipate having to sell
these securities in order to operate our business, if that were
to change, or if the liquidity issues continue over a prolonged
period, we might be unable to liquidate some holdings of our
auction rate securities and as a result, might suffer losses
from these investments. In addition, given the complexity of
auction rate securities and their valuations, our estimates of
their fair value may differ from the actual amount we would be
able to collect in an ultimate sale.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The consolidated financial statements and related financial
statement schedules required by this item are included beginning
on
page F-1
of this report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer,
performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures
(as defined in
Rule 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934) as of
December 31, 2007. Based upon this evaluation, management
has concluded that, as of December 31, 2007, our disclosure
controls and procedures were effective to provide reasonable
assurance that the information required to be disclosed is
recorded, processed, summarized and reported within the time
periods specified under applicable rules of the Securities and
Exchange Commission, and that such information is accumulated
and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.
Changes
in Internal Controls
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
85
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information regarding our executive officers required by
this Item is set forth under Item 1 to this Annual Report
on
Form 10-K.
The following information will be included in our Proxy
Statement to be filed within 120 days after the fiscal year
end of December 31, 2007, and is incorporated herein by
reference:
|
|
|
|
|
Information regarding our directors required by this Item is set
forth under the heading Election of Directors;
|
|
|
|
Information regarding our Audit Committee and designated
audit committee financial experts is set forth under
the heading Corporate Governance Principles and Board
Matters, Board Structure and Committee Composition
Audit Committee; and
|
|
|
|
Information regarding Section 16(a) beneficial ownership
reporting compliance is set forth under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance.
|
Code of
Ethics
We have adopted a code of ethics and business conduct that
applies to our employees including our principal executive
officer, principal financial officer, principal accounting
officer, and persons performing similar functions. Our code of
ethics and business conduct can be found posted in the investor
relations section on our website at
http://www.sucampo.com.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Executive Compensation of the Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information of the Proxy Statement.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Certain Relationships and Related Transactions of
the Proxy Statement.
86
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Principal Accounting Fees and Services of the Proxy
Statement.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULE
|
(a) The following financial statements, financial statement
schedule and exhibits are filed as part of this report or
incorporated herein by reference:
(1) Consolidated Financial
Statements. See index to consolidated financial
statements on
page F-1.
(2) Financial Statement
Schedule: Schedule II Valuation
and Qualifying Accounts. All other schedules are omitted because
they are not applicable, not required or the information
required is shown in the financial statements or notes thereto.
(3) Exhibits. See subsection (b)
below.
(b) Exhibits. The following exhibits are
filed or incorporated by reference as part of this report.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation
|
|
Exhibit 3.1 to the Companys Current Report on
Form 8-K
(filed August 8, 2007)
|
|
3
|
.2
|
|
Form of Restated Bylaws
|
|
Exhibit 3.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
4
|
.1
|
|
Specimen Stock Certificate evidencing the shares of class A
common stock
|
|
Exhibit 4.1 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
|
10
|
.1
|
|
Amended and Restated 2001 Stock Incentive Plan
|
|
Exhibit 10.1 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.2
|
|
Amended and Restated 2006 Stock Incentive Plan
|
|
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.3
|
|
2006 Employee Stock Purchase Plan
|
|
Exhibit 10.3 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.4
|
|
Form of Incentive Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.5
|
|
Form of Nonstatutory Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.5 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.6
|
|
Form of Restricted Stock Agreement for 2006 Stock Incentive Plan
|
|
Exhibit 10.6 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.7
|
|
Non-employee Director Compensation Summary
|
|
Exhibit 10.7 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.8
|
|
Employment Agreement, dated June 16, 2006, between the Company
and Ryuji Ueno
|
|
Exhibit 10.9 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.9
|
|
Form of Executive Employment Agreement
|
|
Exhibit 10.10 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
87
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.10
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Sachiko Kuno
|
|
Exhibit 10.11 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.11
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Ryuji Ueno
|
|
Exhibit 10.12 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.12
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Michael Jeffries
|
|
Exhibit 10.13 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.13
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Hidetoshi Mine
|
|
Exhibit 10.14 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.14
|
|
Form of Investor Rights Agreement
|
|
Exhibit 10.16 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.15
|
|
Lease Agreement, dated September 16, 1998, between the Company
and Plaza West Limited Partnership, successor in interest to
Trizechahn Plaza West Limited Partnership, as amended
|
|
Exhibit 10.17 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.16
|
|
Sublease Agreement, dated October 26, 2005, between the Company
and First Potomac Realty Investment L.P.
|
|
Exhibit 10.18 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.17
|
|
Amended and Restated Patent Access Agreement, dated June 30,
2006, among the Company, Sucampo Pharma Europe Ltd., Sucampo
Pharma, Ltd. and Sucampo AG
|
|
Exhibit 10.19 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.18*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 23,
2004, between the Company and
R-Tech Ueno,
Ltd., as amended on October 2, 2006
|
|
Exhibit 10.20 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.19*
|
|
Collaboration and License Agreement, dated October 29, 2004,
between the Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.21 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.20*
|
|
Agreement, dated October 29, 2004, among the Company, Takeda
Pharmaceutical Company Limited and Sucampo AG
|
|
Exhibit 10.22 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.21*
|
|
Supply Agreement, dated October 29, 2004, among the Company,
Takeda Pharmaceutical Company Limited and R-Tech Ueno, Ltd.
|
|
Exhibit 10.23 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.22*
|
|
Supply and Purchase Agreement, dated January 25, 2006, among the
Company, Takeda Pharmaceutical Company Limited and R-Tech Ueno,
Ltd.
|
|
Exhibit 10.24 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.23*
|
|
Supplemental Agreement, dated February 1, 2006, between the
Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.25 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.24*
|
|
Services Agreement, dated February 9, 2006, between the Company
and Ventiv Commercial Services, LLC
|
|
Exhibit 10.26 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.25
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Timothy Maudlin
|
|
Exhibit 10.27 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.26
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Sue Molina
|
|
Exhibit 10.28 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
88
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.27*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 24,
2005, between Sucampo Pharma Europe Ltd. and R-Tech Ueno, Ltd.,
as amended on October 2, 2006
|
|
Exhibit 10.29 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.28*
|
|
SPI-8811 and SPI-017 Exclusive Clinical Manufacturing and Supply
Agreement, dated October 4, 2006, between the Company and R-Tech
Ueno, Ltd.
|
|
Exhibit 10.31 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.29
|
|
Lease Agreement, dated December 18, 2006, between the Company
and EW Bethesda Office Investors, LLC
|
|
Included herewith
|
|
10
|
.30
|
|
Amendment to Employment Agreement, dated November 20, 2006,
between the Company and Ryuji Ueno
|
|
Exhibit 10.35 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
|
10
|
.31
|
|
Letter agreement, dated January 29, 2007, between the Company
and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.36 to Registration Statement
No. 333-135133,
Amendment No. 6 (filed May 14, 2007)
|
|
10
|
.32
|
|
Employment Agreement, effective June 1, 2007, between the
Company and Sachiko Kuno
|
|
Exhibit 10.37 to Registration Statement
No. 333-135133,
Amendment No. 8 (filed July 17, 2007)
|
|
10
|
.33
|
|
Amended Employment Agreement, dated May 12, 2007, between the
Company and Mariam E. Morris
|
|
Exhibit 10.38 to Registration Statement
No. 333-135133,
Amendment No. 7 (filed June 25, 2007)
|
|
10
|
.34
|
|
Indemnification Agreement, dated October 18, 2007, between the
Company and Anthony C. Celeste
|
|
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.35
|
|
Amendment, dated December 14, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.1 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.36
|
|
Amendment, dated December 10, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.37
|
|
Amendment, dated December 7, 2007, to Employment Agreement
between the Company and Brad Fackler
|
|
Exhibit 10.3 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.38
|
|
Amendment, dated December 6, 2007, to Employment Agreement
between the Company and Gayle Dolecek
|
|
Exhibit 10.4 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.39
|
|
Amendment, dated December 5, 2007, to Employment Agreement
between the Company and Kei Tolliver
|
|
Exhibit 10.5 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.40
|
|
Amendment, dated November 26, 2007, to Employment Agreement
between the Company and Ryuji Ueno
|
|
Exhibit 10.6 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.41
|
|
Credit Line Agreement, dated March 5, 2008, between the Company
and UBS Bank USA
|
|
Included herewith
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLC, Independent Registered
Public Accounting Firm
|
|
Included herewith
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
89
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
31
|
.2
|
|
Certification of the Principal Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.1
|
|
Certification of the Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.2
|
|
Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
|
|
|
|
Compensatory plan, contract or arrangement. |
|
* |
|
Confidential treatment has been requested for portions of this
exhibit. |
90
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Sucampo Pharmaceuticals, Inc.
Ryuji Ueno, M.D., Ph.D.,Ph.D.
Chief Executive Officer,
Chief Scientific Officer and
Chairman of the Board of Directors
March 27, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ RYUJI
UENO
Ryuji
Ueno, M.D., Ph.D., Ph.D.
|
|
Chief Executive Officer
(Principal Executive Officer),
Chief Scientific Officer and Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ MARIAM
E. MORRIS
Mariam
E. Morris
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 27, 2008
|
|
|
|
|
|
/s/ ANTHONY
C. CELESTE
Anthony
C. Celeste
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ MICHAEL
J. JEFFRIES
Michael
J. Jeffries
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ TIMOTHY
I. MAUDLIN
Timothy
I. Maudlin
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ HIDETOSHI
MINE
Hidetoshi
Mine
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ V.
SUE MOLINA
V.
Sue Molina
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ JOHN
C. WRIGHT
John
C. Wright
|
|
Director
|
|
March 27, 2008
|
91
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Sucampo Pharmaceuticals, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Sucampo
Pharmaceuticals, Inc. and its subsidiaries at December 31,
2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the accompanying consolidated
financial statements, the Company changed the manner in which it
accounts for share-based compensation in 2006.
/s/ PricewaterhouseCoopers
LLP
Baltimore, Maryland
March 24, 2008
F-2
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands, except share data)
|
|
|
ASSETS:
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,559
|
|
|
$
|
22,481
|
|
Investments, short-term
|
|
|
51,552
|
|
|
|
29,399
|
|
Accounts receivable
|
|
|
1,525
|
|
|
|
1,537
|
|
Unbilled accounts receivable
|
|
|
5,883
|
|
|
|
|
|
Product royalties receivable
|
|
|
8,667
|
|
|
|
2,029
|
|
Prepaid and income taxes receivable
|
|
|
1,922
|
|
|
|
2,355
|
|
Deferred tax assets, net
|
|
|
88
|
|
|
|
1,612
|
|
Prepaid expenses and other current assets
|
|
|
2,222
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
97,418
|
|
|
|
59,949
|
|
Restricted cash
|
|
|
213
|
|
|
|
213
|
|
Investments, long-term
|
|
|
9,400
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,265
|
|
|
|
343
|
|
Deferred tax assets noncurrent, net
|
|
|
551
|
|
|
|
3,289
|
|
Deposits and other assets
|
|
|
180
|
|
|
|
3,290
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
110,027
|
|
|
$
|
67,084
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,313
|
|
|
$
|
2,391
|
|
Accrued expenses
|
|
|
8,730
|
|
|
|
5,418
|
|
Deferred revenue current
|
|
|
1,062
|
|
|
|
11,517
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,105
|
|
|
|
19,326
|
|
Deferred revenue, net of current portion
|
|
|
8,626
|
|
|
|
9,192
|
|
Other liabilities
|
|
|
1,768
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,499
|
|
|
|
28,551
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.01 par value;
0 and 10,000 shares authorized at December 31, 2007
and 2006, respectively; 0 and 3,780 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
|
|
|
|
20,288
|
|
Preferred stock, $0.01 par value; 5,000,000 and
0 shares authorized at December 31, 2007 and 2006,
respectively; no shares issued and outstanding at
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
Class A common stock, $0.01 par value; 270,000,000 and
75,000,000 shares authorized at December 31, 2007 and
2006, respectively; 15,538,518 and 8,799,385 shares issued
and outstanding at December 31, 2007 and 2006, respectively
|
|
|
155
|
|
|
|
88
|
|
Class B common stock, $0.01 par value;
75,000,000 shares authorized; 26,191,050 shares issued
and outstanding at December 31, 2007 and 2006
|
|
|
262
|
|
|
|
262
|
|
Additional paid-in capital
|
|
|
96,680
|
|
|
|
41,555
|
|
Accumulated other comprehensive loss
|
|
|
(393
|
)
|
|
|
(294
|
)
|
Accumulated deficit
|
|
|
(10,176
|
)
|
|
|
(23,366
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
86,528
|
|
|
|
38,533
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
110,027
|
|
|
$
|
67,084
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Statements of Operations and Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
59,379
|
|
|
$
|
46,382
|
|
|
$
|
38,960
|
|
Product royalty revenue
|
|
|
27,536
|
|
|
|
6,590
|
|
|
|
|
|
Co-promotion revenue
|
|
|
4,411
|
|
|
|
4,243
|
|
|
|
|
|
Contract revenue related parties
|
|
|
418
|
|
|
|
404
|
|
|
|
98
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
147
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
1,500
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
91,891
|
|
|
|
59,266
|
|
|
|
40,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
28,334
|
|
|
|
16,392
|
|
|
|
31,167
|
|
General and administrative
|
|
|
25,031
|
|
|
|
14,587
|
|
|
|
7,760
|
|
Selling and marketing
|
|
|
13,229
|
|
|
|
11,103
|
|
|
|
295
|
|
Product royalties related parties
|
|
|
4,890
|
|
|
|
1,171
|
|
|
|
|
|
Milestone royalties related parties
|
|
|
2,000
|
|
|
|
1,250
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
73,484
|
|
|
|
44,503
|
|
|
|
40,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
18,407
|
|
|
|
14,763
|
|
|
|
(517
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,465
|
|
|
|
1,976
|
|
|
|
1,046
|
|
Interest expense
|
|
|
|
|
|
|
(90
|
)
|
|
|
(311
|
)
|
Other income, net
|
|
|
151
|
|
|
|
255
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net
|
|
|
2,616
|
|
|
|
2,141
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
21,023
|
|
|
|
16,904
|
|
|
|
473
|
|
Income tax (provision) benefit
|
|
|
(7,833
|
)
|
|
|
4,897
|
|
|
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
37,778
|
|
|
|
34,383
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
38,226
|
|
|
|
34,690
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(99
|
)
|
|
|
(200
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
13,091
|
|
|
$
|
21,601
|
|
|
$
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Statements of Changes in Stockholders Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Convertible
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
(Deficit)
|
|
(In thousands, except share data)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance at December 31, 2004
|
|
|
3,780
|
|
|
$
|
20,288
|
|
|
|
2,165,502
|
|
|
$
|
21
|
|
|
|
30,441,050
|
|
|
$
|
305
|
|
|
$
|
10,888
|
|
|
$
|
(62
|
)
|
|
$
|
(127
|
)
|
|
$
|
(44,851
|
)
|
|
$
|
(13,538
|
)
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Conversion of class B common stock to class A common
stock
|
|
|
|
|
|
|
|
|
|
|
4,250,000
|
|
|
|
43
|
|
|
|
(4,250,000
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options and vesting modifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,614
|
|
Forfeitures of 31,875 shares of restricted class A
common stock
|
|
|
|
|
|
|
|
|
|
|
(31,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
Exercise of 8,500 options for 8,500 shares of class A
common stock
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
33
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(316
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,780
|
|
|
|
20,288
|
|
|
|
6,392,127
|
|
|
|
64
|
|
|
|
26,191,050
|
|
|
|
262
|
|
|
|
14,407
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
(45,167
|
)
|
|
|
(10,240
|
)
|
Issuance of 2,398,758 shares of class A common stock
at $10 per share net of offering costs of $91,792
|
|
|
|
|
|
|
|
|
|
|
2,398,758
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
23,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,896
|
|
Exercise of 8,500 options for 8,500 shares of class A
common stock
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
|
(200
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,274
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,801
|
|
|
|
21,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,780
|
|
|
|
20,288
|
|
|
|
8,799,385
|
|
|
|
88
|
|
|
|
26,191,050
|
|
|
|
262
|
|
|
|
41,555
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
(23,366
|
)
|
|
|
38,533
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
401,133
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
6,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,682
|
|
Issuance of 3,125,000 shares of class A common stock
at $11.50 per share, net of offering costs of $5,200
|
|
|
|
|
|
|
|
|
|
|
3,125,000
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
28,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,222
|
|
Conversion of series A convertible preferred stock to
class A common stock
|
|
|
(3,780
|
)
|
|
|
(20,288
|
)
|
|
|
3,213,000
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
20,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
(99
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,190
|
|
|
|
13,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
15,538,518
|
|
|
$
|
155
|
|
|
|
26,191,050
|
|
|
$
|
262
|
|
|
$
|
96,680
|
|
|
$
|
|
|
|
$
|
(393
|
)
|
|
$
|
(10,176
|
)
|
|
$
|
86,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Statements of Cash Flows
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Year Ended December 31,
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(In thousands)
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2007
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2006
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2005
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Cash flows from operating activities:
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Net income (loss)
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$
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13,190
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$
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21,801
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$
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(316
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)
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Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
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Depreciation and amortization
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251
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69
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62
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Loss on disposal of property and equipment
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63
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Deferred tax provision (benefit)
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4,262
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(4,035
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)
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(684
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)
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Stock-based compensation
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6,682
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3,274
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3,615
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Changes in operating assets and liabilities:
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Accounts receivable
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(23
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)
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(813
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)
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(489
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)
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Unbilled accounts receivable
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(5,883
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)
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Product royalties receivable
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(6,638
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)
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(2,029
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)
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Prepaid and income taxes receivable and payable, net
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431
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(4,007
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)
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1,464
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Prepaid expenses and other current assets
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(1,655
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)
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(254
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)
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(103
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)
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Deposits and other assets
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(84
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)
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15
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Accounts payable
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924
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437
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610
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Accrued expenses
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3,341
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3,023
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354
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Deferred revenue
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(11,028
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)
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(26,829
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)
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20,364
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Other liabilities
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1,732
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(1,467
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)
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(1,077
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)
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Net cash provided by (used in) operating activities
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5,649
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(10,914
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)
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23,815
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Cash flows from investing activities:
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Purchases of short-term investments
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(88,647
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)
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(2,309
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)
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(28,435
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)
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Proceeds from the sales and maturities of short-term investments
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57,094
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1,345
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3,000
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Purchases of property and equipment
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(2,231
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)
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(236
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)
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(39
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)
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Investments in restricted cash
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(213
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)
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Net cash used in investing activities
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(33,784
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)
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(1,413
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)
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(25,474
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)
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Cash flows from financing activities:
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Issuance of common stock, net of offering costs
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31,341
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23,896
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Payments of initial public offering costs
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(2,923
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)
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Issuance of notes payable related parties
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1,200
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Payments on notes payable related parties
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(4,754
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)
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(2,280
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)
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Proceeds from exercise of stock options
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2
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2
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Net cash provided by (used in) financing activities
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31,341
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17,421
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(2,278
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)
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Effect of exchange rates on cash and cash equivalents
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(128
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)
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(49
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)
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(545
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)
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Net increase (decrease) in cash and cash equivalents
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3,078
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5,045
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(4,482
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)
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Cash and cash equivalents at beginning of year
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22,481
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17,436
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21,918
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Cash and cash equivalents at end of year
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$
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25,559
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$
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22,481
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$
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17,436
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Supplemental cash flow disclosures:
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Cash paid for interest
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$
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$
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86
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$
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251
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Tax refunds received
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$
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1,361
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$
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$
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Tax payments made
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$
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4,500
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$
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3,161
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$
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Upon the completion of the Companys initial public
offering in August 2007, $3.1 million of initial public
offering costs paid in 2006 were reclassified from deposits and
other assets to additional paid-in capital.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
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1.
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Business
Organization and Basis of Presentation
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Description
of the Business
Sucampo Pharmaceuticals, Inc. (Sucampo) was incorporated in the
State of Delaware on December 5, 1996 and is a specialty
biopharmaceutical company focused on the discovery, development
and commercialization of proprietary drugs based on prostones, a
class of compounds derived from functional fatty acids that
occur naturally in the human body. Sucampo is focused on
developing prostones for the treatment of gastrointestinal,
respiratory, vascular and central nervous system diseases and
disorders. In September 2006, Sucampo acquired the capital stock
of its affiliated European and Asian operating companies,
Sucampo Pharma Europe, Ltd. (Sucampo Europe) and Sucampo Pharma,
Ltd. (Sucampo Japan). Hereinafter, Sucampo, Sucampo Europe and
Sucampo Japan are referred to collectively as the
Company. The financial information of these three
entities is presented in these consolidated financial statements.
The Company is a member of a group of affiliated companies
(Affiliates) in which the Companys founders and
controlling stockholders own directly or indirectly the majority
holdings. Currently, one of the Companys founders is a
member of some of the Affiliates boards of directors and
serves as the Chief Executive Officer and Chief Scientific
Officer of the Company (see Note 9).
The Company is party to a collaboration and license agreement
with Takeda Pharmaceutical Company Limited (Takeda) to jointly
develop and commercialize
AMITIZA®
(lubiprostone) for chronic idiopathic constipation, irritable
bowel syndrome with constipation, opioid-induced bowel
dysfunction and other gastrointestinal indications in the United
States and Canada. In January 2006, the Company received
marketing approval from the U.S. Food and Drug
Administration (FDA) for its first product, AMITIZA, to treat
chronic idiopathic constipation in adults. Commercialization of
AMITIZA began in April 2006 throughout the United States.
Basis
of Presentation
The accompanying consolidated financial statements of the
Company have been prepared in accordance with generally accepted
accounting principles in the United States of America (GAAP).
The consolidated financial statements include the accounts of
Sucampo and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to
the current year presentation, primarily with respect to items
and matters not required to be disclosed separately in prior
periods.
Initial
Public Offering
In August 2007, the Company completed its initial public
offering of 3,125,000 shares of class A common stock
at a public offering price of $11.50 per share, resulting in
gross proceeds to the Company of approximately
$35.9 million. After deducting underwriters
discounts, commissions, and expenses of the offering, including
costs of $3.1 million incurred in 2006, the Company raised
net proceeds of $28.2 million. An additional
625,000 shares of class A common stock were sold by a
selling stockholder of the Company and 562,500 shares were
sold under an overallotment option by S&R Technology
Holdings, LLC (S&R), which is an entity wholly-owned by the
Companys founders. In connection with the initial public
offering, the Company implemented an 8.5-to-one stock split of
the Companys class A and class B common stock in
the form of a stock dividend. This stock dividend was effective
July 12, 2007. All historical common stock and per share
common stock information has been retroactively restated to
reflect this stock split. Historical series A convertible
preferred stock information has not been changed except to
reflect the modification of the conversion ratio to 850-to-one,
after giving effect to this stock split.
In connection with the initial public offering, the Company
amended its certificate of incorporation to increase the
authorized number of shares of class A common stock to
270,000,000 and the authorized number of shares of
F-7
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
class B common stock to 75,000,000 and authorized
5,000,000 shares of undesignated preferred stock, par value
$0.01 per share. Upon consummation of the initial public
offering, all shares of the Companys series A
convertible preferred stock were converted into an aggregate of
3,213,000 shares of class A common stock.
Capital
Resources
The Company has a limited operating history and its expected
activities will necessitate significant uses of working capital
throughout 2008 and beyond. The Companys working capital
requirements will depend on many factors, including the
successful sales of AMITIZA, research and development efforts to
develop new products, payments received under contractual
agreements with other parties, the status of competitive
products and market acceptance of the Companys new
products by physicians and patients. The Company plans to
continue financing operations in part with cash received from
its initial public offering and from its joint collaboration and
license agreement and the supplemental agreement entered into
with Takeda (see Note 10).
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2.
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Summary
of Significant Accounting Policies
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Cash
and Cash Equivalents
For the purpose of the consolidated balance sheets and
statements of cash flows, cash equivalents include all highly
liquid investments with an original maturity of 90 days or
less at the time of purchase.
Restricted
Cash
Restricted cash consists of approximately $213,000 at
December 31, 2007 and 2006 of cash securing a letter of
credit related to the Companys new headquarters lease
agreement dated December 18, 2006. This letter of credit
renews automatically each year and is required until the lease
expires on February 15, 2017.
Short-
and Long-Term Investments
Short- and long-term investments consist entirely of auction
rate securities and a money market account. The Companys
investments in these securities are classified as
available-for-sale securities under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities
(SFAS 115). Although the auction rate securities have
variable interest rates which typically reset every seven to
49 days through a competitive bidding process known as a
Dutch auction, they have long-term contractual
maturities usually exceeding ten years, and therefore are not
classified as cash equivalents. These investments are generally
classified within current assets because the Company has the
ability and the intent to liquidate these securities if needed
within a short time frame, usually at the next auction.
The available-for-sale securities are accounted for at fair
market value and unrealized gains and losses on these
securities, if any, are included in accumulated other
comprehensive income (loss) in stockholders equity. The
Company assesses the recoverability of its available-for-sale
securities and, if impairment is indicated, the Company measures
the amount of such impairment by comparing the fair value to the
carrying value. Other-than-temporary impairments are included in
the statement of operations and comprehensive income (loss).
Interest and dividend income is recorded when earned and
included in interest income. Premiums and discounts, if any, on
short- and long-term investments are amortized or accreted to
maturity and included in interest income. During the years ended
December 31, 2007, 2006 and 2005, there were no short- and
long-term investments that were purchased at a premium or
discount. The Company uses the specific identification method in
computing realized gains and losses on sale of its securities.
During the years ended December 31, 2007, 2006 and 2005,
there were no gains or losses realized on the sale of these
investments.
F-8
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Certain
Risks, Concentrations and Uncertainties
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash and
cash equivalents, restricted cash, investments and receivables.
The Company places its cash and cash equivalents, restricted
cash and investments with highly rated financial institutions.
At December 31, 2007 and 2006, the Company had
approximately $85.9 million and $49.9 million,
respectively, of cash and cash equivalents, restricted cash and
investments in excess of federally insured limits. The Company
has not experienced any losses on these accounts related to
amounts in excess of insured limits.
As of December 31, 2007, all of the Companys auction
rate securities consisted of AAA rated non-mortgage related
auction rate securities which are insured against loss of
principal and interest by bond insurers whose AAA ratings are
under review. As of March 20, 2008, the Company had reduced its
investment in auction rate securities by selling
$33.2 million of investments at par value. It is uncertain
as to when the liquidity issues relating to these investments
will improve, although the Company believes as of
December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. The Company does not anticipate having to sell the
remaining securities in order to operate its business. If this
changes, however, the Company may be unable to liquidate some
holdings of the auction rate securities and as a result, may
suffer losses from these investments. Although a limited
secondary market exists for these securities, the Company does
not currently intend to use the secondary market to dispose of
the auction rate securities. In addition, given the complexity
of auction rate securities and their valuations, the
Companys estimates of their fair value may differ from the
actual amount that the Company would be able to collect in an
ultimate sale.
The Companys product candidates under development require
approval from the FDA or other international regulatory agencies
prior to commercial sales. For those product candidates that
have not yet been approved by the FDA, or international
regulatory agencies, there can be no assurance the products will
receive the necessary approval. If the Company is denied
approval or approval is delayed, it may have a material adverse
impact on the Company.
The Companys product competes in a rapidly changing,
highly competitive market, which is characterized by advances in
scientific discovery, changes in customer requirements, evolving
regulatory requirements and developing industry standards. Any
failure by the Company to anticipate or to respond adequately to
scientific developments in its industry, changes in customer
requirements or changes in regulatory requirements or industry
standards, or any significant delays in the development or
introduction of products or services could have a material
adverse effect on the Companys business, operating results
and future cash flows.
Revenues from one unrelated party, Takeda, accounted for 100%,
98% and 100% of the Companys total revenues for the years
ended December 31, 2007, 2006 and 2005, respectively.
Accounts receivable, unbilled accounts receivable and product
royalties receivable from Takeda accounted for 99% of the
Companys accounts and product royalty receivables at
December 31, 2007 and 2006. The Company depends
significantly upon the collaboration with Takeda and its
activities may be impacted if this relationship is disrupted.
The Company has also entered into an exclusive supply
arrangement with R-Tech Ueno, Ltd (R-Tech), an affiliate, to
provide it with commercial and clinical supplies of its product
and product candidates. Any difficulties or delays in performing
the services under this exclusive supply arrangement may cause
the Company to lose revenues, delay research and development
activities or otherwise disrupt the Companys operations
(see Note 9).
Fair
Value of Financial Instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, restricted
cash, short- and long-term investments, receivables, accounts
payable and accrued liabilities, approximate their fair values
based on their short maturities, independent valuations or
internal assessments.
F-9
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Accounts
Receivable
Accounts receivable represent amounts due under the joint
collaboration and licensing agreement with Takeda (see
Note 10). The Company did not record an allowance for
doubtful accounts at December 31, 2007 or 2006 because it
believes that its accounts receivable are fully collectible and
it does not have a history of credit losses or write-offs of its
accounts receivable.
Unbilled
Accounts Receivable
Unbilled accounts receivable represent the research and
development expenses that are reimbursable by Takeda but have
not been billed to Takeda as of the balance sheet date.
Product
Royalties Receivable
Product royalties receivable represent amounts due from Takeda
for the Companys royalties on sales of AMITIZA, which are
based on reports obtained directly from Takeda.
Property
and Equipment
Property and equipment are recorded at cost and consist of
computer and office machines, furniture and fixtures and
leasehold improvements. Depreciation is computed using the
straight-line method over the estimated useful lives of the
respective assets. Computer and office machines are depreciated
over four years and furniture and fixtures are depreciated over
seven years. Leasehold improvements are amortized over the
shorter of ten years or the life of the lease. Significant
additions and improvements are capitalized. Expenditures for
maintenance and repairs are charged to earnings as incurred.
When assets are sold or retired, the related cost and
accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is included in earnings.
Impairment
of Long-lived Assets
When necessary, the Company assesses the recoverability of its
long-lived assets by determining whether the carrying value of
such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company
measures the amount of such impairment by comparing the fair
value to the carrying value. There have been no impairment
charges recorded during the years ended December 31, 2007,
2006 or 2005 because there have been no indicators of impairment
during those years.
Deposits
and Other Assets
At December 31, 2006, the Company was uncertain of when the
initial public offering would be completed; therefore, the
Company capitalized costs of $3.1 million associated with
its initial public offering and recorded the capitalized costs
as other assets. Upon the completion of the initial public
offering in August 2007, the Company reclassified these costs,
as well as additional costs of $2.1 million in 2007, to
additional paid-in capital at the closing date of the offering.
Revenue
Recognition
Collaboration
and License Agreements
The Companys primary sources of revenue include up-front
payments, development milestone payments, reimbursements of
development and co-promotion costs and product royalties. The
Company recognizes revenue from these sources in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition (SAB 104), Emerging Issues Task Force
(EITF)
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent
(EITF 99-19),
and EITF
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21).
The application of
EITF 00-21
requires subjective analysis and requires management
F-10
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
to make estimates and assumptions about whether deliverables
within multiple-element arrangements are separate units of
accounting and to determine the fair value to be allocated to
each unit of accounting.
The Company entered into a
16-year
joint collaboration and license agreement with Takeda in October
2004 (Takeda Agreement) and a supplemental agreement to the
Takeda Agreement (Supplemental Agreement) in February 2006. The
Company evaluated the multiple deliverables within the Takeda
Agreement and the Supplemental Agreement in accordance with the
provisions of
EITF 00-21
to determine whether the delivered elements that are the
obligation of the Company have value to Takeda on a stand-alone
basis and whether objective reliable evidence of fair value of
the undelivered items exists. Deliverables that meet these
criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and
accounted for as a single unit of accounting. The appropriate
recognition of revenue is then applied to each separate unit of
accounting.
The Companys deliverables under the Takeda Agreement and
the Supplemental Agreement, including the related rights and
obligations, contractual cash flows and performance periods, are
more fully described in Note 10.
The Takeda Agreement consists of the following key funding
streams: an up-front payment, product development milestone
payments, reimbursements of development costs and product
royalty payments. The cash flows associated with the individual
units of accounting from the Takeda Agreement are recognized as
revenue using a time-based model when the Company has
obligations to perform. Under this model, cash flow streams
related to each unit of accounting are recognized as revenue
over the estimated performance period. Upon receipt of cash
payments, revenue is recognized to the extent the accumulated
service time, if any, has occurred. The remainder is deferred
and recognized as revenue ratably over the remaining estimated
performance period. A change in the period of time expected to
complete the deliverable is accounted for as a change in
estimate on a prospective basis. Revenue is limited to amounts
that are nonrefundable and that Takeda is contractually
obligated to pay to the Company.
The Company has other obligations with Takeda to perform
research and development activities, for which Takeda reimburses
the Company after the services have been performed. The Company
recognizes these reimbursable costs as research and development
revenue using a similar time-based model over the estimated
performance period. The research and development revenue for
these obligations is limited to the lesser of the actual
reimbursable costs incurred or the straight-line amount of
revenue recognized over the estimated performance period.
Revenues are recognized for reimbursable costs only if those
costs are supported by an invoice or final contract with a
vendor.
Based on the guidance of
EITF 99-19,
the Company has determined that it is acting as a principal
under the Takeda Agreement and, as such, records these amounts
as collaboration revenue and research and development revenue.
Royalties from licensees are based on third-party sales of
licensed products and are recorded on the accrual basis when
earned in accordance with contractual terms when third-party
results are reliably measurable, collectability is reasonably
assured and all other revenue recognition criteria are met.
The Supplemental Agreement consists of the following key funding
streams: reimbursements of co-promotion costs based upon a
per-day rate
and reimbursements of the costs of miscellaneous marketing
activities.
Reimbursements of co-promotion costs for the Companys
sales force efforts and reimbursements of miscellaneous
marketing costs under the Supplemental Agreement are recognized
as revenue as the related costs are incurred and Takeda becomes
contractually obligated to pay the amounts. Based on the
guidance of
EITF 99-19,
the Company has determined that it is acting as a principal as
it relates to these activities under the Supplemental Agreement
and, as such, records reimbursements of these amounts as
co-promotion revenue.
Option fees received for other potential joint collaboration and
license agreements with Takeda are not recognized as revenue
immediately because the transactions do not represent a separate
earnings process. Because there are contingent performance
obligations by the Company when and if the options are
exercised, the Companys
F-11
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
policy is to recognize revenue immediately upon expiration of
the option or to commence revenue recognition upon exercise of
the option and continue recognition over the estimated
performance period. When recognized, option fees are recorded as
contract revenue.
Contract
Revenue
Contract revenue related to development and consulting
activities with related parties is also accounted for under the
time-based model.
Deferred
Revenue
Consistent with the Companys policy on revenue
recognition, deferred revenue represents cash received in
advance for licensing fees, option fees, consulting, research
and development contracts and related cost sharing and supply
agreements. Such payments are reflected as deferred revenue
until revenue can be recognized under the Companys revenue
recognition policy. Deferred revenue is classified as current if
management believes the Company will be able to recognize the
deferred amount as revenue within 12 months of the balance
sheet date. At December 31, 2007 and 2006, total deferred
revenue was approximately $9.7 million and
$20.7 million, respectively.
Total deferred revenue consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Deferred revenue current
|
|
$
|
1,062
|
|
|
$
|
11,517
|
|
Deferred revenue, net of current portion
|
|
|
8,626
|
|
|
|
9,192
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,688
|
|
|
$
|
20,709
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue to related parties current
|
|
$
|
419
|
|
|
$
|
419
|
|
Deferred revenue to related parties, net of current portion
|
|
|
6,862
|
|
|
|
7,281
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue to related parties, included above
|
|
$
|
7,281
|
|
|
$
|
7,700
|
|
|
|
|
|
|
|
|
|
|
Research
and Development Expenses
Research and development costs are expensed in the period in
which they are incurred and include the expenses from third
parties who conduct research and development activities pursuant
to development and consulting agreements on behalf of the
Company. Costs related to the acquisition of intellectual
property are expensed as incurred in research and development
expenses since the underlying technology associated with such
acquisitions is unproven, has not received regulatory approval
at its early stage of development and does not have alternative
future uses. Milestone payments due under agreements with
third-party contract research organizations (CROs) are accrued
when it is deemed probable that the milestone event will be
achieved.
General
and Administrative Expenses
General and administrative costs are expensed as incurred and
consist primarily of salaries and other related costs for
personnel serving executive, finance, accounting, information
technology and human resource functions. Other costs include
facility costs and professional fees for legal and accounting
services.
Reimbursement of the Companys safety costs under the
Supplemental Agreement is recorded as a reduction of safety
expenses and is included in general and administrative expenses.
The Company has determined, in accordance with
EITF 99-19,
that it is acting as an agent in this arrangement and, as such,
records reimbursements of these expenses on a net basis,
offsetting the underlying expenses.
F-12
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Selling
and Marketing Expenses
Selling and marketing expenses are expensed as incurred and
consist primarily of salaries and related costs for personnel,
sales force fees and certain marketing expenditures.
Milestone
Royalties Related Parties
The milestone royalties related parties represent
royalties paid or due to Sucampo AG (SAG), a company organized
in Switzerland, affiliated through common ownership. The
milestone royalty is 5% of milestone payments received under any
sublicensing agreements for AMITIZA. In addition, for each
indication for AMITIZA for which the Company obtains regulatory
approval, the Company must pay a $250,000 milestone. The
Company must also pay a $500,000 milestone upon the
initiation of the first Phase II clinical trial for each
compound in each of the three territories covered by the
license: (1) North, Central and South America, including
the Caribbean, (2) Asia and (3) the rest of the world,
and a $1.0 million milestone for the first NDA filing or
comparable foreign regulatory filing for each compound in each
of the same three territories. Milestone royalties
related parties are expensed as incurred immediately when the
related milestones become probable under the guidance of
SFAS No. 5, Accounting for
Contingencies. For the years ended December 31,
2007 and 2006, the Company expensed $2.0 million and
$1.3 million in milestone royalties related
parties, respectively.
Product
Royalties Related Parties
Product royalties related parties represent the
Companys obligation to SAG for 3.2% of AMITIZA net sales
and are expensed as incurred. For the years ended
December 31, 2007 and 2006, the Company expensed
approximately $4.9 million and $1.2 million in product
royalties, respectively. The Company has recorded a
corresponding liability of approximately $1.5 million and
$361,000 as accrued expenses as of December 31, 2007 and
2006, respectively.
Interest
Income
Interest income consists of interest earned on the
Companys cash and cash equivalents and short- and
long-term investments.
Accrued
expenses
As part of the process of preparing financial statements,
management estimates accrued expenses. This process involves
identifying services that have been performed on the
Companys behalf, and then estimating the level of service
performed and the associated cost incurred for such services as
of each balance sheet date. Accrued expenses include contract
service fees, such as those under contracts with clinical
monitors, data management organizations and investigators in
conjunction with clinical trials, fees to its contract
manufacturer for the production of clinical materials and
commercial supplies, professional service fees and other
activities. Pursuant to managements assessment of the
services that have been performed, the Company recognizes these
expenses as the services are provided. Such assessments include,
but are not limited to: (1) an evaluation by the project
manager of the work that has been completed during the period,
(2) measurement of progress prepared internally
and/or
provided by the third-party service provider and
(3) analyses of data that justify the progress.
Employee
Stock-Based Compensation
On January 1, 2006, the Company adopted
SFAS No. 123R, Share-Based Payment
(SFAS 123R), which requires the measurement and
recognition of expense for all share-based compensation of
employees and directors to be based on estimated fair values of
the share-based awards. SFAS 123R requires companies to
estimate the fair value of share-based awards on the date of
grant using an option-pricing model. The value of the portion of
the
F-13
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
award that is ultimately expected to vest is recognized as
expense over the requisite service period in the Companys
consolidated statement of operations.
The Company adopted SFAS 123R utilizing the modified
prospective method. Under this method, the Companys
consolidated financial statements for prior periods were not
restated to reflect, and do not include, the impact of
SFAS 123R. Upon adoption of SFAS 123R, the Company
decided to utilize the straight-line method of allocating
stock-based compensation expense over the vesting term of the
stock-based awards and continued to use the Black-Scholes-Merton
Option Pricing Formula which was previously used for the
Companys pro-forma information required under
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). The Companys
determination of fair value of share-based awards on the date of
grant using an option-pricing model is affected by the
Companys stock price and assumptions regarding a number of
highly complex and subjective variables.
The assumptions used to estimate the fair value of stock options
granted for the years ended December 31, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
Expected volatility
|
|
39.20% - 60.10%
|
|
54.0% - 75.7%
|
Risk-free interest rate
|
|
2.99% - 3.59%
|
|
4.72% - 4.93%
|
Expected term (in years)
|
|
3.25 - 6.25
|
|
2.63 - 5.75
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
Expected Volatility: The Company evaluated the
assumptions used to estimate expected volatility, including
whether implied volatility of its options appropriately reflects
the markets expectations of future volatility. The Company
determined that it would calculate the expected volatility rate
using historical stock prices obtained from comparable
publicly-traded companies due to the limited history of the
Companys common stock activity.
Risk-Free Interest Rate: The risk-free
interest rate is based on the market yield currently available
on U.S. Treasury securities with maturity that approximates
the expected term of the share-based awards.
Expected Term: Due to the limited history of
employee stock options granted by the Company, the Company
elected to use the simplified method allowed under
SAB No. 107, Share-Based Payment
(SAB 107), to calculate its expected term as the share-
based awards meet the plain vanilla definition
described in SAB 107. Under this method, the expected term
is the weighted average of the vesting term and the contractual
term.
Expected Dividend Yield: The Company has not
paid, and does not anticipate paying, any dividends in the
foreseeable future.
Employee stock-based compensation expense for the years ended
December 2007 and 2006 has been reduced for estimated
forfeitures as such expense is based upon awards expected to
ultimately vest. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. During the years ended December 31, 2007 and
2006, the estimated forfeiture rate ranged from 8.0% to 12.0%.
F-14
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Employee stock-based compensation expense under SFAS 123R
recorded in the Companys consolidated statements of
operations for years ended December 31, 2007 and 2006 was
as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Selling and marketing expense
|
|
$
|
333
|
|
|
$
|
566
|
|
General and administrative expense
|
|
|
595
|
|
|
|
2,708
|
|
Founders stock-based awards (Note 9)
|
|
|
6,112
|
|
|
|
|
|
Cumulative out-of-period adjustment
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense included in operating
expenses
|
|
$
|
6,682
|
|
|
$
|
3,274
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense per basic share of
common stock
|
|
$
|
0.18
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense per diluted share of
common stock
|
|
$
|
0.17
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a cumulative out-of-period adjustment of
approximately $358,000 during the year ended December 31,
2007 to reduce an overstatement of additional paid-in capital
and general and administrative expenses that had been recorded
as of and for the year ended December 31, 2006 in
connection with certain employee stock options awarded in 2006.
The error resulted from applying the incorrect contractual term
for certain employee stock options. The impacts of this
adjustment were not material to the consolidated financial
statements for the year ended December 31, 2006 or for the
period in which it was recorded, as the adjustment consisted of
insignificant amounts related to each of the quarterly reporting
periods dating back to the quarter ended June 30, 2006.
Pro forma information for period prior to adoption of
SFAS 123R: Through December 31, 2005,
the Company had elected to account for stock-based compensation
attributable to stock options awarded to employees, directors
and officers using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25). Under APB 25 guidance, stock-based compensation expense was
based on the intrinsic value of awarded stock options, which is
measured as the excess, if any, of the fair market value of the
Companys common stock at the date of grant over the
exercise price of the option granted. Stock-based compensation,
if any, is recognized over the related vesting period.
Had stock-based employee compensation expense been recorded
based on the fair value at the grant dates consistent with the
recognition method prescribed by SFAS 123, the
Companys net loss for the year ended December 31,
2005 would have been changed to the following pro forma amounts:
|
|
|
|
|
|
|
Year Ended
|
|
(In thousands, except per share data)
|
|
December 31, 2005
|
|
|
Net loss
|
|
$
|
(316
|
)
|
Add: Stock-based employee compensation expense included in net
loss
|
|
|
317
|
|
Less: Stock-based employee compensation expense determined under
SFAS 123
|
|
|
(531
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(530
|
)
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
Non-employee
Stock-Based Compensation
The Company accounts for non-employee stock-based compensation
in accordance with EITF Issue
No. 96-18,
Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods, or Services. In August 2005, the
Company granted 510,000 shares to non-
F-15
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
employees. The stock-based compensation expense was calculated
at the date of grant using the fair value method and the
Black-Scholes-Merton Option Pricing Formula with the following
assumptions:
|
|
|
|
|
Contractual term
|
|
|
10 years
|
|
Risk-free interest rate
|
|
|
4.4%
|
|
Expected volatility
|
|
|
75.0%
|
|
Expected dividend yield
|
|
|
0%
|
|
There were no stock options granted to non-employees during the
years ended December 31, 2007 and 2006.
Income
Taxes
The Company accounts for income taxes under the liability method
in accordance with provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109),
which requires companies to account for deferred income taxes
using the asset and liability method. Under the asset and
liability method, current income tax provision or benefit is the
amount of income taxes expected to be payable or refundable for
the current year. A deferred income tax asset or liability is
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Tax rate
changes are reflected in the income tax provision during the
period such changes are enacted. Changes in ownership may limit
the amount of net operating loss carryforwards that can be
utilized in the future to offset taxable income.
Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against the Companys net deferred tax assets. The
Company has recorded a partial valuation allowance, which
resulted in a net deferred tax asset of $639,000 and
$4.9 million as of December 31, 2007 and
December 31, 2006, due to uncertainties related to its
ability to utilize a portion of the net deferred tax assets.
Significant future events, including marketing approval by the
FDA of AMITIZA for the treatment of irritable bowel syndrome
with constipation, are not in the control of the Company and
will impact the amount of net deferred tax assets that will be
utilized. The amount of the valuation allowance has been
determined based on managements estimates of income by
jurisdiction in which the Company operates, over the periods in
which the related deferred tax assets are recoverable.
For all significant transactions between Sucampo, Sucampo Europe
and Sucampo Japan, the Companys management has evaluated
the terms of the transactions using significant estimates and
judgments to ensure that each significant transaction would be
on similar terms if the Company completed the transaction with
an unrelated party. Although the Company believes there will be
no material tax liabilities to the Company as a result of
multi-jurisdictional transactions, there can be no assurance
that taxing authorities will not assert that transactions were
entered into at monetary values other than fair values. If such
assertions were made, the Companys intention would be to
vigorously defend its positions; however, there can be no
assurance that additional liabilities may not occur as a result
of any such assertions.
On January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 prescribes a
recognition threshold that a tax position is required to meet
before being recognized in the financial statements and provides
guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition issues. The adoption of FIN 48 did not have a
significant impact on the Companys consolidated financial
statements.
The Company conducts business in the United States, Japan and
the United Kingdom and is subject to tax in those jurisdictions.
As a result of its business activities, the Company files tax
returns that are subject to
F-16
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
examination by the respective federal, state, local and foreign
tax authorities. For income tax returns filed by the Company,
the Company is no longer subject to U.S. federal, state and
local, or foreign income tax examination by tax authorities for
years before 2004, although carryforward tax attributes that
were generated prior to 2004 may still be adjusted upon
examination by tax authorities if they either have been or will
be utilized. The Company has not received any communications by
taxing authorities that cause it to believe it is currently
under examination by the tax authorities in any of the
jurisdictions in which it operates.
The Company recognizes interest and penalties accrued related to
uncertain tax positions as a component of the income tax
provision. There were no material uncertain tax positions as of
December 31, 2007. For the year ended December 31,
2007, there have been no interest and penalties recorded as a
component of the income tax provision.
Foreign
Currency
The Company translates the assets and liabilities of its foreign
subsidiaries, Sucampo Europe and Sucampo Japan, into
U.S. dollars at the current exchange rate in effect at the
end of the year and maintains the capital accounts of these
subsidiaries at the historical exchange rates. The revenue,
income and expense accounts of the foreign subsidiaries are
translated into U.S. dollars at the average rates that
prevailed during the relevant period. The gains and losses that
result from this process are included in accumulated other
comprehensive income (loss) in the stockholders equity
section of the consolidated balance sheet.
Realized and unrealized foreign currency gains or losses on
assets and liabilities denominated in a currency other than the
functional currency are included in net income (loss).
Other
Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income
(Loss), requires that all components of comprehensive
income (loss) be reported in the financial statements during the
period in which they are recognized. Comprehensive income (loss)
is net income (loss) plus certain other items that are recorded
directly to stockholders equity. The Company has reported
the comprehensive income (loss) in the consolidated statements
of operations and comprehensive income (loss).
Segment
Information
Management has determined that the Company has three reportable
segments, which are based on its method of internal reporting by
geographical location. The Companys reportable segments
are the United States, Europe and Japan.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates that affect the reported
amounts of assets and liabilities at the date of the financial
statements, disclosure of contingent assets and liabilities, and
the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Change
in Estimate
Effective June 1, 2006, as a result of new study evaluation
requirements released by the Rome III Committee on
Functional Gastrointestinal Disorders, an international
committee of gastroenterologists, management of the Company
concluded that the completion of the final analysis of data from
its clinical trials of AMITIZA for the treatment of irritable
bowel syndrome with constipation would be extended from December
2006 to mid 2007. Accordingly, the Company determined in June
2006 that the recognition period for associated research and
development revenue should be extended. The Company deferred the
remaining $11.0 million as of December 31,
F-17
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
2006 and recognized the revenues ratably through the completion
date of June 2007. Under the provisions of
SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (SFAS 154), the Company
recognized this as a change in estimate on a prospective basis
from June 1, 2006. The effect on net income and basic and
diluted net income per share for the year ended
December 31, 2006 was as follows:
|
|
|
|
|
(In thousands, except for per share data)
|
|
|
|
|
Decrease in revenue and net income
|
|
$
|
10,951
|
|
Impact on basic net income per share
|
|
|
(0.32
|
)
|
Impact on diluted net income per share
|
|
|
(0.32
|
)
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which addresses how companies should measure fair value when
they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting
principles. SFAS 157 outlines a common definition of fair
value and the new standard intends to make the measurement of
fair value more consistent and comparable and improve
disclosures about those measures. The Company will need to adopt
SFAS 157 for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008, the
FASB agreed to delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after
November 15, 2008. The Company is assessing SFAS 157
and its impact on the consolidated financial statements upon
adoption.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this
standard, entities will now be permitted to measure many
financial instruments and certain other assets and liabilities
at fair value on an
instrument-by-instrument
basis. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is assessing
SFAS 159 in connection with SFAS 157 and its impact on
the consolidated financial statements upon adoption.
In June 2007, the EITF issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities
(EITF 07-3),
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. The
Company will be required to adopt
EITF 07-3
for the year beginning after December 15, 2007. The Company
is currently assessing
EITF 07-3
and does not expect a material impact on its future consolidated
financial statements upon its adoption.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R) and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51 (SFAS 160).
SFAS 141R will change how business acquisitions are
accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS 160 will
change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141R and
SFAS 160 will be applied to acquisitions that close in
years beginning after December 15, 2008. Early adoption is
not permitted. SFAS 141R and SFAS 160 will not have
any impact on the Companys future consolidated financial
statements unless it undertakes an acquisition in the future.
In December 2007, the FASB ratified EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
The consensus prohibits the equity method of accounting for
collaborative arrangements under APB 18, The Equity
Method of Accounting for Investments in Common Stock,
unless a legal entity exists. Payments between the collaborative
partners will be evaluated and reported in the income statement
based on applicable GAAP. Absent specific GAAP, the participants
to the arrangement will apply other existing GAAP by analogy or
F-18
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
apply a reasonable and rational accounting policy consistently.
The guidance in
EITF 07-1
is effective for periods that begin after December 15, 2008
and will apply to arrangements in existence as of the effective
date. The effect of the new consensus will be accounted for as a
change in accounting principle through retrospective
application. The Company is assessing
EITF 07-1
and its impact on the consolidated financial statements upon
adoption.
In December 2007, the SEC issued SAB No. 110,
Share-Based Payment (SAB 110), which
expresses the views of the SEC regarding the use of a simplified
method, as discussed in SAB 107, in developing an estimate
of the expected term of plain vanilla share options in
accordance with SFAS 123R. In SAB 110, the SEC stated
that it understood that the detailed information necessary to
calculate an expected term for plain vanilla options may not be
widely available by December 31, 2007, as previously
discussed within SAB 107. Accordingly, the SEC will
continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. As allowed
under SAB 110, the Company will continue to use the
simplified method in estimating the expected term of its stock
options until such time as more relevant detailed information
becomes available.
|
|
3.
|
Net
Income (Loss) per Share
|
Basic net income (loss) per share is computed by dividing net
income (loss) by the sum of the weighted average class A
and B common shares outstanding. Diluted net income per share is
computed by dividing net income by the weighted average common
shares and potential dilutive common shares outstanding. Diluted
net loss per share is computed by dividing net loss by the
weighted average common shares outstanding without the impact of
potential dilutive common shares outstanding because they would
have an anti-dilutive impact on diluted net loss per share.
The computation of net income (loss) per share for the years
ended December 31, 2007, 2006 and 2005 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average class A and B common shares outstanding
|
|
|
37,778
|
|
|
|
34,383
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average class A and B common shares outstanding
for diluted net income (loss) per share
|
|
|
37,778
|
|
|
|
34,383
|
|
|
|
32,601
|
|
Assumed exercise of stock options under the treasury stock method
|
|
|
448
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,226
|
|
|
|
34,690
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
For the years listed above, the potentially dilutive securities
used in the calculations of diluted net income per share as of
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Series A preferred stock*
|
|
|
|
|
|
|
3,780
|
|
|
|
|
|
Employee stock options
|
|
|
908,400
|
|
|
|
826,200
|
|
|
|
|
|
Non-employee stock options
|
|
|
510,000
|
|
|
|
510,000
|
|
|
|
|
|
The following securities were excluded from the computation of
diluted net income (loss) per share as their effect would be
anti-dilutive as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Series A preferred stock*
|
|
|
|
|
|
|
|
|
|
|
3,780
|
|
Employee stock options
|
|
|
10,757
|
|
|
|
15,300
|
|
|
|
171,000
|
|
Non-employee stock options
|
|
|
|
|
|
|
|
|
|
|
510,000
|
|
|
|
|
* |
|
Each share of series A preferred stock was converted into
850 shares of class A common stock in connection with
the initial public offering, which was completed in August 2007. |
|
|
4.
|
Short-
and Long-Term Investments
|
As of December 31, 2007, the Company had short- and
long-term investments of $61.0 million, consisting of
primarily investments in auction rate securities. Auction rate
securities are long-term debt instruments that provide liquidity
through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally
every seven to 49 days. This mechanism generally allows
existing investors to roll-over their holdings and continue to
own their respective securities or liquidate their holdings by
selling their securities at par value and therefore are usually
classified within current assets.
The Company generally invests in auction rate securities for
short periods of time as part of its cash management program.
Recent uncertainties in the credit markets have prevented the
Company from liquidating certain holdings of auction rate
securities subsequent to December 31, 2007 as the amount of
securities submitted for sale during the auction exceeded the
amount of purchase orders. Although an event of an auction
failure does not necessarily mean that a security is impaired,
the Company considered various factors to assess the fair value
and the classification of the securities as short-term or
long-term assets. Such factors include, but are not necessarily
limited to, timing of the failed auction, specific security
auction history, likelihood of redemptions, restructurings and
other similar liquidity events, quality of underlying
collateral, rating of the security and the bond insurer and
other factors. Such considerations involve a considerable amount
of judgment. As a result of the Companys assessment of the
market conditions and related facts, including an instance in
which the first auction after year-end failed, one security in
the amount of $9.4 million was classified as a long-term
investment as of December 31, 2007. In other instances, the
Company experienced successful auctions shortly after
December 31, 2007, but then encountered subsequent failed
auctions in February and March 2008 in an aggregate amount of
$18.3 million.
As of March 20, 2008, the Company reduced its investment in
auction rate securities by selling $33.2 million of
investments at par value. The Company continues to hold the
remaining securities and is due interest at a higher rate on
those securities as to which the auctions have failed than
similar securities for which auctions have cleared. These
investments consist of AAA-rated non-mortgage related auction
rate securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. At
December 31, 2007 and 2006, the fair market values of these
securities were determined to be the carrying values and no
unrealized gains and losses or other-than-temporary impairments
were recorded. The Company assessed the fair value of the
auction rate securities as of December 31, 2007 through
either an independent valuation for securities which it felt
were subject to credit risk at December 31, 2007, including
an assessment of all key underlying data and assumptions, or
through
F-20
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
its own internal assessment of the carrying value and
reasonableness of fair values. Considerable judgment was
involved in reaching these determinations. If the credit ratings
of the issuer, the bond insurer or the collateral deteriorate or
the carrying value of the investments decline for any other
reason, the Company may need to adjust the carrying value of
these investments. Although a limited secondary market exists
for these securities, the Company does not intend at this time
to use the secondary market to dispose of the auction rate
securities.
It is uncertain as to when the liquidity issues relating to
these investments will improve, although the Company believes as
of December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. Although the Company does not currently anticipate
having to sell these securities in order to operate our
business, if that were to change, or if the liquidity issues
continue over a prolonged period, it might be unable to
liquidate some holdings of its auction rate securities and as a
result, might suffer losses from these investments. In addition,
given the complexity of auction rate securities and their
valuations, the Companys estimates of their fair value may
differ from the actual amount it would be able to collect in an
ultimate sale.
|
|
5.
|
Property
and Equipment
|
Property and equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Computer and office machines
|
|
$
|
1,036
|
|
|
$
|
587
|
|
Furniture and fixtures
|
|
|
348
|
|
|
|
290
|
|
Leasehold improvements
|
|
|
1,270
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
2,654
|
|
|
|
946
|
|
Less: accumulated depreciation and amortization
|
|
|
(389
|
)
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,265
|
|
|
$
|
343
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2007, 2006 and 2005 was $251,000, $69,000 and
$62,000, respectively.
The leasehold improvements as of December 31, 2007 are
related to tenant improvements to the Companys new
headquarters in Bethesda, Maryland, to which the Company
relocated in July 2007.
Accrued expenses consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Research and development costs
|
|
$
|
4,422
|
|
|
$
|
2,460
|
|
Selling and marketing costs
|
|
|
384
|
|
|
|
986
|
|
Employee compensation
|
|
|
1,867
|
|
|
|
1,238
|
|
Legal service fees
|
|
|
226
|
|
|
|
213
|
|
Royalty liability related party
|
|
|
1,536
|
|
|
|
361
|
|
Other expenses
|
|
|
295
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,730
|
|
|
$
|
5,418
|
|
|
|
|
|
|
|
|
|
|
F-21
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Other liabilities consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Deferred leasehold incentive
|
|
$
|
1,080
|
|
|
$
|
|
|
Deferred rent expense
|
|
|
397
|
|
|
|
33
|
|
Lease loss liability
|
|
|
286
|
|
|
|
|
|
Other liabilities
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,768
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the Company relocated to new offices (see
Note 8). Under the terms of the new lease, the Company
received $1.1 million in associated leasehold incentives in
the form of reimbursements for leasehold improvement
expenditures. The Company recorded a liability for the cash
incentives and is amortizing these incentives as reductions of
rental expense over the term of the lease, which expires in
February 2017, using the straight-line method.
Operating
Leases
The Company leases office space in the United States, United
Kingdom and Japan under operating leases through 2017. Total
future minimum, non-cancelable lease payments under operating
leases are as follows as of December 31, 2007:
|
|
|
|
|
(In thousands)
|
|
|
|
|
2008
|
|
$
|
1,555
|
|
2009
|
|
|
1,325
|
|
2010
|
|
|
969
|
|
2011
|
|
|
937
|
|
2012
|
|
|
963
|
|
2013 and thereafter
|
|
|
4,243
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
9,992
|
|
|
|
|
|
|
Rent expense for all operating leases was $1.1 million,
$572,000 and $538,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
The Company is party to a non-cancelable operating lease
agreement for office space in the United States, which expires
in November 2009. The Company vacated these premises in July
2007 to relocate to its new leased facility. According to
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), a
liability for costs that will continue to be incurred under a
lease for its remaining term without economic benefit to the
Company shall be recognized and measured when the Company ceases
using the right conveyed by the lease, reduced by estimated
sublease rentals that could be reasonably obtained. In
accordance with SFAS 146, the Company recorded non-cash
charges relating to the abandonment of its former office of
approximately $432,000 during the year ended December 31,
2007. This is reflected in general and administrative expenses
in the accompanying consolidated statement of operations and
comprehensive income (loss). At December 31, 2007, the
lease loss liability was $286,000.
F-22
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Research
and Development Costs
The Company routinely enters into agreements with third-party
CROs to oversee clinical research and development studies
provided on an outsourced basis. The Company is not generally
contractually obligated to pay the CRO if the service or reports
are not provided. Total future estimated costs under these
agreements as of December 31, 2007 are as follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
2008
|
|
$
|
19,999
|
|
2009
|
|
|
4,211
|
|
|
|
|
|
|
|
|
$
|
24,210
|
|
|
|
|
|
|
|
|
9.
|
Related
Party Transactions
|
Founders
Stock-Based Awards
On June 19, 2007, the Compensation Committee of the
Companys Board of Directors authorized a one-time stock
and cash award to each of the Companys founders. These
awards were granted and fully vested on June 29, 2007 when
the founders agreed to their terms, but were not to be settled
until the earlier of the completion of the initial public
offering or December 31, 2007. In August 2007, the awards
were settled upon the completion of the initial public offering.
The Compensation Committee intended for these awards to
compensate the founders for the lost value of stock options that
had been granted to them in 2001 and 2002 and had been
understood by them to have ten-year terms, but which had expired
in 2006 and early 2007 as a result of the terms of the 2001
Stock Incentive Plan. The expired options would have entitled
the founders to purchase an aggregate of 578,000 shares of
class A common stock at a price of $0.21 per share and
136,000 shares at a price of $2.95 per share.
Upon their settlement at the completion of the initial public
offering, these stock and cash awards had an aggregate value
equal to the difference between the value of the shares that
could have been purchased under each of the expired options,
determined on the basis of the public offering price per share
of $11.50, and the respective aggregate exercise prices for such
shares as provided in the option agreements.
These awards consisted of a combination of cash and shares of
class A common stock. Of the aggregate value of each award,
40% was payable in cash and 60% in stock. For purposes of
determining the number of shares of class A common stock to
be issued in connection with each award, the stock was valued on
the basis of the $11.50 public offering price per share in the
initial public offering.
The estimated fair value of these awards, totaling
$10.2 million on the grant date, was determined using the
Black-Scholes-Merton Option Pricing Formula, as allowed under
SFAS 123R. For the six months ended June 30, 2007, the
Company recorded $10.2 million of general and
administrative expense for these awards, of which
$4.1 million was recorded as other liabilities
related parties for the cash settlement portion and
$6.1 million as additional paid-in capital for the stock
settlement portion. The liability portion of the awards was
adjusted based upon the final cash settlement amount, but the
equity portion was fixed upon the grant date.
When the initial public offering was completed in August 2007,
the awards were settled and 401,133 shares of class A
common stock were issued to the founders. In addition, as a
result of the lower public offering price compared to the
estimated public offering price at June 30, 2007, the
Company recorded an adjustment of $1.0 million to reduce
the amount of expense and related liability for the cash portion
of the awards, which was paid to the founders, resulting in a
net expense of $9.2 million for the year ended
December 31, 2007.
R-Tech
Ueno, Ltd.
On March 7, 2003, the Company entered into an exclusive
supply agreement with R-Tech Ueno), affiliated through common
ownership. This agreement grants R-Tech the exclusive right to
manufacture and supply RUG-
F-23
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
015, a prostone compound, and lubiprostone, and in consideration
for such right R-Tech agreed to pay the Company as follows:
$1.0 million upon execution of the agreement,
$2.0 million upon commencement of a first Phase II
lubiprostone trial, $3.0 million upon commencement of a
first Phase II RUG-015 trial and $2.0 million upon
commencement of the earlier of a second Phase II or a first
Phase III RUG-015 trial. Upon execution of the agreement,
the Company had already commenced Phase II clinical trials
for RUG-015 and lubiprostone, which resulted in an immediate
payment of $6.0 million $1.0 million for
the agreement execution, $2.0 million for the commencement
of the first Phase II lubiprostone trial, and
$3.0 million for the commencement of the first
phase II RUG-015 trial. The Company evaluated the
$6.0 million in cash receipts from R-Tech and determined
the payments were made for the exclusive right to supply
inventory to the Company and determined that the amounts should
be deferred until commercialization of the drugs begins since
this is the point at which the underlying services would
commence. Management also was unable to adequately assign value
between the two compounds based on the information available to
the Company and determined that the full $6.0 million
deferred amount would be amortized over the contractual life of
the relationship which was equivalent to the estimated
commercialization periods of both RUG-015 and lubiprostone
(estimated to be through December 2020).
During the year ended December 31, 2005, the Company ceased
the development of RUG-015 due to less than satisfactory
Phase II results and the Companys Board of Directors
approved the Companys decision to discontinue the
development of RUG-015. In addition to the Companys Board
of Directors, R-Tech also formally approved the abandonment of
RUG-015, which was a requirement in the supply agreement terms.
Because the Company was unable to assign value to the compounds
at the time the agreement was executed and the $6.0 million
was received from R-Tech, the full $6.0 million remained
deferred at the abandonment of RUG-015.
The abandonment of RUG-015 changed the amortization period of
the $6.0 million deferred revenue to the commercialization
period of AMITIZA, which began April 2006. The Company has
recognized revenue of $418,000 and $314,000 for the years ended
December 31, 2007 and 2006, respectively, which is recorded
as contract revenue related parties. During the
years ended December 31, 2007, 2006 and 2005, Sucampo
purchased from R-Tech $1.6 million, $608,000 and
$1.3 million, respectively, of clinical supplies under the
terms of this agreement.
On June 24, 2005, the Company entered into a
20-year
exclusive manufacturing and supply agreement with R-Tech. The
agreement grants R-Tech the exclusive right to manufacture and
supply lubiprostone for clinical and commercial supplies within
Europe. In consideration of the exclusive rights, R-Tech paid
the Company $2.0 million prior to the execution of the
agreement on March 31, 2005. Management has determined that
the amount should be deferred until such time as the commercial
benefit to R-Tech can be realized. As lubiprostone has not been
approved within Europe, the $2.0 million has been recorded
as non-current deferred revenue as of December 31, 2007 and
2006. During the year ended December 31, 2007, Sucampo
Europe purchased from R-Tech $336,000 of clinical supplies under
the terms of this agreement. There were no such clinical supply
purchases in 2006 or 2005.
On September 7, 2006, the Companys Board of Directors
approved an agreement which amends the exclusive manufacturing
agreement with R-Tech. This agreement allows the Company to
elect a
back-up
supplier for the supply of drug substance and drug product. In
addition, the agreement provides that R-Tech shall maintain at
least a six-month inventory of drug substance and at least a
six-month inventory of intermediate drug product. Sucampo had no
clinical supply purchases from a
back-up
supplier in 2007 or 2006.
On October 4, 2006, the Company entered into a two-year
exclusive clinical manufacturing and supply agreement with
R-Tech for two of its drug compounds, cobiprostone and SPI-017.
Under the terms of this agreement, R-Tech agreed to manufacture
and supply the necessary drug substance and drug product for the
purpose of clinical development. Pricing for clinical supplies
will be determined on a
batch-by-batch
basis and shall not exceed a certain
mark-up
percentage. Unless this agreement is terminated by mutual
written consent within 90 days of expiration, it will
automatically be renewed for an additional two years. During the
years ended December 31, 2007 and 2006, Sucampo purchased
from R-Tech $1.8 million and $472,000, respectively, of
clinical supplies under the terms of this agreement.
F-24
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Sucampo
AG License Agreements
On June 30, 2006, the Company entered into a restated
license agreement with SAG. Under this agreement, SAG has
granted to the Company a royalty-bearing, exclusive, worldwide
license, with the right to sublicense, to develop and
commercialize AMITIZA, cobiprostone and SPI-017 and any other
prostone compounds, other than RESCULA, subject to SAGs
patents. This agreement supersedes all previous license and data
sharing arrangements between the parties and functions as a
master license agreement with respect to SAGs prostone
technology. The license is perpetual as to AMITIZA, cobiprostone
and SPI-017 and cannot be terminated unless the Company defaults
in its payment obligations to SAG. If the Company has not
committed specified development efforts to any prostone compound
other than AMITIZA, cobiprostone and SPI-017 by the end of a
specified period, which ends on the later of June 30, 2011
or the date upon which the founders, no longer control our
company, then the commercial rights to that compound will revert
to SAG, subject to a
15-month
extension in the case of any compound designate by the Company
in good faith as planned for development within that extension
period. Under the terms of the license, the Company is obligated
to assign to SAG any patentable improvements derived or
discovered by the Company relating to AMITIZA, cobiprostone and
SPI-017 through the term of the license. In addition, the
Company is obligated to assign to SAG any patentable
improvements derived or discovered by the Company relating to
other licensed prostone compounds prior to the date which is the
later of June 30, 2011 or the date on which the founders
cease to control the Company. All compounds assigned to SAG
under this agreement will be immediately licensed back to the
Company on an exclusive basis.
In consideration of the license, the Company is required to make
milestone and royalty payments to SAG. The milestone payments
include:
|
|
|
|
|
a payment of $500,000 upon the initiation of the first
Phase II clinical trial for each compound in each of three
territories covered by the license: North, Central and South
America (including the Caribbean), Asia and the rest of the
world; and
|
|
|
|
a payment of $1.0 million for the first NDA filing or
comparable foreign regulatory filing for each compound in each
of the same three territories.
|
Upon payment of the above milestones, no further payments will
be required either for new indications or formulations or for
further regulatory filings for the same compound in additional
countries within the same territory. In addition, the Company is
required to pay SAG 5% of any up-front or milestone payments
that are received from sublicensees.
In addition, the Company is required to pay SAG, on a
country-by-country
basis, royalty payments of 6.5% of net sales for every product
covered by existing patents and, if applicable, thereafter 4.25%
of net sales for every product candidate covered by new or
improvement patents assigned by the Company to SAG. With respect
to sales of AMITIZA in North, Central and South America,
including the Caribbean, the rates for these royalty payments
are set at 3.2% and 2.1% of net sales, respectively. The product
royalties that the Company pays to SAG are based on total
product net sales, whether by the Company or a sublicensee, and
not on amounts actually received by the Company. The Company
expensed $4.9 million and $1.2 million in product
royalties to SAG during the years ended December 31, 2007
and 2006, respectively, reflecting 3.2% of AMITIZA net sales
during each of these years, which was recorded as product
royalties related parties.
During the years ended December 31, 2006 and 2005 the
Company paid SAG $1.1 million and $400,000, respectively,
of non-refundable upfront payments for the initial SPI-017
license which were recorded as a research and development
expense.
During the year ended December 31, 2005, and in accordance
with the initial license agreement for AMITIZA, the Company paid
SAG $1.5 million in milestone royalty payments upon
receiving $30.0 million in development milestone payments
from Takeda for work surrounding AMITIZA. During the year ended
December 31, 2006, the Company paid SAG milestone royalty
payments of $1.0 million and $250,000 upon receiving a
$20.0 million
F-25
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
development milestone payment from Takeda for the FDA approval
of AMITIZA. During the year ended December 31, 2007, the
Company paid SAG $1.5 million upon receiving a
$30.0 million development milestone payment from Takeda for
the supplemental NDA for irritable bowel syndrome with
constipation and $500,000 upon the initiation of the first Phase
IIb dose-ranging study in Japan. These milestone royalty
payments to SAG were expensed in the respective period as
milestone royalties related parties.
Sucampo
AG Notes Payable
On August 1, 2003, Sucampo Japan entered into a note
agreement with SAG pursuant to which Sucampo Japan borrowed
$2.5 million. The rate of interest charged on the loan was
calculated on an annual basis of 1% in excess of the six-month
Tokyo InterBank Offered Rate per annum on the outstanding
principal balance. Interest payments were due and payable
semi-annually and the note balance of $2.6 million was
completely paid off in the year ended December 31, 2006.
On July 1, 2004, Sucampo Europe formalized a note agreement
with SAG, related to the advances previously made to Sucampo
Europe by SAG for general working capital purposes. The rate of
interest charged on the loan was equal to the minimum rate
permitted by the Swiss Federal Tax Administration for
obligations denominated in British Pounds. Interest payments
were due and payable semi-annually and the note balance of
$947,000 was completely paid off in the year ended
December 31, 2006.
On February 27, 2006, Sucampo Europe entered into a note
agreement with SAG, pursuant to which Sucampo Europe borrowed
$1.2 million. The rate of interest charged on the loan was
equal to the minimum rate permitted by the Swiss Federal Tax
Administration for obligations denominated in British Pounds.
Interest payments were due and payable semi-annually and the
note balance of $1.2 million was completely paid off in the
year ended December 31, 2006.
S&R
Technology Holdings LLC Notes Payable
On February 20, 2004 and March 29, 2004, Sucampo Japan
issued three-year bonds with an aggregate face value of
$1,025,970 to S&R. Interest on the bonds was payable every
six months at a rate of 0.5% per annum, which represented a
market rate of interest in Japan. The bonds were paid in full
during 2005 and all conversion rights were cancelled.
On May 7, 2004, Sucampo Europe entered into a three-year
facility agreement with S&R pursuant to which Sucampo
Europe borrowed $603,919 during May 2004 and $613,925 during
July of 2004. The rate of interest charged on the agreement was
calculated on the basis of Euro LIBOR plus 0.5% per annum
(approximately 2.9% at December 31, 2005). Principal and
interest payments were repayable anytime during the three-year
term. The note paid in full during 2005.
F-26
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
10.
|
Collaboration
and License Agreements
|
The following table summarizes the cash streams and related
collaboration and research and development revenue recognized
under the Takeda Agreement and the Supplemental Agreement, which
are described in more detail below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
Amount
|
|
|
|
through
|
|
|
Revenue Recognized for the Year Ended
|
|
|
Receivable at
|
|
|
Deferred at
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007*
|
|
|
2007
|
|
|
Collaboration revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment associated with the obligation to participate
in joint committees with Takeda
|
|
$
|
2,375
|
|
|
$
|
23
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
|
|
|
$
|
1,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment remainder
|
|
$
|
17,624
|
|
|
$
|
1,356
|
|
|
$
|
8,134
|
|
|
$
|
6,157
|
|
|
$
|
1,977
|
|
|
$
|
|
|
|
$
|
|
|
Development milestones
|
|
|
80,000
|
|
|
|
|
|
|
|
16,154
|
|
|
|
28,237
|
|
|
|
35,609
|
|
|
|
|
|
|
|
|
|
Reimbursement of research and development expenses
|
|
|
43,048
|
|
|
|
1,482
|
|
|
|
14,672
|
|
|
|
11,988
|
|
|
|
21,793
|
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,672
|
|
|
$
|
2,838
|
|
|
$
|
38,960
|
|
|
$
|
46,382
|
|
|
$
|
59,379
|
|
|
$
|
6,887
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes billed and unbilled accounts receivable. |
On October 29, 2004, the Company entered into the Takeda
Agreement to exclusively co-develop, commercialize and sell
products that contain lubiprostone for gastroenterology
indications in the United States and Canada. Payments to the
Company under the Takeda Agreement include a non-refundable
up-front payment, non-refundable development and commercial
milestone payments, reimbursement of certain development and
co-promotion costs and royalties.
Upon execution of the Takeda Agreement, the Company was required
to complete several deliverables, which Takeda was responsible
to fund. The following are the required deliverables of the
Company, along with the related contractual cash flows from
Takeda and the associated obligations and performance period of
the Company:
|
|
|
|
|
The Company granted Takeda an exclusive license of lubiprostone
to co-develop, commercialize, and sell products for
gastroenterology indications in the United States and Canada.
There are no defined contractual cash flows within the Takeda
Agreement for the grant of this license, but the Company did
receive a non-refundable up-front payment of $20.0 million
upon executing the Takeda Agreement. The license was granted to
Takeda on October 29, 2004 and will expire when the Takeda
Agreement expires or is terminated. After the commercial launch
in 2006, Takeda has paid and will pay the Company pre-determined
royalties on net revenues on a quarterly basis for the products
sold by Takeda during the term of the Takeda Agreement. The
level of royalties is tiered based on the net sales recognized
by Takeda. Royalty payments, which the Company began to earn in
April 2006 and receive in July 2006, will cease when the Takeda
Agreement is terminated and all cash payments due to the Company
are paid. The Company has recorded product royalty revenue of
approximately $27.5 million and $6.6 million for the
years ended December 31, 2007 and 2006, respectively. This
revenue is recorded as product royalty revenue in the
consolidated statements of operations and comprehensive income
(loss).
|
F-27
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
The Company participates in the following committees, along with
Takeda: Joint Steering Committee, Joint Development Committee,
Joint Commercialization Committee and Joint Manufacturing
Committee. There are no separate cash flows identified within
the Takeda Agreement associated with the participation by the
Company in these committees. There is no defined performance
period for this obligation, but the performance period will not
exceed the term of the Takeda Agreement. The Company expects its
participation on all committees to continue throughout the term
of the Takeda Agreement, except for the Joint Development
Committee, which will continue until development work is
complete.
|
|
|
|
The Company has provided development work necessary for an NDA
submission to the FDA for the treatment of chronic idiopathic
constipation and irritable bowel syndrome with constipation
indications. Takeda funded the initial $30.0 million of
development costs, the Company was obligated to fund the first
$20.0 million in excess of the initial $30.0 million
funded by Takeda and the two parties are to equally share any
required development costs in excess of $50.0 million.
Although there was no defined performance period for this
development work, the period to perform the work would not
exceed the term of the Takeda Agreement. In January 2006, the
Company received approval for its NDA for AMITIZA to treat
chronic idiopathic constipation and completed and submitted the
supplemental NDA for irritable bowel syndrome with constipation
to the FDA in June 2007.
|
As a result of its assessment of the deliverables under the
Takeda Agreement, the Company determined there were four
separate units of accounting as of the inception of the Takeda
Agreement (1) participation in the Joint
Steering Committee, (2) participation in the Joint
Manufacturing Committee, (3) participation in the Joint
Commercialization Committee and (4) the combined
requirement of the development work of chronic idiopathic
constipation and irritable bowel syndrome with constipation and
participation in the Joint Development Committee. The Company
has assessed these required deliverables under the guidance of
EITF 00-21
to determine which deliverables are considered separate units of
accounting.
Upon receipt of the $20.0 million up-front payment, the
Company deferred approximately $2.4 million to be
recognized using the time-based model over the performance
period of the participation in these meetings. During the years
ended December 31, 2007, 2006 and 2005, the Company
recognized approximately $147,000 of this deferred amount as
collaboration revenue on the consolidated statements of
operations and comprehensive income (loss). The related deferred
revenue as of December 31, 2007 and 2006 was approximately
$1.9 million and $2.1 million, respectively.
Since the execution of the Takeda Agreement, the Company
deferred the residual amount of the $20.0 million up-front
payment totaling approximately $17.6 million, development
milestone payments received totaling $50.0 million, and
reimbursement of the initial $30.0 million of research and
development costs for the development of AMITIZA for chronic
idiopathic constipation and irritable bowel syndrome with
constipation indications. These deferred amounts were applied
towards the unit of accounting that combines the participation
in the Joint Development Committee and the development of
chronic idiopathic constipation and irritable bowel syndrome
with constipation and was recognized over the performance period
of developing the chronic idiopathic constipation and irritable
bowel syndrome with constipation NDA submissions. The Company
completed the development of the chronic idiopathic constipation
and irritable bowel syndrome with constipation in June 2007 and
filed a supplemental NDA (sNDA) for irritable bowel syndrome
with constipation. This was the culmination of the performance
period. In June 2007, the Company also recognized as revenue, in
full, $30.0 million from Takeda upon the filing of the sNDA
for AMITIZA to treat irritable bowel syndrome with constipation.
During the years ended December 31, 2007, 2006 and 2005,
the Company recognized approximately $41.1 million,
$45.3 million and $39.0 million, respectively, of
research and development revenue in the consolidated statements
of operations and comprehensive income (loss) relating to this
unit of accounting for the development of AMITIZA for chronic
idiopathic constipation and irritable bowel syndrome with
constipation indications. There was no related deferred revenue
as of December 31, 2007. The related deferred revenue as of
December 31, 2006 was $11.0 million.
F-28
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
The Company incurred research and development costs for the
development of AMITIZA for chronic idiopathic constipation and
irritable bowel syndrome with constipation indications of
approximately $5.0 million, $11.6 million and
$25.9 million for the years ended December 31, 2007,
2006 and 2005, respectively.
During the quarter ended June 30, 2006, the Joint
Commercialization Committee granted approval for the Company and
Takeda to begin three new studies related to funding
arrangements discussed in both the Takeda Agreement and the
Supplemental Agreement. The following are the three additional
deliverables of the Company, along with the related contractual
cash flows from Takeda and the associated obligations and
performance period of the Company, when the three studies were
agreed upon:
|
|
|
|
|
The Company is obligated to perform studies in connection with
changes to labeling for chronic idiopathic constipation. Takeda
is obligated to fund 70% of the labeling studies and the
Company is obligated to fund the remaining 30%. There is no
defined performance period, but the performance period will not
exceed the term of the Takeda Agreement. The Company initiated
the first labeling study for chronic idiopathic constipation in
August 2006.
|
|
|
|
The Company is obligated to perform studies for the development
of an additional indication for opioid-induced bowel
dysfunction. Takeda is obligated to fund all development work up
to a maximum aggregate of $50.0 million for each additional
indication and $20.0 million for each new formulation. If
development costs exceed these amounts, Takeda and the Company
shall equally share such excess costs. There is no defined
performance period, but the performance period will not exceed
the term of the Takeda Agreement. The Company initiated work on
the first additional indication for AMITIZA in July 2006 and
expects the development costs to exceed $50.0 million.
|
|
|
|
The Company is obligated to perform all development work
necessary for Phase IV studies, for which Takeda is
obligated to fund all development work. There is no defined
performance period, but the performance period will not exceed
the term of the Supplemental Agreement. The Company began work
on a Phase IV study for chronic idiopathic constipation in
August 2006.
|
The Company has assessed these required deliverables under the
guidance of
EITF 00-21
to determine which deliverables are considered separate units of
accounting. As a result of the Company and Takeda agreeing to
perform and fund these studies simultaneously, the Company
determined that there is no objective and reliable evidence to
determine the fair value for each of the studies. Accordingly,
the Company has combined these three required deliverables as a
single unit of accounting. All cash payments from Takeda related
to these three deliverables are deferred upon receipt and
recognized over the estimated performance period to complete the
three studies using the time-based model. The estimated
completion date is June 2009. During the years ended
December 31, 2007 and 2006, the Company recognized
approximately $18.3 million and $1.1 million related
to these three deliverables as research and development revenue
in the consolidated statements of operations and comprehensive
income (loss), respectively.
On February 1, 2006, the Company entered into the
Supplemental Agreement with Takeda, which amended the
responsibilities of both the Company and Takeda for the
co-promotion of AMITIZA and clarified the responsibilities and
funding arrangements for other marketing services to be
performed by both parties.
Upon execution of the Supplemental Agreement, the Company was
required to complete several deliverables, which Takeda was
responsible to fund. The following are the required deliverables
of the Company, along with the related contractual cash flows
from Takeda and the associated obligations and performance
period of the Company, under the Supplemental Agreement:
|
|
|
|
|
The Company is obligated to co-promote AMITIZA with Takeda by
employing a sales force of approximately 38 representatives to
supplement Takedas sales activities. Takeda is obligated
to reimburse the Company a specified amount per day per sales
force representative, but such reimbursements shall not exceed
certain pre-defined amounts. The term of this reimbursement
arrangement ceases five years
|
F-29
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
following the first date that the Company deployed sales
representatives, which was in April 2006. The Company has
recognized approximately $4.3 million and $3.4 million
of revenues for the years ended December 31, 2007 and 2006,
respectively, reflecting these co-promotion reimbursements,
which is recorded as co-promotion revenue in the consolidated
statements of operations and comprehensive income (loss).
|
|
|
|
|
|
The Company was obligated to perform miscellaneous marketing
activities for AMITIZA, the majority of which would be
reimbursed by Takeda. The miscellaneous marketing activities
were completed in the first quarter of 2007 and the Company has
recorded $158,000 and $779,000 of reimbursements of
miscellaneous costs for the years ended December 31, 2007
and 2006, respectively. These amounts are recorded as
co-promotion revenue in the consolidated statements of
operations and comprehensive income (loss).
|
The Company views the deliverables under the Supplemental
Agreement as economically independent of those in the original
Takeda Agreement.
The Company has assessed these required deliverables under the
guidance of
EITF 00-21
to determine which deliverables are considered separate units of
accounting. The Company was able to determine that its sales
force miscellaneous marketing activities are treated as separate
units of accounting. The Company is recognizing the cost
reimbursements received for these deliverables as co-promotion
revenues when services are performed and the reimbursement
payments are due under the Supplemental Agreement.
Capital
Structure
The class A common stock is entitled to one vote per share
and, with respect to the election of directors, votes as a
separate class and is entitled to elect that number of directors
which constitutes ten percent of the total membership of the
Board of Directors. The class B common stock is entitled to
10 votes per share and votes as a separate class on the
remaining percentage of Board of Directors not voted on by the
class A common stockholders. Each holder of record of
class B common stock may, in such holders sole
discretion and at such holders option, convert any whole
number or all of such holders shares of class B
common stock into fully paid and non-assessable shares of
class A common stock for each share of class B common
stock surrendered for conversion. The class B common stock
is not transferable, except upon conversion. All of the shares
of class B common stock are indirectly owned by the
Companys founders.
On March 18, 2005, R-Tech converted all shares of its
class B common stock into 4,250,000 shares of
class A common stock.
During the year ended December 31, 2006, the Company sold
2,398,758 shares of class A common stock in a private
transaction. As a result, the Company received net proceeds of
$23.9 million.
In August 2007, the Company completed its initial public
offering, consisting of 3,125,000 shares of class A
common stock at a public offering price of $11.50 per share.
After deducting underwriters discounts, commissions, and
expenses of the offering, including costs of $3.1 million
incurred in 2006, the Company raised net proceeds of
$28.2 million. Upon completion of the initial public
offering, all shares of the Companys series A
convertible preferred stock were converted into an aggregate of
3,213,000 shares of class A common stock.
Stock
Option Plan
On February 15, 2001, the Company adopted the 2001 Stock
Incentive Plan (the 2001 Incentive Plan) in order to provide
common stock incentives to certain eligible employees, officers
and directors, consultants and advisors of the Company. The
Board of Directors administers the 2001 Incentive Plan and has
sole discretion to grant options. Prior to the Companys
initial public offering, the exercise price of each option
granted under the 2001 Incentive Plan was determined by the
Board of Directors and was to be no less than 100% of the fair
market value of
F-30
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
the Companys common stock on the date of grant.
Determinations of fair market value of the class A common
stock under the 2001 Incentive Plan was made in accordance with
methods and procedures established by the Board of Directors
prior to the Companys initial public offering. On
September 1, 2003, the Board of Directors amended the 2001
Incentive Plan to allow for a maximum of 8,500,000 shares
of class A common stock to be issued under all awards,
including incentive stock options under the 2001 Incentive Plan.
Although at December 31, 2007, 7,332,100 shares were
available for future grants under the 2001 Incentive Plan, the
Company does not currently plan to issue equity instruments
under the 2001 Incentive Plan.
On June 5, 2006, the Companys Board of Directors
approved a 2006 Stock Incentive Plan (the 2006 Incentive Plan)
and reserved 8,500,000 shares of class A common stock
for issuance under that plan. In addition, the Board at that
time approved the Employee Stock Purchase Plan (ESPP) and
reserved 4,250,000 shares of class A common stock for
issuance under the ESPP. At December 31, 2007, a total of
8,232,500 shares were available for future grants under the
2006 Incentive Plan and no shares have been issued under the
ESPP. Option awards under the 2006 Incentive Plan are generally
granted with an exercise price equal to the closing market price
of the Companys stock at the date of grant and they
generally vest over four years and have ten-year contractual
terms. The stock option awards granted in 2007 generally vest
over three years.
On October 18, 2007, the Companys Board of Directors
approved an amendment to the 2006 Incentive Plan. The 2006
Incentive Plan includes an evergreen provision by
which the number of shares of the Companys class A
common stock available for issuance under the 2006 Incentive
Plan increases automatically on the first day of each calendar
year by a number equal to 5% of the aggregate number of shares
of the Companys class A common stock and class B
common stock outstanding on such date, or such lesser number as
the Board of Directors may determine. As amended, the 2006
Incentive Plan will provide that the number of shares of
class A common stock included in each annual increase will
be 500,000, or such lesser number as the Board of Directors may
determine. The Board of Directors also determined that the
amount of the increase in the shares available for issuance
under the 2006 Incentive Plan as of January 1, 2008,
pursuant to the evergreen provision, would be zero.
When an option is exercised, the Company issues a new share of
class A common stock.
A summary of the employee stock option activity for the year
ended December 31, 2007 under the Companys 2001
Incentive Plan is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
Value
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
|
826,200
|
|
|
$
|
9.02
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(25,925
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(159,375
|
)
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2007
|
|
|
640,900
|
|
|
|
10.24
|
|
|
|
7.10
|
|
|
$
|
5,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2007
|
|
|
538,900
|
|
|
|
10.28
|
|
|
|
6.89
|
|
|
$
|
4,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
A summary of the employee stock option activity for the year
ended December 31, 2007 under the Companys 2006
Incentive Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
Value ($000)
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
267,500
|
|
|
|
14.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2007
|
|
|
267,500
|
|
|
|
14.44
|
|
|
|
8.83
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2007
|
|
|
67,500
|
|
|
|
14.44
|
|
|
|
8.84
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during the years ended December 31, 2007 and 2006 were
$7.19 and $6.41, respectively. There were no employee options
granted in 2005. The total intrinsic value of options exercised
during the years ended December 31, 2006 and 2005 were
$83,000 and $66,000, respectively. As of December 31, 2007,
approximately $1.6 million of total unrecognized
compensation costs, net of estimated forfeitures, related to
non-vested awards are expected to be recognized over a weighted
average period of 2.71 years.
The Company granted 510,000 stock options with an exercise price
of $5.85 per share to non-employees in August 2005 under the
2001 Incentive Plan and recorded a charge of $3.4 million
in conjunction with the grant, which was recorded as a component
of research and development expenses. These non-employee stock
options vested immediately and have a maximum term of
10 years and the weighted average remaining contractual
life of these options as of December 31, 2007 was
7.33 years. The weighted average fair value per share of
non-employee options granted for the year ended
December 31, 2005 was $6.75.
The provision (benefit) for income taxes consists of the
following for the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Current tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,900
|
|
|
$
|
(715
|
)
|
|
$
|
1,505
|
|
State
|
|
|
671
|
|
|
|
(261
|
)
|
|
|
261
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision (benefit)
|
|
|
3,571
|
|
|
|
(976
|
)
|
|
|
1,472
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,821
|
|
|
|
(4,182
|
)
|
|
|
(862
|
)
|
State
|
|
|
441
|
|
|
|
261
|
|
|
|
(117
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
4,262
|
|
|
|
(3,921
|
)
|
|
|
(683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
7,833
|
|
|
$
|
(4,897
|
)
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Deferred tax assets, net, consist of the following as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Foreign net operating loss carryforwards
|
|
$
|
1,892
|
|
|
$
|
683
|
|
Deferred revenue
|
|
|
3,345
|
|
|
|
7,409
|
|
General business credit carryforwards
|
|
|
3,086
|
|
|
|
4,366
|
|
Accrued expenses
|
|
|
1,102
|
|
|
|
198
|
|
Tax benefits on stock options
|
|
|
2,069
|
|
|
|
2,005
|
|
Other
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
11,494
|
|
|
|
14,785
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(42
|
)
|
|
|
(12
|
)
|
Other
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(42
|
)
|
|
|
(33
|
)
|
Less: valuation allowance
|
|
|
(10,813
|
)
|
|
|
(9,851
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
639
|
|
|
$
|
4,901
|
|
|
|
|
|
|
|
|
|
|
The Company continued to assess its ability to realize certain
deferred tax assets in the years ended December 31, 2007
and 2006. During the fourth quarter of 2006, the Company
performed an analysis of future projections due to an additional
year of profitability in 2006 and the expectation of
profitability in 2007. As a result of this analysis, the Company
reversed an additional $4.9 million of valuation allowance
on its U.S. deferred tax assets in 2006. During the fourth
quarter of 2007, the Company had an additional release of
$204,000. The net deferred tax asset as of December 31,
2007 and 2006 represents the amount which the Company believes
is more likely than not to be utilized. As of December 31,
2007, the net deferred tax asset of $639,000 represents the
expected realization of deferred tax assets with the carryback
of anticipated taxable losses in future years.
The provision (benefit) for income taxes vary from the income
taxes provided based on the federal statutory rate of 35%, 34%
and 34% as follows for the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Federal tax provision at statutory rate
|
|
|
35.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
4.7
|
|
|
|
2.3
|
|
|
|
(52.1
|
)
|
General business credits
|
|
|
(2.6
|
)
|
|
|
(2.6
|
)
|
|
|
(361.0
|
)
|
Changes in valuation allowance
|
|
|
4.2
|
|
|
|
(69.6
|
)
|
|
|
272.2
|
|
Adjustment to net operating loss carryforward
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
248.3
|
|
Changes in other tax matters
|
|
|
(4.0
|
)
|
|
|
7.0
|
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
37.3
|
%
|
|
|
(29.0
|
)%
|
|
|
166.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the Company had foreign net
operating loss carryforwards (NOLs) of $5.4 million and
$2.2 million, respectively. Approximately $2.9 million
of the foreign NOLs begin to expire in December 2010, and
$2.5 million of the foreign NOLs do not expire. At
December 31, 2007 and 2006, the Company had
U.S. general business credits of $3.1 million and
$4.4 million, respectively, which also may be available to
offset future income tax liabilities and will expire if not
utilized at various dates beginning
F-33
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
December 31, 2022. The realization of the benefits of the
tax credits is dependent on sufficient taxable income in future
years. Lack of earnings, a change in the ownership of the
Company, or the application of the alternative minimum tax rules
could adversely affect the Companys ability to utilize
these tax credits.
As of December 31, 2007 and 2006, the Company had a
valuation allowance on its deferred tax assets of
$10.8 million and $9.9 million, respectively. The
increase in the valuation allowance of $962,000 was due
primarily to an increase in foreign deferred tax assets related
to NOLs that are not more likely than not to be
utilized.
Should the Company determine that it would be able to realize
its deferred tax assets in the foreseeable future, an adjustment
to the remaining deferred tax assets could cause a material
increase to income in the period such determination is made.
Significant management judgment is required in determining the
period in which the reversal of a valuation allowance should
occur. The Company considered all available evidence, both
positive and negative, such as historical levels of income and
future forecasts of taxable income amongst other items in
determining whether a full or partial release of a valuation
allowance was required as of December 31, 2007 and 2006.
The valuation allowance at December 31, 2007 was
approximately $10.8 million, of which $8.4 million
related to deferred tax assets in the United States. The Company
will continue to evaluate its valuation allowance position in
each jurisdiction on a regular basis. Significant future events,
including marketing approval by the FDA of AMITIZA for the
treatment of irritable bowel syndrome, are not in the
Companys control and could affect its future earnings
potential and consequently the amount of deferred tax assets
that will be utilized. To the extent that the Company determines
that all or a portion of its valuation allowance is no longer
necessary, the Company will recognize an income tax benefit in
the period such determination is made for the reversal of the
valuation allowance. Once the valuation allowance is eliminated
in whole or in part, it will not be available to offset the
Companys future tax provision. Any such reduction of the
Companys valuation allowance could have a material impact
on the Companys future results from operations and
financial condition.
The Company has determined that it has three reportable
geographic segments based on the Companys method of
internal reporting, which disaggregates the business by
geographic location. These segments are the United States,
Europe and Japan. The Company evaluates performance of these
segments based on income from operations. The reportable
segments have historically derived their revenue from joint
collaboration and license agreements (see Note 2).
Transactions between the segments consist primarily of loans and
the provision of research and development services by Sucampo
Europe and Sucampo Japan to the domestic entity. Following is a
summary of financial information by reportable geographic
segment.
F-34
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
United States
|
|
|
Europe
|
|
|
Japan
|
|
|
Eliminations
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
59,379
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,379
|
|
Product royalty revenue
|
|
|
27,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,536
|
|
Co-promotion revenue
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,411
|
|
Contract revenue related parties
|
|
|
418
|
|
|
|
|
|
|
|
840
|
|
|
|
(840
|
)
|
|
|
418
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
91,891
|
|
|
|
|
|
|
|
840
|
|
|
|
(840
|
)
|
|
|
91,891
|
|
Depreciation and amortization
|
|
|
239
|
|
|
|
2
|
|
|
|
10
|
|
|
|
|
|
|
|
251
|
|
Other operating expenses
|
|
|
69,971
|
|
|
|
1,125
|
|
|
|
2,985
|
|
|
|
(848
|
)
|
|
|
73,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
21,681
|
|
|
|
(1,127
|
)
|
|
|
(2,155
|
)
|
|
|
8
|
|
|
|
18,407
|
|
Interest income
|
|
|
2,618
|
|
|
|
1
|
|
|
|
7
|
|
|
|
(161
|
)
|
|
|
2,465
|
|
Interest expense
|
|
|
|
|
|
|
(57
|
)
|
|
|
(104
|
)
|
|
|
161
|
|
|
|
|
|
Other non-operating (expense) income, net
|
|
|
(72
|
)
|
|
|
311
|
|
|
|
(80
|
)
|
|
|
(8
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
24,227
|
|
|
$
|
(872
|
)
|
|
$
|
(2,332
|
)
|
|
$
|
|
|
|
$
|
21,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,231
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
46,382
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
46,382
|
|
Product royalty revenue
|
|
|
6,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,590
|
|
Co-promotion revenue
|
|
|
4,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,243
|
|
Contract revenue related parties
|
|
|
314
|
|
|
|
|
|
|
|
161
|
|
|
|
(71
|
)
|
|
|
404
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
57,676
|
|
|
|
1,500
|
|
|
|
161
|
|
|
|
(71
|
)
|
|
|
59,266
|
|
Depreciation and amortization
|
|
|
59
|
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
69
|
|
Other operating expenses
|
|
|
43,643
|
|
|
|
518
|
|
|
|
343
|
|
|
|
(70
|
)
|
|
|
44,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
13,974
|
|
|
|
980
|
|
|
|
(190
|
)
|
|
|
(1
|
)
|
|
|
14,763
|
|
Interest income
|
|
|
2,035
|
|
|
|
2
|
|
|
|
4
|
|
|
|
(65
|
)
|
|
|
1,976
|
|
Interest expense
|
|
|
(20
|
)
|
|
|
(71
|
)
|
|
|
(67
|
)
|
|
|
68
|
|
|
|
(90
|
)
|
Other non-operating income, net
|
|
|
31
|
|
|
|
23
|
|
|
|
201
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
16,020
|
|
|
$
|
934
|
|
|
$
|
(52
|
)
|
|
$
|
2
|
|
|
$
|
16,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
196
|
|
|
$
|
|
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
United States
|
|
|
Europe
|
|
|
Japan
|
|
|
Eliminations
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
38,960
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,960
|
|
Contract revenue related parties
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
39,107
|
|
|
|
|
|
|
|
1,098
|
|
|
|
|
|
|
|
40,205
|
|
Depreciation and amortization
|
|
|
61
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
62
|
|
Other operating expenses
|
|
|
38,931
|
|
|
|
1,475
|
|
|
|
254
|
|
|
|
|
|
|
|
40,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
115
|
|
|
|
(1,475
|
)
|
|
|
843
|
|
|
|
|
|
|
|
(517
|
)
|
Interest income
|
|
|
941
|
|
|
|
3
|
|
|
|
136
|
|
|
|
(34
|
)
|
|
|
1,046
|
|
Interest expense
|
|
|
(157
|
)
|
|
|
(139
|
)
|
|
|
(49
|
)
|
|
|
34
|
|
|
|
(311
|
)
|
Other non-operating income, net
|
|
|
|
|
|
|
174
|
|
|
|
81
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
899
|
|
|
$
|
(1,437
|
)
|
|
$
|
1,011
|
|
|
$
|
|
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
39
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,182
|
|
|
$
|
|
|
|
$
|
83
|
|
|
$
|
|
|
|
$
|
2,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
114,490
|
|
|
$
|
2,381
|
|
|
$
|
1,987
|
|
|
$
|
(8,831
|
)
|
|
$
|
110,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
253
|
|
|
$
|
2
|
|
|
$
|
88
|
|
|
$
|
|
|
|
$
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
68,943
|
|
|
$
|
496
|
|
|
$
|
2,544
|
|
|
$
|
(4,899
|
)
|
|
$
|
67,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 19, 2008, the Company announced that Sucampo
Europe opened a branch office in Basel, Switzerland. This office
will interact with the Swiss Agency for Therapeutic Products on
planned future regulatory submissions for clinical research and
product marketing as the Company advances AMITIZA through the
regulatory process in Europe and other overseas markets.
On February 27, 2008, the Company announced that Sucampo
Europe filed a Marketing Authorization Application (MAA) for
lubiprostone, 24 micrograms, for the indication of chronic
idiopathic constipation in adults in the United Kingdom. Under
the Takeda Agreement, if the Company wishes to use data or
information developed under the collaboration with Takeda
outside the United States or Canada, for example in support of a
regulatory filing in Europe or Asia, the Company is obligated to
pay to Takeda a one-time fee the first time such data or
information is used in specified territories. The amount of the
fee for each territory is to be agreed between the Company and
Takeda. In connection with the Companys MAA filing for
lubiprostone in Europe, the Company agreed with Takeda to make a
one-time payment of $1.8 million, which will permit the
Company to use in Europe, the Middle East and Africa certain
data and information developed under the Takeda Agreement
relating to the use of lubiprostone to treat chronic idiopathic
constipation. Also, in consideration of the license agreement
with SAG, the Company is required to make a $1.0 million
payment to SAG for its first NDA filing, or comparable foreign
regulatory filing, in each of the three following territories
covered by the license agreement: North, Central and South
America (including the Caribbean), Asia and the rest of the
world. The Companys MAA filing described
F-36
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
above triggered the obligation on the part of the Company to
make a $1.0 million payment to SAG for the
rest-of-world
territory.
On March 5, 2008, the Company entered into a line of credit
providing for uncommitted borrowings of up to
$30.0 million. The lender has no obligation to make
advances under this line of credit but may do so in its sole
discretion. The line of credit is collateralized by the
Companys short- and long-term investments. Advances made
under this line of credit will bear an interest rate based on
LIBOR plus a predetermined percentage based on the amount of the
advance and other conditions. Borrowings under this line of
credit are due upon the demand of the lender and the lender can
make a repayment demand at its sole option at any time for any
or no reason. As of March 20, 2008, the Company had not
drawn down any funds under this line of credit.
|
|
15.
|
Quarterly
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarters Ended
|
|
(In thousands, except per share data)
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total revenues
|
|
$
|
17,145
|
|
|
$
|
12,852
|
|
|
$
|
48,934
|
|
|
$
|
12,960
|
|
Loss (income) from operations
|
|
$
|
(2,115
|
)
|
|
$
|
(875
|
)
|
|
$
|
20,859
|
|
|
$
|
538
|
|
Net (loss) income
|
|
$
|
(735
|
)
|
|
$
|
(474
|
)
|
|
$
|
13,883
|
|
|
$
|
516
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.40
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.39
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total revenues
|
|
$
|
11,372
|
|
|
$
|
8,294
|
|
|
$
|
15,432
|
|
|
$
|
24,168
|
|
Loss (income) from operations
|
|
$
|
(494
|
)
|
|
$
|
(376
|
)
|
|
$
|
2,751
|
|
|
$
|
12,882
|
|
Net income
|
|
$
|
4,937
|
|
|
$
|
82
|
|
|
$
|
3,475
|
|
|
$
|
13,307
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share is computed independently for each
of the quarters presented. Therefore, the sum of the quarterly
net (loss) income per share information may not equal annual net
income (loss) per share.
F-37
Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
|
|
|
End
|
|
(In thousands)
|
|
of Year
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Other
|
|
|
of Year
|
|
|
Valuation allowance for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
20,764
|
|
|
$
|
1,675
|
(a)
|
|
$
|
(980
|
)(b)
|
|
$
|
|
|
|
$
|
21,459
|
|
2006
|
|
|
21,459
|
|
|
|
|
|
|
|
(11,608
|
)(c)
|
|
|
|
|
|
|
9,851
|
|
2007
|
|
|
9,851
|
|
|
|
1,166
|
(a)
|
|
|
(204
|
)(b)
|
|
|
|
|
|
|
10,813
|
|
|
|
|
(a) |
|
The 2007 and 2005 increases in the valuation allowance are
primarily associated with certain foreign net operating losses.
This increase in the valuation allowance was based on
managements assessment that, due to changing business
conditions and the limitation of tax planning strategies, the
Company was not likely to fully realize these deferred tax
assets. |
|
(b) |
|
In 2007 and 2005, the decrease in valuation allowance for
deferred tax assets reflects the change in managements
judgment related to estimated future taxable income in the
United States. |
|
(c) |
|
The 2006 decrease in valuation allowance for deferred tax assets
reflects primarily the Companys utilization of the
deferred tax assets of $6.7 million and a decrease in
valuation allowance for deferred tax assets of $4.9 million
resulting from a change in managements judgment related to
estimated future taxable income in the United States. |
S-1
Sucampo
Pharmaceuticals, Inc.
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation
|
|
Exhibit 3.1 to the Companys Current Report on
Form 8-K
(filed August 8, 2007)
|
|
3
|
.2
|
|
Form of Restated Bylaws
|
|
Exhibit 3.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
4
|
.1
|
|
Specimen Stock Certificate evidencing the shares of class A
common stock
|
|
Exhibit 4.1 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
|
10
|
.1
|
|
Amended and Restated 2001 Stock Incentive Plan
|
|
Exhibit 10.1 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.2
|
|
Amended and Restated 2006 Stock Incentive Plan
|
|
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.3
|
|
2006 Employee Stock Purchase Plan
|
|
Exhibit 10.3 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.4
|
|
Form of Incentive Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.5
|
|
Form of Nonstatutory Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.5 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.6
|
|
Form of Restricted Stock Agreement for 2006 Stock Incentive Plan
|
|
Exhibit 10.6 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.7
|
|
Non-employee Director Compensation Summary
|
|
Exhibit 10.7 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.8
|
|
Employment Agreement, dated June 16, 2006, between the Company
and Ryuji Ueno
|
|
Exhibit 10.9 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.9
|
|
Form of Executive Employment Agreement
|
|
Exhibit 10.10 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.10
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Sachiko Kuno
|
|
Exhibit 10.11 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.11
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Ryuji Ueno
|
|
Exhibit 10.12 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.12
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Michael Jeffries
|
|
Exhibit 10.13 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.13
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Hidetoshi Mine
|
|
Exhibit 10.14 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.14
|
|
Form of Investor Rights Agreement
|
|
Exhibit 10.16 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.15
|
|
Lease Agreement, dated September 16, 1998, between the Company
and Plaza West Limited Partnership, successor in interest to
Trizechahn Plaza West Limited Partnership, as amended
|
|
Exhibit 10.17 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
II-1
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.16
|
|
Sublease Agreement, dated October 26, 2005, between the Company
and First Potomac Realty Investment L.P.
|
|
Exhibit 10.18 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.17
|
|
Amended and Restated Patent Access Agreement, dated June 30,
2006, among the Company, Sucampo Pharma Europe Ltd., Sucampo
Pharma, Ltd. and Sucampo AG
|
|
Exhibit 10.19 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.18*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 23,
2004, between the Company and R-Tech Ueno, Ltd., as amended on
October 2, 2006
|
|
Exhibit 10.20 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.19*
|
|
Collaboration and License Agreement, dated October 29, 2004,
between the Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.21 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.20*
|
|
Agreement, dated October 29, 2004, among the Company, Takeda
Pharmaceutical Company Limited and Sucampo AG
|
|
Exhibit 10.22 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.21*
|
|
Supply Agreement, dated October 29, 2004, among the Company,
Takeda Pharmaceutical Company Limited and R-Tech Ueno, Ltd.
|
|
Exhibit 10.23 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.22*
|
|
Supply and Purchase Agreement, dated January 25, 2006, among the
Company, Takeda Pharmaceutical Company Limited and R-Tech Ueno,
Ltd.
|
|
Exhibit 10.24 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.23*
|
|
Supplemental Agreement, dated February 1, 2006, between the
Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.25 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.24*
|
|
Services Agreement, dated February 9, 2006, between the Company
and Ventiv Commercial Services, LLC
|
|
Exhibit 10.26 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.25
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Timothy Maudlin
|
|
Exhibit 10.27 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.26
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Sue Molina
|
|
Exhibit 10.28 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.27*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 24,
2005, between Sucampo Pharma Europe Ltd. and R-Tech Ueno, Ltd.,
as amended on October 2, 2006
|
|
Exhibit 10.29 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.28*
|
|
SPI-8811 and SPI-017 Exclusive Clinical Manufacturing and Supply
Agreement, dated October 4, 2006, between the Company and R-Tech
Ueno, Ltd.
|
|
Exhibit 10.31 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.29
|
|
Lease Agreement, dated December 18, 2006, between the Company
and EW Bethesda Office Investors, LLC
|
|
Included herewith
|
|
10
|
.30
|
|
Amendment to Employment Agreement, dated November 20, 2006,
between the Company and Ryuji Ueno
|
|
Exhibit 10.35 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
II-2
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.31
|
|
Letter agreement, dated January 29, 2007, between the Company
and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.36 to Registration Statement
No. 333-135133,
Amendment No. 6 (filed May 14, 2007)
|
|
10
|
.32
|
|
Employment Agreement, effective June 1, 2007, between the
Company and Sachiko Kuno
|
|
Exhibit 10.37 to Registration Statement
No. 333-135133,
Amendment No. 8 (filed July 17, 2007)
|
|
10
|
.33
|
|
Amended Employment Agreement, dated May 12, 2007, between the
Company and Mariam E. Morris
|
|
Exhibit 10.38 to Registration Statement
No. 333-135133,
Amendment No. 7 (filed June 25, 2007)
|
|
10
|
.34
|
|
Indemnification Agreement, dated October 18, 2007, between the
Company and Anthony C. Celeste
|
|
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.35
|
|
Amendment, dated December 14, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.1 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.36
|
|
Amendment, dated December 10, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.37
|
|
Amendment, dated December 7, 2007, to Employment Agreement
between the Company and Brad Fackler
|
|
Exhibit 10.3 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.38
|
|
Amendment, dated December 6, 2007, to Employment Agreement
between the Company and Gayle Dolecek
|
|
Exhibit 10.4 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.39
|
|
Amendment, dated December 5, 2007, to Employment Agreement
between the Company and Kei Tolliver
|
|
Exhibit 10.5 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.40
|
|
Amendment, dated November 26, 2007, to Employment Agreement
between the Company and Ryuji Ueno
|
|
Exhibit 10.6 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.41
|
|
Credit Line Agreement, dated March 5, 2008, between the Company
and UBS Bank USA
|
|
Included herewith
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLC, Independent Registered
Public Accounting Firm
|
|
Included herewith
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
31
|
.2
|
|
Certification of the Principal Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.1
|
|
Certification of the Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.2
|
|
Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
|
|
|
|
Compensatory plan, contract or arrangement. |
|
* |
|
Confidential treatment has been requested for portions of this
exhibit. |
II-3
exv10w29
Exhibit 10.29
DEED OF LEASE
BY AND BETWEEN
EW BETHESDA OFFICE INVESTORS, LLC,
a Delaware limited liability company
AS LANDLORD
AND
SUCAMPO PHARMACEUTICAL, INC.,
a Delaware corporation
AS TENANT
DATED DECEMBER 18, 2006
TABLE OF CONTENTS
|
|
|
|
|
|
|
1. |
|
DEMISE |
|
|
1 |
|
|
|
|
|
|
|
|
2. |
|
PREMISES |
|
|
1 |
|
|
|
|
|
|
|
|
3. |
|
TERM |
|
|
2 |
|
|
|
|
|
|
|
|
4. |
|
RENT |
|
|
2 |
|
|
|
|
|
|
|
|
5. |
|
UTILITIES AND SERVICES |
|
|
9 |
|
|
|
|
|
|
|
|
6. |
|
LATE CHARGE |
|
|
11 |
|
|
|
|
|
|
|
|
7. |
|
SECURITY DEPOSIT |
|
|
12 |
|
|
|
|
|
|
|
|
8. |
|
POSSESSION |
|
|
13 |
|
|
|
|
|
|
|
|
9. |
|
USE OF PREMISES |
|
|
13 |
|
|
|
|
|
|
|
|
10. |
|
ACCEPTANCE OF PREMISES |
|
|
15 |
|
|
|
|
|
|
|
|
11. |
|
SURRENDER |
|
|
15 |
|
|
|
|
|
|
|
|
12. |
|
ALTERATIONS AND ADDITIONS |
|
|
16 |
|
|
|
|
|
|
|
|
13. |
|
MAINTENANCE AND REPAIRS OF PREMISES |
|
|
17 |
|
|
|
|
|
|
|
|
14. |
|
LANDLORDS INSURANCE |
|
|
18 |
|
|
|
|
|
|
|
|
15. |
|
TENANTS INSURANCE |
|
|
18 |
|
|
|
|
|
|
|
|
16. |
|
INDEMNIFICATION |
|
|
19 |
|
|
|
|
|
|
|
|
17. |
|
SUBROGATION |
|
|
20 |
|
|
|
|
|
|
|
|
18. |
|
SIGNS |
|
|
20 |
|
|
|
|
|
|
|
|
19. |
|
FREE FROM LIENS |
|
|
21 |
|
|
|
|
|
|
|
|
20. |
|
ENTRY BY LANDLORD |
|
|
21 |
|
-i-
|
|
|
|
|
|
|
21. |
|
DESTRUCTION AND DAMAGE |
|
|
22 |
|
|
|
|
|
|
|
|
22. |
|
CONDEMNATION |
|
|
23 |
|
|
|
|
|
|
|
|
23. |
|
ASSIGNMENT AND SUBLETTING |
|
|
24 |
|
|
|
|
|
|
|
|
24. |
|
TENANTS DEFAULT |
|
|
28 |
|
|
|
|
|
|
|
|
25. |
|
LANDLORDS REMEDIES |
|
|
29 |
|
|
|
|
|
|
|
|
26. |
|
LANDLORDS RIGHT TO PERFORM TENANTS OBLIGATIONS |
|
|
31 |
|
|
|
|
|
|
|
|
27. |
|
ATTORNEYS FEES |
|
|
32 |
|
|
|
|
|
|
|
|
28. |
|
TAXES |
|
|
32 |
|
|
|
|
|
|
|
|
29. |
|
EFFECT OF CONVEYANCE |
|
|
32 |
|
|
|
|
|
|
|
|
30. |
|
TENANTS ESTOPPEL CERTIFICATE |
|
|
32 |
|
|
|
|
|
|
|
|
31. |
|
SUBORDINATION |
|
|
33 |
|
|
|
|
|
|
|
|
32. |
|
ENVIRONMENTAL COVENANTS |
|
|
34 |
|
|
|
|
|
|
|
|
33. |
|
NOTICES |
|
|
37 |
|
|
|
|
|
|
|
|
34. |
|
WAIVER |
|
|
37 |
|
|
|
|
|
|
|
|
35. |
|
HOLDING OVER |
|
|
37 |
|
|
|
|
|
|
|
|
36. |
|
SUCCESSORS AND ASSIGNS |
|
|
38 |
|
|
|
|
|
|
|
|
37. |
|
TIME |
|
|
38 |
|
|
|
|
|
|
|
|
38. |
|
BROKERS |
|
|
38 |
|
|
|
|
|
|
|
|
39. |
|
LIMITATION OF LIABILITY |
|
|
38 |
|
|
|
|
|
|
|
|
40. |
|
FINANCIAL STATEMENTS |
|
|
39 |
|
|
|
|
|
|
|
|
41. |
|
RULES AND REGULATIONS |
|
|
39 |
|
|
|
|
|
|
|
|
42. |
|
MORTGAGEE PROTECTION |
|
|
40 |
|
-ii-
|
|
|
|
|
|
|
43. |
|
INTENTIONALLY OMITTED |
|
|
40 |
|
|
|
|
|
|
|
|
44. |
|
PARKING |
|
|
40 |
|
|
|
|
|
|
|
|
45. |
|
ENTIRE AGREEMENT |
|
|
41 |
|
|
|
|
|
|
|
|
46. |
|
INTEREST |
|
|
41 |
|
|
|
|
|
|
|
|
47. |
|
GOVERNING LAW; CONSTRUCTION |
|
|
41 |
|
|
|
|
|
|
|
|
48. |
|
REPRESENTATIONS AND WARRANTIES OF TENANT |
|
|
42 |
|
|
|
|
|
|
|
|
49. |
|
NAME OF BUILDING |
|
|
43 |
|
|
|
|
|
|
|
|
50. |
|
SECURITY |
|
|
43 |
|
|
|
|
|
|
|
|
51. |
|
JURY TRIAL WAIVER |
|
|
44 |
|
|
|
|
|
|
|
|
52. |
|
RECORDATION |
|
|
44 |
|
|
|
|
|
|
|
|
53. |
|
RIGHT TO LEASE |
|
|
44 |
|
|
|
|
|
|
|
|
54. |
|
FORCE MAJEURE |
|
|
44 |
|
|
|
|
|
|
|
|
55. |
|
ACCEPTANCE |
|
|
44 |
|
|
|
|
|
|
|
|
56. |
|
RENEWAL OPTION |
|
|
45 |
|
|
|
|
|
|
|
|
57. |
|
RIGHT OF FIRST OFFER |
|
|
46 |
|
|
|
|
|
|
|
|
58. |
|
TENANT ACCESS |
|
|
46 |
|
|
|
|
|
|
|
|
59. |
|
STORAGE SPACE |
|
|
46 |
|
|
|
|
|
|
|
|
60. |
|
ROOF RIGHTS |
|
|
46 |
|
-iii-
Index of Exhibits
|
|
|
A
|
|
Diagram of the Premises |
|
|
|
B
|
|
Tenant Improvements |
|
|
|
C
|
|
Commencement and Expiration Date Memorandum |
|
|
|
D
|
|
Rules and Regulations |
|
|
|
E
|
|
Form of Estoppel Certificate |
|
|
|
F
|
|
Form of Subordination, Non-Disturbance and Attornment Agreement |
-iv-
INDEX OF DEFINED TERMS
Paragraph #
|
|
|
ADA |
|
9 |
|
|
|
Additional Rent |
|
4 |
|
|
|
Additional Space |
|
57 |
|
|
|
Alterations |
|
12 |
|
|
|
Bank |
|
7 |
|
|
|
Base Insurance Expenses |
|
4 |
|
|
|
Base Operating Expenses |
|
4 |
|
|
|
Base Rent |
|
4 |
|
|
|
Base Taxes |
|
4 |
|
|
|
Base Utility Expenses |
|
4 |
|
|
|
Base Year |
|
4 |
|
|
|
Building |
|
2 |
|
|
|
Casualty Discovery Date |
|
21 |
|
|
|
Commencement Date |
|
3 |
|
|
|
Common Areas |
|
2 |
|
|
|
Computation Year |
|
4 |
|
|
|
Condemnation |
|
22 |
|
|
|
CPA |
|
4 |
|
|
|
Default |
|
24 |
|
|
|
Dish |
|
9 |
|
|
|
Electric Rates |
|
5 |
|
|
|
Electric Service Provider |
|
5 |
|
|
|
Electricity Charge |
|
5 |
|
|
|
Environmental Laws |
|
32 |
-v-
|
|
|
Expiration Date |
|
3 |
|
|
|
Extension Notice |
|
56 |
|
|
|
Force Majeure |
|
54 |
|
|
|
Guarantor |
|
24 |
|
|
|
Hazardous Materials |
|
32 |
|
|
|
Holder |
|
42 |
|
|
|
Insurance Expenses |
|
4 |
|
|
|
Landlord Parties |
|
39 |
|
|
|
Landlords Agents |
|
8 |
|
|
|
Landlords Investment Advisors |
|
15 |
|
|
|
Laws |
|
9 |
|
|
|
Lease |
|
Introduction |
|
|
|
Lease Guarantor |
|
7 |
|
|
|
Letter of Credit |
|
7 |
|
|
|
Mold Conditions |
|
32 |
|
|
|
Normal Business Hours |
|
5 |
|
|
|
Offer Terms |
|
57 |
|
|
|
Operating Expenses |
|
4 |
|
|
|
Option |
|
56 |
|
|
|
Option Period |
|
56 |
|
|
|
Parking Areas |
|
2 |
|
|
|
Payment of Additional Rent |
|
4 |
|
|
|
Premises |
|
1 |
|
|
|
Private Restrictions |
|
9 |
|
|
|
Project |
|
2 |
|
|
|
Proportionate Share |
|
4 |
-vi-
|
|
|
Related Corporation |
|
23 |
|
|
|
Rent |
|
4 |
|
|
|
Rules and Regulations |
|
41 |
|
|
|
Successor Landlord |
|
31 |
|
|
|
Superior Lease(s) |
|
31 |
|
|
|
Superior Lessor |
|
31 |
|
|
|
Superior Mortgage(s) |
|
31 |
|
|
|
Systems |
|
4 |
|
|
|
Taxes |
|
4 |
|
|
|
Tenant Improvements |
|
Exhibit B |
|
|
|
Tenants Agents |
|
9 |
|
|
|
Tenants Property |
|
15 |
|
|
|
Term |
|
3 |
|
|
|
Utilities |
|
4 |
|
|
|
Utility Expenses |
|
4 |
|
|
|
Visitor Parking Fees |
|
44 |
|
|
|
Visitors |
|
44 |
-vii-
LEASE AGREEMENT
BASIC LEASE INFORMATION
|
|
|
Lease Date: |
|
December 18, 2006 |
|
|
|
Landlord: |
|
EW BETHESDA OFFICE INVESTORS, LLC |
|
|
|
Landlords Address: |
|
c/o UBS Realty Investors LLC |
|
|
242 Trumbull Street |
|
|
Hartford, Connecticut 06103-1205 |
|
|
|
|
|
All notices sent to Landlord under this Lease shall be sent to the above address, with copies to: |
|
|
|
|
|
LPC Commercial Services, Inc. |
|
|
4520 East-West Highway |
|
|
Bethesda, MD 20814 |
|
|
|
Tenant: |
|
SUCAMPO PHARMACEUTICAL, INC., a Delaware corporation |
|
|
|
Tenants Contact
Person: |
|
Kei Tolliver |
|
|
|
Tenants Address and |
|
|
Telephone Number: |
|
Before Lease Commencement: 4733 Bethesda Avenue, Suite 450 |
|
|
Bethesda, MD 20814 |
|
|
|
|
|
(301) 961-3400 |
|
|
|
|
|
After Lease Commencement: |
|
|
At the Premises |
|
|
Attn: Chief Financial Officer |
|
|
(301) 961-3400 |
|
|
|
Premises Square |
|
|
Footage: |
|
Approximately Twenty-Five Thousand Sixteen (25,016) rentable square feet |
|
|
|
Premises Address: |
|
4520 East-West Highway, Suite 300 |
|
|
Bethesda, Maryland 20814 |
|
|
|
Building: |
|
4520 East-West Highway |
|
|
Bethesda, Maryland 20814 |
|
Building Square |
|
|
Footage: |
|
Approximately One Hundred Seventy-four Thousand Four Hundred Forty-eight (174,448) |
|
|
|
Tenants Proportionate |
|
|
Share of Building: |
|
14.34% |
|
|
|
Length of Term: |
|
One Hundred Seventeen (117) months |
-viii-
|
|
|
Commencement Date: |
|
May 15, 2007 |
|
|
|
Rent Commencement
Date: |
|
October 15, 2007 |
|
|
|
Expiration Date: |
|
February 15, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly |
|
|
|
|
Annual Base |
|
Annual Base |
|
Base |
Base Rent: |
|
Months |
|
Rate |
|
Rent |
|
Rent |
|
|
1-5 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
6-17 |
|
$ |
34.00 |
|
|
$ |
850,544.00 |
|
|
$ |
70,878.67 |
|
|
|
18-29 |
|
$ |
35.02 |
|
|
$ |
876,060.32 |
|
|
$ |
73,005.03 |
|
|
|
30-41 |
|
$ |
36.07 |
|
|
$ |
902,327.12 |
|
|
$ |
75,193.93 |
|
|
|
42-53 |
|
$ |
37.15 |
|
|
$ |
929,344.40 |
|
|
$ |
77,445.37 |
|
|
|
54-65 |
|
$ |
38.26 |
|
|
$ |
957,112.16 |
|
|
$ |
79,759.35 |
|
|
|
66-77 |
|
$ |
39.41 |
|
|
$ |
985,880.56 |
|
|
$ |
82,156.71 |
|
|
|
78-89 |
|
$ |
40.59 |
|
|
$ |
1,015,399.44 |
|
|
$ |
84,616.62 |
|
|
|
90-101 |
|
$ |
41.81 |
|
|
$ |
1,045,918.96 |
|
|
$ |
87,159.91 |
|
|
|
102-113 |
|
$ |
43.06 |
|
|
$ |
1,077,188.96 |
|
|
$ |
89,765.75 |
|
|
|
114-117 |
|
$ |
44.35 |
|
|
$ |
1,109,459.60 |
* |
|
$ |
92,454.97 |
|
|
|
|
|
* Annualized |
|
|
|
|
|
Prepaid Base Rent:
|
|
Seventy Thousand Eight Hundred Seventy-eight and 67/100 Dollars ($70,878.67) |
|
|
|
Month(s) to which |
|
|
Prepaid Base Rent
|
|
|
will be Applied: |
|
Sixth (6th) month of the Term |
|
|
|
Base Year:
|
|
2007 calendar year |
|
|
|
Security Deposit:
|
|
Two Hundred Twelve Thousand Six Hundred Thirty-six and 01/100 Dollars ($212,636.01) |
|
|
|
Permitted Use:
|
|
General office use consistent with the standards of a Class A office building. |
|
|
|
Parking Spaces:
|
|
Fifty (50) spaces at the then prevailing market rate, currently $150 per month for exclusive and designated parking spaces, and $100 per month for nonexclusive and undesignated parking spaces. Two (2) of the foregoing spaces may be reserved by Tenant. |
-ix-
|
|
|
Broker(s):
|
|
LPC Commercial Services, Inc. (Landlords Broker) Newmark of Washington DC, LLC (Tenants Broker) |
-x-
DEED OF LEASE
THIS DEED OF LEASE AGREEMENT is made and entered into by and between Landlord and Tenant on
the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease
Information attached to this Deed of Lease (Basic Lease Information) shall have the meaning and
definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits,
the addendum or addenda described in the Basic Lease Information, and this Deed of Lease are and
shall be construed as a single instrument and are referred to herein as the Lease.
1. DEMISE
In consideration for the rents and all other charges and payments payable by Tenant, and for
the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY
LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below
(the Premises), upon the agreements, terms and conditions of this Lease for the Term hereinafter
stated.
2. PREMISES
The
Premises demised by this Lease are located in that certain building (the Building)
specified in the Basic Lease Information, which Building is located in that certain real estate
development (the Project) specified in the Basic Lease Information. The Premises has the address
and contains the square footage specified in the Basic Lease Information. All measurements set
forth in this Lease are measured in accordance with the BOMA Standard Method of Measurement for
Office Buildings, American National Standard z.65-1-1996, which square footage may be verified by
Tenants architect at Tenants sole cost and expense. The location and dimensions of the Premises
are depicted on Exhibit A, which is attached hereto and incorporated herein by this reference.
Tenant shall have the non-exclusive right (in common with the other tenants, Landlord and any other
person granted use by Landlord) to use the Common Areas (as hereinafter defined), except that with
respect to the Projects parking areas (the Parking Areas), Tenant shall have only the rights, if
any, set forth in Paragraph 44 below. For purposes of this Lease, the term Common Areas shall
mean all areas and facilities outside the Premises and within the exterior boundary line of the
Project that are, from time to time, provided and designated by Landlord for the non-exclusive use
of Landlord, Tenant and other tenants of the Project and their respective employees, guests and
invitees.
Tenant understands and agrees that the Premises shall be leased by Tenant in its as-is
condition without any improvements or alterations by Landlord unless Landlord has expressly agreed
to make such improvements or alterations in a tenant improvement work agreement attached hereto, if
at all, as Exhibit B. If Landlord has agreed to make any such improvements or alterations, then the
Premises demised by this Lease shall include any Tenant Improvements (as that term is defined in
the aforesaid tenant improvement work agreement) to be constructed by Landlord within the interior
of the Premises. Landlord shall construct any Tenant Improvements
on the terms and conditions set forth in Exhibit B, if attached hereto. Landlord and Tenant
agree to and shall be bound by the terms and conditions of Exhibit B, if any.
Landlord has the right, in its sole discretion, from time to time, to: (a) make changes to the
Common Areas, the Building and/or the Project, including, without limitation, changes in the
location, size, shape and number of driveways, entrances, parking spaces, parking areas, ingress,
egress, direction of driveways, entrances, hallways, corridors, lobby areas and walkways; (b) close
temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the
Premises remains available; (c) add additional buildings and improvements to the Common Areas or
remove existing buildings or improvements therefrom; (d) use the Common Areas while engaged in
making additional improvements, repairs or alterations to the Project or any portion thereof, and
(e) do and perform any other acts, alter or expand, or make any other changes in, to or with
respect to the Common Areas, the Building and/or the Project as Landlord may, in its sole
discretion, deem to be appropriate. Without limiting the foregoing, Landlord reserves the right
from time to time to install, use, maintain, repair, relocate and replace pipes, ducts, conduits,
wires, and appurtenant meters and equipment for service to the Premises or to other parts of the
Building which are above the ceiling surfaces, below the floor surfaces, within the walls and in
the central core areas of the Building which are located within the Premises or located elsewhere
in the Building. In connection with any of the foregoing activities of Landlord, Landlord shall
(i) use reasonable efforts while conducting such activities to minimize any interference with
Tenants use of the Premises; (ii) not increase Tenants Proportionate Share of the Building or the
Project; and (iii) use commercially reasonable efforts to give Tenant reasonable prior notice of
its intention to work on the Premises.
No rights to any view or to light or air over any property, whether belonging to Landlord or
any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises
are temporarily darkened or the light or view therefrom is obstructed, the same shall be without
liability to Landlord and without any reduction or diminution of Tenants obligations under this
Lease.
3. TERM
The term of this Lease (the Term) shall be for the period of months and days specified in
the Basic Lease Information, commencing on May 15, 2007 (the Commencement Date). Promptly after
the Commencement Date, Landlord and Tenant shall promptly execute a Commencement and Expiration
Date Memorandum in the form attached hereto as Exhibit C, wherein the parties shall specify the
Commencement Date, the date on which the Term expires (the Expiration Date) and the date on which
Tenant is to commence paying Rent (as defined below).
4. RENT
(a) Base Rent. Commencing on the Rent Commencement Date, Tenant shall pay to Landlord, in
advance on the first day of each month thereafter, and, except as required by this Lease, without
further notice or demand and without abatement, offset, rebate, credit or deduction for any reason
whatsoever, the monthly installments of rent specified in the Basic Lease Information (the Base
Rent).
Upon execution of this Lease, Tenant shall pay to Landlord the Security Deposit and Prepaid
Rent to be applied toward Base Rent for the month of the Term specified in the Basic Lease
Information.
As used in this Lease, the term Additional Rent shall mean all sums of money, other than
Base Rent, that shall become due from and payable by Tenant pursuant to this Lease.
-2-
(b) Additional Rent.
(1) During the Term, in addition to the Base Rent, Tenant shall pay to Landlord as Additional
Rent, in accordance with this Paragraph 4, (i) Tenants Proportionate Share(s) of Operating
Expenses (as defined below), (ii) Tenants Proportionate Share(s) of Insurance Expenses (as defined
below) attributable to each Computation Year, (iii) Tenants Proportionate Share(s) of Utility
Expenses (as defined below) attributable to each Computation Year, and (iv) Tenants Proportionate
Share(s) of Taxes (as defined below) attributable to each Computation Year.
(2) As used in this Lease, the following terms shall have the meanings
specified:
(A) Operating Expenses means the total costs and expenses paid or incurred by Landlord in
connection with the operation, maintenance, management and repair of the Premises, the Building
and/or the Project or any part thereof, including, without limitation, all the following items:
(i) Common Area Operating Expenses. All costs to operate, maintain, repair, replace,
supervise, insure and administer the Common Areas, including, without limitation, any Parking Areas
owned by Landlord for the use of tenants, and further including, without limitation, supplies,
materials, labor and equipment used in or related to the operation and maintenance of the Common
Areas, including Parking Areas (including, without limitation, all costs of restriping Parking
Areas, but exclusive of resurfacing costs), signs and directories on the Building and/or the
Project, landscaping (including, without limitation, maintenance contracts and fees payable to
landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs,
lighting systems and security services, if any, provided by Landlord for the Common Areas, and any
charges, assessments, costs or fees levied by any association or entity of which the Project or any
part thereof is a member or to which the Project or any part thereof is subject.
(ii) Parking Charges; Public Transportation Expenses. Any parking charges or other costs
levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations,
or interpretations thereof, promulgated by any governmental authority or insurer in connection with
the use or occupancy of the Building or the Project after the Commencement Date, and the cost of
maintaining any public transit system, vanpool, or other public or semi-public transportation
imposed upon Landlords ownership and operation of the Building and/or the Project.
(iii) Maintenance and Repair Costs. All costs to maintain, repair, and replace the Premises,
the Building and/or the Project or any part thereof and the personal property used in conjunction
therewith, including insurance deductibles and, without limitation, (a) all costs
paid under third party maintenance, management and service agreements such as contracts for
janitorial, security and refuse removal, (b) all costs to maintain and repair the roof coverings of
the Building or the Project or any part thereof, (c) all costs to maintain, repair and replace the
heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection,
escalator, elevator, life safety and security systems and other mechanical, electrical and
communications systems and equipment serving the Premises, the Building and/or the Project or any
part thereof (collectively, the Systems), (d) the cost of all cleaning and janitorial services
-3-
and supplies, the cost of window glass replacement and repair, (e) the cost of maintenance and
replacement of machinery, tools and equipment (if owned by Landlord) and for rental paid for such
machinery, tools and equipment (if rented) used in connection with the operation or maintenance of
the Building, and (f) subject to 4(b)(2)(A)(vi) below, costs for improvements made to the Project
which, although capital in nature, Landlord determines, in its sole discretion, are necessary to
enhance the security systems and improve security measures at the Project.
(iv) Life Safety and Security Costs. All costs to install, maintain, repair and replace all
life safety systems, including, without limitation, (a) all fire alarm systems, serving the
Premises, the Building and/or the Project or any part thereof (including all third party
maintenance contracts and fees payable to life safety consultants) whether such systems are or
shall be required by Landlords insurance carriers, Laws (as hereinafter defined) or otherwise, and
(b) all costs of security and security systems at the Project, including, without limitation; (i)
wages and salaries of all third-party employees engaged in the security of the Project; (ii) all
supplies, materials, equipment, and devices used in the security of the Project, and any upgrades
thereto; and (iii) all third party service or maintenance contracts with independent contractors
for Project security, including, without limitation, alarm service personnel, security guards,
watchmen, and any other security personnel.
(v) Management and Administration. All costs for management and administration of the
Premises, the Building and/or the Project or any part thereof, including, without limitation, a
property management fee, accounting, auditing, billing, postage, salaries and benefits for all
employees (up to and including the level of property manager) and third party contractors engaged
in the management, operation, maintenance, repair and protection of the Building and the Project,
whether located on the Project or off-site, payroll taxes and legal and accounting costs, fees for
licenses and permits related to the ownership and operation of the Project, and office rent for the
Building and/or Project management office or the rental value of such office if it is located
within the Building and/or Project (but only for an office of 1,000 rentable square feet or less).
(vi) Capital Improvements. Amounts paid for capital improvements or other costs incurred in
connection with the Project (a) which are intended to effect economies in the operation or
maintenance of the Project, or any portion thereof, or (b) relate to an expenditure which is
required to comply with changes in governmental law or regulation which occur after the
Commencement Date; and then in both cases only to the extent in any one year of the amount equal to
the total expenditure divided by the useful life of the improvement which requires such cost.
(vii) Operating Expenses shall not include the following: original construction costs of the
Building; expenses for repairs, replacements or maintenance arising from the initial construction
of the Building to the extent such expenses are either (i) reimbursed to Landlord by
virtue of warranties from contractors or suppliers; or (ii) result by reason of deficiencies
in design or workmanship, except conditions resulting from ordinary wear and tear; cost of expenses
associated with leasing space in the Building or the sale of any interest in the Building,
including, without limitation, advertising and marketing, commissions or any amounts paid for or on
behalf of any tenant such as space planning, moving costs, rental and other tenant concessions;
amounts paid to any partners, shareholder, officer, or director of Landlord, for salary or other
compensation; reserves for repairs, maintenance, and replacements; any amounts
-4-
paid to any person,
firm, or corporation related to or otherwise affiliated with Landlord or any general partner,
officer or director of Landlord or any of its general partners to the extent they materially exceed
arms-length competitive prices paid in the Metropolitan Washington, D.C. area. for the services or
goods provided; costs of electricity outside normal business hours sold to tenants of the Building
by Landlord; costs of repairs incurred by reason of fire or other casualty or condemnation whether
or not Landlord receives compensation therefore through the proceeds of insurance or condemnation
awards (exclusive of insurance deductibles); costs of renovating or otherwise improving space for
new or existing tenants or in renovating space vacated by any tenant or any other work which
Landlord performs for any tenant; interest, penalties or liens arising by reason of Landlords
failure to timely pay any operating expense (including ground rent) or real estate tax due;
compensation paid to clerks, attendants, sales persons, or other persons on or in commercial
concessions (including the parking garage) operated in the Building; costs relating to maintaining
Landlords existence, as a corporation, partnership or other entity, such as trustees fees, annual
fees, corporate or partnership organization or administration expenses, deed recordation expenses,
and legal and accounting fees (other than with respect to building operations); costs (including
fines and penalties imposed) incurred by Landlord to remove any hazardous or toxic wastes,
materials or substances from either the Building or land; the cost of any tap fees or one time
lump sum sewer or water connection fees for the Building; Landlords general corporate overhead and
general and administrative expenses; costs directly resulting from the gross negligence or willful
misconduct of Landlord or its agents, contractors or employees; salaries, wages, or other
compensation paid to employees of any property management organization being paid a fee by Landlord
for its services where such services are covered by a management fee; costs related to any Building
or land not included in the Property, including any allocation of costs incurred on a shared basis,
such as centralized accounting costs, unless the allocation is made on a reasonable and consistent
basis that fairly reflects the share of any costs actually attributable to the Property; costs
incurred to remedy, repair, or otherwise correct any defects or violations of the Building which
exist as of the Commencement Date; costs for sculpture, paintings and other art objects; increased
insurance premiums caused by Landlords or any other tenants hazardous acts; cost of any item,
service or repair to the extent Landlord is actually reimbursed by a warranty, guaranty or
insurance policy; improvements to common areas specifically undertaken by Landlord as inducements
or concessions in order to lease space to new or existing tenants, which would not have otherwise
been undertaken; rental costs and related expenses for leasing systems or equipment that would be
considered a capital improvement or expenditure if purchased; and costs of selling, syndicating,
financing, mortgaging or hypothecating any part of or interest in the Property.
Notwithstanding anything in this Paragraph 4(b) to the contrary, Insurance Expenses, Utility
Expenses and Taxes shall not be deemed to constitute Operating Expenses for purposes of this
Paragraph 4(b)(2)(A).
(B) Insurance Expenses means the total costs and expenses paid or incurred by Landlord in
connection with the obtaining of insurance on the Premises, the Building and/or the Project or any
part thereof or interest therein, including, without limitation, premiums for all risk fire and
extended coverage insurance, commercial general liability insurance, rent loss or abatement
insurance, earthquake insurance, flood or surface water coverage, and other insurance as Landlord
deems necessary in its sole discretion, and any deductibles paid under policies of any such
insurance. The foregoing shall not be deemed an agreement by Landlord to carry any particular
insurance relating to the Premises, Building, or Project.
-5-
(C) Utility Expenses means the cost of all electricity, water, gas, sewers, oil and other
utilities (collectively, Utilities"), including any third party surcharges imposed, serving the
Premises, the Building and the Project or any part thereof that are not separately metered to
Tenant or any other tenant, and any third party amounts, taxes, charges, surcharges, assessments or
impositions levied, assessed or imposed upon the Premises, the Building or the Project or any part
thereof, or upon Tenants use and occupancy thereof, as a result of any rationing of Utility
services or restriction on Utility use affecting the Premises, the Building and/or the Project, as
contemplated in Paragraph 5 below.
(D) Taxes means all real estate taxes and assessments, which shall include any form of tax,
assessment (including any special or general assessments and any assessments or charges for
Utilities not otherwise included under Section 4(c) or similar purposes included within any tax
bill for the Building or the Project or any part thereof, including, without limitation,
entitlement fees, allocation unit fees and/or any similar fees or charges), fee, license fee,
business license fee, levy, penalty (if a result of Tenants delinquency), sales tax, rent tax,
occupancy tax or other tax (other than net income, estate, succession, inheritance, transfer or
franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any
city, county, state or federal government or any improvement or other district or division thereof,
whether such tax is determined by the area of the Premises, the Building and/or the Project or any
part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants,
including, but not limited to, (i) any gross income or excise tax levied by any of the foregoing
authorities, with respect to receipt of Rent and/or other sums due under this Lease; (ii) upon any
legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any
part thereof, (iii) upon this transaction or any document to which Tenant is a party creating or
transferring any interest in the Premises, the Building and/or the Project; (iv) levied or assessed
in lieu of, in substitution for, or in addition to, existing or additional taxes against the
Premises, the Building and/or the Project, whether or not now customary or within the contemplation
of the parties; or surcharged against the Parking Areas. Taxes shall also include reasonable
legal and consultants fees, costs and disbursements incurred in connection with proceedings to
contest, determine or reduce taxes, Landlord specifically reserving the right, but not the
obligation, to contest by appropriate legal proceedings the amount or validity of any taxes.
Tenant will receive Tenants Proportionate Share of any awards Landlord receives in connection with
tax contests which relate to a period during the Lease Term.
(E) Base Year shall mean the calendar year specified in the Basic Lease Information.
(F) Base Operating Expenses shall mean the amount of Operating Expenses for the Base Year.
(G) Base Insurance Expenses shall mean the amount of Insurance Expenses for the Base Year.
(H) Base Taxes shall mean the amount of Taxes for the Base Year.
(I) Base Utility Expenses shall mean the amount of Utility Expenses for the Base Year.
Notwithstanding anything to the contrary contained in this Lease, Base Utility Expenses shall not
include increases in utility costs due to extraordinary
-6-
circumstances, including, without
limitation, conservation, bond and/or debt repayment surcharges, charges of a one-time nature,
boycotts, strikes, embargoes or other events resulting in shortages.
(J) Computation Year shall mean each twelve (12) consecutive month period commencing January
1 of each year during the Term, provided that Landlord, upon notice to Tenant, may change the
Computation Year from time to time to any other twelve (12) consecutive month period, and, in the
event of any such change, Tenants Proportionate Share(s) of Operating Expenses, of Insurance
Expenses, of Utility Expenses and of Taxes shall be equitably adjusted for the Computation Years
involved in any such change.
(K) Landlord shall have no obligation to return, rebate or credit to Tenant any refund,
rebate, or return of Operating Expenses received by Landlord after the date which is 18 months
after the Expiration Date of the Lease. Tenant shall have no obligation to pay any Operating
Expense charged by Landlord after the date which is 18 months after the Expiration Date of this
Lease.
(c) Payment of Additional Rent.
(1) Within ninety (90) days of the end of each Computation Year or as soon thereafter as
practicable (but in no event more than two hundred seventy (270) days after the end of each
Computation Year), Landlord shall give to Tenant notice of Landlords estimate of the total amounts
that will be payable by Tenant under Paragraph 4(b) for the following Computation Year, and Tenant
shall pay such estimated Additional Rent on a monthly basis, in advance, on the first day of each
month. Tenant shall continue to make said monthly payments until notified by Landlord of a change
therein. If at any time or times Landlord determines that the amounts payable under Paragraph 4(b)
for the current Computation Year will vary from Landlords estimate given to Tenant, Landlord, by
notice to Tenant, may reasonably revise the estimate for such Computation Year, and subsequent
payments by Tenant for such Computation Year shall be based upon such revised estimate. By April 1
of each calendar year following the initial Computation Year, Landlord shall endeavor to provide to
Tenant a statement showing the actual Additional Rent due to Landlord for the prior Computation
Year. If the total of the monthly payments of Additional Rent that Tenant has made for the prior
Computation Year is less than the actual Additional Rent chargeable to Tenant for such prior
Computation Year, then Tenant shall pay the difference in a lump sum within thirty (30) days after
receipt of such statement from Landlord. Any overpayment by Tenant of Additional Rent for the
prior Computation Year shall, at Tenants option, be either credited towards the Additional Rent
next due or returned to Tenant in a lump sum payment within thirty (30) days after delivery of such
statement.
(2) Landlords then-current annual operating and capital budgets for the Building and the
Project or the pertinent part thereof shall be used for purposes of calculating Tenants monthly
payment of estimated Additional Rent for the current year, subject to adjustment as provided above.
Landlord shall make the final determination of Additional Rent for the year in which this Lease
terminates as soon as possible after termination of such year. Even though the Term has expired
and Tenant has vacated the Premises, with respect to the year in which this Lease expires or
terminates, Tenant shall remain liable for a period of 18 months after the expiration of the Lease
for payment of any amount due to Landlord in excess of the
-7-
estimated Additional Rent previously
paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment. Failure
of Landlord to submit statements as called for herein shall not be deemed a waiver of Tenants
obligation to pay Additional Rent as herein provided.
(3) With respect to Operating Expenses, Insurance Expenses, Utility Expenses or Taxes which
Landlord allocates to the Building, Tenants Proportionate Share shall be the percentage set
forth in the Basic Lease Information as Tenants Proportionate Share of the Building, as adjusted
by Landlord from time to time for a remeasurement of or changes in the physical size of the
Premises or the Building, whether such changes in size are due to an addition to or a sale or
conveyance of a portion of the Building or otherwise; provided, however, that no such remeasurement
may occur during the original Term, unless due to Tenant leasing additional space in the Building.
(4) In the event the average occupancy level of the Building or the Project for the Base Year
or any Computation Year is not ninety-five percent (95%) or more of full occupancy, then the
Operating Expenses that vary with occupancy for such year shall be apportioned among the tenants by
the Landlord to reflect those costs which would have occurred had the Building or the Project, as
applicable, been ninety-five percent (95%) occupied during such year.
(5) Without limiting the terms of Paragraph 4(c) above, Landlord reserves the right from time
to time to remeasure the Premises, the Building and/or the Project in accordance with the current
or revised standards promulgated from time to time by the Building Owners and Managers Association
(BOMA) or the American National Standards Institute or other generally accepted measurement
standards utilized by Landlord and to thereafter adjust the Proportionate Share(s) of Tenant and
any other affected tenants of the Building and/or Project.
(d) General Payment Terms. The Base Rent, Additional Rent and all other sums payable by
Tenant to Landlord hereunder, any late charges assessed pursuant to Paragraph 6 below and any
interest assessed pursuant to Paragraph 46 below, are referred to as the Rent. All Rent shall be
paid in lawful money of the United States of America. Checks are to be made payable to EW Bethesda
Office Investors, LLC, and shall be delivered to: LPC Commercial Services, Inc., 4520 East-West
Highway, Bethesda, MD 20814, or to such other person or place as Landlord may, from time to time,
designate to Tenant in writing. The Rent for any fractional part of a calendar month at the
commencement or termination of the Term shall be a prorated amount of the Rent for a full calendar
month based upon a thirty (30) day month.
(e) Statements Binding. Every statement given by Landlord pursuant to paragraph (c) of this
Paragraph 4 shall be conclusive and binding upon Tenant unless (i) within one hundred twenty (120)
days after the receipt of such statement Tenant shall notify Landlord that it disputes the
correctness thereof, specifying the particular respects in which the statement is claimed to be
incorrect, and (ii) if such dispute shall not have been settled by agreement, Tenant shall submit
the dispute to arbitration within one hundred twenty (120) days after receipt of the statement.
Pending the determination of such dispute by agreement or arbitration as aforesaid, Tenant shall,
within thirty (30) days after receipt of such statement, pay Additional Rent in accordance with
Landlords statement and such payment shall be without prejudice to Tenants position. If the
dispute shall be determined in Tenants favor, Landlord shall forthwith pay Tenant the amount of
Tenants overpayment of Additional Rent resulting from compliance with Landlords statement.
-8-
(f) Audit Rights. Provided Tenant notifies Landlord in accordance with the terms of paragraph
(e) above that Tenant disputes a statement received from Landlord, Tenant or its CPA (as defined
below) shall have the right, at Tenants sole cost and expense, provided Tenant utilizes a
Certified Public Accountant (the CPA) compensated on an hourly basis, upon at least thirty (30)
days prior notice to Landlord at any time during regular business hours to audit, review and
photocopy Landlords records pertaining to Operating Expenses for the immediately previous calendar
year only; provided, however, to the extent that Tenants audit identifies one or more material
discrepancies, Tenant may audit the books and records for the previous two (2) years with respect
to those discrepancies. Tenant shall complete the audit and present any disputed charges to
Landlord, in writing, within six months of receipt of Landlords statement pursuant to Paragraph
(c) of this Paragraph 4. If, following Landlords receipt of the audit and any disputed charges
(the Report Date), Landlord disputes the findings contained therein, and Landlord and Tenant are
not able to resolve their differences within thirty (30) days following the Report Date, the
dispute shall be resolved by binding arbitration as follows: Landlord and Tenant shall each
designate an independent certified public accountant, which shall in turn jointly select a third
independent Certified Public Accountant (the Third CPA). The Third CPA, within thirty (30) days
of selection, shall, at Tenants sole expense (unless the Third CPA resolves the difference in
Tenants favor, in which event Landlord shall pay the cost of the Third CPA in an amount not to
exceed $2,000.00), audit the relevant records and certify the proper amount within. That
certification shall be final and conclusive. If the Third CPA determines that the amount of
Operating Expenses billed to Tenant was incorrect, the appropriate party shall pay to the other
party the deficiency or overpayment, as applicable, within thirty (30) days following delivery of
the Third Party CPAs decision, without interest. Tenant agrees to keep all information thereby
obtained by Tenant confidential and to obtain the agreement of its CPA and Third CPA to keep all
such information confidential. Tenant shall provide a copy of such CPA agreements to Landlord
promptly upon request.
5. UTILITIES AND SERVICES
(a) From 8:00 a.m. to 6:00 p.m. on weekdays, and 8:00 a.m. to 12:00 p.m. Saturdays (Normal
Business Hours (excluding legal holidays)), Landlord shall furnish to the Premises electricity for
lighting and operation of customary office machines, water, heat and air conditioning, and elevator
service (at least one elevator shall be in service 24 hours a day, 7 days a week). During all
other hours, Landlord shall furnish such service except for heat and air conditioning. Landlord
shall provide janitorial services for the Premises on weekdays
(excluding legal holidays) as determined reasonably necessary by Landlord. Tenant shall
separately arrange with, and pay directly to, the applicable local public authorities or utilities,
as the case may be, for the furnishing, installation and maintenance of all telephone services and
equipment as may be required by Tenant in the use of the Premises. Landlord shall not be liable
for any damages resulting from interruption of, or Tenants inability to receive such service, and
any such inability shall not relieve Tenant of any of its obligations under this Lease. If at any
time during the Term Landlord shall determine that installation of a separate electrical meter for
the Premises is necessary or desirable as a result of Tenants electrical usage, Landlord shall pay
the cost of installing and maintaining such meter and Tenant shall pay the cost of Tenants
electrical usage as measured by such meter.
(b) If requested by Tenant, Landlord shall furnish heat and air conditioning at times other
than Normal Business Hours and the cost of such services as established by Landlord shall
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be paid
by Tenant as Additional Rent, payable concurrently with the next installment of Base Rent. As of
the date of this Lease, the overtime HVAC charge is $50.00 per hour, per floor.
(c) Without limiting the terms of Paragraph 5(a) above, Tenant acknowledges that Landlord has
contracted with Potomac Electric Power Company to provide electricity for the Building, and that
Landlord reserves the right to change the provider of such service at any time and from time to
time in Landlords sole discretion (any such provider being referred to herein as the Electric
Service Provider). Tenant shall obtain and accept electrical service for the Premises only from
and through Landlord, in the manner and to the extent expressly provided in this Lease, at all
times during the term of this Lease, and Tenant shall have no right (and hereby waives any right
Tenant may otherwise have) (i) to contract with or otherwise obtain any electrical service for or
with respect to the Premises or Tenants operations therein from any provider of electrical service
other than the Electric Service Provider, or (ii) to enter into any separate or direct contract or
other similar arrangement with the Electric Service Provider for the provision of electrical
service to Tenant at the Premises. Tenant shall cooperate with Landlord and the Electric Service
Provider at all times to facilitate the delivery of electrical service to Tenant at the Premises
and to the Building, including without limitation allowing Landlord and the Electric Service
Provider, and their respective agents and contractors, (a) to install, repair, replace, improve and
remove and any and all electric lines, feeders, risers, junction boxes, wiring, and other
electrical equipment, machinery and facilities now or hereafter located within the Building or the
Premises for the purpose of providing electrical service to or within the Premises or the Building,
and (b) reasonable access for the purpose of maintaining, repairing, replacing or upgrading such
electrical service from time to time. Tenant shall provide such information and specifications
regarding Tenants use or projected use of electricity at the Premises as shall be required from
time to time by Landlord or the Electric Service Provider to efficiently provide electrical service
to the Premises or the Building. In no event shall Landlord be liable or responsible for any loss,
damage, expense or liability, including without limitation loss of business or any consequential
damages, arising from any failure or inadequacy of the electrical service being provided to the
Premises or the Building, whether resulting from any change, failure, interference, disruption, or
defect in the supply or character of the electrical service furnished to the Premises or the
Building, or arising from the partial or total unavailability of electrical service to the Premises
or the Building, from any cause whatsoever, or otherwise, nor shall any such failure, inadequacy,
change, interference, disruption, defect or unavailability constitute an actual or constructive
eviction of Tenant, or entitle Tenant to any
abatement or diminution of Rent or otherwise relieve Tenant from any of its obligations under
this Lease.
(d) Tenant acknowledges that the Premises, the Building and/or the Project may become subject
to the rationing of Utility services or restrictions on Utility use as required by a public utility
company, governmental agency or other similar entity having jurisdiction thereof. Tenant
acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing
or restrictions as may be imposed upon Landlord, Tenant, the Premises, the Building and/or the
Project, and Tenant shall in no event be excused or relieved from any covenant or obligation to be
kept or performed by Tenant by reason of any such rationing or restrictions. Tenant agrees to
comply with energy conservation programs implemented by Landlord by reason of rationing,
restrictions or Laws.
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(e) Landlord shall not be liable for any loss, injury or damage to property caused by or
resulting from any variation, interruption, or failure of Utilities. No temporary interruption or
failure of such services incident to the making of repairs, alterations, improvements, or due to
accident, strike, or conditions or other events shall be deemed an eviction of Tenant or relieve
Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant for
any damage to the Premises or for any loss, damage or injury to any property therein or thereon
occasioned by bursting, rupture, leakage or overflow of any plumbing or other pipes (including,
without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking
fountains or washstands, or other similar cause in, above, upon or about the Premises, the
Building, or the Project.
(f) Landlord makes no representation with respect to the adequacy or fitness of the
air-conditioning or ventilation equipment in the Building to maintain temperatures which may be
required for, or because of, any equipment of Tenant, other than normal fractional horsepower
office equipment, or occupancy of the Premises by more than one person per 200 rentable square
feet. Landlord warrants that all HVAC equipment serving the Premises will be in good working order
as of the Commencement Date. Tenant shall not, without Landlords prior written consent, use
heat-generating machines, machines other than normal fractional horsepower office machines,
equipment or lighting other than building standard lights in the Premises, which may affect the
temperature otherwise maintained by the air conditioning system or increase the water normally
furnished for the Premises by Landlord pursuant to the terms of this Paragraph 5. If such consent
is given, Landlord shall have the right to install supplementary air conditioning units or other
facilities in the Premises, including supplementary or additional metering devices, and the cost
thereof, including the cost of installation, operation and maintenance, increased wear and tear on
existing equipment and other similar charges, shall be paid by Tenant to Landlord upon billing by
Landlord. Tenant shall not use water or heat or air conditioning in excess of that normally
supplied by Landlord. Tenants consumption of electricity shall not exceed five (5) watts per
rentable square foot.
(g) Notwithstanding the foregoing, (i) to the extent any of the foregoing services for which
Landlord is responsible are not furnished to the Premises for five (5) or more consecutive days
after Landlord receives notice from Tenant, (ii) the Premises are rendered untenantable due to the
Landlords failure to deliver such services, and (iii) the Landlord is not diligently pursuing a
cure of such interruption, then commencing with the sixth (6th) day after Landlord
receives
such notice, the Base Rent shall be abated until the Premises are again tenantable. Such
abatement shall be Tenants sole and exclusive remedy due to any such interruption.
6. LATE CHARGE
Notwithstanding any other provision of this Lease to the contrary, Tenant hereby acknowledges
that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be extremely difficult to
ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlords
designated agent within five (5) business days after their due date, then Tenant shall pay to
Landlord a late charge equal to five percent (5%) of such overdue amount. Notwithstanding the
foregoing, no late charge shall be assessed for the first time in any twelve-month period the Base
Rent is not paid when due, if such Base Rent is received by Landlord within five (5) days after
notice thereof is sent to Tenant. Landlord and Tenant hereby agree that such late
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charges represent
a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenants late
payment and shall not be construed as a penalty. Landlords acceptance of such late charges shall
not constitute a waiver of Tenants default with respect to such overdue amount or estop Landlord
from exercising any of the other rights and remedies granted under this Lease.
7. SECURITY DEPOSIT
On or before the date hereof, Tenant shall deposit with Landlord a clean, irrevocable and
unconditional letter of credit payable at sight in a form acceptable to Landlord in its sole
discretion (Letter of Credit) issued by a bank or financial institution and branch, all approved
by Landlord in its sole discretion (hereinafter referred to as the Bank) in favor of Landlord, in
the amount of Two Hundred Twelve Thousand Six Hundred Thirty-six and 01/100 Dollars ($212,636.00)
as security for the faithful performance and observance by Tenant of the terms, conditions and
provisions of this Lease, including without limitation the surrender of possession of the Premises
to Landlord as herein provided. The Letter of Credit shall have a term which expires no sooner
than sixty (60) days after the Expiration Date, or Tenant may deliver a one (1) year unconditional
and irrevocable Letter of Credit which by its terms automatically, for the remainder of the Term,
renews for successive one (1) year periods unless the Bank provides no less than sixty (60) days
written notice to Landlord that such Letter of Credit shall not be renewed, in which event Landlord
shall have the right to draw down the entire amount of the Letter of Credit unless Tenant
substitutes, prior to the expiration of such letter of Credit, a new Letter of Credit which meets
the requirements of this Paragraph 7. The Letter of Credit shall permit multiple drawings and be
fully transferable by Landlord without the payment of any fees or charges by Landlord. If Tenant
defaults in respect of any of the terms, conditions or provisions of this Lease including, but not
limited to, the payment of Rent, and Tenant fails to cure any such default after any required
notice and within any applicable cure period hereunder or if Landlord receives a notice that the
Letter of Credit shall not be renewed, (i) Landlord shall have the right to require the Bank to
make payment to Landlord or its designee of the entire proceeds of the Letter of Credit, and (ii)
Landlord may, at the option of Landlord (but Landlord shall not be required to) apply or retain the
whole or any part of such sum so paid to it by Tenant or the Bank to the extent required for the
payment of any Rent or any other sum as to which Tenant is in default, and any damages to which
Landlord is entitled pursuant to the Lease, whether such damages accrue before or after summary
proceedings or other reentry by Landlord,
and (iii) Landlord or any Superior Mortgagee shall hold the remainder of such sum paid to it
by the Bank or Tenant, if any, for Landlords benefit, as security for the faithful performance and
observance by Tenant of the terms, covenants, and conditions of this Lease on Tenants part to be
observed and performed, with the same rights as hereinabove set forth to apply or retain the same
in the event of any further default by Tenant under this Lease. If Landlord applies or retains any
part of the proceeds of the Letter of Credit, Tenant shall, within five (5) business days after
demand from Landlord, restore the Letter of Credit to its original amount and deliver it to
Landlord or its designee the so that Landlord or its designee shall have the full Letter of Credit
on hand at all times during the Term of this Lease (and any extension). Tenants failure to do so
within ten (10) days of receipt of such demand shall constitute a breach of this Lease.
In the event of a transfer, sale or lease of Landlords interest in the Building, Landlord
shall transfer or cause to be transferred either the cash or Letter of Credit or any sums collected
thereunder by Landlord, together with any other sums then held by Landlord or its designee as
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such
security, to the transferee, vendee or lessee; Tenant, at its sole cost, shall arrange for the
transfer of the Letter of Credit, and Landlord thereupon shall be released by Tenant from all
liability under this Paragraph. Tenant agrees to look solely to the new landlord for the return of
the cash or Letter of Credit or any sums collected thereunder and any other security, and it is
agreed that the provisions hereof shall apply to every transfer or assignment made of the Letter of
Credit or any sums collected thereunder and any other security to a new landlord. Tenant further
covenants that it shall not assign or encumber, or attempt to assign or encumber, any part of such
security and that neither Landlord nor its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment, or attempted encumbrance. Landlord shall not be
required to exhaust its remedies against Tenant before having recourse to the Letter of Credit or
such cash security held by Landlord. Recourse by Landlord to the Letter of Credit or such security
shall not affect any remedies of Landlord which are provided in this Lease or which are available
to Landlord in law or equity.
In the event that Tenant shall fully and faithfully comply with all of the terms, provisions,
covenants and conditions of this Lease, the Letter of Credit except as same may have been applied
by Landlord in accordance with this Lease, shall be returned to Tenant promptly after the
expiration of this Lease.
8. POSSESSION
(a) Tenants Right of Possession. Subject to Paragraph 8(b), Tenant shall be entitled to
possession of the Premises upon commencement of the Term.
(b) Delay in Delivering Possession. If for any reason whatsoever, Landlord cannot deliver
possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord, or Landlords agents, advisors, employees, partners,
shareholders, directors, invitees, independent contractors or Landlords Investment Advisors (as
hereinafter defined) (collectively, Landlords Agents), be liable to Tenant for any loss or
damage resulting therefrom. Tenant shall not be liable for Rent until Landlord delivers possession
of the Premises to Tenant.
9. USE OF PREMISES
(a) Permitted Use. The use of the Premises by Tenant and Tenants agents, advisors,
employees, partners, shareholders, directors, customers, invitees and independent contractors
(collectively, Tenants Agents) shall be solely for the Permitted Use specified in the Basic
Lease Information and for no other use. Tenant shall not permit any objectionable or unpleasant
odor, smoke, dust, gas, noise or vibration to emanate from or near the Premises. The Premises
shall not be used to create any nuisance or trespass, for any illegal purpose, for any purpose not
permitted by Laws (as hereinafter defined), for any purpose that would invalidate the insurance or
increase the premiums for insurance on the Premises, the Building or the Project or for any purpose
or in any manner that would interfere with other tenants use or occupancy of the Project. If any
of Tenants office machines or equipment disturb any other tenant in the Building, then Tenant
shall provide adequate insulation or take such other action as may be necessary to eliminate the
noise or disturbance. Tenant agrees to pay to Landlord, as Additional Rent, any increases in
premiums on policies to the extent resulting from Tenants Permitted Use or any other use or action
by Tenant or Tenants Agents which increases Landlords premiums or requires additional coverage by
Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building.
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(b) Compliance with Governmental Regulations and Private Restrictions. Tenant and Tenants
Agents shall, at Tenants expense, faithfully observe and comply with (1) all municipal, state and
federal laws, statutes, codes, rules, regulations, ordinances, requirements, and orders
(collectively, Laws), now in force or which may hereafter be in force pertaining to the Premises
or Tenants use of the Premises, the Building or the Project; (2) all recorded covenants,
conditions and restrictions affecting the Project (Private Restrictions) now in force or which
may hereafter be in force; and (3) the Rules and Regulations (as defined in Paragraph 41 of this
Lease). Without limiting the generality of the foregoing, to the extent Landlord is required by the
city or county in which the Building is located to maintain carpooling and public transit programs,
Tenant shall cooperate in the implementation and use of these programs by and among Tenants
employees.
(c) Compliance with Americans with Disabilities Act. The Premises, the Building and/or the
Project may be subject to, among other Laws, the Americans with Disabilities Act, 42 U.S.C. 12101
et seq., including, but not limited to Title III thereof, and all regulations and guidelines
related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes
now or hereafter enacted by local or state agencies having jurisdiction thereof, as the same may be
in effect on the date of this Lease and may be hereafter modified, amended or supplemented
(collectively, the ADA). Any Tenant Improvements to be constructed hereunder shall comply with
the ADA, and all costs incurred to comply therewith shall be a part of and included in the cost of
the Tenant Improvements. Tenant shall be solely responsible for conducting its own independent
investigation of this matter and for ensuring that the design of all Tenant Improvements complies
with all requirements of the ADA. Subject to reimbursement pursuant to Paragraph 4 above, if any
barrier removal work or other work is required to the Building, the Common Areas or the Project
under the ADA, then such work shall be the responsibility of Landlord; provided
that, if such work is required under the ADA as a result of Tenants particular use of the
Premises or any work or Alteration (as hereinafter defined) made to the Premises by or on behalf of
Tenant, then such work shall be performed by Landlord at the sole cost and expense of Tenant.
Except as otherwise expressly provided in this provision,
Tenant shall be responsible at its sole cost and expense for fully and faithfully complying
with all applicable requirements of the ADA. Within fifteen (15) days after receipt, Tenant shall
advise Landlord in writing, and provide Landlord with copies of (as applicable), any notices
alleging violation of the ADA relating to any portion of the Premises, the Building or the Project;
any claims made or threatened orally or in writing regarding noncompliance with the ADA and
relating to any portion of the Premises, the Building, or the Project; or any governmental or
regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA
and relating to any portion of the Premises, the Building or the Project. Tenant shall and hereby
agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and Landlords
Agents harmless and indemnify Landlord and Landlords Agents from and against all liabilities,
damages, claims, losses, penalties, judgments, charges and expenses (including reasonable
attorneys fees, costs of court and expenses necessary in the prosecution or defense of any
litigation including the enforcement of this provision) to the extent arising from or in any way
related to, directly or indirectly, Tenants or Tenants Agents violation or alleged violation of
the ADA. Landlord shall and hereby agrees to protect, defend (with counsel acceptable to Tenant)
and hold Tenant and Tenants Agents harmless and indemnify
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Tenant and Tenants Agents from and
against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses
(including reasonable attorneys fees, costs of court and expenses necessary in the prosecution or
defense of any litigation including the enforcement of this provision) to the extent arising from
or in any way related to, directly or indirectly, Landlord or Landlords Agents violation or
alleged violation of the ADA as to the Common Areas. Landlord and Tenant agree that their
respective obligations herein shall survive the expiration or earlier termination of this Lease.
(d) No Roof Access. Subject to Paragraph 60, at no time during the Term shall Tenant have
access to the roof of the Building or have the right to install, operate or maintain a
satellite-earth communications station (antenna and associated equipment), microwave equipment
and/or an FM antenna on the Building or the Project.
10. ACCEPTANCE OF PREMISES
By its execution hereof, Tenant acknowledges that it had the opportunity to fully inspect the
Premises, including, but not limited to, conducting any desired testing.
By accepting Landlords delivery of the Premises, Tenant accepts the Premises as suitable for
Tenants intended use and as being in good and sanitary operating order, condition and repair, AS
IS, and without representation or warranty by Landlord as to the condition, use or occupancy which
may be made thereof. Any exceptions to the foregoing must be by written agreement executed by
Landlord and Tenant.
11. SURRENDER
Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease,
Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by
casualty, acts of God, fire, and normal wear and tear excepted), and (b) otherwise in accordance
with Paragraph 32(f). Normal wear and tear shall not include any damage or deterioration that
would have been prevented by proper maintenance by Tenant or Tenant otherwise performing all of its
obligations under this Lease. On or before the expiration or sooner termination of this Lease, (i)
Tenant shall remove all of Tenants Property (as hereinafter defined) which it is obligated to
remove, remove Tenants signage from the Premises, the Building and the Project and repair any
damage caused by such removal, and (ii) Landlord may, by notice to Tenant given not later than
ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease
prior to the scheduled Expiration Date, in which event no advance notice shall be required),
require Tenant at Tenants expense to remove any or all Alterations and to repair any damage caused
by such removal. Any of Tenants Property not so removed by Tenant as required herein shall be
deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenants expense, and
Tenant waives all claims against Landlord for any damages resulting from Landlords retention and
disposition of such property; provided, however, that Tenant shall remain liable to Landlord for
all costs incurred in storing and disposing of such abandoned property of Tenant. All Tenant
Improvements and Alterations except those which Landlord requires Tenant to remove shall remain in
the Premises as the property of Landlord.
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12. ALTERATIONS AND ADDITIONS
(a) Tenant shall not make, or permit to be made, any alteration, addition or improvement
(hereinafter referred to individually as an Alteration
and collectively as the Alterations) to
the Premises or any part thereof without the prior written consent of Landlord, which consent shall
not be unreasonably withheld; provided, however, that Landlord shall have the right in its sole and
absolute discretion to consent or to withhold its consent to any Alteration which affects the
structural portions of the Premises, the Building or the Project or the Systems serving the
Premises, the Building and/or the Project or any portion thereof.
(b) Any Alteration to the Premises shall be at Tenants sole cost and expense, in compliance
with all applicable Laws and all reasonable requirements requested by Landlord, including, without
limitation, the requirements of any insurer providing coverage for the Premises or the Project or
any part thereof, and in accordance with plans and specifications reasonably approved in writing by
Landlord, and shall be constructed and installed by a contractor reasonably approved in writing by
Landlord. In connection with any Alteration, Tenant shall deliver plans and specifications
therefor to Landlord. Before Alterations may begin, valid building permits or other required
permits or licenses must be furnished to Landlord, and, once the Alterations begin, Tenant will
diligently and continuously pursue their completion. Landlord may monitor construction of the
Alterations and Tenant shall reimburse Landlord for all actual third-party costs incurred, as well
as one percent (1%) of Tenants total costs of construction for monitoring Tenants construction;
provided, however, that Landlord shall not charge a construction management fee if no formal
drawings or governmental permits are required for Tenants work. Tenant shall maintain during the
course of construction, at its sole cost and expense, builders risk insurance for the amount of
the completed value of the Alterations on an all-risk non-reporting form covering all improvements
under construction, including building materials, and other insurance in amounts and against such
risks as Landlord shall reasonably require in connection with the Alterations. In addition to and
without limitation on the generality of the foregoing, Tenant shall ensure that its contractors
procure and maintain in full force and effect during the course of construction a broad form
commercial general liability and property damage policy of insurance naming Landlord, Tenant,
Landlords Investment Advisors, any property manager designated by Landlord and Landlords lenders
as additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the
amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in
any one accident or occurrence and in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of more than one person in any one accident or occurrence,
and shall contain a severability of interest clause or a cross liability endorsement. Such
insurance shall further insure Landlord and Tenant against liability for property damage of at
least One Million Dollars ($1,000,000.00).
(c) All Alterations, including, but not limited to, heating, lighting, electrical, air
conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and
carpeting installations made by Tenant, together with all property that has become an integral part
of the Premises or the Building, shall at once be and become the property of Landlord, and shall
not be deemed trade fixtures or Tenants Property.
(d) No private telephone systems and/or other related computer or telecommunications equipment
or lines may be installed without Landlords prior written consent. If Landlord gives such
consent, all equipment must be installed within the Premises and, at the request of Landlord made
at any time prior to the expiration of the Term, removed upon the expiration or sooner termination
of this Lease and the Premises restored to the same condition as before such installation.
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(e) Notwithstanding anything herein to the contrary, before installing any equipment or lights
which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power
usage equipment in the Premises, Tenant shall obtain the written permission of Landlord. Landlord
may refuse to grant such permission unless Tenant agrees to pay the costs to Landlord for
installation of supplementary air conditioning capacity or electrical systems necessitated by such
equipment.
(f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from
Landlord to do so, until Tenant notifies Landlord in writing of the date Tenant desires to commence
construction or installation of such Alterations and Landlord has approved such date in writing, in
order that Landlord may post appropriate notices to avoid any liability to contractors or material
suppliers for payment for Tenants improvements. Tenant will at all times permit such notices to
be posted and to remain posted until the completion of work..
(g) Tenant shall not, at any time prior to or during the Term, directly or indirectly employ,
or permit the employment of, any contractor, mechanic or laborer in the Premises, whether in
connection with any Alteration or otherwise, if it is reasonably forseeable that such employment
will materially interfere or cause any material conflict with other contractors, mechanics, or
laborers engaged in the construction, maintenance or operation of the Project by Landlord, Tenant
or others. In the event of any such interference or conflict, Tenant, upon demand of Landlord,
shall cause all contractors, mechanics or laborers causing such interference or conflict to leave
the Project immediately.
13. MAINTENANCE AND REPAIRS OF PREMISES
(a) Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole expense, subject to
Paragraphs 5(a) and 13(b) hereof, (1) keep and maintain in good order and condition the Premises
and Tenants Property, (2) keep and maintain in good order and condition, repair and replace all of
Tenants security systems in or about or serving the Premises, and (3) maintain and replace all
specialty lamps, bulbs, starters and ballasts. Tenant shall not do nor shall Tenant
allow Tenants Agents to do anything to cause any damage, deterioration or unsightliness to
the Premises, the Building or the Project.
(b) Maintenance by Landlord. Subject to the provisions of Paragraphs 13(a), 21 and 22, and
further subject to Tenants obligation under Paragraph 4 to reimburse Landlord, in the form of
Additional Rent, for Tenants Proportionate Share(s) of the cost and expense of the following
items, Landlord agrees to maintain, repair and replace, as necessary in Landlords sole discretion,
the following items: the roof coverings; the Systems serving the Premises (excluding any specialty
systems installed by or for Tenant) and the Building; and the Parking Areas, pavement, landscaping,
sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas. Subject
to the provisions of Paragraphs 13(a), 21 and 22, Landlord, at its own cost and expense, agrees to
maintain, repair and replace, as necessary in Landlords sole discretion, the following items: the
structural portions of the roof (specifically excluding the roof coverings), the foundation, the
footings, the floor slab, and the load bearing walls and exterior
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walls of the Building (excluding
any glass and any routine maintenance, including, without limitation, any painting, sealing,
patching and waterproofing of such walls). Notwithstanding anything in this Paragraph 13 to the
contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage
to any portion of the Premises, the Building and/or the Project caused by or created due to any
act, omission, negligence or willful misconduct of Tenant or Tenants Agents and to restore the
Premises, the Building and/or the Project, as applicable, to the condition existing prior to the
occurrence of such damage; provided, however, that in the event Landlord elects to perform such
repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses
incurred by Landlord in connection therewith. Landlords obligation hereunder to repair and
maintain is subject to the condition precedent that Landlord shall have received written notice of
the need for such repairs and maintenance (or Landlord would have actual notice of the need for
such repairs and maintenance as a result of the normal operation of the Building) and a reasonable
time to perform such repair and maintenance. Tenant shall promptly report in writing to Landlord
any defective condition known to it which Landlord is required to repair.
14. LANDLORDS INSURANCE
Landlord shall purchase and keep in force fire, extended coverage and all risk insurance
covering the Building and the Project. Tenant shall, at its sole cost and expense, comply with any
and all reasonable requirements pertaining to the Premises, the Building and the Project of any
insurer necessary for the maintenance of reasonable fire and commercial general liability
insurance, covering the Building and the Project. Landlord may maintain Loss of Rents insurance,
insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve
(12) months if the Premises, the Building or the Project or any portion thereof are destroyed or
rendered unusable or inaccessible by any cause insured against under this Lease.
15. TENANTS INSURANCE
(a) Commercial General Liability Insurance. Tenant shall, at Tenants expense, secure and
keep in force a broad form commercial general liability insurance and property damage policy
covering the Premises, insuring Tenant, and naming Landlord, Landlords investment advisors and
agents from time to time, including, without limitation, UBS Realty Investors LLC (collectively
Landlords Investment Advisors), and Landlords lenders as additional insureds (collectively,
Landlords Insureds), against any liability arising out of the
ownership, use, occupancy or maintenance of the Premises. The minimum limit of coverage of
such policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for
injury or death of one person in any one accident or occurrence and in the amount of not less than
Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one
accident or occurrence, shall include a standard extended liability endorsement providing
contractual liability coverage, and shall contain a severability of interest clause or a cross
liability endorsement. Such insurance shall further insure Landlord and Tenant against liability
for property damage of at least Three Million Dollars ($3,000,000.00). Landlord may from time to
time require reasonable increases in any such limits if Landlord believes that additional coverage
is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant
hereunder. No policy maintained by Tenant under this Paragraph 15(a) shall contain a deductible
greater than twenty-five thousand dollars ($25,000.00). No policy shall be cancelable or subject to
reduction of coverage without thirty (30) days prior written notice to Landlord. Such policies of
insurance shall be issued as primary policies and not contributing with or in excess of coverage
that Landlord may carry, by an insurance company authorized to do business in the
state/commonwealth in which the Premises are located for the issuance of such type of insurance
coverage and rated B+:XIII or better in Bests Key Rating Guide.
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(b) Personal Property Insurance. Tenant shall maintain in full force and effect on all of its
personal property, furniture, furnishings, trade or business fixtures and equipment (collectively,
Tenants Property) on the Premises, a policy or policies of fire and extended coverage insurance
with standard coverage endorsement to the extent of the full replacement cost thereof. No such
policy shall contain a deductible greater than twenty-five thousand dollars ($25,000.00). Landlord
shall have no interest in the insurance upon Tenants equipment and fixtures and will sign all
documents reasonably necessary in connection with the settlement of any claim or loss by Tenant.
Landlord will not carry insurance on Tenants possessions.
(c) Workers Compensation Insurance; Employers Liability Insurance. Tenant shall, at
Tenants expense, maintain in full force and effect workers compensation insurance with not less
than the minimum limits required by law, and employers liability insurance with a minimum limit of
coverage of One Million Dollars ($1,000,000).
(d) Evidence of Coverage. Tenant shall deliver to Landlord certificates of insurance and true
and complete copies of any and all endorsements required herein for all insurance required to be
maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at
least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of
renewal thereof. Each certificate shall expressly provide that such policies shall not be
cancelable or otherwise subject to modification except after thirty (30) days prior written notice
to Landlord and the other parties named as additional insureds as required in this Lease (except
for cancellation for nonpayment of premium, in which event cancellation shall not take effect until
at least ten (10) days notice has been given to Landlord).
16. INDEMNIFICATION
(a) Of Landlord. Subject to Paragraph 17, Tenant shall defend, protect, indemnify and hold
harmless Landlord and Landlords Agents against and from any and all claims, suits, liabilities,
judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable
attorneys fees, costs and disbursements) to the extent arising from (1) the use of the Premises,
the Building or the Project by Tenant or Tenants Agents, or from any
activity done, permitted or suffered by Tenant or Tenants Agents in or about the Premises,
the Building or the Project, and (2) any act, neglect, fault, willful misconduct or omission of
Tenant or Tenants Agents, or from any breach or default in the terms of this Lease by Tenant or
Tenants Agents, and (3) any action or proceeding brought on account of any matter in items (1) or
(2). If any action or proceeding is brought against Landlord by reason of any such claim, upon
notice from Landlord, Tenant shall defend the same at Tenants expense by counsel reasonably
satisfactory to Landlord. The obligations of Tenant under this Paragraph 16 shall survive any
termination of this Lease.
(b) Of Tenant. Subject to Paragraph 17, Landlord shall defend, protect, indemnify and hold
harmless Tenant and Tenants Agents against and from any and all claims, suits, liabilities,
judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable
attorneys fees, costs and disbursements) to the extent arising from (1)
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Landlords use of the
Project, or from any activity done by Landlord or Landlords Agents in or about the Project, and
(2) any act, neglect, fault, willful misconduct or omission of Landlord or Landlords Agents, or
from any breach or default in the terms of this Lease by Landlord or Landlords Agents, and (3) any
action or proceeding brought on account of any matter in items (1) or (2). If any action or
proceeding is brought against Tenant by reason of any such claim, upon notice from Tenant, Landlord
shall defend the same at Landlords expense by counsel reasonably satisfactory to Tenant. The
obligations of Landlord under this Paragraph 16 shall survive any termination of this Lease.
(c) Notwithstanding anything in this Lease to the contrary, no indemnifying party under any
indemnification obligation under this Lease is required to indemnify the other party for any
claims, suits, liabilities, judgments, costs, demands, causes of action and expenses to the extent
that the same arise from, or to the extent the same are related to, the negligence or the wanton
acts of the indemnified party.
(d) No Impairment of Insurance. The foregoing indemnity shall not relieve any insurance
carrier of its obligations under any policies required to be carried by either party pursuant to
this Lease, to the extent that such policies cover the peril or occurrence that results in the
claim that is subject to the foregoing indemnity.
17. SUBROGATION
Landlord and Tenant hereby mutually waive any claim against the other and its Agent(s) for any
loss or damage to any of their property located on or about the Premises, the Building or the
Project to the extent caused by or to the extent results from perils covered by property insurance
carried by the respective parties, whether or not due to the negligence of the other party or its
Agents. Because the foregoing waivers will preclude the assignment of any claim by way of
subrogation to an insurance company or any other person, each party shall immediately notify its
insurer, in writing, of the terms of these mutual waivers. Nothing in this Paragraph 17 shall
relieve a party of liability to the other for failure to carry insurance required by this Lease.
The risk to be borne by each party under this section shall also include the satisfaction of any
deductible amounts required to be paid under the applicable all risks fire and casualty insurance
carried by the party whose property is damaged, and each party agrees that the other party shall
not be responsible for satisfaction of such deductible (provided that Landlord shall have the right
to include its deductible in Operating Expenses). These waivers shall apply if the damage would
have been covered by a customary all risks insurance policy, even if the party fails to obtain
such coverage. The intent of
this provision is that each party shall look solely to its insurance with respect to property
damage or destruction which can be covered by all risks insurance of the type described in this
Lease. Each such policy shall include a waiver of all rights of subrogation by the insurance
carrier against the other party, its agents and employees with respect to property damage covered
by the applicable all risks fire and casualty insurance policy.
18. SIGNS
Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building or
the Project any exterior lights, decorations, balloons, flags, pennants, banners, advertisements or
notices, or erect or install any signs, windows or door lettering, placards, decorations, or
advertising media of any type which can be viewed from the exterior the Premises without obtaining
Landlords prior written consent. Tenant shall remove any sign, advertisement or notice
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placed on
the Premises, the Building or the Project by Tenant upon the expiration of the Term or sooner
termination of this Lease, and Tenant shall repair any damage or injury to the Premises, the
Building or the Project caused thereby, all at Tenants expense. If any signs are not removed, or
necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage
or injury to the Premises, the Building or the Project at Tenants sole cost and expense. In
addition to any other rights or remedies available to Landlord, in the event that Tenant erects or
installs any sign in violation of this Paragraph 18, and Tenant fails to remove same within three
(3) business days after notice from Landlord or erects or installs a similar sign in the future,
Landlord shall have the right to charge Tenant a signage fee equal to $500 per day for each day
thereafter that such sign is not removed or a similar sign is installed or erected in the future.
Landlords election to charge such fee shall not be deemed to be a consent by Landlord to such sign
and Tenant shall remain obligated to remove such sign in accordance with Landlords notice.
19. FREE FROM LIENS
Tenant shall keep the Premises, the Building and the Project free from any liens arising out
of any work performed, material furnished or obligations incurred by or for Tenant. In the event
that Tenant shall not, within thirty (30) days following the imposition of any such lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord shall have in
addition to all other remedies provided herein and by law the right but not the obligation to cause
same to be released by such means as it shall deem proper, including payment of the claim giving
rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection
therewith (including, without limitation, reasonable attorneys fees) shall be payable to Landlord
by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law or that Landlord shall deem proper for the
protection of Landlord, the Premises, the Building and the Project, from mechanics and
materialmens liens.
20. ENTRY BY LANDLORD
Tenant shall permit Landlord and Landlords Agents to enter into and upon the Premises at all
reasonable times, upon reasonable notice (except in the case of an emergency, for which no notice
shall be required), and subject to Tenants reasonable security arrangements, for the purpose of
inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to
provide services, alter, improve, maintain and repair the Premises or the Building as required or
permitted of Landlord under the terms hereof, or for any other business purpose, without any rebate
of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of
the Premises thereby occasioned (except for actual damages resulting from the gross negligence or
willful misconduct of Landlord); and Tenant shall permit Landlord to post notices of
non-responsibility and ordinary for sale or for lease signs. No such entry shall be construed
to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction or
constructive eviction of Tenant from the Premises. Landlord may temporarily close entrances,
doors, corridors, elevators or other facilities without liability to Tenant by reason of such
closure in the case of an emergency and when Landlord otherwise deems such closure necessary.
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21. DESTRUCTION AND DAMAGE
(a) If the Premises are damaged by fire or other perils covered by extended coverage
insurance, Tenant shall give Landlord immediate notice thereof and Landlord shall, at Landlords
option:
(1) In the event of total destruction (which shall mean destruction or damage in excess of
twenty-five percent (25%) of the full insurable value thereof) of the Premises, elect either to
commence promptly to repair and restore the Premises and prosecute the same diligently to
completion, in which event this Lease shall remain in full force and effect; or not to repair or
restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant
written notice of its intention within sixty (60) days after the date Landlord obtains actual
knowledge of such destruction (the Casualty Discovery
Date). If Landlord elects not to restore
the Premises, this Lease shall be deemed to have terminated as of the Casualty Discovery Date.
(2) In the event of a partial destruction (which shall mean destruction or damage to an extent
not exceeding twenty-five percent (25%) of the full insurable value thereof) of the Premises for
which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore
such partial destruction and, if the damage thereto is such that the Premises may be substantially
repaired or restored to its condition existing immediately prior to such damage or destruction
within two hundred forty (240) days from the Casualty Discovery Date, Landlord shall commence and
proceed diligently with the work of repair and restoration, in which event the Lease shall continue
in full force and effect. If such repair and restoration requires longer than two hundred forty
(240) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated
to contribute) are not sufficient to cover the cost of such repair and restoration, either party
may elect to terminate this Lease. Landlord shall give written notice to Tenant of its estimate of
the repair time within sixty (60) days after the Casualty Discovery Date. If either party
terminates, this Lease shall be deemed to have terminated as of the Casualty Discovery Date.
(3) Notwithstanding anything to the contrary contained in this Paragraph, in the event of
material damage to the Premises occurring during the last twelve (12) months of the Term, either
Landlord or Tenant may elect to terminate this Lease by written notice of such election given to
the other within thirty (30) days after the Casualty Discovery Date.
(b) If the Premises are damaged by any peril not fully covered by insurance proceeds to be
received by Landlord, and the cost to repair such damage exceeds any amount Tenant may agree to
contribute, Landlord may elect either to commence promptly to repair and restore the Premises and
prosecute the same diligently to completion, in which event this Lease shall remain
in full force and effect; or not to repair or restore the Premises, in which event this Lease
shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days
after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease
shall be deemed to have terminated as of the date on which Tenant surrenders possession of the
Premises to Landlord, except that if the damage to the Premises materially impairs Tenants ability
to continue its business operations in the Premises, then this Lease shall be deemed to have
terminated as of the date such damage occurred.
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(c) Notwithstanding anything to the contrary in this Paragraph 21, Landlord shall have the
option to terminate this Lease, exercisable by notice to Tenant within sixty (60) days after the
Casualty Discovery Date, in each of the following instances:
(1) If more than twenty-five percent (25%) of the full insurable value of the Building or the
Project is damaged or destroyed, regardless of whether or not the Premises is destroyed.
(2) If the Building or the Project or any portion thereof is damaged or destroyed and the
repair and restoration of such damage requires longer than one hundred eighty (180) days from the
Casualty Discovery Date, regardless of whether or not the Premises is destroyed.
(3) If the Building or the Project or any portion thereof is damaged or destroyed and the
insurance proceeds therefor are not sufficient to cover the costs of repair and restoration,
regardless of whether or not the Premises is destroyed.
(4) If the Building or the Project or any portion thereof is damaged or destroyed during the
last twelve (12) months of the Term, regardless of whether or not the Premises is destroyed.
(d) In the event of repair and restoration as herein provided, the monthly installments of
Base Rent shall be abated proportionately in the ratio which Tenants use of the Premises is
impaired during the period of such repair or restoration, but only to the extent of rental
abatement insurance proceeds received by Landlord; provided, however, that Tenant shall not be
entitled to such abatement to the extent that such damage or destruction resulted from the acts or
inaction of Tenant or Tenants Agents. Except as expressly provided in the immediately preceding
sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for,
and hereby releases Landlord and Landlords Agents from responsibility for and waives its entire
claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any
damage to or destruction of the Premises, the Building or the Project or the repair or restoration
thereof, including, without limitation, any cost, loss or expense resulting from any loss of use of
the whole or any part of the Premises, the Building or the Project and/or any inconvenience or
annoyance occasioned by such damage, repair or restoration.
(e) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord
shall repair or restore only the initial tenant improvements, if any, constructed by Landlord in
the Premises pursuant to the terms of this Lease, substantially to their condition existing
immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair
and restore, at Tenants expense, Tenants Alterations which were not constructed by Landlord.
22. CONDEMNATION
(a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project
or the parking areas for the Building or the Project is permanently taken for any public or
quasi-public purpose by any lawful governmental power or authority, by exercise of the right of
appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking
(each such event being referred to as a Condemnation), Landlord may, at its option,
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terminate
this Lease as of the date title vests in the condemning party. If twenty-five percent (25%) or
more of the Premises is taken and if the Premises remaining after such Condemnation and any repairs
by Landlord would be untenantable (in Landlords reasonable opinion) for the conduct of Tenants
business operations, Tenant shall have the right to terminate this Lease as of the date title vests
in the condemning party. If either party elects to terminate this Lease as provided herein, such
election shall be made by written notice to the other party given within thirty (30) days after the
nature and extent of such Condemnation have been finally determined. If neither Landlord nor
Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly
proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to
substantially the same condition as existed prior to such Condemnation, allowing for the reasonable
effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent
corresponding to the time during which, and to the portion of the floor area of the Premises
(adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived
on account of such Condemnation and restoration, as reasonably determined by Landlord. Except as
expressly provided in the immediately preceding sentence with respect to abatement of Base Rent,
Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlords Agents
from responsibility for and waives its entire claim of recovery for any cost, loss or expense
suffered or incurred by Tenant as a result of any Condemnation, whether permanent or temporary, or
the repair or restoration of the Premises, the Building or the Project or the parking areas for the
Building or the Project following such Condemnation, including, without limitation, any cost, loss
or expense resulting from any loss of use of the whole or any part of the Premises, the Building,
the Project or the parking areas and/or any inconvenience or annoyance occasioned by such
Condemnation, repair or restoration.
(b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or
any interest therein whatsoever which may be paid or made in connection with any Condemnation, and
Tenant shall have no claim against Landlord for the value of any unexplored term of this Lease or
otherwise; provided, however, that Tenant shall be entitled to receive any award separately
allocated by the condemning authority to Tenant for Tenants relocation expenses or the value of
Tenants Property (specifically excluding fixtures, Alterations and other components of the
Premises which under this Lease or by law are or at the expiration of the Term will become the
property of Landlord), provided that such award does not reduce any award otherwise allocable or
payable to Landlord.
23. ASSIGNMENT AND SUBLETTING
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate or
encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest
herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto,
or allow any other person (the employees and invitees of Tenant excepted)
to occupy or use the Premises, or any portion thereof, without first obtaining the written
consent of Landlord, which consent shall not be withheld or delayed unreasonably as set forth below
in this Section 23, provided that Tenant is not then in Default under this Lease
nor is any event then occurring which with the giving of notice or the passage of time, or both,
would constitute a Default hereunder. A transfer of greater than a fifty percent (50%) interest
(whether stock, partnership interest, membership interest or otherwise) of Tenant, either in one
(1) transaction or a series of transactions shall be deemed to be an assignment under this Lease.
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(b) When Tenant requests Landlords consent to such assignment or subletting, it shall notify
Landlord in writing of the name and address of the proposed assignee or subtenant and the nature
and character of the business of the proposed assignee or subtenant and shall provide current and 3
years prior financial statements for the proposed assignee or subtenant, which financial statements
shall be audited to the extent available and shall in any event be prepared in accordance with
generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the
proposed sublease or assignment agreement, including all material terms and conditions thereof.
Landlord shall have the option, to be exercised within thirty (30) days of receipt of the
foregoing, to (1) terminate this Lease as of the commencement date stated in the proposed sublease
or assignment, (2) sublease or take an assignment, as the case may be, from Tenant of the interest,
or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or
sublease, on the same terms and conditions as stated in the proposed sublet or assignment
agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the
proposed assignment or sublease, provided that (A) such consent shall not be unreasonably withheld
so long as Tenant is not then in Default under this Lease nor is any event then occurring which,
with the giving of notice or the passage of time, or both, would constitute a Default hereunder,
and (B) as a condition to providing such consent, Landlord may require attornment from the proposed
subtenant on terms and conditions reasonably acceptable to Landlord. In the event Landlord elects
to terminate this Lease or sublease or take an assignment from Tenant of the interest, or portion
thereof, in the Lease and/or the Premises that Tenant proposes to assign or sublease as provided in
the foregoing clauses (1) and (2), respectively, then Landlord shall have the additional right to
negotiate directly with Tenants proposed assignee or subtenant and to enter into a direct lease or
occupancy agreement with such party on such terms as shall be acceptable to Landlord in its sole
and absolute discretion.
(c) Without otherwise limiting the criteria upon which Landlord may withhold its consent,
Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the
following: (1) whether or not the proposed subtenant or assignee is engaged in a business which,
and the use of the Premises will be in an manner which, is in keeping with the then character and
nature of all other tenancies in the Project, (2) whether the use to be made of the Premises by the
proposed subtenant or assignee will conflict with any so-called exclusive use then in favor of
any other tenant of the Building or the Project, and whether such use would be prohibited by any
other portion of this Lease, including, but not limited to, any rules and regulations then in
effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and
the Building and Project services than imposed by Tenant, and (3) the creditworthiness and
financial stability of the proposed assignee or subtenant in light of the responsibilities
involved. In any event, Landlord may withhold its consent to any assignment or sublease, if (i)
the actual use proposed to be conducted in the Premises or portion thereof conflicts with the
provisions of Paragraph 9(a) or (b) above or with any other lease which restricts the use to which
any space in the Building or the Project may be put, (ii) the portion of
the Premises proposed to be sublet does not permit safe or otherwise appropriate means of
ingress and egress, or does not comply with governmental safety and other codes, (iii) the proposed
sublessee or assignee is either a governmental or quasi-governmental agency or instrumentality
thereof; (iv) the proposed sublessee or assignee, or any person or entity which directly or
indirectly, controls, is controlled by, or is under common control with, the proposed sublessee or
assignee, either (x) occupies space in the Project at the time of the request for Landlords
consent, or (y) is negotiating with Landlord or has negotiated with Landlord to lease
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comparable
space (in size and term) in the Project during the six (6) month period immediately preceding the
date Landlord receives Tenants request for consent.
(d) As a further condition to any rights Tenant may have under this Lease to sublet all or any
portion of the Premises, Tenant shall advertise space for sublease at a starting base rental rate
no lower than Landlords then current highest asking base rental rate for other space in the
Project which is then on the market for direct lease. If there is no space in the Project then
currently on the market for direct lease, Tenant shall not advertise the space for sublease at a
starting base rental rate lower than a rate which is the average of the starting rate for
Landlords last two new leases and/or renewals in the Project, or if Landlord has not entered into
two new leases and/or renewals within the immediately preceding six (6) month period, then Tenant
shall offer the space for sublease at a starting base rental rate no lower than Landlords
advertised rental rate for comparable spaces within the Building.
(e) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to
Landlord, as Additional Rent, fifty percent (50%) of the excess, if any, of (1) the rent and any
additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary
market-based leasing commissions, if any, incurred by Tenant in connection with such assignment or
sublease; minus (2) Base Rent plus Additional Rent allocable to that part of the Premises affected
by such assignment or sublease pursuant to the provisions of this Lease, which commissions shall,
for purposes of the aforesaid calculation, be amortized on a straight-line basis over the term of
such assignment or sublease. The assignment or sublease agreement, as the case may be, after
approval by Landlord, shall not be amended without Landlords prior written consent, and shall
contain a provision directing the assignee or subtenant to pay the rent and other sums due
thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in
default under this Lease with respect to the payment of Rent. In the event that, notwithstanding
the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant,
then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward
the same to Landlord. Landlords collection of such rent and other sums shall not constitute an
acceptance by Landlord of attornment by such assignee or subtenant.
(f) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of
Tenants obligations under this Lease shall at all times remain fully and primarily responsible and
liable for the payment of the Rent and for compliance with all of Tenants other obligations under
this Lease (regardless of whether Landlords approval has been obtained for any such assignment or
subletting).
(g) Tenant shall pay up to $1,500.00 for Landlords reasonable fees (including, without
limitation, the fees of Landlords counsel), incurred in connection with Landlords review and
processing of documents regarding any proposed assignment or sublease.
(h) A consent to one assignment, subletting, occupation or use shall not be deemed to be a
consent to any other or subsequent assignment, subletting, occupation or use, and consent to any
assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any
assignment or subletting without Landlords consent shall be void, and shall, at the option of
Landlord, constitute a Default under this Lease.
(i) If this Lease is assigned, whether or not in violation of the provisions of this Lease,
Landlord may collect Rent from the assignee. If the Premises or any part thereof is sublet
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or used
or occupied by anyone other than Tenant, whether or not in violation of this Lease, Landlord may,
after a Default by Tenant, collect Rent from the subtenant or occupant. In either event, Landlord
may apply the net amount collected to Rent, but no such assignment, subletting, occupancy or
collection shall be deemed a waiver of any of the provisions of this Paragraph 23, or the
acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of Tenants obligations under this Lease. The consent by Landlord to
an assignment, mortgaging, pledging, encumbering, transfer, use, occupancy or subletting pursuant
to any provision of this Lease shall not, except as otherwise provided herein, in any way be
considered to relieve Tenant from obtaining the express consent of Landlord to any other or further
assignment, mortgaging, pledging, encumbering, transfer, use, occupancy or subletting. References
in this Lease to use or occupancy by anyone other than Tenant shall not be construed as limited to
subtenants and those claiming under or through subtenants but as including also licensees or others
claiming under or through Tenant, immediately or remotely. The listing of any name other than that
of Tenant on any door of the Premises or on any directory or in any elevator in the Building, or
otherwise, shall not, except as otherwise provided herein, operate to vest in the person so named
any right or interest in this Lease or in the Premises, or be deemed to constitute, or serve as a
substitute for, or any waiver of, any prior consent of Landlord required under this Paragraph 23.
(j) Each subletting and/or assignment pursuant to this Paragraph shall be subject to all of
the covenants, agreements, terms, provisions and conditions contained in this Lease and each of the
covenants, agreements, terms, provisions and conditions of this Lease shall be automatically
incorporated therein. If Landlord shall consent to, or reasonably withhold its consent to, any
proposed assignment or sublease, Tenant shall indemnify, defend and hold harmless Landlord against
and from any and all loss, liability, damages, costs and expenses (including reasonable counsel
fees) resulting from any claims that may be made against Landlord by the proposed assignee or
sublessee or by any brokers or other persons claiming a commission or similar fee in connection
with the proposed assignment or sublease.
(l) Tenant may assign this Lease, or sublease all or part of the Premises, without the consent
of Landlord and with no right to recapture the space, to:
(i) an entity which is controlled by Tenant;
(ii) an entity which controls Tenant;
(iii) an entity which is in common control with Tenant;
(iv) an entity succeeding to Tenant by operation of law by reason of a merger, provided that
the liabilities of Tenant are also assumed by such entity;
(v) an entity succeeding to Tenants business by virtue of its purchase of substantially all
of Tenants assets (but excluding a leveraged buyout of Tenant) provided that the liabilities of
Tenant are also assumed by such entity; or
(vi) an entity which acquires the majority of the capital stock and voting shares in Tenant
(each a Permitted Transferee).
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For the purposes of the foregoing control means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of an entity, whether
through the ownership of voting securities, by contract or otherwise.
24. TENANTS DEFAULT
The occurrence of any one of the following events shall constitute an event of default on the
part of Tenant (Default):
(a) The abandonment of the Premises by Tenant which would cause any insurance policy to be
invalidated or otherwise lapse. Tenant agrees to notice and service of notice as provided for in
this Lease and waives any right to any other or further notice or service of notice which Tenant
may have under any statute or law now or hereafter in effect;
(b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said
failure continuing for a period of five (5) days after the same is due; provided that, on up to one
(1) occasion in any twelve (12) month period, there shall exist no Default unless Landlord gives
Tenant written notice of such failure and Tenant fails to make such payment within five (5) days
following the giving of such notice;
(c) A general assignment by Tenant or any guarantor or surety of Tenants obligations
hereunder, including, without limitation Lease Guarantor, if any, (collectively, Guarantor) for
the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing by
Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against Tenant
or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing of an
involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition
remaining undischarged for a period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially all of Tenants
assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for
a period of sixty (60) days after the levy thereof;
(f) Death or disability of Tenant or any Guarantor, if Tenant or such Guarantor is a natural
person, or the failure by Tenant or any Guarantor to maintain its legal existence, if Tenant or
such Guarantor is a corporation, partnership, limited liability company, trust or other legal
entity;
(g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate,
subordination agreement, or lease amendment within the time periods and in the manner required by
Paragraphs 30 or 31 or 42, and/or failure by Tenant to deliver to Landlord any financial statement
within the time period and in the manner required by Paragraph 40;
(h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the
Premises by Tenant contrary to the provision of Paragraph 23, unless such assignment or sublease is
expressly conditioned upon Tenant having received Landlords consent thereto;
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(i) Failure of Tenant to restore the Security Deposit to the amount and within the time period
provided in Paragraph 7 above;
(j) Failure in the performance of any of Tenants covenants, agreements or obligations
hereunder (except those failures specified as events of Default in subparagraphs (b)(i), (1) or (m)
herein or any other subparagraphs of this Paragraph 24, which shall be governed by the notice and
cure periods set forth in such other subparagraphs), which failure continues for thirty (30) days
after written notice thereof from Landlord to Tenant, provided that, if Tenant has exercised
reasonable diligence to cure such failure and such failure cannot be cured within such thirty (30)
day period despite reasonable diligence, Tenant shall not be in default under this subparagraph so
long as Tenant thereafter diligently and continuously prosecutes the cure to completion;
(k) Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled
or terminated or shall expire or be reduced or materially changed, except as permitted in this
Lease;
(l) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any
part thereof in violation of this Lease within thirty (30) days after the date such lien or
encumbrance is filed or recorded against the Project or any part thereof; and
(m) Any representation of Tenant herein or in any financial statement or other materials
provided by Tenant or any guarantor of Tenants obligations under this Lease shall prove to be
untrue or inaccurate in any material respect, or any such financial statements or other materials
shall have omitted any material fact.
25. LANDLORDS REMEDIES
(a) Termination. In the event of any Default by Tenant, then in addition to any other
remedies available to Landlord at law or in equity and under this Lease, Landlord may terminate
this Lease immediately and all rights of Tenant hereunder by giving written notice to Tenant of
such intention to terminate. If Landlord shall elect to so terminate this Lease then Landlord may
recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other sums due and payable which
have been earned at the time of such termination; plus
(2) the worth at the time of award of the amount by which the unpaid Rent and any other sums
due and payable which would have been earned after termination until the time of award exceeds the
amount of such rental loss Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid Rent and any other sums
due and payable for the balance of the term of this Lease after the time of
award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided;
plus
(4) any other amount necessary to compensate Landlord for all the detriment proximately caused
by Tenants failure to perform its obligations under this Lease or which in
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the ordinary course
would be likely to result therefrom, including, without limitation, (A) any costs or expenses
incurred by Landlord (1) in retaking possession of the Premises; (2) in maintaining, repairing,
preserving, restoring, replacing, cleaning, altering, remodeling or rehabilitating the Premises or
any affected portions of the Building or the Project, including such actions undertaken in
connection with the reletting or attempted reletting of the Premises to a new tenant or tenants;
(3) for leasing commissions, advertising costs and other expenses of reletting the Premises; or (4)
in carrying the Premises, including taxes, insurance premiums, utilities and security precautions;
(B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any
previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate
granted hereunder; and (D) any concession made or paid by Landlord for the benefit of Tenant
including, but not limited to, any moving allowances, contributions, payments or loans by Landlord
for tenant improvements or build-out allowances (including without limitation, any unamortized
portion of the Tenant Improvement Allowance , such Tenant Improvement Allowance to be amortized
over the Term in the manner reasonably determined by Landlord), if any, and any outstanding balance
(principal and accrued interest) of the Tenant Improvement Loan, if any), or assumptions by
Landlord of any of Tenants previous lease obligations; plus
(5) such reasonable attorneys fees incurred by Landlord as a result of a Default, and costs
in the event suit is filed by Landlord to enforce such remedy; and plus
(6) at Landlords election, such other amounts in addition to or in lieu of the foregoing as
may be permitted from time to time by applicable law.
(7) As used in subparagraphs (1) and (2) above, the worth at the time of award is computed
by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less. As used in subparagraph (3) above, the worth at the time of
award is computed by discounting such amount at the discount rate of Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant hereby waives for Tenant and for all
those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of
any court or by any legal process or writ, Tenants right of occupancy of the Premises after any
termination of this Lease.
(b) Re-entry. In the event of any Default by Tenant, Landlord shall also have the right, with
or without terminating this Lease, in compliance with applicable law, to re-enter the Premises, by
force if necessary, and remove all persons and property from the Premises; such property may be
removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant.
(c) Reletting. In the event of the abandonment of the Premises by Tenant or in the event that
Landlord shall elect to re-enter as provided in Paragraph 25(b) or shall take possession of the
Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord
does not elect to terminate this Lease as provided in Paragraph 25(a), Landlord may
from time to time, without terminating this Lease, relet the Premises or any part thereof for
such term or terms and at such rental or rentals and upon such other terms and conditions as
Landlord in its sole discretion may deem advisable with the right to make alterations and repairs
to the Premises in Landlords sole discretion. In the event that Landlord shall elect to so relet,
then rentals received by Landlord from such reletting shall be applied in the following order: (1)
to reasonable attorneys fees incurred by Landlord as a result of a Default and costs in the event
suit
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is filed by Landlord to enforce such remedies; (2) to the payment of any indebtedness other
than Rent due hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting;
(4) to the payment of the costs of any alterations and repairs to the Premises; (5) to the payment
of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and
applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become
due and payable hereunder. Should that portion of such rentals received from such reletting during
any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during
the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency
shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained,
any costs and expenses incurred by Landlord in such reletting or in making such alterations and
repairs not covered by the rentals received from such reletting.
(d) Termination. No re-entry or taking of possession of the Premises by Landlord pursuant to
this Paragraph 25 shall be construed as an election to terminate this Lease unless a written notice
of such intention is given to Tenant or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of
any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease
for any such Default.
(e) Cumulative Remedies. The remedies herein provided are not exclusive and Landlord shall
have any and all other remedies provided herein or by law or in equity.
(f) No Surrender. No act or conduct of Landlord, whether consisting of the acceptance of the
keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the
surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by
Landlord of surrender by Tenant shall only flow from and must be evidenced by a written
acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that
such merger take place, but shall operate as an assignment to Landlord of any and all existing
subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger
terminating Tenants estate under this Lease, and thereupon Landlord may terminate any or all such
subleases by notifying the sublessee of its election so to do within five (5) days after such
surrender.
26. LANDLORDS RIGHT TO PERFORM TENANTS OBLIGATIONS
(a) Without limiting the rights and remedies of Landlord contained in Paragraph 25 above, if
Tenant shall be in Default in the performance of any of the terms, provisions, covenants or
conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at
Landlords option, without any obligation to do so, and without notice to Tenant perform any such
term, provision, covenant, or condition, or make any such payment and Landlord by
reason of so doing shall not be liable or responsible for any loss or damage thereby sustained
by Tenant or anyone holding under or through Tenant or any of Tenants Agents.
(b) Without limiting the rights of Landlord under Paragraph 26(a) above, Landlord shall have
the right at Landlords option, without any obligation to do so, to perform any of Tenants
covenants or obligations under this Lease without notice to Tenant in the case of an emergency, as
determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in
its sole discretion that such performance is necessary or desirable for the
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proper management and
operation of the Building or the Project or for the preservation of the rights and interests or
safety of other tenants of the Building or the Project.
(c) If Landlord performs any of Tenants obligations hereunder in accordance with this
Paragraph 26, the full amount of the cost and expense incurred or the payment so made or the amount
of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant shall
promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest
thereon from the date of payment by Landlord at the lower of (i) twelve percent (12%) per annum, or
(ii) the highest rate permitted by applicable law.
27. ATTORNEYS FEES
(a) If either party hereto fails to perform any of its obligations under this Lease or if any
dispute arises between the parties hereto concerning the meaning or interpretation of any provision
of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case
may be, shall pay any and all costs and expenses incurred by the other party on account of such
default and/or in enforcing or establishing its rights hereunder, including, without limitation,
court costs and reasonable attorneys fees and disbursements. Any such attorneys fees and other
expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be
recoverable separately from and in addition to any other amount included in such judgment, and such
attorneys fees obligation is intended to be severable from the other provisions of this Lease and
to survive and not be merged into any such judgment.
(b) Without limiting the generality of Paragraph 27(a) above, if Landlord or Tenant utilizes
the services of an attorney for the purpose of collecting any sums due and unpaid by a party or in
connection with any other breach of this Lease by a party, the non-prevailing party agrees to pay
the prevailing partys actual attorneys fees, regardless of the fact that no legal action may be
commenced or filed.
28. TAXES
Tenant shall be liable for and shall pay directly to the taxing authority, prior to
delinquency, all taxes levied against Tenants Property. If any Alteration installed by Tenant
pursuant to Paragraph 12 or any of Tenants Property is assessed and taxed with the Project or
Building, Tenant shall pay such taxes to Landlord within thirty (30) days after delivery to Tenant
of a statement therefor.
29. EFFECT OF CONVEYANCE
The term Landlord as used in this Lease means, from time to time, the then current owner of
the Building or the Project containing the Premises, so that, in the event of any sale of the
Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder, provided that the purchaser of the Building or the
Project has assumed and agreed to carry out any and all covenants and obligations of Landlord
hereunder.
30. TENANTS ESTOPPEL CERTIFICATE
From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and
deliver to Landlord or its designee, an Estoppel Certificate in substantially the form attached
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hereto as Exhibit E and with any other factual statements reasonably requested by Landlord or its
designee. Any such Estoppel Certificate may be relied upon by a prospective purchaser of
Landlords interest or a mortgagee of (or holder of a deed trust encumbering) Landlords interest
or assignment of any mortgage or deed of trust upon Landlords interest in the Premises. If Tenant
fails to provide such certificate within ten (10) business days of receipt by Tenant of a written
request by Landlord as herein provided, such failure shall, at Landlords election, constitute a
Default under this Lease, and Tenant shall be deemed to have given such certificate as above
provided without modification and shall be deemed to have admitted the accuracy of any information
supplied by Landlord to a prospective purchaser or mortgagee. Landlord agrees that before any
Tenant failure to respond shall be deemed to admit the accuracy of such information, Landlord shall
deliver notice to Tenant (which may be in the initial notice to Tenant), which shall be captioned
in BOLD, ALL CAPITAL LETTERS, stating that any failure to respond shall be deemed to have admitted
the accuracy of the information contained in such notice.
31. SUBORDINATION
At the option of Landlord, this Lease, and all rights of Tenant hereunder, are and shall be
subject and subordinate to all ground leases, overriding leases and underlying leases affecting the
Building or the Project now or hereafter existing and each of the terms, covenants and conditions
thereto (the Superior Lease(s)), and to all mortgages or deeds of trust which may now or
hereafter affect the Building, the Property or any of such leases and each of the terms, covenants
and conditions thereto (the Superior Mortgage(s)), whether or not such mortgages or deeds of
trust shall also cover other land, buildings or leases, to each and every advance made or hereafter
to be made under such mortgages or deeds of trust, and to all renewals, modifications, replacements
and extensions of such leases and such mortgages or deeds of trust and spreaders and consolidations
of such mortgages or deeds of trust; provided, however, that in no event will Tenants possession
of the Premises be disturbed, or rights and privileges under this Lease be reduced, as long as no
Tenant Default exists. This Paragraph shall be self-operative and no further instrument of
subordination shall be required. Tenant shall promptly execute, acknowledge and deliver any
reasonable instrument that Landlord, the lessor under any such lease or the holder of any such
mortgage or deed of trust or any of their respective successors in interest may reasonably request
to evidence such subordination. As used herein the lessor of a Superior Lease or its successor in
interest is herein called Superior Lessor; and the holder of a Superior Mortgage is herein called
Superior Mortgagee.
Notwithstanding the foregoing terms of this Paragraph 31, if a Superior Lease or Superior
Mortgage is hereafter placed against or affecting any or all of the Building or the Premises or any
or all of the Building and improvements now or at any time hereafter constituting a part of or
adjoining the Building, Landlord shall obtain an agreement from the holder thereof in recordable
form and substantially in the form attached hereto as Exhibit F or otherwise in form and
substance reasonably acceptable to Tenant, whereby the holder of such Superior Lease or Superior
Mortgage agrees that the Tenant, upon paying the Base Rent and all of the Additional Rent and other
charges herein provided for, and observing and complying with the covenants, agreements and
conditions of this Lease on its part to be observed and complied with, shall lawfully and quietly
hold, occupy and enjoy the Premises during the Term of this Lease (including any exercised renewal
term), without hindrance or interference from anyone claiming by or through said Superior Mortgagee
or Superior Lessor and that said Superior Mortgagee or Superior Lessor shall respect Tenants
rights
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under the Lease and, upon succeeding to Landlords interest in the Building and Lease, shall
observe and comply with all of Landlords duties under the Lease.
If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord under
this Lease, whether through possession or foreclosure action or delivery of a new lease or deed
(such party so succeeding to Landlords rights herein called Successor Landlord), then Tenant
shall attorn to and recognize such Successor Landlord as Tenants landlord under this Lease
(without the need for further agreement) and shall promptly execute and deliver any reasonable
instrument that such Successor Landlord may reasonably request to evidence such attornment. This
Lease shall continue in full force and effect as a direct lease between the Successor Landlord and
Tenant upon all of the terms, conditions and covenants as are set forth in this Lease, except that
the Successor Landlord shall not (a) be liable for any previous act or omission of Landlord under
this Lease, except to the extent such act or omission shall constitute a continuing Landlord
default hereunder; (b) be subject to any offset, not expressly provided for in this Lease; or (c)
be bound by any previous modification of this Lease or by any previous prepayment of more than one
months Base Rent, unless such modification or prepayment shall have been expressly approved in
writing by the Successor Landlord (or predecessor in interest).
32. ENVIRONMENTAL COVENANTS
(a) As used in this Lease, the term Hazardous Materials means (i) any substance or material
that is included within the definitions of hazardous substances, hazardous materials, toxic
substances, pollutant, contaminant, hazardous waste, or solid waste in any Environmental
Law; (ii) petroleum or petroleum derivatives, including crude oil or any fraction thereof, all
forms of natural gas, and petroleum products or by-products or waste; (iii) polychlorinated
biphenyls (PCBs); (iv) asbestos and asbestos containing materials (whether friable or
non-friable); (v) lead and lead based paint or other lead containing materials (whether friable or
non-friable); (vi) urea formaldehyde; (vii) microbiological pollutants; (viii) batteries or liquid
solvents or similar chemicals; (ix) radon gas; and (x) mildew, fungus, mold, bacteria and/or other
organic spore material, whether or not airborne, colonizing, amplifying or otherwise.
(b) As used in this Lease, the term Environmental Laws means all statutes, terms,
conditions, limitations, restrictions, standards, prohibitions, obligations, schedules, plans and
timetables that are contained in or promulgated pursuant to any federal, state or local laws
(including rules, regulations, ordinances, codes, judgments, orders, decrees, contracts, permits,
stipulations, injunctions, the common law, court opinions, and demand or notice letters issued,
entered, promulgated or approved thereunder), relating to pollution or the protection of the
environment, including laws relating to emissions, discharges, releases or threatened releases of
Hazardous Materials into ambient air, surface water, ground water or lands or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials including but not limited to the: Comprehensive Environmental
Response Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments
and Reauthorization Act of 1986 (SARA), 42 U.S.C. 9601 et seq.; Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (RCRA), 42 U.S.C.
6901 et seq.; Federal Water Pollution Control Act, 33 U.S.C. 1251 et
seq.; Toxic Substances Control Act, 15 U.S.C. 2601 et seq.; Clean Air Act,
42 U.S.C. 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. § 300f et
seq.; and the Maryland Environment Code Ann.
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Environmental Laws shall include any
statutory or common law that has developed or develops in the future regarding mold, fungus,
microbiological pollutants, mildew, bacteria and/or other organic spore material. Environmental
Law shall not include laws relating to industrial hygiene or worker safety, except to the extent
that such laws address asbestos and asbestos containing materials (whether friable or non-friable)
or lead and lead based paint or other lead containing materials.
(c) Landlord covenants that Landlord will comply with all Environmental Laws relating to the
use, storage or disposal of any Hazardous Materials. Landlord shall indemnify and hold harmless
Tenant from and against any and all claims, damages, fines, judgments, penalties, costs, losses,
liabilities and expenses (including, without limitation, reasonable attorneys, consultants, and
experts fees) incurred by Tenant and to the extent attributable to (i) any Hazardous Materials
placed on or about the Project by Landlord or Landlords Agents, or (ii) Landlords breach of any
provision of this Paragraph 32.
(d) During its use and occupancy of the Premises Tenant will not permit Hazardous Materials to
be present on or about the Premises except for normal quantities of cleaning and other business
supplies customarily used and stored in an office and that it will comply with all Environmental
Laws relating to the use, storage or disposal of any such Hazardous Materials.
(e) If Tenants use of Hazardous Materials on or about the Premises results in a release,
discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises or
the property in which the Premises are located, Tenant agrees to investigate, clean up, remove or
remediate such Hazardous Materials in full compliance with (a) the requirements of (i) all
Environmental Laws and (ii) any governmental agency or authority responsible for the enforcement
of any Environmental Laws; and (b) any additional requirements of Landlord that are necessary, in
Landlords reasonable discretion, to protect the value of the Premises or the property in which the
Premises are located. Landlord shall also have the right, but not the obligation, to take whatever
action with respect to any such Hazardous Materials that it deems necessary, in Landlords sole
discretion, to protect the value of the Premises or the property in which the Premises are located.
All reasonable costs and expenses paid or incurred by Landlord in the exercise of such right shall
be payable by Tenant promptly upon demand.
(f) Upon reasonable notice to Tenant, Landlord may inspect the Premises for the purpose of
determining whether there exists on the Premises any Hazardous Materials or other condition or
activity that is in violation of the requirements of this Lease or of any Environmental Laws. The
right granted to Landlord herein to perform inspections shall not create a duty on Landlords part
to inspect the Premises, or liability on the part of Landlord for Tenants use, storage or disposal
of Hazardous Materials.
(g) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination
of this Lease free of those Hazardous Materials that Tenant or Tenant Parties introduced or for
which Tenant is legally responsible. Notwithstanding anything to the contrary provided herein,
Tenant shall not be required to remove any Hazardous Material, debris or waste to the extent such
existed prior to the Tenants occupancy of the Premises or was caused by Landlord, Landlords
Agents or other tenants in the Building. Tenants obligations and liabilities pursuant to this
Paragraph 32 shall be in addition to any other surrender requirements in this Lease and shall
survive the expiration or earlier termination of this Lease. To the extent
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reasonably determined
by Landlord that the condition of all or any portion of the Premises, the Building, and/or the
Project is not in compliance with the provisions of this Lease with respect to Hazardous Materials,
debris or waste, including, without limitation, all Environmental Laws, at the expiration or
earlier termination of this Lease due to a default by Tenant of its obligations under this Lease,
then at Landlords sole option, and following reasonable notice to Tenant, Landlord may perform
such work as is necessary to cure such default by Tenant, and Tenant shall be responsible for
payment of all costs reasonably expended by Landlord in such cure. For purposes hereof, the term
normal wear and tear shall not include any deterioration in the condition or diminution of the
value of any portion of the Premises, the Building, and/or the Project in any manner whatsoever
related directly or indirectly to Hazardous Materials brought (or generated) on the Premises by
Tenant or Tenants invitees.
(h) Tenant shall indemnify and hold harmless Landlord from and against any and all claims,
damages, fines, judgments, penalties, costs, losses (including, without limitation, loss in value
of the Premises or the property in which the Premises is located, and any and all sums paid for
settlement of claims), liabilities and expenses (including, without limitation, attorneys,
consultants, and experts fees) incurred by Landlord during or after the term of this Lease and to
the extent attributable to (i) any Hazardous Materials placed on or about the Premises, the
Building or the Project by Tenant or Tenants Agents, or resulting from the action or inaction (to
the extent Tenant had an obligation under this Lease to act) of Tenant or Tenants Agents, or (ii)
Tenants breach of any provision of this Paragraph 32. This indemnification includes, without
limitation, any and all costs incurred by Landlord due to any investigation of the site or any
cleanup, removal or restoration mandated by a federal, state or local agency or political
subdivision.
(i) Because mold spores are present essentially everywhere and mold can grow in almost any
moist location, Tenant acknowledges the necessity of adopting and enforcing good housekeeping
practices, ventilation and vigilant moisture control within the Premises (particularly in kitchen
areas, janitorial closets, bathrooms, in and around water fountains and other plumbing facilities
and fixtures, break rooms, in and around outside walls, and in and around HVAC systems and
associated drains) for the prevention of mold (such measures, Mold Prevention Practices). Tenant
will, at its sole cost and expense, keep and maintain the Premises in good order and condition in
accordance with the Mold Prevention Practices.
(j) Tenant, at its sole cost and expense, shall:
(i) Regularly monitor the Premises for the presence of mold and any conditions that reasonably
can be expected to give rise to or be attributed to mold or fungus including, but not limited to,
observed or suspected instances of water damage, condensation, seepage, leaks or any
other water collection or penetration (from any source, internal or external), mold growth,
mildew, repeated complaints of respiratory ailments or eye irritation by Tenants employees or any
other occupants of the Premises, or any notice from a governmental agency of complaints regarding
the indoor air quality at the Premises (the Mold Conditions); and
(ii) Immediately notify Landlord in writing if it observes or suspects mold or Mold Conditions
in, at, or about the Premises or a surrounding area.
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(k) In the event of suspected mold or Mold Conditions in, at, or about the Premises and
surrounding areas, Landlord may cause an inspection of the Premises to be conducted, during such
time as Landlord may designate, to determine if mold or Mold Conditions are present in, at, or
about the Premises.
(l) Tenant hereby releases and relieves Landlord from any and all liability for bodily injury
and damage to property, waives any and all claims against Landlord and assumes all risk of personal
injury and property damage related to or allegedly caused by or associated with any mold or Mold
Conditions in or on the Premises caused by Tenant arising after the Commencement Date.
(m) The provisions of this Paragraph 32 shall survive the expiration or earlier termination of
this Lease.
33. NOTICES
All notices and demands which are required or may be permitted to be given to either party by
the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid,
certified, or by personal delivery or nationally recognized overnight courier, addressed to the
addressee at Tenants Address or Landlords Address as specified in the Basic Lease Information, or
to such other place as either party may from time to time designate in a notice to the other party
given as provided herein. Copies of all notices and demands given to Landlord shall additionally
be sent to Landlords property manager at the address specified in the Basic Lease Information or
at such other address as Landlord may specify in writing from time to time. Notice shall be deemed
given upon actual receipt (or attempted delivery if delivery is refused), if personally delivered,
or one (1) business day following deposit with a reputable overnight courier that provides a
receipt, or on the third (3rd) day following deposit in the United States mail in the manner
described above.
34. WAIVER
The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed
to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent acceptance of payment shall not
be deemed to be a waiver of any preceding breach, other than the failure to pay the particular
amount so accepted, regardless of a partys knowledge of such preceding breach at the time of
acceptance. No delay or omission in the exercise of any right or remedy in regard to any Default
shall impair such a right or remedy or be construed as a waiver. Any waiver of any Default must be
in writing and shall not be a waiver of any other Default concerning the same or any other
provisions of this Lease.
35. HOLDING OVER
Any holding over after the expiration of the Term, without the express written consent of
Landlord, shall constitute a Default and, without limiting Landlords remedies provided in this
Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate equal
to the greater of one hundred fifty percent (150%) of the fair market rental value for the Premises
as determined by Landlord or two hundred percent (200%) of the Base Rent last due in this Lease,
plus Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far
as applicable; provided, however, in no event shall any renewal or expansion option, option to
purchase, or other similar right or option contained in this Lease be deemed applicable to any such
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tenancy at sufferance. If the Premises are not surrendered at the end of the Term or sooner
termination of this Lease, and in accordance with the provisions of Paragraphs 11 and 32(e), Tenant
shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability
resulting from delay by Tenant in so surrendering the Premises including, without limitation, any
loss or liability resulting from any claim against Landlord made by any succeeding tenant or
prospective tenant founded on or resulting from such delay and losses to Landlord due to lost
opportunities to lease any portion of the Premises to any such succeeding tenant or prospective
tenant, together with, in each case, actual attorneys fees and costs.
36. SUCCESSORS AND ASSIGNS
The terms, covenants and conditions of this Lease shall, subject to the provisions as to
assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all
of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations
of Tenant under this Lease shall be joint and several.
37. TIME
Time is of the essence of this Lease and each and every term, condition and provision herein.
38. BROKERS
Landlord and Tenant each represents and warrants to the other that neither it nor its officers
or agents nor anyone acting on its behalf has dealt with any real estate broker except the
Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and
each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and
expenses, including attorneys fees, incurred by the indemnified party in conjunction with any such
claim or claims of any other broker or brokers to a commission in connection with this Lease as a
result of the actions of the indemnifying party.
39. LIMITATION OF LIABILITY
In the event of any default or breach by Landlord under this Lease or arising in connection
herewith or with Landlords operation, management, leasing, repair, renovation, alteration or any
other matter relating to the Project or the Premises Tenants remedies shall be limited solely and
exclusively to an amount which is equal to the interest in the Building of the then current
Landlord (including rentals and insurance payable to or received by Landlord and condemnation
awards, but excluding any amounts needed to repair or restore the Building). Except as provided in
the
following sentence, Tenants remedy shall not extend to any sales proceeds received by
Landlord or the Landlord Parties (as hereinafter defined) in connection with the sale of the
Building and/or the Land. If Landlord (i) requests and Tenant provides an estoppel certificate to
Landlord in connection with such sale, the estoppel certificate asserts a default by Landlord under
the Lease, such default is not cured by the closing of the sale, and Tenant makes a claim against
Landlord no later than sixty (60) days after Tenant receives written notice of the closing of the
sale, then Tenant may make a claim against the sale proceeds for the default specified in the
estoppel certificate to the extent of its damages, or (ii) fails to request an estoppel certificate
from Tenant in connection with such sale, and Tenant, no later than sixty (60) days after Tenant
receives written notice of the closing of the sale, asserts a default by Landlord under this Lease
for a Landlord default arising
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prior to the closing of the sale, then Tenant may make a claim
against Landlord for the proceeds of the sale to the extent of its damages. For purposes of this
Lease, Landlord Parties shall mean, collectively Landlord, its partners, shareholders, officers,
directors, employees, investment advisors, or any successor in interest of any of them. Neither
Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant
hereby expressly waives and releases such personal liability on behalf of itself and all persons
claiming by, through or under Tenant. The limitations of liability contained in this Paragraph 39
shall inure to the benefit of Landlords and the Landlord Parties present and future partners,
beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their
respective partners, heirs, successors and assigns. Under no circumstances shall any present or
future partner of Landlord (if Landlord is a partnership), future member in Landlord (if Landlord
is a limited liability company) or trustee or beneficiary (if Landlord or any partner or member of
Landlord is a trust), have any liability for the performance of Landlords obligations under this
Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties
shall be liable under any circumstances for injury or damage to, or interference with Tenants
business, including but not limited to, loss of profits, loss of rents or other revenues, loss of
business opportunity, loss of goodwill or loss of use, in each case, however occurring. The
provisions of this section shall apply only to the Landlord and the parties herein described, and
shall not be for the benefit of any insurer nor any other third party. Under no circumstances shall
any present or future partner of Tenant (if Tenant is a partnership), future member in Tenant (if
Tenant is a limited liability company) or trustee or beneficiary (if Tenant or any partner or
member of Tenant is a trust), or any officer, director, shareholder or employee of Tenant have any
liability for the performance of Tenants obligations under this Lease.
40. FINANCIAL STATEMENTS
Within ten (10) days after Landlords request, Tenant shall deliver to Landlord the then
current audited financial statements of Tenant (including interim periods following the end of the
last fiscal year for which annual statements are available), prepared or compiled by a certified
public accountant, including a balance sheet and profit and loss statement for the most recent
prior year, all prepared in accordance with generally accepted accounting principles consistently
applied.
41. RULES AND REGULATIONS
Tenant shall comply with the rules and regulations attached hereto as Exhibit D, along with
any modifications, amendments and supplements thereto, and such reasonable rules and regulations as
Landlord may adopt in the future, from time to time, for the orderly and proper operation of the
Building and the Project (collectively, the Rules and Regulations). The Rules and Regulations
may include, but shall not be limited to, the following: (a) restriction of employee parking to a
limited, designated area or areas; and (b) regulation of the removal, storage and disposal of
Tenants refuse and other rubbish. The then current Rules and Regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for
the failure of any other person to observe and abide by any of said Rules and Regulations.
Landlord shall use reasonable efforts to enforce all such Rules and Regulations, including any
exceptions thereto, uniformly and in a manner which does not discriminate against Tenant, although
it is understood that Landlord may grant exceptions to such Rules and Regulations in circumstances
in which it reasonably determines such exceptions are warranted.
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42. MORTGAGEE PROTECTION
(a) Modifications for Lender. If, in connection with obtaining financing for the Project or
any portion thereof, Landlords lender shall request reasonable modifications to this Lease as a
condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent to
such modifications, provided such modifications do not materially adversely affect Tenants rights
or increase Tenants obligations under this Lease.
(b) Rights to Cure. Tenant shall give to any trust deed or mortgage holder (Holder), by a
method provided for in Paragraph 33 above, at the same time as it is given to Landlord, a copy of
any notice of default given to Landlord, provided that prior to such notice Tenant has been
notified, in writing, (by way of notice of assignment of rents and leases, or otherwise) of the
address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such
default within the time provided for in this Lease, then the Holder shall have an additional
reasonable period within which to cure such default, or if such default cannot be cured without
Holder pursuing its remedies against Landlord, then such additional time as may be necessary to
commence and complete a foreclosure proceeding, provided Holder commences and thereafter diligently
pursues the remedies necessary to cure such default (including but not limited to commencement of
foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be
terminated.
43. INTENTIONALLY OMITTED.
44. PARKING
(a) Provided that Tenant shall not then be in Default under the terms and conditions of the
Lease, and provided further, that Tenant shall comply with and abide by Landlords parking rules
and regulations from time to time in effect, Tenant shall have the right to use for the parking of
standard size passenger automobiles, pick up trucks, vans and SUVs, the number of exclusive and
designated and non-exclusive and undesignated parking spaces, if any, set forth in the Basic Lease
Information in the Parking Areas, provided, however, that Landlord shall not be required to enforce
Tenants right to use such parking spaces. All unreserved spaces will be on a first-come,
first-served basis in common with other tenants of and visitors to the Project in parking spaces
provided by Landlord from time to time in the Projects Parking Areas. In the event Tenant is
granted the use of exclusive and designated parking spaces, as indicated in the Basic Lease
Information, then such spaces shall be located in the area(s) designated by Landlord from time to
time. Tenants license to use the parking spaces provided for herein shall be subject to such
terms, conditions, rules and regulations as Landlord or the operator of the Parking Area
may reasonably impose from time to time, including, without limitation, the imposition of a
parking charge.
(b) Each vehicle shall, at Landlords option to be exercised from time to time, bear a
permanently affixed and visible identification sticker to be provided by Landlord. Tenant shall
not and shall not permit its Agents to park any vehicles in locations other than those specifically
designated by Landlord as being for Tenants use. The license granted hereunder is for
self-service parking only and does not include additional rights or services. Neither Landlord nor
its Agents shall be liable for: (i) loss or damage to any vehicle or other personal property parked
or located upon or within such parking spaces or any Parking Areas whether pursuant to this license
or otherwise and whether caused by fire, theft, explosion, strikes, riots or any other cause
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whatsoever; or (ii) injury to or death of any person in, about or around such parking spaces or any
Parking Areas or any vehicles parking therein or in proximity thereto whether caused by fire,
theft, assault, explosion, riot or any other cause whatsoever and Tenant hereby waives any claim
for or in respect to the above and against all claims or liabilities arising out of loss or damage
to property or injury to or death of persons, or both, relating to any of the foregoing. Tenant
shall not assign any of its rights hereunder, other than in connection with an assignment of this
Lease or subletting of the Premises, and in the event an attempted assignment is made, it shall be
void.
(c) Tenant
recognizes and agrees that visitors, clients and/or customers
(collectively the Visitors) to the Project and the Premises must park automobiles or other vehicles only in areas
designated by Landlord from time to time as being for the use of such Visitors and Tenant hereby
agrees to ask its Visitors to park only in the areas designated by Landlord from time to time for
the use of Tenants Visitors. Further, parking for Visitors is subject to the payment of fees
(Visitor Parking Fees) at rates set and to be set by Landlord from time to time in its sole
discretion. Tenant hereby covenants and agrees to pay or ask its Visitors to pay the Visitor
Parking Fees, plus tax thereon, as shall be set by Landlord from time to time and to comply with
and abide by Landlords or Landlords parking operators rules and regulations governing the use of
such Visitors parking as may be in existence from time to time.
(d) In the event any tax, surcharge or regulatory fee is at any time imposed by any
governmental authority upon or with respect to parking or vehicles parking in the parking spaces
referred to herein, Tenant shall pay such tax, surcharge or regulatory fee as Additional Rent under
this Lease, such payments to be made in advance and from time to time as required by Landlord
(except that they shall be paid monthly with Base Rent payments if permitted by the governmental
authority).
45. ENTIRE AGREEMENT
This Lease, including the Exhibits and any Addenda attached hereto, which are hereby
incorporated herein by this reference, contains the entire agreement of the parties hereto, and no
representations, inducements, promises or agreements, oral or otherwise, between the parties, not
embodied herein or therein, shall be of any force and effect. If there is more than one Tenant,
the obligations hereunder imposed shall be joint and several.
46. INTEREST
Any installment of Rent and any other sum due from Tenant under this Lease which is not
received by Landlord within five (5) business days from when the same is due shall bear interest
from the date such payment was originally due under this Lease until paid at the greater of (a) an
annual rate equal to the maximum rate of interest permitted by law, or (b) twelve percent (12%) per
annum. Payment of such interest shall not excuse or cure any default.
47. GOVERNING LAW; CONSTRUCTION
This Lease shall be construed and interpreted in accordance with the laws of state in which
the Premises is located. The parties acknowledge and agree that no rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall be employed in the
interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions
in this Lease are for reference only and shall not be used in the interpretation of this Lease.
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Whenever required by the context of this Lease, the singular shall include the plural, the
masculine shall include the feminine, and vice versa. If any provision of this Lease shall be
determined to be illegal or unenforceable, such determination shall not affect any other provision
of this Lease and all such other provisions shall remain in full force and effect.
48. REPRESENTATIONS AND WARRANTIES OF TENANT
Tenant (and, if Tenant is a corporation, partnership, limited liability company or other legal
entity) hereby makes the following representations and warranties, each of which is material and
being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall
survive the expiration or termination of the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing
under the laws of the state of its organization, and is qualified to do business in the state in
which the Premises is located, and the persons executing this Lease on behalf of Tenant have the
full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the
consent or approval of any other person or entity. Tenant has full power, capacity, authority and
legal right to execute and deliver this Lease and to perform all of its obligations hereunder.
This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its
terms.
(b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any
voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any
creditors, (3) suffered the appointment of a receiver to take possession of all or substantially
all of its assets, (4) suffered the attachment or other judicial seizure of all or substantially
all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6)
made an offer of settlement, extension or composition to its creditors generally.
(c)
(A) to the best of its knowledge, Tenant is not in violation of any Anti-Terrorism Law;
(B) to the best of its knowledge, Tenant is not, as of the date hereof:
(i) conducting any business or engaging in any transaction or dealing
with any Prohibited Person, including the making or receiving of any
contribution of funds, goods or services to or for the benefit of any
Prohibited Person;
(ii) dealing in, or otherwise engaging in any transaction relating to,
any property or interests in property blocked pursuant to Executive Order
No. 13224; or
(iii) engaging in or conspiring to engage in any transaction that
evades or avoids, or has the purpose of evading or avoiding, or attempts to
violate any of the prohibitions set forth in, any Anti-Terrorism Law; and
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(C) to the best of its knowledge, neither Tenant nor any of its officers, directors,
shareholders or members, as applicable, is a Prohibited Person.
If at any time any of these representations becomes false, then it shall be considered a
material default under this Lease.
As used herein, Anti-Terrorism Law is defined as any law relating to terrorism,
anti-terrorism, money-laundering or anti-money laundering activities, including without limitation
the United States Bank Secrecy Act, the United States Money Laundering Control Act of 1986,
Executive Order No. 13224, and Title 3 of the USA Patriot Act, and any regulations promulgated
under any of them. As used herein Executive Order No. 13224 is defined as Executive Order No.
13224 on Terrorist Financing effective September 24, 2001, and relating to Blocking Property and
Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism, as may
be amended from time to time. Prohibited Person is defined as (i) a person or entity that is
listed in the Annex to Executive Order No. 13224, or a person or entity owned or controlled by an
entity that is listed in the Annex to Executive Order No. 13224; (ii) a person or entity with whom
Landlord is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism
Law; or (iii) a person or entity that is named as a specially designated national and blocked
person on the most current list published by the U.S. Treasury Department Office of Foreign Assets
Control at its official website, http://www.treas.gov/ofac/t11sdn.pdf or at any replacement
website or other official publication of such list. USA Patriot Act is defined as the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (Public Law 107-56), as may be amended from time to time.
49. NAME OF BUILDING
In the event Landlord chooses to change the name or address of the Building and/or the
Project, Tenant agrees that such change shall not affect in any way its obligations under this
Lease, and that, except for the name or address change, all terms and conditions of this Lease
shall remain in full force and effect. Tenant agrees further that such name or address change
shall not require a formal amendment to this Lease, but shall be effective upon Tenants receipt of
written notification from Landlord of said change. Landlord shall reimburse Tenant for Tenants
reasonable replacement stationery expenses which Tenant has on hand as of the date Landlord
notifies Tenant that Landlord intends to change the name of the Building.
50. SECURITY
(a) Tenant acknowledges and agrees that, while Landlord may in its sole and absolute
discretion engage security personnel to patrol the Building or the Project, Landlord is not
providing any security services with respect to the Premises and that Landlord shall not be liable
to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or
any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the
Premises or any other breach of security with respect to the Premises, the Building or the Project.
(b) Tenant hereby agrees to the exercise by Landlord and Landlords Agents, within their sole
discretion, of such security measures as, but not limited to, the evacuation of the Premises, the
Building or the Project for cause, suspected cause or for drill purposes, the denial
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of any access
to the Premises, the Building or the Project and other similarly related actions that it deems
necessary to prevent any threat of property damage or bodily injury. The exercise of such security
measures by Landlord and Landlords Agents, and the resulting interruption of service and cessation
of Tenants business, if any, shall not be deemed an eviction or disturbance of Tenants use and
possession of the Premises, or any part thereof, or render Landlord or Landlords Agents liable to
Tenant for any resulting damages or relieve Tenant from Tenants obligations under this Lease.
51. JURY TRIAL WAIVER
The parties hereto hereby waive any right to trial by jury with respect to any action or
proceeding (i) brought by Landlord, Tenant or any other party, relating to (A) this Lease and/or
any understandings or prior dealings between the parties hereto, or (B) the Premises, the Building
or the Project or any part thereof, or (ii) to which either is a party.
52. RECORDATION
Neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall
be recorded by Tenant or by any one acting through, under or on behalf of Tenant, and the recording
thereof in violation of this provision shall make this Lease null and void at Landlords election.
53. RIGHT TO LEASE
Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord
in the exercise of its sole business judgment shall determine to best promote the interest of the
Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant
or type or number of tenants shall, during the Lease Term, occupy any space in the Project.
54. FORCE MAJEURE
Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God,
inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental
actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control
of the party obligated to perform, except with respect to the obligations imposed with regard to
payment of money pursuant to this Lease (collectively, the Force Majeure), notwithstanding
anything to the contrary contained in this Lease, shall excuse the performance of such party
for a period equal to any such prevention, delay or stoppage and therefore, if this Lease specifies
a time period for performance of an obligation of either party, that time period shall be extended
by the period of any delay in such partys performance cause by a Force Majeure.
55. ACCEPTANCE
This Lease shall only become effective and binding upon full execution hereof by Landlord and
delivery of a signed copy to Tenant and Landlords receipt of the Security Deposit.
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56. RENEWAL OPTION
(a) Exercise of Options. Provided Tenant is not in Default, Tenant shall have the
option (each an Option) to renew this Lease for two (2) additional five (5) year periods (each an
Option Period) for the period commencing on the date following the Expiration Date (as same may
be extended) upon the terms and conditions contained in this Lease, except, as provided in this
Paragraph 56. To exercise the Option, Tenant shall give Landlord notice (the Extension Notice)
of the intent to exercise said Option not less than twelve (12) months or more than fifteen (15)
months prior to the date on which the Option Period which is the subject of the notice will
commence. The notice shall be given as provided in Paragraph 33 hereof. In the event Tenant shall
exercise the Option, this Lease will terminate in its entirety at the end of the Option Period and
Tenant will have no further Options to renew or extend the Term of this Lease.
(b) Determination of Base Rent. The Base Rent for the Option shall be determined as
follows:
(i) Landlord and Tenant will have thirty (30) days after Landlord receives the Extension
Notice within which to agree on the fair market rental value of the Premises in the Bethesda,
Maryland submarket as of the commencement date of the Option Period, as defined in subsection (ii)
below. If they agree on the Base Rent within thirty (30) days, they will amend this Lease by
stating the Base Rent.
(ii) If Landlord and Tenant are unable to agree on the Base Rent for the Option Period within
thirty (30) days, the Base Rent for the Option Period will be the-fair market rental value of the
Premises as of the commencement date of the Option Period as determined in accordance with
subsection (iii) hereof. As used in this Lease, the fair market rental value of the Premises
means what a landlord under no compulsion to lease the Premises, and a tenant under no compulsion
to lease the Premises, would determine as Base Rent (including initial monthly rent and rental
increases), which shall include concessions, for the Option Period, as of the commencement of the
Option Period, taking into consideration the uses permitted under this Lease, the quality, size,
design and location of the Premises, and the rent for comparable buildings located in the vicinity
of the Project.
(iii) Within thirty (30) days after the expiration of the thirty (30) day period set forth in
subparagraph (ii) above, Landlord and Tenant shall each appoint one licensed real estate appraiser,
and the two appraisers so appointed shall jointly attempt to determine and agree upon the then fair
market rental value of the Premises. If they are unable to agree, then each appraiser
so appointed shall set one value, and notify the other appraiser, of the value set by him or
her, concurrently with such appraisers receipt of the value set by the other appraiser. The two
appraisers then shall, together, select a third licensed appraiser, who shall make a determination
of the then fair market rental value, after reviewing the reports of the first two appraisers
appointed by the parties, and after doing such independent research as he/she deems appropriate.
The value determined by the third appraiser shall be the then fair market rental value of the
Premises. Landlord and Tenant shall each pay for their own respective appraiser, and they shall
divide equally the cost of the third appraiser.
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57. RIGHT OF FIRST OFFER.
Provided Tenant is not then in Default under the terms of this Lease and there are a minimum
of five (5) years remaining in the Lease Term, Landlord shall notify Tenant that additional office
space on the second (2nd) floor of the Building (the Additional Space) is to become
available. The Term of the Lease for the Additional Space shall be coterminous with this Lease and
the Base Rent shall be the then fair market rent, as determined in accordance with Section 56(b)
above (the Offer Terms). Tenant shall have an option exercisable by written notice to Landlord
within five (5) business days after receipt of Landlords notice, to lease the Additional Space
upon the Offer Terms. Rent in respect of the Additional Space shall commence to be due and
payable on the date Landlord delivers the Additional Space to Tenant free of other tenants and
occupants and otherwise in accordance with the Offer Terms. Promptly after Tenant exercises this
option but no later than five (5) business days after the Base Rent is determined, the parties
shall enter into a supplemental agreement to this Lease setting forth the terms and conditions upon
which Tenant shall lease the Additional Space and incorporating the Additional Space as part of the
Premises.
58. TENANT ACCESS
Subject to Landlords reasonable regulations, Tenant shall have access to the Building,
underground parking garage and Premises 24 hours per day, 365 days per year, except in the case of
an emergency or when the Building may be closed by governmental authorities. Landlord shall
provide Tenant with a restricted entry access system for after-hours access to the Building.
59. STORAGE SPACE
In addition to the Premises, Landlord leases to Tenant 1,000 rentable square feet of storage
space on the lower level of the Building (the Storage Premises). Such space shall be used solely
by Tenant for storage and is not to be occupied by any of Tenants personnel. Tenant promises and
agrees to pay Landlord as Additional Rent the annual sum of Fifteen Thousand and 00/100 Dollars
($15,000.00), payable in equal monthly installments of One Thousand Two Hundred Fifty and 00/100
Dollars ($1,250.00), triple net, without demand, notice, deduction, counterclaim or set-off, for
each month of the entire Lease Term. Such additional rent shall be increased by three percent (3%)
each year on the anniversary of the Commencement Date. The first monthly installment shall be due
and payable upon execution of this Lease. The rental for each subsequent month shall be paid in
advance beginning on the first day of the calendar month following the expiration of the first
calendar month of the Lease Term and continuing thereafter on or before the first day of each
succeeding calendar month during the term hereof. Landlord will not be required to provide heat,
air conditioning, water, char service or any other utility or service to the Storage Premises, all
of
which shall be at Tenants sole cost and expense. All rights and remedies of Landlord herein
enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law.
60. ROOF RIGHTS
If, during the term of the Lease, Tenant wishes to install a satellite dish or other antenna
on the roof of the Building, Landlord and Tenant agree to negotiate in good faith a separate
License Agreement which will more particularly detail the obligations of each party with respect to
such satellite dish or antenna.
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61. LANDLORD DEFAULT
If Landlord fails to perform its obligations under this Lease, Landlord shall not be in
default unless Landlord fails to perform such obligations within thirty (30) days after notice by
Tenant to Landlord specifying the nature of the obligations Landlord has failed to perform;
provided, however, that if the nature of Landlords obligations is such that more than thirty (30)
days are required for performance, then Landlord shall not be in default if Landlord commences
performance within such thirty (30) day period and thereafter diligently prosecutes the same to
completion. If Landlord is unable to fulfill or is delayed in fulfilling any of Landlords
obligations under this Lease by reason of floods, earthquakes, lightning, or any other acts of
God, accidents, breakage, repairs, strikes, lockouts, other labor disputes, inability to obtain
utilities or materials, or by any other reason beyond Landlords reasonable control, or if Landlord
enters the Premises or makes any Alterations to the Premises, the Building or any portion thereof
pursuant to this Lease, then no such inability or delay by Landlord and no such entry or work by
Landlord shall constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of Rent, or relieve Tenant from any of its obligations under
this Lease, or impose any liability upon Landlord or its agents. This Lease shall be construed as
though the covenants herein between Landlord and Tenant are independent, and Tenant shall not be
entitled to any setoff, offset, abatement or deduction of Rent or other amounts due Landlord
hereunder if Landlord fails to perform its obligations hereunder. Notwithstanding any provision of
this Lease to the contrary, Tenants sole remedy for a default of this Lease by Landlord shall be
an action for damages, injunction or specific performance; Tenant shall have no right to terminate
this Lease on account of any breach or default by Landlord.
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LANDLORD: |
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EW BETHESDA OFFICE INVESTORS, LLC, a |
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By:
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UBS Realty Investors LLC, a Massachusetts |
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limited liability company, its Manager |
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By:
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/s/ STUART FEINBERG
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TENANT: |
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SUCAMPO PHARMACEUTICAL, INC., a Delaware corporation |
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By:
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/s/ SACHIKO KUNO
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Print Name: Sachiko Kuno, Ph.D. |
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Its:
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President and Chair of the Board
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EXHIBIT A
DIAGRAM OF THE PREMISES
A
EXHIBIT B
TENANT IMPROVEMENTS
Lease between
EW BETHESDA OFFICE INVESTORS, LLC, as Landlord
and
SUCAMPO PHARMACEUTICALS, INC., as Tenant
WORK LETTER
Tenant agrees to accept the Premises in its as is condition, as of the Commencement Date
subject to the following:
1. Tenant acknowledges it has inspected and is fully familiar with the Premises and is taking
possession of such in its as is condition as of date of the full the Commencement Date.
2. Any renovation of the Premises after their initial build-out shall constitute an Alteration
and shall be subject to the terms and conditions of Section 12 of this Lease.
3. Tenant shall make all improvements to the Premises using Building Standard materials in
accordance with its obligations set forth under this Lease, and in accordance with the requirements
of the Standard Rules and Regulations for Contractors attached to this Lease as Exhibit B-1 and
incorporated herein by reference. Tenant may select a general contractor from a list that
previously has been approved by Landlord or shall obtain Landlords consent to its proposed general
contractor.
4. Once approved by Landlord, no material deviation from the Tenant Plans (defined below)
which shall affect the base Building or any mechanical, electrical or plumbing systems or equipment
or which would alter the appearance of the Building from the exterior as determined by Landlord in
Landlords reasonable judgment, shall be made by Tenant without Landlords prior written consent.
Landlord agrees to consent or withhold its consent to all Tenant Plans within five(5) business days
after delivery of such documents to Landlord. Upon completion of all improvements, Tenant shall,
at no cost or expense to Landlord, furnish to Landlord a complete set of final, as-built drawings
related to such work showing all changes and deviations from the Tenant Plans, as well as
certificates and lien waivers from all contractors and sub-contractors providing materials to, or
performing work within, the Premises. Approval of the Tenant Plans by Landlord shall not
constitute the assumption of any responsibility by Landlord for their accuracy or sufficiency, or
that they comply in any way with applicable federal, state or local law, and Tenant shall be solely
responsible for such accuracy, sufficiency or compliance. All work performed by Tenant shall be in
accordance with: good construction practices; all applicable laws, orders, regulations and
requirements of federal, state and local authorities having
jurisdiction (Jurisdictional Authorities); and all insurance requirements. It is further
A
understood and agreed that Landlord shall have no responsibility or liability whatsoever for any
loss of, or damage to, any fixtures, installed or left in the Premises. Tenant shall obtain at its
sole cost and immediately thereafter furnish to Landlord all certificates and approvals with
respect to work done and installations made pursuant to this Section that may be required from any
of the Jurisdictional Authorities for the issuance of a certificate of occupancy for the Premises.
Upon the issuance of the certificate of occupancy, a copy thereof shall be immediately delivered to
Landlord.
5. All improvements constructed in the Premises by Tenant shall become and remain the property
of Landlord. In addition to the foregoing, in the event Tenant decides to demolish any of the
existing improvements in the Premises, Landlord shall have the right to recover and remove any
items which Tenant intends to demolish or remove. Notwithstanding the foregoing, however, Tenants
trade fixtures, equipment and moveable wall systems, furniture and furnishings shall be and remain
the property of Tenant. In the event Tenant removes any of the foregoing, Tenant agrees to repair
any damage to the Premises or the Building. Any replacement of any property, fixtures or
improvements of Landlord, whether made at Tenants expense or otherwise, shall be and remain the
property of Landlord.
6. Tenant shall use the services of an architect selected by Tenant for the preparation of all
space planning and construction documents with respect to the renovation of the Premises (Tenant
Plans). Tenants architect, who must be fully licensed in the jurisdiction in which the Building
is located and insured in accordance with industry standards, shall be subject to the approval of
Landlord. The cost associated with the preparation of such documents, including any services of an
engineering consultant approved by Landlord, which approval shall not be unreasonably withheld or
delayed, shall be paid by Tenant. Tenant shall be responsible for all bidding and construction of
the Tenant Work in the Premises. Landlord agent, Lincoln Property Company, shall be notified of,
and shall have the right to attend, all architectural and construction meetings, and shall have the
right to enter and inspect the Premises, without notice to Tenant, during the construction and
build-out. Tenant shall pay Landlord a construction management fee of one percent (1%) of the
total hard and soft costs of the improvements.
7. Landlord shall provide Tenant with an allowance (the Allowance) which shall be an amount
equal to the product of (i) the total rentable area of the Premises multiplied by (ii) $45.00. The
Allowance shall be available to Tenant in monthly installments upon timely submission of Tenants
statement with all required lien waivers and certificates as provided below as construction of the
improvements to the Premises progresses and Tenant incurs expenses toward which the Allowance may
be applied. Each statement delivered by Tenant shall show, in reasonable detail, all costs
incurred and shall be accompanied by invoices of each contractor, subcontractor, supplier or vendor
for which reimbursement is sought, and a lien waiver and a certificate, from each contractor and
subcontractor whose contract has an aggregate value equal to or greater than $2,500, certifying
that all payments then due such contractor or subcontractor and to laborers, materialmen and
subcontractors under it have been made, except the amounts then being requisitioned. All contract
documents and requisitions submitted by Tenant for reimbursement from the Tenant Allowance relating
to design and construction shall be in the then current AIA format. Disbursement shall be made
from the Allowance on or before
thirty (30) days after Landlord receives Tenants complete and correct statements with all required
supporting documentation.
A
9. Tenant shall not be required to remove any of the initial Tenant improvements prior to,
upon or after the expiration or earlier termination of the Lease, so long as the foregoing initial
Tenant improvements are considered to be a normal Tenant office buildout.
A
EXHIBIT C
COMMENCEMENT AND EXPIRATION DATE MEMORANDUM
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LANDLORD:
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EW BETHESDA OFFICE INVESTORS, LLC |
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TENANT:
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SUCAMPO PHARMACEUTICALS, INC. |
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LEASE DATE:
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, 2006 |
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PREMISES:
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Located at 4520 East-West Highway, Suite 300, Bethesda,
Maryland |
Tenant hereby accepts the Premises as being in the condition required under the Lease, with
all Tenant Improvements completed (except for minor punchlist items which Landlord agrees to
complete).
The Commencement Date of the Lease is hereby established as May 15, 2007, the Rent
Commencement Date is October 15, 2007, and the Expiration Date is February 15, 2017.
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TENANT: |
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SUCAMPO PHARMACEUTICALS, INC., |
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a corporation |
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By: |
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Print Name:
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Its:
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Approved and Agreed:
Landlord:
EW BETHESDA OFFICE INVESTORS, LLC,
a Delaware limited liability company
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By:
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UBS Realty Investors LLC, |
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Its Manager |
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By: |
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Its
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C-1
EXHIBIT D
RULES AND REGULATIONS
This exhibit, entitled Rules and Regulations, is and shall constitute Exhibit D to the Lease
Agreement, dated as of the Lease Date, by and between landlord and Tenant for the Premises. The
terms and conditions of this Exhibit D are hereby incorporated into and are made a part of the
Lease. Capitalized terms used, but not otherwise defined, in this Exhibit D have the meanings
ascribed to such terms in the Lease.
1. Tenant shall not use any method of heating or air conditioning other than that supplied by
Landlord without the consent of Landlord.
2. All window coverings installed by Tenant and visible from the outside of the building
require the prior written approval of Landlord.
3. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or
substance or any flammable or combustible materials on or around the Premises, except to the extent
that Tenant is permitted to use the same under the terms of Paragraph 32 of the Lease.
4. Tenant shall not alter any lock or install any new locks or bolts on any door at the
Premises without the prior consent of Landlord.
5. Tenant shall not make any duplicate keys or key cards to the Premises or the Building
without the prior consent of Landlord.
6. Tenant shall park motor vehicles in parking areas designated by Landlord except for loading
and unloading. During those periods of loading and unloading, Tenant shall not unreasonably
interfere with traffic flow around the Building or the Project and loading and unloading areas of
other tenants. Tenant shall not park motor vehicles in designated parking areas after the
conclusion of normal daily business activity.
7. Tenant shall not disturb, solicit or canvas any tenant or other occupant of the Building or
Project and shall cooperate to prevent same.
8. No person shall go on the roof without Landlords permission.
9. Business machines and mechanical equipment belonging to Tenant which cause noise or
vibration that may be transmitted to the structure of the Building, to such a degree as to be
objectionable to Landlord or other tenants, shall be placed and maintained by Tenant, at Tenants
expense, on vibration eliminators or in noise-dampening housing or other devices sufficient to
eliminate noise or vibration.
10. All goods, including material used to store goods, delivered to the Premises of Tenant
shall be immediately moved into the Premises and shall not be left in parking or receiving areas
overnight.
11. Tenant is responsible for the storage and removal of all trash and refuse. All such trash
and refuse shall be contained in suitable receptacles stored behind screened enclosures at
locations approved by Landlord.
D-1
12. Tenant shall not store or permit the storage or placement of goods or merchandise in or
around the common areas surrounding the Premises. No displays or sales of merchandise shall be
allowed in the parking lots or other common areas.
13. Tenant shall not permit any animals, including but not limited to, any household pets (but
excluding service animals, which are permitted), to be brought or kept in or about the Premises,
the Building, the Project or any of the common areas.
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INITIALS: |
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TENANT: |
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LANDLORD: |
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D-2
EXHIBIT E
FORM OF ESTOPPEL CERTIFICATE
(herein Tenant) hereby certifies to
and its successors and assigns that Tenant leases from
(Landlord) approximately square feet of space (the Premises) in
pursuant to that certain Deed of Lease dated by and between Landlord and Tenant,
as amended by (collectively, the Lease), a true and correct copy of which is
attached hereto as Exhibit A. Tenant hereby certifies to , that as of the date
hereof:
1. The Lease is in full force and effect and has not been modified, supplemented or amended,
except as set forth in the introductory paragraph hereof.
2. Tenant is in actual occupancy of the Premises under the Lease and Tenant has accepted the
same. Landlord has performed all obligations under the Lease to be performed by Landlord,
including, without limitation, completion of all tenant work required under the Lease and the
making of any required payments or contributions therefor. Tenant is not entitled to any further
payment or credit for tenant work.
3. The initial term of the lease commenced and shall expire .
Tenant has the following rights to renew or extend the term of the Lease or to expand the
Premises: .
4. Tenant has not paid any rentals or other payments more than one (1) month in advance
except as follows: .
5. Base Rent payable under the Lease is . Base Rent and additional Rent have
been paid through
. There currently exists no
claims, defenses, rights of set-off or abatement to or against the obligations of Tenant to pay
Base Rent or Additional Rent or relating to any other term, covenant or condition under the Lease.
6. There are no concessions, bonuses, free months rent, rebates or other matters affecting
the rentals except as follows: .
7. No security or other deposit has been paid with respect to the Lease except as follows:
8. To the best of the undersigneds knowledge, Landlord is not currently in default under the
Lease and there are no events or conditions existing which, with or without notice or the lapse of
time, or both, could constitute a default of the Landlord under the Lease or entitle Tenant to
offsets or defenses against the prompt payment of rent except as follows:
. Tenant is not in default under any of the
terms and conditions of the lease nor is there now any fact or condition which, with notice or
lapse of time or both, will become such a default.
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9. Tenant has not assigned, transferred, mortgaged or otherwise encumbered its interest under
the lease, nor subleased any of the Premises nor permitted any person or entity to use the Premises
except as follows: .
10. Tenant has no rights of first refusal or options to purchase the property of which the
Premises is a part.
11. The Lease represents the entire agreement between the parties with respect to Tenants
right to use and occupy the Premises.
Tenant acknowledges that the parties to whom this certificate is addressed will be relying
upon the accuracy of this certificate in connection with their acquisition and/or financing of the
Premises. IN WITNESS WHEREOF, Tenant has caused this certificate to be executed this
day of , .
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TENANT |
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By: |
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Name:
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Title: |
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E-2
EXHIBIT F
FORM OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
AGREEMENT
THIS AGREEMENT is dated the day of , 19
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, a having a place of business and mailing address of
(Mortgagee), and , a having a
place of business and mailing address of (Tenant).
RECITALS:
I. Tenant has entered into a certain lease (Lease) dated , 19 , with
, as lessor (Landlord) covering certain premises known as
, being part of a premises commonly known as and
located in (the Premises).
II. Mortgagee has agreed to make a mortgage loan in the amount of ($ )
Dollars (together with all amendments, modifications, supplements, renewals, extensions, spreaders
and consolidations thereto, the Mortgage) to the Landlord, secured by the Premises, and the
parties desire to set forth their agreement herein.
NOW, THEREFORE, in consideration of the Premises, and of the sum of One Dollar ($1.00) by each
party in hand paid to the other, the receipt of which is hereby acknowledged, the parties hereby
agree as follows:
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Said Lease is and shall be subject and subordinate to the Mortgage insofar as
it affects the real property of which the Premises form a part to the full extent of
the amounts secured thereby and interest thereon. |
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Tenants possession of the Premises will not be disturbed, and Tenants rights
and privileges under the Lease will not be reduced, as long as no Tenant Default, as
defined in the Lease, exists. |
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Tenant agrees that it will attorn to and recognize any purchaser at a
foreclosure sale under the Mortgage, any transferee who acquires the Premises by deed
in lieu of foreclosure, and the successors and assigns of such purchaser(s), as its
landlord for the unexpired balance (and any extensions, if exercised) of the term of
said Lease upon the same terms and conditions set forth in said Lease. |
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If it becomes necessary to foreclose the Mortgage, Mortgagee will not terminate
said Lease nor join Tenant in summary or foreclosure proceedings (unless such joinder
shall be required to protect Mortgagees interest under the Mortgage and in which case
Mortgagee shall not seek affirmative relief from Tenant in such action or proceeding)
so long as Tenant is not in default under any of the terms, covenants, or condition of
said Lease. |
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If Mortgagee succeeds to the interest of Landlord under the Lease, Mortgagee
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liable for any act or omission of any prior landlord (including
Landlord); or |
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liable for the return of any security deposit; or |
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subject to any offsets or defenses which Tenant might have
against any prior landlord (including Landlord); or |
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bound by any rent or additional rent which Tenant might have
paid for more than the current month to any prior landlord (including
Landlord); or |
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bound by any amendment, modification, extensions or renewal of
the Lease made without Lenders consent, which shall not be unreasonably
withheld; or |
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bound by any representation or warranty made by any prior
landlord (including Landlord). |
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This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their successors and assigns. |
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Tenant agrees to give Mortgagee, by registered or certified mail, return
receipt requested, a copy of any notice of default served upon Landlord, provided that
prior to such notice Tenant has been notified in writing (by way of Notice of
Assignment of Rent and Leases, or otherwise) of the address of such Mortgagee. Tenant
further agrees that Tenant shall not terminate the Lease nor, except to the extent that
the following are expressly permitted by the Lease, abate rents thereunder or claim an
offset against rents thereunder unless notice has been given to Mortgagee and Mortgagee
has been the same period of time as Landlord is afforded under the Lease to cure such
default. |
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Tenant acknowledges that it has notice that Landlords interest under the Lease
and the rents thereunder have been collaterally assigned to Mortgagee as part of the
security for the obligations secured by the Mortgage. Notice from Mortgagee to Tenant
directing payment of rent and all other sums due under the Lease shall have the same
effect under the Lease as a notice to Tenant from Landlord and Tenant agrees to be
bound by such notice. In the event of any conflict or inconsistency between a notice
from Landlord and a notice from Mortgagee, the notice from Mortgagee shall control. |
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This Agreement shall not be modified, amended or terminated except by a writing
duly executed by the party against whom the same is sought to be enforced. |
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This Agreement shall be governed by and construed in accordance with the
internal laws (as opposed to the laws of conflicts) of the state in which the Premises
are located. |
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IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year
first above written.
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Mortgagee: |
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By: |
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Its:
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Address:
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Tenant: |
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F-3
exv10w41
Page 1 of 1
Exhibit 10.41
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UBS Bank USA |
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C/O UBS Financial Services Inc. |
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100D Harbor Blvd./7th Floor |
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[ILLEGIBLE] |
March 5, 2008
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SUCAMPO PHARMACEUTICALS INC.
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Account Number:
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5V56045 |
4520 EAST WEST HIGHWAY
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Approved Facility Amount:
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$30,000,000.00 |
THIRD FLOOR |
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BETHESDAMD 20814-3319 |
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We are pleased to inform you that your application for a UBS Premier Variable Credit Line
has been approved.
Here are some important terms that apply to your
Credit Line
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Interest Rate: |
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Prevailing 1-month LIBOR (Reset Daily) +1% |
Loan Term: |
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Payable on demand |
Frequency of Interest Payments: |
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Monthly* |
Minimum Initial Draw Amount: |
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$25,001 |
Access Available Credit Via: |
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Credit Line checks or electronic disbursement*** |
If you did not request checks for your Credit Line during the application process, or
if you want to
arrange an electronic disbursement, please contact your Financial Advisor. Your
Financial Advisor can
also assist you with any questions about your Credit Line.
Thank you for your business.
Sincerely,
Steven M. Stewart
Senior Vice President
UBS Bank USA
Note: Loans made through a Credit Line are extended solely at the discretion of UBS Bank
USA under the terms of the Credit Line Agreement (Agreement). This is not a committed
loan facility and UBS Bank USA is [ILLEGIBLE] obligated to you or any third party to satisfy your
borrowing requests. Credit Line loan funds cannot be used to
purchase, trade or carry securities; to repay an outstanding loan that was used to purchase, trade or carry securities; or to pay off
a loan that you may have with an affiliate of UBS Bank USA.
* Loans extended by UBS Bank USA under your Credit Line are governed by the terms and conditions
set forth in your Credit Line Agreement.
** Unless other payment arrangements are made,
your monthly interest payment will be added to
the outstanding principal of your Credit Line provided the Bank
determines there is sufficient collateral, the loan,
balance does not exceed your approved facility amount and all other requirements under the Agreement are met.
*** Changes in the value of the collateral supporting a Credit Line, as well as other factors
described in the Credit Line Agreement may limit your ability to access funds from your Credit Line.
Borrower Agreement
BY
SIGNING BELOW, THE BORROWER UNDERSTANDS, ACKNOWLEDGES AND AGREES THAT:
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The Borrower has received and read a copy of this Borrower Agreement, the attached Credit
Line Account Application and Agreement (including the Credit Line Agreement following this
Borrower Agreement) and the Loan Disclosure Statement explaining the risk factors that the
Borrower should consider before obtaining a loan secured by the Borrowers securities account.
The Borrower agrees to be bound by the terms and conditions contained in the Credit Line
Account Application and Agreement (which terms and conditions are incorporated by reference).
Capitalized terms used in this Borrower Agreement have the meanings set forth in the Credit
Line Agreement. |
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THE BORROWER UNDERSTANDS AND AGREES THAT UBS BANK USA MAY DEMAND FULL OR PARTIAL PAYMENT OF
THE CREDIT LINE OBLIGATIONS, AT ITS SOLE OPTION AND WITHOUT CAUSE, AT ANY TIME, AND THAT
NEITHER FIXED RATE ADVANCES NOR VARIABLE RATE ADVANCES ARE EXTENDED FOR ANY SPECIFIC TERM OR
DURATION. THE BORROWER UNDERSTANDS AND AGREES THAT ALL ADVANCES ARE SUBJECT TO COLLATERAL
MAINTENANCE REQUIREMENTS. I UNDERSTAND THAT UBS BANK USA MAY, AT ANY TIME, IN ITS DISCRETION,
TERMINATE AND CANCEL THE CREDIT LINE REGARDLESS OF WHETHER OR NOT AN EVENT HAS OCCURRED. |
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UNLESS DISCLOSED IN WRITING TO UBS BANK USA AT THE TIME OF THIS AGREEMENT, AND APPROVED BY
UBS BANK USA, THE BORROWER AGREES NOT TO USE THE PROCEEDS OF ANY ADVANCE EITHER TO PURCHASE,
CARRY OR TRADE IN SECURITIES OR TO REPAY ANY DEBT (I) USED TO PURCHASE, CARRY OR TRADE IN
SECURITIES OR (II) TO ANY AFFILIATE OF THE UBS BANK USA. THE BORROWER WILL BE DEEMED TO REPEAT
THIS AGREEMENT EACH TIME THE BORROWER REQUESTS AN ADVANCE. |
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THE BORROWER UNDERSTANDS THAT BORROWING USING SECURITIES AS COLLATERAL ENTAILS RISKS. SHOULD
THE VALUE OF THE SECURITIES IN THE COLLATERAL ACCOUNT
DECLINE BELOW THE REQUIRED COL LATERAL
MAINTENANCE REQUIREMENTS, UBS BANK USA MAY REQUIRE THAT THE BORROWER POST ADDITIONAL
COLLATERAL, REPAY PART OR ALL OF THE LOAN AND/OR SELL THE BORROWERS SECURITIES. ANY REQUIRED
LIQUIDATIONS MAY INTERRUPT THE BORROWERS LONG-TERM INVESTMENT STRATEGIES AND MAY RESULT IN
ADVERSE TAX CONSEQUENCES. |
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Neither UBS Bank USA nor UBS Financial Services Inc. provides legal or tax advice. |
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Upon execution of this Credit Line Account Application and Agreement, the Borrower will have
supplied all of the information requested in the Application and the Borrower declares it as
true and accurate and further agrees to promptly notify UBS Bank USA in writing of any
material changes to any or all of the information contained in the Application including
information relating to the Borrowers financial situation. |
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Subject to any applicable financial privacy laws and regulations, data regarding the Borrower
and the Borrowers securities account may be shared with UBS Bank USA affiliates. Subject to
any applicable financial privacy laws and regulations, the Borrower requests that UBS Bank
USA share such personal financial data with non-affiliates of UBS Bank USA as is necessary or
advisable to effect, administer or enforce, or to service, process or maintain, all
transactions and accounts contemplated by this Agreement. |
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The Borrower authorizes UBS Bank USA and UBS Financial Services Inc. to obtain a credit
report or other credit references concerning the Borrower (including making verbal or written
inquiries concerning credit history) or to otherwise verify or update credit information
given to UBS Bank USA at any time. The Borrower authorizes the release of this credit report
or other credit information to UBS Bank USA affiliates as it deems necessary or advisable to
effect, administer or enforce, or to service, process or maintain all transactions and
accounts contemplated by this Agreement, and for the purpose of offering
additional products, from time to time, to the Borrower. The Borrower authorizes UBS Bank USA to
exchange Borrower information with any party it reasonably believes is conducting a
legitimate credit inquiry in accordance with the Fair Credit Reporting Act. UBS Bank USA may
also share credit or other transactional experience with the Borrowers designated UBS
Financial Services Inc. Financial Advisor or other parties designated by the Borrower. |
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UBS Bank USA is subject to examination by various federal, state and self-regulatory
organizations and that books and records maintained by UBS Bank USA are subject to inspection
and subpoena by these regulators and by federal, state, and local law enforcement officials.
The Borrower acknowledges that such regulators and officials may, pursuant to treaty or other
arrangements, in turn disclose such information to the officials or regulators of other
countries, and that U.S. courts may be required to compel UBS Bank USA to disclose such
information to the officials or regulators of other countries. The Borrower agrees that UBS
Bank USA may disclose to such regulators and officials information about the Borrower and
transactions in the credit line account or other accounts at UBS BANK USA without notice to
the Borrower. In addition, UBS Bank USA may in the context of a private dispute be required by
subpoena or other judicial process to disclose information or produce documentation related to
the Borrower, the credit line account or other accounts at UBS Bank USA. The Borrower
acknowledges and agrees that UBS Bank USA reserves the right, in its sole discretion, to
respond to subpoenas and judicial process as it deems appropriate. |
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To help the government fight the funding of terrorism and money laundering activities,
Federal law requires all financial institutions to obtain, verify, and record information
that identifies each person who opens an account. When the Borrower opens an account with UBS
Bank USA, UBS Bank USA will ask for the Borrowers name, address, and other information that
will allow UBS Bank USA to identify the Borrower. UBS Bank USA may also ask to see other
identifying documents. UBS Financial Services Inc. and UBS Bank USA are firmly committed to
compliance with all applicable laws, rules and regulations, including those related to
combating money laundering. The Borrower understands and agrees that the Borrower must take
all necessary steps to comply with the anti-money laundering laws, rules and regulations of
the Borrowers country of origin, country of residence and the situs of the Borrowers
transaction. |
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UBS Bank USA and its affiliates will act as creditors and, accordingly, their interests may
be inconsistent with, and potentially adverse to, the Borrowers interest. As a lender and
consistent with normal lending practice, UBS Bank USA may take any steps necessary to perfect
its interest in the Credit Line, issue a call for additional collateral or force the sale of
the Borrowers securities if the Borrowers actions or inactions call the Borrowers
creditworthiness into question. Neither UBS Bank USA nor UBS Financial Services Inc. will act
as Clients investment advisor with respect to any liquidation. In fact, UBS Bank USA will
act as a creditor and UBS Financial Services Inc. will act as a securities intermediary. |
L. |
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The Borrower understands that, if the Collateral Account is a managed account with UBS
Financial Services Inc., (i) in addition to any fees payable to UBS Financial Services Inc.
in connection with the Borrowers managed account, interest will be payable to the Bank on an
amount advanced to the Borrower in connection with the Credit Line Account, and (ii) the
performance of the managed account might not exceed the managed account fees and the interest
expense payable to the Bank in which case the Borrowers overall rate of return will be less
than the costs associated with the managed account. |
M. |
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UBS Bank USA may provide copies of all credit line account statements to UBS Financial
Services Inc. and to any Guarantor. The Borrower acknowledges and agrees that UBS Bank USA
may share any and all information regarding the Borrower and the Borrowers accounts at UBS
Bank USA with UBS financial Services Inc. UBS Financial Services Inc. may provide copies of
all statements and confirmations concerning each Collateral Account to UBS Bank USA at such
times and in such manner as UBS Bank USA may request and may share with UBS Bank USA any and
all information regarding the Borrower and the Borrowers accounts with UBS Financial Services
Inc. |
IN WITNESS WHEREOF, the undersigned (Borrower) has signed this Agreement, or has caused this
Agreement to be signed in its name by its duly authorized representatives, as of the date
indicated below.
DATE:
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Name of Borrower |
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SUCAMPO PHARMACEUTICALS, INC. |
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BY: |
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/s/ Mariam Morris |
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Title: |
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CFO OF SUCAMPO PHARMACEUTICALS, INC. |
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(Signature of Authorised Signatory of Borrower) MARIAM MORRIS |
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(Title of Authorized Signatory of Borrower) |
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BY: |
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/s/ Ryuji Ueno |
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Title: |
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CEO OF SUCAMPO PHARMACEUTICALS, INC. |
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(Signature of Authorised Signatory of Borrower) Ryuji Ueno |
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(Title of Authorized Signatory of Borrower) |
The authorized signatory of the Borrower must be one of the Authorized Persons designated on the
applicable UBS Bank USA supplemental form executed by the Borrower (e.g., the Supplemental
Corporate Resolution Form (HP Form).
©2006 UBS Bank USA. All rights reserved.
UBS Bank USA is a service mark of UBS AG.
Credit Line Agreement
Credit Line Agreement Demand Facility
THIS CREDIT LINE AGREEMENT as it may be amended, supplemented or otherwise modified from time to
time, this Agreement) is made by and between the party or parties signing (as the Borrower on the
Application to which this Agreement is attached (together and individually, the Borrower) and UBS
Bank USA (the Bank) and, together with the Application, establishes the terms and conditions that
will govern the uncommitted demand loan facility made available to the Borrower by the Bank. This
Agreement becomes effective upon the earlier of (i) notice from the Bank (which notice may be oral
or written) to the Borrower that the Credit Line has been approved and (ii) the Bank making an
Advance to the Borrower.
1. Definitions
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Advance means any Fixed Rate Advance or Variable Rate Advance made by the Bank pursuant to
this Agreement. |
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Advance Advice means a written or electronic notice by the Bank, sent to the Borrower, the
Borrowers financial advisor at UBS Financial Services Inc. or any other party designated by
the Borrower to receive the notice, confirming that a requested Advance will be a Fixed Rate
Advance and specifying the amount, fixed rate of interest and interest Period for the Fixed
Rate Advance. |
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Application means the Credit Line Account Application and Agreement that the Borrower has
completed and submitted to the Bank. |
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Approved Amount means the maximum principal amount of Advances that is permitted to be
outstanding under the Credit Line at any time, as specified in writing by the Bank. |
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Breakage Costs and Breakage Fee have the meanings specified in Section 6(b). |
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Business Day means a day on which both of the Bank and UBS Financial Services Inc. are
open for business. For notices and determinations of LIBOR, Business
Day must also be a day for trading by and between banks in U.S. dollar deposits in the London interbank
market. |
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Collateral has the meaning specified in Section 8(a). |
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Collateral Account means, individually and collectively, each account of the Borrower
or pledgor at UBS Financial Services Inc. or UBS International Inc., as applicable, that is
either identified as a Collateral Account on the Application to which this Agreement is
attached or subsequently identified as a Collateral Account by the
Borrower or Pledgor in
writing, together with all successors to those identified accounts, irrespective of whether
the successor account bears a different name or account number. |
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Credit Line has the meaning specified in Section 2(a). |
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Credit Line Account means each Fixed Rate Account and each Variable Rate Account of the
Borrower that is established by the Bank in connection with this Agreement and either
identified on the Application or subsequently identified as a Credit Line Account by the Bank
by notice to the Borrower, together with all successors to those identified accounts,
irrespective of whether any successor account bears a different name or account number. |
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Credit Line Obligations means, at any time of determination, the aggregate of the
outstanding principal amounts of all Advances, together with all accrued but unpaid interest
on the outstanding principal amounts, any and all fees or other charges payable in connection
with the Advances and any costs of collection (including reasonable attorneys fees) and other
amounts payable by the Borrower under this Agreement, and any and all other present or future
obligations of the Borrower and the other respective Loan Parties under this Agreement and the
related agreements, whether absolute or contingent, whether or not due or mature. |
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Event means any of the events listed in Section 10. |
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Fixed Rate Advance means any advance made under the Credit Line that accrues interest at
a fixed rate. |
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Guarantor means any party who guaranties the payment and performance of the Credit Line
Obligations. |
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Guaranty Agreement means an agreement pursuant to which a Guarantor agrees to guaranty
payment of the Credit Line Obligations. |
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Interest Period means, for a Fixed Rate Advance, the number of days, weeks or months
requested by the Borrower and confirmed in the Advance Advice relating to the Fixed Rate
Advance, commencing on the date of (i) the extension of the
Fixed Rate Advance or (ii) any
renewal of the Fixed Rate Advance and, in each case, ending on the last day of the period. If
the last day is not a Business Day, then the Interest Period will end on the immediately
succeeding Business Day. If the last Business Day would fall in the next calendar month, the
Interest Period will end on the immediately preceding Business Day. Each monthly or longer
Interest Period that commences on the last Business Day of a calendar month (or on any day for
which there is no numerically corresponding day in the appropriate subsequent calendar month)
will end on the last Business Day of the appropriate calendar month. |
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Joint Borrower has the meaning specified in Section 7(a). |
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LIBOR means, as of any date of determination: |
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for Variable Rate Advances, the prevailing London Interbank Offered Rate for
deposits in U.S. dollars having a maturity of 30 days as published in The Wall Street
Journal Money Rates Table on the date of the Advance; and |
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(ii) |
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for Fixed Rate Advances, the prevailing London Interbank Offered Rate for deposits
in U.S. dollars having a maturity corresponding to the length of the Interest Period
applicable to the Advance as quoted by the Bloomberg service at 4:00 a.m. Eastern
Standard Time on the date of the Advance. |
If the rate ceases to be regularly published by The Wall Street Journal or stated by the
Bloomberg service, as applicable, LIBOR will be determined by the Bank in its sole and absolute
discretion. For any day that is not a Business Day, LIBOR will be the applicable LABOR in
effect immediately prior to that day.
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Loan Party means each Borrower, Guarantor and Pledgor, each in their respective
capacities under this Agreement or any related agreement. |
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Person means any natural person, company, corporation, firm,partnership, joint venture,
limited liability company or limited liability partnership, association, organization or any
other legal entity. |
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Pledgor means each Person who pledges to the Bank any Collateral to secure the Credit
Line Obligations (or to secure the obligations of any Guarantor with respect to the guaranty
of the Credit Line Obligations). Pledgor will include (i) each Borrower who pledges |
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Collateral to secure the Credit Line Obligations, (ii) each Guarantor who has pledged
collateral to secure the Credit Line Obligations or its obligations under a Guaranty Agreement,
(iii) any spouse of a Borrower who executes a spouses pledge and consent agreement with respect
to a jointly held collateral account, (iv) any other joint account holder who executes a joint
account holder pledge and consent agreement with respect to a jointly held collateral account,
and (v) any other Person who executes a pledge agreement with respect to the Credit Line. |
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Premier Credit Line means any Credit Line with an Approved Amount equal to or greater than
$250,000. |
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Prime Credit Line means any Credit Line with an Approved Amount less than $250,000. |
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Prime Rate means the floating Prime Rate as published in The Wall Street Journal Money
Rates Table from time to time. The Prime Rate will change as and when the Prime Rate as
published in The Wall Street Journal. In the event that The Wall Street Journal does not
publish a Prime Rate, the Prime Rate will be the rate as determined by the Bank in its sole
and absolute discretion. |
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Securities Intermediary has the meaning specified in Section 9. |
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UBS Financial Services Inc. means UBS Financial Services Inc. and its successors. |
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UBS-I means UBS International Inc. and its successors. |
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Variable Rate Advance means any advance made under the Credit Line that accrues interest
at a variable rate. |
2. Establishment of Credit Line; Termination
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Upon the effectiveness of this Agreement, the Bank establishes an UNCOMMITTED, demand
revolving line of credit (the Credit Line) in an amount equal to the Approved Amount. The
Bank may, from time to time upon request of the Borrower, without obligation and in its sole
and absolute discretion, authorize and make one or more Advances to the Borrower. The Borrower
acknowledges that the Bank has no obligation to make any Advances to the Borrower. The Bank
may carry each Variable Rate Advance in a Variable Rate Account and may carry each Fixed Rate
Advance in a Fixed Rate account, but all Advances will constitute extensions of credit
pursuant to a single Credit Line. The Approved Amount will be determined, and may be adjusted
from time to time, by the Bank in its sole and absolute discretion. |
b) |
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THE BORROWER AND EACH OTHER LOAN PARTY UNDER STAND AND AGREE THAT THE BANK MAY DEMAND FULL
OR PARTIAL PAYMENT OF THE CREDIT LINE OBLIGATIONS, AT ITS SOLE AND ABSOLUTE DISCRETION AND
WITHOUT CAUSE, AT ANY TIME, AND THAT NEITHER FIXED RATE ADVANCES NOR VARIABLE RATE ADVANCES
ARE EXTENDED FOR ANY SPECIFIC TERM OR DURATION. |
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UNLESS DISCLOSED IN WRITING TO THE BANK AT THE TIME OF THE APPLICATION, AND APPROVED BY THE
BANK, THE BORROWER AGREES NOT TO USE THE PROCEEDS OF ANY ADVANCE EITHER TO PURCHASE,
CARRY OR TRADE IN SECURITIES OR TO REPAY ANY DEBT (I) USED TO PURCHASE, CARRY OR TRADE IN
SECURITIES OR (II) TO ANY AFFILIATE OF THE BANK. THE BORROWER WILL BE DEEMED TO REPEAT THE
AGREEMENT IN THIS SECTION 2(C) EACH TIME IT REQUESTS AN ADVANCE. |
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Prior to the first Advance under the Credit Line, the Borrower must
sign and deliver to the Bank a Federal Reserve Form U-1 and all other documentation as the Bank
may require. The Borrower acknowledges that neither the Bank nor any of its affiliates has
advised the Borrower in any manner regarding the purposes for which the Credit Line will be
used. |
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The Borrower consents and agrees that, in connection with establishing the Credit Line
Account, approving any Advances to the Borrower or for any other purpose associated with the
Credit Line, the Bank may obtain a consumer or other credit report from a credit reporting
agency relating to the Borrowers credit history. Upon request, the Bank will inform the
Borrower: (i) whether or not a consumer or other credit report was requested; and (ii) if so,
the name and address of the consumer or other credit reporting agency that furnished the
report. |
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The Borrower understands that the Bank will, directly or indirectly, pay a portion of the
interest that it receives to the Borrowers financial advisor at UBS Financial Services Inc.
or one of its affiliates. To the extent permitted by applicable law, the Bank may also charge
the Borrower fees for establishing and servicing the Credit Line Account. |
g) |
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Following each month in which there is .activity in the Borrowers Credit Line Account in
amounts greater than $1, the Borrower will receive an account statement showing the new
balance, the amount of any new Advances, year to date interest charges, payments and other
charges and credits that have been registered or posted to the Credit Line Account. |
h) |
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Each of the Loan Parties understands and agrees that the Bank may, at any time, in its
discretion, terminate and cancel the Credit Line regardless of whether or not an Event has
occurred. In the event the Bank terminates and cancels the Credit Line, the Credit Line
Obligations shall be immediately due and payable in full. If the Credit Line Obligations are
not paid in full, the Bank shall have the right, at its option, to exercise any or all of
its remedies described in Section 10 of this Agreement. |
3. Terms of Advances
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Advances made under this Agreement will be available to the Borrower in the form, and
pursuant to procedures, as are established from time to time by the Bank in its sole and
absolute discretion. The Borrower and each Loan Party agree to provide all documents,
financial or other information regarding any Advance as the Bank may request. Advances will be
made by wire transfer of funds to an account as specified in writing by the Borrower or by any
other method agreed upon by the Bank and the Borrower. The Borrower acknowledges and agrees
that the Bank will riot make any Advance to the Borrower unless the collateral maintenance
requirements that are established by the Bank in its sole and absolute discretion have been
satisfied. |
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Each Advance made under a Premier Credit Line will be a Variable Rate Advance unless
otherwise designated as a Fixed Rate Advance in an Advance Advice sent by the Bank to the
Borrower. The Ban will not designate any Advance as a Fixed Rate Advance unless it has been
requested to do so by the Borrower (acting directly or indirectly through the Borrowers UBS
Financial Services Inc. financial advisor or other agent designated by the Borrower and
acceptable to the Bank). Each Advance Advice will be conclusive and binding upon the Borrower,
absent manifest error, unless the Borrower otherwise notifies the Bank in writing no later
than the close of business, New York time, on the third Business Day after the Advance Advice
is received by the Borrower. |
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Each Advance made under a Prime Credit Line will be a Variable Advance. |
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Unless otherwise agreed by the Bank: (i) all Fixed Rate Advances must be in an amount of at
least $100,000; and (II) all variable Rate Advances must be in an amount of at least $2,500.
If the Borrower is a natural person, the initial Variable Rate Advance under the Credit Line
must be in an amount equal to at least $25,001 (the Initial
Advance Requirement). If the
initial Advance requested by the Borrower is made in the form of a check drawn on the Credit
Line that does not satisfy the initial Advance Requirement, then, in addition to and not in
limitation of the Banks rights, remedies, powers or privileges under this Agreement or
applicable law, the Bank may, in its sole and absolute discretion: |
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pay the check drawn by the Borrower if, prior to paying that check, the Bank makes
another Advance to the Borrower, which Advance shall be in an amount not less than
$25,001; or |
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pay the check drawn by the Borrower; or |
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decline to pay (bounce) the check. |
If the Bank elects option (ii), no interest shall accrue on the amount of the Advance made by
paying the check, and the amount of that Advance shall be due and payable to the Bank
immediately (with or without demand by the Bank).
4. Interest
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Each Fixed Rate Advance will bear interest at a fixed rate for the Interest Period specified
in the related Advance Advice. The rate of interest payable on each Fixed Rate Advance will be
determined by adding a percentage rate to LIBOR as of the date that the fixed rate is
determined. |
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Each Variable Rate Advance under a Premier Credit Line will bear interest at a variable rate
equal to LIBOR, adjusted daily, plus the per centage rate that (unless otherwise specified by
the Bank in writing) is shown on Schedule I below for the Approved Amount of the Credit Line.
For Premier Credit Lines, the rate of interest payable on Variable Rate Advances is subject to
change without notice in accordance with fluctuations in LIBOR and in the Approved Amount. On
each day that LIBOR changes or the Approved Amount crosses one of the thresholds that is
indicated on Schedule I (or that is otherwise specified by the Bank in writing), the interest
rate on all Variable Rated Advances will change accordingly. |
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Each Variable Rate Advance under a Prime Credit Line will bear interest at a variable rate
equal to the Prime Rate, adjusted daily, plus the percentage rate that (unless otherwise
specified by the Bank in writing) is shown on the attached Schedule II and that corresponds to
the aggregate principal amount outstanding under the Prime Credit Line on that day. For Prime
Credit Lines, the rate of interest payable on Variable Rate Advances is subject to change
without notice in accordance with fluctuations in the Prime Rate and in the aggregate amount
outstanding under the Prime Credit Line. On each date that the Prime Rate changes or the
aggregate principal amount outstanding under the Prime Credit Line crosses one of the
thresholds that is indicated on Schedule II (or that is otherwise specified by the Bank in
writing), the interest rate on all Variable Rate Advances will change accordingly. |
5. Payments
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Each Fixed Rate Advance will be due and payable in full ON DEMAND or, if not earlier
demanded by the Bank, on the last day of the applicable Interest Period. Any Fixed Rate
Advance as to which the Bank has not made a demand for payment and that is not paid in full
or renewed, which renewal is in the sole and absolute discretion of the Bank (pursuant to
procedures as may be established by the Bank) as another Fixed Rate Advance on or before the
last day of its interest Period, will be automatically renewed on that date as a U.S. dollar
denominated Variable Rate Advance in an amount (based,
in the case of any conversion of a non-US. dollar denominated Fixed Rate Advance, upon the
applicable, spot currency exchange rate as of the maturity date, as determined by the Bank)
equal to the unpaid principal balance of the Fixed Rate Advance plus any accrued but unpaid
interest on the Fixed Rate Advance, which Variable Rate Advance will then accrue additional
interest at a variable rate as provided in this Agreement. |
b) Each Variable Rate Advance will be due and payable ON DEMAND.
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The Borrower promises to pay the outstanding principal amount of each Advance, together with
all accrued but unpaid interest on each Advance, any and all fees or other charges payable in
connection with each Advance, on the date the principal amount becomes due (whether by reason
of demand, the occurrence of a stated maturity date, by reason of acceleration or otherwise).
The Borrower further promises to pay interest in respect of the unpaid principal balance of
each Advance from the date the Advance is made until it is paid in full. All interest will be
computed on the basis of the number of days elapsed and a 360-day year. Interest on each
Advance will be payable in arrears as follows: |
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for Fixed Rate Advances on the last day of the Interest Period (or if the
Interest Period is longer than three months, on the last day of each three month period
following the date of the Advance) and on each date that all or any portion of the
principal amount of the Fixed Rate Advance becomes due or is paid; and |
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for Variable Rate Advances on the twenty-second day of each month other than
December, and on the thirty-first day of December, and on each date that all or any
portion of the principal amount of the Variable Rate Advance becomes due or is paid. |
To the extent permitted by law, interest charges on any Advance that are not paid when due will
be treated as principal and will accrue interest at a variable rate from the date the payment
of interest was due until it is repaid in full.
d) |
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All payments of principal, interest or other amounts payable under this Agreement will be
made in immediately available funds and in the same currency in which the Advance was made,
which unless otherwise agreed by the Bank, will be U.S. dollars. UBS Financial Services Inc.
or UBS International Inc., as applicable, may act as collecting and servicing agent for the
Bank for the Advances. All payments will be made by wire transfer of funds to an account
specified by the Bank or by another method agreed upon by the Bank and the Borrower. Upon
receipt of all payments, the Bank will credit the same to the Credit Line Account. The Bank
shall apply the proceeds of any payments in the following order; first to any Breakage Costs,
Breakage Fee, other fees, costs of collection and expenses, second to accrued interest and
third to the outstanding principal amount of the related Advance. |
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All payments must be made to the Bank free and clear of any and all present and future taxes
(including withholding taxes), levies, imposts, duties, deductions, fees, liabilities and
similar charges other than those imposed on the overall net income of the Bank. If so
requested by the Bank, the Borrower will deliver to the Bank the original or a certified copy
of each receipt evidencing payment of any taxes or, if no taxes are payable in respect of any
payment under this Agreement, a certificate from each appropriate taxing authority, or an
opinion of counsel in form and substance and from counsel acceptable to the Bank in its sole
and absolute discretion, in either case stating that the payment is exempt from or not subject
to taxes. If any taxes or other charges are required to be withheld or deducted from any
amount payable by the Borrower under this Agreement,
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the amount payable will be increased to the amount which, after deduction from the increased
amount of all taxes and other charges required to be withheld or deducted from the amount
payable, will yield to the Bank the amount stated to be payable under this Agreement If any of
the taxes or charges are paid by the Bank, the Borrower will reimburse the Bank on demand for
the payments, together with ail interest and penalties that may be imposed by any governmental
agency. None of the Bank, UBS Financial Services Inc., UBS-I or their respective employees has
provided or will provide legal advice to the Borrower or any Loan Party regarding compliance
with (for the implications of the Credit Line and the related guaranties and pledges under) the
laws (including tax laws) of the jurisdiction of the Borrower or any Loan Party or any other
jurisdiction. The Borrower and each Loan Party are and shall be solely responsible for, and the
Bank shall have no responsibility for, the compliance by the Loan Parties with any and all
reporting and other requirements arising under any applicable laws. |
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In no event will the total interest and fees, if any, charged under this Agreement exceed
the maximum interest rate or total fees permitted by law. In the event any excess interest or
fees are collected, the same will be refunded or credited to the Borrower. If the amount of
interest payable by the Borrower for any period is reduced pursuant to this Section 5(f), the
amount of interest payable for each succeeding period will be increased to the maximum rate
permitted by law until the amount of the reduction has been received by the Bank. |
6. Prepayments; Breakage Charges
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The Borrower may repay any Variable Rate Advance at any time, in whole or in part, without
penalty. |
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The Borrower may repay any Fixed Rate Advance, in whole or in part. The Borrower agrees to
reimburse the Bank, immediately upon demand, for any loss or cost (Breakage Costs) that the
Bank notifies the Borrower has been incurred by the Bank as a result of (i) any payment of the
principal of a Fixed Rate Advance before the expiration of the Interest Period for the Fixed
Rate Advance (whether voluntarily, as a result of acceleration, demand or otherwise), or (ii)
the Customers failure to take any Fixed Rate Advance on the date agreed upon, including any
loss or cost (including loss of profit or margin) connected with the Banks re-employment of
the amount so prepaid or of those funds acquired by the Bank to fund the Advance not taken on
the agreed upon date. |
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Breakage Costs will be calculated by determining the differential between the stated rate of
interest for the Fixed Rate Advance and prevailing LIBOR and multiplying the differential by
the sum of the outstanding principal amount of the Fixed Rate Advance (or the principal amount
of Fixed Rate Advance not taken by the Borrower) multiplied by the actual number of days
remaining in the Interest Period for the Fixed Rate Advance (based upon a 360-day year). The
Borrower also agrees to promptly pay to the Bank an administrative fee (Breakage Fee) in
connection with any permitted or required prepayment. The Breakage Fee will be calculated by
multiplying the outstanding principal amount of the Fixed Rate Advance (or the principal amount
of Fixed Rate Advance not taken by the Borrower) by two basis points (0 02%). Any written
notice from the Bank as to the amount of the loss or cost will be conclusive absent manifest
error. |
7. Joint Credit Line Account Agreement; Suspension and Cancellation
a) |
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If more than one Person is signing this Agreement as the Borrower, each party (a joint
Borrower) will be jointly and severally liable for the Credit Line Obligations, regardless
of any change in business relations, divorce, legal separation, or other legal proceedings or
in any agreement that may affect liabilities between the parties. Except as
provided below for the reinstatement of a suspended or cancelled Credit Line, and unless
otherwise agreed by the Bank in writing, the Bank may rely on, and each Joint Borrower will be
responsible for, requests for Advances, directions, instructions and other information provided
to the Bank by any joint Borrower. |
b) |
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Any Joint Borrower may request the Bank to suspend or cancel the Credit Line by sending the
Bank a written notice of the request addressed to the Bank at the address shown on the
Borrowers periodic Credit Line Account statements. Any notice will become effective three
Business Days after the date that the Bank receives it, and each joint Borrower will continue
to be responsible for paying: (i) the Credit Line Obligations as of the effective date of the
notice, and (ii) all Advances that any joint Borrower has requested but that have not yet
become part of the Credit Line Obligations as of the effective date of the notice. No notice
will release or in any other way affect the Banks interest in the Collateral. All subsequent
requests to reinstate credit privileges must be signed by all Joint Borrowers comprising the
Borrower, including the Joint Borrower requesting the suspension of credit privileges. Any
reinstatement will be granted or denied in the sole and absolute discretion of the Bank. |
c) |
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All Credit Line Obligations will become immediately due and payable in full as of the
effective date of any suspension or cancellation of the Credit Line. The Borrower will be
responsible for the payment of all charges incurred on the Advances after any the effective
date. The Bank will not release any Loan Party from any of the obligations under this
Agreement or any related agreement until the Credit Line Obligations have been paid in full
and this Agreement has been terminated. |
8. Collateral; Grant of Security Interest; Set-off
a) |
|
To secure payment or performance of the Credit Line Obligations, the Borrower assigns,
transfers and pledges to the Bank, and grants to the Bank a first priority lien and security
interest in the following assets and rights of the Borrower, wherever located and whether
owned now or acquired or arising in the future: (i) each Collateral Account; (ii) any and all
money, credit balances, certificated and uncertificated securities, security entitlements,
commodity contracts, certificates of deposit, instruments, documents, partnership interests,
general intangibles, financial assets and other investment property now or in the future
credited to or carried, held or maintained in any Collateral Account; (iii) any and all
over-the-counter options, futures, foreign exchange, swap or similar contracts between the
Borrower and either UBS Financial Services Inc. or any of its affiliates; (iv) any and all
accounts of the Borrower at the Bank or any of its affiliates; (v) any and all supporting
obligations and other rights ancillary or attributable to, or arising in any way in connection
with, any of the foregoing; and (vi) any and all interest, dividends, distributions and other
proceeds of any of the foregoing (collectively, the Collateral). |
b) |
|
The Borrower and, if applicable, any Pledgor on the Collateral Account will take all
actions reasonably requested by the Bank to evidence, maintain and perfect the Banks first
priority security interest in, and to enable the Bank to obtain control over, the Collateral
and any additional collateral pledged by the Pledgors, including but not limited to making,
executing, recording and delivering to the Bank financing statements and amendments thereto,
control agreements, notices, assignments, listings, powers, consents and other documents
regarding the Collateral and the Banks security interest in the Collateral in a form as the
Bank reasonably may require. Each Loan Party irrevocably authorizes and appoints each of the
Bank and UBS Financial Services Inc., as collateral agent, to act as their agent and
attorney-in-fact to file any documents or to execute any documents in their name, with or
without designation of authority. Each Loan Party acknowledges that it will be obligated in
respect of the documentation as if it had executed the documentation itself. |
8
c) |
|
The Borrower ,and, if applicable, any other Pledgor on the Collateral Account)
agrees to maintain in a Collateral Account, at all times, Collateral having an aggregate lending
value as specified by the Bank from time to time. |
|
d) |
|
The Banks sole duty for the custody, safe keeping and physical preservation of any
Collateral in its possession will be to deal with the Collateral in the same manner as the Bank
deals with similar property for its own account. The Borrower (and, if applicable, any other
Pledgor on the Collateral Account) agrees that the Bank will have no responsibility to act on any
notice of corporate actions or events provided to holders of securities or other investment
property included in the Collateral. The Borrower (and, if applicable, any other Pledgor on the
Collateral Account) agrees to (i) notify the Bank promptly upon receipt of any communication to
holders of the investment property disclosing or proposing any stock split, stock dividend,
extraordinary cash dividend, spin-off or other corporate action or event as a result of which the
Borrower or Pledgor would receive securities, cash (other than ordinary cash dividends) or other
assets in respect of the investment property, and (ii) immediately upon receipt by the Borrower or
Pledgor of any of these assets, cause them to be credited to a Collateral Account or deliver them
to or as directed by the Bank as additional Collateral. |
|
e) |
|
The Borrower (and, if applicable, any other Pledgor on the Collateral Account) agrees that
all principal, interest, dividends, distributions, premiums or other income and other payments
received by the Bank or credited to the Collateral Account in respect of any Collateral may be held
by the Bank as additional Collateral or applied by the Bank to the Credit Line Obligations. The
Bank may create a security interest in any of the Collateral and may, at any time and at its
option, transfer any securities or other investment property constituting Collateral to a
securities account maintained in its name or cause any Collateral Account to be redesignated or
renamed in the name of the Bank. |
|
f) |
|
If a Collateral Account has margin features, the margin features will be removed by UBS
Financial Services Inc. or UBS International Inc., as applicable, so long as there is no
outstanding margin debit in the Collateral Account. |
|
g) |
|
If the Collateral Account permits cash withdrawals in the form of check writing, access card
charges, bill payment and/or electronic funds transfer services (for example, Resource
Management Account®, Business Services Account BSA®, certain Basic Investment Accounts and certain
accounts enrolled in UBS Financial Services Inc. Investment solutions programs), the Withdrawal
Limit for the Collateral Account, as described in the documentation governing the account will be
reduced on an ongoing basis so that the aggregate lending value of the Collateral remaining in the
Collateral Account following the withdrawal may not be less than the amount required pursuant to
Section 8(c). |
|
h) |
|
In addition to the Banks security interest, the Bank will at all times have a right to set off
any or all of the Credit Line Obligations at or after the time at which they become due, whether
upon demand, at a stated maturity date, by acceleration or otherwise, against all securities, cash,
deposits or other property in the possesion of or at any time in any account maintained with the
Bank or any of its affiliates by or for the benefit of the Borrower, whether carried individually
or jointly with others. This right is in addition to, and not in limitation of, any right the Bank
may have at law or otherwise. |
|
i) |
|
The Bank reserves the right to disapprove any Collateral and to require the Borrower at any time
to deposit into the Borrowers Collateral Account additional Collateral in the amount as the Bank
requests or to substitute new or additional Collateral for any Collateral that has previously been
deposited in the Collateral Account. |
9. Control
For the purpose of giving the Bank control over each Collateral Account and in order to perfect the
Banks security interests in the Collateral, the Borrower and each Pledgor on the applicable
Collateral Account consents to compliance by UBS Financial Services Inc., UBS-I or any other
securities intermediary (in any case, the Securities Intermediary) maintaining a Collateral
Account with entitlement orders and instructions from the Bank (or from any assignee or successor
of the Bank) regarding the Collateral Account without the further consent of the Borrower or any
other Pledgor on the applicable Collateral Account. Without limiting the foregoing, the Borrower
and each Pledgor on the Collateral Account acknowledges, consents and agrees that, pursuant to a
control agreement entered into between the Bank and the Securities Intermediary:
a) |
|
The Securities Intermediary will comply with entitlement orders originated by the Bank
regarding any Collateral Account without further consent from the Borrower or any Pledgor.
The Securities Intermediary will treat all assets credited to a Collateral Account, including
money and credit balances, as financial assets for purposes of Article 8 of the Uniform
Commercial Code. |
|
b) |
|
In order to enable the Borrower and any Pledgor on the applicable Collateral Account to trade
financial assets that are from time to time credited to a Collateral Account, the Securities
Intermediary may comply with entitlement orders originated by the Borrower or any Pledgor on the
applicable Collateral Account (or if so agreed by the Bank, by an investment adviser designated by
the Borrower or any Pledgor on the applicable Collateral Account and acceptable to the Bank and
the Securities Intermediary) regarding the Collateral Account, but only until the time that the
Bank notifies the Securities Intermediary, that the Bank is asserting exclusive control over the
Collateral Account. After the Securities Intermediary has received a notice of exclusive control
and has had a reasonable opportunity to comply, it will no longer comply with entitlement orders
originated by the Borrower or any Pledgor (or by any investment adviser designated by the Borrower
or any Pledgor) concerning the Collateral Account. Notwithstanding the foregoing, however, and
irrespective of whether it has received any notice of exclusive control, the Securities
Intermediary will not comply with any entitlement order originated by the Borrower or any Pledgor
(or by any investment adviser designated by the Borrower or any Pledgor) to withdraw any financial
assets from a Collateral Account or to pay any money, free credit balance or other amount owing on
a Collateral Account (other than cash withdrawals and payments not exceeding the
Withdrawal Limit as contemplated in Section 8 (g)) without the prior consent of the Bank. |
10. Remedies
a) |
|
If any of the following events (each, an Event) occurs: |
|
(i) |
|
the Borrower fails to pay any amount due under this Agreement; |
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(ii) |
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the Borrower and/or any other relevant Loan Party fails to maintain sufficient Collateral in a
Collateral Account or any Guarantor fails to maintain collateral as required under its Guaranty
Agreement; |
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(iii) |
|
the Borrower or any other Loan Party breaches or fails to perform any other covenant,
agreement, term or condition that is applicable to it under this Agreement or any related
agreement, or any representation or other statement of the Borrower (or any Loan Party) in this
Agreement or in any related agreement is incorrect in any material respect when made or deemed
made; |
9
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(iv) |
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the Borrower or any other Loan Party dies or is declared (by appropriate authority)
incompetent or of unsound mind or is indicted or convicted of any crime or, if not an individual,
ceases to exist; |
|
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(v) |
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any voluntary or involuntary proceeding for bankruptcy, reorganization, dissolution or
liquidation or similar action is commenced by or against the Borrower
or any other Loan Party, or a
trustee in bankruptcy, receiver, conservator or rehabilitator is appointed, or an assignment for
the benefit of creditors is made, with respect to the Borrower or any other Loan Party or its
property; |
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(vi) |
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the Borrower or any Loan Party is insolvent, unable to pay its debts as they fall due,
stops, suspends or threatens to stop or suspend payment of all or a material part of its debts,
begins negotiations or takes any proceeding or other step with a view to readjustment, rescheduling
or deferral of all or any part of its indebtedness, which it would or might otherwise be unable to
pay when due, or proposes or makes a general assignment or an arrangement or composition with or
for the benefit of its creditors; |
|
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(vii) |
|
a Collateral Account (or any account in which collateral provided by a Loan Party is
maintained) or any portion thereof is terminated, attached or subjected to a levy; |
|
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(viii) |
|
the Borrower or any Loan Party fails to provide promptly all financial and other
information as the Bank may request from time to time; |
|
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(ix) |
|
any indebtedness of the Borrower or any other Loan Party in respect of borrowed money
(including indebtedness guar antied by the Borrower or any other Loan Party) or in respect of any
swap, forward, cap, floor, collar, option or other derivative transaction, repurchase or similar
transaction or any combination of these transactions is not paid when due, or any event or
condition causes the indebtedness to become, or permits the holder to declare the indebtedness to
be, due and payable prior to its stated maturity; |
|
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(x) |
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final judgment for the payment of money is rendered against Client (or any Loan Party) and
within thirty days from the entry of judgment has not been discharged or stayed pending appeal or
has not been discharged within thirty days from the entry of a final order of affirmance on appeal; |
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(xi) |
|
any legal proceeding is instituted or any other event occurrs or condition exists that in the
Banks judgment calls into question (A) the validity or binding effect of this Agreement or any
related agreement or any of the Borrowers (or any other Loan Partys) obligations under this
Agreement or under any related agreement or (B) the ability of the Borrower (or any Loan Party) to
perform its obligations under this Agreement, or under any related agreement; or |
|
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(xii) |
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the Bank otherwise deems itself or its security interest in the Collateral insecure or the
Bank believes in good faith that the prospect of payment or other performance by any Loan Party is
impaired. |
then, the Credit Line Obligations will become immediately due and payable (without demand) and the
Bank may, in its sole and absolute discretion, liquidate, withdraw or sell all or any part of the
Collateral and apply the same, as well as the proceeds of any liquidation or sale, to any amounts
owed to the Bank, including any applicable Breakage Costs and Breakage Fee. The Bank will not be
liable to any Loan Party in any way for any adverse consequences (for tax effect
or otherwise) resulting from the liquidation of appreciated Collateral. Without limiting the
generality of the foregoing, the sale may be made in the Banks sole and absolute discretion by
public sale on any exchange or market where business is then usually transacted or by private sale,
and the Bank may purchase at any public or private sale. Any Collateral that may decline speedily
in value or that customarily is sold on a recognized exchange or market may be sold without
providing any Loan Party with prior notice of the sale. Each Loan Party agrees that, for all other
Collateral, two calendar days notice to the Loan Party, sent to its last address shown in the
Banks account records, will be deemed reasonable notice of the time and place of any public sale
or time after which any private sale or other disposition of the Collateral
may occur. Any amounts due and not paid on any Advance following a Event will bear interest from
the day following the Event until fully paid at a rate per annum equal to the interest rate
applicable to the Advance immediately prior to the Event plus 2.00%. In addition to the Banks
rights under this Agreement, the Bank will have the right to exercise any one or more of the rights
and remedies of a secured creditor under the Utah Uniform Commercial Code, as then in effect.
b) |
|
Nothing contained in this Section 10 will limit the right of the Bank to demand full or
partial payment of the Credit Line Obligations, in its sole and absolute discretion and without
cause, at any time. |
|
c) |
|
All rights and remedies of the Bank under this Agreement are cumulative and are in addition
to all other rights and remedies that the Bank may have at law or equity or under any other
contract or other writing for the enforcement of the security interest herein or the collection of
any amount due under this Agreement. |
|
d) |
|
Any non-exercise of rights, remedies and powers by the Bank under this Agreement and the other
documents delivered in connection with this Agreement shall not be construed as a waiver of any
rights, remedies and powers. The Bank fully reserves its rights to invoke any of its rights,
remedies and powers at any time it may deem appropriate. |
11. Representations, Warranties and Covenants by the Loan Parties.
Each Borrower and each other Loan Party (if applicable) makes the following representations,
warranties and covenants (and each Borrower will be deemed to have repeated each representation and
warrany each time a Borrower requests an Advance) to the Bank:
a) |
|
Except for the Banks rights under this Agreement and the rights of the Securities
Intermediary under any account agreement, the Borrower and each relevant Pledgor owns the
Collateral, free of any interest or lien in favor of any third party and free of any impediment to
transfer; |
|
b) |
|
Each Loan Party: (i) if a natural Person, is of the age of majority; (ii) is authorized to
execute and deliver this Agreement and to perform its obligations under this Agreement and any
related agreement; (iii) is not an employee benefit plan, as that term is defined by the Employee
Retirement income Security Act of 1974, or an Individual Retirement Credit Line Account (and none
of the Collateral is an asset of a plan or account); and (iv) unless the Loan Party advises the
Bank to the contrary, in writing, and provides the Bank with a letter of approval, where required,
from its employer, is not an employee or member of any exchange or of any corporation or firm
engaged in the business of dealing, either as a broker or as principal, in securities, bills of
exchange, acceptances or other forms of commercial paper; |
|
c) |
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Neither the Borrower nor any Pledgor on the Collateral Account will pledge the Collateral or
grant a security interest in the Collateral to |
10
|
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any party ether than the Bank or the Securities Intermediary, or permit the Collateral to become
subject to any liens or encumbrances (other than those of the Bank and the Securities
Intermediary), during the term of this Agreement; |
|
d) |
|
Each Loan Party is not in default under any material contract, judgment, decree or order to
which it is a party or by which it or its properties may be bound; and |
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e) |
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Each Loan Party has duly filed all tax and information returns required to be filed and has
paid all taxes, fees, assessments and other governmental charges or levies that have become due and
payable, except to the extent such taxes or other charges are being contested in good faith and are
adequately reserved against in accordance with GAAP. |
12. Indemnification; Limitation on Liability of the Bank and the Securities Intermediary.
Borrower agrees to indemnify and hold harmless the Bank and the Securities Intermediary, their
affiliates and their respective directors, officers, agents and employees against any and all
claims, causes of action, liabilities, lawsuits, demands and damages, for example, any and all
court costs and reasonable attorneys fees, in any way relating to or arising out of or in
connection with this Agreement, except to the extent caused by the Banks or Securities
Intermediarys breach of its obligations under this Agreement. Neither the Bank nor the Securities
Intermediary will be liable to any party for any consequential damages arising out of any act or
omission by either of them with respect to this Agreement or any
Advance or Collateral Account.
13. Acceptance of Application and Agreement; Applicable Law
THIS APPLICATION AND AGREEMENT WILL BE RECEIVED AND ACCEPTED BY BANK IN THE STATE OF UTAH, OR IF
THIS APPLICATION AND AGREEMENT IS DELIVERED TO BANKS AGENT, UBS FINANCIAL SERVICES INC., IT WILL
BE RECEIVED AND ACCEPTED WHEN RECEIVED BY UBS FINANCIAL SERVICES INC.S UNDERWRITING DEPARTMENT.
DELIVERY OF THE APPLICATION AND AGREEMENT TO THE BORROWERS FINANCIAL ADVISOR AT UBS FINANCIAL
SERVICES INC. WILL NOT BE CONSIDERED RECEIPT OR ACCEPTANCE BY BANK. ALL DECISIONS MADE BY BANK
REGARDING THE CREDIT LINE WILL BE MADE IN UTAH.
THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF UTAH
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY IN THE STATE OF UTAH AND, IN CONNECTION
WITH THE CHOICE OF LAW GOVERNING INTEREST, THE FEDERAL LAWS OF THE UNITED STATES.
14. Assignment
This Agreement may not be assigned by the Borrower without the prior written consent of the Bank.
This Agreement will be binding upon and inure to the benefit of the heirs, successors and permitted
assigns of the Borrower. The Bank may assign this Agreement, and this Agreement will inure to the
benefit of the Banks successors and assigns.
15. Amendment
This Agreement may be amended only by the Bank at any time by sending written notice, signed by an
authorized officer of the Bank, of an amendment to the Borrower. The amendment shall be effective
as of the date established by the Bank. This Agreement may not be amended orally. The Borrower or
the Bank may waive compliance with any provision of this Agreement, but any waiver must be in
writing and will not be deemed to be a waiver of any other provision of this Agreement.
16. Severability
If any provision of this Agreement is held to be invalid, illegal, void or unenforceable, by reason
of any law, rule, and administrative order or judicial or arbitral decision, the determination will
not affect the validity of the remaining provisions of this Agreement.
17. Choice of Forum; Waiver of Jury Trial
a) |
|
ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY JUDGMENT ENTERED BY ANY COURT
REGARDING THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT WILL BE BROUGHT AND
MAINTAINED EXCLUSIVELY IN THE THIRD JUDICIAL DISTRICT COURT FOR THE STATE OF UTAH OR IN THE UNITED
STATES DISTRICT COURT FOR THE STATE OF UTAH. EACH OF THE LOAN PARTIES IRREVOCABLY SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE THIRD JUDICIAL DISTRICT COURT FOR THE STATE OF UTAH AND OF THE
UNITED STATES DISTRICT COURT FOR THE STATE OF UTAH FOR THE PURPOSE OF ANY SUCH ACTION OR PROCEEDING
AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH SUCH ACTION OR PROCEEDING. EACH OF THE LOAN PARTIES IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE NOW OR IN THE
FUTURE TO THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT REFERRED
TO ABOVE AND ANY CLAIM THAT ANY SUCH ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM. |
|
b) |
|
EACH OF THE LOAN PARTIES (FOR ITSELF, ANYONE CLAIMING THROUGH IT OR IN ITS NAME, AND ON BEHALF
OF ITS EQUITY HOLDERS) IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY REGARDING ANY
CLAIM BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. |
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c) |
|
Any arbitration proceeding between the Borrower (or any other Loan Party) and the Securities
Intermediary, regardless of whether or not based on circumstances related to any court proceedings
between the Bank and the Borrower (or the other Loan Party), will not provide a basis for any stay
of the court proceedings. |
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d) |
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Nothing in this Section 17 will be deemed to alter any agreement to arbitrate any
controversies which may arise between the Borrower (or any other Loan Party) and UBS Financial
Services Inc. or its predecessors, and any claims between the Borrower or the Loan Party, as
applicable, and UBS Financial Services Inc. or its employees (whether or not they have acted as
agents of the the Bank) will be arbitrated as provided in any agreement between the Borrower or the
Loan Party, as applicable, and UBS Financial Services Inc. |
11
18. |
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State Specific Provisions and Disclosures |
|
a) |
|
For residents of Ohio:
The Ohio laws against discrimination require that all creditors make credit equally available to
all creditworthy customers, and that credit reporting agencies maintain separate credit histories
on each individual upon request. The Ohio civil rights commission administers compliance with this
law. |
|
b) |
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For residents of Oregon:
NOTICE TO BORROWER: DO NOT SIGN THIS AGREEMENT BEFORE YOU READ IT. THIS AGREEMENT PROVIDES FOR
THE PAYMENT OF A PENALTY IF YOU WISH TO REPAY A FIXED RATE ADVANCE PRIOR TO THE DATE PROVIDED FOR
REPAYMENT IN THE AGREEMENT. |
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c) |
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For residents of Vermont:
NOTICE TO BORROWER: THE ADVANCES MADE UNDER THIS AGREEMENT ARE DEMAND LOANS AND SO MAY BE
COLLECTED BY THE LENDER AT ANY TIME. A NEW LOAN MUTUALLY AGREED UPON AND SUBSEQUENTLY ISSUED MAY
CARRY A HIGHER OR LOWER RATE OF INTEREST. |
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|
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NOTICE TO JOINT BORROWER: YOUR SIGNATURE ON THE AGREEMENT MEANS THAT YOU ARE EQUALLY LIABLE FOR
REPAYMENT OF THIS LOAN. IF THE BORROWER DOES NOT PAY, THE LENDER HAS A LEGAL RIGHT TO COLLECT
FROM YOU. |
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d) |
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For residents of California: |
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(i) |
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Any person, whether married, unmarried, or separated, may apply for separate credit. |
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|
(ii) |
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As required by law, you are notified that a negative credit report reflecting on your
credit record may be submitted to a credit reporting agency if you fail to fulfill the
terms of your credit obligations. |
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(iii) |
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The Borrower will notify the Bank, within a reasonable time, of any change in the
Borrowers name, address, or employment. |
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(iv) |
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The Borrower will not attempt to obtain any Advance if the Borrower knows that the
Borrowers credit privileges under the Credit Line have been terminated or suspended. |
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(v) |
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The Borrower will notify the Bank by telephone, telegraph, letter, or any other
reasonable means that an unauthorized use of the Credit Line has occurred or may occur as
the result of the loss or theft of a credit card or other instrument identifying the Credit
Line, within a reasonable time after the Borrowers discovery of the loss or theft, and
will reasonably assist the Bank in determining the facts and circumstances relating to any
unauthorized use of the Credit Line. |
19. |
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Account Agreement |
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Each Loan Party acknowledges and agrees that this Agreement supplements their account agreement(s)
with the Securities Intermediary relating to the Collateral Account and, if applicable, any
related account management agreement(s) between the Loan Party and the Securities Intermediary. In
the event of a conflict between the terms of this Agreement and any other agreement between the
Loan Party and the Securities Intermediary, the terms of this Agreement will prevail. |
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20. |
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Notices |
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Unless otherwise required by law, all notices to a Loan Party may be oral or in writing, in the
Banks discretion, and if in writing, delivered or mailed by the United States mail, or by
overnight carrier or by telecopy to the address of the Loan Party shown on the records of the
Bank. Each Loan Party agrees to send notices to the Bank, in writing, at such address as provided
by the Bank from time to time. |
12
Schedule I to UBS Bank USA Credit Line Agreement
Schedule of Percentage Spreads Over LIBOR
|
|
|
|
|
Aggregate Approved Amount |
|
Spread Over LIBOR |
|
$250,000 to $499,999 |
|
|
2.750 |
% |
$500,000 to $999,999 |
|
|
1.750 |
% |
$1,000,000 to $4,999,999 |
|
|
1.500 |
% |
$5,000,000 and over |
|
|
1.250 |
% |
Schedule II to UBS Bank USA Credit Line Agreement
Schedule of Percentage Spreads Over Prime
|
|
|
|
|
Outstanding Amount under Credit Line |
|
Spread Over Prime |
|
$0 to $24,999 |
|
|
3.125 |
% |
$25,000 to $49,999 |
|
|
2.625 |
% |
$50,000 to $74,999 |
|
|
2.125 |
% |
$75,000 to $99,999 |
|
|
1.625 |
% |
$100,000 to $249,999 |
|
|
1.375 |
% |
NOTICE TO CO-SIGNER (Traduccion en Ingles Se Requiere Por La Ley)
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesnt
pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to
accept this responsibility.
You may have to pay to the full amount of the debt if the borrower does not pay. You may
also have to pay late fees or collection costs, which increase this amount.
The creditor can collect this debt from you without first trying to collect from the borrower. The
creditor can use the same collection methods against you that can be used against the borrower,
such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may
become a part of your credit record.
This notice is not the contract that makes you
liable for the debt.
AVISO PARA EL FIADOR (Spanish Translation
Required By Law)
Se le esta pidiendo que garantice esta deuda. Pienselo con cuidado antes de ponerse de acuerdo. Si
la persona que ha pedido este prestamo no paga la deuda, usted tendra que pagarla. Este seguro de
que usted podra pagar si sea obligado a pagarla y de que usted desea aceptar la responsabilidad.
Si la persona que ha pedido el prestamo no paga la deuda, es posible que usted tenga que pagar la
suma total de la deuda, mas los cargos por tardarse en el pago o el costo de cobranza, lo cual
aumenta el total de esta suma.
El acreedor (financiero) puede cobrarle a usted sin, primeramente, tratar de cobrarle al deudor.
Los mismos metodos de cobranza que pueden usarse contra el deudor, podran usarse contra usted,
tales como presentar una demanda en corte, quitar parte de su sueldo, etc. Si alguna vez no se
cumpla con ia obligacion de pagar esta deuda, se puede incluir esa informacion en la historia de
credito de usted.
Este aviso no es el contrato mismo en que se le echa a usted la responsabilidad de la deuda.
13
UBS Bank USA
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HP |
CREDIT LINE SUPPLEMENTAL CORPORATE RESOLUTIONS (LENDING)
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Variable Credit Line Account Title (if applicable)
SUCAMPO PHARMACEUTICALS, INC.
Fixed Credit Line Account Title (if applicable)
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The undersigned certifies that I am the Secretary or an Assistant Secretary of the Corporation
indicated under the signature line below (the Corporation) and that the Corporation is a duly
organized and validly existing corporation in good standing in the jurisdiction of its
incorporation. The following resolutions were duly adopted by the Board of Directors at a duly
called meeting or by unanimous written consent of the Board of Directors.
WHEREAS, the Corporation seeks to benefit (directly or indirectly) from the opening and
maintaining of one or more loan accounts at UBS Bank USA, and/or its successor firms,
subsidiaries, affiliates, and any third party service providers (collectively, UBS Bank USA), on
its own behalf or a related person or entity.
NOW, THEREFORE, BE IT RESOLVED THAT:
1) |
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The Corporation is authorized to: |
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(a) |
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enter into a Credit Line Agreement with UBS Bank USA under which UBS Bank USA
will establish one or more loan accounts for the benefit of the Corporation (the
Credit Line Agreement); |
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(b) |
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enter into a Credit Line Guaranty Agreement for the benefit of UBS Bank USA
under which the Corporation will become liable to UBS Bank USA for the obligations of
the third party named below, arising under or in connection with the third partys
Credit Line Agreement with UBS Bank USA; and |
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(c) |
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enter into any other agreements or documents in connection with the Credit Line
Agreement and/or the Credit Line Guaranty Agreement. |
2) |
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The Corporation is authorized to: |
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(a) |
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use any loan accounts established under the Credit Line Agreement to borrow
and/or obtain credit from time to time from UBS Bank USA; |
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(b) |
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guaranty the obligations of others to UBS Bank USA, in United States dollars or any
foreign currency; and |
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(c) |
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pledge, mortgage, assign or subject to a security interest or lien any property
of any sort of the Corporation as security for any liability of the Corporation. |
3) |
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Each of the corporate officers named in the signature area below (each, together with
persons designated under resolution number 4 below an Authorized Person) is authorized
individually, without counter signature or co-signature, to act on behalf of the
Corporation to: |
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(a) |
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enter into the Credit Line Agreement, establish loan accounts and pledge the
Corporations assets as collateral under the Credit Line Agreement or any related
agreement as applicable; |
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(b) |
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enter into the Credit Line Guaranty Agreement, assume all liabilities and
pledge the Corporations assets as collateral under the Credit Line Agreement or
Guaranty Agreement or any other related agreement, as applicable; |
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(c) |
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execute and deliver on behalf of the Corporation any and all relevant
documents, and to deal with UBS Bank USA in connection with the Credit Line Agreement,
loan and collateral accounts, Credit Line Guaranty Agreement and any related agreement,
with no limits as to amount; |
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(d) |
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obtain all services that UBS Bank USA offers, including the services set forth in these
resolutions; |
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(e) |
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bind the Corporation in respect of any agreements entered into with UBS Bank USA; and |
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(f) |
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take any other actions on behalf of the Corporation necessary or appropriate to carry
out the intent of these resolutions. |
4) |
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Each of the Authorized Persons acting as specified in these resolutions is authorized to
appoint one or more attorneys-in-fact or agents to act on behalf of the Corporation in the
same capacity as set forth in these resolutions, and is authorized to execute and deliver to
UBS Bank USA any powers of attorney or other documents to effect or evidence the appointment. |
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5) |
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UBS Bank USA is authorized, but not obligated, to deal with each Authorized Person
individually, as follows, subject to the Corporation having completed documentation relating
to the relevant products and services, and subject to UBS Bank USA policy and practice as in
effect from time to time: |
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(a) |
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to accept all instructions of any nature in connection with any loan account
or collateral account given verbally, in writing, or by electronic communication by
him or her on behalf of the Corporation, as the action of the Corporation without
limit or further inquiry as to his or her authority or the validity or legality of the
actions under any and all laws, rules and regulations applicable to the Corporation
and the conduct of its business and affairs; |
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(b) |
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to extend loans in connection with the loan accounts or-other credit facility for the
Corporation; and |
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(c) |
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to act, in effecting any of the transactions, upon instructions contained in
any message received by it, transmitted by any form or agency or communication, which
UBS Bank USA believes in good faith to have been originated by an Authorized Person
acting as specified in these resolutions. |
6) |
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Any borrowing made from time to time on behalf of the Corporation with UBS Bank USA is ratified,
confirmed and approved. |
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7) |
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UBS Bank USA is authorized to rely upon the authority conferred by these resolutions until
UBS Bank USA receives a certified copy of resolutions of the Corporations Board of Directors
revoking or modifying these resolutions. In the event that UBS Bank USA, for any reason, is
uncertain as to the continuing effectiveness of the authority conferred by these
resolutions or any other resolutions of the Corporation, UBS Bank USA will be indemnified
against and held harmless from any claims, demands, expenses, loss or damage, including legal
fees and costs, resulting from or arising out of its refraining from taking any action. |
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8) |
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In consideration of UBS Bank USA acting in reliance upon these resolutions, it shall be
fully protected in acting and the Corporation agrees to indemnify and save harmless UBS Bank
USA from and against any and all loss, damage, liability, claims and expenses arising by
reason of its acting in reliance upon these resolutions. |
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9) |
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The Secretary or an Assistant Secretary of the Corporation is authorized and directed to certify
to UBS Bank USA: |
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(a) |
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that these resolutions have been duly adopted, are in full force and effect and
are in accordance with the provisions of applicable law and regulation and the charter
and by-laws of the Corporation; |
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(b) |
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the identities of the Authorized Persons and, from time to time in the future
any changes that may occur in the identities of the Authorized Persons as the changes
are made, and |
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(c) |
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that UBS Bank USA will be fully protected in relying on the certifications of
the Secretary or an Assistant Secretary and will be indemnified and saved harmless
from any and all loss, damage, liability, claims and expenses resulting from honoring
the signature of any Authorized Person certified or refusing to honor any signature not
certified. |
10) |
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I certify that there is no provision in the charter or by-laws of the Corporation limiting
the power of the Board of Directors to adopt these resolutions and that these resolutions are
in the conformity with the provisions of the charter and by-laws, neither of which requires or
provides for any vote or consent of other than the Board of Directors to authorize the
adoption of these resolutions. |
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11) |
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I further certify that the persons listed below are duly elected or appointed qualified
officers of the Corporation, hold in the Corporation the respective positions indicated above
and that set forth opposite each respective name is the true and correct signature of the
person. |
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12) |
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This Supplemental Corporate Resolutions Form shall inure to the benefit of UBS Bank USA and
the benefit of any successor corporations or firms, and of the assigns of UBS Bank USA and/or
any successor corporations or firms. |
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/s/ KEI TOLLIVER |
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(Signature of Secretary or Assistant Secretary) DATE |
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KEI TOLLIVER, SECRETARY |
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(Print Name of Secretary or Assistant Secretary, as applicable) |
PLEASE COMPLETE THE FOLLOWING INFORMATION:
Name of Corporation: SUCAMPO PHARMACEUTICALS, INC.
Jurisdiction where Corporation is organized: DELAWARE
Name of third-party whose Credit Line Agreement is being guaranteed (if applicable):
Corporate Officers Designated as Authorized Persons to act on behalf of the Corporation
(AT LEAST TWO SHOULD BE DESIGNATED) please sign below:
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MARIAM MORRIS, CFO OF SUCAMPO PHARMACEUTICALS, INC
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/s/ MARIAM MORRIS |
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(Print Name and Title of Officer)
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(Signature of Officer)
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(Print Name and Title of Officer)
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(Signature of Officer) |
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RYUJI UENO, CEO OF SUCAMPO PHARMACEUTICALS, INC
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/s/ RYUJI UENO |
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(Print Name and Title of Officer)
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(Signature of Officer) |
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UBS Bank USA Know Your Customer:
Appropriateness and Client Verification
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List all Borrower names below: |
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List all Guarantor names below: |
1)
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SUCAMPO PHARMACEUTICALS, INC
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1)
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SUCAMPO PHARMACEUTICALS, INC
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2)
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2) |
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3)
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3) |
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In connection with the loan (the Loan) to be offered by UBS Bank USA (the Bank) to the
Borrower(s) described above (together with the Guarantor(s), the Clients) and the guaranty (the
Guaranty) to be executed by the Guarantor(s) in favor of the Bank, we hereby represent and
warrant as follows:
1. |
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Client Disclosure. The terms and conditions of, as applicable,
the Loan and/or the Guaranty have been explained to the Clients including the
following: |
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The Bank can demand repayment of the Loan at any time. |
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All advances under the Loan are subject to the Loan meeting the Banks
collateral value and other requirements. |
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If the Loan is a Fixed-Rate Loan, the Borrower(s) will be assessed a prepayment
fee in the event all or a portion of the Loan is paid prior to maturity (whether as a
result of voluntary prepayment, demand or otherwise). |
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If the Loan is a non-purpose Loan, the proceeds of the Loan may not be used
(directly or indirectly) to purchase or carry securities, including margin stock. |
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If the value of the pledged collateral falls below the Banks maintenance
requirements, the Bank may require the Client to deposit additional collateral and/or
sell the pledged collateral to repay the Loan. |
2. |
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Review. The request for an extension of credit has been reviewed for appropriateness
by a Series 8 registered manager of UBS Financial Services. |
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3. |
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Accurate Information. To the best of our knowledge, the information regarding the
Client contained in the Loan and/or Guaranty
agreement and furnished to the Bank in connection with the Loan and/or Guaranty is true and
complete in all material respects. |
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4. |
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Original Documentation. To the extent we had possession of and forwarded the
documents executed in connection with the Loan and/or Guaranty to the Bank, we confirm that
all such documents contain original and authentic signatures of the Client. All original,
signed Loan documents we received have been forwarded to the Bank or its agents, and we have
not retained any such original documents. |
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5. |
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Client Residence. We further confirm that the Client resides at the address reflected
in UBS Financial Services Inc.s records, |
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6. |
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Non-Purpose Loans. To the extent that the Loan is a non-purpose Loan and the proceeds
are deposited into an account with us, we will monitor the use of such proceeds to ensure they
are not used by the Client to purchase or carry margin stock (including, without limitation,
payment of debit balances, if any, in the Clients account(s) with us). |
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7. |
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Security Interest. We understand that the Bank has been granted a first-priority
security interest in, and has control over, the Securities Account(s) to be referenced in
the Guarantee agreement(s) entered into in connection with the Loan, and we have received a
copy of such Guaranty agreement(s). |
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Name:
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/s/ HOWARD L. McMILLAN
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Signature:
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/s/ HOWARD L. McMILLAN
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Date: 2-26-08 |
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Financial Advisor |
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Name:
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RICHARD N LEISHMAN
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Signature:
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/s/ RICHARD N LEISHMAN
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Date: 2/26/08 |
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ASSOCIATE DIRECTOR
ADMINISTRATIVE MANAGER
Series 8 Registered Manager |
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FR U-1
OMB No. 7100-0115
Approval expires March 31, 2008 |
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Statement of Purpose for an Extension of Credit Secured by Margin Stock
(Federal Reserve Form U-1)
UBS BANK USA
Name of Bank
This
report is required by law (15 U.S.C. §§78g and 78w; 12 CFR 221).
The Federal Reserve may not conduct or sponsor, and an organization (or a person) is not required
to respond to, a collection of information unless it displays a currently valid OMB control number.
Public reporting burden for this collection of information is estimated to average 10 minutes per
response, including the time to gather and maintain data in the required form and to review
instructions and complete the information collection. Send comments regarding this
burden estimated or any other aspect of this collection of information, including suggestions for
reducing this burden to: Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets, N.W., Washington, DC 20551; and to the Office of Management and Budget, Paperwork
Reduction Project (7100-0011), Washington, DC 20503.
Instructions
1. This form must be completed when a bank extends credit in excess of $100,000 secured directly or
indirectly, in whole or in part, by any margin stock.
2. The term margin stock is defined in Regulation U (12 CFR 221) and includes, principally: (1)
stocks that are registered on a national securities exchange; (2) debt securities (bonds) that are
convertible into margin stocks; (3) any over-the-counter security designated as qualified for
trading in the National Market System under a designation plan approved by the Securities and
Exchange Commission (NMS security); and (4) shares of most mutual funds, unless 95 per cent of the
assets of the fund are continuously invested in U.S. government, agency, state, or municipal
obligations.
3. Please
print or type (if space is inadequate, attach separate sheet).
Part I To be completed by borrower(s)
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1. What is the amount of the credit being extended?
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Maximum available credit as determined by UBS Bank USA from time to time based, in
part, on the value of the securities pledged
as collateral for the credit facility. |
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2. Will any part of this credit be used to purchase or carry margin stock? o Yes þ No
If the answer is no, describe the specific purpose of the credit. The UBS Credit Line proceeds
will only be used for legally permissible purposes, including personal, household, family or
business purposes; but no portion of the UBS Credit Line proceeds will be used to purchase, trade
or carry securities, or to repay debt incurred to purchase, trade or carry securities.
I (We) have read this form and certify that to the best of my (our) knowledge and belief
the information given is true, accurate, and complete, and that the margin stock and any
other securities collateralizing this credit are authentic, genuine, unaltered, and not
stolen, forged, or counterfeit.
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Signed:
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Signed: |
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/s/ MARIAM MORRIS
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2/19/08 |
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/s/ RYUJI UENO |
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2/19/08 |
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Borrowers signature
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Date
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Borrowers signature
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Date |
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MARIAM MORRIS, CFO |
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RYUJI UENO, CEO |
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Print or type name
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Print or type name |
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This form should not be signed if blank.
A borrower who falsely certifies the purpose of a credit on this form or otherwise
willfully or intentionally evades the provisions of Regulation U will also violate
Federal Reserve Regulation X, Borrowers of Securities Credit.
exv23w1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.
333-147420) of Sucampo Pharmaceuticals, Inc. of our report dated March 24, 2008 relating to the
consolidated financial statements and financial statement schedule, which appears in this Form
10-K.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
March 24, 2008
exv31w1
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ryuji Ueno, certify that:
1. |
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I have reviewed this Annual Report on Form 10-K of Sucampo Pharmaceuticals, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15(d)-15(e)) for the registrant and have: |
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(a) |
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designed such disclosure controls and procedures or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared; |
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(b) |
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evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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(c) |
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disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect the registrants internal control
over financial reporting; and |
5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
functions): |
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(a) |
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all significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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(b) |
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any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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Date: March 27, 2008 |
/s/ RYUJI UENO
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Ryuji Ueno, M.D., Ph.D., Ph.D. |
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Chief Executive Officer
(Principal Executive Officer) |
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exv31w2
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mariam E. Morris, certify that:
1. |
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I have reviewed this Annual Report on Form 10-K of Sucampo Pharmaceuticals, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15(d)-15(e)) for the registrant and have: |
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(a) |
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designed such disclosure controls and procedures or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared; |
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(b) |
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evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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(c) |
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disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect the registrants internal control
over financial reporting; and |
5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
functions): |
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(a) |
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all significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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(b) |
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any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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Date: March 27, 2008 |
/s/ MARIAM E. MORRIS
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Mariam E. Morris |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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exv32w1
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code), the undersigned officer of Sucampo Pharmaceuticals,
Inc. (the Company) certifies to the best of his knowledge that:
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(1) |
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The Annual Report on Form 10-K for the year ended December 31, 2007 of the Company
(the Report) fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company. |
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Date: March 27, 2008 |
/s/ RYUJI UENO
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Ryuji Ueno, M.D., Ph.D., Ph.D. |
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Chief Executive Officer
(Principal Executive Officer) |
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exv32w2
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code), the undersigned officer of Sucampo Pharmaceuticals,
Inc. (the Company) certifies to the best of her knowledge that:
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(1) |
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The Annual Report on Form 10-K for the year ended December 31, 2007 of the Company
(the Report) fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company. |
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Date: March 27, 2008 |
/s/ MARIAM E. MORRIS
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Mariam E. Morris |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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