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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File No. 0-20139
Diacrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 96 13th Street, Charlestown Navy
Yard, Charlestown, MA 02129
(Address of principal executive offices,
including zip code)
(617) 242-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
Common Stock, $.01 par value
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 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. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price of the Common Stock
on March 15, 2002) was $22,056,383.
As of March 15, 2002, 17,937,204 shares of the registrant's Common
Stock were outstanding.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning our business, operations and financial condition, including
statements with respect to planned timetables for the initiation and completion
of various clinical trials, development funding expected to be received in
connection with our joint venture and the expected sources of porcine cells used
in our products. All statements, other than statements of historical facts
included in this Annual Report on Form 10-K regarding our strategy, future
operations, timetables for product testing, financial position, costs,
prospects, plans and objectives of management are forward-looking statements.
When used in this Annual Report on Form 10-K, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
intended to identify forward looking statements, although not all
forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under
"Certain Factors That May Affect Future Results," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Annual Report on Form 10-K.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. You should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this Annual Report
on Form 10-K could substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these events, the
trading price of our common stock could decline.
We cannot guarantee any future results, levels of activity, performance or
achievements. The forward-looking statements contained in this Annual Report on
Form 10-K represent our expectations as of the date this Annual Report on Form
10-K was first filed with the Securities and Exchange Commission and should not
be relied upon as representing our expectation as of any other date. Subsequent
events and developments will cause our expectations to change. However, while we
may elect to update these forward-looking statements, we specifically disclaim
any obligation to do so even if our expectations change.
PART I
Item 1. Business
Overview
We are developing cell transplantation technology for treating human
diseases that are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent. Our products under
development include:
- - Porcine spinal cord cells for spinal cord injury
- - Porcine neural cells for stroke
- - Porcine neural cells for focal epilepsy
- - Porcine neural cells for chronic intractable pain
- - NeuroCell-PD for Parkinson's disease
- - Human liver cells for cirrhosis
- - Porcine liver cells for acute liver failure
- - Human muscle cells for cardiac disease
Although scientists have demonstrated the feasibility of cell
transplantation, an inadequate supply of human donor cells has hampered
widespread use of cell transplantation in clinical applications. To overcome
this constraint, we have pioneered the use of porcine (pig) cells for clinical
transplantation. Because porcine cells are functionally similar to human cells,
we believe that pigs will be a reliable source of a wide range of cell types
suitable for transplantation into humans. We have shown in preclinical studies
and clinical trials that transplanted porcine cells appear capable of
integrating into the surrounding tissue and addressing the functional deficits
caused by cell damage or cell death.
After receiving clearance from the United States Food and Drug
Administration, commonly referred to as the FDA, to conduct the first ever
clinical trial of transplanted porcine neural cells in humans, we completed a
three-year, twelve-patient, Phase 1 clinical trial to evaluate NeuroCell-PD for
the treatment of Parkinson's disease in 1999. Based on encouraging results from
this Phase 1 clinical trial, we initiated an 18-patient, pivotal, randomized,
double-blinded, placebo-controlled Phase 2 clinical trial of NeuroCell-PD in
1998. In March 2001, the trial was unblinded and we announced a preliminary
analysis of the results. We did not see a statistically significant difference
between the treated patients and the patients in the control group and,
therefore, did not meet the primary endpoint in the trial. Development of
NeuroCell-PD is currently suspended while we gather and evaluate additional
data.
We are currently evaluating six other product candidates in Phase 1
clinical trials. These include porcine spinal cord cells for spinal cord injury,
fetal porcine neural cells for stroke recovery, fetal porcine neural cells for
the treatment of focal epilepsy, human liver cells for cirrhosis, porcine liver
cells for acute liver failure, and human muscle cells for cardiac disease. We
have also received FDA clearance to initiate a Phase 1 clinical trial to
evaluate fetal porcine neural cells for chronic intractable pain.
We are also developing a proprietary technology designed to modulate the
human immune system in order to prevent rejection of transplanted cells without
the use of immunosuppressive drugs. This technology, which we refer to as our
immunomodulation technology, involves the selective treatment of cell
populations prior to transplantation to prevent the patient's immune system from
rejecting the transplanted cells. Our approach would eliminate the need for
long-term immunosuppressive drugs, which may leave the patient vulnerable to a
wide range of undesirable side effects, including increasing the patient's
susceptibility to infections and cancer. We have shown in preclinical and
clinical studies the ability of our immunomodulation technology to prevent
rejection of transplanted porcine cells without compromising the immune system
or causing undesirable side effects. We published scientific evidence in The
Journal of Immunology in June 1999 that describes how this technology might work
to allow survival of transplanted cells.
We were incorporated in October 1989. Our principal executive offices are
located at Building 96, 13th Street, Charlestown Navy Yard, Charlestown, MA
02129, and our telephone number at that location is (617) 242-9100.
Diacrin is our trademark. All other trademarks and service marks used in
this Annual Report are the property of their respective owners.
Diacrin's Transplantation Technology
We have pioneered the use of fetal porcine cells for clinical
transplantation for the treatment of human disease. In March 1995, we received
the first FDA clearance to transplant porcine cells into humans. We have
developed critical technology relating to the production process for obtaining
and screening porcine cells. We are also developing technology to modulate the
human immune system to enable porcine cell transplantation into the body without
the use of immunosuppressive drugs.
Each step of our production process has been designed based on FDA
guidelines and is controlled in order to obtain cells suitable for human
transplantation. We have developed procedures to screen pigs for infectious
agents and then quarantine qualified donor pigs at our biomedical animal
facilities. We harvest cells of appropriate age and type under current good
manufacturing procedures, commonly referred to as cGMP, at our facility in
Charlestown, Massachusetts.
We perform our screening procedures in accordance with FDA guidelines
covering xenotransplantation. These guidelines have been designed to prevent
contamination of transplanted cellular products with infectious agents that have
the potential to affect human cells. The FDA requires all sponsors of human
clinical trials involving porcine tissue, including us, to test for the presence
of porcine endogenous retroviruses, commonly known as PERV, in patient blood
samples. To date, none of our patients have shown any sign of PERV.
Current transplantation technology generally requires that the patient's
immune system be suppressed in order to avoid rejection of transplanted cells. T
cells, the main cells involved in directing the body's immune response,
recognize and bind to cell surface proteins known as MHC class I proteins. When
T cells recognize foreign MHC class I proteins, a cascade of events is triggered
which ultimately results in destruction of the transplanted cells that display
these foreign proteins. Cyclosporine, a standard immunosuppressive drug,
prevents this rejection process. Using cyclosporine, we have demonstrated
survival of transplanted porcine cells in a variety of preclinical animal models
and have histologically documented survival of transplanted porcine fetal neural
cells in a deceased patient who had received NeuroCell-PD.
We are also developing proprietary technology to modulate the immune system
to avoid rejection of transplanted cells. We treat isolated cell populations
prior to transplantation with antibody fragments directed against MHC class I
proteins. This technology is designed to eliminate the need for long-term
immunosuppressive drugs. To date the use of our immunomodulation technology in
clinical trials has not resulted in any undesirable side effects. Our scientists
and academic collaborators have performed preclinical studies which show that
cells that have been pretreated using our immunomodulation technology prior to
transplantation survived in several animal models without immunosuppression. The
long-term survival of the transplanted cells seen in these studies suggests that
the recipient's immune system has "learned" to accept the transplant. Thus, we
believe that treatment of cells with antibody fragments prior to transplantation
will induce a state of graft-specific immunological tolerance, which would allow
continued survival of the transplanted cells.
In connection with Phase 1 clinical trials, six Parkinson's disease
patients, six Huntington's disease patients, three focal epilepsy patients, five
stroke patients and five spinal cord injury patients have been transplanted with
antibody-pretreated porcine neural cells, using no immunosuppressive drugs.
Preliminary indications from the Phase 1 NeuroCell-PD clinical trial suggest
that the improvement in Parkinson's disease symptoms that has occurred in
patients transplanted with antibody-treated NeuroCell-PD is comparable to the
improvement shown in patients transplanted with NeuroCell-PD with
immunosuppressive drugs.
Product Development Programs
We are developing products to address human diseases characterized by cell
dysfunction or cell death which represent a broad-based application of our
technologies for cell production and transplantation. Our research and
development expenses were $6.4 million, $6.0 million and $5.9 million for the
years ended December 31, 2001, 2000 and 1999, respectively. The following table
summarizes our product development programs in cell transplantation and each
product's stage of development:
Diacrin Product Development Programs
U.S. Targeted Patient
Product Candidate Disease Indication Population Status
Porcine spinal cord cells Spinal cord injury 200,000 Phase 1
Porcine neural cells Stroke 3,100,000 Phase 1
Porcine neural cells Focal epilepsy 200,000 Phase 1
Porcine neural cells Chronic intractable pain 2,100,000 IND cleared
NeuroCell-PD Parkinson's disease 130,000 Phase 2
(development
suspended)
Human liver cells Cirrhosis 1,100,000 Phase 1
Porcine liver cells Acute liver failure 45,000 Phase 1
Human muscle cells Cardiac disease 200,000 Phase 1
Porcine Spinal Cord Cells for Spinal Cord Injury
The prevalence of spinal cord injury, commonly known as SCI, in the United
States is approximately 200,000, with 13,000 additional SCIs annually. Nearly
80% of the injured patients are males in their late 20s to early 30s. Greater
than 95% of these SCIs are compression injuries, the remainder are cases in
which the cord is severed. The spinal cord in the neck is vulnerable to injury
because of its extreme mobility, and approximately 80% of SCIs occur in this
region. Loss of sensorimotor neuron function due to injury requires lengthy
hospitalization after the initial incident as well as extensive rehabilitative
care. Furthermore, all victims of SCI face a lifelong series of acute and
chronic non-neurological complications that can be life-threatening.
The primary objective of current therapies available for SCIs is to prevent
further injury by physically stabilizing the spine and by inhibiting the
inflammatory response that results from the injury. These strategies attempt to
establish optimal conditions for functional recovery and improve patients'
rehabilitative potential. Surgery is designed to protect the patient from
further injury through immobilization, spinal cord realignment and
stabilization, and decompression. To date, there is no drug therapy available
for SCIs except palliative therapies using the corticosteroid,
methylprednisolone, to reduce inflammation of the injured area, and standard
medical practice for complications arising from chronic denervation.
We believe that the transplantation of porcine fetal spinal cord cells into
the site of injury of a damaged human spinal cord may partially reestablish
neural pathways. The transplantation of these cells into a recently injured cord
may prevent secondary neural and muscular atrophy known to occur in these
patients. Partial or full recovery of limb movement, and other motor neural
pathways may reduce the overall time spent in the hospital, decrease the
secondary equipment required for care, and reduce severe and life threatening
complications arising from the injury.
We have initiated a six-patient, Phase 1 clinical trial at Albany Medical
Center in Albany, New York and at Washington University Medical Center in St.
Louis. As of March 15, 2002, we had treated five patients in this trial. We hope
to determine from this trial whether porcine fetal spinal cord cells
transplanted into the damaged spinal cord region will engraft and repair the
damage, leading to improved mobility and function.
Porcine Neural Cells for Stroke
Stroke is the third leading cause of death in the United States, ranking
behind coronary artery disease and cancer. It is also the leading cause of
long-term disability in the United States. Approximately 600,000 people suffer a
stroke each year and there are 4.4 million people that have been disabled by
stroke in the United States. A stroke occurs when the blood supply to a part of
the brain is suddenly interrupted. When blood flow to the brain is interrupted,
some brain cells die immediately, while others will die days or weeks after the
stroke. The death of these brain cells creates a void which becomes a fluid
filled cavity in the brain.
Current therapies for stroke target the early events that occur at the time
of the stroke. Timely intervention with surgery or with non-invasive therapies
that restore blood flow can limit the cell death that occurs. Therapies include
surgical intervention to remove a clearly defined clot or anticoagulant therapy
to "break up" the clot formation. All current therapies are most effective when
administered as quickly as possible after the stroke, and there is a time
post-stroke (12-24 hours) after which therapeutic intervention is useless in
limiting brain cell death.
Our approach of using porcine fetal neural cell transplantation is based on
the premise that many patients who have survived but not fully recovered from a
stroke may benefit from the introduction of cells that may repair or replace the
damaged neural circuitry. We and others have demonstrated in numerous animal
studies the feasibility of repairing and restoring function to a stroke-damaged
brain. In an animal model of stroke, we have shown that transplanted porcine
fetal neural cells survive at high frequency. These cells not only survived in
the brain cavity, but formed solid grafts that integrated appropriately with the
normal brain tissue surrounding the cavity. We have observed extensive neural
outgrowth from the graft to the surrounding brain and behavioral improvements in
a rat model of stroke after transplantation of porcine fetal neural cells. The
transplanted cells have the capacity to form billions of new synaptic
connections as well as to release other chemicals that promote neural cell
growth.
We initiated a six-patient, Phase 1 clinical trial using porcine fetal
neural cells in stroke patients in Boston, Massachusetts at Beth Israel
Deaconess Medical Center and Brigham and Women's Hospital. In April 2000, this
Phase 1 clinical trial was suspended by the FDA to allow investigation of the
cause of two serious adverse events. At the time the trial was suspended we had
treated 5 patients. Both patients who suffered adverse events have recovered
from their adverse event. We have reviewed the scientific and clinical
information relating to these adverse events and concluded that they were most
likely associated with the surgical procedure used to implant the cells. This
conclusion has been supported by an independent group of experts convened by
Diacrin. We are now working with the FDA to obtain clearance to continue
recruiting patients in this trial, which we expect will occur in the first half
of 2002.
Porcine Neural Cells for Focal Epilepsy
Epilepsy is a chronic, recurrent disorder characterized by excessive
neuronal discharge in the brain, causing muscle spasms or convulsions. Epileptic
seizures are usually associated with some alteration of consciousness. Epilepsy
is one of the most common neurological disorders and is estimated to affect 1.8
million people in the United States. The only currently available treatments for
epilepsy are drug therapy and surgery. A number of anti-epileptic drugs are
available to treat seizures. However, these drugs fail to control seizure
activity in a significant number of patients and frequently cause side effects
that range in severity from minimal impairment of the central nervous system to
death from liver failure. By several estimates, approximately 200,000 patients
with complex partial epilepsy have seizures that are not well-controlled with
currently available drug therapy. The seizures are of many different types and
arise as a result of diverse pathologies. Other therapies available to these
patients are surgical removal of portions of the temporal or frontal lobe and
vagal nerve stimulation through an implantable device. We believe that
transplantation of porcine fetal neural cells will be preferable to removal of
brain tissue if the transplantation is shown to be safe and efficacious.
Our initial therapeutic focus in this area is in the treatment of patients
with complex partial seizures, which are characterized by a focal onset and a
loss of consciousness. Because focal epilepsy is characterized by excessive
electrical activity in a localized area of the brain and the spread of this
activity through the brain, our approach to therapy is to transplant porcine
fetal neural cells in order to exert an inhibitory effect on the hyperexcitable
brain region.
We have initiated a six-patient, Phase 1 clinical trial of porcine fetal
neural cells at Beth Israel Deaconess Medical Center and Brigham and Women's
Hospital in Boston, SUNY Health Science Center in Syracuse, New York and Emory
University in Atlanta, Georgia. As of March 15, 2002, we had treated three
patients in this trial.
Porcine Neural Cells for Chronic Intractable Pain
Chronic intractable pain can be caused by neuropathologic processes in
tissues and organs, or by prolonged dysfunction of peripheral or central nervous
system pathways. Chronic intractable pain is characterized by the death of
inhibitory neural cells in the spinal cord and cannot be relieved even with pain
killers such as morphine. It is estimated that 500,000 individuals in the United
States suffer from unrelieved chronic pain as a result of these peripheral
neuropathies. Peripheral neuropathies can also be associated with diseases such
as HIV, diabetes and cancer. Many patients with malignant disease develop
chronic intractable pain, and the prevalence of severe pain in cancer patients
increases as the disease progresses to the advanced stages. There are an
estimated 1.6 million cancer patients who experience chronic intractable pain in
the United States.
We intend to use porcine fetal neural cells to alleviate chronic pain by
repopulating inhibitory neural cells to recover appropriate neurotransmission in
the spinal cord. We have demonstrated in animal studies a favorable safety
profile and survival of porcine fetal inhibitory neural cells transplanted into
the dorsal horn of the spinal cord. Our Investigational New Drug Application,
commonly referred to as IND, has been cleared by the FDA and we plan to initiate
a six-patient, Phase 1 clinical trial in 2002 at New England Medical Center in
Boston, Washington University Medical Center in St. Louis, Missouri and
University of Washington in Seattle, Washington.
NeuroCell-PD for Parkinson's Disease
Parkinson's disease is a neurodegenerative disease that results from the
loss of dopamine-producing neural cells within an area of the brain called the
substantia nigra, causing the loss of coordinated muscular activity. The disease
is generally characterized by progressively worsening physical conditions,
including difficulty in movement, muscular rigidity, tremors and postural
instability. In addition to a decreased quality of life, Parkinson's disease may
also result in premature death. In the United States, there are approximately
500,000 people afflicted with Parkinson's disease. The majority of Parkinson's
disease patients are first diagnosed between the ages of 45 and 65. NeuroCell-PD
will be directed to the treatment of patients with advanced Parkinson's disease,
which we estimate to be approximately 130,000 patients in the United States. We
expect the prevalence of Parkinson's disease to increase with the increasing
average age of the population.
Current therapies consist of administration of levodopa, commonly known as
L-dopa, a precursor of dopamine, and dopamine analogues. However, L-dopa is only
effective for a limited period of time, with most patients experiencing a
progressive reduction in drug efficacy over a 10 to 15 year period, due to the
cumulative loss of viable neural cells and tolerance to L-dopa. In addition,
L-dopa therapy can result in severe side-effects, including uncontrolled
movements, also known as dyskinesia, and hallucinations. No currently available
therapy prevents progression of the neurological deficits caused by Parkinson's
disease.
Clinical researchers have shown that transplantation of human fetal neural
cells into Parkinson's disease patients is effective in treating the disease.
For example, Swedish researchers have demonstrated survival and function of
transplanted human fetal neural cells in Parkinson's disease patients in an
ongoing study which commenced in 1989. This study has shown long-term survival
of cells and improvements in patients' conditions. However, the lack of
availability of human fetal neural cells and ethical concerns regarding the use
of human fetal tissue limit its widespread clinical application. Moreover, even
when available, the quality of human fetal neural cells is variable, which may
limit the clinical effectiveness of this treatment.
Our approach to the treatment of Parkinson's disease is to produce and
transplant NeuroCell-PD to replace the function of those neural cells damaged by
the disease. We and our collaborators have shown in animal models that
transplanted porcine fetal neural cells become integrated into the surrounding
brain tissue and correct functional deficits. While NeuroCell-PD is not a cure
for Parkinson's disease, the goal of this treatment is to significantly improve
the clinical condition of patients with severe Parkinson's disease in order to
allow them to function independently.
Our twelve-patient Phase 1 clinical trial of NeuroCell-PD, which completed
enrollment in October 1996, was the first FDA-authorized trial involving
transplantation of porcine cells into humans. Although the study was designed to
evaluate the safety of NeuroCell-PD, we also evaluated its effects on the
Parkinson's disease symptoms of the transplant recipients. Each of the twelve
patients in the study received approximately 12 million cells transplanted
unilaterally (one side of the brain). A histological study of one of the
patients, who died of causes unrelated to the transplant, published in the March
1997 issue of Nature Medicine, demonstrated that porcine fetal neural cells
survived and matured in his brain. This study marked the first published
documentation of the survival of cells transplanted from another species into
the human brain and the appropriate growth of the non-human neural cells in the
brain of a Parkinson's disease patient.
Our clinical evaluators observed clinical improvement in the Parkinson's
disease patients beginning approximately three months after transplantation. The
patients who have been followed demonstrated statistically significant clinical
improvement at one year, two years and three years post transplantation as
measured by the Unified Parkinson's Disease Rating Scale.
In 1996, we formed Diacrin/Genzyme LLC with Genzyme, a joint venture
to develop and commercialize NeuroCell-PD and a previously suspended product
candidate, NeuroCell-HD. We refer to NeuroCell-PD and NeuroCell-HD as the joint
venture's product candidates. In 1999, our joint venture with Genzyme completed
accrual of patients in an 18-patient pivotal, randomized, double-blinded,
placebo-controlled Phase 2 clinical trial involving the transplantation of
NeuroCell-PD in conjunction with cyclosporine immunosuppression versus a control
group. Each of the treated patients in this trial received approximately 48
million cells transplanted bilaterally (both sides of the brain). In March 2001,
the trial was unblinded and we announced a preliminary analysis of the results.
We did not see a statistically significant difference between the treated
patients and the patients in the control group and, therefore, did not meet the
primary endpoint in the trial. Development is currently suspended while we
gather and evaluate additional clinical data.
Human Liver Cells for Cirrhosis
Cirrhosis of the liver is a common affliction in the United States,
affecting an estimated 1.5 million individuals and leading to approximately
50,000 deaths annually. In cirrhosis, liver tissue is progressively lost due to
accumulation of fibrous tissue and scarring, and liver function is compromised
due to the degenerative changes. The most common causes of cirrhosis are viral
hepatitis B and C infections and alcoholic liver disease. In the initial stages
of the disease, the patient may experience jaundice and disorientation as liver
function decreases. As the disease progresses, the patient will be hospitalized
with increasing central nervous system effects, known as encephalopathy, which
may lead to coma. The tremendous reserve of liver tissue allows the continued
function of the organ, despite loss of up to 90% of the normal complement of
liver cells. In advanced cirrhosis, little normal liver tissue remains.
The only effective therapy for advanced cirrhosis is liver transplantation.
However, the United Network of Organ Sharing has documented a national lack of
donor livers for transplantation, resulting in a waiting period of over two
years for the average patient. Over 5,000 individuals await liver transplants in
the United States and about 4,000 liver transplants are performed per year for
all indications. Recently, artificial extra-corporeal liver assist devices,
commonly known as ELAD, containing porcine or human liver cells attached to a
dialysis cartridge have been used in an attempt to treat liver failure in
advanced cirrhosis. Studies to date suggest that ELAD may improve some
biochemical parameters such as ammonia levels but the devices have not resulted
in increased survival. Human whole liver transplantation has also been used in
both acute and chronic liver failure. In pilot clinical trials by others,
transplantation of liver cells into either the liver or the spleen has been
shown to be both safe and potentially effective in humans as a bridge to whole
liver transplantation.
For chronic liver disease, we and others have shown in animal models that
liver cell integration is possible when liver cells are injected into the liver
or into the spleen. The spleen appears to be the preferred site due to the
fibrosis and loss of blood supply to the cirrhotic liver. In animal models,
transplantation of liver cells into the spleen is well described, and results in
populating parts of the spleen with functioning liver cells that perform normal
liver functions.
We have initiated a six-patient, Phase 1 clinical trial of human liver cell
transplantation for the treatment of cirrhosis in patients that have been listed
for organ transplantation but are likely to wait at least one year before
receiving a transplant. We believe these patients may benefit from the growth of
transplanted liver cells in their liver or spleen leading to an increase in
liver function. In addition, expansion of the cells may allow sufficient
improvement to render a liver transplant unnecessary, unlike the case with ELAD
which are used only as a bridge to transplantation. As part of the clinical
trial, conventional immunosuppression will be compared to the use of our
immunomodulation technology to determine whether graft protection is achieved by
this technique. We are conducting this study in collaboration with Massachusetts
General Hospital, New England Medical Center and at the University of Nebraska
Medical Center in Omaha, Nebraska.
Porcine Liver Cells for Acute Liver Failure
Acute liver failure is a severe life-threatening disease that can result
from alcohol consumption, viral infections, such as hepatitis B and C, and drugs
or toxins that damage the liver. The clinical spectrum of acute liver disease
can vary from patients with severe liver failure to patients without symptoms.
The mortality from acute liver failure can be as high as 70%, with patients
dying from associated complications. Acute liver failure results in
approximately 63,000 deaths annually in the United States.
There is currently no therapy that is beneficial for all patients with
acute liver failure. The best available therapy is liver transplantation.
However, many patients are unable to qualify as candidates for liver
transplantation due to multi-organ failure or active alcohol consumption.
Current therapies attempt to treat complications arising from the acute
condition, such as swelling of the brain, infections, and circulatory collapse.
Our approach to the treatment of acute liver failure is to support the
patient by liver cell transplantation in order to provide liver function while
allowing the patient's own liver to recover. In extensive studies in animal
models, our scientists have shown that porcine liver cells can be isolated and
infused into the recipient liver where they continue to function. Long-term
survival and function of these cells has been demonstrated in these animal
models. We believe liver cell transplantation could become a viable alternative
to whole liver transplantation for the treatment of acute liver disease. We
believe this approach would be preferable to transplantation of a whole liver,
due to the difficulty of obtaining livers for transplantation as well as the
expense and invasiveness of the procedure.
Porcine liver cells will be infused into the spleen or liver of these
patients by minimally invasive procedures, thus avoiding a surgical procedure
for these critically ill patients. In addition to the high level of quality
control that can be maintained over the production of porcine liver cells, these
cells also have the advantage of being resistant to infection by human hepatitis
B and C viruses. Since many of the patients enrolled in this study are likely to
carry these viruses, we believe the resistance of the porcine liver cells to
infection may provide a further advantage over human liver transplantation in
which hepatitis B and C reinfect donor livers.
We have initiated a six-patient, Phase 1 clinical trial and as of March 15,
2002 one patient has been treated. We are currently recruiting patients for this
clinical trial which is being conducted at Massachusetts General Hospital, New
England Medical Center and University of Nebraska Medical Center.
Additional Liver Cell Applications
Successful delivery of liver cells to patients with alcoholic hepatitis or
cirrhosis may provide the possibility of applying this technology to a variety
of other diseases. The preparation of the cells and their delivery by minimally
invasive procedures should be the same in most of these applications, thus
providing a platform that may be used in multiple applications.
Additional applications include the use of liver cells for the treatment of
metabolic diseases resulting from genetic mutations. Familial
hypercholesterolemia is a disease caused by a defective receptor gene for low
density lipoprotein, commonly referred to as LDL, that leads to elevated levels
of LDL cholesterol and coronary disease at an early age. Familial
hypercholesterolemia afflicts approximately 500,000 patients in the United
States. Currently available drugs do not sufficiently lower circulating LDL
cholesterol levels in approximately 20% of these patients, who may thus benefit
from liver cell transplantation. Our scientists have shown through
transplantation of liver cells into a rabbit model of this disease that porcine
liver cells provide the animal with functional receptors that reduce serum LDL
levels. There is a range of additional metabolic disorders that may be
candidates for treatment by liver cell transplantation. Approximately 30,000
patients in the United States suffer from these metabolic disorders.
Human Muscle Cells for Cardiac Disease
Coronary heart disease is the leading cause of death in the United States,
responsible for approximately 1 of every 5 deaths, or approximately 500,000
deaths each year. According to the American Heart Association, approximately 1
million heart attacks occur annually in the United States. Of the 800,000
patients who survive, approximately 200,000 will die within a year. The disease
is caused by the accumulation of plaque, consisting of lipid deposits,
macrophages and fibrous tissue, on the walls of vessels supplying blood to the
heart muscle. Rupture of unstable plaques exposes substances that promote
platelet aggregation and clot formation. The clot is composed of platelets,
blood cells and fibrin that can block one or more of the coronary vessels,
resulting in an inadequate supply of oxygen to the heart muscle. This highly
active muscle is quickly damaged and the lesions are irreversible because heart
muscle cells are not capable of cell division. The end result is an infarct, a
damaged area of heart muscle in which scar tissue and fibrosis replace dead
heart muscles, lowering the ability of the heart to contract and function.
Treatments to prevent tissue damage after a heart attack include drugs that
break down fibrin clots and open up blocked arteries. These drugs have greatly
influenced morbidity and mortality, but must be administered within a short
interval after a heart attack to be effective. Even with current medical
management, over one third of acute heart attacks are fatal. Cardiac
catheterization and angioplasty to dislodge the clot and open the blocked vessel
have proved effective in restoring blood flow, but cannot reverse preexisting
tissue damage.
Our scientists have isolated and expanded muscle cells from human tissue
and are studying the use of these cells for transplantation into damaged heart
muscle. We believe that patients suffering from heart attacks would benefit if
these muscle cells could repair their damaged hearts. These cells would be
isolated from a muscle biopsy of a patient who had suffered a heart attack,
thereby allowing transplantation of a patient's own muscle cells into his or her
heart, which would avoid any rejection. In preclinical studies, we have
demonstrated that muscle cells integrate into rodent heart muscle. The cells
form stable grafts in a damaged heart.
We are currently conducting two Phase 1 clinical trials treating patients
with damaged heart muscle. One clinical trial is treating patients at the same
time they receive a ventricular assist device (VAD) while the other is treating
patients as they undergo coronary bypass surgery (CABG). The VAD is implanted in
patients in order to maintain heart function while they wait for a donor heart
to become available. Our clinical trial involves implantation of 300 million
myoblasts in six patients. After the patient is transplanted with a new heart,
we are able to histologically examine the old heart. Preliminary results from
one heart showed that cells survive and new blood vessel formation was
stimulated. The clinical trial involving CABG patients is a 12-patient dose
escalation trial, with safety being evaluated at doses ranging from 10 million
to 300 million cells. It is planned that all patients will be enrolled in this
trial by mid-2002.
Our clinical trials are being conducted at six medical centers,
including Temple University Hospital in Philadelphia, Pennsylvania, the
University of Michigan in Ann Arbor, Michigan, the UCLA Medical Center in Los
Angeles, California, The Cleveland Clinic in Cleveland, Ohio, the Arizona Heart
Institute in Phoenix, Arizona and Ohio State University in Columbus, Ohio. As
of March 15, 2002, we had treated 13 patients in these clinical trials.
Manufacturing
The manufacture of most of our products will require the continuous
availability of porcine tissue harvested under cGMP from pigs tested to be free
of infectious agents. Our current source of pig facilities and services is
obtained under contracts from Tufts University School of Veterinary Medicine and
PharmServices, Inc., a division of Charles River Laboratories, Inc. We have also
qualified several pig producers to provide pigs for our production processes.
We currently obtain the antibody fragments used in our immunomodulation
technology from a contract manufacturer. We will evaluate on an ongoing basis
the cost effectiveness and other relevant factors necessary to determine whether
we should continue to obtain the antibody fragment from a contract manufacturer
or produce them ourselves.
We isolate and prepare cell populations in our own clinical production
facilities in Charlestown, Massachusetts. Our long-range plan is to expand our
internal manufacturing capabilities, including the facilities necessary to test,
isolate and package an adequate supply of finished cell products in order to
meet our long-term clinical and commercial manufacturing needs.
Patents and Licenses
We intend to aggressively seek patent protection for any products we
develop. We also intend to seek patent protection or rely upon trade secrets to
protect certain of our technologies which will be used in discovering and
evaluating new products. We have 16 issued U.S. patents and 20 patent
applications pending with the United States Patent and Trademark Office. We have
also filed foreign counterparts in the European Union and other selected
countries. These applications seek composition-of-matter and use protection for
the various products we have in development.
Massachusetts General Hospital has been awarded two patents in the United
States covering the basic immunomodulation technology we use. Foreign
counterparts of these patents have been filed in the European Union and other
selected countries. Under an agreement with MGH, we have an exclusive, worldwide
license to the technology and the inventions described in the patents, and all
foreign counterparts, including any continuations, reissues or substitutions as
well as any patents and equivalents which may mature from such patents, subject
to the payment of royalties. Unless sooner terminated, our rights will continue,
on a country by country basis, until the last patent expires. We or MGH may
terminate the agreement, upon notice, in the event the other party defaults in
its material obligations and has failed to cure this default within 60 days of
receipt of written notice of the default.
To protect our trade secrets and other proprietary information, we require
all employees, consultants, advisors and collaborators to enter into
confidentiality agreements with us.
Sales and Marketing
We have not yet developed sales and marketing capabilities for our product
candidates. We may form strategic alliances with established pharmaceutical or
biotechnology companies in order to finance the development of certain of our
products and, assuming successful development, to market such products. These
alliances may enable us to expand or accelerate our product development efforts
and also may provide us with access to established marketing organizations.
Alternatively, we may decide to market some of our products on our own.
Government Regulation
Regulation by governmental authorities in the United States, the European
Union member states and other foreign countries is a significant factor in the
development, manufacture and marketing of our product candidates and in our
ongoing research and product development activities. All of our products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, human therapeutic products are subject to rigorous testing and
approval procedures by the FDA and similar authorities in foreign countries.
Various statutes and regulations govern the preclinical and clinical testing,
manufacturing, labeling, distribution, advertising and sale of these products.
The process of obtaining these approvals and the subsequent compliance with
applicable statutes and regulations require the expenditure of substantial time
and financial and other resources.
Preclinical testing is generally conducted in the laboratory on animals to
evaluate the potential efficacy and the safety of a product. In the United
States, the results of these studies are submitted to the FDA as part of an IND
application, which must receive FDA clearance before human clinical testing can
begin. Clinical trials are typically conducted in three phases which may
overlap. Generally, in Phase 1, clinical trials are conducted with a small
number of human subjects to determine the early safety profile. In Phase 2,
clinical trials are conducted with groups of patients afflicted with the
specific disease in order to determine preliminary efficacy, optimal treatment
regimens and expanded evidence of safety. Where a product candidate is found to
have an effect at an optimal dose and to have an acceptable safety profile in
Phase 2, larger scale, multi-center, randomized and blinded Phase 3 clinical
trials are conducted with patients afflicted with the target disease to further
test for safety, to further evaluate clinical effectiveness and to obtain
additional information for labeling. In addition, the FDA may request
post-marketing (Phase 4) monitoring of the approved product, during which
clinical data are collected on selected groups of patients to monitor
longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center for
Biologic Evaluation and Research, commonly referred to as CBER, the results of
preclinical and clinical testing are submitted to the FDA in the form of a
Biologics License Application, commonly referred to as BLA, for approval to
manufacture and commence commercial sales. In responding to these applications,
the FDA may grant marketing approval, request additional information or deny the
application if it determined that the application does not satisfy the agency's
regulatory approval criteria. We expect that CBER will regulate all of our
product candidates.
The nature of the marketing claims we will be permitted to use for labeling
and advertising will be limited to those allowed in the FDA's approval. Claims
beyond those approved would constitute a violation of the Food, Drug & Cosmetic
Act or the FD&C Act. Noncompliance with the provisions of the FD&C Act or Public
Health Service Act can result in, among other things, loss of approval,
voluntary or mandatory product recall, seizure of products, fines, injunctions
and civil or criminal penalties. Our advertising is also subject to regulation
by the Federal Trade Commission under the FTC Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. Violation can result in a variety of enforcement actions including
fines, injunctions and other remedies.
In the European member states and other foreign countries, our ability to
market a product is contingent upon receiving marketing authorization from the
appropriate regulatory authorities. The requirements governing the conduct of
clinical trials, marketing authorization, pricing and reimbursement vary widely
from country to country. Generally, we intend to apply for foreign marketing
authorizations at a national level. However, within the European Union,
procedures are available to companies wishing to market a product in one or all
European Union member states. This centralized process is conducted through the
European Medicines Evaluation Agency, known as the EMEA. The EMEA coordinates
the regulatory process, while a body of experts drawn from member states
undertakes the scientific assessment of the product and recommends whether a
product satisfies the criteria of safety, quality and efficacy for approval. If
the authorities are satisfied that adequate evidence of safety, quality and
efficacy has been presented, a marketing authorization will be granted. This
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above. We may rely on licensees to obtain regulatory
approval for marketing certain of our products in certain European Union member
states or other foreign countries.
We are also subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds, infectious disease agents and recombinant DNA materials used in
connection with our research work.
We intend to take advantage of the regulatory pathways which may provide
expedited review of our cell transplantation products and allow limited cost
recovery during the clinical research phase. These include: (1) expedited review
for more effective or better tolerated therapies for serious conditions,
commonly referred to as fast track designation, and (2) seeking approval for
limited cost recovery during clinical testing under treatment IND status. We
also intend to seek marketing exclusivity for products which qualify for orphan
drug status, where appropriate.
Fast Track Designation. In 1997, Congress enacted the Food and Drug
Administration Modernization Act, in part, to ensure the availability of safe
and effective drugs by expediting the FDA review process for new products. This
act establishes a statutory program for the approval of fast track products. A
fast track product is defined as a new drug intended for the treatment of a
serious or life-threatening condition, which demonstrates the potential to
address unmet medical needs. Under the fast track program, the sponsor of a new
drug may request the FDA to designate the drug as a fast track product at the
time of the IND submission or after. If a preliminary review of the clinical
data suggests that a fast track product may be effective, the FDA may initiate
review of sections of a marketing application for a fast track product before
the sponsor completes the application. NeuroCell-PD was granted fast track
designation in 1999.
Treatment IND. Treatment IND is a mechanism established by the FDA in 1987
which allows a company to distribute promising investigational therapies to
patients outside of the established clinical trials and to charge a reasonable
fee for such therapy. The disease must be serious or life-threatening and there
must not be satisfactory alternative treatments. Treatment IND status has been
applied to a variety of diseases including cancer, AIDS, Parkinson's disease,
Alzheimer's disease and multiple sclerosis and to several anti-infectives for
renal transplant patients. We intend to pursue this designation, where
appropriate.
Orphan Drug Status. The Orphan Drug Act generally provides incentives to
manufacturers to undertake development and marketing of products to treat
relatively rare diseases or diseases where fewer than 200,000 persons in the
United States would be likely to receive the treatment. A drug that receives
orphan drug designation by the FDA and is the first product to receive FDA
marketing approval for its product claim is entitled to a seven-year exclusive
marketing period in the United States for that product claim. The FDA may
terminate an orphan drug designation for many reasons, including if the
manufacturer of the orphan drug product cannot provide an adequate supply of the
product. Furthermore, a drug that the FDA considers to be different from a
particular orphan drug is not barred from sale in the United States during such
seven-year exclusive marketing period. Legislation to limit the marketing
exclusivity provided for certain orphan drugs has occasionally been introduced
in Congress. Although the outcome of that legislation is uncertain, future
legislation may limit the incentives currently afforded to the developers of
orphan drugs.
We have assigned to our joint venture with Genzyme the orphan drug
designation we received from the FDA for the joint venture's product candidates.
Our porcine fetal spinal cord cells for spinal cord injury product is also
targeted to a population of less than 200,000 and, therefore, we will pursue
orphan drug designation for this product candidate.
Competition
We believe that our ability to compete successfully will be based on our
ability to create and maintain scientifically advanced technology, develop
proprietary products and attract and retain qualified scientific personnel. In
addition, we have to obtain adequate financing, patents, orphan drug designation
or other protection for our products, and required regulatory approvals, and to
manufacture and successfully market our products both independently and through
collaborators.
The biopharmaceutical and pharmaceutical industries are characterized by
intense competition. We compete against numerous companies, many of which have
substantially greater financial and other resources than we do. Private and
public academic and research institutions also compete with us in the research
and development of human therapeutic products. In addition, many of our
competitors have significantly greater experience than we do in the testing of
pharmaceutical and other therapeutic products and obtaining FDA and other
regulatory approvals of products for use in health care. Accordingly, our
competitors may succeed in obtaining FDA approval for products more rapidly than
we do. If we commence significant commercial sales of our products, we will also
be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which we have limited or no experience.
Our products under development will compete with products and therapies
which are either currently available or currently under development. Competition
will be based, among other things, on efficacy, safety, reliability, price,
availability of reimbursement and patent position. We are aware of other
companies which are pursuing research and development of alternative products or
technologies addressing the same disease categories as our development programs.
Employees
As of March 15, 2002, we had 30 full-time employees, 23 of whom were
engaged in research, development, clinical and quality assurance/quality control
activities. None of our employees are represented by a labor union or covered by
a collective bargaining agreement.
Item 2. Properties
We lease a facility which contains approximately 25,000 square feet of
space in Charlestown, Massachusetts. The current lease has a five-year term
ending in 2006, providing for a base rental rate of approximately $75,000 per
month, plus applicable property taxes and insurance. We have the right to extend
the lease an additional five years commencing in 2006. Our facilities are
equipped with laboratory and cell culture capabilities sufficient to satisfy our
research and development requirements for the foreseeable future and cell
isolation capabilities sufficient to satisfy the clinical production
requirements of several of our product candidates. To the extent that additional
similar facilities may be required, we will be required to secure additional
facilities or seek outside contractors to provide such capabilities.
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders, through
solicitation of proxies or otherwise, during the last quarter of the fiscal year
ended December 31, 2001.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of the Company:
Name Age Position
Thomas H. Fraser, Ph.D. 54 President and Chief Executive Officer;
Director
E. Michael Egan 48 Chief Operating Officer
Kevin Kerrigan 31 Controller
Jonathan H. Dinsmore, Ph.D. 40 Senior Director of Cell Transplantation
Roger J. Gay, Ph.D. 48 Senior Director of Process Development
Abdellah Sentissi, Ph.D. 52 Senior Director of Quality Control
and Quality
Douglas B. Jacoby, Ph.D. 41 Director of Research
Zola P. Horovitz, Ph.D. (1) 67 Director
John W. Littlechild (2) 50 Director
Stelios Papadopoulos, Ph.D.(1)(2) 53 Director
Joshua Ruch (1) 52 Director
Henri A. Termeer (2) 55 Director
(1) Member of Audit Committee
(2) Member of Compensation Committee
Thomas H. Fraser, Ph.D., has served as our President and Chief Executive
Officer and as a Director since 1990. Dr. Fraser was previously Executive
Vice President, Corporate Development, for Repligen Corporation, a
biopharmaceutical company. Dr. Fraser was the founding Vice President for
Research and Development at Repligen in 1981 and served as Executive Vice
President from 1982 through 1990 as well as Chief Technical Officer from
1982 through 1988. Prior to joining Repligen, Dr. Fraser headed the
recombinant DNA research group in Pharmaceutical Research and Development at
The Upjohn Company, a pharmaceutical company. Dr. Fraser received his Ph.D.
in Biochemistry from the Massachusetts Institute of Technology and was a Damon
Runyon-Walter Winchell Cancer Fund Postdoctoral Fellow at The University of
Colorado.
E. Michael Egan was promoted to Chief Operating Officer in January 2001.
Prior to that, Mr. Egan had served as our Senior Vice President, Corporate
Development, since 1993. Mr. Egan joined us from Repligen, where he was employed
from 1983 to 1993, and since 1989 had been Vice President of Business
Development. He was also a member of the Board of Directors of Repligen Clinical
Partners, L.P., and the Secretary/Treasurer of Repligen Sandoz Research
Corporation. Mr. Egan's previous positions at Repligen include Director of
Business Development and Manager of Business Development. Prior to joining
Repligen in 1983, Mr. Egan was a laboratory supervisor at Dana-Farber Cancer
Institute, Division of Medicine. He received a B.S. in biology from Boston
College and a Certificate of Special Studies in Administration and Management
from Harvard University in 1986.
Kevin Kerrigan has served as our Controller since November 1998. Mr.
Kerrigan joined us in 1997 as Accounting Manager. From 1993 to 1997 Mr.
Kerrigan was a member of the professional staff of Price Waterhouse LLP.
Mr. Kerrigan received a B.S. degree in accounting from Merrimack College
and was awarded a CPA certificate from the Commonwealth of Massachusetts in
1993.
Jonathan H. Dinsmore, Ph.D., has been Senior Director of Cell
Transplantation Research since April 1999. He joined Diacrin in 1992 as a
Research Scientist and was subsequently promoted to Principal Investigator and
then Director of Cell Transplantation Research. Dr. Dinsmore was previously a
Postdoctoral Fellow of the American Cancer Society in the Biology department at
the Massachusetts Institute of Technology from 1988 to 1992. He received a Ph.D.
in biology from Dartmouth College, where he was a Presidential Scholar and
recipient of a Kramer Fellowship. Dr. Dinsmore has worked on National Science
Foundation-sponsored research projects at the Marine Biological Laboratories in
Woods Hole, Massachusetts and at a United States research base in Antarctica.
Roger J. Gay, Ph.D., has been Senior Director of Process Development
since February 2000. Dr. Gay was hired by Diacrin in 1993 as Director of
Process Development. From 1986 through 1993, he was Director of Product
Development at Organogenesis, Inc. Dr. Gay's previous positions were Manager
of a Contract Research and Cytotoxicity Testing Laboratory and Director of
Product Development at Bioassay Systems Research Corporation from 1982 to
1986. He received a B.A. in chemistry from the College of the Holy Cross in
1975 and a Ph.D. in biochemistry from the University of Rochester in 1981.
From 1981 through 1983, he was a postdoctoral research fellow in the
Department of Microbiology and Molecular Genetics at Harvard Medical School.
Abdellah Sentissi, Ph.D., has been Senior Director of Quality Control and
Quality Assurance since February 2000. Dr. Sentissi came to Diacrin in 1995 as
Director of Quality Control and Quality Assurance. Prior to joining Diacrin,
from 1992 to 1995, he served as the Director of QC/QA and Technical Affairs at
Endocon, Inc. From 1985 through 1992, he was the Chief of Quality Control at
Massachusetts Biologics Laboratories. He received a pharmacy degree in 1973 and
a biology degree in 1976 from the University of Paul Sabatier, Toulouse, France,
and a Ph.D. in biomedical sciences from Northeastern University in 1984. From
1984 through 1985, he was a postdoctoral research fellow in the Department of
Clinical Chemistry at Northeastern University. He has been a lecturer in
pharmaceutical biotechnology at the School of Pharmacy at Northeastern
University since 1990.
Douglas B. Jacoby, Ph.D., was appointed Director of Research in April 1999.
He joined Diacrin in 1993 as a Research Scientist and was subsequently promoted
to Principal Investigator. While a postdoctoral fellow in the Biochemistry
department at Brandeis University, Dr. Jacoby was awarded a fellowship from the
NIH. He received his Ph.D. in Biochemistry from the University of Minnesota with
awards from the NIH and a Doctoral Dissertation Fellowship. He was graduated
with an A.B. in Biology from Kenyon College.
Zola P. Horovitz, Ph.D., has served as a Director of Diacrin since 1994.
Dr. Horovitz was Vice President, Business Development and Planning at
Bristol-Myers Squibb Pharmaceutical Group from 1991 until 1994 and was Vice
President, Licensing from 1989 to 1991. Prior to 1989, Dr. Horovitz spent 30
years as a member of the Squibb Institute for Medical Research, most recently
as Vice President, Research Planning. Dr. Horovitz is also a director of
Avigen, Inc., BioCryst Pharmaceuticals, Genaera Pharmaceuticals,
Paligent, Synaptic Pharmaceuticals, Inc. and Palatin Technologies. Dr. Horovitz
received his Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of Diacrin since 1992. Mr.
Littlechild is associated with several venture capital partnerships managed by
HealthCare Ventures LLC, including HealthCare Ventures II, L.P., HealthCare
Ventures III, L.P., and HealthCare Ventures IV, L.P. Mr. Littlechild currently
serves as Vice Chairman of HealthCare Ventures LLC. From 1984 to 1991, Mr.
Littlechild was a Senior Vice President of Advent International Corporation, a
venture capital company in Boston and London. Prior to working at Advent in
Boston, Mr. Littlechild was involved in establishing Advent in the United
Kingdom. From 1980 to 1982, Mr. Littlechild served as Assistant Vice President
for Citicorp Venture Corporation, a venture capital company, in London, prior to
which he worked with ICI Ltd., an agro-chemical company, and Rank Xerox, an
office equipment company, in marketing and financial management. Mr. Littlechild
holds a B.Sc. (1st class honors) from the University of Manchester and an MBA
from Manchester Business School. Mr. Littlechild serves on the board of
directors of various health care and biotechnology companies, including Dyax, a
biotechnology company, and Orthofix International N.V., a medical device
company. Mr. Littlechild also serves on several Boards for the Harvard Medical
School including the Executive Committee of the Board of Fellows, the Science
and Technology Committee, and is Chairman of the Microbiology Department
Advisory Board. He is also a member of the Board of Visitors of the Beth Israel
Deaconess Center for Research and Education.
Stelios Papadopoulos, Ph.D., has been a Director of Diacrin since 1991. Dr.
Papadopoulos is a Managing Director in the investment banking division at SG
Cowen Securities Corporation focusing on the biotechnology and pharmaceutical
sectors. Prior to joining SG Cowen Securities Corporation in February 2000, he
spent 13 years as an investment banker at PaineWebber, where he was most
recently Chairman of PaineWebber Development Corp., a PaineWebber subsidiary.
Prior to becoming an investment banker he spent two years as a biotechnology
analyst, first at Donaldson, Lufkin & Jenrette and subsequently at Drexel
Burnham Lambert, where he was elected to the Institutional Investor 1987
All-American Research Team. Before coming to Wall Street in 1985, Dr.
Papadopoulos was on the faculty of the Department of Cell Biology at New York
University Medical Center. He continues his affiliation with NYU Medical Center
as an Adjunct Associate Professor of Cell Biology. Dr. Papadopoulos holds a
Ph.D. in biophysics and an MBA in finance, both from New York University. He is
a founder and Chairman of the Board of Exelixis, Inc., and sits on the board of
several private companies in the biotechnology sector.
Joshua Ruch has been a Director of Diacrin since March 1998. Mr. Ruch is
the Chairman and Chief Executive Officer of Rho Capital Partners, Inc., an
international investment management firm which he co-founded in 1981. Prior to
founding Rho, Mr. Ruch was employed in investment banking at Salomon Brothers
and Bache Halsey Stuart, Inc. Mr. Ruch received a B.S. degree in electrical
engineering from the Israel Institute of Technology (Technion) and an MBA from
the Harvard Business School. Mr. Ruch also serves on the board of directors of
3-Dimensional Pharmaceuticals, Inc. as well as several private companies in
the technology sector.
Henri A. Termeer has been a Director of Diacrin since December 1996. Mr.
Termeer has served as President and Director of Genzyme Corporation, a
biopharmaceutical company, since 1983, as Chief Executive Officer since 1985 and
as Chairman of the Board since 1988. For ten years prior to joining Genzyme, Mr.
Termeer held various management positions at Baxter Travenol Laboratories, Inc.,
a manufacturer of human health care products. Mr. Termeer also serves on the
boards of directors of Abiomed, Inc., AutoImmune, Inc., Genzyme Transgenics
Corporation and is a trustee of Hambrecht & Quist Healthcare Investors and
Hambrecht & Quist Life Sciences Investors.
Directors are elected annually by our stockholders and hold office until
the next annual meeting of stockholders or until their resignation or removal.
Each executive officer serves at the discretion of the board of directors and
holds office until his or her successor is elected and qualified or until his or
her earlier resignation or removal. There are no family relationships among any
of our directors or executive officers.
Scientific Advisory Board
Our scientific advisory board is a multi-disciplinary assemblage of
scientists and physicians in the fields of transplantation, immunology,
endocrinology, neurophysiology and neuromuscular physiology, transplantation
biology and surgery. The scientific advisory board meets regularly to review and
evaluate our research programs and advise us with respect to technical matters.
The members of the scientific advisory board are as follows:
Member
Name Since Position
Hugh Auchincloss, Jr., M.D. 1992 Professor of Surgery, Harvard
Medical School; Director, Kidney
Transplantation, Brigham and
Women's Hospital; Surgical
Director, Pancreas Transplantation
and Visiting Surgeon,
Massachusetts General Hospital
Jay A. Berzofsky, M.D., Ph.D. 1992 Chief, Molecular Immunogenetics
and Vaccine Research Section,
Metabolism Branch, National
Cancer Institute, National
Institutes of Health
Robert H. Brown, Jr., M.D., D.Phil. 1992 Director of Cecil B. Day
Laboratory for Neuromuscular
Research, Associate in Neurology,
Massachusetts General Hospital;
Professor of Neurology, Harvard
Medical School
Laurie H. Glimcher, M.D. 1993 Professor of Immunology,
Department of Immunology and
Infectious Diseases, Harvard
School of Public Health; Professor
of Medicine, Harvard Medical
School
Ronald D. McKay, Ph.D. 1998 Chief, Laboratory of Molecular
Biology, National Institute of
Neurological Disorders and Stroke,
National Institutes of Health
David H. Sachs, M.D. 1990 Director, Transplantation Biology
Research Center, Massachusetts
General Hospital; Paul S. Russell/
Warner-Lambert Professor of
Surgery(Immunology), Harvard
Medical School
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock is traded on the NASDAQ National Market under the
symbol DCRN. The following table sets forth for the periods indicated the high
and low sale prices for the common stock during 2000 and 2001 as reported on the
Nasdaq National Market:
High Low
Fiscal Year 2000
First Quarter 19.6875 5.7500
Second Quarter 13.5000 6.3125
Third Quarter 9.6250 6.2500
Fourth Quarter 7.6250 3.8750
Fiscal Year 2001
First Quarter 6.5000 1.1250
Second Quarter 2.9700 1.0500
Third Quarter 2.2000 1.5000
Fourth Quarter 2.1500 1.5000
As of March 15, 2002 there were approximately 105 record holders of our
common stock and approximately 3,500 beneficial owners of our common stock.
We have never declared or paid cash dividends on our capital stock. We
intend to retain earnings, if any, for use in our business and do not anticipate
declaring or paying any cash dividends in the foreseeable future.
We did not sell any equity securities during the quarter ended December 31,
2001 that were not registered under the Securities Act.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 2000 and
2001 and for each of the three years in the period ended December 31, 2001 are
derived from our financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, and which are included elsewhere in this
Annual Report on Form 10-K. The selected financial data set forth below as of
December 31, 1997, 1998 and 1999 and for the years ended December 31, 1997 and
1998 are derived from our financial statements which have been audited by Arthur
Andersen LLP and are not included herein. The data set forth below should be
read in conjunction with our financial statements, related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
-------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except share and per share data)
REVENUES:
Research and development $ 4,763 $ 3,623 $ 2,971 $ 2,082 $ 737
Investment income 1,302 1,576 1,323 3,125 3,150
------- ------- ------- ------ -------
Total revenues 6,065 5,199 4,294 5,207 3,887
------- ------- ------- ------ -------
OPERATING EXPENSES:
Research and development 6,863 7,372 5,921 5,997 6,350
General and administrative 1,460 1,484 1,398 1,348 1,624
Interest expense 93 89 47 30 14
-------- ------ ------- ------ -------
Total operating expenses 8,416 8,945 7,366 7,375 7,988
-------- ------ ------- ------ -------
Equity in operations of joint venture - (1,084) (1,688) (1,369) (547)
-------- ------- ------- ------- -------
Net loss $ (2,351) $(4,830) $(4,760) $(3,537) $(4,648)
======== ======= ======= ======== ========
Net loss per common share:
Basic and diluted $ (.18) $ (.34) $ (.33) $ (.21) $ (.26)
========= ======= ======== ======== =======
Weighted average shares outstanding(1):
Basic and diluted 13,235,286 14,156,179 14,364,154 17,073,194 17,914,889
========== ========== ========== ========== ==========
At December 31,
--------------------------------------------------------
Balance Sheet Data: 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Cash, cash equivalents and investments $ 21,347 $ 26,270 $ 21,420 $ 54,607 $ 49,727
Working capital 9,551 21,812 17,133 32,502 41,078
Total assets 22,780 27,484 22,366 55,793 50,681
Long-term debt 672 392 249 119 -
Stockholders' equity 20,204 24,845 20,145 53,766 49,146
- ---------------------------------------
(1) Computed as described in Note 2 (d) of Notes to Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since our inception, we have principally focused our efforts and resources
on research and development of cell transplantation technology for treating
human diseases that are characterized by cell dysfunction or cell death and for
which current therapies are either inadequate or nonexistent. Our primary source
of working capital to fund those activities has been proceeds from the sale of
equity and debt securities. In addition, since October 1, 1996, we have received
funding from our joint venture with Genzyme in support of the joint venture's
product development programs. We have not received any revenues from the sale of
products to date and do not expect to generate product revenues for the next
several years. We have experienced fluctuating operating losses since inception
and expect that the additional activities required to develop and commercialize
our products will result in increasing operating losses for the next several
years. At December 31, 2001, we had an accumulated deficit of $52.4 million.
In 1996, we formed a joint venture with Genzyme to develop and
commercialize the joint venture's product candidates. We are currently
responsible for funding 25% of the development and commercialization costs of
the joint venture and will share all costs in excess of $50 million equally with
Genzyme. As of December 31, 2001, approximately $33.0 million had been
contributed to the joint venture by Genzyme and approximately $7.6 million had
been contributed by us. Genzyme's President and Chief Executive Officer is a
director of the Company.
Critical Accounting Policies
Our significant accounting policies are discussed in Note 2 of our audited
financial statements which are included in this Form 10-K. We believe our most
critical accounting policies are those that dictate how we recognize revenue and
expense related to the joint venture's activity. We record as research and
development expense all costs related to the joint venture's product candidates
incurred by us on behalf of the joint venture. We then recognize research and
development revenue equal to the amount of reimbursement received by us from the
joint venture out of funds contributed by Genzyme. We do not recognize research
and development revenue for amounts we receive from the joint venture out of
funds contributed by us. As Genzyme incurs costs on behalf of the joint venture
that we are obligated to fund, we recognize an expense in our statement of
operations captioned "Equity in operations of joint venture."
Results of Operations
Year Ended December 31, 2001 Versus Year Ended December 31, 2000
Research and development revenues were approximately $737,000 for the year
ended December 31, 2001 and $2.1 million for the year ended December 31, 2000.
Revenues for both years were comprised entirely of revenue from the joint
venture. The decrease in revenues was primarily a result of a decrease in
clinical production activity related to our joint venture with Genzyme.
Investment income of $3.1 million for the years ended December 31, 2001
and 2000 remained relatively unchanged. We expect our investment income in
2002 will decrease due to a drop in interest rates.
Research and development expenses were $6.4 million for the year ended
December 31, 2001 versus $6.0 million for the year ended December 31, 2000. The
increase in research and development expenses was primarily due to an increase
in the costs associated with sponsoring and managing our clinical trials.
General and administrative expenses were $1.6 million for the year ended
December 31, 2001 versus $1.3 million for the year ended December 31, 2000. The
increase in general and administrative expenses was primarily due to an increase
in personnel costs related to an executive retention plan and an increase in
professional fees incurred as we evaluated strategic relationships.
Interest expense was $14,000 for the year ended December 31, 2001 and
$30,000 for the year ended December 31, 2000. The decrease in 2001 was due to
the scheduled pay down of lease and loan debt outstanding.
For the year ended December 31, 2001, we recorded a $547,000 charge related
to our equity in the operations of the joint venture compared to a $1.4 million
charge for the year ended December 31, 2000. This expense related to funds
contributed by us to the joint venture that were used to fund expenses incurred
by Genzyme on behalf of the joint venture. The decreased charge in 2001 was
primarily due to a decrease in clinical activity performed by Genzyme on behalf
of the joint venture.
We incurred a net loss of approximately $4.6 million for the year ended
December 31, 2001 versus a net loss of approximately $3.5 million for the year
ended December 31, 2000.
Year Ended December 31, 2000 Versus Year Ended December 31, 1999
Research and development revenues were approximately $2.1 million for the
year ended December 31, 2000 and $3.0 million for the year ended December 31,
1999. Revenues for both years were comprised entirely of revenue from the joint
venture. The decrease in revenues was primarily a result of a decrease in
clinical production activity related to our joint venture with Genzyme. The
joint venture completed accruing patients into its Phase 2 clinical trial for
NeuroCell-PD in 1999.
Investment income was $3.1 million for the year ended December 31, 2000
versus $1.3 million for the year ended December 31, 1999. The increase in 2000
was due to greater cash balances available for investment in 2001 as a result
of our public stock offering completed in March 2000.
Research and development expenses of $6.0 million for the year ended
December 31, 2000 and $5.9 million for the year ended December 31, 1999,
remained relatively unchanged between the periods.
General and administrative expenses of $1.3 million for the year ended
December 31, 2000 and $1.4 million for the year ended December 31, 1999,
remained relatively unchanged between the periods.
Interest expense was $30,000 for the year ended December 31, 2000 and
$47,000 for the year ended December 31, 1999. The decrease in 2000 was due to
the scheduled pay down of lease and loan debt outstanding.
For the year ended December 31, 2000, we recorded a $1.4 million charge
related to our equity in the operations of the joint venture compared to a $1.7
million charge for the year ended December 31, 1999. This expense related to
funds contributed by us to the joint venture that were used to fund expenses
incurred by Genzyme on behalf of the joint venture. The decreased charge in 2000
was primarily due to a decrease in clinical activity performed by Genzyme on
behalf of the joint venture as the joint venture completed recruiting patients
into it Phase 2 clinical trial in 1999.
We incurred a net loss of approximately $3.5 million for the year ended
December 31, 2000 versus a net loss of approximately $4.8 million for the year
ended December 31, 1999.
Liquidity and Capital Resources
We have financed our activities primarily with the net proceeds from the
sale of equity and debt securities aggregating $102.0 million and with interest
earned thereon. In addition, we have recorded approximately $15.2 million in
revenue from our joint venture since it commenced on October 1, 1996. At
December 31, 2001, we had cash and cash equivalents, short-term investments and
long-term investments aggregating approximately $49.7 million.
Net cash used in operating activities was $3.9 million for the year ended
December 31, 2001, $2.5 million for the year ended December 31, 2000 and $2.9
million for the year ended December 31, 1999. Cash used in operations for the
years ended December 31, 2001, 2000 and 1999 was primarily attributable to our
net loss, offset in part by our equity in operations of the joint venture.
Net cash provided by investing activities was $1.4 million for the year
ended December 31, 2001. Net cash used in investing activities was $25.6 million
for the year ended December 31, 2000. Net cash provided by investing activities
was $344,000 for the year ended December 31, 1999. Net cash provided by
investing activities for the year ended December 31, 2001, was primarily
attributable to a decrease in long-term investments offset by an increase in
short-term investments. Net cash used in investing activities for the year ended
December 31, 2000, was primarily attributable to an increase in short-term
investments and long-term investments. The increase in investments was due to
our public offering of Common Stock in March 2000. Net cash provided by
investing activities for the year ended December 31, 1999 was primarily
attributable to a decrease in short-term investments and the return of capital
for services provided on behalf of our joint venture, offset in part by our
investment in our joint venture.
Net cash used in financing activities was $102,000 for the year ended
December 31, 2001. Net cash provided by financing activities was $37.0 million
for the year ended December 31, 2000. Net cash used in financing activities was
$220,000 for the year ended December 31, 1999. Net cash used in financing
activities for the year ended December 31, 2001 was primarily attributable to
principal payments made towards long-term debt. Net cash provided by financing
activities for the year ended December 31, 2000 was primarily attributable to
net proceeds from the sale of common stock in a public offering in March 2000.
Net cash used in financing activities for the year ended December 31, 1999 was
primarily attributable to principal payments made towards long-term debt.
In November 1997, we borrowed $650,000 at the prime rate plus 0.5% (5.25%
at December 31, 2001) under an unsecured five-year term loan with a bank to
finance our biomedical animal facility acquired during 1997. As of December 31,
2001, we owed $119,000 under this term loan. We had no material commitments for
capital expenditures as of December 31, 2001. In October 2000, we exercised the
first of two options we have to extend the lease of a facility an additonal five
years. During the extension period, which began in October 2001, we will pay
annual rent of approximately $898,000.
We believe that our existing funds will be sufficient to fund our operating
expenses and capital requirements as currently planned for the foreseeable
future. However, our cash requirements may vary materially from those now
planned because of results of research and development, the scope and results of
preclinical and clinical testing, any termination of the joint venture,
relationships with future strategic partners, changes in the focus and direction
of our research and development programs, competitive and technological
advances, the FDA's regulatory process, the market acceptance of any approved
products and other factors.
We expect to incur substantial additional costs, including costs related to
ongoing research and development activities, preclinical studies, clinical
trials, expanding our cell production capabilities and the expansion of our
laboratory and administrative activities. Therefore, in order to achieve
commercialization of our potential products, we may need substantial additional
funds. We cannot assure you that we will be able to obtain the additional
funding that we may require on acceptable terms, if at all.
Diacrin/Genzyme LLC Financial Statements
For the year ended December 31, 2000, our equity in operations of the joint
venture exceeded 20% of our net loss. Accordingly, pursuant to the rules of the
Securities and Exchange Commission, our prior year Annual Report on Form 10-K
included separate audited financial statements for the joint venture. For the
year ended December 31, 2001, our equity in operations of the joint venture did
not exceed 20% of our net loss. As a result, the current year financial
information with respect to the joint venture presented in this Annual Report on
Form 10-K is unaudited.
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and portions of Accounting Principles Bulletin Opinion
30, Reporting the Results of Operations. This statement provides a single
accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. In addition, it requires expected future operating losses from
discontinued operations to be displayed in the period(s) in which the losses are
incurred, rather than as of the measurement date as presently required. This
statement is effective for fiscal years beginning after December 15, 2001. We
adopted SFAS No. 144 as of January 1, 2002 and, based on current circumstances,
we do not expect the adoption of the statement will have a material impact on
our financial statements.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time. The forward-looking statements contained in this Annual Report on Form
10-K represent our expectations as of March 28, 2002, the date our Annual Report
on Form 10-K was filed with the SEC. Subsequent events will cause our
expectations to change. However, while we may elect to update these
forward-looking statements, we specifically disclaim any obligation to do so.
See "Cautionary Note Regarding Forward-Looking Statements."
Risks Related to Our Business, Industry and Strategy
We have not successfully commercialized any products to date and, if we do
not successfully commercialize any products, we will not be profitable
Neither we nor any other company has received regulatory approval to market
the types of products we are developing. The products that we are developing
will require additional research and development, clinical trials and regulatory
approval prior to any commercial sale. Our product candidates are currently in
early phase clinical trials or in the preclinical stage of development. Our
products may not be effective in treating any of our targeted disorders or may
prove to have undesirable or unintended side effects, toxicities or other
characteristics that may prevent or limit their commercial use.
We currently have no products for sale and do not expect to have any
products available for sale for several years. If we are not successful in
developing and commercializing any products, we will never become profitable.
The evaluation of the unblinded data from our Phase 2 clinical trial of
NeuroCell-PD may not support further development
In March 2001, we unblinded our Phase 2 clinical trial of NeuroCell-PD and
announced a preliminary analysis of the results. We did not see a statistically
significant difference between the treated patients and the patients in the
control group and, therefore, did not meet the primary endpoint in the trial.
While we are still evaluating the data from this clinical trial, it is possible
that further clinical development of NeuroCell-PD by the joint venture will not
be supported by Genzyme, or that we may choose to discontinue development or
modify the clinical trial protocols, which could result in the termination of or
significant delay in the progress of the NeuroCell-PD development program or the
termination of the joint venture.
Our cell transplantation technology is complex and novel and there are
uncertainties as to its effectiveness
We have concentrated our efforts and therapeutic product research on cell
transplantation technology, and our future success depends on the successful
development of this technology. Our principal approach is based upon
xenotransplantation, or the transplantation of cells, tissues or organs from one
species to another. Our product candidates generally involve the transplantation
of porcine (pig) neural cells into humans. Xenotransplantation is an emerging
technology with limited clinical experience. Neither the FDA nor any foreign
regulatory body has approved any xenotransplantation-based therapeutic product
for humans.
Our technological approaches may not enable us to successfully develop and
commercialize any products. If our approaches are not successful, we may be
required to change the scope and direction of our product development
activities. In that case, we may not be able to identify and implement
successfully an alternative product development strategy.
Xenotransplantation involves risks which have resulted in additional FDA
oversight and which in the future may result in additional regulation
Xenotransplantation poses a risk that viruses or other animal pathogens may
be unintentionally transmitted to a human patient. The FDA requires us to
perform tests to determine whether infectious agents, including porcine
endogenous retroviruses, referred to as PERV, are present in patients who have
received porcine cells. While PERV has not been shown to cause any disease in
pigs, it is not known what effect, if any, PERV may have on humans. We have
performed tests on patients who have received our porcine cells. No PERV has
been detected to date, but we cannot assure you that we will not detect PERV or
another infectious agent in the future.
The FDA requires lifelong monitoring of porcine cell transplant recipients.
If PERV or any other virus or infectious agent is detected in tests or samples,
the FDA may require us to halt our clinical trials and perform additional tests
to assess the risk to patients of infection. This could result in additional
costs to us and delays in the trials of our porcine cell products. Furthermore,
even if patients who have received our porcine cells remain PERV-free, we could
be adversely affected if PERV is detected in patients who receive porcine cells
provided by others.
In January 2001, the FDA issued definitive regulatory guidelines for
xenotransplantation titled "PHS Guideline on Infectious Disease Issues in
Xenotransplantation." We cannot assure you that we will be able to comply with
these guidelines.
We face substantial competition, which may result in others discovering,
developing or commercializing products before or more successfully than we do
The products we are developing compete with existing and new products being
developed by pharmaceutical, biopharmaceutical and biotechnology companies, as
well as universities and other research institutions. Many of our competitors
are substantially larger than we are and have substantially greater capital
resources, research and development staffs and facilities than we have. Efforts
by other biotechnology or pharmaceutical companies could render our products
uneconomical or result in therapies for the disorders we are targeting that are
superior to any therapy we develop. Furthermore, many of our competitors are
more experienced in product development and commercialization, obtaining
regulatory approvals and product manufacturing. As a result, they may develop
competing products more rapidly and at a lower cost. These competitors may
discover, develop and commercialize products which render non-competitive or
obsolete the products that we are seeking to develop and commercialize.
If the market is not receptive to our products upon introduction, our
products may not achieve commercial success
The commercial success of any of our products will depend upon their
acceptance by patients, the medical community and third-party payors. Among the
factors that we believe will materially affect acceptance of our products are:
- the timing of receipt of marketing approvals and the countries in which
those approvals are obtained;
- the safety and efficacy of our products;
- the need for surgical administration of our products;
- problems encountered in the field of xenotransplantation;
- the success of physician education programs;
- the cost of our products which may be higher than conventional
therapeutic products because our products involve surgical
transplantation of living cells; and
- the availability of government and third-party payor reimbursement of our
products.
Risks Relating to Clinical and Regulatory Matters
If our clinical trials are not successful for any reason, we will
not be able to develop and commercialize any related products
In order to obtain regulatory approvals for the commercial sale of our
product candidates, we will be required to complete extensive clinical trials in
humans to demonstrate the safety and efficacy of the products. We have limited
experience in conducting clinical trials.
The submission of an investigational new drug application, or IND, may not
result in FDA authorization to commence clinical trials. If clinical trials
begin, we may not complete testing successfully within any specific time period,
if at all, with respect to any of our product candidates. Furthermore, we or the
FDA may suspend clinical trials at any time on various grounds, including a
finding that the patients are being exposed to unacceptable health risks.
Clinical trials, if completed, may not show any potential product to be safe or
effective. Thus, the FDA and other regulatory authorities may not approve any of
our product candidates for any disease indication.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials and the availability of alternative treatments. In
particular, the patient population for some of our potential products is small.
Delays in planned patient enrollment may result in increased costs and program
delays.
We rely on third-party clinical investigators to conduct our clinical
trials. As a result, we may encounter delays outside of our control.
We may not be able to reinitiate a clinical trial that has been suspended
by the FDA
Clinical trials are subject to ongoing review by the FDA. The FDA has the
authority to suspend a clinical trial for various reasons, as they did in April
2000 with respect to our clinical trial using porcine neural cells to treat
stroke patients. Because our products are novel and complex, getting the FDA to
lift a suspension could result in significant program delays and additional
costs to us. It is possible that we may not be able to obtain permission from
the FDA to continue a clinical trial that has been suspended. Cost increases and
ongoing delays as a result of an FDA suspension could result in our decision to
postpone pursuing certain product candidates.
The regulatory approval process is costly and lengthy and we may not be
able to successfully obtain all required regulatory approvals
We must obtain regulatory approval for each of our product candidates
before we can market or sell it. We may not receive regulatory approvals to
conduct clinical trials of our products or to manufacture or market our
products. In addition, regulatory agencies may not grant approvals on a timely
basis or may revoke previously granted approvals. Any delay in obtaining, or
failure to obtain, approvals could adversely affect the marketing of our
products and our ability to generate product revenue.
The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. The time required for FDA and other clearances or
approvals is uncertain and typically takes a number of years, depending on the
complexity and novelty of the product. We have only limited experience in filing
and prosecuting applications necessary to gain regulatory approvals.
Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities which could
delay, limit or prevent regulatory approval. Any regulatory approval to market a
product may be subject to limitations on the indicated uses for which we may
market the product. These limitations may limit the size of the market for the
product.
We also are subject to numerous foreign regulatory requirements governing
the design and conduct of the clinical trials and the manufacturing and
marketing of our future products. The approval procedure varies among countries.
The time required to obtain foreign approvals often differs from that required
to obtain FDA approvals. Moreover, approval by the FDA does not ensure approval
by regulatory authorities in other countries.
Even if we obtain marketing approval, our products will be subject to
ongoing regulatory oversight which may affect the success of our products
Any regulatory approvals that we receive for a product may be subject to
limitations on the indicated uses for which the product may be marketed or
contain requirements for costly post-marketing follow-up studies. After we
obtain marketing approval for any product, the manufacturer and the
manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product, such as
the presence of PERV, or with the manufacturer or facility, may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
Risks Relating to Financing Our Business
We have incurred substantial losses, we expect to continue to incur losses
and we may never achieve profitability
We have incurred losses in each year since our founding in 1989. At
December 31, 2001, we had an accumulated deficit of $52.4 million. We expect to
incur substantial operating losses for the foreseeable future. We have no
material sources of revenue from product sales or license fees. We anticipate
that it will be a number of years, if ever, before we develop significant
revenue sources or become profitable, even if we are able to commercialize
products.
We expect to increase our spending significantly as we continue to expand
our research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities. In particular, we
may devote significant economic resources to funding our joint venture with
Genzyme and to its product development plans. Under the joint venture agreement,
we are currently required to provide 25% of the funding required for the
development and commercialization of NeuroCell-PD and NeuroCell-HD and in the
future will be required to provide 50% of the required funding.
We may require additional financing, which may be difficult to obtain and
may dilute your ownership interest
We will require substantial funds to conduct research and development,
including clinical trials of our product candidates, and to manufacture and
market any products that are approved for commercial sale. Our future capital
requirements will depend on many factors, including the following:
- the analysis of the data from the Phase 2 clinical trial of NeuroCell-PD
which could result in the termination of our joint venture with Genzyme;
- continued progress in our research and development programs, as well as
the magnitude of these programs;
- the resources required to successfully complete our clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the cost of manufacturing and commercialization activities;
- the cost of any additional facilities requirements;
- the timing, receipt and amount of milestone and other payments from
future collaborative partners;
- the timing, receipt and amount of sales and royalties from our potential
products in the market; and
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies.
We may seek additional funding through collaborative arrangements and
public or private financings. Additional financing may not be available to us on
acceptable terms or at all.
If we raise additional funds by issuing equity securities further dilution
to our then existing stockholders may result. In addition, the terms of the
financing may adversely affect the holdings or the rights of our stockholders.
If we are unable to obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development programs.
We also could be required to seek funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, or products which we would
otherwise pursue independently.
Risks Relating to Intellectual Property
We may not be able to obtain patent protection for our discoveries and we
may infringe patent rights of others
The patent positions of pharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal, scientific and
factual issues.
Our success depends significantly on our ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
Patents may not issue from any patent applications that we own or license.
If patents do issue, the claims allowed may not be sufficiently broad to protect
our technology. In addition, issued patents that we own or license may be
challenged, invalidated or circumvented. Our patents also may not afford us
protection against competitors with similar technology. Because patent
applications in the United States may be maintained in secrecy until patents
issue, others may have filed or maintained patent applications for technology
used by us or covered by our pending patent applications without our being aware
of these applications.
We may not hold proprietary rights to some patents related to our proposed
products. In some cases, others may own or control these patents. As a result,
we or our collaborative partners may be required to obtain licenses under
third-party patents to market some of our proposed products. If licenses are not
available to us on acceptable terms, we will not be able to market these
affected products.
If we are not able to keep our trade secrets confidential, our technology
and information may be used by others to compete against us
We rely significantly upon unpatented proprietary technology, information,
processes and know how. We seek to protect this information by confidentiality
agreements with our employees, consultants and other third-party contractors as
well as through other security measures. These confidentiality agreements may be
breached, and we may not have adequate remedies for any such breach. In
addition, our trade secrets may otherwise become known or be independently
developed by competitors.
We may become involved in expensive patent litigation or other intellectual
property proceedings which could result in liability for damages or stop our
development and commercialization efforts
There has been substantial litigation and other proceedings regarding the
complex patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. We may become a party to patent litigation or other
proceedings regarding intellectual property rights.
The types of situations in which we may become involved in patent
litigation or other intellectual property proceedings include:
- we may initiate litigation or other proceedings against third parties to
enforce our patent rights;
- we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by these third parties or to obtain a
judgment that our products or services do not infringe the third parties'
patents;
- if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention; and
- if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such claims.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation or proceedings more effectively than we
can because of their substantially greater financial resources. If a patent
litigation or other intellectual property proceeding is resolved unfavorably to
us, we may be enjoined from manufacturing or selling our products and services
without a license from the other party and be held liable for significant
damages. We may not be able to obtain any required license on commercially
acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other proceedings
may also absorb significant management time.
If we breach any of the agreements under which we license technology from
others we could lose license rights that are important to our business
We are a party to technology in-licenses that are important to our business
and expect to enter into additional licenses in the future. In particular, our
immunomodulation technology and some of our product candidates are covered by
patents licensed from Massachusetts General Hospital. These licenses impose
commercialization, sublicensing, royalty, insurance and other obligations on us.
If we fail to comply with these requirements, the licensor will have the right
to terminate the license.
Risks Relating to Product Manufacturing, Marketing and Sales
Since we have no sales and marketing experience or infrastructure, we must
rely on third parties
We have no sales, marketing and distribution experience or infrastructure.
We plan to rely significantly on sales, marketing and distribution arrangements
with third parties for the products that we are developing. For example, under
our joint venture agreement, we have granted to Genzyme (on behalf of the joint
venture) exclusive worldwide marketing rights to NeuroCell-PD and NeuroCell-HD.
We may have limited or no control over the sales, marketing and distribution
activities of Genzyme, the joint venture or any future collaborative partners.
Our future revenues will be materially dependent upon the success of the efforts
of these third parties.
If in the future we determine to perform sales, marketing and distribution
functions ourselves, we would face a number of additional risks, including:
- we may not be able to attract and build a significant marketing or sales
force;
- the cost of establishing a marketing or sales force may not be
justifiable in light of any product revenues; and
- our direct sales and marketing efforts may not be successful.
Delays in obtaining regulatory approval of our manufacturing facility and
disruptions in our manufacturing process may delay or disrupt our
commercialization efforts
Before we can begin commercially manufacturing our product candidates, we
must obtain regulatory approval of our manufacturing facility and process.
Manufacturing of our product candidates must comply with cGMP, and foreign
regulatory requirements. The cGMP requirements govern quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we will be obligated to expend time, money and effort
on production, recordkeeping and quality control to ensure that our product
candidates meet applicable specifications and other requirements. If we fail to
comply with these requirements, we would be subject to possible regulatory
action and may be limited in the jurisdictions in which we are permitted to sell
our product candidates.
We are the only manufacturers of our product candidates. For the next
several years, we expect that we will conduct all of our manufacturing in our
facility in Charlestown, Massachusetts. If this facility or the equipment in
this facility is significantly damaged or destroyed, we will not be able to
replace quickly or inexpensively our manufacturing capacity.
We have no experience manufacturing our product candidates in the volumes
that will be necessary to support large clinical trials or commercial sales. Our
present manufacturing process may not meet our initial expectations as to
scheduling, reproducibility, yield, purity, cost, potency or quality.
The manufacture of our products would be delayed by disruptions in our
supply of porcine tissue
The manufacture of our products requires the continuous availability of
porcine tissue harvested from pigs tested to be free of infectious agents and
quarantined in a qualified animal facility. Our main sources of these facilities
and services are Tufts University School of Veterinary Medicine and
PharmServices, Inc., a division of Charles River Laboratories, Inc. A disease
epidemic or other catastrophe in either of these facilities could destroy all or
a portion of our pig supply, which would interrupt or significantly delay the
research, development and commercialization of our products.
Risks Related to Ongoing Operations
If we fail to obtain an adequate level of reimbursement for our future
products by third party payors, there may be no commercially viable markets for
our products
Our products may be more expensive than conventional treatments because
they involve the surgical transplantation of living cells. The availability of
reimbursement by governmental and other third-party payors affects the market
for any pharmaceutical product. These third-party payors continually attempt to
contain or reduce the costs of health care by challenging the prices charged for
medical products. In some foreign countries, particularly the countries of the
European Union, the pricing of prescription pharmaceuticals is subject to
governmental control. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope or amount.
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
Further proposals are likely. The potential for adoption of these proposals may
affect our ability to raise capital, obtain additional collaborative partners
and market our products.
If we obtain marketing approval for our products, we expect to experience
pricing pressure due to the trend toward managed health care, the increasing
influence of health maintenance organizations and additional legislative
proposals.
We could be exposed to significant liability claims if we are unable to
obtain insurance at acceptable costs or otherwise to protect us against
potential product liability claims
We may be subjected to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of human health care products. These
claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. Although we
maintain limited product liability insurance coverage for the clinical trials of
our products, it is possible that we will not be able to obtain further product
liability insurance on acceptable terms, if at all, and that our present
insurance levels and any insurance we subsequently obtain will not provide
adequate coverage against all potential claims.
Our growth could be limited if we are unable to attract and retain key
personnel and consultants
Our success depends substantially on our ability to attract and retain
qualified scientific and technical personnel for the research and development
activities we conduct or sponsor. If we lose one or more of the members of our
senior management or other key employees or consultants, our business and
operating results could be seriously harmed.
Our anticipated growth and expansion into areas and activities requiring
additional expertise, such as regulatory compliance, manufacturing and
marketing, will require the addition of new management personnel. The pool of
personnel with the skills that we require is limited. Competition to hire from
this limited pool is intense, and we may be unable to hire, train, retain or
motivate such additional personnel.
Risks Relating to our Common Stock
Our officers and directors may be able to control the outcome of most
corporate actions requiring stockholder approval
Our directors and officers and entities with which they are affiliated
control approximately 40% of our outstanding common stock. Due to this
concentration of ownership, this group may be able to prevail on all matters
requiring a stockholder vote, including:
- the election of directors;
- the amendment of our organizational documents; or
- the approval of a merger, sale of assets or other major corporate
transaction.
Our stock price could be volatile, which could cause you to lose part or
all of your investment
The market price of our common stock, like that of the common stock of many
other development stage biotechnology companies, may be highly volatile. In
addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many biotechnology and pharmaceutical companies for reasons
frequently unrelated to or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock. Prices for our common stock will be determined
in the market place and may be influenced by many factors, including variations
in our financial results and investors' perceptions of us, changes in
recommendations by securities analysts as well as their perceptions of general
economic, industry and market conditions.
We have antitakeover defenses that could delay or prevent an acquisition
and could adversely affect the price of our common stock
Provisions of our certificate of incorporation, our bylaws, and Delaware
law may have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control of our management, including transactions in which
our stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interest.
Our certificate of incorporation permits our board of directors to issue
preferred stock without shareholder approval upon such terms as the board of
directors may determine. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of our outstanding common stock. The issuance of a
substantial number of preferred shares could adversely affect the price of our
common stock.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We own financial instruments that are sensitive to market risks as part
of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. Our investment portfolio contains instruments that are
subject to the risk of a decline in interest rates. For example, if the interest
rate on our interest bearing investments were to change 1%, investment income
would have hypothetically increased or decreased by approximately $520,000 in
2001. This hypothetical analysis does not take into consideration the effects of
the economic conditions that would give rise to such an interest rate change or
our response to such hypothetical conditions.
Our investment portfolio includes investment grade debt instruments.
These bonds are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
these instruments, we do not believe that it has a material exposure to interest
rate risk.
Item 8. Financial Statements
The financial statements required to be filed hereunder are filed as
an exhibit hereto, are listed under item 14(a)(1) and are incorporated herein
by reference.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
There have been no disagreements on accounting and financial disclosure
matters.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding our executive officers and directors is furnished
in Part I of this Annual Report on Form 10-K under the heading "Executive
Officers of the Registrant."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors, executive officers and persons who own
more than ten percent of a registered class of our equity securities to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities.
Officers, directors and greater than ten percent beneficial owners are required
to furnish us with copies of all Section 16(a) forms that they file.
Based solely on our review of the copies of such reports received or
written representations that no other reports were required, we believe that,
except as follows, during the fiscal year ended December 31, 2001, our officers,
directors and ten-percent stockholders complied with all Section 16(a) filing
requirements applicable to such individuals. A Form 5, Annual Statement of
Changes in Beneficial Ownership, for Mr. Littlechild reporting a stock option
grant was inadvertently filed late.
Item 11. Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to the annual and long-term compensation for each of
the last three fiscal years of each of our executive officers:
Annual Compensation Long-Term All Other
Compensation Compensation(3)
Awards
Securities
Name and Underlying
Principal Position Year Salary($)(1) Bonus($)(2) Options(#)
- ------------------- ---- ------------ ---------- ---------- --------
Thomas H. Fraser 2001 $ 275,000 $ 137,500 - $5,250
President and Chief 2000 270,000 25,000 25,000 2,625
Executive Officer 1999 260,000 40,000 25,000 -
E. Michael Egan 2001 $ 220,000 $ 110,000 - $5,250
Chief Operating Officer 2000 200,000 20,000 20,000 2,625
1999 190,000 30,000 20,000 -
Kevin Kerrigan 2001 $ 93,500 $ 46,750 - $2,805
Controller 2000 85,000 8,000 10,000 1,275
1999 75,000 8,000 10,000 -
- -------------------------------
(1) Amounts shown include cash compensation earned and received by the Named
Officers as well as amounts earned but deferred at the election of these
officers to our 401(k) Plan.
(2) Amounts in this column represent bonuses paid or accrued under a
retention or bonus plan.
(3) Represents matching contributions under our 401(k) Plan.
Aggregated Option Exercises and Year-End Option Table. The following table sets
forth certain information regarding aggregate option exercises during the fiscal
year ended December 31, 2001 and the number and value of unexercised stock
options held as of December 31, 2001 by the Named Officers:
Number of
Securities Underlying Value of Unexercised In-
Unexercised Options at the-Money Options at
Fiscal Year-End(#) Fiscal Year-End($)(2)
------------- -------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise(#) ($)(1) Unexercisable Unexercisable
---- --------------- -------------- ------------- -------------
Thomas H. Fraser 22,500 $13,500 162,500/37,500 $11,250/ -
E. Michael Egan - - 182,495/30,000 $44,373/ -
Kevin Kerrigan - - 17,000/15,000 - / -
- ---------------------
(1) Represents the difference between the exercise price and the value of our
common stock on the date of exercise.
(2) Based on the value of our common stock on December 31, 2001 ($1.85 per
share), the last trading day of 2001, less the applicable option exercise
price.
Director Compensation
Dr. Horovitz receives $2,000 plus expenses per board meeting he attends
plus an additional $4,000 annually for consulting work performed on our behalf.
No other directors receive any cash compensation for services on the board of
directors.
On June 11, 2001, all non-employee directors were granted an option to
purchase 6,000 shares of common stock under our 1997 Stock Option Plan at an
exercise price of $2.00 per share. The options may be exercised on a cumulative
basis as to 25% of the shares on the first anniversary of the date of grant and
an additional 25% at the end of each one-year period thereafter.
Employment Agreements
We entered into a letter agreement with Dr. Fraser dated February 6,
1990, providing for an annual salary plus bonus as determined by our board of
directors. We have agreed with Dr. Fraser to continue to pay his then current
salary for a period of six months if we terminate his employment without cause.
Dr. Fraser has also agreed not to compete with us for one year following
termination of his employment. At our election, this non-competition provision
can be extended for an additional two-year period upon the payment of additional
consideration.
Compensation Committee Interlocks and Insider Participation
Mr. Termeer serves on our Compensation Committee. In September 1996, we
formed a joint venture with Genzyme Corporation to develop and commercialize two
product candidates. Under the terms of the joint venture agreement which became
effective on October 1, 1996, Genzyme agreed to provide 100% of the first $10
million in funding and 75% of the following $40 million in funding for the
development and commercialization of the two products. All costs incurred in
excess of $50 million are to be shared equally between us and Genzyme in
accordance with the terms of the agreement. Any profits of the joint venture
will be shared equally by the two parties. Mr. Termeer, a member of our board of
directors, is President, Chief Executive Officer and Chairman of the Board of
Genzyme. We have recorded approximately $15.2 million in revenue from the joint
venture since it commenced, $737,290 of which the Company recognized during
2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of our common
stock as of February 28, 2002 by:
- each person who is known to beneficially own more than 5% of our common
stock;
- each of our directors;
- each of our executive officers; and
- all of our executive officers and directors as a group.
Unless otherwise noted, each person or group has sole voting and
investment power of the shares listed. The inclusion of any shares listed below
as beneficially owned does not constitute an admission of beneficial ownership
of those shares.
The "Options" column reflects shares of our common stock subject to
options which are exercisable within 60 days after February 28, 2002. The shares
of our common stock which are subject to options are deemed to be outstanding
for the purpose of computing the percentage of ownership of the person holding
such options, but are not deemed to be outstanding for computing the percentage
of ownership of any other person. As of February 28, 2002, there were 17,937,204
shares of our common stock outstanding.
Number of Shares
Beneficially Owned Percentage of
------------------- Common Stock
Name and Address Shares Options Outstanding
- ------------------ ------ ------- -----------
HealthCare Ventures II, L.P. (1).........3,196,385 -- 17.8%
HealthCare Ventures III, L.P. (1)..........994,078 -- 5.5
HealthCare Ventures IV, L.P. (1)...........291,922 -- 1.6
State of Wisconsin Investment Board (2)..2,658,200 -- 14.8
Rho Management Trust II (3)..............1,592,887 -- 8.9
Hudson Trust (4).........................1,342,680 -- 7.5
Thomas H. Fraser, Ph.D.....................505,988 162,500 3.7
Zola P. Horovitz, Ph.D. .....................4,000 19,500 *
John W. Littlechild (1)..................4,482,385 19,500 25.1
Stelios Papadopoulos, Ph.D.................200,000 19,500 1.2
Joshua Ruch (5)..........................1,759,587 19,500 9.9
Henri A. Termeer.............................7,750 49,000 *
E. Michael Egan..............................4,169 182,495 1.0
Kevin Kerrigan................................-- 17,000 *
All directors and executive officers as a
group (8 persons) .......................6,963,879 488,995 40.4
- ------------------------------
* Less than 1.0%
(1) John W. Littlechild is a general partner of HealthCare Partners II, L.P.
("HCPII"), HealthCare Partners III, L.P. ("HCPIII") and HealthCare Partners
IV, L.P. ("HCPIV"), the general partner of HealthCare Ventures II, L.P.
("HCVII"), HealthCare Ventures III, L.P. ("HCVIII") and HealthCare Ventures
IV, L.P. ("HCVIV"), respectively. Mr. Littlechild, together with James H.
Cavanaugh, Harold R. Werner and William Crouse, the other general partners
of HCPII, HCPIII and HCPIV, share voting and investment control with
respect to shares owned by HCVII, HCVIII and HCVIV, respectively. Mr.
Littlechild does not own any shares of our capital stock in his individual
capacity. The address of HealthCare Ventures II, III and IV, L.P. is 44
Nassau Street, Princeton, New Jersey 08542.
(2) The address of the State of Wisconsin Investment Board is P.O. Box 7842,
Madison, Wisconsin 53707.
(3) Rho Capital Partners, Inc. ("Rho") may be deemed the beneficial owner of
these shares pursuant to an investment advisory agreement that confers
voting and investment control over such shares to Rho. The address of Rho
Management Trust II is c/o Rho Capital Partners, Inc., 152 West 57th
Street, New York, New York 10019.
(4) The address of Hudson Trust is c/o Summit Asset Management Co., Inc., 47
Hulfish Street, Suite 420, Princeton, New Jersey 08542.
(5) Mr. Ruch is a controlling person of Rho and as such may be deemed the
beneficial owner of the shares held by Rho Management Trust II. In
addition, Mr. Ruch exercises investment and voting authority over
166,700 shares directly for his own account, for the account of family
members or for the account of other clients of Rho or its affiliates.
Item 13. Certain Relationships and Related Transactions
HCVII, HCVIII and HCVIV owned 17.8%, 5.5% and 1.6% or our outstanding
capital stock as of February 28, 2002, respectively. HCVII, HCVIII and HCVIV are
limited partnerships which were formed to provide capital to companies in the
health care fields. HCPII, HCPIII and HCPIV are limited partnerships which serve
as general partner of HCVII, HCVIII and HCVIV, respectively. John Littlechild, a
member of our board of directors, is a general partner of HCPII, HCPIII and
HCPIV and Vice Chairman of Healthcare Ventures LLC, the management company for
HCVII, HCVIII and HCVIV. Mr. Littlechild is an officer of HealthCare Ventures
LLC. See "Security Ownership of Certain Beneficial Owners and Management."
Rho Management Trust II, which owned 8.9% of our outstanding capital
stock as of February 28, 2002, also holds approximately 18.9% and 54.3% of the
outstanding limited partnership interests of HCVII and HCVIV, respectively. An
affiliate of Rho is also a limited partner of HCPII, HCPIII and HCPIV. Joshua
Ruch, a member of our board of directors, is a controlling person of Rho. See
"Security Ownership of Certain Beneficial Owners and Management."
Hudson Trust, which owned 7.5% of our outstanding capital stock as
of February 28, 2002, also holds approximately 6.0% and 11.9% of the
outstanding limited partnership interests of HCVII and HCVIV, respectively.
Hudson is also a limited partner of HCPII. See "Security Ownership of
Certain Beneficial Owners and Management."
See "Executive Compensation - Compensation Committee Interlocks and Insider
Participation."
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
The following Financial Statements are included in this Annual Report on
Form 10-K.
Financial Statements: Page
(a.) Diacrin, Inc.
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 2000 and 2001 F-2
3. Statements of Operations for each of the three years in the period
ended December 31, 2001 F-3
4. Statements of Stockholders' Equity (Deficit) for each of the three
years in the period ended December 31, 2001 F-4
5. Statements of Cash Flow for each of the three years in the period
ended December 31, 2001 F-5
6. Notes to Financial Statements F-6
(b.) Diacrin/Genzyme LLC (A Development Stage Enterprise)
1. Report of Independent Public Accountants F-18
2. Balance Sheets as of December 31, 2000 and 2001 F-19
3. Statements of Operations for the years ended December 31, 2000 and
2001 and for the period from October 1, 1996 (date of inception)
to December 31, 2001 F-20
4. Statements of Cash Flows for the years ended December 31, 2000 and
2001 and for the period from October 1, 1996 (date of inception)
to December 31, 2001 F-21
5. Statements of Change in Venturers' Capital (Deficit) for the period
from October 1, 1996 (date of inception) to December 31, 2001 F-22
6. Notes to Financial Statements F-23
(2) Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form
10-K:
Exhibit No. Title Page
- ---------- ----- ----
3.1 - Amended and Restated Certificate of Incorporation of Diacrin as
amended to date (5)
3.2 - Amended and Restated By-laws of Diacrin (4)
+10.1 - Employment Agreement dated February 6, 1990 by and between Diacrin
and Dr. Thomas H. Fraser (2)
10.2 - Rights Agreement dated July 29, 1991 by and among Diacrin and the
holders of the preferred stock as amended on September 27, 1991 (2)
10.2(a) - Consent and Agreement to Amend dated April 26, 1995 by and among
Diacrin and certain investors named therein (1)
10.2(b) - Consent and Agreement to Amend dated as of January 4, 1996 by and
among Diacrin and certain investors named therein (4)
+10.3 - 1990 Stock Option Plan, as amended (3)
10.4 - Sublease dated January 24, 1991 by and among Diacrin and Building 79
Associated Limited Partnership and Building 96 Associates Limited
Partnership (2)
+10.5 - 1994 Directors' Stock Option Plan, as amended (7)
10.6 - Registration Rights Agreements dated May 31, 1995 by and among
Diacrin and the investors listed on Schedules I and II attached
thereto (1)
10.6(a) - Amendment No. 1 to Registration Rights Agreement dated as of January
4, 1996 by and among Diacrin and certain investors named therein (4)
10.7 - Collaboration Agreement among Diacrin, Inc., Genzyme Corporation and
Diacrin/Genzyme LLC dated as of October 1, 1996 (6)
10.8 - Operating Agreement of Diacrin/Genzyme LLC (6)
Exhibit No. Title Page
- ---------- ----- ----
+10.9 - 1997 Stock Option Plan (8)
10.10 - $650,000 Promissory Note dated November 25, 1997 made by Diacrin to
the order of Fleet National Bank (9)
10.10(a) - Letter Agreement dated November 25, 1997 by and between Diacrin and
Fleet National Bank (9)
21 - Subsidiaries *
23.1 - Consent of Arthur Andersen LLP *
23.2 - Consent of PricewaterhouseCoopers LLP *
99 - Letter to Commission Pursuant to Temporary Note 3T *
- -----------------------------
* Filed herewith
(1) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended June 30, 1995 and incorporated herein by reference.
(2) Filed as an exhibit to our Form 10, as amended (File No. 0-20139), on April
29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended September 30, 1994 and incorporated herein by reference.
(4) Filed as an exhibit to our Registration Statement on Form S-2, as amended
(Registration No. 33-80773) on December 22, 1995, and incorporated herein by
reference.
(5) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139) for
the fiscal year ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to our Quarterly Report on Form 10-Q, as amended on Form
10-Q/A (File No. 0-20139) for the quarter ended September 30, 1996 and
incorporated herein by reference.
(7) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139) for
the fiscal year ended December 31, 1996 and incorporated herein by reference.
(8) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended June 30, 1997 and incorporated herein by reference.
(9) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139) for
the fiscal year ended December 31, 1997 and incorporated herein by reference.
+ Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
(b) Reports on Form 8-K.
We did not file any current reports on Form 8-K during the last quarter of
the period covered by this report.
(c) Description of Exhibits.
See Item 14 (a)
(d) Description of Financial Statement Schedules.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser
------------------------------------
Thomas H. Fraser
President and Chief Executive Officer
Date: March 28, 2002
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Date Title
/s/ Thomas H. Fraser March 28, 2002 President, Chief Executive
- --------------------- Officer and Director
Thomas H. Fraser (Principal Executive Officer)
/s/ Kevin Kerrigan March 28, 2002 Controller
- --------------------- (Principal Financial and
Kevin Kerrigan Accounting Officer)
/s/ Zola P. Horovitz March 28, 2002 Director
- ---------------------
Zola P. Horovitz
Director
- ---------------------
John W. Littlechild
/s/ Stelios Papadopoulos March 28, 2002 Director
- ---------------------
Stelios Papadopoulos
/s/ Henri A. Termeer March 28, 2002 Director
- ---------------------
Henri A. Termeer
/s/ Joshua Ruch March 28, 2002 Director
- ---------------------
Joshua Ruch
Report of Independent Public Accountants
To the Board of Directors of
Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a
Delaware corporation) as of December 31, 2000 and 2001 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of Diacrin, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Diacrin, Inc. as of
December 31, 2000 and 2001 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 21, 2002
F-1
DIACRIN, INC.
Balance Sheets
At December 31,
---------------------------
2000 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 11,143,116 $ 8,534,426
Short-term investments 22,485,675 33,410,736
Interest receivable and other current assets 780,406 668,020
------------ -----------
Total current assets 34,409,197 42,613,182
------------ -----------
Property and equipment, at cost:
Laboratory and manufacturing equipment 1,655,064 1,660,963
Furniture and office equipment 320,106 324,913
Leasehold improvements 77,529 77,529
----------- -----------
2,052,699 2,063,405
Less - Accumulated depreciation and amortization 1,651,618 1,861,110
----------- -----------
401,081 202,295
----------- -----------
Long-term investments 20,977,940 7,782,035
Investment in joint venture 4,785 83,984
----------- -----------
Total other assets 20,982,725 7,866,019
----------- -----------
Total assets $ 55,793,003 $ 50,681,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 130,000 $ 119,167
Accounts payable 109,307 117,663
Accrued expenses 1,323,786 1,269,278
Deferred revenue from joint venture 344,468 29,238
------------ -----------
Total current liabilities 1,907,561 1,535,346
Long-term debt, net of current portion 119,167 -
Commitments (Notes 4 and 10)
Stockholders' equity:
Preferred stock, $0.01 par value; authorized--5,000,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value; authorized--30,000,000 shares;
issued and outstanding--17,914,704 and 17,937,204 shares at
December 31, 2000 and 2001, respectively 179,147 179,372
Additional paid-in capital 101,373,922 101,401,822
Accumulated deficit (47,786,794) (52,435,044)
----------- -----------
Total stockholders' equity 53,766,275 49,146,150
----------- -----------
Total liabilities and stockholders' equity $ 55,793,003 $ 50,681,496
=========== ===========
The accompanying notes are an integral part of these
financial statements.
F-2
DIACRIN, INC.
Statements of Operations
Year Ended December 31,
------------------------------------------------
1999 2000 2001
---- ---- ----
REVENUES:
Research and development $ 2,970,846 $ 2,081,795 $ 737,290
Investment income 1,323,520 3,124,929 3,149,543
------------ ----------- ----------
Total revenues 4,294,366 5,206,724 3,886,833
------------ ----------- ----------
OPERATING EXPENSES:
Research and development 5,921,141 5,996,550 6,350,190
General and administrative 1,398,151 1,348,072 1,624,470
Interest expense 47,318 29,898 13,861
----------- ---------- ---------
Total operating expenses 7,366,610 7,374,520 7,988,521
----------- ---------- ---------
EQUITY IN OPERATIONS OF JOINT VENTURE (1,688,071) (1,368,945) (546,562)
----------- ---------- ---------
NET LOSS $(4,760,315) $(3,536,741) $(4,648,250)
=========== ========== =========
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.33) $ (.21) $ (.26)
=========== ========== =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic and diluted 14,364,154 17,073,194 17,914,889
=========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
F-3
DIACRIN, INC.
Statements of Stockholders' Equity
Common Stock
-------------------
Number $.01 Additional Total
of Par Paid-In Accumulated Stockholders'
Shares Value Capital Deficit Equity
---------- ------- ---------- ----------- ----------
BALANCE, December 31, 1998 14,327,218 143,272 64,191,075 (39,489,738) 24,844,609
Exercise of stock options 58,965 590 59,666 - 60,256
Net loss - - - (4,760,315) (4,760,315)
---------- ------- ----------- ---------- ----------
BALANCE, December 31, 1999 14,386,183 143,862 64,250,741 (44,250,053) 20,144,550
Proceeds from public offering of
common stock, net of $2,765,500
financing costs 3,450,000 34,500 36,875,000 - 36,909,500
Exercise of stock options and warrants 78,521 785 248,181 - 248,966
Net loss - - - (3,536,741) (3,536,741)
---------- ------- ----------- ---------- ----------
BALANCE, December 31, 2000 17,914,704 179,147 101,373,922 (47,786,794) 53,766,275
Exercise of stock options 22,500 225 27,900 - 28,125
Net loss - - - (4,648,250) (4,648,250)
---------- ------- ----------- ---------- ----------
BALANCE, December 31, 2001 17,937,204 179,372 101,401,822 (52,435,044) 49,146,150
========== ======= =========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
F-4
DIACRIN, INC.
Statements of Cash Flows
Year Ended December 31,
1999 2000 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,760,315) $ (3,536,741) $ (4,648,250)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 237,976 213,969 209,492
Equity in operations of joint venture 1,688,071 1,368,945 546,562
Changes in current assets and liabilities-
Interest receivable and other current assets 65,048 (451,041) 112,386
Accounts payable (129,234) (29,461) 8,356
Accrued expenses (126,762) 55,866 160,687
Deferred revenue from joint venture 99,872 (94,259) (315,230)
---------- --------- ---------
Net cash used in operating activities (2,925,344) (2,472,722) (3,925,997)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments 2,088,140 (5,903,423) (10,925,061)
Purchases of property and equipment, net (26,019) (102,510) (10,706)
(Increase) decrease in long-term investments (39,074) (18,333,856) 13,195,905
Investment in joint venture (2,669,384) (1,947,422) (1,086,545)
Return of capital for services provided on behalf
of joint venture 990,282 693,932 245,589
----------- ---------- ----------
Net cash provided by (used in) investing activities 343,945 (25,593,279) 1,419,182
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock - 36,909,500 -
Net proceeds from the exercise of stock options and
warrants 60,256 248,966 28,125
Principal payments on long-term debt (279,910) (143,350) (130,000)
----------- ---------- ---------
Net cash (used in) provided by financing (219,654) 37,015,116 (101,875)
----------- ---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,801,053) 8,949,115 (2,608,690)
CASH AND CASH EQUIVALENTS, beginning of year 4,995,054 2,194,001 11,143,116
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 2,194,001 $11,143,116 $ 8,534,426
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 49,743 $ 30,946 $ 15,547
========= ======== ========
The accompanying notes are an integral part of these
financial statements.
F-5
Diacrin, Inc.
Notes to Financial Statements
(1) Operations and Basis of Presentation
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989 and
is developing cell transplantation technology for the treatment of human
diseases that are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent.
(2) Summary of Significant Accounting Policies
(a) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by
charges to operations in amounts estimated to allocate the cost of these assets
over a five-year life. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the estimated useful life of the
asset or the lease term.
(b) Research and Development
Collaborative revenue under the joint venture agreement with Genzyme
Corporation ("Genzyme") (see Note 4) and revenues from research grants are
recognized as work is performed. Collaborative revenue under the joint venture
agreement is recognized as revenue to the extent that the Company's research and
development costs are funded by Genzyme through the joint venture. The Company
receives non-refundable monthly advances from the joint venture. Deferred
revenue represents amounts received prior to recognition of revenue. Research
and development costs are expensed as incurred.
(c) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. At
December 31, 2001, the Company has a net operating loss carryforward for federal
income tax purposes of approximately $53,400,000. The difference from losses
reported for financial reporting purposes relates primarily to expenses
reflected in the financial statements not yet deductible for tax purposes. The
net operating loss carryforwards expire commencing in the year 2006 and are
subject to review and possible adjustment by the Internal Revenue Service. Net
operating loss and tax credit carryforwards may be limited in the event of
certain changes in the ownership interests of significant shareholders. The
Company believes the issuance of the convertible notes payable in May 1995, as
well as the initial public offering in February 1996, caused a change in
ownership, as defined by the Tax Reform Act of 1986 (the "Act"). Additionally,
the Company's private placement in 1998 and secondary offering in 2000 may cause
a
F-6
Diacrin, Inc.
Notes to Financial Statements - (Continued)
change in ownership, as defined by the Act. The Company does not believe that
such ownership changes will significantly impact the Company's ability to
utilize the net operating loss and tax credit carryforwards as of the date of
such ownership changes. Ownership changes in future periods may limit the
Company's ability to utilize net operating loss and tax credit carryforwards.
The components of the net deferred tax assets are approximately as follows:
2000 2001
---- ----
Loss carryforwards $19,900,000 $21,360,000
Credit carryforwards 4,900,000 4,250,000
Other temporary differences 13,500 43,500
----------- ----------
Total deferred tax assets 24,813,500 25,653,500
Less - valuation allowance (24,813,500) (25,653,500)
---------- ----------
Net deferred tax asset $ - $ -
============ ===========
A valuation allowance has been provided as it is uncertain if the
Company will realize the deferred tax assets. The change in the total valuation
allowance during the year ended December 31, 2001 was an increase of
approximately $840,000 and relates to the increase in the deferred tax asset
which is primarily due to the net operating loss generated during 2001.
(d) Net Loss per Common Share
In accordance with SFAS No. 128, Earnings per Share, basic and diluted
net loss per share is calculated by dividing the net loss by the weighted
average number of common shares outstanding for all periods presented. Diluted
weighted average shares outstanding for all periods presented exclude the
potential common shares from stock options and warrants of 4,111,523, 1,258,247
and 1,263,872 at December 31, 1999, 2000, and 2001, respectively, because to
include such shares would have been antidilutive.
(e) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(f) Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted this statement for the year ended
December 31, 1998 with no impact on the Company's financial statements as there
are no differences between the Company's reported income and comprehensive
income for all periods presented.
(g) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. The Company adopted this statement for the year
ended December 31, 1998. In accordance with SFAS 131, the Company believes that
it operates in one operating segment.
(h) Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents,
short-term investments, long-term investments, accounts payable, current portion
of long-term debt and long-term debt. The carrying amounts of these instruments
approximate their fair value.
(i) New Accounting Standards
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and portions of Accounting Principles Bulletin Opinion
30, Reporting the Results of Operations. This Statement provides a single
accounting model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. In addition, it requires expected future operating losses from
discontinued operations to be displayed in the period(s) in which the losses are
incurred, rather than as of the measurement date as presently required. This
Statement is effective for fiscal years beginning after December 15, 2001. The
Company does not expect adoption of this Statement to have a material impact on
the Company's financial statements.
F-8
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(3) Sale of Common Stock
In March 2000, the Company completed a public offering of 3,450,000
shares of its common stock for $11.50 per share for net proceeds of
approximately $36.9 million.
(4) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation formed a joint
venture to develop and commercialize the Company's NeuroCell-PD and NeuroCell-HD
products for transplantation into people with advanced Parkinson's disease and
Huntington's disease, respectively. Under the terms of the joint venture
agreement, which was effective October 1, 1996, Genzyme agreed to provide 100%
of the first $10 million in funding and 75% of the following $40 million in
funding for the two products. All costs incurred in excess of $50 million will
be shared equally between Genzyme and the Company in accordance with the terms
of the agreement. Any profits of the joint venture will be shared equally by the
two parties. As of December 31, 2001, Genzyme had provided $33.0 million to the
joint venture and the Company had provided $7.6 million.
The Company records as research and development expense all costs
related to NeuroCell-PD and NeuroCell-HD incurred by it on behalf of the joint
venture. The Company recognizes research and development revenue equal to the
amount of reimbursement received by it from the joint venture out of funds
contributed by Genzyme. The Company does not recognize research and development
revenue for amounts received from the joint venture out of funds it contributed.
As Genzyme incurs costs on behalf of the joint venture that the Company is
obligated to fund, it recognizes an expense in its statement of operations
captioned "Equity in operations of joint venture."
F-9
Diacrin, Inc.
Notes to Financial Statements - (Continued)
Genzyme agreed to make financing available to Diacrin from and after
the date that Genzyme provides the initial $10 million of funding to the joint
venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated
line of credit of up to an aggregate amount of $10 million. Diacrin may draw on
the line only in the event that Diacrin's cash and cash equivalents are
insufficient to fund Diacrin's budgeted operations for a specified period of
time, and the funds may be used by Diacrin only to fund capital contributions to
the joint venture. The line will be available through the date five years after
the date Diacrin first draws on the line, and all outstanding principal and
interest will be due on that fifth anniversary. Advances will be
interest-bearing, evidenced by a promissory note and subject to other
considerations and the aggregate amount of draws in any calendar year may not
exceed $5 million. Diacrin did not make any draws on the line through December
31, 2001.
The Company accounts for its investment in the joint venture on the
equity method. The detail of the Company's investment in the joint venture is as
follows:
1999 2000 2001
---- ---- ----
Balance, beginning of year $ 94,508 $103,730 $ 4,785
Contributions to joint venture 2,669,384 1,947,422 1,086,545
Return of capital (990,282) (693,932) (245,589)
Funding of operations of joint venture (1,669,880) (1,352,435) (761,757)
---------- --------- -------
Balance, end of year $103,730 $4,785 $83,984
========== ========= =======
Contributions to the joint venture represent cash contributions. The
return of capital represents cash payments made to the Company by the joint
venture for research and development costs that are funded by the Company.
Funding of operations of the joint venture represents costs incurred by Genzyme
on behalf of the joint venture, which are funded by the Company.
A summary of the revenue and expenses from the joint venture are as
follows:
1999 2000 2001
---- ---- ----
Revenue recognized (see note 2b) $2,970,846 $2,081,795 $737,290
Research and development
expense (see note 2b) $3,961,128 $2,775,727 $983,053
Equity in operations of joint venture $1,688,071 $1,368,945 $546,562
Genzyme's President and Chief Executive Officer is a director of the
Company.
F-10
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(5) Cash, Cash Equivalents and Investments
The Company's cash equivalents and investments are classified as
held-to-maturity and are carried at amortized cost, which approximates market
value. Cash equivalents, short-term investments and long-term investments have
maturities of less than three months, less than one year and greater than one
year, respectively. Cash and cash equivalents, short-term investments and
long-term investments at December 31, 2000 and 2001 consisted of the following:
2000 2001
---- ----
Cash and cash equivalents-
Cash $ 806 $ 1,003
Corporate note 1,006,519 -
Money market mutual fund 10,135,791 8,533,423
----------- -----------
$11,143,116 $ 8,534,426
=========== ===========
Short-term investments-
Corporate notes (remaining avg. maturity of 5 mos. at Dec. 31, 2001) $22,485,675 $26,651,221
US Gov't Obligations (remaining avg. maturity of 8 mos. at Dec. 31, 2001) - 6,510,826
Commercial paper (remaining avg. maturity of 2 mos. at Dec. 31, 2001) - 248,689
----------- -----------
$22,485,675 $33,410,736
=========== ===========
Long-term investments-
Corporate notes (remaining avg. maturity of 16 mos. at Dec. 31, 2001) $20,977,940 $ 4,198,142
US Gov't Obligations (remaining avg. maturity of 13 mos. at Dec. 31, 2001) - 3,583,893
----------- -----------
$20,977,940 $ 7,782,035
=========== ===========
During the year ended December 31, 2001 the Company sold two of its
held-to-maturity investments due to significant evidence of deterioration in the
issuers' creditworthiness. The cost of the two investments was approximately
$5.5 million and the sale resulted in a realized gain of approximately $96,000,
which is included in Investment Income on the statement of operations for the
current period. This sale represents a change in circumstances as defined in
SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities
and does not taint the remaining portfolio of the Company's held-to-maturity
investments as the Company continues with the intent and ability to hold its
investments to maturity.
F-11
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(6) Accrued Expenses
Accrued expenses consisted of the following at December 31, 2000 and
2001:
2000 2001
---- ----
Accrued clinical trials costs $ 812,384 $ 499,341
Accrued professional fees 159,999 138,364
Accrued payroll 114,899 288,813
Accrued contract research costs 54,862 98,934
Accrued other 181,642 243,826
-------- ---------
Total $1,323,786 $1,269,278
=========== ==========
(7) Long-term Debt
In November 1997, the Company entered into an unsecured term loan
agreement with a bank whereby the bank loaned the Company $650,000 to construct
a pilot manufacturing facility. Interest accrues at the prime rate plus one-half
of one percent (5.25% at December 31, 2001) and is payable monthly in arrears.
The loan is payable in 60 principal installments of $10,833 commencing December
1, 1997 and may be prepaid without penalty. The Company is required to maintain
certain covenants, including certain financial ratios and unencumbered cash
balances of not less than $1 million. As of December 31, 2001, the Company was
in compliance with all covenants. Principal payments on the loan for the next
year will be $119,167.
(8) Preferred Stock
The Company has authorized 5,000,000 shares of undesignated preferred
stock. The Company's Board of Directors is authorized, subject to any
limitations prescribed by law and without further stockholder approval, to issue
from time to time up to 5,000,000 shares of preferred stock in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and rights or
privileges as shall be determined by the Board of Directors.
(9) Common Stock Options
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan")
under which the Board of Directors is authorized to grant incentive stock
options, non-qualified stock options and stock appreciation rights to employees,
directors and consultants of the Company for up to 800,000 shares of the
Company's common stock. All options granted have 10-year terms, and the majority
vest in equal annual installments of 25% over four years of continued service
from the date of hire or grant. As of December 31, 2001, there were options to
purchase 99,045 shares of common stock available for future grant under the 1990
Plan.
F-12
Diacrin, Inc.
Notes to Financial Statements - (Continued)
In July 1994, the stockholders approved the 1994 Directors' Stock
Option Plan (the "Director Plan") which automatically grants an option to each
eligible outside director of the Company for the purchase of 7,500 shares of
common stock at an exercise price of the then fair market value. Each option
granted under the Director Plan has a 10-year term and may be exercised on a
cumulative basis as to 25% of the shares on the first anniversary of the date of
grant and an additional 25% at the end of each one-year period thereafter. In
December 1996, the Board of Directors amended the Director Plan to automatically
grant 15,000 options to each new eligible outside director. The Company has
reserved 30,000 shares for issuance under this plan. As of December 31, 2001,
there were 15,000 options outstanding under the Director Plan at a weighted
average exercise price of $9.50 per share. As of December 31, 2001, there were
options to purchase 13,125 shares of commons stock available for future grant
under the Director Plan.
In June 1997, the stockholders approved the 1997 Stock Option Plan (the
"1997 Plan") under which the Board of Directors is authorized to grant incentive
stock options and non-qualified stock options to employees, directors and
consultants of the Company for up to 1,200,000 shares of the Company's common
stock. All options granted have 10-year terms, and vest in equal annual
installments of 25% over four years of continued service from the date of hire
or grant. As of December 31, 2001, options to purchase 572,375 shares of common
stock were available for future grant under the 1997 Plan.
F-13
Diacrin, Inc.
Notes to Financial Statements - (Continued)
The following table summarizes incentive and non-qualified stock option
activity:
Number of Weighted average
options Exercise price
Balance, December 31, 1998 1,125,738 $ 4.87
Options granted 183,500 5.97
Options exercised (58,965) 1.02
Options canceled (13,750) 11.20
--------- -----
Balance, December 31, 1999 1,236,523 5.14
Options granted 154,750 5.56
Options exercised (75,526) 2.66
Options canceled (57,500) 8.91
--------- ----
Balance, December 31, 2000 1,258,247 5.15
Options granted 32,000 2.18
Options exercised (22,500) 1.25
Options canceled (3,875) 6.27
--------- ----
Balance, December 31, 2001 1,263,872 $ 5.14
========= ====
Exercisable, December 31, 2001 988,996 $ 5.08
======== ====
Exercisable, December 31, 2000 860,869 $ 4.68
======== ====
Exercisable, December 31, 1999 822,332 $ 4.15
======== ====
All options have been granted at the fair market value of the Company's
common stock on the date of grant.
F-14
Diacrin, Inc.
Notes to Financial Statements - (Continued)
The following table summarizes certain information about options
outstanding and exercisable at December 31, 2001:
Options outstanding
- --------------------------------------------------------------------------------
Number of Weighted Weighed average
exercisable at average remaining exercise
Range of exercise prices December 31, 2001 contractual life price
- ------------------------ ----------------- ---------------- --------------
$1.22 to $2.50 528,497 2.74 $2.11
$4.50 to $7.50 470,750 7.67 $5.74
$7.88 to $15.75 264,625 5.81 $10.12
--------- -----
1,263,872 $5.14
========= =====
Options exercisable
- --------------------------------------------------------------------------------
Number exercisable Weighted average
Range of exercise prices At December 31, 2001 exercise price
- ------------------------ ---------------------- ----------------
$1.22 to $2.50 498,497 $2.12
$4.50 to $7.50 250,562 $5.97
$7.88 to $15.75 239,937 $10.31
------- -----
988,996 $5.08
======= =====
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has continued to
account for employee stock options in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and has
included the proforma disclosure required by SFAS No. 123 for all periods
presented.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee and director stock options under the fair value
method of SFAS No. 123. The fair-value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions for 1999, 2000 and 2001: risk-free interest rates of 6.0% for all
years; dividend yield of 0% for all years; volatility factor of the expected
market price of the Company's common stock of 95% for all years; and a
weighted-average expected life of the options of 7.5 years for all years. The
weighted average fair value of options granted in 1999, 2000 and 2001 was $4.97,
$4.71 and $1.85, respectively.
F-15
Diacrin, Inc.
Notes to Financial Statements - (Continued)
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The aggregate
fair value of options granted in 1999, 2000 and 2001 was approximately $912,000,
$729,000 and $59,082, respectively. The Company's pro forma information follows:
1999 2000 2001
---- ---- ----
Net loss As reported $(4,760,315) $(3,536,741) $(4,648,250)
Pro forma $(5,796,810) $(4,714,923) $(5,612,794)
Basic and As reported $(.33) $(.21) $(.26)
and diluted
net loss per Pro forma $(.40) $(.27) $(.31)
share:
(10) Facility Lease
During 1991, the Company entered into a 10-year operating lease for a
facility. In October 2000, the Company exercised the first of two options to
extend the lease an additional five years commencing October 2001. Minimum
rental payments under the lease are as follows:
Rental
Commitment
----------
2002 $ 898,000
2003 898,000
2004 898,000
2005 898,000
2006 673,000
---------
$ 4,265,000
=========
Total rent expense for the years ended December 31, 1999, 2000 and
2001 was approximately $761,000, $751,000 and $758,000, respectively.
(11) Employment Retirement / Savings Plan
The Company maintains an employee retirement / savings plan (the
"Plan") which permits participants to make tax deferred contributions by salary
reduction pursuant to section 401(k) of the Internal Revenue Code. All active
employees, 21 years of age or older, who have completed a calendar quarter of
service are eligible to participate in the Plan. The Company pays all
administrative costs of the Plan. There were no contributions made to the Plan
by the Company in 1999. During 2000 and 2001, the Company made discretionary
contributions of $28,500 and $54,700, respectively, to the Plan.
F-16
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(12) Quarterly Results of Operations (Unaudited)
The following table presents a condensed summary of quarterly
results of operations for the years ended December 31, 2001 and 2000.
Year Ended December 31, 2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $ 1,292 $ 990 $ 909 $ 696
======= ======= ====== ======
Net loss $ (811) $(1,334) $(1,175) $(1,328)
======= ======= ======= ======
Basic and diluted net loss per
common share $ (.05) $ (.07) $ (.07) $ (.07)
======= ====== ====== ======
Year Ended December 31, 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $ 863 $ 1,404 $ 1,543 $1,397
====== ======= ======= ======
Net loss $(1,249) $ (808) $ (820) $ (660)
======= ======= ======= ======
Basic and diluted net loss per
common share $ (.09) $ (.05) $ (.05) $ (.04)
====== ====== ====== ======
F-17
Report of Independent Accountants
To the Steering Committee of Diacrin/Genzyme LLC:
In our opinion, the accompanying balance sheet and the related statement of
operations, of cash flows and of changes in Venturers' capital (deficit) present
fairly, in all material respects, the financial position of Diacrin/Genzyme LLC
(a development stage enterprise) at December 31, 2000, and the results of its
operations and its cash flows for the period then ended (information for the
period ended December 31, 2001 and from inception through December 31, 2001 is
unaudited), in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Steering Committee of the Joint Venture; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, 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, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As more fully discussed in Note A, either Venturer may terminate the
Collaboration Agreement of the Joint Venture for any reason upon 180 days notice
to the other Venturer and such termination could lead to the discontinuation of
the Joint Venture.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 2001
F-18
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Balance Sheets
December 31, 2000 and 2001
2000 2001
(Unaudited)
Assets
Current assets:
Cash $ 1,032,170 $ 498,093
Prepaid to Diacrin, Inc. (Note C) 365,245 50,014
Other current assets 11,266 11,267
----------- ----------
Total current assets 1,408,681 559,374
Property and equipment, net (Note D) 156,176 106,365
----------- ----------
Total assets $ 1,564,857 $ 665,739
=========== ==========
Liabilities and Venturers' Capital (Deficit)
Payable to Genzyme Corporation (Note C) $ 2,150,488 $ 77,699
Accrued expenses 23,900 -
----------- ----------
Total liabilities 2,174,388 77,699
Commitments and contingencies (Note C)
Venturers' capital (deficit) (including deficit accumulated
during the development stage of $40,041,520);
Venturers' capital - Genzyme Corporation 444,140 485,654
Venturers' capital - Diacrin, Inc. 88,548 102,386
Unpaid Venturers' capital - Genzyme Corporation (861,664) -
Unpaid Venturers' capital - Diacrin, Inc. (280,555) -
----------- ---------
Total Venturers' capital (deficit) (609,531) 588,040
----------- ---------
Total liabilities and Venturers' capital (deficit) $ 1,564,857 $ 665,739
=========== =========
The accompanying notes are an integral part of
these financial statements.
F-19
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Operations
For the period
from
October 1, 1996
(date of inception)
to December 31,
2000 2001 2001
(Unaudited) (Unaudited)
Operating costs and expenses:
Research and development - Genzyme Corporation $ 5,394,335 $ 2,178,191 $ 21,739,280
Research and development - Diacrin, Inc. 2,736,293 983,054 18,029,875
General and administrative 90,113 64,959 342,712
----------- ---------- -----------
Total operating costs and expenses 8,220,741 3,226,204 40,111,867
Interest income 8,667 56,902 70,347
---------- ---------- ----------
Net loss $(8,212,074) $(3,169,302) $(40,041,520)
========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
F-20
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Cash Flows
For the period
from
October 1, 1996
(date of inception)
to December 31,
2000 2001 2001
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (8,212,074) $ (3,169,302) $ (40,041,520)
Reconciliation of net loss to net cash used
Depreciation 49,146 49,811 206,396
Increase (decrease) in cash from working
Prepaid to Diacrin, Inc. 68,467 315,230 (50,014)
Payable to Genzyme Corporation 1,202,400 (2,072,790) 77,699
Other current assets (11,266) - (11,267)
Accrued expenses (453) (23,900) -
---------- ---------- ----------
Net cash used by operating activities (6,903,780) (4,900,951) (39,818,706)
Cash flows from investing activities:
Acquisition of property and equipment (13,268) - (312,761)
Cash flows from financing activities:
Capital contributed by Genzyme Corporation 5,992,265 3,280,155 33,016,794
Capital contributed by Diacrin, Inc. 1,947,422 1,086,719 7,612,766
---------- --------- ----------
Net cash provided by financing activities 7,939,687 4,366,874 40,629,560
---------- --------- ----------
Increase (decrease) in cash 1,022,639 (534,077) 498,093
Cash at beginning of period 9,531 1,032,170 -
---------- --------- ----------
Cash at end of period $ 1,032,170 $ 498,093 $ 498,093
========== ========= ==========
The accompanying notes are an integral part of
these financial statements.
F-21
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Changes in Venturers' Capital (Deficit)
For the Period from October 1, 1996 (Date of Inception) to December 31, 2001
Total
Unpaid Venturers' capital Venturers'
Genzyme Genzyme Diacrin, capital
Corporation Diacrin, Inc. Corporation Inc. (deficit)
1996 capital contributions $ 1,911,968 $ - $ - $ - $ 1,911,968
1996 net loss (1,542,374) - - - (1,542,374)
----------- ----------- --------- --------- ----------
Balance at December 31, 1996 369,594 - - - 369,594
1997 capital contributions 6,819,536 - - - 6,819,536
1997 net loss (6,809,012) - - - (6,809,012)
----------- ----------- --------- ---------- -----------
Balance at December 31, 1997 380,118 - - - 380,118
1998 capital contributions 7,709,137 2,085,079 (704,415) (175,838) 8,913,963
1998 net loss (7,608,663) (1,986,683) - - (9,595,346)
----------- ---------- -------- --------- -----------
Balance at December 31, 1998 480,592 98,396 (704,415) (175,838) (301,265)
1999 capital contributions 8,068,415 2,691,774 (60,267) (22,390) 10,677,532
1999 net loss (8,035,058) (2,678,353) - - (10,713,411)
---------- ---------- --------- --------- ----------
Balance at December 31, 1999 513,949 111,817 (764,682) (198,228) (337,144)
2000 capital contributions 6,089,247 2,029,749 (96,982) (82,327) 7,939,687
2000 net loss (6,159,056) (2,053,018) - - (8,212,074)
---------- ---------- -------- --------- ----------
Balance at December 31, 2000 444,140 88,548 (861,664) (280,555) (609,531)
2001 capital contributions (Unaudited) 2,418,491 806,164 861,664 280,555 4,366,874
2001 net loss (Unaudited) (2,376,977) (792,326) - - (3,169,303)
---------- ---------- -------- --------- ----------
Balance at December 31, 2001 (Unaudited) $ 485,654 $ 102,386 $ - $ - $ 588,040
========== ========== ======== ========= ==========
The accompanying notes are an integral part of
these financial statements.
F-22
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2001 Financial Statements
(Information for the period ended December 31, 2001 and
from inception through December 31, 2001 is unaudited)
A. Nature of Business and Organization
On October 1, 1996, Diacrin/Genzyme LLC ("the Joint Venture") was
established as a joint venture between Genzyme Corporation ("Genzyme") and
Diacrin, Inc. ("Diacrin") (collectively, the "Venturers"), to develop and
commercialize products and processes for use in the treatment of Parkinson's
disease and Huntington's disease in humans using porcine fetal cells. Under the
terms of the Collaboration Agreement among Diacrin, Genzyme and the Joint
Venture (the "Collaboration Agreement"), all funding is provided by the
Venturers, and all payments for work performed are made to the Venturers.
Genzyme provided the initial $10.0 million of the funding requirements, and the
next $40.0 million of the funding requirements are to be provided 75% by Genzyme
and 25% by Diacrin. After $50.0 million has been funded, any additional funding
will be provided equally by the Venturers. Funding is provided on a monthly
basis. Profits and losses from the Joint Venture will be shared in proportion to
the then current capital contribution ratio of each Venturer. The Joint Venture
reimburses the Venturers for costs incurred based upon the dollar amount of
work, at a defined cost, that each Venturer performs an behalf of the Joint
Venture. All general and administrative expenses recorded on the statements of
operations are for costs incurred by and reimbursed to the Venturers. See also
Note C.
The Steering Committee of the Joint Venture is comprised of
representatives of each Venturer. The Steering Committee is responsible for
approving the budget of the Joint Venture, reviewing costs incurred by the
Venturers and monitoring the scientific progress of the Joint Venture.
The Joint Venture is subject to risks common to companies in the
biotechnology industry, including but not limited to, the results of clinical
trials development by its competitors of new technological innovations,
protection of proprietary technology, health care cost containment initiatives,
product liability and compliance with government regulations, including those of
the United States Department of Health and Human Services and the United States
Food and Drug Administration.
In addition, either Venturer may terminate the Collaboration Agreement
for any reason upon 180 days notice to the other Venturer. During the 180-day
period, the obligations of the Venturers, including without limitation
obligations with respect to capital contributions, will continue in full force
and effect. A decision by one or both of the Venturers to discontinue the
Collaboration Agreement for any reason could lead to the discontinuation of the
Joint Venture.
F-23
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2001 Financial Statements - (Continued)
(Information for the period ended December 31, 2001 and
from inception through December 31, 2001 is unaudited)
The intangible assets and technological know-how contributed by Diacrin
to the Joint Venture are not included as an asset in these financial statements,
because generally accepted accounting principles require that the Joint Venture
record contributed assets at the book value of the Venturer, at the time of the
asset transfer the book value was $0.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents, consisting principally of money market funds
and municipal notes purchased with initial maturities of three months or less,
are valued at cost plus accrued interest, which approximates market.
Property and Equipment
Depreciation expense is computed on a straight-line basis over the
useful life of the property and equipment (3 to 10 years), and over the lesser
of the life of the lease or the life of the leasehold improvement. When assets
are retired or otherwise disposed of, the assets and the related accumulated
depreciation are removed from the accounts and any resulting gains or losses are
included in the results of operations.
Research and Development Expenses
Research and development costs are expensed as incurred. The research
and development efforts are being conducted by the Venturers. The costs incurred
by these related parties, which are subject to an annual budget approved by the
Joint Venture's Steering Committee, are then charged to the Joint Venture, at a
defined cost, or at amounts agreed to by the Venturers.
Income Taxes
The Joint Venture is organized as a pass-through entity; accordingly,
the financial statements do not include a provision for income taxes. Taxes, if
any, are the liability of Genzyme and Diacrin, as Venturers.
F-24
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2001 Financial Statements - (Continued)
(Information for the period ended December 31, 2001 and
from inception through December 31, 2001 is unaudited)
C. Agreements with Venturers
Funding
Genzyme agreed to make available to Diacrin an unsecured, subordinated
line of credit (the "Line") of up to an aggregate amount of $10.0 million after
the date that Genzyme provided the initial $10.0 million of funding to the Joint
Venture. Diacrin may draw on the Line only in the event that Diacrin's cash and
cash equivalents are insufficient to fund Diacrin's budgeted operations for a
specified period of time, and the funds may be used by Diacrin only to fund
capital contributions to the Joint Venture. The Line will be available through
the date five years after the date Diacrin first draws on the Line, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest bearing, evidenced by a promissory note and subject to
other considerations; and the aggregate amount of draws in any calendar year may
not exceed $5.0 million. As of December 31, 2001, Diacrin had not made any draws
on the Line.
During the year ended December 31, 1998, Genzyme provided its initial
$10.0 million of funding to the Joint Venture. After the initial $10.0 million,
Genzyme and Diacrin provide 75% and 25%, respectively, of the next $40.0 million
of funding to the Joint Venture. Thereafter, all funding will be shared equally
by the two parties. As of December 31, 2001, Genzyme and Diacrin have funded
$33.0 million and $7.6 million, respectively.
Other Agreements
The payable to Genzyme Corporation will be settled by cash payment and
represents costs incurred by Genzyme that are reimbursable under the
Collaboration Agreement. The prepaid to Diacrin is an estimate of the
reimbursable costs Diacrin expects to incur on behalf of the Joint Venture in
the next month.
At December 31, 2000, both Venturers had funded less than their
allocated losses which resulted in unpaid Venturer's capital and represents
receivables from the Venturers.
Genzyme charges the Joint Venture for use of certain research and
development facilities under a three-year agreement which commenced July 1,
1998. The charges were $364,164 for the year ended December 31, 2000. The
charges were $182,082 and $1,520,802 for the year ended December 31, 2001 and
period from inception through December 31, 2001 (unaudited).
F-25
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2001 Financial Statements - (Continued)
(Information for the period ended December 31, 2001 and
from inception through December 31, 2001 is unaudited)
D. Property and Equipment
Property and equipment is stated at cost. At December 31, 2000 and
2001, property and equipment consisted of the following:
2000 2001
Lab equipment $200,199 $200,199
Computer equipment 71,991 71,991
Leasehold improvements 27,608 27,608
Furniture and fixtures 12,963 12,963
-------- --------
312,761 312,761
Less: accumulated depreciation (156,585) (206,396)
-------- -------
Property and equipment, net $156,176 $106,365
======== ========
Depreciation expense was $49,146 and $49,811 for the years ended
December 31, 2000 and 2001 (unaudited), respectively, and $206,396 from
inception through December 31, 2001 (unaudited).
F-26