UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission File No. 000-20139
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)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of July 31, 2002, 17,937,204 shares of the registrant's Common
Stock were outstanding.
-1-
Diacrin, Inc.
Index
Page
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
December 31, 2001 and June 30, 2002...........................3
Statements of Operations for each of the three and six month
periods ended June 30, 2001 and 2002..........................4
Statements of Cash Flows for each of the six month periods
ended June 30, 2001 and 2002..................................5
Notes to Financial Statements.................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk..........................................21
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............21
Item 6. Exhibits and Reports on Form 8-K.....................21
SIGNATURES......................................................22
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 and the expected sources of porcine cells used in our products.
All statements, other than statements of historical facts included in this
Quarterly Report on Form 10-Q 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
Quarterly Report on Form 10-Q, 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
Quarterly Report on Form 10-Q.
You should read these statements carefully because they discuss our
expectations about our future performance and 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
Quarterly Report on Form 10-Q 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 Quarterly
Report on Form 10-Q represent our expectations as of the date this Quarterly
Report on Form 10-Q 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.
-2-
Diacrin, Inc.
Balance Sheets
(Unaudited)
December 31, June 30,
2001 2002
ASSETS
Current assets:
Cash and cash equivalents $ 8,534,426 $ 16,530,245
Short-term investments 33,410,736 29,224,576
Interest receivable and other current assets 668,020 723,363
---------- ----------
Total current assets 42,613,182 46,478,184
---------- ----------
Property and equipment, at cost:
Laboratory and manufacturing equipment 1,660,963 1,667,436
Furniture and office equipment 324,913 327,382
Leasehold improvements 77,529 81,397
--------- ---------
2,063,405 2,076,215
Less- Accumulated depreciation and amortization 1,861,110 1,957,553
--------- ---------
202,295 118,662
--------- ---------
Long-term investments 7,782,035 527,593
Investment in joint venture 83,984 -
--------- ---------
Total other assets 7,866,019 527,593
---------- ----------
Total assets $ 50,681,496 $ 47,124,439
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 119,167 $ 54,167
Accounts payable 117,663 112,163
Accrued expenses 1,269,278 1,082,080
Deferred revenue from joint venture 29,238 33,317
---------- ----------
Total current liabilities 1,535,346 1,281,727
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized--
5,000,000 shares; none issued and outstanding - -
Common stock, $.01 par value; authorized-- 30,000,000
shares; issued and outstanding-17,937,204
shares at December 31, 2001 and
June 30, 2002 179,372 179,372
Additional paid-in capital 101,401,822 101,401,822
Accumulated deficit (52,435,044) (55,738,482)
---------- ----------
Total stockholders' equity 49,146,150 45,842,712
---------- ----------
Total liabilities and stockholders' equity $ 50,681,496 $ 47,124,439
========== ==========
The accompanying notes are an integral part of these financial statements
-3-
Diacrin, Inc.
Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2001 2002 2001 2002
REVENUES:
Research and development $ 157,545 $ 46,853 $ 540,607 $ 79,441
--------- -------- --------- --------
OPERATING EXPENSES:
Research and development 1,698,341 1,699,769 3,148,408 3,322,105
General and administrative 461,811 433,603 887,314 790,798
--------- -------- --------- -------
Total operating expenses 2,160,152 2,133,372 4,035,722 4,112,903
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Equity in operations of joint venture (160,210) (39,175) (382,639) (70,585)
Investment income 832,875 346,126 1,741,733 802,739
Interest expense (3,859) (866) (9,043) (2,130)
--------- -------- -------- --------
Total other income (expense) 668,806 306,085 1,350,051 730,024
--------- -------- -------- --------
NET LOSS $ (1,333,801) $(1,780,434) $(2,145,064) $(3,303,438)
========== ========= ========= =========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.07) $ (.10) $ (.12) $ (.18)
========= ======== ======== =======
SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER
COMMON SHARE 17,914,704 17,937,204 17,914,704 17,937,204
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
-4-
Diacrin, Inc.
Statements of Cash Flows
(Unaudited)
Six Months
Ended June 30,
2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,145,064) $ (3,303,438)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 106,831 96,443
Equity in operations of joint venture 382,639 70,585
Changes in assets and liabilities-
Interest receivable and other current assets (138,883) (55,343)
Accounts payable 82,005 (5,500)
Accrued expenses 95,591 (200,279)
Deferred revenue from joint venture (39,466) 4,079
--------- ---------
Net cash used in operating activities (1,656,347) (3,393,453)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (15,242,405) 4,186,160
Purchases of property and equipment, net (4,514) (12,810)
Decrease in long-term investments 13,389,015 7,254,442
Investment in joint venture (597,510) -
Return of capital for services provided on behalf of joint venture 52,515 26,480
------- -------
Net cash (used in) provided by investing activities (2,402,899) 11,454,272
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (65,000) (65,000)
--------- ---------
Net cash used in financing activities (65,000) (65,000)
--------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (4,124,246) 7,995,819
CASH AND CASH EQUIVALENTS, beginning of period 11,143,116 8,534,426
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 7,018,870 $ 16,530,245
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 9,043 $ 2,130
======= ========
The accompanying notes are an integral part of these financial statements
-5-
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
1. Operations and Basis of Presentation
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989
and is developing transplantable cells for the treatment of human diseases
which are characterized by cell dysfunction or cell death and for which current
therapies are either inadequate or nonexistent.
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and include, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that
its disclosures are adequate to make the information presented not misleading.
The results for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year or any future periods. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's latest Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
(a) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation
("Genzyme") formed a joint venture to develop and commercialize two
product candidates. The joint venture is funded by Genzyme and the
Company in accordance with the terms of the joint venture agreement.
Collaborative revenue under the joint venture agreement with Genzyme 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 advances from the joint venture. Deferred
revenue represents amounts received prior to recognition of revenue.
Research and development costs are expensed as incurred.
The detail of the Company's investment in the joint venture for the
second quarter is as follows:
2002
------
Balance, beginning of period $ 83,984
Contributions to joint venture -
Return of capital (26,480)
Funding of operations of joint venture (57,504)
---------
Balance, end of period $ -
=========
-6-
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
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:
Six months ended June 30,
2001 2002
------ ------
Revenue recognized $540,607 $79,441
Research and development expense $720,809 $105,921
Equity in operations of joint venture $382,639 $70,585
(b) Net Loss per Common Share
In accordance with Statement of Financial Accounting Standards
("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 of 1,258,247 and 1,540,622 at June 30,
2001 and 2002, respectively, because to include such shares would be
antidilutive.
(c) Reclassification
Investment income has been reclassified in the prior period financial
statements into Other Income/ (Expense) to conform to the current period
presentation.
-7-
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
3. 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 fair
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 equivalents, short-term investments
and long-term investments at December 31, 2001 and June 30, 2002 consisted
of the following:
December 31, June 30,
2001 2002
Cash and cash equivalents-
Cash $ 1,003 $ 951
Money market mutual fund 8,533,423 16,529,294
----------- ---------
$ 8,534,426 $ 16,530,245
=========== ============
Short-term investments-
Corporate notes (remaining avg. mat. of 3 mos. at June 30, 2002) $ 26,651,221 $ 24,160,073
U.S. gov't oblig. & agencies (remaining avg. mat. of 6 mos. at June 30, 2002) 6,510,826 5,064,503
Commercial paper 248,689 -
---------- -----------
$ 33,410,736 $ 29,224,576
=========== ===========
Long-term investments-
Corporate notes (remaining mat. of 13 mos. at June 30, 2002) $ 4,198,142 $ 527,593
U.S. gov't obligations 3,583,893 -
---------- ----------
$ 7,782,035 $ 527,593
=========== ===========
-8-
Item 2. 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 June 30, 2002, we
had an accumulated deficit of $55.7 million.
In 1996, we formed a joint venture with Genzyme to develop and
commercialize two 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 June 30, 2002, approximately $33.0 million had been
contributed to the joint venture by Genzyme and approximately $7.6 million
had been contributed by us.
Critical Accounting Policies
Our significant accounting policies are discussed in Note 2 of our
audited financial statements which are included in our latest Annual Report on
Form 10-K filed with the Securities and Exchange Commission. 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
Three Months Ended June 30, 2002 Versus Three Months Ended June
30, 2001
Research and development revenues of approximately $47,000 for the
three months ended June 30, 2002 and $158,000 for the three months ended
June 30, 2001 were derived exclusively from the joint venture. The decrease
in revenues was primarily a result of a decrease in clinical production
activity related to the joint venture's product candidates.
Research and development expenses of $1.7 million for the three
months ended June 30, 2002 and 2001 remained relatively unchanged between
the periods.
General and administrative expenses were $434,000 and $462,000 for
the three months ended June 30, 2002 and 2001, respectively. The decrease in
general and administrative expenses was primarily due to a decrease in
professional fees related to the Company's evaluation of strategic
relationships.
-9-
For the three months ended June 30, 2002 and 2001, the Company
recorded an expense of $39,000 and $160,000, respectively, related to its
equity in operations of the joint venture. This expense was due to funds
contributed by the Company to the joint venture that were used to fund
expenses incurred by Genzyme on behalf of the joint venture. The decreased
charge in the current year period was primarily due to a decrease in clinical
activity performed by Genzyme on behalf of the joint venture.
Investment income was $346,000 and $833,000 for the three months
ended June 30, 2002 and 2001, respectively. The decrease in investment
income was due to lower cash balances available for investment in the current
year period and a lower return on investment due to the decline in interest
rates.
The Company incurred a net loss of approximately $1.8 million for the
three months ended June 30, 2002 versus approximately $1.3 million for the
three months ended June 30, 2001.
Six Months Ended June 30, 2002 Versus Six Months Ended June 30, 2001
Research and development revenues of approximately $79,000 for the
six months ended June 30, 2002 and $541,000 for the six months ended June
30, 2001 were derived exclusively from the joint venture. The decrease in
revenues was primarily a result of a decrease in clinical production activity
related to the joint venture's product candidates.
Research and development expenses were $3.3 million and $3.1
million for the six months ended June 30, 2002 and 2001, respectively. The
increase in research and development expenses was due to an increase in
clinical and production costs related to our human muscle cells for cardiac
disease and porcine spinal cord cells for spinal cord injury product
candidates.
General and administrative expenses were $791,000 and $887,000 for
the six months ended June 30, 2002 and 2001, respectively. The decrease in
general and administrative expenses was primarily due to a decrease in
professional fees related to the Company's evaluation of strategic
relationships.
For the six months ended June 30, 2002 and 2001, the Company
recorded an expense of $71,000 and $383,000, respectively, related to its
equity in operations of the joint venture. This expense was due to funds
contributed by the Company to the joint venture that were used to fund
expenses incurred by Genzyme on behalf of the joint venture. The decreased
charge in the current year period was primarily due to a decrease in clinical
activity performed by Genzyme on behalf of the joint venture.
Investment income was $803,000 and $1.7 million for the six months
ended June 30, 2002 and 2001, respectively. The decrease in investment
income was due to lower cash balances available for investment in the current
year period and a lower return on investment due to the decline in interest
rates.
The Company incurred a net loss of approximately $3.3 million for the
six months ended June 30, 2002 versus approximately $2.1 million for the six
months ended June 30, 2001.
Liquidity and Capital Resources
We have financed our activities primarily with the net proceeds from
the sale of equity and debt securities aggregating $102 million and with the
interest earned thereon. In addition, we have recorded approximately $15.3
million in revenue from our joint venture since it commenced on October 1,
1996. At June 30, 2002, we had cash and cash equivalents, short-term
investments and long-term investments aggregating approximately $46.3
million.
-10-
Net cash used in operating activities was $3.4 million for the six
months ended June 30, 2002 and $1.7 million for the six months ended June
20, 2001. Cash used in operations for the six months ended June 30, 2002 was
primarily attributable to our net loss and a decrease in accrued expenses,
offset in part by our equity in operations of joint venture and depreciation.
Cash used in operations for the six months ended June 30, 2001 was primarily
attributable to our net loss and an increase in interest receivable and other
current assets, offset in part by our equity in operations of joint venture and
depreciation.
Net cash provided by investing activities was $11.5 million for the six
months ended June 30, 2002. Net cash used in investing activities was $2.4
million for the six months ended June 30, 2001. Net cash provided by
investing activities for the six months ended June 30, 2002 was primarily
attributable to a decrease in short-term and long-term investments. Net cash
used in investing activities for the six months ended June 30, 2001 was
primarily attributable to a decrease in short-term investments offset by an
increase in long-term investments.
Net cash used in financing activities of $65,000 for the six months
ended June 30, 2002 and 2001 was attributable to principal payments on long-
term debt.
In November 1997, we borrowed $650,000 at the prime rate plus 0.5%
(5.25% at June 30, 2002) under an unsecured five-year term loan with a bank
to finance our biomedical animal facility acquired during 1997. At June 30,
2002 we had $54,167 outstanding under the borrowing. We had no material
commitments for capital expenditures as of June 30, 2002. In October 2000,
we exercised the first of two options we have to extend the lease of a facility
an additional five years. During the extension period, which began in October
2001, we will pay annual rent of approximately $908,000.
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.
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 Quarterly Report on Form 10-Q or presented elsewhere by management
from time to time. The forward-looking statements contained in this Quarterly
Report on Form 10-Q represent our expectations as of August 13, 2002, the
date our Quarterly Report on Form 10-Q 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."
- -11-
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. 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. Certain of our product candidates involve
xenotransplantation, or the transplantation of cells, tissues or organs from
one species to another. These product candidates all involve the
transplantation of porcine (pig) 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.
-12-
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.
-13-
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.
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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 June
30, 2002, we had an accumulated deficit of $55.7 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.
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;
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- 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.
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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.
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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 two
product candidates. 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.
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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.
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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 41% 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.
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Item 3. 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
annualized interest rate on our interest bearing investments were to change
1%, investment income would have hypothetically increased or decreased by
approximately $240,000 during the six months ended June 30, 2002. 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) The Company did not sell any equity securities during the quarter
ended June 30, 2002 that were not registered under the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed as part of this Quarterly Report
on Form 10-Q:
99.1 Statement Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the quarter
ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Diacrin, Inc.
August 13, 2002 /s/ Thomas H. Fraser
-----------------------
Thomas H. Fraser
President and
Chief Executive Officer
/s/ Kevin Kerrigan
-----------------------
Kevin Kerrigan
Controller
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