Cell Pathways

� 1999, Biotechclinician

Cell Pathways, Inc.
Nasdaq:CLPA

702 Electronic Drive
Horsham, PA 19044
Phone: (215) 706-3800
Fax: (215) 706-3801

Contact: Brian Hayden
Vice President
and Chief Financial Officer
(215) 706-3800

COMPANY DESCRIPTION

Cell Pathways, Inc. is a privately held biotech company focused on the development and commercialization of products to prevent and treat cancer. Tseng Labs, Inc. was a developer of custom semiconductor and board level enhancement products that expand graphics capabilities, until the 12/97 sale of its graphics design assets. Tseng Labs does maintain a minor position in that business. After Tseng Labs sold most of its graphics development assets, it was seeking to convert its largely cash assets into investments in a growth-stage company or companies in the late stage of product development. On June 23, 1998 Cell Pathways and Tseng Labs announced that they had signed a definitive agreement whereby the stockholders of Tseng will exchange all of their stock tax-free for approximately 5.5 million shares of stock in Cell Pathways. Through the reorganization, the shareholders of Tseng will exchange their Tseng capital stock for approximately 23% of the outstanding equity of a newly formed holding company of Cell Pathways which will obtain the benefit of the substantial cash assets of Tseng. As of May 1, 1998 Cell Pathways had a cash position of $21 million with R&D spending in FY97 of $9 million. The number of shares of common stock issued in the Tseng Merger in exchange for the outstanding shares of Tseng common stock is approximately 5.478 million shares, or .3631326 per share of Tseng common stock. Upon completion of the transaction Cell Pathways became publicly traded on the Nasdaq under the symbol CLPA. According to Robert J. Towarnicki, President and CEO of Cell Pathways "the completion of this transaction will provide Cell Pathways with additional financial resources to continue the aggressive clinical development of our lead compound, FGN-1™ exisulind, in the prevention and treatment of several of the most common and deadly forms of cancer." "In addition, it will allow us to accelerate the preclinical development of some of the most promising new anticancer compounds in our research pipeline." Cell Pathways' shareholders voted November 2, 1998 to approve the merger. Tseng Labs, Inc. had a scheduled special meeting of its stockholders on November 3, 1998, in which they voted to merge with Cell Pathways, Inc. After approval by both sets of shareholders, Cell Pathways began trading in November 4, 1998 as CLPA.

Cell Pathways, as we mentioned before, develops and commercializes treatments to prevent and treat cancer. The company's technology is based upon its discovery of a novel mechanism that can be targeted to induce selective apoptosis, or programmed cell death, in precancerous and cancerous cells without affecting normal cells. Cell Pathway's stated objectives are to be a leader in cancer chemoprevention and to build an integrated pharmaceutical company focused on the oncology market.

The company has an interesting strategy to increase the speed of the clinical trials and FDA approval. The strategy for its targeted indications is to identify subsets of larger patient populations in which clinical endpoints occur in high frequency and in a relatively short time frame. Cell Pathways plans to use data obtained in completed clinical trials in other indications. The company believes that this strategy may allow it to reduce the size and duration of clinical trials, thereby generating statistically significant clinical results more quickly and cost-effectively.

TECHNOLOGY

Cell Pathways (CPI) focuses on chemoprevention, which involves creating drug therapies that prevent malignancies from arising and prevent previously treated tumors from recurring. They are developing therapeutic approaches with the potential to arrest or reverse carcinogenesis by selectively increasing the rate of apoptosis, or "programmed" cell death, in premalignant cells. Apoptosis is the normal process by which the body disposes of genetically damaged or unwanted cells. In cancer, an imbalance between the rate of cellular growth and apoptosis results in uncontrolled growth. Apoptosis occurs in tissues that are continually renewing themselves or as a natural defense mechanism that prevents the replication of cells that have undergone DNA damage. They have "identified novel mechanisms for triggering apoptosis that do not involve the regulators of apoptosis most commonly explored by other companies (p53, bax- and bcl-2 genes or cyclo-oxygenase related events). Using a proprietary screening algorithm, CPI has identified a number of potential drug candidates that exploit these novel mechanisms." The company further states it has "moved two of these compounds into preclinical development, and expects to continue to develop a pipeline of diverse chemical compounds that may be useful in the treatment of precancerous lesions, as well as cancer and other conditions characterized by abnormal cell growth."

Cell Pathways has reportedly discovered a previously undefined mechanism for regulating apoptosis. There seem to be two key elements of this mechanism. One is an apoptosis-inducing element ("AIE"), which is activated by naturally-occurring triggers. The other is an apoptosis regulatory element ("ARE"), which plays a key role in controlling levels of activated AIE. They have determined in colon cancer that the neoplastic tissue has a higher level of ARE activity than neighboring normal tissue, which may prevent neoplastic cells from responding to normal signals that trigger apoptosis. "When ARE activity increases, as in neoplastic cells, AIE activity is reduced and activation of a critical downstream protein is interrupted, subsequently preventing the activation of the caspases" (a member of a family of enzymes that is involved in the apoptotic process).

PREVATAC (exisulind) is Cell Pathways leading therapeutic candidate. It seems to be targeted at inhibiting ARE activity in neoplastic cells. This in turn prevents ARE from deactivating the active AIE which can then trigger a downstream protein which leads to the activation of caspase. Caspases then trigger a cascade of events leading to apoptosis.

PREVATAC works in a "significant number of clinically important cell lines (including colon, cervical, prostate, skin, lung, breast, etc.), without inducing resistance in those cells." It has also shown significant dose-dependent inhibitory effects on the growth of colon, lung and mammary tumors in rats.

The majority of treatments for cancer also induce apoptosis but they do not differentiate between normal and abnormal cells (i.e. chemotherapy, radiation). This, of course, causes severe side effects including nausea/vomiting, fatigue and immune dysfunction. These agents therefore, are not used in patients for treatment of precancerous lesions. Cell Pathways' technology can be targeted to induce selective apoptosis in neoplastic cells without affecting normal cells. This opens up a huge patient population that before now, has not had a good option to prevent the development of cancer from precancerous lesions.

Cell Pathways has created over 450 new chemical compounds in five chemical families and over 27 chemical classes, over 200 of which display significantly greater apoptotic potency than PREVATAC. The new compounds are tested for inhibitory effects on the growth of cancer cells in vitro, for activity against ARE and for the induction of apoptosis.

PRODUCTS

Cell Pathways currently has no products on the market (hopefully soon to change!!!!). They do have a drug currently in Phase III clinical trials. PREVATAC (exisulind) is in Phase III trials for the indication of Adenomatous Polyposis Coli (APC). This is also called familial adenomatous polyposis (FAP). This is a disease with a very strong genetic predisposition. Family members affected with this disease have innumerable polyps in the colon and 100% will develop colon cancer by the fifth decade of life if not treated. The current treatment is a prophylactic colectomy (removal of the entire colon prior to development of cancer). Needless to say, anything that will decrease the need for a colectomy would be well received. The rate of APC is estimated to occur in between 25,000 to 50,000 persons in the U.S. These patients would probably have to take this drug continuously to prevent the occurrence of polyps and the development of cancer.

PREVATAC received Orphan Drug status from the FDA in 1994 for the indication of APC. Orphan Drug status provides an applicant exclusive marketing rights in the U.S. for a designated indication for seven years following marketing approval, in order to obtain such benefits, the applicant must be the sponsor of the first NDA approved for that drug and indication. In 1995 Cell Pathways began Phase I/II trials under the sponsorship of the National Cancer Institute. Phase I/II trials were completed in January 1997. 18 APC patients received PREVATAC treatment for six months. Following the six month period, all patients elected to continue therapy in an open-label extension trial. Several patients have exceeded 24 months on the drug. Nearly all patients experienced a dose-related reduction in the number and size of exophytic precancerous rectal polyps that were six millimeters or less in diameter at the beginning of the study. In the extended study, no progressive increase in polyp size or volume was observed in 13 of the 14 patients who have remained in the study on the optimal dose. There have been no withdrawals from the study or its extension attributable to serious adverse events. Phase III trials were started in the second quarter of 1997. This study is a double-blind, placebo-controlled trial of PREVATAC being conducted at 12 centers worldwide. The primary endpoint of the study is the reduction in the formation of new polyps. Cell Pathways completed recruitment of 74 patients for this study on January 15,1998. They also initiated another study on January 16, 1998 utilizing the identical protocol to the Phase III study to gather additional patient data. They are enrolling patients with high rates of recurrence of polyps, who would have been excluded from the Phase III study, in a concurrent study and have commenced a safety study in pediatric APC patients. An NDA in the first quarter of 1999 is expected. They will seek approval to market PREVATAC for the prevention of precancerous adenomatous polyps in APC patients. Cell Pathways has been granted Fast Track designation for PREVATAC for the reduction in development of new polyps in patients with APC. The Fast Track Program is a new mechanism for facilitating the development and expediting the approval of drugs that demonstrate the potential to address unmet medical needs for serious and life-threatening conditions (and it takes some of the congressional pressure off of the FDA).

In the studies, PREVATAC is noted to cause a few adverse events. The dose limiting adverse events are asymptomatic, fully reversible liver function test abnormalities. Beyond these, the medication seems to be well tolerated by all the patients in the study.

PIPELINE

Cell Pathways has a number of indications it is hoping to use PREVATAC for. The company also has numerous compounds that show promise in apoptosis. PREVATAC is in Phase II/III trials for the treatment of sporadic adenomatous colonic polyps. This affects up to 30% of the people in the United States over the age of 50. There are currently over 5 million people with this disease and this number will grow exponentially with the aging of the population. There are subgroups of people with this disease at higher risk of developing colorectal cancer. These patients include persons with close relatives that have had colorectal cancer, persons over the age of 60, persons with multiple polyps, large polyps, severely dysplastic polyps or polyps that recur frequently. Cell Pathways is targeting this group of patients for clinical studies and chemopreventive therapy. These lesions are histologically/genetically indistinguishable from APC lesions. In September 1997, a Phase IB study in 18 patients with a history of sporadic adenomatous colonic polyps was completed. The company subsequently initiated a multi-center, "pivotal" Phase II/III trial in December 1997 to evaluate the safety and efficacy of different doses of PREVATAC in the treatment of existing sporadic adenomatous colonic polyps. The evaluation will include evaluation of size as well as formation of new polyps.

Cell Pathways also has PREVATAC in Phase II/III trials for prostate cancer. They have a 12 month study in patients who had a radical prostatectomy for prostate cancer and have continued elevation of PSA levels (prostate specific antigen, can be a marker of prostate cancer) without evidence of metastatic disease. The elevated PSA suggests there are still abnormal prostate cells in the body. The hopeful endpoint would be no metastatic disease found and normalization of PSA levels. This is a very large market for this drug. In 1997 there were 209,000 new cases of prostate cancer in the United States. Preclinical studies show PREVATAC inhibiting the growth of prostate cancer, including cancers resistant to other chemotherapeutic agents. If this drug can inhibit the growth of prostate cancer it would be an important alternative to current therapy which can cause impotence and incontinence in treated patients.

PREVATAC is also in Phase II/III trials for breast cancer. There is currently an eighteen month study in patients who have advanced breast cancer but no evidence of remaining metastasis. The efficacy will be determined by the time until recurrence. In 1997 there were 185,000 new cases of breast cancer in the United States. The current statistics show a lifetime risk of 1 in 8 for a woman to develop breast cancer. Cell Pathways is also studying the prevention of recurrent breast cancer in women who have not responded to Tamoxifen (a chemotherapeutic agent). They are also looking at women in remission after conventional chemotherapy. Preclinical studies have been promising. They showed dose-related inhibitory effects in several in vitro breast cancer cell systems, in vivo chemically-induced cancer models and in vitro studies with primary breast cancer tissues removed from patients.

Barrett's Esophagus is a premalignant condition in the lower esophagus. This is a complication associated with long standing gastroesophageal reflux. It is seen in adults and has been noted in children under two years of age. The risk of developing adenocarcinoma in the esophagus is 30-40 times the rate in the general population. An estimated 2 million people in the United States have Barrett's Esophagus though only half of these patients exhibit symptoms. Eight to ten percent of patients will develop adenocarcinoma. Treatment with anti-reflux medications/procedures does not seem to be effective in obviating the risk. Cell Pathways is planning a 12 month Phase II trial in the fourth quarter of 1998 to evaluate the safety and efficacy of the drug. They will be evaluating the degree of dysplasia in the lower esophagus prior to and after treatment.

Cell Pathways is also planning on evaluating the effectiveness of PREVATAC on cervical dysplasia. Cervical dysplasia is a relatively common finding in women who are or have been sexually active. About five percent of the pap smears show some dysplastic changes each year. The rate seems to be increasing in association with the increased rate of the Human Papilloma Virus (HPV, the virus associated with genital warts). A large percent of young women will clear the dysplasia (and the virus) on their own or with treatment. A small percent of women with dysplasia will go on to have cervical cancer. The problem is we do not know which women will progress and which will not. An 18 month Phase IB safety and pharmacokinetic study was completed in September 1997. A Phase II/III study evaluating the effectiveness in reducing the size and degree of dysplasia is to start in 1999.

There are ongoing Phase II trials to evaluate the use of PREVATAC in advanced lung cancer. In 1997 there were 178,000 new cases of lung cancer in 1997. It has shown positive preclinical results in lung cancer in rodents.

The company is also looking at bronchial dysplasia. This entity is a precancerous lesion that is present in up to 30% of smokers. Cell Pathways is planning a Phase II/III study to begin in the fourth quarter of 1998. The study will evaluate the efficacy in affecting the degree of dysplasia.

Cell Pathways has a number of other compounds that affect apoptosis. It has up to 200 that show greater apoptotic potency than PREVATAC in the lab. Two of these compounds have been moved into preclinical trials. The plans for their stable of compounds includes treatment of cancers, precancerous lesions and other conditions involving abnormal cell growth. The company is actively seeking biotech and pharmaceutical companies as development partners.

MANAGEMENT

ROBERT J. TOWARNICKI, 47, Chief Executive Officer and a Director of Cell Pathways, Inc. since October 1996 and President of Cell Pathways since January 1998. Prior to joining Cell Pathways he served as President, Chief Operating Officer, a Director and Executive Vice President of Integra LifeSciences Corporation, which is the publicly held parent firm for a group of biotechnology and medical device companies including Collatech, Inc., ABS LifeSciences Inc., Telios Pharmaceuticals, Inc. and Vitaphore Corporation. In addition, from 1991 to 1992, he served as Founder, President and Chief Executive Officer of MediRel, Inc. From 1989 to 1991, he was General Manager of Focus/MRL, Inc. From 1985 to 1989, he was Vice President of Development and Operations for Collagen Corporation and from 1974 to 1985, he held a variety of operations management positions at Pfizer, Inc. and Merck & Co., Inc. Mr. Towarnicki was a Ph.D. candidate in Pharmaceutical Chemistry at Temple University School of Pharmacy and received his M.S. and B.S. degrees from Villanova University.

BRIAN J. HAYDEN, 46, Vice President and Chief Financial Officer of Cell Pathways, Inc. since November 1997 and as Treasurer since June 1998. Prior to joining Cell Pathways, during 1996 and 1997, he served as Vice President of Finance and Administration for NeoStrata, Inc., a dermatology company and Vice President and Chief Financial Officer of Micrus Corporation, a medical device company. From 1992 to 1996, he served as Vice President, Finance, Chief Financial Officer and Treasurer of Biomatrix, Inc., a public medical device company. From 1988 to 1992, he served as Vice President, Chief Financial Officer, Treasurer and Secretary of Alteon Inc., a public biopharmaceutical company. Mr. Hayden served as Vice President, Finance and Administration for Healthways Systems, Inc., a managed care organization, from 1985 to 1988. From 1976 to 1985, he served in various auditing, financial analysis and senior financial management positions with Hoffmann-La Roche, Inc. He served as a Senior Auditor from 1973 to 1976 with Coopers and Lybrand LLP. Mr. Hayden received a B.B.A. in Accounting from Loyola University of Chicago and has completed graduate courses at Seton Hall University.

RIFAT PAMUKCU, M.D., 41, is Cell Pathways, Inc.'s Chief Scientific Officer and Senior Vice President--Research and Development. Dr. Pamukcu is a co-founder of Cell Pathways, Inc. Prior to joining Cell Pathways, Inc. full time in 1993, from 1989 to 93 March 1993, he was Assistant Professor of Medicine at the University of Cincinnati and co-chair of Cell Pathways, Inc.'s SAB. He continued as an Adjunct Assistant Professor of Medicine at the University of Cincinnati from 1993 to 1995. He was a postdoctoral fellow from 1986 to 1989 in the Division of Gastroenterology at the University of Chicago. Dr. Pamukcu received a B.A. in Biology from Johns Hopkins University in 1979 and a M.D. degree from the University of Wisconsin School of Medicine in 1983.

RICHARD H. TROY, 60, Senior Vice President--Corporate Development of Cell Pathways, Inc. since November 1997, Vice President--Finance, Law and Administration from January 1993 until November 1997, and General Counsel, Secretary and a Director of Cell Pathways, Inc. since December 1992. He has been an advisor to Cell Pathways since its inception, and he is a Director and President of FGN, Inc., the predecessor partnership's first general partner and a principal stockholder of Cell Pathways, Inc. From 1990 to 1992, he served as Vice President and Associate General Counsel of UST, Inc. Prior to that, from 1973 to 1990, he worked at Combustion Engineering, Inc., most recently as Vice President and Deputy General Counsel, and from 1964 to 1973, he practiced law with the firm of Shearman & Sterling in New York City. Mr. Troy received a B.A. in Philosophy from Georgetown University in 1959, studied at the Ludwig-Maximilians-Universitat in Munich in 1959-60, and received a LL.B. degree from Harvard Law School in 1963.

WILLIAM A. BOEGER, 48, Chairman of the Board of Directors of Cell Pathways, Inc. since September 1996 and Director since December 1992. Since 1986 he has been Managing General Partner of Quest Ventures II, a venture capital company that he founded. Since 1993 he also has been Chairman of the Board of Calypte Biomedical Corporation. Since December 1997 he has been President and Chief Executive Officer of Calypte Biomedical Corporation, having also served as President and Chief Executive Officer at that company from 1993 to 1995. In addition, Mr. Boeger is Chief Executive Officer of Pepgen Corporation. From 1981 to 1986, Mr. Boeger was employed by Continental Capital Ventures, a publicly traded venture capital fund, where he attained the position of General Partner. Mr. Boeger received a B.S., with an emphasis in Psychobiology, from Williams College in 1972 and an M.B.A. from the Harvard Business School.

THOMAS M. GIBSON, 70, Director of Cell Pathways, Inc. since August 1996. He also has served as President of Integrated Technologies Development Corporation since 1995. Prior to coming out of retirement in 1994 to serve as President of Jupiter Electric Company, Inc. until 1996, he was associated with Gibson Electric Company, Inc. from 1947 to 1992, where he attained the position of Chief Executive Officer. In addition, in the early 1980s he co-founded Gibson Information Systems, a data service bureau. Mr. Gibson attended Culver Military Academy, the University of Arizona and the University of Illinois.

JUDITH A. HEMBERGER, Ph.D., 51 director of Cell Pathways, Inc. since June 1998. Since 1997, she has served as Vice-Chair, Strategic Planning and Regulatory Affairs, Mayo Foundation for Medical Research and Education. From 1979 to 1997, she served Marion Merrell Dow Inc., most recently as Senior Vice President, Global Regulatory Affairs (1995-1997), and Vice President, Global Medical Affairs and Commercial Development (1994-1995). She is a member of the Board of Directors of NexStar Pharmaceutical Company, the International Board of Directors of Pharmaceutical Research Associates and of the Dean's Advisory Board, School of Pharmacy, University of Missouri at Kansas City. Since 1985, she has been Adjunct Associate Professor, Division of Pharmacology, University of Missouri at Kansas City School of Pharmacy. Dr. Hemberger received her undergraduate degree in Biology from Mt. St. Scholastica College, a Ph.D. in Pharmacology from the University of Missouri, Kansas City, and an M.B.A. from Rockhurst College.

ROGER J. QUY, Ph.D., 47, Director of Cell Pathways, Inc. since December 1992. He has been a General Partner of Technology Partners, a venture capital firm, since 1990 and has been responsible for health care investments at Technology Partners since 1989. From 1982 to 1989, Dr. Quy held various management positions with the Hewlett-Packard Company. Dr. Quy received his undergraduate degree with a major in Psychology and Law and a Doctorate in Neuroscience from the University of Keele, England, and an M.B.A. from the Haas School of Business, University of California, Berkeley.

BRUCE R. ROSS, 56, Director of Cell Pathways, Inc. since January 1998. He also works as a consultant at Cancer Rx, Inc. From 1994 to 1997, he served as Chief Executive Officer of The National Comprehensive Cancer Network, an association of fifteen U.S. cancer centers. From 1976 to 1994, he held various positions with Bristol-Myers Squibb Company, including as Senior Vice President, Policy, Planning and Development 94 of the U.S. Pharmaceutical Group from 1993 to 1994 and as President of the U.S. Pharmaceutical Group from 1990 to 1992. Mr. Ross received his B.S. degree from Syracuse University in 1962.

PETER G. SCHIFF, 46, Director of Cell Pathways, Inc. since December 1992. He is the President and founder of Northwood Ventures LLC, a firm specializing in venture capital and leveraged buyouts, President of Northwood Capital Partners LLC, and Managing General Partner of Rabbit Hollow Partners. Prior to founding Northwood Ventures LLC in 1983, Mr. Schiff worked for E.M. Warburg Pincus & Co., Inc. from 1980 to 1983, and at Chemical Bank from 1976 to 1980. Mr. Schiff received a B.A. from Lake Forest College in 1974 and an M.B.A. from the University of Chicago's Graduate School of Business in 1976.

RANDALL M. TOIG, M.D., 47, served as a Director of Cell Pathways, Inc. since November 1994. He has been in private medical practice at Prentise Women's Hospital in Chicago, Illinois since 1982. He has been Associate of Clinical Obstetrics and Gynecology in the Department of Obstetrics and Gynecology at both Northwestern University Hospital and the Northwestern University Medical School since 1982, and has been a Fellow at the American College of Obstetrics and Gynecology since 1985. Dr. Toig received a B.S. in Zoology and Anthropology from the University of Michigan in 1972 and an M.D. from the University of Pittsburgh School of Medicine in 1977.

COMPETITORS

Competition is fierce in the area of cancer treatment. Numerous pharmaceutical and biotechnology companies are attempting to develop and market treatments for different types of cancer. There has certainly been some significant progress in certain areas. Genentech has a new drug, Herceptin, which is an interesting treatment for metastatic breast cancer. This is the first humanized monoclonal antibody to treat breast cancer. A number of other companies are also working on monoclonal antibodies for various cancers.

There is terrific promise for companies and investors alike. Even a suggestion of a promising treatment for cancer can drive the price of a companies stock to terrific heights. A perfect example is EntreMed. This company announced promise for 2 drugs in preclinical trials that drove the price from 13 to 85 dollars per share. This highlights the intense interest in this area of treatments.

INSIDE OWNERSHIP

Before the merger essentially all of the ownership is "inside." The owners of the company were the officers, directors, employees, venture capital firms and private investors. After the merger there will still be an overwhelming portion of the company owned by "insiders." Tseng shareholders will get 23% of the combined company and the current Cell Pathways shareholders will have 77% of the company. It will be interesting to see what percent of the "insiders" sell their shares into the market. Because this is NOT an IPO, the shareholders are not required to hold their stock for a significant period of time.

FINANCIALS

SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- ---------- --------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CPI STATEMENT OF OPERATIONS DATA: Expenses: Research and development....... $ 1,623 $ 2,429 $ 2,575 $ 4,163 $ 8,757 $ 3,224 $ 6,898 General and administrative..... 698 705 644 663 950 342 1,966 Provision for redemption of CPI Redeemable Preferred Stock... -- -- -- -- 1,017 -- -- --------- --------- --------- --------- ---------- --------- ---------- Total expenses........... 2,321 3,134 3,219 4,826 10,724 3,566 8,864 Interest income.................. 52 24 28 91 427 123 244 --------- --------- --------- --------- ---------- --------- ---------- Net loss......................... $ (2,269) $ (3,110) $ (3,191) $ (4,735) $ (10,297) $ (3,443) $ (8,620) ========= ========= ========= ========= ========== ========= ========== Basic and diluted net loss per common share(1)................ $ (1.00) $ (1.36) $ (1.39) $ (1.83) $ (3.63) $ (1.27) $ (2.88) ========= ========= ========= ========= ========== ========= ========== Shares used in computing basic and diluted net loss per common share.......................... 2,279,500 2,291,306 2,296,167 2,587,552 2,838,814 2,718,845 2,990,095 ========= ========= ========= ========= ========== ========= ========== Pro forma basic and diluted net loss per common share(2)....... $ (.82) $ (.56) ========== ========== Shares used in computing pro forma basic and diluted net loss per common share.......... 12,526,620 15,524,145 ========== ========== JUNE 30, 1998 ----------------------------------------------- CPHI CPHI PRO FORMA PRO FORMA CPI BEFORE AFTER ACTUAL TSENG MERGER(3) TRANSACTIONS(4) -------- --------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Cash and cash equivalents................................. $ 20,349 $ 20,020 $ 44,639 Working capital........................................... 18,747 18,418 41,993 Total assets.............................................. 22,332 22,003 50,080 Redeemable Preferred Stock................................ 1,092 -- -- Accumulated deficit....................................... (34,605) (34,605) (34,605) Total stockholders' equity................................ 19,200 19,963 46,021 --------------- (1) See Note 2 of Notes to Financial Statements for information concerning the computation of basic and diluted net loss per common share. (2) See Note 2 of Notes to Financial Statements for information concerning the computation of pro forma basic and diluted net loss per common share. (3) Includes the (i) conversion of all shares of outstanding CPI Series A, B, C, D, E, F and G Preferred Stock into the rights to receive 15,614,266 shares of CPHI Common Stock, (ii) redemption of all shares 14 of the CPI Redeemable Preferred Stock for $546,000 of cash consideration and 82,732 shares of CPI Common Stock which shares will be converted into rights to receive an equivalent number of shares of CPHI Common Stock and (iii) the exercise of all warrants to purchase Series E Preferred Stock into 69,044 shares of CPI Series E Preferred Stock at $3.15 per share which shares will be converted into rights to receive an equivalent number of shares of CPHI Common Stock. All of the shares of CPI Common Stock then outstanding will be converted into the same number of shares of CPHI Common Stock. See "The Transactions" and "Unaudited Pro Forma Condensed Consolidated Financial Information." (4) Includes the sale of 5,477,614 shares of CPHI Common Stock in exchange for Tseng's cash and other net assets less estimated Transactions costs of approximately $1,850,000 consisting principally of investment banking and other professional fees and the payment of $640,000 related to severance to be triggered by the Transactions and paid to Tseng employees after consummation of the Transactions, as it is anticipated that the affected Tseng employees will not be employed by CPHI, CPI or Tseng. The pro forma information is subject to the assumptions set forth in the notes to the Unaudited Pro Forma Condensed Consolidated Financial Information appearing elsewhere in this Joint Proxy Statement/ Prospectus. See "The Transactions" and "Unaudited Pro Forma Condensed Consolidated Financial Information." 15 COMPARATIVE PER SHARE DATA The following table shows comparative per share data. The table should be read in conjunction with the CPI and Tseng financial statements and related notes thereto and the "Unaudited Pro Forma Condensed Consolidated Financial Information" included elsewhere in this Joint Proxy Statement/Prospectus. AS OF AND FOR THE AS OF AND FOR THE SIX YEAR ENDED MONTHS ENDED DECEMBER 31, 1997 JUNE 30, 1998 ----------------- --------------------- Actual CPI Per Share: Historical basic and diluted net loss(1).............. $(3.63) $ (2.88) Pro forma basic and diluted net loss(1)............... (.82) (.56) Dividends............................................. -- -- Book deficit(2)....................................... (8.85) (11.95) Pro Forma After Transactions Book Value Per Share(2).... N/A 1.90 Equivalent Pro Forma After Transactions Book Value Per Share(3)............................... N/A .69 Tseng Historical Book Value Per Share(4)................ 1.88 1.89 --------------- (1) See Note 2 of Notes to Financial Statements for information concerning the computation of historical and pro forma basic and diluted net loss per share. (2) Book deficit per share is computed by dividing stockholders' equity less the Series A, B, C, D, E, F and G Preferred Stock at the higher of stated, redemption or liquidation value, as well as the increase of the Redeemable Preferred Stock to redemption value by the number of shares of CPI Common Stock outstanding. Pro forma after transactions book value per share is computed by dividing the pro forma after transactions stockholders' equity by the pro forma after transactions number of estimated shares of CPHI Common Stock outstanding at June 30, 1998. The calculations exclude Common Stock equivalents as they would be anti-dilutive. The pro forma after transactions information is subject to the assumptions set forth in the notes to the Unaudited Pro Forma Condensed Consolidated Financial Information appearing elsewhere in this Joint Proxy Statement/Prospectus. See "The Transactions" and "Unaudited Pro Forma Condensed Consolidated Financial Information". (3) The equivalent pro forma after transactions book value per share represents the CPHI pro forma after transactions book value per share multiplied by the Tseng Exchange Ratio. (4) Tseng's historical basic and diluted net income (loss) per share was ($.60) and $.02 for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. Tseng paid no dividends in 1997 or in the six months ended June 30, 1998. See Tseng consolidated financial statements and related notes thereto included elsewhere in this Joint Proxy Statement/Prospectus. It is anticipated that upon consummation of the Transactions, Tseng will have no continuing operations. Consequently, neither CPHI, CPI nor Tseng believe that Tseng's per share data is indicative of future results.

RECOMMENDATION/OUTLOOK

In examining Cell Pathways financials included in the 424B3 filed with the SEC on September 22, 1998 a few things look interesting. Cell Pathways had $20.3 million on the balance sheet as of June 30, 1998 with a burn rate of $17.8 million based on the first half of 1998. Obviously, at that rate the company essentially had a year before they had to find new financing or have a significant increase in revenue. The options the company had were to borrow (not necessarily the best option with an accumulated deficit of $34.6 million), sell more to the venture capitalists/private investors or do an IPO. The company seemed to have decided on an IPO not only for the cash but also to make the shareholders more liquid. This was shelved with the poor valuations of small caps in general and biotechs in particular. The management of CLPA found another option. They would exchange 23% of the company for Tseng Labs. This would get them a large infusion of cash (about $24 million) and the benefits of being publicly traded. They would get this without the typical costs of an IPO. This combination should get CLPA through 2000 and into mid-2001 at a constant burn rate. With the number of Phase III trials the company is planning, a better estimate would be the cash would last through the end of 2000.

Cell Pathways has approximately $20.9 million of net operating loss carryforwards for income tax purposes to offset future federal income tax. The net operating loss carryforwards are subject to examination by tax authorities and expire between 2008 and 2012. These will be important once Cell Pathways become profitable.

Valuation of this company is somewhat difficult. Unlike Sepracor we do not have a similar drug to compare their leading candidate to. The company recently had 23.8 million shares outstanding, at recent prices this gives Cell Pathways a market cap of about $375 million. The company had $44 million in cash plus another $20.9 million of net operating loss carryforwards. To value the company we need to make a few assumptions. In our estimation, they have a very good chance of the FDA approving PREVATAC for the indication of Adenomatous Polyposis Coli (APC). This would give us an initial patient population of 25,000 to 50,000. If you consider a cost of $5000-$10,000 per patient per year (this is probably a reasonable estimation considering drugs such as Interferon cost $500-$1,000 per month) yearly revenue would be $125 million to $500 million. This would be (using typical drug company ratios) a gross profit of $112.5 million to $450 million, EBITDA of $62.5 million to $250 million, pre-tax income of $50 million to $200 million and net income from $37.5 million to $150 million. This would translate to EPS of $1.57 to $6.30. If you place a P/E ratio of 25 on the company (quite reasonable for a development stage biotech) the valuation is $39.25 to $157.50 per share. This equals a return of 149% to 900% within one to two years. Even with $1,000 per patient per year of revenue, this would translate to EPS $0.63. A P/E ratio of 25 would mean a price of $15.75 per share. These valuations are based on one indication only. Obviously expanding to other uses would vastly increase these numbers. If you wish to become somewhat more speculative about usage then consider lung, breast and prostate cancer. The total number of new patients from these three diseases alone is 572,000. Once you start valuing the company based on even a percentage of these cases the numbers increase exponentially!

We hope to see results from the Phase III trials out in early 1999. Once these results are public we will have a better handle on the prospects for Cell Pathways, Inc.

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