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______________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(MARK ONE)
(X) Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended January 31, 1999
Or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from _____ to _____
Commission File No. 0-19122
___________
APHTON CORPORATION
444 Brickell Avenue, Suite 51-507
Miami, Florida 33131-2492
(305) 374-7338
Incorporated in Delaware I.R.S. Employer Identification
No. 95-3640931
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)
Title of Each Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of the registrant's and will not be contained to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.(X)
Aggregate market value of Common Stock ($.001 par value) held by non-affiliates
on March 31, 1999 based on the last sale price on March 31, 1999: $199,110,730
Number of shares of Common Stock ($.001 par value)
Outstanding as of March 31, 1999: 14,433,384
Documents Incorporated by Reference
Document Part of Form 10-K
Proxy Statement for the Annual Part III
Meeting of Stockholders
PART I
Item 1. Business
The Company
Aphton Corporation is a biopharmaceutical company developing products using its
innovative vaccine-like technology for neutralizing hormones that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases;
and the prevention of pregnancy. Aphton has strategic alliances with Pasteur
Merieux Connaught (Rhone-Poulenc Group), SmithKline Beecham, Schering-Plough
Animal Health and the World Health Organization (WHO). Aphton's Web page,
describing the company, its technology, products, strategic alliances and news
releases, can be visited at: www.aphton.com.
Basis of Approach
Aphton's approach to the treatment of major diseases is to employ anti "hormone
therapy." Aphton's hormone therapy involves neutralizing, or blocking, targeted
hormones which play a critical role in diseases of the gastrointestinal and
reproduction systems. Aphton has selected the strategy of hormone therapy
because it has proved, over many years, to be efficacious in the treatment of
major diseases, both malignant and non-malignant. In short, because this
risk-averse strategy has been proven to be effective in humans. Well-documented
examples of such efficacy in humans are: either blocking the hormone gastrin
(Proglumide) or blocking histamine (Zantac, Tagamet), which is a hormone
stimulated by gastrin, in order to reduce stomach acid to treat ulcerations of
the esophagus and to heal or prevent peptic ulcers; blocking estrogen
(Tamoxifen) for breast cancer therapy and blocking the production of
testosterone (Lupron, Zoladex) for prostate cancer therapy.
Results and Status
Anti-Gastrin Immunogen
Overview
Aphton's anti-gastrin immunogen programs which treat human cancers encompass
several gastrointestinal system cancers since adenocarcinomas arising in the
gastrointestinal system are stimulated by the hormones gastrin 17 and
glycine-extended gastrin 17. Aphton's anti-gastrin immunogen induces antibodies
in the patient that neutralize both gastrin 17 and glycine-extended gastrin 17.
The company knows of no other vaccine or drug that selectively blocks or
neutralizes both gastrin 17 and glycine-extended gastrin 17.
Safety / Dose Ranging
Aphton has successfully completed a safety and dose-ranging Phase I/II clinical
trial with its anti-gastrin immunogen in terminal cancer patients. The
anti-gastrin immunogen induced large antibody responses in terminally ill
patients whose colon cancer had not only metastasized to the liver, but was
considered "end-stage".
Survival
In 1998, Aphton announced increased survival results, which were statistically
significant, from a comparative analysis of its Phase I/II clinical trials in
which Aphton's anti-gastrin immunogen was administered to patients with
end-stage colorectal cancer ("advanced" Duke's D). The study was carried out at
the Queens Medical Center, University of Nottingham, United Kingdom (UK). The
group treated with the anti-gastrin immunogen had 40 evaluable patients. The
comparative placebo group was from a parallel study at the same medical center,
with the same principal investigator as the Aphton study, carried out under the
auspices of the Cancer Research Campaign (CRC). The CRC is a leading cancer
research organization in the UK. The placebo group from the CRC study had 77
evaluable patients, also with end-stage colorectal cancer.
The anti-gastrin immunogen treatment group and placebo group had similar patient
inclusion and exclusion criteria. The treatment group had a higher proportion of
patients with liver and a similar incidence of lung metastases. A larger
proportion of patients in the placebo group had received adjuvant chemotherapy
or chemotherapy for advanced disease, prior to entry into the trial. Both the
lower rate of liver metastases and the higher proportion of antecedent
chemotherapy in the placebo group, tended to confer on the placebo group an
expected, or theoretical, "survival advantage" over the treatment group
(anti-gastrin immunogen).
Results: The patients immunized with Aphton's anti-gastrin immunogen had a
median survival of 338 days versus 184 days for the placebo group. The increased
survival in the treatment group was statistically significant both by univariate
analysis and by multivariate analysis.
Phase III Clinical Trial Programs
Aphton's Phase III clinical trial programs encompass several gastrointestinal
system cancers. Aphton selected stomach cancer as the first indication to begin
Phase III clinical trials in, because: (a) survival time, the "end point," is
short relative to colon cancer (the patients selected in Phase I/II); (b) trial
costs are relatively low; (c) there is no current effective therapy; (d) the
number of patients, worldwide, is in the millions. Subsequently, Aphton also
initiated Phase III clinical trials with its anti-gastrin immunogen to treat
patients with pancreatic cancer and colorectal cancer.
Strategic Alliance
In 1997 Aphton signed an agreement with Pasteur Merieux Connaught ("PMC") the
vaccine business of Rhone-Poulenc Group, for a strategic alliance for all human
cancer applications of its anti-gastrin immunogen, including stomach,
colorectal, liver, esophageal and pancreatic cancers. Under the terms of the
twenty-year agreement, Aphton is responsible for product development, clinical
trials and regulatory agency approvals, and PMC is responsible for and will fund
the promotion, advertising, marketing, distribution and sales of Aphton's
anti-gastrin immunogen in North America, Mexico and Europe. In addition, Aphton
and PMC have entered into further agreements providing for the supply of certain
components of the anti-gastrin immunogen (as well as other Aphton products) from
PMC to Aphton.
Aphton is in active discussions with potential strategic partners for marketing
rights to the anti-gastrin immunogen in Japan and Asia. Because of the high per
capita incidence of gastrointestinal cancers in Japan and other Asian countries,
Aphton is pursuing these discussions as a high priority subject.
GnRH pharmaccine
Overview
Aphton has developed a second major anti-hormone immunogen for human cancer
indications, one that targets the reproductive hormone Gonadotropin Releasing
Hormone (GnRH) and which is now in Phase I/II clinical trials. By successfully
neutralizing (blocking) GnRH, it shuts down the production of estrogen and
testosterone in the gonadal organs. Estrogen fuels breast cancer and
testosterone fuels prostate cancer. It has been known for decades that
biological blockage, like physical castration, is efficacious in the treatment
of prostate and breast cancers. Aphton's anti-GnRH immunogen induces biological
blockage.
Safety / Dose Ranging
In October 1998, a safety and dose-ranging trial was initiated using Aphton's
anti-GnRH immunogen called GnRH pharmaccine, in patients with advanced prostate
cancer. The purpose of the safety and dose-ranging trial is to demonstrate
safety and determine an optimal dose regimen to use in the pivotal Phase III
efficacy trial.
Biological Castration
The objective of immunizing with GnRH pharmaccine is to reduce gonadal
testosterone to levels achieved by surgical castration. In March 1999, Aphton
announced that GnRH pharmaccine reduced, in some patients at the lowest dose
level, gonadal testosterone to levels achieved by surgical castration. This
demonstrated "proof of concept" in man. In addition, the prostate cancer
"progression" marker Prostate Specific Antigen (PSA) was reduced markedly in
these patients to very low levels.
Strategic Alliance
In June 1998, Aphton and SmithKline Beecham signed a Collaboration and License
Agreement for a worldwide strategic alliance for Aphton's anti-GnRH immunogen.
The agreement covers the diagnosis, treatment and prevention of GnRH-related
cancers and other diseases in humans. Human cancer indications for Aphton's GnRH
pharmaccine are prostate, breast, ovarian and endometrial cancer. Additional
medical indications for GnRH pharmaccine are endometriosis, polycystic ovaries,
uterine fibroids, infertility and precocious puberty.
Under terms of the agreement, SmithKline Beecham received exclusive rights
worldwide to Aphton's GnRH-related patents and proprietary technology. Aphton
and SmithKline Beecham are collaborating in a joint product development program.
SmithKline Beecham is responsible for funding all costs of product development,
clinical trials and regulatory approvals, and for worldwide marketing and
distribution of approved products. The agreement uses a royalty mechanism based
on product sales, in dollars, worldwide to determine Aphton's revenues.
Immunocontraceptive
Aphton's immunocontraceptive, an anti-hCG immunogen which prevents pregnancy,
has been in a Phase I/II trial, funded by the World Health Organization (WHO).
Aphton has developed a "next generation" anti-hCG immunogen which incorporates
two major advances: (1) Aphton's proprietary delivery vehicle which provides a
protection profile tailored to meet the consensus of needs as communicated to
Aphton and WHO by Women's Healthcare Organizations; (2) An additional target on
hCG as part of the immunogen which provides increased efficacy. Women will be
immunized in a continuing but accelerated, Phase I/II trial in the near future
with this new formulation. It is expected that a final pivotal Phase III trial
will follow shortly thereafter.
Equine Anti-Gastrin Immunogen
In 1998, a preliminary safety trial commenced using Aphton's Equine (horse)
anti-gastrin immunogen to reduce stomach acid and heal ulcers in horses.
Following completion of this safety and a dose-ranging phase, a larger safety
and a pivotal efficacy trial are planned.
In August, 1997, Aphton announced that it formed an exclusive worldwide
strategic alliance with Schering-Plough Animal Health for the development,
clinical testing, manufacturing and marketing of Aphton's proprietary
anti-gastrin immunogen, as a veterinary product, that reduces stomach acid and
heals peptic ulcers in animals. Equine (horse) ulcers was selected as the first
indication to be pursued under the alliance. Under the terms of the agreement,
Schering-Plough Animal Health will work closely with Aphton's scientists and
management to bring the anti-gastrin immunogen to market. Schering-Plough is
responsible for all capital costs and financial requirements, product
development, clinical trials and marketing for each animal health indication.
Schering-Plough Animal Health and Aphton will share in all product profits.
Technical Background
Aphton has developed an innovative technology to create immunogens, which are
vaccine-like products. They harness and direct the body's immune system to
generate antibodies which bind to specific peptide portions of the administered
immunogen. These antibodies cross-react (bind) with targeted "self" molecules,
such as hormones, when they encounter that portion of the hormone which is
similar to the peptide portion of the administered immunogen. Because diseases
involving hormones are not pathogen (microorganism) driven, they have not been
viewed traditionally as being susceptible to treatment using the body's immune
system. Instead, the traditional pharmaceutical industry approach to controlling
these diseases has been to treat them with synthetic drugs. These drugs
typically must be administered in relatively large quantities and on a daily or
more frequent basis, giving rise to patient compliance problems, and often have
adverse side effects. In contrast, Aphton's immunogens create a strong antibody
response from the patient's own immune system and have a longer-lasting
therapeutic effect. Aphton's technology enables it to specifically target a
small sequence within the hormone to be neutralized, in order to achieve a
specific desired biological and physiological response. This approach directs
all of the immunogen-induced antibodies to the targeted hormone sequence, and at
the same time: minimizes the possibility of undesired physiological consequences
through cross-reactivity of the immunogen with any self molecule or portion
thereof, other than the specifically-targeted hormone sequence; and avoids the
possibility of autoimmune disease where the antibody production is not "turned
off." This is because the antibody production can only be "turned on and kept
on" in the presence of the "carrier" portion of the immunogen (see below).
Indeed, without a "booster shot" of the immunogen, the antibodies wane
(diminish) and are cleared by the body, over time. Aphton's products may be
administered in much smaller dosages and on a much less frequent basis than
pharmaceutical drugs; typically twice a year. This virtually eliminates the
problem of patient compliance, which is associated with pharmaceutical drugs.
Aphton's anti-gastrin immunogen, for example, consists of:
(a) A synthetic peptide, which is similar to a portion of the hormone
gastrin 17 which is targeted to be neutralized (i.e., blocked or prevented from
reaching and binding to its receptor).
(b) A "carrier," Diphtheria Toxoid (DT), foreign to the body, to which a
number of the synthetic peptides in (a) are chemically bound (conjugated). This
makes them available to be both bound to and, together with the DT, internalized
by "B-cells." DT contains the structures (epitopes) which, when internalized and
"presented" on B-cells and Macrophages, are bound to by "T-cells." By binding to
these foreign epitopes, these T-cells, in turn, proliferate and signal the
B-cells which bind to the peptide (a) to proliferate and to "mass-produce" the
desired antibodies (all of which bind to the peptide (a)).
(c) A liquid slow-release suspender which contains (a) and (b).
The anti-gastrin immunogen, is administered by injection, with booster shots
contemplated at, typically, six-month intervals. The immunogen induces
antibodies in the patient which bind with peptide (a) and which also bind
(cross-react) with and neutralize gastrin 17 (when they encounter that portion
on gastrin 17 which is similar to peptide (a)). Gastrin 17 is known to drive (or
fuel) colorectal, stomach, liver and pancreatic cancer. It is believed that
neutralizing gastrin 17 will prove to inhibit both the growth and metastasis
(spread) of these gastrointestinal cancers. In addition, the anti-gastrin
immunogen uniquely neutralizes glycine-extended gastrin 17, which has also been
shown, recently, to fuel these gastrointestinal system cancers.
Gastrin 17 is also responsible for the production of the bulk of stomach acid
(approximately 90% in humans), the reduction of which is therapeutic for
gastroesophageal reflux disease (GERD) and for both peptic ulcers and NSAID
- -induced ulcers (NSAID examples include Aspirin and Ibuprofen).
Aphton's anti-GnRH immunogen is similarly constructed. In this case, the
synthetic peptide sequence in (a) represents the hormone GnRH, which is targeted
to be neutralized. Neutralizing GnRH inhibits the production of estrogen,
progesterone and testosterone. Inhibiting estrogen (and progesterone) is
therapeutic for women with breast cancer, endometrial cancer, ovarian cancer and
endometriosis. Inhibiting testosterone is therapeutic for men with prostate
cancer.
Aphton's immunocontraceptive, which prevents pregnancy in humans, is also
similarly constructed. In this case, the so-called "C-terminal" peptide portion
of the hormone hCG (which is targeted to be neutralized) is synthesized. A
second, unique target, located on the hormone hCG, is now also incorporated into
the immunogen, which enhances efficacy. Pregnancy is prevented by immunizing the
woman; this induces antibodies which bind to and neutralize hCG.
Strategic Alliances
In June, 1998, Aphton completed a major strategic alliance agreement with
SmithKline Beecham for all human applications of its anti-GnRH immunogen, as
discussed above. SmithKline Beecham is the world's largest vaccine company in
terms of annual sales.
In August, 1997, Aphton completed a major strategic alliance with
Schering-Plough Animal Health covering all animal health applications of
Aphton's anti-gastrin immunogen, as discussed above. Schering-Plough Animal
Health, in terms of annual sales, is one of the largest animal healthcare
companies in the world.
In February, 1997, Aphton completed a major strategic alliance agreement with
Pasteur Merieux Connaught (Rhone Poulenc Group) for all human cancer
applications of the anti-gastrin immunogen, as discussed above. Pasteur Merieux
Connaught is the largest vaccine company in the world in terms of annual
patients dosed. Subsequently, Rhone-Poulenc Group and Hoechst A.G. have
announced an agreement to merge the two companies into a new company to be
called Aventis. The Rhone-Poulenc Group / Hoechst A.G. merger is expected to be
completed during 1999. Pasteur Merieux Connaught will be responsible for the
vaccine business of Aventis. We believe this merger strengthens our anti-gastrin
immunogen program as Pasteur Merieux Connaught now will be responsible for
Aventis' entire vaccine business, worldwide. In addition, Rhone-Poulenc Rorer,
the other "arm" (together with Pasteur Merieux Connaught) of Rhone-Poulenc
Pharma, has been increasingly participating in the Clinical Trials Program for
the anti-gastrin immunogen. Rhone-Poulenc Rorer is a major factor in the
worldwide cancer markets, including the successful commercialization of
Taxotere, as well as other cancer products.
In January, 1995, Aphton announced a major relationship with the World Health
Organization (WHO), for the development and testing of an immunocontraceptive
(which prevents pregnancy), as well as exclusive rights for the manufacture,
distribution and supply of the immunocontraceptive for the developing countries,
worldwide. Under a separate agreement executed simultaneously, Aphton has
exclusive manufacturing and distribution rights for the immunocontraceptive in
the developed countries.
Manufacturing and Marketing
Aphton plans to commercialize its products by executing long-term contracts with
third parties, including major pharmaceutical companies, to manufacture its
products and by contracting with similar drug companies to market, sell and
distribute its products.
The contract manufacturing "outsourcing" approach takes advantage of the large
and available manufacturing resources of pharmaceutical industry companies.
Aphton has contracted with drug manufacturing sources which have provided
Aphton's immunogens for toxicology studies and clinical trials. Aphton's
contract marketing, distribution and sales (outsourcing) strategy, as
exemplified by the Pasteur Merieux Connaught, SmithKline Beecham and
Schering-Plough Animal Health agreements, similarly takes advantage of the large
and effective sales forces of the major pharmaceutical companies. Aphton's
capital formation, personnel and plant and equipment requirements, together with
associated risks, are clearly greatly reduced by such a commercialization
strategy. This significantly enhances Aphton's ability to achieve rapid market
penetration and growth and to exploit the benefits of the patent life of its
products.
It should be noted that contract manufacturing and contract marketing differ
significantly from the normal "licensing" of products to third parties. In the
former, Aphton can retain a significantly larger degree of control, share of
profits and thus earnings. Under typical licensing (with royalty payments which
are generally a small percentage of sales), the opposite would be the case. By
avoiding the industry norm of "corporate partnering" with drug companies in its
earlier development stages, and by both undertaking and overcoming the
associated risks, Aphton has earned and retained its options and the ability to
optimally carry out its commercialization approach. This strategy was
successfully validated with Aphton's agreements with Pasteur Merieux Connaught,
SmithKline Beecham and Schering-Plough Animal Health.
Patents and Trade Secrets
Proprietary protection for Aphton's products is central to the Company's
business. Aphton's policy is to protect its technology by, among other things,
filing patent applications in worldwide markets of interest for products which
it considers important and intends to market. In that regard, Aphton has filed
patent applications and has continued to receive patents for its products, both
domestic and foreign. Additional patent applications are in preparation or being
filed or are pending in the US and in other countries. Aphton intends to
continue filing additional patent applications relating to its products and,
when appropriate, improvements in its technology and other specific products
that it develops.
Regulation
Government regulation in the US and other countries is a significant factor in
the development and marketing of all of the Company's products and in the
Company's ongoing research and development activities. International regulations
governing human clinical studies can vary widely, depending on the specific
country. In particular, regulatory approvals in certain countries, including
countries in the European Union with a combined population larger than that of
the US, often result in more rapid product approvals than in the US. Aphton will
conduct trials with some of its products commencing in the UK (where much of the
data is expected to be readily acceptable in the US, given the high standards of
medicine and clinical trials monitoring in the UK), in addition to conducting
trials in the US and elsewhere in the world, if, and as, required or
advantageous. Regulatory approval, of course, is required for marketing a
product in the US and other countries.
Clinical trials of new drugs are typically conducted in three sequential phases.
Phase I studies typically test the product for safety tolerance. Phase II
studies involve limited trials to determine the optimal dose and frequency of
administration and an indication of efficacy for defined indications. When the
product has been found safe and shows promise of efficacy, further (pivotal)
trials are undertaken in Phase III to fully evaluate clinical efficacy and to
test further for safety using a large number of patients at geographically
diverse medical centers.
Directors, Executive Officers and Employees
The directors and executive officers of the Company are set forth below:
Name: Position(s):
Philip C. Gevas Chairman of the Board of Directors,
President and Chief Executive Officer
William A. Hasler Vice Chairman of the Board of
Directors and Co-Chief
Executive Officer
Robert S. Basso Chairman of Compensation
and Audit Committees and Director
Nicholas John Stathis, Esq. Director
Dov Michaeli, M.D., Ph.D. Senior Vice President,
Director of Medical Science and
Chief Medical Officer
Richard Ascione, Ph.D. Vice President, Director of
Laboratory of Molecular Medicine
Paul Broome, MB., Ch.B., MFPM Vice President and Medical Director,
Clinical Trials and Regulatory
Affairs
Peter Blackburn, Ph.D. Vice President, Program Development
Theo de Roij, D.V.M., Ph.D. Vice President, Business and
Product Development
Douglas A. Eayrs Vice President, Chief Financial
Information Officer
Donald Henderson Regional Managing Director,
Finance and Administration
Frederick W. Jacobs Treasurer and Chief
Accounting Officer
Philip C. Gevas--Chairman of the Board of Directors, President and Chief
Executive Officer, has served as Director, President and Chief Executive Officer
since co-founding Aphton in 1981. Previously, Mr. Gevas had over ten years
experience in executive management, including finance, manufacturing and
marketing, following ten years of experience as a project scientist/engineer.
Mr. Gevas conceived and directed the development of Aphton's inventions which
have resulted in numerous patents for Aphton, both US and foreign, for the
treatment of colorectal, pancreatic, liver, esophageal and stomach cancers, GERD
and chronic peptic ulcers. He is also a co-inventor for Aphton's human
contraceptive product (issued patent). Mr. Gevas has the degrees of M.E., and
M.S. Mathematics (Stevens Institute of Technology) and M.S.E.E. (Ohio State
University).
William A. Hasler--Vice Chairman of the Board of Directors and Co-Chief
Executive Officer. In August, 1998, Mr. Hasler was appointed the Co-Chief
Executive Officer of the Company. Mr. Hasler has been a Director of the Company
since October, 1991 and was elected Vice Chairman in 1996. From 1991 until he
joined the Company in 1998 as Co-CEO, Mr. Hasler was Dean of both the Graduate
School and Undergraduate School of Business at the University of California,
Berkeley. Mr. Hasler was formerly Vice Chairman of KPMG Peat Marwick,
responsible for management consulting worldwide. He is also a Director of
Solectron Corporation, Walker Interactive Systems, Tenera, Inc., TCSI
Corporation and is a Public Governor of the Pacific Exchange.
Robert S. Basso--Director of the Company since February, 1988, has been a
Director of the Company or of its now dissolved subsidiary, Aphton Development
Corporation, since 1984. Mr. Basso has been President, Correspondent Services
Corporation (CSC) and a Managing Director of PaineWebber Incorporated since
1990. Formerly, Mr. Basso was President, Broadcort Capital Corporation and
Managing Director, Merrill Lynch, Pierce, Fenner & Smith.
Nicholas John Stathis, Esq.--Director of the Company since January, 1994. Mr.
Stathis is retired from the law firm of White & Case, where he was of counsel
from 1989 to 1993. Prior to that he was partner at Botein, Hays & Sklar, from
1984 to 1989. Previously, Mr. Stathis was a partner successively at Watson,
Leavenworth, Kelton & Taggart and Hopgood, Calimafde, Kalil, Blaustein &
Judlowe. Since 1954, Mr. Stathis has been engaged in the practice of all phases
of patent, trademark, copyright and unfair competition law, including conduct of
litigation and counseling of Fortune 500 clients.
Dov Michaeli, M.D. (University of California, San Francisco), Ph.D. (University
of California, Berkeley)--Senior Vice President, Director of Medical Science and
Chief Medical Officer. Dr. Michaeli joined Aphton as a senior member of the
management team and was elected Vice President in 1989. Previously, Dr. Michaeli
was a Professor for twenty years at the University of California, San Francisco
(Departments of Biochemistry and Surgery). He has served as a member of Aphton's
Scientific Advisory Board since 1988. He has over thirty years of experience in
scientific research and in clinical medicine. This experience includes extensive
consulting on human clinical trials sponsored by drug companies. Dr. Michaeli
has five patents and over fifty published articles and book chapters.
Richard Ascione, Ph.D. (Princeton University), Vice President, is Aphton's
Director of the Laboratory of Molecular Medicine. Dr. Ascione directs R&D in the
area of Molecular Biology and works closely with Aphton's Laboratory of
Immunobiology in research and product development. Previously, Dr. Ascione was
Professor in the Department of Experimental Oncology and Associate Director of
the Center for Molecular and Structural Biology at the Hollings Cancer Center
and the Medical University of South Carolina, respectively, in Charleston, South
Carolina. Prior to that, Dr. Ascione was with the National Cancer Institute
(NCI) of the National Institutes of Health (NIH) for approximately twenty years,
the last ten of which he served as Deputy Chief of NCI's Laboratory of Molecular
Oncology. Dr. Ascione has published over sixty-five peer-reviewed papers,
several book chapters and articles related to the molecular biology of cancer,
human retroviruses and HIV/AIDS.
Paul Broome, MB., Ch.B., MFPM (University of Sheffield Medical School, UK)--Vice
President and Medical Director for Clinical Trials and Regulatory Affairs. Dr.
Broome's more than twenty years of clinical experience includes, notably, the
responsibility at Glaxo for clinical trials which provided data for US (FDA) and
UK (MCA) registration of the indication for ranitidine (Zantac) as maintenance
therapy, which became the world's largest selling drug. Later, Dr. Broome was
Medical Director for BIOS, a leading company in the UK which provides services
ranging from consulting and R&D through clinical trials, regulatory affairs and
the registration of drugs for marketing approval from government regulatory
agencies.
Peter Blackburn, Ph.D.-Vice President, Program Development of the Company since
September, 1997. Previously Dr. Blackburn was Executive Vice President, Applied
Microbiology, Inc., where he was employed for over ten years. His
responsibilities encompassed those of a chief operating officer, engaged in the
R&D and manufacture of antimicrobial peptides and pharmaceutical grade bulk
drug. Earlier, and for ten years, he was engaged in academic research at the
Rockefeller University, New York, in protein chemistry in the laboratory of two
recipients of the Nobel Prize for Chemistry. Dr. Blackburn has published
numerous papers in peer-reviewed journals and is the inventor on numerous US and
foreign patents.
Theo de Roij, D.V.M., Ph.D.--Vice President, Business and Product Development
since September 1998. Prior to joining the company, Dr. de Roij served as the
Director of Business Development at SmithKline Beecham Biologicals S.A.
responsible for worldwide business development activities. Previously, Dr. de
Roij was employed by the Animal Health Division of Solvay, S.A. where he held
several senior positions during his 13 year tenure with the company. For several
years, he was the Corporate Director, Business Development for Solvay Animal
Health responsible for worldwide business development and strategic planning.
Douglas A. Eayrs--Vice President, Chief Financial Information Officer. Prior to
joining Aphton Corporation, Mr. Eayrs was a Research Analyst for John G. Kinnard
& Company, a Minneapolis-based brokerage firm, since 1989 he focused primarily
on companies developing new pharmaceutical drugs and emerging medical
technologies. In 1996, Mr. Eayrs was named an "All-Star Analyst" in medical
stocks in the Wall Street Journal's annual analyst survey. Mr. Eayrs also holds
a Master's degree in Applied Economics (Marquette University).
Donald Henderson-Regional Managing Director, Finance and Administration of the
Company since February, 1998. Mr. Henderson has held management positions with
Warner Lambert and Fisons, including postings to Australia and Japan, and was
most recently Director of Finance and Administration for Europe/Middle
East/Africa for the Australian based pharmaceuticals group Fauldings. His
experience includes implementing six corporate acquisitions, and creating new
pharmaceutical operations in four countries. Mr. Henderson is qualified as a
CPA-equivalent in England.
Frederick W. Jacobs--Treasurer and Chief Accounting Officer, has been with the
Company since June, 1989. Previously, Mr. Jacobs, a CPA, was Chief Financial
Officer at a Health Maintenance Organization (HMO) and before that served on the
staff of Coopers & Lybrand, providing both audit and tax services.
The Company's Bylaws authorize the Board of Directors to fix the number of
directors from time to time by vote.
All directors currently hold office until the next annual meeting of
shareholders and until their successors have been elected. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among executive
officers or directors of the Company.
Messrs. Basso and Stathis are non-executive Board Members.
Scientific Advisory Board
The members of the Scientific Advisory Board, which functions primarily as a
review board for research projects and for product development programs, in
addition to Philip C. Gevas, Drs. Dov Michaeli, Paul Broome and Richard Ascione,
are:
Eliezer Benjamini, Ph.D., University of California, Berkeley. A co-founder of
the Company, Dr. Benjamini is the Chairman of the Scientific Advisory Board. Dr.
Benjamini is a co-inventor of two of the Company's issued US patents. Dr.
Benjamini has been a professor in the Department of Medical Microbiology and
Immunology at the University of California, Davis, for over twenty years. He now
holds the title of Professor Emeritus. Dr. Benjamini is widely recognized in the
field of immunology. He has received awards from industry and academia,
including the Distinguished Scientists Award in Virology and Immunology (1984)
which was given for his pioneering work in the development of synthetic peptide
vaccines. Dr. Benjamini has over one hundred publications and is co-author, with
Dr. Sidney Leskowitz, of Immunology: A Short Course, a textbook for medical
students.
Richard L. Littenberg, M.D. A co-founder of the Company, Dr. Littenberg is a
member of Aphton's Scientific Advisory and Program Review Board and is a
co-inventor of three Aphton patent filings. Dr. Littenberg is Board Certified in
both Internal Medicine and Nuclear Medicine and a Diplomate of the National
Board of Medical Examiners and is President and Chief Executive Officer of The
Honolulu Medical Group (HMG). Dr. Littenberg received his M.D. degree from the
State University of New York. He has practiced internal and nuclear medicine for
over seventeen years. He has participated in clinical trials for major
pharmaceutical companies and has engaged in both cancer and cardiovascular
research.
Demosthenes Pappagianis, M.D. (Stanford School of Medicine), Ph.D. (University
of California, Berkeley). A co-founder of the Company, Dr. Pappagianis is its
principal resource on the mechanisms of infection of pathogens and of host
defenses. Professor and Chairman (1967-1985) in the Department of Medical
Microbiology and Immunology at the University of California, Davis, Dr.
Pappagianis is widely recognized in the field of infectious diseases. He is a
Diplomate of the National Board of Medical Examiners and Diplomate of the
American Board of Medical Microbiology. In addition, he is a Fellow of the
Infectious Diseases Society of America and an Associate Member of the Armed
Forces Epidemiological Board. Dr. Pappagianis has over one hundred publications.
Robert J. Scibienski, Ph.D., University of California, Los Angeles. A co-founder
of the Company, Dr. Scibienski focuses on immunology-related basic technology at
the Company, currently addressing immune system regulation and antigen
presentation. Dr. Scibienski is a co-inventor of both issued US patents and a
number of patent applications of the Company. Dr. Scibienski is Associate
Professor, Department of Medical Microbiology and Immunology at the University
of California, Davis. Dr. Scibienski has over thirty publications.
Vernon C. Stevens, Ph.D. Professor of Reproductive Biology, Ohio State
University. Dr. Stevens is recognized worldwide as one of the pre-eminent
authorities on vaccines for contraception and synthetic peptide based immunogen
formulations. He pioneered the development of synthetic peptide immunogens for
human use, particularly for Aphton's immunocontraceptive product, which prevents
pregnancy, under development with the World Health Organization (WHO).
Other scientists (consultants) participate when their expertise is needed on a
specific project.
Scientific Staff
In addition to the founding scientists (Drs. Benjamini, Scibienski and
Pappagianis), the Company's full-time scientific staff includes the following:
Dov Michaeli, M.D., Ph.D. - see "Directors and Executive Officers."
Richard Ascione, Ph.D. - see "Directors and Executive Officers."
Paul Broome, MB., Ch.B., MFPM, - see "Directors and Executive Officers."
Stephen L. Karr, Jr., Ph.D., University of California, Davis. Dr. Karr joined
Aphton in 1983 and serves in a number of capacities, namely:. Divisional Vice
President and General Manager, Laboratory of Immunobiology. Responsible for:
daily operations; program planning, budgeting and control; and Project Manager,
in which capacity he is responsible for the experimental design and
implementation of special projects. Dr. Karr, who is also an
immunoparasitologist, is an inventor of two of the Company's issued patents and
three pending patent applications. Dr. Karr has sixteen publications and had
presented twenty papers prior to joining the Company.
Stephen Grimes, Ph.D.,University of California, Davis. Dr. Grimes, Divisional
Vice President, Immunology, is responsible for research and development in
immunology and the experimental design and implementation of immunology-based
projects. He also serves as the principal scientific deputy to Dr. Michaeli and
Dr. Broome for Aphton's clinical trials projects. Dr. Grimes is a co-inventor of
issued US patents of the Company and of additional patents in preparation and
pending. Dr. Grimes came directly to the Company in 1981 upon finishing his
doctoral dissertation under Dr. Scibienski at the University of California,
Davis.
Both Dr. Karr and Dr. Grimes support closely the office of Program Development
and Aphton's Product Development/Manufacturing Team in the UK, which includes
former SmithKline Beecham employees with many years of development /
manufacturing experience. Aphton employs approximately thirty-five individuals
directly and has numerous others under contracts with other supporting
organizations.
Item 2. Properties
Aphton has noncancelable facilities leases expiring at various dates through
fiscal 2003. The leases provide various options to renew. The minimum rental
commitments for the fiscal years 2000 through 2003, respectively, are, $101,000,
$103,000, $80,000, $22,000 and none thereafter. Rental expense for these leases
for the year ended January 31, 1999, the nine months ended January 31, 1998 and
for the years ended April 30, 1997 and 1996, was approximately $115,000,
$80,000, $108,000 and $108,000, respectively.
Item 3. Legal Proceedings
Aphton is not involved, and has never been involved, in any litigation,
administrative or governmental proceeding and none is believed by Aphton's
management to be threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of Aphton has been trading on Nasdaq's National Market System
since June 2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues
(formerly over-the-counter) market since April 1, 1991, the date of Aphton's
initial public offering. The following table sets forth high and low price
information, provided by Nasdaq Historical Research Department, for each full
quarter beginning after April 30, 1997. Aphton's Common Stock is traded under
the symbol "APHT."
Fiscal Period Ended January 31, 1998: High Low
1st Quarter $15 1/2 $ 11 1/2
2nd Quarter 16 1/2 10 1/4
3rd Quarter 12 3/4 9 3/8
Fiscal Period Ended January 31, 1999:
1st Quarter $15 $ 11 7/16
2nd Quarter 18 1/8 11
3rd Quarter 13 1/4 6 1/4
4th Quarter 17 1/2 10 3/8
Quarter ended April 30, 1999: 17 3/4 10 3/4
As of January 31, 1999, Aphton had approximately 300 shareholders of record and
approximately 4,000 beneficial holders of its Common Stock. Aphton did not
declare dividends on its common stock during the year ended January 31, 1999 and
nine months ended January 31, 1998.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations and balance sheets for the year ended January 31, 1999,
the nine months ended January 31, 1998 and each of the four years in the period
ended April 30, 1997, are derived from audited financial statements and should
be read together with the financial statements and related notes included in
this Annual Report. All selected financial data are not covered by the
independent accountants' report. The data presented below should be read
together with the financial statements, related notes, and other financial
information included herein.
(In thousands except for per share data)
Year Nine Months
Ended Ended ---- Year Ended April 30,----
January 31, January 31,
Statements of
Operations: 1999 1998 1997 1996 1995 1994
Revenue $ 547 $ 534 $ 271 $ 438 $ 463 $ 62
Research & Development
Expenditures 9,063 4,963 5,206 4,501 3,905 2,924
Net Loss (9,757) (6,605) (5,629) (4,711) (3,930) (3,139)
Net Loss per Share
(basic and diluted) $(0.68) $(0.48) $(0.44) $(0.37) $(0.32) $(0.28)
Weighted Average Shares
Outstanding 14,431 13,733 12,913 12,723 12,378 11,268
January 31, ------------ April 30, -----------
1999 1998 1997 1996 1995 1994
Balance Sheets:
Cash and Short-Term
Cash Investments $10,164 $14,226 $8,846 $8,169 $7,520 $11,157
Total Assets 19,499 23,580 18,362 8,354 7,741 11,290
Total Liabilities 12,948 12,273 15,851 1,313 997 619
Accumulated Deficit (41,760) (32,004) (25,399) (19,770) (15,059) (11,130)
Total Stockholders'
Equity 6,552 11,307 2,511 7,041 6,744 10,671
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year Ended January 31, 1999, Nine Months Ended January 31, 1998
and the Fiscal Year Ended April 30, 1997
During the year ended January 31, 1999, the Company reported a net loss of
$9,756,815. During this period the Company had no contract or product revenues.
Investment earnings on cash for twelve months was approximately the same as the
$534,000 earned in the nine months ended January 31, 1998 due to lower average
cash balances. Research and development expenditures were $9,062,775 which
represented an increase in average quarterly research and development
expenditures from about $1.7 million per quarter in the nine months ended
January 31, 1998 to about $2.3 million per quarter for the year ended January
31, 1999. This 35% increase was budgeted for and related to the on-going and
planned additional (human) Clinical Trials.
During the nine months ended January 31, 1998, the Company reported a net loss
of $6,604,544, including non-cash interest expense of $1,566,971 relating to the
convertible debenture described below. During this period the Company had no
contract or product revenues. Investment earnings on cash increased $262,738 to
$533,908 due to higher average cash balances. Research and development
expenditures were $4,963,481 which represented an increase in average quarterly
research and development expenditures from about $1.3 million per quarter in the
year ended April 30, 1997 to about $1.7 million per quarter for the nine months
ended January 31, 1998. This increase was budgeted for and related to the
on-going and planned additional (human) Clinical Trials.
During the fiscal year ended April 30, 1997, the Company reported a net loss of
$5,628,966. During this period the Company had no contract or product revenues.
Investment earnings on cash decreased to $271,170 due to lower average cash
balances. Research and development expenditures increased to $5,205,854. This
increase was budgeted for and related to the on-going and planned additional
(human) Clinical Trials.
In fiscal 1999, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 132,
"Employers' Disclosure About Pensions and Other Postretirement Benefits." These
new accounting standards had no impact on the Company's financial statements
since the Company does not have elements of comprehensive income other than net
loss, nor does it provide pension or other postretirement benefits. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which will not have an effect on the Company's financial
statements since the Company does not engage in the transaction of derivative
instruments and hedging activities.
Many computer programs were written to use only two digits to identify the year.
Thus, a computer program could read the digits "00" as the year 2000 or as the
year 1900. In addition, microprocessors embedded in many operating facilities
such as communication systems may cause equipment malfunctions because of the
year 2000 date change. Failure by third parties upon which the Company relies
(or by the Company) to address the year 2000 issue could cause material loss to
the Company.
Management has completed the awareness and assessment phase of a comprehensive
program to address the year 2000 issue. The Company utilizes standard
"off-the-shelf" software and will implement any necessary vendor upgrades and
modifications to assure continued functionality. At present, management does not
expect that material incremental costs will be incurred in the aggregate or in
any single future year.
The Company has also begun to assess the year 2000 compliance efforts of
external parties upon which the Company relies. The Company is developing
contingency plans for addressing any material failure to deal with the year 2000
date change that will address the Company's exposure to year 2000 noncompliance
by third parties.
Even though the Company's planned software and hardware modifications and system
upgrades should adequately address year 2000 issues, there can be no assurance
that unforeseen difficulties will not arise. There is no assurance that the
failure of any external party to resolve its year 2000 issues would not have a
material adverse effect on the Company.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any material effect in the foreseeable
future. Dividend, interest and other income were primarily derived from
money-market accounts.
Liquidity and Capital Resources
The Company had financed its operations since inception through the sale of its
equity securities and, to a lesser extent, operating revenues from R&D limited
partnerships to conduct research and development. These funds provided the
Company with the resources to acquire staff, construct its research and
development facility, acquire capital equipment and to finance technology and
product development, manufacturing and clinical trials.
In June 1998, Aphton and SmithKline Beecham signed a Collaboration and License
Agreement for a worldwide strategic alliance for Aphton's anti-GnRH immunogen.
The agreement covers the diagnosis, treatment and prevention of GnRH-related
cancers and other diseases in humans. Human cancer indications for Aphton's GnRH
pharmaccine are prostate, breast, ovarian and endometrial cancer. Additional
medical indications for GnRH pharmaccine are endometriosis, polycystic ovaries,
uterine fibroids, infertility and precocious puberty.
Under terms of the agreement, SmithKline Beecham received exclusive rights
worldwide to Aphton's GnRH-related patents and proprietary technology. Aphton
and SmithKline Beecham are collaborating in a joint product development program.
SmithKline Beecham is responsible for funding all costs of product development,
clinical trials and regulatory approvals, and for worldwide marketing and
distribution of approved products. The agreement uses a royalty mechanism based
on product sales, in dollars, worldwide to determine Aphton's revenues.
As part of the Agreement, SmithKline Beecham made an equity investment of
$5,000,000 for shares of newly issued Aphton common stock. In addition,
SmithKline Beecham has granted Aphton an irrevocable two-year option (which can
be exercised by Aphton at any time during that period) to sell to SmithKline
Beecham additional shares of newly-issued Aphton common stock for a value of
$5,000,000 at the then current market price. If and when Aphton exercises that
option, SmithKline Beecham shall have the right for 90 days to purchase a number
of additional shares of newly-issued Aphton common stock for a value of
$5,000,000 at the then current market price.
On June 17, 1997, the Company announced that it had received proceeds of
$10,000,000 from the closing of a private financing of Common Stock. The Company
issued 715,000 shares of common stock with a 7-year warrant for 225,000 shares
exercisable at $17.50 per share.
In April 1997, the Company issued a $5,000,000 7% senior redeemable convertible
debenture. During the nine months ended January 31, 1998 the debenture and
related interest was converted into 559,068 shares of the Company's common
stock. Non-cash interest on such debt amounted to approximately $1,567,000 in
the nine months ended January 31, 1998 and $15,000 in fiscal 1997.
On February 14, 1997 Aphton signed an agreement with Pasteur Merieux Connaught
("PMC") (Rhone-Poulenc Group), a leader in medical science and research and the
world's largest vaccine manufacturer and marketer, for a strategic alliance for
all human cancer applications of the Company's anti-gastrin immunogen including
stomach, colorectal, liver and pancreatic cancers. Under the terms of the
twenty-year license and co-promotion agreement, Aphton will be responsible for
product development, clinical trials and regulatory agency approvals, and PMC
will be responsible for promotion, advertising, marketing, distribution and
sales of its anti-gastrin immunogen in the United States, Canada, Europe
(including the C.I.S. countries) and Mexico. In addition, Aphton and PMC will
enter into agreements providing for: (a) the supply of anti-gastrin immunogen
from Aphton to PMC; and (b) the supply of certain components of anti-gastrin
immunogen (as well as other Aphton products) from PMC to Aphton. PMC will fund
the costs associated with product introduction, promotion, advertising and
marketing throughout the territory covered by the agreement. Under the terms of
the agreement, in addition to upfront consideration aggregating $10 million
including $1 million cash and the supply commitment (of material suitable for
human use) of $9 million, Aphton will receive the majority of the profits from
sales of its anti-gastrin immunogen with the balance of profits to be retained
by PMC.
The supply commitment of materials suitable for human use consists of Diphtheria
Toxoid and/or Tetanus Toxoid. Aphton may use some or all of the unconditional
supply commitment in the Product under development with PMC or Aphton may use
some or all of the supply commitment on other current product lines or on
Research and Development.
The Company anticipates that its existing capital resources which are composed
primarily of cash and short-term cash investments, including the proceeds of its
private placements and interest thereon, and available capital sources, would
enable it to maintain its currently planned operations into the year 2001. The
Company's working capital and capital requirements will depend upon numerous
factors, including the following: the progress of the Company's research and
development program, preclinical testing and clinical trials; the timing and
cost of obtaining regulatory approvals; the levels of resources that the Company
devotes to product development, manufacturing and marketing capabilities;
technological advances; competition; and collaborative arrangements or strategic
alliances with other drug companies, including the further development,
manufacturing and marketing of certain of the Company's products and the ability
of the Company to obtain funds from such strategic alliances or from other
sources.
Item 8. Financial Statements and Supplementary Data.
Financial Statements are set forth in this report beginning at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required for this item is incorporated by reference to the
section captioned "Election of Directors" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required for this item is incorporated by reference to the
section captioned "Executive Compensation" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated by reference to the
section captioned "Election of Directors" of the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
(i) Financial Statements:
Report of Independent Accountants
Balance sheets as of January 31, 1999 and 1998
Statements of Operations for the year ended January 31, 1999,
the nine months ended January 31, 1998
and for the year ended April 30, 1997
Statements of Stockholders' Equity for the year ended
January 31, 1999, the nine months ended Januarym31, 1998
and for the year ended April 30, 1997
Statements of Cash Flows for the year ended January 31, 1999,
the nine months ended January 31, 1998 and for
the year ended April 30, 1997
Notes to Financial Statements
(ii) Financial Statements Schedules:
Financial Statement Schedules are omitted because they are either
not required, not applicable, or the information is included
in the Financial Statements or Notes thereto.
(b) Exhibits
Exhibit Number Description
3.1 Certificate of Incorporation (Incorporated by
reference to Exhibit B of the Registrant's
Definitive Proxy Statement filed October 8, 1997)
3.3 By-Laws (Incorporated by reference to Exhibit C of
the Registrant's Definitive Proxy Statement
filed October 8, 1997)
23.1 Written Consent of PricewaterhouseCoopers LLP.
(attached as an exhibit)
27.1 Financial Data Schedules. (attached as an exhibit)
(c) Reports on Form 8-K
During the three-month period ending January 31, 1999, the Company
did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 30, 1999 APHTON CORPORATION
By: PHILIP C. GEVAS
Chairman of the Board, Chief Executive
Officer, and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
PHILIP C. GEVAS Chairman of the Board, Chief Executive April 30, 1999
Officer and President
WILLIAM A. HASLER Vice Chairman of the Board and Co-Chief April 30, 1999
Executive Officer
ROBERT S. BASSO Director April 30, 1999
NICHOLAS JOHN STATHIS Director April 30, 1999
FREDERICK W. JACOBS Treasurer and Chief Accounting Officer April 30, 1999
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Report of Independent Accountants.........................................F-1
Balance Sheets - January 31, 1999 and 1998................................F-2
Statements of Operations - for the year ended January 31, 1999, the nine
months ended January 31, 1998 and for the year ended April 30, 1997.......F-3
Statements of Stockholders' Equity - for the year ended January 31, 1999, the
nine months ended January 31, 1998 and for the year ended April 30, 1997..F-4
Statements of Cash Flows - for the year ended January 31, 1999, the nine
months ended January 31, 1998 and for the year ended April 30, 1997.......F-5
Notes to the Financial Statements.........................................F-6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Aphton Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholder' equity and cash flows present fairly, in all material
respects, the financial position of Aphton Corporation at January 31, 1999 and
1998, and the results of its operations and its cash flows for the year ended
January 31, 1999, the nine months ended January 31, 1998 and the year ended
April 30, 1997 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Aphton Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 29, 1999
APHTON CORPORATION
Balance Sheets - January 31, 1999 and 1998
1999 1998
Assets
Current Assets:
Cash and short-term cash investments $10,164,069 $14,226,000
Other assets (including current portion of
unconditional supply commitment) 469,811 205,454
---------- ----------
Total current assets 10,633,880 14,431,454
Equipment and improvements, at cost,
net of accumulated depreciation
and amortization 215,599 197,736
Unconditional supply commitment 8,650,000 8,951,000
---------- ----------
Total assets $19,499,479 $23,580,190
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities:
Accounts payable and other $2,947,951 $2,273,072
--------- ---------
Total current liabilities 2,947,951 2,273,072
Deferred revenue 10,000,000 10,000,000
---------- ----------
Total liabilities 12,947,951 12,273,072
Commitment
Stockholders' Equity:
Common stock, $0.001 par value -
Authorized: 30,000,000 shares
Issued and outstanding:
14,433,384 shares at January 31,
1999 and 14,191,217 shares
at January 31, 1998 14,434 14,191
Additional paid in capital 47,960,689 42,955,207
Purchase warrants 336,904 341,404
Accumulated deficit (41,760,499) (32,003,684)
---------- ----------
Total stockholders' equity 6,551,528 11,307,118
---------- ----------
Total liabilities and
stockholders' equity $19,499,479 $23,580,190
========== ==========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Operations
for the year ended January 31, 1999,
the nine months ended January 31, 1998
and for the year ended April 30, 1997
1999 1998 1997
Revenue:
Dividend, interest and other income $547,283 $ 533,908 $271,170
------- ------- -------
Total revenue 547,283 533,908 271,170
Costs and Expenses:
General and administrative 1,241,323 608,000 543,939
Research and development 9,062,775 4,963,481 5,205,854
Non-cash interest expense - 1,566,971 15,342
--------- --------- ---------
Total costs and expenses 10,304,098 7,138,452 5,765,136
---------- --------- ---------
Loss before provision
for income taxes (9,756,815) (6,604,544) (5,493,966)
Provision for income taxes - - 135,000
----------- ---------- ----------
Net loss $(9,756,815) (6,604,544) $(5,628,966)
============ =========== ===========
Per share data
Basic and diluted loss
per common share $(0.68) $(0.48) $(0.44)
======= ======= =======
Weighted average number of
common shares outstanding 14,431,417 3,733,478 12,912,982
========== ========= ==========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Stockholders' Equity
for the year ended January 31, 1999,
the nine months ended January 31, 1998
and for the year ended April 30, 1997
Additional
Common Stock Paid in Purchase Accumulated
Shares Amount Capital Warrants Deficit Total
Balance,
May 1,
1996 12,911,149 $26,664,591 $147,004 $(19,770,174) $7,041,421
Exercise
of purchase
warrants 2,000 500 - - - 500
Conversion
feature of
convertible
debt - - 1,097,560 - - 1,097,560
Net loss - - - - (5,628,966) (5,628,966)
---------- ----------- ----------- ---------- ------------- ----------
Balance,
April 30,
1997 12,913,149 26,665,091 1,097,560 147,004 (25,399,140) 2,510,515
Sale of stock,
net 715,000 10,000,000 - - - 10,000,000
Issuance
of purchase
warrants for
services - - - 198,900 - 198,900
Exercise
of
purchase
warrants 4,000 - 5,500 (4,500) - 1,000
Transfer between
equity accounts
resulting from a
change in the par
value of the stock (41,857,647) 41,857,647 - - -
Conversion
of convertible
debt 559,068 - 5,201,247 - - 5,201,247
Net loss - - - - (6,604,544)(6,604,544)
---------- ----------- ----------- ---------- ------------- ----------
Balance,
January 31,
1998 14,191,217 14,191 42,955,207 341,404 (32,003,684) 11,307,118
Exercise
of
purchase
warrants 4,900 5 5,720 (4,500) - 1,225
Sale of stock,
net 237,867 238 4,999,762 - - 5,000,000
Net loss - - - - (9,756,815)(9,756,815)
---------- ----------- ----------- ---------- ------------- ----------
Balance,
January 31,
1999 14,433,384 $14,434 $47,960,689 $336,904 $(41,760,499) $6,551,528
========== ======= =========== ======== ============= ==========
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Cash Flows
for the year ended January 31, 1999,
the nine months ended January 31, 1998
and for the year ended April 30, 1997
Increase (decrease) in cash and short-term cash investments
1999 1998 1997
Cash flows from operating activities:
Cash paid to suppliers and employees $(9,510,514) $(5,115,606) $(4,156,450)
Interest and dividends received 547,283 533,908 271,170
---------- ---------- ---------
Net cash used in operating activities (8,963,231) (4,581,698) (3,885,280)
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (99,925) (39,041) (151,349)
------- -------- ---------
Cash used in investing activities (99,925) (39,041) (151,349)
Cash flows from financing activities:
Issuance of convertible debenture - - 5,000,000
Debenture issue costs - - (287,500)
Sales of stock 5,001,225 10,001,000 500
--------- ---------- ---------
Cash received from financing activities 5,001,225 10,001,000 4,713,000
--------- ---------- ---------
Net increase (decrease) in cash and
short-term cash investments (4,061,931) 5,380,261 676,371
Cash and short-term cash investments:
Beginning of period 14,226,000 8,845,739 8,169,368
---------- ---------- ---------
End of period $10,164,069 $14,226,000 $8,845,739
========== ========== =========
Reconciliation of net loss to net cash
used in operating activities
Net loss $(9,756,815) $(6,604,544) $(5,628,966)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 82,062 57,428 67,529
Warrants issued for services
received - 198,900 -
Stock issued for non-cash debenture
interest, debenture discount and
issuance costs = - 1,566,971
Changes in -
Other assets (138,357) (124,698) 40,114
Unconditional supply commitment 175,000 - -
Cash receipt treated as
deferred revenue - - 1,000,000
Accounts payable and other 674,879 324,245 636,043
---------- ---------- ----------
Net cash used in operating
activities: $(8,963,231) $(4,581,698) $(3,885,280)
========== ========== ==========
Non-cash investing and financing activities:
For information about non-cash investing and financing activities,
see Notes 3 and 6.
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Notes to the Financial Statements
1. Organization and Operations
Aphton Corporation is a biopharmaceutical company developing products using its
innovative vaccine-like technology for neutralizing hormones that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases;
and the prevention of pregnancy. Aphton has strategic alliances with Pasteur
Merieux Connaught (Rhone-Poulenc Group) (PMC), SmithKline Beecham,
Schering-Plough Animal Health and the World Health Organization (WHO).
Aphton changed its state of incorporation from California to Delaware effective
January 29, 1998. As part of the reincorporation, the company's fiscal year end
was changed from April 30 to January 31.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, however
management believes such differences are unlikely to be significant.
Research and Development Expenses -
Research and development costs are expensed as incurred.
General and Administrative Expenses -
Amounts shown represent expenses not clearly related to research and
development expense. A significant portion of these expenses relate to
intellectual property/patent legal costs and salaries.
Equipment and Improvements -
Equipment and furniture are depreciated using accelerated methods over the
estimated economic lives (5-7 years) of the assets. Improvements are amortized
over the term of the lease using the straight-line method. Betterments that
substantially extend the useful life of equipment and furniture are capitalized
and depreciated over the period of expected benefit.
Income Taxes -
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes. Under
this method, the amount of deferred tax asset or liability is calculated by
applying the provisions of enacted tax laws to the differences in the bases of
assets and liabilities for financial and income tax purposes. Income tax expense
is the tax payable for the period and the change during the period in deferred
tax assets and liabilities. Investment tax credits and research and
experimentation credits are accounted for using the flow-through method.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Per Share Data -
The Company has adopted SFAS No. 128, "Earnings per Share," which specifies
the computation, presentation and disclosure requirements for earnings per
share. The Company's basic loss per common share was calculated by dividing net
loss by the weighted average number of common shares outstanding. The Company's
common stock equivalents are anti-dilutive, and accordingly, basic and diluted
loss per share are the same. Such common stock equivalents consist of purchase
warrants (See Note 7) and could potentially dilute basic earnings per share in
the future.
Cash Equivalents -
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments, including short-term cash investments, purchased
with an original maturity of three months or less to be cash equivalents.
Concentrations Of Credit Risk -
The Company's short-term cash investments are held in several financial
institutions and consist principally of insured money market accounts and cash
management accounts that are collateralized by or invested in US Government and
US Government agency securities.
Impairment of the unconditional supply commitment -
As discussed in Note 3, the Company has the unconditional right to receive
supplies aggregating $9 million from PMC. The Company's policy is to review the
current market prices of available supplies, if any, to assure that they remain
above the stated PMC contract price of the materials and that the right to
receive the supplies remains unimpaired. PMC is one of the largest
pharmaceutical vaccine manufacturers in the world. The Company monitors the
financial performance of PMC to assure that they will continue to be able to
perform under the contract, wherein the special order supplies are to be
provided from supplies manufactured by PMC in large quantities and sold to many
customers, including the US Government, as part of PMC's basic franchise
(business). The contract allows for inflation based increases in the per unit
costs of the supplies which the Company and PMC believes are sufficient to
assure that there will be no future financial hardship incurred by PMC in the
execution of the agreement. The Company does not believe that any impairment of
this asset exists at January 31, 1999.
Accounting for stock based compensation-
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations as permitted by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation."
New Accounting Pronouncements-
In fiscal 1999, the Company implemented SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 132, "Employers' Disclosure About Pensions
and Other Postretirement Benefits." These new accounting standards had no impact
on the Company's financial statements since the Company does not have elements
of comprehensive income other than net loss, nor does it provide pension or
other postretirement benefits. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which will not
have an effect on the Company's financial statements since the Company does not
engage in the transaction of derivative instruments and hedging activities.
3. License and Co-Promotion Agreements
On June 19, 1998, Aphton and SmithKline Beecham announced the signing of a
Collaboration and License Agreement for a worldwide strategic alliance for
Aphton's anti-Gonadotropin Releasing Hormone (anti-GnRH) immunogen.
Under the terms of the agreement, SmithKline Beecham will receive exclusive
rights worldwide to Aphton's patents and proprietary technology covering the
diagnosis, treatment and prevention of GnRH-related cancers and other diseases
in humans - including - prostate, breast, ovarian and endometrial cancers; and
endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility
and precocious puberty. SmithKline Beecham will be responsible for funding all
costs of product development, clinical trials and approvals for worldwide
marketing and distribution. The agreement uses a mechanism based on product
sales, in dollars, worldwide to determine Aphton's revenues. As part of the
Agreement, SmithKline Beecham made an equity investment of $5,000,000 for shares
of newly issued Aphton common stock.
In addition, SmithKline Beecham has granted Aphton an irrevocable two-year
option to sell to SmithKline Beecham additional shares of newly-issued Aphton
common stock for a value of $5,000,000 at the then current market price. If and
when Aphton exercises that option, SmithKline Beecham shall have the right for
90 days to purchase a number of additional shares of newly-issued Aphton common
stock for a value of $5,000,000 at the then current market price.
On February 14, 1997 Aphton signed an agreement with Pasteur Merieux
Connaught ("PMC") (Rhone-Poulenc Group), a leader in medical science and
research and the world's largest vaccine manufacturer and marketer, for a
strategic alliance for all human cancer applications of the Company's
ant-gastrin immunogen including stomach, colorectal, liver and pancreatic
cancers. Under the terms of the twenty-year license and co-promotion agreement,
Aphton will be responsible for product development, clinical trials and
regulatory agency approvals, and PMC will be responsible for promotion,
advertising, marketing, distribution and sales of anti-gastrin immunogen in the
United States, Canada, Europe (including the C.I.S. countries) and Mexico. Under
the terms of the agreement, in addition to upfront consideration aggregating $10
million including $1 million cash and the supply commitment (of material
suitable for human use) of $9 million, Aphton will receive the majority of the
profits from sales of anti-gastrin immunogen with the balance of profits to be
retained by PMC.
The supply commitment of materials suitable for human use consists of
Diphtheria Toxoid and/or Tetanus Toxoid. Aphton may use some or all of the
unconditional supply commitment in the Product under development with PMC or
Aphton may use some or all of the supply commitment on other current product
lines or on Research and Development.
The $10 million upfront consideration has been classified as a license
payment and has been deferred and will be recognized for financial statement
(accounting) purposes as revenue within the twenty-year period of the agreement.
The revenue recognition will begin once regulatory agency approval to market the
product has been received and will be recognized ratably over the remaining
period of the contract, which ends February 13, 2017. There is no provision
under the agreement for the unconditional supply commitment to be satisfied by
PMC with a cash payment.
4. Equipment And Improvements
At January 31, 1999 and 1998, equipment and improvements
consisted of the following:
January 31, January 31,
1999 1998
Laboratory equipment $ 495,557 $ 430,782
Leasehold improvements 276,955 266,123
Office and laboratory
furniture and fixtures 216,618 192,300
------- -------
989,130 889,205
Less accumulated depreciation
and amortization (773,531) (691,469)
------- -------
$ 215,599 $ 197,736
======= =======
5. Accounts Payable and Other
At January 31, 1999 and 1998, accounts payable and other was composed of
approximately $1,673,000 and $1,167,000 payable on trade accounts and
approximately $1,275,000 and $1,106,000 accrued for employee wages and benefits,
respectively.
6. Senior Redeemable Convertible Debenture
In April 1997, the Company issued a $5,000,000 7% senior redeemable
convertible debenture. For financial reporting purposes, $1,097,560 of the
proceeds was allocated to the conversion feature of the debt and recorded as
additional paid in capital. The value of the conversion feature was based on the
Company's stock market price at the date of issuance, less an 18% discount. As a
result, the convertible debt instrument of $5,000,000 was recorded net of
discount equal to the conversion feature which increases the effective interest
rate of the debt. Accordingly, beginning on the date of issuance, the discount
was charged to interest expense on a pro rata basis using the effective interest
method as the security became convertible. The effective interest rate on this
debenture was approximately 52%. Non-cash interest on such debt amounted to
approximately $15,000 in fiscal 1997. In the period ended January 31, 1998, the
debenture and related interest was converted to 559,068 shares of common stock.
Non-cash interest expense for the period then ended was approximately
$1,567,000.
7. Common Stock and Purchase Warrants
Common Stock -
As discussed in Note 3, during fiscal 1999, SmithKline Beecham made an
equity investment of $5,000,000 for shares of newly issued Aphton common stock.
The Company also sold 4,900 shares through the exercise of outstanding purchase
warrants.
During fiscal 1998, in a private placement, the Company sold 715,000 shares
of common stock for $10,000,000 net of insignificant legal, accounting and
filing fee expenses and 4,000 shares through the exercise of outstanding
purchase warrants.
Purchase Warrants -
Each warrant described below is exercisable for one share of common stock
and is subject to the restrictive holding requirements of SEC Rule 144. The term
of the warrants is from 8 to 23 years. All warrants exercised from inception of
the Company have been from warrants issued prior to April 30, 1991.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," companies
can either continue to account for employee stock based compensation plans
pursuant to existing accounting standards or elect to expense the value derived
from using an option pricing model such as Black-Scholes. Aphton Corporation
will continue to apply existing accounting standards for employee stock
compensation plans. However, SFAS No. 123 requires disclosure of pro forma net
income and earnings per share as if the Company had adopted the expensing
provisions of SFAS No. 123. Based on Black-Scholes values, for the year ended
April 30, 1997, the pro forma net loss would have been $6,011,431 and the pro
forma loss per common share would have been $.47. There were no employee stock
purchase warrants granted in 1999 or 1998.
In the nine months ended January 31, 1998 the Company issued 13,000
warrants to individuals (non-employees) for services. The Company recorded an
expense of $198,900 for these warrants. The Company also issued 225,000 warrants
to an institutional investor in conjunction with the sale of 715,000 shares of
stock for $10,000,000.
The following assumptions were used in the Black-Scholes option pricing
model for the 25,000 purchase warrants granted in fiscal 1997 to a director and
for the 13,000 warrants granted to individuals for services in 1998. The and
exercise price was set equal to the fair market value of the Company's common
stock on the date of grant. The risk-free rate of return used was 7.01%. The
expected dividend yield used was 0%. The expected time to exercise used was 10
years. The expected volatility used was 75%.
The following table summarizes purchase warrant
activity over the past three fiscal periods:
Weighted-Average
Number of Shares Exercise Price
Outstanding and exercisable at May 1, 1996 1,761,300 $12.88
Granted (1) 25,000 $18.25
Exercised (2,000) $.25
Canceled or expired - -
---------
Outstanding and exercisable at April 30, 1997 1,784,300 $13.26
Granted (1) 238,000 $17.35
Exercised (4,000) $.25
Canceled or expired - -
---------
Outstanding and exercisable at January 31,1998 2,018,300 $13.76
Granted (1) - -
Exercised (4,900) $.25
Canceled or expired - -
---------
Outstanding and exercisable at January 31,1999 2,013,400 $13.80
========= ======
For options outstanding and exercisable at January 31, 1999, the exercise
price ranges and average remaining lives were:
Options Outstanding and Exercisable
Range of Exercise Prices
Number Outstanding Average Period(2) Average Price(3)
$.25 to $14.00 766,400 14.7 $ 9.98
$14.01 to $24.00 1,247,000 14.8 $16.15
---------
2,013,400 14.8 $13.80
=========
(1) Weighted average grant date fair value is $15.30
(2) Weighted average remaining years
(3) Weighted average exercise price
8. Income Taxes
The provision for income taxes consists of the following:
Current 1999 1998 1997
Federal $ -- $ -- $100,000
State -- -- 35,000
Deferred -- -- --
-------- ------- --------
$ -- $ -- $135,000
======== ======= ========
The 1997 current provision reflects alternative minimum tax for which a
deferred tax asset was not recognized.
Gross deferred tax assets result from net operating loss and income tax
credit carryforwards. Realization of these assets is dependent on the Company's
ability to generate sufficient future taxable income, prior to the expiration of
the carryforwards, which is dependent on the completion of research and
development activities and successful approval and commercialization of the
Company's various products. Due to the uncertainties related to the above and in
accordance with guidance contained in Statement No. 109, a valuation allowance
has been provided for these deferred tax assets. Accordingly, these assets do
not appear in the Company's balance sheet at January 31, 1999 and 1998. The
changes in the valuation allowance in 1999 and 1998 were $3,450,000 and
$2,578,000, respectively.
1999 1998
Deferred tax assets consisted of:
Federal net operating loss carryforward $9,123,000 $5,956,000
State net operating loss carryforward 1,213,000 972,000
---------- ---------
Total operating loss carryforward 10,336,000 6,928,000
Deferred license payment revenues 4,014,000 4,330,000
Expenses deductible in future periods 512,000 479,000
Federal tax credits 1,651,000 1,433,000
State tax credits 608,000 501,000
--------- ---------
Total tax credits 2,259,000 1,934,000
--------- ---------
Total deferred tax assets 17,121,000 13,671,000
Valuation allowance (17,121,000) (13,671,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
At January 31, 1999, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $26,833,000 and various income tax
credit carryforwards, primarily research and experimentation, aggregating
$1,651,000, which expire at various dates through 2014.
At January 31, 1999, for California income tax purposes, the Company had
net operating loss carryforwards of approximately $19,764,000, which expire at
various dates through 2004; and various income tax credit carryforwards,
primarily research and experimentation, aggregating $608,000, which expire at
various dates through 2013.
9. Commitments and Contingencies
The Company has noncancelable facilities leases expiring at various dates
through fiscal 2003. The leases provide various options to renew. The minimum
rental commitments for the fiscal years 2000 through 2003, respectively, are,
$101,000, $103,000, $80,000, $22,000 and none thereafter. Rental expense for
these leases for the year ended January 31, 1999, the nine months ended January
31, 1998 and for the year ended April 30, 1997, was approximately $115,000,
$80,000 and $108,000, respectively.