ENHANCE BIOTECH INC (EBOI) - Description of business

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Company Description
The CompanyEnhance Biotech, Inc. ("Enhance") acquires, develops and seeks to commercialize drugs primarily to treat Lifestyle disorders. Our drug pipeline consists of thirteen products and focuses on three of the seven major segments in the Lifestyle drug market: Urology (including Male Sexual Dysfunction ("MSD")), Dermatology and Central Nervous System ("CNS") disorders.Enhance's lead Urology product targets Premature Ejaculation ("PE"), which is recognized as potentially the most widespread indication in MSD. The disorder affects as much as 29% of the adult male population and represents a potential $6 billion market, according to Reuters Business Insight. We are also developing products to treat Urinary Incontinence ("UI") and enhance Male Fertility. In Dermatology, we are developing treatments for Cellulite, Atopic Dermatitis/Psoriasis, Eczema/Itch and Anti-Aging. In the CNS area our lead product in Pain is presently undergoing a feasibility study, which, if successful, may lead to a full license with ALZA Corporation ("ALZA"), a wholly owned subsidiary of Johnson & Johnson. We are also developing unique acting compounds in Depression and Parkinson's Disease that we will seek to license at a similar stage of development.Reuters Business Insight projects the Lifestyle segment of the global Lifestyle drug market will grow from $22.9 billion in 2002 to approximately $32 billion in 2008. Demographic trends indicate sustained demand for Lifestyle drugs, including a large aging population, growth in disposable income, increased consumer health awareness and direct-to-consumer marketing. We believe our drug portfolio is poised to take advantage of three of the most potentially lucrative segments of that market.Business StrategyLarge pharmaceutical companies need additional drugs of substantial market potential to fill depleted development pipelines, particularly since in many cases their lead products will soon be losing patent protection and internal development may fail to keep up with commercial demand for innovation. Increasingly those companies seek to fill that gap by in-licensing drugs at the middle to late stages of development as well as acquiring compounds at an earlier stage. In-licensed Phase III products accounted for more than 30% of the in-licensed agreements made by large pharmaceutical companies in 2002, according to Reuters Business Insight and they believe that this trend will continue to grow.On December 20, 2004 Enhance acquired Ardent Pharmaceuticals, Inc. ("Ardent"), a private drug discovery and development company based in Durham, North Carolina. Following the acquisition and the resultant expansion of the portfolio, Enhance will continue our prior strategy of in-licensing later stage products, but we now also have the ability to develop unique new chemical entities ("NCEs") in selected areas of our portfolio through the delta receptor development engine and compound library recently acquired from Ardent.Enhance uses a broad network of relationships forged in academia, medical research centers and industry to in-license or acquire promising early-stage compounds and existing marketed compounds that can be reformulated or otherwise used for new indications. We rely upon these relationships and a product development network to accelerate the time it takes for new compounds to reach the proof of concept efficacy clinical trials after which a drug is most attractive to large pharmaceutical companies.We enter into development, marketing and partnership agreements with contract research organizations ("CRO's"), contract laboratories, industry experts and pharmaceutical companies to develop, test and seek regulatory approval for our drug candidates. By relying primarily upon contracts with third parties for preclinical and clinical development rather than doing that work in-house, we are able to maintain a limited and less costly infrastructure, particularly as compared with large pharmaceutical companies. Our management believes that this streamlined operating strategy has created an efficient and cost-effective route from early-stage clinical development to a commercial product.Some industry estimates show typical NCE development budgets of $500 million or more while clinical development budgets for post-patent expiration reformulations usually pursued by us generally range between $10 million to $50 million. We will continue to advance our clinical development strategy, balancing in-licensing and reformulations with NCE development, when appropriate, from our delta receptor compound library. Our management believesthat a strategic combination of virtual resources and in-house early-stage R&D resources can create a cost-effective path to market for drugs that can compete very favorably with traditional development routes.We plan to continue our strategy of managing risk and operating expenses by focusing our resources on developing our Urology and Dermatology products while seeking early stage licenses or partnerships for our CNS and Other products. As appropriate, we will also continue looking for additional new compounds and reformulation opportunities through our delta receptor research and our network of relationships.Company BackgroundWe were incorporated in Delaware on June 7, 1999 as Becor Communications, Inc. On February 6, 2003 Becor agreed to acquire Enhance Lifesciences, Inc. ("ELSI"), a privately held Delaware company. As part of the acquisition, effective March 27, 2003 Becor Communications, Inc. changed its name to Enhance Biotech, Inc. Under the terms of the agreement, Enhance Biotech (formerly Becor Communications, Inc.) acquired 100% of all the outstanding shares of ELSI in exchange for 14,516,000 shares, or 90%, of Common Stock of Enhance Biotech. The exchange was based upon a ratio of one (1) share of ELSI for every 0.7258 shares of Enhance's stock. On April 29, 2003, Enhance Biotech completed the acquisition, and ELSI became a wholly owned subsidiary of Enhance.In February 2003, we entered into an agreement with Jano Holdings Limited ("Jano"), a related party, to provide up to $1 million in funding. In addition, we granted Jano 5-year warrants to purchase 1,000,000 shares (1,500,000 post split) of our Common Stock at $1.00 per share. On May 6, 2003 Bioaccelerate Inc. ("Bioaccelerate"), another affiliate, took over the Jano credit facility, assumed all of Jano's responsibilities and was assigned Jano's warrants.On November 3, 2003, the Company completed a $2 million private equity financing through the sale to Bioaccelerate of 2,000,000 shares of Common Stock and 5-year warrants to purchase 1,333,333 shares (2,000,000 post split) at $1.00 per share. These funds have been used to accelerate the development of the Company's lead products. Bioaccelerate had the right to repeat the investment within 12 months on identical terms.Effective January 29, 2004, the Company 1) increased the number of authorized shares of its Common Stock to 75,000,000 and authorized 25,000,000 shares of preferred stock and 2) enacted a 1.5 for 1 forward split applied to all the Common Stock and warrants outstanding as of that date. All share and warrants amounts in these financial statements have been retroactively restated to reflect this forward stock split. As a result of the forward split, as of that date we had 21,774,000 shares of Common Stock outstanding.Bioaccelerate invested a further $2 million in a private equity financing consisting of three tranches of funds from December 2003 to May 2004. For the amounts received of $775,000 on December 16, 2003, $870,000 on April 3, 2004 and $355,000 on May 31, 2004. Bioaccelerate received 2,000,000 shares of Common Stock and 5-year warrants to purchase 2 million shares (post split) at an exercise price of $1.00 per share.In August of 2004, Bioaccelerate purchased an additional 775,010 shares of Common Stock at $1.00 per share.On August 11, 2004 we completed a senior secured credit facility with Bioaccelerate for loans of up to $4 million. As an inducement for Bioaccelerate to provide the credit facility, we granted Bioaccelerate 5-year warrants to purchase 1,500,000 shares of Common Stock at an exercise price of $3.00 per share. As of December 31, 2004, the Company had drawn down $1,442,000 of the facility.On August 11, 2004 Enhance and Ardent executed and delivered an Agreement and Plan of Merger (later amended, the "Merger Agreement"). Under the terms of the Merger Agreement, Enhance acquired the privately held Ardent through the merger of Ardent Acquisition Corp. (a wholly owned subsidiary of Enhance), with and into Ardent. Except for certain "Excluded Shares" and "Contingent Fee Shares", upon the conclusion of the merger, on a fully diluted basis, Enhance shareholders owned approximately fifty-five percent (55%) and the former Ardent securities holders owned approximately forty-five percent (45%), of the Common Stock of Enhance. The merger subsequently closed on December 20, 2004, and Ardent became a wholly-owned subsidiary of Enhance. As part of the acquisition Bioaccelerate agreed to extend an additional $2 million senior secured credit facility to Ardent on terms similar to the August 11, 2004 facility provided to Enhance.48,420 shares that were issued to Bioaccelerate were cancelled at year-end to conform with the holdings outlined in the Merger Agreement.On February 22, 2005 we began utilizing a monthly draw down of the Ardent senior secured credit facility with Bioaccelerate for loans up to $2 million which came into effect January 1, 2005. As an inducement for Bioaccelerate to provide the credit facility, we granted Bioaccelerate warrants to purchase 750,000 shares of Common Stock at an exercise price of $3.00 per share. These options expire January 1, 2009.Enhance's Product PipelineOur pipeline includes thirteen products under development in three main groups, Urology, Dermatology and CNS. A fourth group of Other products is intended to be out-licensed. Our products include both NCEs and reformulations of existing marketed compounds.The following table summarizes our development programs and status: ---------------------------------------------------------------------------------------------- PRODUCT PIPELINE ---------------------------------------------------------------------------------------------- INDICATION PRE-CLINICAL PHASE I PHASE II PHASE III ---------------------------------------------------------------------------------------------- UROLOGY Premature Ejaculation: LI-301 Urinary Incontinence: DPI-221 DERMATOLOGY Callulite: LI-303 Eczema/Itch: LI-412 Psoriasis: LI-312 Cortisol Management Anti Aging: LI-236 CNS Pain: DPI-125 Parkinson's Disease: DPI-290 Depression: DPI 289 OTHERS Cardioprotection: ARD-353 Periodontal Disease: LI-401 Fertility - (Human): LI-316 (a) Fertility - (Animal): LI-316(b) ---------------------------------------------------------------------------------------------- Table indicates the Phases the development programs are in for each product ---------------------------------------------------------------------------------------------- Note: For therapeutic switch products components of the development pathway can be attenuated. For our therapeutic switch programs in Cellulite and Itch, the Phase I/II studies will include a brief Phase I component to measure the systemic effect of the topical mode of administration prior to a rapid progression to Phase II."Pre-Clinical" refers to the series of tests performed on animals after a lead molecule has been identified. Basic pharmacology is completed in this phase. The toxicology required for human testing may be ongoing or completed. Primary and secondary manufacturing of the active compound and the method of drug delivery, respectively, will be established during this time. Human testing is expected to occur between 12 and 18 months. Pre-clinical tests must be completed successfully before an Investigational New Drug application ("IND") can be submitted to the FDA."IND" refers to the preparation of an IND application, the process by which a drug is submitted to the FDA to receive approval for human testing."Phase I" refers to the stage in which compounds are tested for safety, maximal tolerated dose and pharmacokinetics in volunteers without the disease."Phase II" refers to the initial stages of compound testing in patients with the disease or symptoms of interest for ultimate New Drug application ("NDA") approval and labeling. This stage first demonstrates the compound's efficacy and dosing range and expands the safety profile."Phase III" refers to the rigorously controlled test of a new drug in a large population of patients with the disease. After the successful conclusion of Phase III clinical trials, an NDA is filed with the FDA for approval to market the drug.Therapeutic switch programs may have reduced requirements at some or all phases of development due to the history of use and established safety profile of the compounds.Enhance Products in DevelopmentOne objective of Lifestyle drugs is to treat conditions that are non-life threatening yet may have a detrimental effect on people's confidence and lives generally. Frequently these conditions fall into areas that one might consider socially sensitive. On a personal level, these conditions can affect the sufferer's physical and psychological well-being, and can cause considerable discomfort when left untreated. Over recent years, recognition of this class of drug has led to acceptance within the medical profession of the need to treat conditions that were previously ignored. This has been clearly demonstrated by doctors' response to products such as Viagra for erectile dysfunction or Propecia for hair loss. The number of major pharmaceutical companies developing drugs for, and the resources dedicated to, this sector demonstrate the industry's belief in the potential for profit. According to Reuters Market Reports on Lifestyle drugs, more than $20 billion has been spent in the past 10 years to develop drugs to treat Lifestyle conditions.Urology ProductsThe Sexual Dysfunction marketplace is currently valued at $11.5 billion, according to Reuters Business Insight. Our lead PE compound, LI-301 is currently undergoing Phase II dose-ranging trials. We are also developing an NCE from the delta development engine as a follow on PE product.LI-301 Premature EjaculationOn March 23, 2003, the Company entered into a co-development agreement with DMI BioSciences, Inc. ("DMI") to jointly develop and commercialize product(s) comprising or using the compound family LI-301 for the delay of ejaculation in men. LI-301 is a reformulation of an existing marketed compound into an orally bio-available fast melt form with pleasant mint taste masking which can be taken without water as and when required. It has a novel mode of action that combines the low-level effect of a Selective Serotonin Reuptake Inhibitor ("SSRI") and a mu-opioid. LI-301 takes effect within 45 minutes and remains active in the system for up to seven hours, enabling patients to relax, free of pressure from time limitations.Market Opportunity. Industry experts estimate that as many as 29% of men worldwide will suffer with PE at some point in their lives. In the U.S. alone, the disorder will affect as many as 50 million men in their lifetime. Of the 49 drugs currently in clinical development for sexual dysfunction, only a few target PE. The most advanced PE product is an SSRI compound from Johnson & Johnson which has been submitted for approval by the FDA. This class of drugs has a well-documented side effect profile including potentially reducing libido. Several other SSRI products are also in development.Status. Preliminary Phase II(a) double blind, randomized, single dose, crossover trials were successfully completed in Utrecht, Holland at the beginning of 2004. Thirty (30) couples participated and Kendle International BV acted as our CRO. A definitive Phase II dose ranging clinical trial of significant size is underway now in the Netherlands. Recruitment began in the last week of September and the first subjects were dosed in November 2004. Subject to the practical constraints of recruitment, subject selection and drop-out, the trial is expected to be completed and results available in the third quarter of 2005. With successful results from the ongoing Phase II study we will seek a larger pharmaceutical partner to assist in funding the Phase III studies planned for 2006.Patents. Ownership, maintenance and upkeep of the patents on this compound are the responsibility of our license partner, DMI. The U.S. patent expires February 2017. Patents are pending in several major markets, including several European countries, Japan and Canada, as well as China, Mexico and South Africa, among others. We anticipate additional filings on formulation and delivery mechanisms if and when appropriate based on information generated through the development process.Delta Receptor NCE - Premature EjaculationCurrent Status. Enhance has identified the importance of the delta receptor in ejaculatory physiology and has developed an animal ejaculation model. This research has resulted in the discovery of delta agonists that provide significant dose-dependent inhibition of the ejaculatory response. We will continue testing these compounds to identify a lead candidate in conjunction with the development of LI-301, the Company's lead product in the Urology group.Urinary IncontinenceDPI-221 is a delta receptor NCE being developed by the Company as a new treatment for urge and mixed UI with a novel mechanism of action.Market Opportunity. UI is a common illness, particularly in the rapidly growing elderly population. It is defined as the uncontrollable loss of urine from the bladder and is the primary cause of institutionalization of the elderly. UI remains a significantly under-diagnosed and sub-optimally treated disease. According to Decision Resources, of the 15 million significant urge and mixed UI cases in the US only about 20% receive proper diagnosis and only about 10% actually receive pharmacological treatment.The anticholinergic agents Detrol(R) and Ditropan XL(R) dominate the pharmacological treatment for UI. According to IMS Sales Review, U.S. sales of these agents, which are used only for urge and mixed UI, exceed $1 billion. Many patients are unable to tolerate the side effects associated with these anticholinergic drugs. Efficacy is also sub-optimal as both agents reduce but do not eliminate incidents of UI.Current Status. Enhance has identified DPI-221 as its lead compound for UI, has completed pre-clinical studies, and intends to file an IND application and complete Phase I clinical trials during 2005.Dermatology ProductsThe market for dermatological treatments is currently worth $8.6 billion and, spurred by medical advances, is expected to grow over the next five years, according to Reuters Business Insight. The U.S. accounts for 45% of the global Dermatology market. The Company's portfolio includes the following compounds: LI-303 for Cellulite; LI-312 for Psoriasis and Atopic Dermatitis; LI-412 for Eczema/Itch; and LI-236 for Anti-Aging.LI-303 CelluliteOn July 7, 2002 the Company entered into a Co-Development and Licensing Agreement with Stegram Pharmaceuticals Ltd. ("Stegram") for the joint development and exclusive international license of LI-303 as a prescription product for the treatment of Cellulite. LI-303 is a therapeutic switch of an ethisterone derivative used in high oral doses for breast fibrosis, endometriosis and fistula. This product is being reformulated to target Cellulite and the "vanity pharmaceutical" sector where products such as Botox have seen success.Market Opportunity. The market for Cellulite treatments ranges from simple and ineffective cosmetics to surgical treatments. In the U.S. this market exceeds $3 billion a year and parallels similar spending in Europe. At least 40% of women over the age of 35 suffer with Cellulite. There is no product available that has been clinically approved by the FDA to treat this condition.Status. LI-303 is currently being formulated into a topical formulation for pre-clinical and clinical studies. We intend to complete formulation and pre-clinical testing during 2005 and commence clinical studies in early 2006. As a therapeutic switch product, we believe components of the development pathway can be attenuated. For LI-303 the Phase I/II studies will include a brief Phase I component to measure the systemic effect of the topical mode of administration prior to a rapid progression to Phase II. We believe the history and record of use for this existing agent will reduce the clinical trial requirements for this new indication and allow a more rapid path to approval than an NCE at a similar stage of development.In addition to LI-303 we have discovered a follow-on NCE with a similar structure and mechanism of action. We are working to confirm the pre-clinical safety and efficacy of this new compound prior to initiating toxicology and other IND related studies.On July 30, 2004 we announced that pre-clinical research into LI-303 and follow on compound demonstrated a unique combination mode of action for treating Cellulite. This new data helps to explain the molecular basis for the promising cosmetic effects reported in anecdotal and early-stage research anddifferentiates the compound from current available treatments. We believe the findings from these studies will form the basis for additional intellectual property for this condition. In addition there may be promising possibilities as a topical treatment in other more severe dermatologic conditions.Patents. Our license partner, Stegram, will file, prosecute and maintain all of the patents that are the property of Stegram. We will bear all the patenting expenses related to the filing, prosecution or maintenance of all patent and improvement licenses.LI-412 Eczema/ItchLI-412 is a therapeutic switch of an existing compound with a long history of use in oral doses. We are developing a topical formulation for the treatment of Eczema and Itch. LI-412 is designed to influence the neural pathways that transmit the urge to itch.Market Opportunity. Scratching often exacerbates the unpleasant effects of allergy, hives and Eczema and increases both irritation and the risk of infection. According to the Scrip Report on Psoriasis, the Eczema market is forecast to grow to $2.7 billion by 2007. As many as 60% of sufferers fail to receive diagnosis and increasing numbers of pediatric sufferers carry the condition into adulthood.Status. We have a fee-based agreement with SoleRx LLC, a consultancy that develops proprietary therapeutic candidates for Dermatology indications, to provide input and assist in developing the product.LI-412 is currently being formulated into a topical formulation for pre-clinical and clinical studies. We intend to complete formulation and pre-clinical testing during 2005 and commence clinical studies in early 2006. As a therapeutic switch product, we believe components of the development pathway can be attenuated. For LI-412 the Phase I/II studies will include a brief Phase I component to measure the systemic effect of the topical mode of administration prior to a rapid progression to Phase II. We believe the history and record of use for this existing agent will reduce the clinical trial requirements for this new indication and allow a more rapid path to approval than an NCE at a similar stage of development.Patents. We have submitted a patent application for use of this product in Itch and for a topical formulation of this product.LI-236 Cortisol Management (Anti-Aging)On June 3, 2003, we entered into a Co-Development and Licensing Agreement with Stegram for the joint development and exclusive international license of LI-236 for the treatment of aging symptoms in skin, hair and sleep patterns. LI-236 is an oral formulation of an existing compound that inhibits the release of cortisol and manages the overall diurnal cycle of cortisol production. Human and animal trials have demonstrated the ability of this compound to modulate the cortisol cycle, which was seen to directly affect sleep patterns and the quality, thickness and general condition of skin as well as indicating additional potential to treat conditions including hypertension, weight gain and age-associated diabetes. We are targeting potential anti-aging effects on skin for the development of this compound.Market Opportunity. The U.S. accounts for 45% of the global skin care market by sales. Anti-Aging prescription drug therapies are approaching a $1 billion market and are forecast to increase substantially as the media focus on Anti-Aging treatments intensifies and a larger percentage of the population reaches middle age. In the U.S., 83 million people are 50 years old or older.Status. We have begun the initial stages of development planning for LI-236 focused on seeking experts with relevant experience and regulatory advice. Development activities will commence upon completion of the development plan.Patents. Our license partner, Stegram, will file, prosecute and maintain all of the patents that are the property of Stegram. We will bear all the patenting expenses related to the filing, prosecution or maintenance of all patent and improvement licenses.LI-312 Psoriasis / Atopic DermatitisOn March 25, 2003 we entered into a Co-Development Agreement with DMI for the development and international marketing of LI-312, a naturally derived protein with the potential to treat a range of Dermatological conditions, including Psoriasis and Atopic Dermatitis. This NCE is being formulated as a topical treatment for these conditions. Early indications suggest minimal side effects compared with current treatment options.Market Opportunity. The market for Psoriasis treatments is expected to grow from current sales of $500 million to sales of $5 billion over the next five years, according to Reuters Business Insight. They estimate the patient population to be 7 million in the U.S. and 14.5 million in Europe.Status. We selected Covance Ltd. UK as the CRO for pre-clinical testing through to Phase I clinical trials. The testing is subject to the availability of the compound. To date we have been unable to develop a viable manufacturing process for this agent. While we continue to seek such a process we cannot guarantee a positive result. No progress can be made until such process is identified.Patents. Ownership, maintenance and upkeep on the patents on the compound are the responsibility of our license partner, DMI.CNS ProductsPainDPI-125 is a mixed delta/mu receptor NCE being developed by the Company as a new treatment for moderate to severe pain with a novel mechanism of action. Enhance believes a mixed delta/mu compound such as DPI-125 has the potential to provide patients with similar analgesia to current mu opioid analgesics with reduced side effects such as respiratory depression, nausea and vomiting and addiction.Market Opportunity. Millions of patients in the U.S. experience short-term moderate-to-severe pain in surgical, emergency room and intensive care settings. Additionally, according to the American Pain Society, almost 10% of the U.S. population experiences chronic moderate-to-severe pain from cancer and non-cancer causes, such as arthritis or chronic back pain. As a result of several studies showing inadequate treatment of pain, the Joint Commission on Accreditation of Healthcare Organizations has mandated that all U.S. hospitals and healthcare facilities assess the adequacy of pain management for each patient. The American Pain Society subsequently declared pain to be the fifth vital sign for evaluation by healthcare providers.Opioids with mu receptor agonist activity currently dominate the analgesic treatment of patients in emergency, hospital and perioperative settings. Morphine, fentanyl, oxycodone and other opioids provide strong analgesia, but also cause multiple, serious and restricting acute and chronic side effects including respiratory Depression, constipation, nausea and vomiting. These agents also have high addiction, dependence and abuse potential.IMS Sales show the current market for acute injectable analgesics in the U.S. to be approximately $300 million in 2003. This opportunity is focused primarily on hospital use and includes intra-operative, post-operative, intensive care unit, emergency room, end stage cancer and office surgery pain. The market for chronic opioids in the US was approaching $4 billion, growing in excess of 30% per year. The leading products are OxyContin(R) (extended release oxycodone) and Duragesic(R) (fentanyl in a transdermal patch).Current Status. Pre-clinical data for DPI-125 has shown the potential for reduced respiratory depression, vomiting and addiction. The Company filed an IND for DPI-125 and successfully completed a Phase I clinical trial with an intravenous ("i.v.") formulation. Ardent subsequently signed a feasibility study and license agreement for DPI-125 with ALZA Corporation (a division of Johnson & Johnson) in November, 2004.In addition to the $1,250,000 option fee upon signing the agreement, we will receive further payments should ALZA exercise its option following feasibility studies, and will also be eligible for development milestone payments and royalties. We will also obtain the right to co-promote the i.v. product in the U.S.DepressionDPI-289 is a selective delta receptor agonist NCE discovered by the Company and in development as a novel compound for the treatment of Depression.Market Opportunity. Clinical Depression is one of the most common mental illnesses. According to the National Institute for Mental Health, almost 10% of the U.S. population suffers from Depression. According to Reuters Business Insight, the global antidepressant market was worth approximately $14.3 billion in 2002 and is forecast to expand to $18.3 billion in 2008. The market for Depression is currently divided between the SSRIs (branded as Prozac(R), Paxil(R) and Zoloft(R)), the neurostimulators such as Effexor(R), the older agents such as tricyclic antidepressants (imipramine or desipramine and others) and Wellbutrin(R) (buproprion). All available SSRIs, Wellbutrin(R) and Effexor(R) have stimulatory effects that can manifest as hyperactivity, sleep loss, increased seizure risk or other unwanted side effects on the central nervous system, or CNS. SSRIs may be associated with nausea, vomiting, headache and sexual dysfunction, but have a wider therapeutic window than the older agents. All of the currently available antidepressants require several weeks to manifest their active clinical effects. In addition, a variable but significant percentage of patients treated with SSRIs have an inadequate response to therapy. Agents that provide enhanced efficacy, a rapid onset of clinical antidepressant activity, and/or an improved side effect profile would be viewed as a major medical and commercial opportunity.Current Status. DPI-289 has demonstrated efficacy in various pre-clinical models of antidepression. In these models, DPI-289 appears to have a more rapid onset of action as compared to fluoxetine (Prozac(R)). DPI-289 was selected as the lead compound for the Depression program for its efficacy and safety shown in these pre-clinical studies. We intend to make such investments in this compound as are necessary to attract and obtain a license with a larger pharmaceutical partner.Parkinson's DiseaseDPI-290 is currently the lead selective delta receptor agonist NCE discovered by the Company being pursued for the treatment of Parkinson's Disease ("PD").Market Opportunity. PD, a chronic and progressive neurological condition, affects approximately 1.5 million people in the U.S. alone. While its cause is unknown, the symptoms of PD are primarily the result of degeneration of dopaminergic neurons, in the part of the brain that controls and modulates movement. Symptoms include limbs that tremble; slowness of movement; stiffness and rigidity of limbs and gait or balance problems. Current medical therapy for PD is based primarily around the replacement of the dopamine deficit through the administration L-DOPA with or without dopamine agonists. However, after 3 to 5 years of L-DOPA treatment alone patients develop motor fluctuations due to "wearing-off" of the therapeutic effect, "on-off" fluctuations in efficacy immediately after dosing, or most commonly, an "overshoot" of effect manifested as abnormal involuntary movements (dyskinesias).Despite the growth of generic levodopa products, PD drug revenues grew approximately 20% to reach $1.7 billion in 2003, driven by the increasingly important role of the dopamine agonist class.Current Status. Outside investigators have demonstrated that delta opioid agonists have significant effects in both rodent and non-human primate models of PD. Interestingly, even at relatively high doses behavior returned to normal levels but did not show the hyperkinesias associated with L-DOPA administration. We have identified DPI-290 as our potential lead compound based on its oral activity in our internal rodent models of PD. DPI-290 produced clear beneficial effects, alleviating the motor impairments of rats treated with reserpine or haloperidol, without the side-effect profile of dopamine replacement therapy. We intend to confirm our internal work by screening additional selective delta receptor agonists to see if we can find an improvement on DPI-290. We will then work with outside investigators to confirm our internal rodent activity in more definitive non-human primate models of PD.Other Products Under Development To LicenseLI-401 Periodontal DiseaseOn June 18, 2004, we entered into a Co-Development and Licensing Agreement with DMI to jointly develop and commercialize products comprising or using LI-401 for the treatment of Gingivitis and Periodontitis in humans and animals. LI-401 is atherapeutic switch of a well established, off-patent compound that reduces inflammation by chelating copper and iron.Market Opportunity. According to the U.S. Surgeon General's report, "Oral Health in America, 2000," most adults in the U.S. show some degree of periodontal pathology, with severe periodontal diseases affecting 14% of middle aged adults. Current treatments consist of tooth scaling and antibiotic therapies. While bacteria are known to be a causal factor in Periodontal Disease, it is now recognized that most of the damage caused by Periodontal Disease and Gingivitis is a result of the inflammatory response promoted by plaque bacteria, and not from the bacteria themselves.Status: We have contracted with PDMS to manufacture compound sufficient for formulation development and clinical trials. We have also contracted with the University of Bristol Dental School in the UK to conduct an initial Phase IIa trial. We expect to commence this trial in late 2005. We currently intend to license this compound upon successful completion of Phase II trials.Patents. A U.S. patent is applied for use of this product's active compound in oral care. Enhance will pay for filing and maintaining the patents covering this product which will continue to be held by DMI.LI-316(a){Stimulant}, LI-316(b){Inhibitor} Human Male and Animal Fertility EnhancementOn July 1, 2003 the Company entered into a Co-Development Agreement with Queen Mary and Westfield College, University of London ("QMUL") for a three-year program to isolate and license suitable novel treatments for Male Infertility. Two product candidates were isolated as suitable compounds for further research and development. LI-316(a) stimulates sperm motility, increasing the possibility of successful fertilization. LI-316(b) stops and holds sperm in suspended animation, making it easier to manage the handling and manipulation of sperm in vitro and in vivo. Both products are synthesized from a naturally occurring, non-toxic compound found in mammals.The Company is currently focusing its efforts primarily on veterinary applications for these compounds:Artificial Insemination ("AI") of commercially farmed livestock. The treatment seeks to enhance the control and yield of sperm used for artificially inseminating livestock first by treating the sperm with LI-316(b) to stop and suspend sperm motility, then rejuvenating it later with LI-316(a). Doing so is expected to increase the yield and productivity of artificially inseminating livestock. The initial target is the bovine market; secondary markets include other commercially farmed livestock such as pigs and sheep.Laboratory results have indicated that the product may both increase the yield of healthy semen surviving storage in frozen conditions, transit and handling from bull to cow and potentially provide more time flexibility working with the sperm for cows coming into estrus across a herd. This work has been monitored in partnership with a major commercial AI group active in the European and U.S. markets and is expected to progress to field trials in their cattle herds during 2005. If successful, we believe these field trials will provide a basis for partnering with commercial AI group(s) with the infrastructure to successfully market this compound.We also have the potential to utilize this technology in humans:Human IVF. Based on positive results in pre-clinical research on bovine sperm, LI-316(a) may have benefit as a naturally produced alternative to current man-made methods for transporting and using sperm for IVF in humans. The compound may be particularly useful when the method involves intracytoplasmic sperm injection (ICSI), which requires the extraction of the sperm's nucleus and its injection directly into the egg in vitro. Initial indications are that the performance of LI-316(b) as sperm inhibitor and LI-316(a) as sperm stimulator may be very similar in human and bovine sperm.Fertility enhancement in human intercourse. The compound may enhance human sperm motility and improve the prospects of fertilization through sexual intercourse.Market Opportunity. Infertility affects one in every six couples who are trying to conceive. In at least half of all cases of infertility, a male factor is a major or contributing cause. That means approximately 10% of all men in the U.S. suffer from infertility.Status. On May 17, 2004 the Company announced its discovery that the two compounds in this product offer a wider opportunity for development than previously understood. The internal laboratory program has identified potential opportunities to enhance sperm yield and productivity in the agricultural industry. Applications for bovine artificial insemination, in particular, may be potentially commercially attractive and the Company is launching projects in this area. Trials designed to confirm that the findings from QMUL laboratory research also apply in the live environment will commence at a semen farm prior to moving to field trials.For the human IVF trials, the Company is seeking suitable clinical partners in the U.S. and London in fertility clinics to participate in the research and assist with the ethical issues involved in the use of human sperm samples in a clinical trial.Patents. Ownership, maintenance and upkeep of the patents on this compound are the responsibility of our license partner, QMUL.CardioprotectionThe Company has identified ARD-353 as the lead selective delta agonist NCE for the Cardioprotection program.Market Opportunity. Cardiovascular Disease is the leading cause of morbidity and mortality in the developed world. Cardiologists and surgeons have an array of mechanical and pharmacological treatments for patients with acute and chronic coronary insufficiency. Most of these approaches are intended to increase blood flow to the affected region of the heart. Advances in reperfusion treatments, such as angioplasty, and the use of thrombolytic drugs are improving the survival of patients with Myocardial Ischemia. There is still a significant need, however, for agents that minimize damage to ischemic cells in areas at risk during ischemic events.The population for which a cardioprotective drug may be appropriate is potentially very large. On an acute basis, such a therapy may provide benefit as a pretreatment for patients undergoing surgical procedures who are at high risk of cardiovascular events. Decision Resources estimates that there are 340,000 patients undergoing Coronary Artery Bypass Graft and the 600,000 patients undergoing Percutaneous Transluminal Coronary Angioplasty yearly in the U.S. This approach may also provide benefit to patients with known Coronary Artery Disease that undergo non-cardiac surgery. An orally active agent may be useful in primary or secondary prevention of cardiovascular events in patients with chronic coronary artery disease who are at risk for myocardial infarction or sudden death.Current Status. We are continuing to expand the pre-clinical studies showing the safety and efficacy of ARD-353 for Cardioprotection. We intend to make such investments in this compound as are necessary to attract and obtain a license with a larger pharmaceutical partner.Product Divestment and Out-LicensingWe elected to divest LI-226, our arthritis product candidate, and out-license LI-247, our generic product for Depression, to focus resources in the key products of the pipeline.LI-226 ArthritisOn November 27, 2002, we entered into a licensing agreement with Kingston Scientific Partnership for the exclusive license of LI-226 for the treatment of rheumatoid arthritis. The license was rescinded to Kingston Scientific in March 2004 by mutual consent and at no further cost to either party.LI-247 Depression (Generic)On March 21, 2003, we entered into a licensing agreement with CLL Pharma S.A., of Nice, France, for the exclusive global license of LI-247 for the treatment of Depression. It is anticipated that during fiscal year 2005, we will continue to seek a suitable sub-licensee to take this product to market from the present stage of readiness where a bio-equivalence trial will be required to complete the clinical program. During the period from July 31, 2003 to date, no further money or development time was spent on the LI-247 compound and any further spending will only be associated with the out-licensing to a third party.Delta Receptor CompoundsOverview of Opioid ReceptorsOpioid receptors are specialized "recognition" proteins located on cell membranes in many organs, including the central and peripheral nervous systems. Currently, three opioid receptors, mu, delta and kappa, have been shown to be important in human physiology. The mu receptor, first identified in 1972, was rapidly understood because of the historical knowledge of classic mu receptor agonists such as morphine, fentanyl and oxycodone.There is a growing realization that because the opioid receptor/G-protein apparatus produces biochemical reactions that differ from cell to cell, and because these receptors are found in many organ systems, compounds interacting with opioid receptors have far-reaching clinical potential not only in analgesia but in other indications. The role of delta receptors as critical regulators of cellular function in several organ systems is clearly established by the many ion channels and enzymes coupled to these receptors and their associated physiological responses. This diversity, along with the multiple opioid receptor subtypes and specific tissue localization, highlights the potential of selectively targeting this receptor for the discovery of therapeutic agents.Limitations of Traditional Opioid Receptor TherapeuticsTraditional mu-opioid receptor agonists currently form the basis for the treatment of patients with moderate-to-severe pain. These mu receptor agonists provide effective analgesia, but they have consistently displayed multiple, serious and restricting acute and chronic side effects. Respiratory depression, the potentially fatal slowing or cessation of breathing, is the most feared side effect of narcotic analgesia and causes significant concern among prescribers of these agents. Constipation, nausea and vomiting are other side effects that occur with great frequency and often lead to inadequate analgesia as patients limit the use of the drugs to avoid these highly uncomfortable side effects. In the chronic setting, mu agonists also have significant potential for addiction, dependence and abuse. Narcotic abuse and dependence are major medical and societal problems that have received a great deal of recent public attention.Overview of Delta Receptor ApproachThe research team has found that the stimulation of delta- and mu-opioid receptors in combination, and delta receptors alone, leads to specific pharmacological responses that suggest unique treatment approaches to a variety of medical conditions. Using the discoveries regarding mixed delta/mu receptor pharmacology the team has created the basis for acute and chronic pain development programs. It is also possible to leverage the company's knowledge of delta receptor pharmacology to advance the use of selective delta receptor agonists for programs in UI, Cardioprotection, Depression, PD, PE and other indications.Mixed Delta/Mu AgonistsThe pre-clinical and clinical evidence indicates that simultaneous mu and delta receptor stimulation will maintain or even enhance the analgesic efficacy of the classic mu receptor opioids while reducing the incidence and severity of the mu-related side effects of respiratory depression and vomiting. There is also evidence in a non-human primate model that addiction/dependence, a mu-related side effect of chronic therapy, is mitigated by concomitant delta and/or kappa receptor agonism.The Company believes that DPI-125, a mixed delta/mu analgesic, may provide potent analgesia with the potential for significantly reduced side effects as compared to currently available products.Selective Delta AgonistsThe science team found that selective stimulation of delta receptors in animal models leads to specific pharmacological actions that suggest unique treatment approaches to a variety of medical conditions. Additionally, unlike mu receptor agonists or mixed delta/mu agonists, specific delta receptor agonists are not known to be associated with abuse or dependence liability in animal studies. Investigations are currently being carried out in to selective delta receptor agonists in several indications.Urinary Incontinence: To date the Company has demonstrated that selective delta agonists improve urinary bladder function in several animal models of UI. DPI-221 has been identified as the lead compound. Pre-clinical studies have been completed and we intend to file an IND application and begin Phase I clinicaltrials for this indication during 2005. DPI-221 could provide a unique, effective new mechanism of action that would avoid the typical dry mouth, dry eye and constipation side effects of current agents. We believe improved tolerability would drive a significant increase in the number of patients receiving drug therapy for UI.Cardioprotection: Animal models of Cardiac Ischemia demonstrate that delta agonists protect heart muscle when administered prior to the onset of the ischemic event. Ardent has been conducting pre-clinical research which has identified ARD-353 as a lead intravenous cardioprotective agent. The Company believes an intravenous formulation of ARD-353 may reduce morbidity or mortality in patients at risk of ischemic events who are undergoing certain medical procedures. An orally active agent may be useful in primary or secondary prevention of cardiovascular events in patients with chronic Coronary Artery Disease who are at risk for Cardiac Ischemia or sudden death.Depression: Our selective delta agonists have produced a faster onset of antidepressant activity, with overall efficacy equal to or greater than existing SSRIs (e.g., Prozac(R), Paxil(R), Zoloft(R)) and tricyclic antidepressants in animal models of Depression. Based on these results we have identified DPI-289 as our lead compound. We believe that a successful delta receptor agonist would provide a unique mechanism of action with the potential for enhanced efficacy and a rapid onset of clinical antidepressant activity. This therapeutic approach should also avoid the well-known side effects of drowsiness, dry mouth, and loss of libido seen in a significant proportion of patients using available antidepressants.Premature Ejaculation: We believe we are the first company to recognize the importance of the delta receptor in ejaculatory physiology. Using a pre-clinical animal ejaculation model the Company has demonstrated a dose-dependent inhibition of ejaculation in response to several selective delta agonists. The Company believes a delta receptor compound may demonstrate effective delay of ejaculation without the side effects of the common antidepressants that are now used by physician's off-label for this indication. We believe a delta receptor compound would be an attractive follow on compound to LI-301 that is already advanced into late Phase II clinical trials.Product DevelopmentA major element of our product development strategy has been and will remain the use of third parties or CROs for drug development at all stages of development of our products. CROs conduct safety and efficacy tests and clinical studies and assist us in guiding products through the FDA and EMEA regulatory review and approval processes. The Company also uses the contract manufacturing, laboratory, formulation and chemistry skills of external providers.We believe the use of third parties to develop and manufacture our products has several advantages over building a comprehensive infrastructure to handle all such functions in-house. This approach generally gives us more choice and greater selectivity in the dedicated resources we will concentrate on a particular product than if those functions were performed by internal personnel who were required to support the full range of our product development activities. We believe that maintaining a limited infrastructure, focused on providing the strategic direction and oversight of outside resources, will enable us to develop products efficiently and cost effectively. Although this approach will allow us to avoid the expense associated with developing a large internal infrastructure to support our product development efforts, it also means that we will continue to be dependent on the ability of outside parties to perform critical functions for us.We acquired the chemistry and pharmacology capabilities of Ardent to complement the early stage development capabilities already existing in the Company. Over time, we expect to build additional development capability and add professionals with substantial industry experience as appropriate based on the progress of our compounds in development. These areas include regulatory affairs, marketing and sales, quality assurance, manufacturing, clinical trials management, finance, information systems and general management.The product development process is designed to identify problems associated with a proposed product's safety and effectiveness. We also attempt to reduce the risk that a proposed product will not be accepted in the marketplace by conducting market research and refining the commercial strategy for each product candidate. A drug development portfolio cannot be completely insulated from potential clinical and market failures. It is likely that some proposed products we select for development will not produce the clinical or commercial results expected. Additionally, we may choose to out-license at an early stage or divest product candidates from our portfolio if they produce clinical results outside our target sector and/or require financial, development and management resources better met by larger or more specialized pharmaceutical or biopharmaceutical companies.We will continue to invest in the research and development of existing and new products, including those that could extend applications of existing technologies. We are currently evaluating a number of additional follow-on product candidates arising from research and co-development agreements with QUML, Stegram, and DMI, including potential product candidates based on our proprietary compounds LI-316 (a and b) and LI-303, and LI-301 respectively. Our research and development efforts on these additional product candidates are considered preliminary and we cannot give an assurance that any of these compounds will be successful or that they will progress through clinical trials. Advancing one or more of these potential products into human clinical trials is dependent on several factors including technological feasibility, commercial opportunity, and securing additional financial resources.Long-Term R&D Programs Utilizing the Delta Compound LibraryEnhance's long-term research and development goals also include the application of our delta receptor expertise to the expanding list of therapeutic areas in which delta receptors appear to play a role. Data is emerging from the research literature indicating positive effects of delta receptor activity in a diverse number of conditions. These include pain states such as Neuropathic Pain, Diabetic Neuropathy, Visceral Pain and Ophthalmic Pain. Other CNS specific areas with existing pre-clinical data include Neuroprotection, Addiction/Dependence and Cough. New areas without existing data but with considerable theoretical interest include Cystitis, Irritable Bowel Syndrome, Attention Deficit Hyperactivity Disorder, Sleep Disorders and Cognition. Early data also exist for an immunomodulatory effect of delta receptor stimulation. These therapeutic areas are generally not well served with existing treatments and may represent significant commercial opportunities.Research and DevelopmentOur primary research and development efforts to date have focused on identifying promising compounds and developing them into products to treat MSD and Skin Disorders. This ongoing research may yield other product opportunities, as may the ongoing work on the delta receptor development engine.Externally we engage in research, pre-clinical studies and clinical development with third-party laboratories, including QMUL and Westfield College, University of London; DMI BioSciences, Inc., Colorado, U.S.; Trauma 1 Laboratories Swedish Hospital; and Stegram Pharmaceuticals Ltd, Sussex, UK. We use other contract research and development organizations, including; Covance Ltd., Huntingdon Research Laboratories, XenoBiotics Laboratories, Inc., Charles River Laboratories, Cardinal Health, Bioreliance Inc. and others for pre-clinical testing and Phase I research; Kendle International Inc. and PPD to manage clinical trials; DMI Synthesis Ltd. and Rhodia Pharma Solutions for early-stage manufacturing; and Ultrafine Ltd, Medpharm Ltd., PDMS, Baxter Pharmaceutical Solutions and Penn Pharmaceuticals Ltd. to undertake chemistry and formulation work as well as to manufacture materials for trials.Our research and development structure is designed to enable us to evaluate and make the best choices for where and how projects are run and resourced. Each is managed as a discrete project with its own budget and project management. When practical and desirable, different projects will use common resources and contracted facilities. We manage our projects through ongoing review of scientific data and rely on the breadth of experience and expertise of the following Science Consultants to assist us: Dr. Gerald Curtis, Dr. Claude Laruelle, George Margetts, Dr. Malcolm Thomas, Professor Gavin Vinson, and Dr. Christopher Wood. Each of these members also contributes directly to specific pipeline projects by applying a particular skill set, and is a significant factor in the future success of that product.Our budget projections for research and development are based primarily upon those established and set out in or pursuant to our agreements with research and co-development partners. Projects may meet development and regulatory barriers; however projects that require additional work or a change in approach, can lead to changes in both timing and in budget requirements to maintain a product's path to market. When this situation arises we tend to be in a more flexible position to meet such demands than a fully internally resourced pharmaceutical company that relies on existing internal capabilities to progress. Nonetheless, the addition of Ardent's early-stage chemistry and pharmacological resources will be valuable and, in our view, does not detract from our responsiveness, but rather augments our capability to plan the development program for a compound with more control over its progress.GlaxoWellcome Intellectual Property AssignmentDuring 1996, Ardent (under the name of Delta Pharmaceuticals) obtained all of the worldwide rights to certain technology from GlaxoWellcome. As a result, we are obligated to make future royalty payments equal to 2% of net sales on some of our earlier products for the duration of certain patents related to such products.ManufacturingThe Company has established relationships with contract manufacturing facilities that have the capability to produce drug substances in quantities ranging from laboratory scale to full production capacity. For our therapeutic switch products raw materials and final compounds are commercially available from a variety of sources at acceptable purity and costs for current purposes. A substantial effort is underway to optimize routes of synthesis and reduce costs of raw materials and intermediates for the delta receptor based products.Intellectual PropertyThe patents covering the in-licensed therapeutic switches and NCEs of Enhance are generally retained and maintained under the license agreements by the licensors.The Company owns and controls patent rights in the field of delta receptor compounds, including mixed delta and mu receptor analgesic compounds, and delta receptor compounds having various other indications for therapeutic treatment, including overactive bladder, Depression, cardio-protection and PE. The patent portfolio covers such delta receptor compounds, formulations containing such compounds, the synthesis and use of such compounds and formulations and methods of treatment using such compounds. The patent portfolio covering such delta receptor compounds includes eight issued U.S. patents, which expire between August 2014 and June 2016 that were acquired from GlaxoWellcome, two pending applications from GlaxoWellcome and six pending applications that originated at Ardent. International filings include 55 patent applications in such countries as Australia, Canada, China, the European Union, Hungary, Israel, Italy, Japan, Malaysia, Mexico, New Zealand, Pakistan, Philippines, Poland, the Russian Federation, South Africa, South Korea, Taiwan and Thailand. Internationally, 17 patents have been issued.The Company also relies on trade secrets and proprietary know-how. Enhance's practice is to require each of the key employees, consultants and advisors to execute a confidentiality and inventions assignment agreement before beginning their employment, consulting or advisory relationship with us. These agreements generally provide that the individuals must keep confidential and not.D.s in total. Of these employees, four are in management, 15 are in Research and Clinical Development, and five are in Administration. The Company seeks to maintain a small core employee resource and it continues to out source all of its clinical development work and some of its pre-clinical requirements too. None of our employees are subject to collective bargaining agreements. We believe our relationships with our employees are good. We anticipate reinforcing our staff with additional hires in research, clinical development, finance and accounting areas. This will be somewhat contingent upon our ability to raise future funding to support these hires and drive the development of the products in the combined product pipeline.disclose to other parties any confidential information developed or learned by the individuals during the course of their relationship with us, except in limited circumstances. These agreements also generally provide that Enhance owns all inventions conceived or developed by the individuals in the course of rendering services to us.Market OverviewThe pharmaceutical industry is characterized by ongoing convergence and consolidation. Large pharmaceutical companies generally continue to experience depleted product pipelines and diminished R&D productivity, as measured by declining numbers of approved NCEs despite year-on-year increases in R&D spending. However, their sales forces, a major asset and investment, require more and ever larger market opportunities to remain commercially viable in their chosen fields of specialization. This is exemplified by the interest of major players in the MSD sector now seeking parallel "blockbuster" compounds for conditions that complement the sales person's call with erectile dysfunction products, yet few have in-house developments advanced in more than one area.In our view, the Lifestyle drug market has the potential to provide significant returns on R&D by both improving the products in existing markets and creating innovative new product areas with as of yet unmet needs. We believe that a number of factors will sustain the growing demand for Lifestyle drugs, including demographic trends (an aging population), growth in disposable income, direct-to-consumer marketing and increasing health awareness by consumers who demand treatment for Lifestyle conditions that are frequently poorly served.CompetitionWe are a small, but emerging, company in the specialty pharma sector and face substantial competition from others in this sector. The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Many third parties compete with us in developing various approaches to Lifestyle disorders. These competitors include major pharmaceutical companies, biotechnology companies, academic institutions and other research organizations.Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approval and marketing than we do. In addition, many of these competitors are active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for proprietary technology. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and

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