| NEUROGEN CORP ITEM 1A RISK FACTORS The following information sets forth risk factors that could cause the Company’s actual results to differ materially from those contained in forward-looking statements that have been made in this Annual Report on Form 10-K and those that may be made from time to time |
| If any of the risks actually occur, the Company’s business, results of operation, prospects or financial condition could be adversely affected |
| Additional risks not presently known or that the Company currently deems immaterial may also affect business operations |
| The testing process for the Company’s drug candidates is long, costly, and uncertain, and most drug candidates do not get approved |
| Even if approved for use in humans, the Company’s drug candidates may later prove to be unsafe or ineffective |
| The Company’s potential drug candidates must go through extensive preclinical (animal) and clinical (human) trials to prove that the drug is safe and effective before it can be commercialized |
| This extensive testing takes several years, is quite expensive, and more often than not leads to the conclusion that a drug candidate is not suitable for commercialization |
| A very ______________________________________________________________________ Page 14 significant majority (estimated to be greater than 80 to 90 percent) of all drugs which enter human clinical trials fail to reach the market |
| In addition, the risk of failure is the highest when working on drug targets that have not yet been validated by the successful commercialization of a prior drug |
| Moreover, even if early drug testing appears positive, later testing or even the results of usage after commercialization may preclude further use of a drug |
| In addition, the current regulatory framework could change, or additional regulations could arise at any stage during our product development or marketing, which may affect its ability to obtain or maintain approval of its products or require Neurogen to make significant expenditures to obtain or maintain such approvals |
| The results of preclinical tests performed on animals are not always accurate predictors of the safety, effectiveness, or suitability of drugs in humans |
| Similarly, the results of initial clinical trials do not necessarily accurately predict the results that will be obtained in the later stages of clinical trials |
| The appearance of adverse side effects, inadequate therapeutic efficacy or inadequate drug properties could prevent or slow product development efforts at any stage of product development by delaying or preventing clinical trials, delaying or preventing regulatory approval by the FDA or foreign regulatory authorities or adversely affecting the commercial potential of a drug candidate |
| Either the FDA or the Company may suspend clinical trials at any time if the FDA or it believes that the individuals participating in the trials are being exposed to unacceptable health risks |
| Even products approved by the FDA or foreign regulatory authorities may later exhibit adverse side effects that prevent their widespread use or necessitate their withdrawal from the market |
| As a result, the Company’s drug candidates may prove to be unsafe or ineffective in humans, produce undesirable side effects, or fail to get through the testing phases to commercialization |
| The Company is subject to strict governmental regulation |
| If the Company cannot obtain product approvals or if it cannot comply with ongoing governmental regulations, its business could be adversely affected |
| The Company’s products are subject to extensive regulation and review by numerous federal, state and local government agencies both in the United States and in other countries where it intends to test and market its products |
| The process by which the Company obtains regulatory approval to market a product involves substantial cost and can take many years |
| The data the Company obtains from preclinical and clinical trials may be subject to varying interpretations which can delay, limit or prevent the approval of the relevant governmental authority |
| If there are delays and costs in obtaining regulatory approvals, the Company’s product development efforts and consequently its business could be adversely affected |
| Agencies, such as the FDA, may change their view of acceptable endpoints for clinical trials once they have begun, clinical data may not be accepted by the FDA or similar agencies, or approvals may not be granted on a timely basis, if at all |
| Even if the Company obtains regulatory approval of a drug, the approval may include limitations and restrictions on the drug’s use |
| In addition, the Company’s products are subject to continual regulatory review and any subsequent discovery of previously unrecognized problems could result in restrictions being placed on either the Company or its products |
| These restrictions could include an order to withdraw a product from the market |
| The failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution |
| The Company faces vigorous competition in the areas of drug discovery and development, which may result in others developing or commercializing products before or more successfully than it does |
| ______________________________________________________________________ Page 15 The pharmaceutical industry is highly competitive and is affected by new technologies, governmental regulations, healthcare legislation, availability of financing, litigation and other factors |
| The Company cannot assure the reader that its competitors will not succeed in developing technologies (including drug discovery techniques) and products that are more effective than its own or that are commercialized prior to similar technologies or products of its own |
| In addition, developments by others may render its products under development or its technologies noncompetitive or obsolete |
| If the Company’s product candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others |
| Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than its products, or may offer comparable performance at lower costs |
| If the Company’s products are unable to capture or maintain market share, it will not achieve significant product revenues and its financial condition will be materially adversely affected |
| The Company competes against fully integrated pharmaceutical companies or other companies that collaborate with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations |
| Many of these competitors have products already approved, marketed or in development |
| In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs, have substantially greater financial resources, experience in developing products, obtaining FDA and other regulatory approvals, formulating and manufacturing drugs, and commercializing drugs than the Company does |
| If a competitor were to develop and successfully commercialize a drug before a similar one that the Company was working on, it would put the Company at a significant competitive disadvantage |
| The Company has limited experience in the clinical process and relies heavily on its collaborative partners for research and development funding and commercialization |
| The Company has depended on its collaborative partners to fund a significant portion of its research and development expenses and to manufacture and market any products that might result from its collaborations |
| In the fiscal years ended December 31, 2005, 2004, and 2003, the Company incurred dlra38dtta5 million, dlra31dtta3 million, and dlra32dtta2 million in research and development expenses (including stock compensation expense of dlra0dtta5 million, dlra0dtta4 million and dlra0dtta3 million respectively) and recognized dlra3dtta9 million, dlra10dtta3 million, and dlra4dtta8 million respectively, in research and development revenue from corporate partners |
| Because the Company has limited experience conducting clinical trials, it often depends on its collaborative partners with respect to regulatory filings relating to, and the clinical testing of, compounds developed under its collaborations |
| In particular, the Company depends on Merck to conduct clinical trials for compounds on which it and Merck collaborate in our VR1 program |
| The Company’s reliance on collaborative partners, whose interests may not coincide with its interests, exposes it to many risks, including the following: · that a collaborator will halt, delay, or repeat clinical trials; · that a collaborator will alter the amount or timing of resources dedicated to the Company’s collaboration; ______________________________________________________________________ Page 16 · that a collaborator will dispute the Company’s rights under an agreement; · that a collaborator will attempt to independently develop a competing drug on its own or in conjunction with a third party; · that existing collaboration agreements will not be extended; · that a collaborator will not continue to develop a drug candidate after a collaboration agreement has ended; and · that a collaborator will breach or terminate an agreement with the Company |
| If any of these risks were to occur, the research program in question, and possibly the Company’s business, would be adversely affected |
| The Company’s existing collaboration with Merck may be unsuccessful and it may not receive any future milestone payments or royalties |
| If the Company’s existing collaboration is not continued or is unsuccessful, its product development efforts and consequently business would be adversely affected |
| Delays or discontinuation of its collaborative programs could significantly delay and decrease the probability of the Company ever achieving product revenues |
| This could negatively impact its ability to access capital and the cost of capital |
| If the Company’s collaborative partner Merck does not continue the development of its compounds under our VR1 collaborations, it may not be able to do so on its own |
| The Company’s current collaboration, with Merck, is subject to certain diligence requirements |
| Merck has the right to determine when and if to advance compounds in the clinical process |
| In addition, the Company may not be able to find suitable partners for any new collaborations it may seek to enter |
| Any new collaborations would likely be subject to some or all of the same risks as the Company’s existing collaboration |
| A consequence of entering into collaborative arrangements is that the Company’s potential upside is smaller if a successful product emerges than if it successfully commercialized a product on its own |
| Historically, the Company has entered into strategic collaborations with large pharmaceutical companies to develop and commercialize new drugs |
| Under its collaboration with Merck, the Company has granted Merck the exclusive worldwide license to manufacture, use and sell products developed under the Merck agreement |
| While these collaborations have allowed the Company to recoup its research and development expenses and avoid risking its own capital on these activities, they have, in most cases, limited its upside to receiving only royalties based on net sales levels should a successful drug result |
| The Company periodically explores new alliances that may never materialize or may fail |
| The Company periodically explores a variety of possible partnerships or alliances in an effort to gain access to additional complimentary resources |
| At the current time, the Company cannot predict what form such a partnership or alliance might take |
| Such strategic business alliances could result in: the issuance of equity securities that would dilute stockholders’ percentage ownership; the expenditure of substantial operational, financial, and management resources in integrating new businesses, technologies, and products; the assumption of substantial actual or contingent liabilities; or a business combination transaction featuring terms that stockholders might not deem desirable |
| ______________________________________________________________________ Page 17 There have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future corporate collaborators |
| If business combinations involving the Company’s corporate collaborators were to occur, the effect could be to diminish, terminate or cause delays in one or more of its corporate collaborations |
| Developing the Company’s drug candidates, particularly its unpartnered product candidates, will require significant additional expenditures |
| The Company is not certain how much capital it may need, and it may have difficulty raising needed capital in the future on favorable terms or at all |
| The Company has spent and will continue to spend substantial funds to complete the research, development and clinical testing of its products |
| In the future the Company expects to need additional funds for these purposes and to establish additional clinical- and commercial-scale manufacturing arrangements and to provide for the marketing and distribution of its products |
| The Company may not be able to acquire additional funds on commercially reasonable terms or at all |
| In particular, the process of carrying out the development of its own unpartnered product candidates to later stages of development and developing other research programs to the stage that they may be partnered, if at all, will require significant additional expenditures, including the expenses associated with preclinical testing, clinical trials and other product development activites |
| If the Company cannot acquire adequate funds, it may have to delay, reduce the scope of or eliminate one or more of its research or development programs |
| Such a reduction could concentrate its risks in fewer programs |
| The Company’s capital requirements will depend on many factors, including: · continued progress of its research and development programs; · the Company’s ability to market and distribute any products it develops and to establish new collaborative and licensing arrangements; · changes in its existing collaborative relationships; · progress with preclinical studies and clinical trials; · the time and costs involved in pursuing regulatory clearance; · the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; and · competing technological and market developments |
| ______________________________________________________________________ Page 18 The Company may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources which may dilute the interest its existing stockholders have in its company |
| In addition, in the event that the Company obtains additional funds through arrangements with collaborative partners or other sources, these arrangements may require it to give up rights to some of its technologies, product candidates or products under development that it would otherwise seek to develop or commercialize ourselves |
| The Company’s patents, trade secrets and confidentiality agreements with collaborators, employees and others may be invalidated or inadequate to protect its intellectual property |
| If the Company or its collaborators are unable to adequately protect or enforce our intellectual property, its competitive position could be impaired |
| The Company’s success depends in part on its ability to obtain patents, maintain trade secrets and operate without infringing on the intellectual property rights of third parties |
| The Company files patent applications both in the United States and in foreign countries to protect both its products and its processes |
| The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues |
| The Company’s patent applications may not be successful or its current or future patents may not afford the Company protection against its competitors |
| It is possible that the Company’s patents will be successfully challenged or that patents issued to others may preclude it from commercializing its products |
| Litigation to establish the validity of patents, to defend against infringement claims or to assert infringement claims against others can be lengthy and expensive |
| Moreover, much of the Company’s expertise and technology cannot be patented or, if patented, any infringement cannot be readily monitored |
| The Company also relies heavily on trade secrets (for example, its AIDD^TM system is not patented, but its proprietary elements are protected as trade secrets) and confidentiality agreements with collaborators, advisors, employees, consultants, vendors and other service providers |
| It is possible that these agreements may be breached or that the Company’s trade secrets may otherwise become known or be independently discovered by competitors |
| The Company’s product development efforts and consequently its business would be adversely affected if its competitors were able to learn its secrets or if it was unable to protect its intellectual property |
| The Company is subject to uncertainties regarding healthcare reimbursement and reform |
| In the event that it is successful in bringing any products to market, its revenues may be adversely affected if it fails to obtain acceptable prices or adequate reimbursement for the cost of its products from third-party payors |
| The continuing efforts of the government, insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of healthcare may affect the Company’s future revenues and profitability, the future revenues and profitability of its potential customers, suppliers and collaborative partners, and the availability of capital |
| For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control |
| In the United States, both the federal and state governments will likely continue to focus on healthcare reform, the cost of prescription pharmaceuticals and reform of the Medicare and Medicaid systems |
| While the Company cannot predict whether any such proposals will be adopted, the announcement or adoption of such proposals could negatively impact its business, financial condition and results of operations |
| The Company’s ability to market its products successfully will depend, in part, on the extent to which appropriate reimbursements for the cost of its products and related treatments are available from governmental authorities, private health insurers and other organizations, such as HMOs |
| Significant uncertainty exists as to the reimbursement status of newly approved healthcare products |
| Third-party payors, including Medicare, are constantly challenging the prices charged for medical products and services |
| If third-party payors institute cost containment measures or fail to approve the Company’s products for reimbursement, its future sales may be adversely affected, as patients will opt for a competing product that is approved for reimbursement |
| ______________________________________________________________________ Page 19 The Company may be unable to attract and retain qualified management and technical personnel |
| The success of the Company’s business depends, in large part, on its continued ability to attract and retain highly qualified management and scientific personnel |
| The Company faces significant competition for such individuals from other companies, academic institutions and other organizations |
| In particular, there is currently a shortage of qualified Ph |
| D chemists and drug metabolism scientists in the industry |
| The Company cannot assure the reader that it will be able to attract or retain qualified personnel or that the costs of retaining such personnel will not materially increase |
| The failure to attract and retain these key personnel and management staff, or the loss of any of the Company’s current management team and its inability replace such staff on a timely basis could adversely affect its business and financial condition |
| The Company relies upon third parties for its manufacturing requirements, and it cannot assure the reader that it will be able to manufacture products on a timely and competitive basis |
| To complete its clinical trials and to commercialize its product candidates, the Company needs access to, or development of, facilities to manufacture a sufficient supply of its product candidates |
| Neurogen depends on its collaborators or third parties for the manufacture of compounds for pre-clinical, clinical and commercial purposes in their FDA-approved manufacturing facilities |
| The Company’s products may be in competition with other products for access to these facilities |
| Consequently, its products may be subject to manufacturing delays if collaborators or outside contractors give other products greater priority than its products |
| For this and other reasons, the Company’s collaborators or third parties may not be able to manufacture these products in a cost-effective or timely manner |
| If not performed in a timely manner, the clinical trial development of its product candidates or their submission for regulatory approval could be delayed, and its ability to deliver products on a timely basis could be impaired or precluded |
| Neurogen may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, if at all |
| The Company does not intend to develop or acquire facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future |
| In our ongoing collaboration, Merck is responsible for manufacturing or obtaining clinical and commercial supplies of pharmaceutical compounds |
| In our unpartnered program we utilize third parties to prepare and formulate pharmaceutical compounds for use in clinical studies |
| The Company’s current dependence upon others for the manufacture of its products may reduce its future profit margin and limit its ability to commercialize products on a timely and competitive basis |
| The Company lacks marketing and sales experience |
| The Company currently has no marketing, sales or distribution efforts and, currently, the Company intends to rely primarily on existing or future collaborative partners for this expertise if one of its products is successfully commercialized |
| Therefore, to service markets for any areas in which it has retained sales and marketing rights or in the event that any of its collaborative agreements is terminated, the Company must develop a sales force with technical expertise |
| The Company has no experience in developing, training or managing a sales force and would incur substantial additional expenses in developing, training and managing such a sales force |
| The Company may be unable to build such a sales force, the cost of establishing such a sales force may exceed any product revenues, or its direct marketing and sales efforts may be unsuccessful |
| In addition, the Company competes with many other companies that currently have extensive and well-funded marketing and sales operations |
| The Company’s marketing and sales efforts may be unable to compete successfully against such other companies |
| Moreover, even if the Company or one of its partners is able to bring a product to market, it is possible that these products will not gain acceptance among physicians, patients or third-party payors |
| ______________________________________________________________________ Page 20 The Company’s business exposes it to clinical trial and product liability claims |
| The Company faces an inherent risk of exposure to product liability claims in the event that the use of one of its products is alleged to have caused an adverse if any effect on patients |
| This risk exists for products being tested in human clinical trials, as well as products that receive regulatory approval for commercial sale |
| Manufacturers of pharmaceuticals have been the subject of significant product liability litigation, and Neurogen cannot assure the reader that it will not be threatened with or become subject to such a claim |
| The Company maintains limited product liability insurance for compounds it is testing in clinical trials |
| It currently maintains liability insurance of dlra5dtta0 million in coverage for the clinical trials that it conducts |
| The Company’s partners indemnify the Company, with certain exceptions, for collaborative compounds they are testing in clinical trials |
| The Company intends to seek additional product liability insurance coverage if and when its products are commercialized |
| It may not, however, be able to obtain such insurance at acceptable costs, if at all, or such coverage, if obtained, may not be adequate to cover any claims |
| If the Company cannot obtain sufficient insurance coverage at an acceptable cost or otherwise protect against potential product liability claims it could be prevented from commercializing our products |
| Or, if the Company is subject to a product liability claim where claims or losses exceed its liability insurance coverage and its ability to pay, it may go out of business |
| The Company’s business involves hazardous materials and the risk of environmental liability |
| In connection with its research and development activities, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes |
| Although the Company believes that it has complied with the applicable laws, regulations and policies in all material respects and have not been required to correct any noncompliance which is material to its business, it may have to incur significant costs to comply with environmental and health and safety regulations in the future |
| The Company’s research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials |
| Although it believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the Company cannot completely eliminate the risk of accidental contamination or injury from these materials |
| In the event of such an occurrence, the Company could be held liable for any damages that result and any such liability could possibly exceed its resources |
| The price of the Company’s common stock may be volatile |
| The market prices for securities of biotechnology companies, including the Company, have historically been highly volatile |
| The market has, from time to time, experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| The market price of the Company’s common stock may fluctuate significantly due to a variety of factors, including: · the results of preclinical testing and clinical trials by the Company or its competitors; · technological innovations or new therapeutic products; ______________________________________________________________________ Page 21 · changes in governmental regulation; · developments or disputes concerning the Companyapstas proprietary rights; · litigation; · public concern as to the safety of products developed by the Company or others; · the Company’s ability to raise capital; · comments by securities analysts; and · general market conditions in the Companyapstas industry |
| The Company’s existing stockholders have significant control of its management and affairs |
| The Company’s executive officers and directors and holders of greater than five percent of its outstanding common stock, together with entities that may be deemed affiliates of, or related to, such persons or entities, beneficially owned greater than 60 percent of its common stock as of June 30, 2005 |
| As a result, these stockholders, acting together, may be able to control the Company’s management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets |
| The interests of the Company’s existing major stockholders may not always coincide with the interests of other stockholders and they may take actions in advance of their respective interests that may be to the detriment of its other stockholders |
| If the Company’s stockholders sell substantial amounts of its common stock, the market price of its common stock may fall |
| If the Company’s stockholders sell substantial amounts of its common stock including shares issued upon the exercise of outstanding options, the market price of its common stock may fall |
| These sales also might make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that it deems appropriate |
| The Company does not expect to pay dividends on its common stock |
| The Company has never declared or paid dividends on its common stock in the past and it does not expect to pay dividends on its common stock for the foreseeable future |
| ______________________________________________________________________ Page 22 The Company anticipates future losses and may never become profitable |
| Neurogen has experienced significant losses since it commenced operations in 1987 |
| The Company’s accumulated net losses as of December 31, 2005 were approximately dlra179 million |
| These losses have primarily resulted from expenses associated with its research and development activities, including pre-clinical and clinical trials, and general and administrative expenses |
| The Company anticipates that its research and development expenses will remain significant in the future and it expects to incur losses over at least the next several years as it continues its research and development efforts, pre-clinical testing and clinical trials and, if implemented, manufacturing, marketing and sales programs |
| As a result, the Company cannot predict when it will become profitable, if at all, and if it does, it may not remain profitable for any substantial period of time |
| If the Company fails to achieve profitability within the timeframe expected by investors, the market price of its common stock may decline and consequently its business may not be sustainable |
| Accounting pronouncements may affect the Company’s future financial position and results of operations |
| There may be new accounting pronouncements or regulatory rulings, which may have an affect on the Company’s future financial position and results of operations |
| In December 2004, the FASB issued SFAS Nodtta 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS Nodtta 123 and supersedes APB Opinion Nodtta 25 |
| SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values |
| Through December 31, 2005, the Company has accounted for grants of stock options and restricted stock to employees utilizing the intrinsic value method in accordance with APB Opinion Nodtta 25, and, accordingly, recognized no compensation expense for the options when the option grants have an exercise price equal to the fair market value at the date of grant, and, for restricted stock, recorded an expense over the vesting periods |
| Through December 31, 2005, the Company followed the disclosure-only provisions of SFAS Nodtta 123 as amended by SFAS Nodtta 148 |
| The Company is evaluating the requirements of SFAS 123R and anticipate that SFAS 123R will have a material impact on its results of operations and loss per share |