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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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Commission
For the fiscal year ended June 30, 2000 File Number 0-12957
[GRAPHIC OMITTED] ENZON, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2372868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Kingsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 980-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _X_
The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 18, 2000 was approximately $2,696,273,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class of
stock outstanding.
As of September 18, 2000, there were 41,108,120 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 41.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 5, 2000, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
ENZON, INC.
2000 Form 10-K Annual Report
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial 24
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 39
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements With Accountants on Accounting and 39
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
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ADAGEN(R), ONCASPAR(R) and PROTHECAN(R) are our registered trademarks. Other
trademarks and trade names used in this annual report are the property of their
respective owners.
Information contained in this Annual Report contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The matters set
forth in the section entitled Risk Factors, constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
vary materially from the future results indicated in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the future results indicated in such forward-looking statements.
PART I
Item 1. BUSINESS
Overview
We are a biopharmaceutical company that develops and commercializes
enhanced therapeutics for life-threatening diseases through the application of
our two proprietary platform technologies: PEG and single-chain antibodies. We
apply our PEG, or polyethylene glycol, technology to improve the delivery,
safety and efficacy of proteins and small molecules with known therapeutic
efficacy. We apply our single-chain antibody, or SCA, technology to discover and
produce antibody-like molecules that offer many of the therapeutic benefits of
monoclonal antibodies while addressing some of their limitations.
PEG-INTRON is a PEG-enhanced version of Schering-Plough's alpha interferon
product, INTRON A. We have designed PEG-INTRON to have an improved side effect
profile, to yield greater efficacy as compared to INTRON A and to allow once per
week dosing as compared to three times per week for INTRON A. Our worldwide
partner for PEG-INTRON, Schering-Plough, received approval in the European Union
for the treatment of adult patients with chronic hepatitis C during May 2000.
Schering-Plough has also filed an application in the United States for approval
of PEG-INTRON for the treatment of adult patients with chronic hepatitis C. In
February 2000, the FDA accepted Schering-Plough's December 1999 application for
PEG-INTRON for standard review, which typically takes 12 months from the date of
its filing. Schering-Plough is also conducting a Phase III clinical trial of
PEG-INTRON as combination therapy with REBETOL for hepatitis C and Phase III
clinical trials of PEG-INTRON for the treatment of chronic myelogenous leukemia
and malignant melanoma. Earlier stage clinical trials of PEG-INTRON are being
conducted for other indications, including the treatment of HIV, hepatitis B and
multiple sclerosis. Schering-Plough's worldwide sales of INTRON A and REBETRON
Combination Therapy for all indications in 1999 totaled $1.1 billion.
PROTHECAN is a PEG-enhanced version of camptothecin, a compound in the
class of molecules called topoisomerase inhibitors. Camptothecin has been shown
in clinical testing to be potent against certain tumor types, but it possesses
limited clinical utility due to significant side effects and poor solubility. We
have shown in pre-clinical studies that PROTHECAN has reduced side effects
compared to other topoisomerase inhibitors and preferentially accumulates in
tumors. We have initiated Phase I clinical trials of PROTHECAN in treating
various types of cancers and expect to initiate Phase II clinical trials in
2001. Two topoisomerase inhibitors, topotecan and irinotecan, are currently
approved and marketed for the treatment of ovarian and colorectal cancers,
respectively. Total 1999 worldwide sales of these two products were
approximately $550 million. We have other PEG-enhanced product candidates, which
are currently in pre-clinical development.
We have commercialized two products based on our PEG technology: ADAGEN for
the treatment of a congenital enzyme deficiency disease called Severe Combined
Immunodeficiency Disease or SCID and ONCASPAR for the treatment of acute
lymphoblastic leukemia. Each of these products is a PEG-enhanced version of a
naturally occurring enzyme. Both products have been on the market for several
years and have demonstrated the safe and effective application of our PEG
technology.
SCAs are genetically engineered proteins, which possess the binding
specificity and affinity of monoclonal antibodies and are designed to expand on
the therapeutic and diagnostic applications possible with monoclonal antibodies.
Preclinical studies have shown that SCAs allow for greater tissue penetration
and faster clearance from the body. We intend to use our strong intellectual
property position for our SCAs to issue additional licenses to third parties
developing SCAs. We also intend to develop PEG-enhanced therapeutic SCAs
internally, focusing initially on cancer and cardiovascular therapeutics. To
date, 11 SCAs have been or are being tested in early stage clinical trials. The
most clinically advanced SCAs based on our technology are being developed by our
licensee, Alexion Pharmaceuticals, for complications arising during
cardiopulmonary bypass and myocardial infarction. This product has been given
fast track review status by the FDA for bypass surgery.
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We intend to continue to commercialize our proprietary products and
technologies both internally and in cooperation with our strategic partners. We
have more than 15 strategic alliances and license relationships for the
development of products using our proprietary technologies.
PEG Technology
Our proprietary PEG technology involves chemically attaching PEG to
therapeutic proteins or small molecules for the purpose of enhancing therapeutic
value. PEG is a relatively non-reactive and non-toxic polymer that is frequently
used in food and pharmaceutical products. We have demonstrated, both in our
marketed products and our products under development, that for some proteins and
small molecules, we can impart significant pharmacologic advantages over the
unmodified forms of the compound by modifying a compound using our PEG
technology.
These advantages include:
o extended circulating life,
o lower toxicity,
o increased drug stability, and
o enhanced drug solubility.
[GRAPHIC OMITTED]
A depiction of a PEG-enhanced molecule.
For many years, we have applied our PEG technology to enhance the
pharmacologic characteristics of potential or existing protein therapeutics.
When we modify proteins with our PEG technology, it often causes these proteins
to have properties, such as improved circulating life and reduced toxicities
that significantly improve their therapeutic performance. In some cases, PEG can
render a protein therapeutically effective, where the unmodified form had been
ineffective. For example, proteins are often limited in their use as
therapeutics because they frequently induce an immunologic response. When PEG is
attached, it disguises the compound and reduces recognition by the patient's
immune system. As a result, many of the favorable characteristics listed above
are achieved. Given such improvement, frequency of dosing can be reduced without
diminishing potency, or higher doses can be given to achieve a more powerful
therapeutic impact.
We recently developed a next generation PEG technology that allows us to
apply PEG to small molecules. Like proteins, many small molecules of potentially
significant therapeutic value possess undesired pharmacologic characteristics
such as poor solubility, limited half-life and the propensity to induce an
immunologic response. The attachment of PEG to small molecules not only
disguises the molecule, thereby lowering potential immunogenicity and extending
its circulatory life, but also greatly increases the solubility of these
compounds. We attach PEG to small molecules by means of a covalent bond that is
designed to
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temporarily inactivate the compound, and then deteriorate over time, releasing
the compound in the proximity of targeted tissue. By inactivating and then
reactivating the compound in the body we create a Pro Drug version of such
compounds. These attributes may significantly enhance the therapeutic value of
new chemicals, drugs already marketed by others and off-patent drugs with
otherwise limited utility. We believe that this technology has broad usefulness
and that it can be applied to a wide range of small molecules, such as:
o cancer chemotherapy agents,
o antibiotics,
o anti-fungals, and
o immunosuppressants.
We also believe that we will be able to use this PEG technology to impart Pro
Drug attributes to proteins and peptides, including enzymes and growth factors.
We have significant expertise and intellectual property in the methods by
which PEG can be attached to a compound, the selection of appropriate sites on
the compound to which PEG is attached, and the amount and type of PEG used. If
PEG is attached to the wrong site on the protein, it can result in a loss of the
protein's activity or therapeutic effect. Similarly, inappropriate linkers or
the incorrect type or amount of PEG applied to a compound will typically fail to
produce the desired outcome. Given our expertise, we are able to tailor the PEG
technology to produce the desired results for the particular substance being
modified.
PEG Products
PEG-INTRON
PEG-INTRON is a PEG-enhanced version of Schering-Plough's recombinant
alpha-interferon product called INTRON A. We have modified the INTRON A compound
by attaching PEG to it, with the goal of imparting upon the drug enhanced
characteristics, such as reduced toxicity, extended circulating life and the
ability to administer higher doses without causing additional side effects. We
have developed PEG-INTRON in conjunction with Schering-Plough. Schering-Plough
currently markets INTRON A for 16 major antiviral and oncology indications
worldwide. The largest indications for INTRON A are hepatitis C and certain
types of cancer. Schering-Plough has been conducting clinical trials of
PEG-INTRON in hepatitis C and cancer, as well as some other potential
indications. During May 2000, Schering-Plough received approval in the European
Union for the treatment of adult patients with chronic hepatitis C and has
submitted an application for marketing approval in the U.S. for use of
PEG-INTRON as a stand-alone therapy in treating hepatitis C.
In late 1998, Schering-Plough began selling INTRON A in combination therapy
with REBETOL for the treatment of hepatitis C. Schering-Plough has reported that
the 1999 worldwide sales of INTRON A, as a stand-alone therapy for all
indications and as combination therapy with REBETOL, were approximately $1.1
billion. Sales of INTRON A as a stand-alone therapy for the treatment of
hepatitis C represent a portion of these combined sales. To date, the only
application filed by Schering-Plough for marketing approval of PEG-INTRON is as
a stand-alone therapy for the treatment of hepatitis C.
Hepatitis C
According to an article published in the New England Journal of Medicine,
approximately 3.9 million people in the U.S. are infected with the hepatitis C
virus. Approximately 2.7 million of these people are characterized as having
chronic hepatitis C infection. We believe that the number of people infected
with the hepatitis C virus in Europe is comparable to that in the U.S. According
to the World Health Organization,
5
there were approximately 170 million chronic cases of hepatitis C worldwide. A
substantial number of people in the U.S. who were infected with hepatitis C more
than 10 years ago are thought to have contracted the virus through blood
transfusions. Prior to 1992, the blood supply was not screened for the hepatitis
C virus. In addition, the majority of people infected with the virus are thought
to be unaware of the infection because the hepatitis C virus can incubate for up
to 10 years before patients become symptomatic. We estimate that fewer than
100,000 patients are currently being treated in the U.S. for hepatitis C.
The current standard of care for hepatitis C infection is alpha-interferon
administered three times per week for one year in combination with ribavirin,
another antiviral drug. The alpha-interferon plus ribavirin therapy was approved
in the U.S. for the treatment of hepatitis C in December 1998. Prior to such
approval, hepatitis C infection was typically treated with alpha-interferon
alone. In clinical studies, alpha-interferon stand-alone therapy for 48 weeks
has reduced viral loads below the detectable levels in 10% to 15% of patients
treated. In clinical studies, alpha-interferon plus ribavirin in combination
therapy has reduced viral loads below detectable levels in 31% to 38% of
patients treated. The clinical efficacy of alpha-interferon, both as a
stand-alone or combination therapy, has been limited by serious side effects,
which include flu-like symptoms, gastro-intestinal disorders and depression, in
addition to undesirable dosing requirements. The requirement of three times per
week dosing for the treatment of hepatitis C has also limited patient
compliance.
PEG-INTRON has shown in clinical trials that it is at least twice as
effective and has allowed for less frequent dosing when compared to unmodified
INTRON A. We expect that PEG-INTRON will be administered once per week, as
opposed to up to three times per week for current hepatitis C regimens utilizing
unmodified INTRON A.
In May 2000, Schering-Plough announced that it had received Marketing
Authorization, from the European Agency for the Evaluation of Medicinal
Products, or EMEA, for PEG-INTRON (PEG-interferon alfa-2b) Powder for Injection.
This approval of PEG-INTRON allows Schering-Plough to market PEG-INTRON
throughout the European Union. In December 1999, Schering-Plough submitted a
Biologics License Application, or BLA, to the FDA seeking marketing approval for
PEG-INTRON Powder for Injection for the treatment of chronic hepatitis C in
patients 18 years of age or older with compensated liver disease. In February
2000, the FDA accepted Schering-Plough's BLA for PEG-INTRON for standard review.
Under the Prescription Drug Users Fee Act, the FDA is required to act on the
application within 12 months from the date of its filing on December 23, 1999.
According to Schering-Plough, the BLA proposes administration of PEG-INTRON
Powder by injection once weekly for one year.
Under our licensing agreement with Schering-Plough, we are entitled to
milestone payments and royalties on worldwide sales of PEG-INTRON. The FDA's
acceptance in February 2000 of the BLA filing submitted by Schering-Plough
entitled us to a $1.0 million milestone payment. Schering-Plough has been
responsible for the clinical development of PEG-INTRON.
Schering-Plough is also continuing its development of PEG-INTRON as a
combination therapy with REBETOL (ribavirin, USP) for the treatment of hepatitis
C. In January 1999, Schering-Plough announced the initiation of a multi-national
Phase III clinical trial for this combination therapy.
Cancer
INTRON A is also used extensively in the treatment of cancer. Of the 16
indications for which INTRON A is approved throughout the world, 12 are cancer
indications. Currently, INTRON A is approved in the U.S. for three cancer
indications and used in some cases for other indications on an off-label basis.
Schering-Plough is currently conducting two Phase III clinical trials of
PEG-INTRON for two cancer indications, malignant melanoma and chronic
myelogenous leukemia. In addition, Schering-Plough is conducting early stage
trials of PEG-INTRON for various solid tumors and other forms of leukemia. The
following is a list of approved and potential cancer indications for which
INTRON A may be prescribed in the U.S.
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Cancer Type Status Annual U.S. Incidence
----------- ------ ---------------------
Malignant melanoma (Stage II, III, IV) Approved 44,200
Follicular NHL (low grade) Approved 11,000
Chronic myelogenous leukemia Approved 4,300
AIDS-related Kaposi's sarcoma Approved 3,200
Bladder cancer Potential 54,200
Renal cell carcinoma Potential 31,000
If the ongoing Phase III clinical trials of PEG-INTRON in malignant
melanoma and chronic myelogenous leukemia demonstrate not only that the product
is effective, but also that it has an improved side effect profile compared to
unmodified INTRON A, we anticipate that higher doses of PEG-INTRON may be used,
as compared to unmodified INTRON A. The ability to administer higher doses of
alpha-interferon could lead to increased efficacy, as well as permit the use of
PEG-INTRON for additional indications or usage. Published data from a Phase I
clinical trial of PEG-INTRON in various cancer types showed that some patients
who previously did not respond to unmodified INTRON A treatment did respond to
PEG-INTRON. In that trial, PEG-INTRON was administered once per week as opposed
to up to five times per week, which is a typical therapy regimen using
unmodified INTRON A, and we expect that the once per week dosing regimen may be
used in treating various cancer types.
Potential Other Indications
We believe that PEG-INTRON may be applied in treating other diseases,
including HIV, hepatitis B and multiple sclerosis. A Phase I clinical trial of
PEG-INTRON has been conducted for HIV. In this study, 58% of the 30 patients had
substantial reductions in their levels of HIV after adding a weekly injection of
PEG-INTRON to their combination treatments.
PROTHECAN
PROTHECAN is a PEG-enhanced version of a small molecule called
camptothecin, which is an anticancer compound in the class of drugs called
topoisomerase inhibitors. Camptothecin, which was originally developed at the
National Institutes of Health and is now off patent, is believed to be a potent
topoisomerase inhibitor.
For many years camptothecin has been known to be a very effective oncolytic
agent but its drug delivery problems have limited its use. Recently, two
camptothecin derivatives, topotecan and irinotecan, have been approved by the
FDA for the treatment of ovarian and colorectal cancers, respectively. While
these two new products are more soluble than camptothecin, their efficacy rate
is relatively low. Despite their limitations, these two products together
achieved 1999 worldwide sales of approximately $550 million.
We believe that by adjusting the way PEG is covalently attached to
camptothecin, the PEG attachment can be used to inactivate the compound's toxic
mechanism, which allows it to circulate in the bloodstream for long periods of
time. This allows the compound to accumulate in the proximity of tumor sites.
Preliminary animal tests have shown that camptothecin modified with our PEG
technology preferentially accumulates in tumors. The covalent bond used in
PROTHECAN to attach PEG to the camptothecin is designed to deteriorate over
time, resulting in the PEG falling off and allowing the compound once again to
become active.
We are currently conducting Phase I clinical trials of PROTHECAN in
treating various types of cancers and expect to commence Phase II clinical
trials in 2001.
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ADAGEN
ADAGEN, our first FDA-approved PEG product, is used to treat patients
afflicted with a type of Severe Combined Immunodeficiency Disease, or SCID, also
known as the Bubble Boy Disease, which is caused by the chronic deficiency of
the adenosine deaminase enzyme, or ADA. ADAGEN represents the first successful
application of enzyme replacement therapy for an inherited disease. SCID results
in children being born without fully functioning immune systems, leaving them
susceptible to a wide range of infectious diseases. Currently, the only
alternative to ADAGEN treatment is a well-matched bone marrow transplant.
Injections of unmodified ADA are not effective because of its short circulating
life (less than 30 minutes) and the potential for immunogenic reactions to a
bovine-sourced enzyme. The attachment of PEG to ADA allows ADA to achieve its
full therapeutic effect by increasing its circulating life and masking the ADA
to avoid immunogenic reactions.
We are marketing ADAGEN on a worldwide basis and selling it in the United
States. A European firm is distributing ADAGEN in Europe and Japan. Currently,
65 patients in eight countries are receiving ADAGEN therapy. We believe many
newborns with ADA-deficient SCID go undiagnosed and we are therefore focusing
our marketing efforts for ADAGEN on new patient identification. Our sales of
ADAGEN for the fiscal years ended June 30, 2000, 1999 and 1998 were $12.2
million, $11.2 million and $10.1 million, respectively.
ONCASPAR
ONCASPAR, our second FDA-approved product, is a PEG-enhanced version of a
naturally occurring enzyme called L-asparaginase. It is currently approved in
the U.S., Canada and Germany, and is used in conjunction with other
chemotherapeutics to treat patients with acute lymphoblastic leukemia who are
hypersensitive, or allergic, to native, or unmodified, forms of L-asparaginase.
Aventis Pharmaceuticals (formerly Rhone-Poulenc Rorer Pharmaceuticals) has the
exclusive license to market ONCASPAR in the U.S. and Canada, and MEDAC GmbH has
the exclusive right to market ONCASPAR in Europe.
L-asparaginase is an enzyme, which depletes the amino acid asparagine upon
which certain leukemic cells are dependent for survival. Other companies market
unmodified L-asparaginase in the U.S. for pediatric acute lymphoblastic leukemia
and in Europe to treat adult acute lymphoblastic leukemia and non-Hodgkin's
lymphoma, as well as pediatric acute lymphoblastic leukemia.
The therapeutic value of unmodified L-asparaginase is limited by its short
half-life, which requires every-other-day injections, and its propensity to
cause a high incidence of allergic reactions. We believe that ONCASPAR offers
significant therapeutic advantages over unmodified L-asparaginase. ONCASPAR has
a significantly increased half-life in blood, allowing every-other-week
administration, and it causes fewer allergic reactions. Based upon the current
use of unmodified L-asparaginase, we believe that ONCASPAR may be used in other
cancer indications, potentially including lymphoma.
Other PEG Products
Our PEG technology may be applicable to other potential products. We are
currently conducting pre-clinical studies for additional PEG-enhanced compounds.
We will continue to seek opportunities to develop other PEG-enhanced products.
In 1998, we concluded a second Phase I clinical trial for a hemoglobin-based
oxygen carrier, PEG-hemoglobin, for use as a radiosensitizer, in conjunction
with radiation treatment of solid hypoxic tumors. We intend to continue to
develop this product only in conjunction with a partner that will fund the
development costs. To date, we have been unable to conclude an agreement with
such a partner. We do not intend to conduct any further clinical trials for
PEG-hemoglobin on our own.
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SCA Proteins
General
Antibodies are proteins produced by the immune system in response to the
presence in the body of bacteria, viruses or other disease causing agents.
Antibodies of identical molecular structure that bind to a specific target are
called monoclonal antibodies. Over the past few years, several monoclonal
antibodies have been approved for therapeutic use and have achieved significant
clinical and commercial success. Much of the clinical utility of monoclonal
antibodies results from the affinity and specificity with which they bind to
their targets, as well as a long circulating life due to their relatively large
size. Monoclonal antibodies, however, are not well suited for use in indications
where a short half-life is advantageous or where their large size inhibits them
physically from reaching the area of potential therapeutic activity.
SCAs are genetically engineered proteins designed to expand on the
therapeutic and diagnostic applications possible with monoclonal antibodies.
SCAs have the binding specificity and affinity of monoclonal antibodies and, in
their native form, are about one-fifth to one-sixth of the size of a monoclonal
antibody, typically giving them very short half lives. We believe that human
SCAs offer the following benefits compared to most monoclonal antibodies:
o faster clearance from the body,
o greater tissue penetration for both diagnostic imaging and therapy,
o a significant decrease in immunogenic problems when compared with
mouse-based antibodies,
o easier and more cost effective scale-up for manufacturing when
compared with monoclonal antibodies,
o enhanced screening capabilities which allow for the more rapid
assessment of SCA proteins of desired specificity using high
throughput screening methods, and
o a better opportunity to be used orally, intranasally, transdermally or
by inhalation.
Comparison of a standard monoclonal antibody and a single-chain antibody.
[GRAPHIC OMITTED]
Monoclonal Antobody
[GRAPHIC OMITTED]
Single-Chain Antibody
In addition to these benefits, fully human SCAs can be isolated directly
from human SCA libraries without the need for costly and time consuming
humanization procedures. SCAs are also readily produced
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through intracellular expression (inside cells) allowing for their use in gene
therapy applications where SCA molecules act as specific inhibitors of cell
function.
We, along with numerous other academic and industrial laboratories, have
demonstrated through in vitro testing the binding specificity of dozens of SCAs.
We, in collaboration with the National Cancer Institute, have shown in published
preclinical studies that SCAs localize to specific tumors and rapidly penetrate
the tumors.
SCAs Under Development
We believe that we have a strong patent position in the area of SCAs. We
also believe that all products made by or incorporating SCA-based proteins or
genes will require a license under our patents. We have granted licenses to a
number of corporations and intend to issue additional licenses. We also intend
to develop our own SCAs, focusing primarily on PEG-enhanced SCAs. To date, we
have granted SCA product licenses to more than 15 companies, including
Bristol-Myers Squibb, Baxter Healthcare and the Gencell Division of Aventis.
These product licenses generally provide for upfront payments, milestone
payments and royalties on sales of any SCA products developed. The following
table sets forth a number of our licensees and summarizes their research and
development efforts to date:
Research Collaborator Status Indication/Use
- --------------------- ------ --------------
Alexion Pharmaceuticals Phase IIb Cardiopulmonary bypass
and myocardial infarction
Cell Genesys Phase I/II Colon cancer
Seattle Genetics Phase I Cancer
MorphoSys Research Phage display
Cambridge Antibody Technology Research Phage display
Baxter Healthcare Corporation Research Cancer
Bristol-Myers Squibb Research All therapeutics
Gencell Division of Aventis Research Gene therapy
Currently, there are 11 SCA proteins that have been or are being tested in
early stage clinical trials by various organizations, including our licensees
and academic institutions. Some of the areas being explored are cancer therapy,
cardiovascular indications and AIDS. We believe that those organizations that
have not yet licensed this technology from us will need a license from us to
commercialize these products. However, we cannot assure you that this will prove
to be the case. Set forth below are some examples of research being conducted in
the SCA area.
Alexion Pharmaceuticals. Our licensee, Alexion Pharmaceuticals, Inc., is
developing an SCA directed against complement protein C5, which is a component
of the body's normal defense against foreign pathogens. Inappropriate complement
activation during cardiopulmonary bypass and myocardial infarction can lead to
clinical problems. In Phase I trials during cardiopulmonary bypass, this SCA
improved cardiac and neurological function and reduced blood loss. Alexion and
its partner, Procter & Gamble, are currently conducting a 1,000 patient Phase
IIb study to evaluate this SCA in patients undergoing cardiopulmonary bypass
surgery and are initiating two additional 1,000 patient Phase II trials to
evaluate this SCA in heart attack patients. This product has been given fast
track review status by the FDA for bypass surgery.
Cell Genesys. Another application of our SCA technology is in the area of
T-Bodies. T-Body technology involves the expression of an SCA protein in a
T-Cell that has been removed from the body and genetically modified. T-Cells, a
type of lymphocyte cell, represent an important component of the immune system
responsible for cell-mediated immunity and represent one of the body's natural
defenses against foreign materials such as cancer cells and infectious
organisms. Using SCA technology, T-Cells can be modified through molecular
biology methods to express an SCA on the cell surface that can then recognize
and bind to a
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specific antigen, thereby targeting the T-Cell to a specific location. Cell
Genesys, our licensee, has had success in applying T-Bodies in preclinical
studies with a T-Body SCA directed to various forms of cancer. In its completed
Phase I/II trial, Cell Genesys reported that the treatment could be safely
administered in an outpatient setting although no antitumor activity was
observed.
Cambridge Antibody Technology and MorphoSys. Cambridge Antibody Technology
Ltd., or CAT, and MorphoSys are using antibody engineering, with phage display
library technology, for the isolation of high specificity antibody binding
regions. Using phage display technology, it is possible to conveniently isolate
a fully human high-affinity SCA specific to virtually any target antigen. CAT
and MorphoSys are leaders in the development of combinatorial antibody
libraries, using phage display. CAT and MorphoSys currently have several
licensing agreements with global pharmaceutical and biotechnology companies to
apply their library to the identification and isolation of high specificity
antibody proteins. Any companies working with CAT or MorphoSys will be required
to negotiate a license with us for any SCAs that they might wish to
commercialize.
Seattle Genetics. Seattle Genetics is developing a single-chain immunotoxin
targeted to cancers. It is in Phase I clinical trials in patients with carcinoma
using its lead product candidate SGN-10, a single-chain version of
Bristol-Myers' monoclonal antibody called BR 96. Preclinical data indicates that
this SCA may have potent activity against a wide variety of solid tumor cancers.
Single-chain immunotoxins combine an SCA that has specificity for a particular
antigen on certain types of cancer cells with a toxin protein that would not
otherwise bind to those tumor cells. SGN-10 has an SCA component that binds with
high specificity to a particular carbohydrate that is expressed on the cell
surface of many forms of solid tumors, including breast, lung, ovarian,
prostate, colorectal and pancreatic cancers.
Dana-Farber Cancer Institute and University of Alabama. Scientists at the
Dana-Farber Cancer Institute and the University of Alabama are conducting
research utilizing SCA proteins called intrabodies. Intrabodies are SCAs
produced inside the cell via gene therapy. The Dana-Farber Cancer Institute is
studying the use of a very specific intrabody for the treatment of HIV
infection. The University of Alabama is studying a separate intrabody for
ovarian cancer targeted to the erbB-2 receptor. Pre-clinical data generated from
these studies have revealed that SCAs produced through intracellular expression
can provide an important therapeutic response. The University of Alabama has
completed a Phase I trial and the Dana-Farber Cancer Institute expects to
initiate its trial shortly. Because the Dana-Farber Cancer Institute and the
University of Alabama are academic research institutions, we have not required
them to license our technologies.
Internal Development
Internally, our research staff are currently working on a SCA protein
candidate, as well as evaluating the feasibility of in-licensing SCA proteins
that are already in clinical development. We are also developing several new
technology platforms, which combine our proprietary SCA and PEG technologies. We
have shown that it is possible to increase the half life of an SCA, by a factor
of two- to twenty-fold, by attaching PEG to it. We can modify these properties
of a PEG-SCA by varying the size of the PEG, the amount and shape of PEG and the
attachment site. We intend to pursue the expansion of PEG-SCA technologies and
develop SCA therapeutics that may be important in the treatment of
cardiovascular disease, cancer, transplantation and acute phases of certain
chronic diseases such as arthritis.
Strategic Alliances and Licenses
In addition to internal product development, we seek to enter into joint
development and licensing arrangements with other pharmaceutical and
biopharmaceutical companies to expand the pipeline of products utilizing our
proprietary PEG and SCA protein technologies. We believe that our technologies
can be used to improve products that are already on the market or that are under
development to produce therapeutic products that provide a safer, more effective
and more convenient therapy. Currently, our partners have two products in late
stages of the approval process, PEG-INTRON and Human Serum Albumin, as well as
several SCA compounds in Phase I and Phase II clinical trials. PEG-INTRON was
approved in the European Union in May 2000.
11
Schering-Plough Agreement
In November 1990, we entered into an agreement with Schering-Plough. Under
this agreement, Schering-Plough agreed to apply our PEG technology to develop a
modified form of Schering-Plough's INTRON A. Schering-Plough is responsible for
conducting and funding the clinical studies, obtaining regulatory approval and
marketing the product worldwide on an exclusive basis and we will receive
royalties on worldwide sales of PEG-INTRON. The royalty percentage to which we
are entitled will be lower in any country where a polyethylene
glycol/interferon-a product is being marketed by a third party in competition
with PEG-INTRON, where such third party is not Hoffmann-La Roche.
In June 1999, we amended our agreement with Schering-Plough, which resulted
in an increase in the effective royalty rate that we receive for PEG-INTRON
sales. In exchange, we relinquished our option to retain exclusive U.S.
manufacturing rights for this product. In addition, we granted Schering-Plough a
non-exclusive license under some of our PEG patents relating to Branched, or
U-PEG, technology. This license gives Schering-Plough the ability to sublicense
rights under these patents to any party developing a competing interferon
product.
In February 2000, we earned a $1.0 million milestone payment when the FDA
accepted the BLA for PEG-INTRON filed by Schering-Plough. We are entitled to an
additional $2.0 million milestone payment upon the approval of the BLA, if and
when such approval occurs. Our agreement with Schering-Plough terminates, on a
country-by-country basis, upon the later of:
o the termination of Schering-Plough's obligation to pay us royalties in
such country under the agreement, which obligation runs until the
later of the date the last patent to contain a claim covering
PEG-INTRON expires in the country or 15 years after the first
commercial sale of PEG-INTRON in such country, or
o the expiration of the last to expire of our U-PEG patents or the
patents owned or assigned to us under the agreement, including any
patent extension or other extension of market exclusivity obtained
relating to the patents.
Schering has the right to terminate this agreement at any time if we fail
to maintain the requisite liability insurance.
Aventis License Agreements
We have entered into a license agreement with Aventis Pharmaceuticals
(formerly Rhone-Poulenc Rorer Pharmaceutical, Inc.), as amended, under which we
granted Aventis an exclusive license to sell in the United States ONCASPAR and
any other asparaginase or PEG-asparaginase product developed by us or Aventis
during the term of the amended license agreement. During July 2000, we further
amended our license agreement with Aventis to increase the base royalty payable
to us on net sales of ONCASPAR from 23.5% to 27.5% on annual sales up to $10
million and 25% on annual sales exceeding $10 million. These royalty payments
will include Aventis' cost of purchasing ONCASPAR from us under our supply
agreement. The term of the agreement was also extended until 2016. Additionally,
the amended license agreement eliminated the super royalty of 43.5% on net sales
of ONCASPAR which exceed certain agreed-upon amounts. The amended Aventis U.S.
License Agreement also provides for a payment of $3,500,000 in advance
royalties, which was received in January 1995.
The payment of royalties to us under the amended license agreement will be
offset by an original credit of $5.9 million, which represents a royalty advance
plus reimbursement of certain amounts due to Aventis under the original license
agreement and interest expense. The royalty advance is shown as a long term
liability, with the corresponding current portion included in accrued expenses
on our consolidated balance
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sheets as of June 30, 2000 and 1999. The royalty advance will be reduced as
royalties are recognized under the agreement.
The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. The
agreement terminates in December 2016 but automatically renews for additional
one-year periods unless either party notifies the other in writing that it
intends not to renew the agreement at least three months prior to the end of the
current term. It can be terminated earlier by either party due to a default by
the other. In addition, Aventis may terminate the agreement at any time upon one
year's prior notice to us or if we are unable to supply product for more than 60
days under our separate supply agreement with Aventis. When the amended license
agreement terminates, all rights we granted to Aventis under the agreement will
revert to us. Under its supply agreement with us, Aventis is required to
purchase from us all of its product requirements for sales of ONCASPAR in North
America. If we are unable to supply product to Aventis under the supply
agreement for more than 60 days for any reason other than a force majeure event,
Aventis may terminate the supply agreement and we will be required to
exclusively license Aventis the know-how required to manufacture ONCASPAR for
the period of time during which the agreement would have continued had the
license agreement not been terminated.
During August 2000 we made a $1.5 million payment to Aventis, which was
accrued for at June 30, 2000, to settle a disagreement over the purchase price
of ONCASPAR under the supply agreement and to settle Aventis' claim that we
should be responsible for its lost profits while ONCASPAR is under the temporary
labeling and distribution modifications described in "Raw Materials and
Manufacturing". Further, beginning in May 2000 and for each month that expires
prior to our receipt of FDA approval to allow marketing and distribution of
ONCASPAR without such labeling and distribution, we shall pay to Aventis
$100,000. As of September 15, 2000 we have not received this approval.
Under separate license agreements, Aventis has exclusive rights to sell
ONCASPAR in Canada and Mexico. These agreements provide for Aventis to seek to
obtain marketing approval of ONCASPAR in Canada and Mexico and for us to receive
royalties on net sales of ONCASPAR in these countries, if any. These agreements
expire 10 years after the first commercial sale of ONCASPAR in each country, but
automatically renew for consecutive five-year periods unless either party elects
to terminate at least three months prior to the end of the current term. Aventis
may terminate these agreements on one year's prior notice to us.
We also have a license agreement with Aventis for the Pacific Rim region,
specifically, Australia, New Zealand, Japan, Hong Kong, Korea, China, Taiwan,
the Philippines, Indonesia, Malaysia, Singapore, Thailand, Laos, Cambodia and
Vietnam. Under the license agreement, Aventis is responsible for obtaining
approvals for indications in the licensed territories. Our supply agreement for
the Pacific Rim region provides for Aventis to purchase ONCASPAR for the region
from us at established prices, which increase over the term of the agreement.
The license agreement also provides for minimum purchase requirements for the
first four years of the agreement. These agreements expire on a
country-by-country basis 10 years after the first commercial sale of ONCASPAR in
each country, but automatically renew for consecutive five-year periods unless
either party elects to terminate at least three months prior to the end of the
current term. Aventis may terminate these agreements on one year's prior notice
to us.
MEDAC License Agreement
We have also granted an exclusive license to MEDAC to sell ONCASPAR and any
PEG-asparaginase product developed by us or MEDAC during the term of the
agreement in Western Europe, Turkey and Russia. Our supply agreement with MEDAC
provides for MEDAC to purchase ONCASPAR from us at certain established prices,
which increase over the initial five-year term of the agreement. Under the
license agreement, MEDAC is responsible for obtaining additional approvals and
indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Under the agreement,
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MEDAC is required to meet certain minimum purchase requirements. The MEDAC
license terminates in October 2001, but automatically renews for successive
two-year periods unless either party elects to terminate at least nine months
prior to the end of the current term. MEDAC may terminate the agreement after
providing us with one year's prior notice.
Green Cross Agreements
We have two license agreements with the Green Cross Corporation for the
development of a recombinant human serum albumin, or rHSA, as a blood volume
expander. Green Cross was acquired by Yoshitomi Pharmaceutical Industries, Ltd.
in April 1998. Green Cross has reported that it filed for approval of this
product in Japan in November 1997. The agreements, which were assigned to us in
connection with our acquisition of Genex Corporation in 1991, entitle us to a
royalty on sales of an rHSA product sold by Green Cross in much of Asia and
North and South America. Currently, Green Cross is only developing this product
for the Japanese market. A binding arbitration was concluded in February 2000
regarding the royalty rate required under the agreements. Green Cross had filed
documents in the arbitration taking the position that no royalty was due to us.
We disputed that position, and the arbitrators awarded us a 1% royalty on
Yoshitomi sales of rHSA in Japan, South East Asia, India, China, Australia, New
Zealand and North and South America for a period of 15 years after the first
commercial sale of Yoshitomi's rHSA following market approval of that product in
Japan or the United States.
Marketing
Other than ADAGEN, which we market on a worldwide basis to a small patient
population, we do not engage in the direct commercial marketing of any of our
products and therefore do not have an established sales force. For some of our
products, we have provided exclusive marketing rights to our corporate partners
in return for royalties on sales.
We expect to evaluate whether to create a sales force to market certain
products in the United States or to continue to enter into licensing and
marketing agreements with others for United States and foreign markets. These
agreements generally provide that our licensees or marketing partners will
conduct all or a significant portion of the marketing of these products. In
addition, under these agreements, our licensee or marketing partners may have
all or a significant portion of the development and regulatory approval
responsibilities.
Raw Materials and Manufacturing
In the manufacture of our products, we couple activated forms of PEG with
unmodified proteins. We do not have a long-term supply agreement for the raw
polyethylene glycol that we use to manufacture the PEG we require. Instead, we
maintain a level of inventory, which we believe should provide us sufficient
time to find an alternate supplier of PEG, in the event it becomes necessary,
without materially disrupting our business.
During 1998, we began to experience manufacturing problems with one of our
FDA-approved products, ONCASPAR. The problems were due to increased levels of
white particulates in batches of ONCASPAR, which resulted in an increased
rejection rate for this product. During November 1998, we agreed with the FDA to
temporary labeling and distribution modifications for ONCASPAR and instituted
additional inspection and labeling procedures prior to distribution. During May
1999, the FDA required us to limit distribution of ONCASPAR to only those
patients who are hypersensitive to native L-asparaginase. In November 1999, the
FDA withdrew this distribution restriction.
In July 1999, the FDA conducted an inspection of our manufacturing facility
in connection with our product license for ADAGEN. Following that inspection,
the FDA documented several deviations from Current Good Manufacturing Practices,
known as cGMP, in a Form 483 report. We provided the FDA with a corrective
action plan. In November 1999, the FDA issued a warning letter citing the same
cGMP deviations
14
listed in the July 1999 Form 483, but it also stated that the FDA was satisfied
with our proposed corrective actions. As a result of the deviations, the FDA
decided not to approve product export requests from us for ONCASPAR until it
determines that all noted cGMP deviations have been corrected. This restriction
was removed in August 2000.
In January 2000, the FDA conducted another inspection of our manufacturing
facility relating to the ONCASPAR product license and as a follow-up to the July
1999 inspection relating to ADAGEN. Following this most recent inspection, the
FDA issued a Form 483 report, citing deviations from cGMP in the manufacture of
ONCASPAR and two cGMP deviations for ADAGEN. We have responded to the FDA with a
corrective action plan to the January 2000 Form 483.
Research and Development
Our primary source of new products is our internal research and development
activities. Research and development expenses for the fiscal years ended June
30, 2000, 1999 and 1998 were approximately $8.4 million, $6.8 million and $8.7
million, respectively.
Our research and development activities during fiscal 2000 concentrated
primarily on the Phase I clinical trial of PROTHECAN, pre-clinical studies, and
continued research and development of our proprietary technologies. As a result
of our clinical trials for PROTHECAN and additional clinical and pre-clinical
studies, we expect our research and expenses for fiscal 2001 and beyond to be at
significantly higher levels then previous years.
Patents
We have licensed, and been issued, a number of patents in the United States
and other countries and have other patent applications pending to protect our
proprietary technology. Although we believe that our patents provide adequate
protection for the conduct of our business, we cannot assure you that such
patents:
o will be of substantial protection or commercial benefit to us,
o will afford us adequate protection from competing products, or
o will not be challenged or declared invalid.
We also cannot assure you that additional United States patents or foreign
patent equivalents will be issued to us.
The patent covering our original PEG technology, which we had licensed from
Research Corporation Technologies, Inc., contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties will be permitted to make, use, or
sell products covered by the claims of the Research Corporation patent, subject
to other patents, including those which we hold. We have obtained and intend to
continue to pursue patents with claims covering improved methods of attaching or
linking PEG to therapeutic compounds. We also have obtained patents relating to
the specific composition of the PEG-modified compounds that we have identified
or created. We will continue to seek such patents as we develop additional
PEG-enhanced products. We cannot assure you that any of these patents will
enable us to prevent infringement or that competitors will not develop
competitive products outside the protection that may be afforded by our patents.
We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. Owners of any such patents
may seek to prevent us or our collaborators from selling our products. In
January
15
2000, Hoffmann-La Roche filed lawsuits in both the U.S. and France against
Schering-Plough alleging that PEG-INTRON infringes certain patents held by
Hoffmann-La Roche. The validity and scope of Hoffmann-La Roche's patents in this
segment of the industry could be judicially determined during these proceedings.
If Schering-Plough does not prevail in this litigation, Hoffmann-La Roche may
completely block Schering-Plough from commercializing PEG-INTRON. Among other
things, the outcome will likely depend not only upon whether the Hoffmann-La
Roche patents are determined valid and infringed, but upon the reasoning behind
such determinations. Prior to the commencement of this litigation we obtained an
opinion of patent counsel that the patent held by Hoffmann-La Roche is invalid.
This opinion has been relied upon by us and Schering-Plough in continuing to
pursue development of this product; however, these opinions are not binding on
any court or the U.S. Patent and Trademark Office. We cannot assure you that the
patent opinion will prove to be correct and that a court would find any of the
claims of such patents to be invalid or that the product developed by us or our
collaborator does not infringe such patents.
We also believe that there are PEG-modified products being developed by
third parties that infringe on one or more of our current PEG technology
patents. On December 7, 1998, we filed a patent infringement suit against
Shearwater Polymers Inc., a company that reportedly has developed a Branched
PEG, or U-PEG, used in Hoffmann-La Roche's Pegasys product, a PEG-modified
version of its alpha-interferon product called Roferon-A. According to published
reports, Pegasys utilizes a type of Branched PEG for which we have been granted
a patent in the U.S. and have a similar patent pending in Europe. Shearwater has
filed a counterclaim in this litigation alleging that our Branched PEG patent is
invalid and unenforceable. During September 2000 we filed a similar infringement
suit against Hoffman-LaRoche under a newly issued related patent.
In the field of SCA proteins, we have several United States and foreign
patents and pending patent applications, including a patent granted in August
1990 covering the genes needed to encode SCA proteins. Creative BioMolecules,
Inc., or Creative, provoked an interference with this patent and on June 28,
1991, the United States Patent and Trademark Office entered summary judgment
terminating the interference proceeding and upholding our patent. Creative
subsequently lost its appeal of this decision in the United States Court of
Appeals and did not file a petition for review of this decision by the United
States Supreme Court within the required time period.
In November 1993, Creative signed collaborative agreements with us in the
field of our SCA protein technology and Creative's Biosynthetic Antibody Binding
Site protein technology. Under the agreements, each company is free, under a
non-exclusive, worldwide license, to develop and sell products utilizing the
technology claimed by both companies' antibody engineering patents, without
paying royalties to the other. Each company is also free to market products in
collaboration with third parties, but the third parties will be required to pay
royalties on products covered by the patents which will be shared by the
companies, except in certain instances. We have the exclusive right to market
licenses under both companies' patents other than to Creative's collaborators.
In addition, the agreements provide for the release and discharge by each
company of the other from any and all claims based on past infringement of the
technology which is the subject of the agreements. The agreements also provide
for any future disputes between the companies regarding new patents in the area
of engineered monoclonal antibodies to be resolved pursuant to agreed-upon
procedures.
The degree of patent protection to be afforded to biotechnological
inventions is uncertain and our products are subject to this uncertainty. We are
aware of certain issued patents and patent applications, and there may be other
patents and applications, containing subject matter which we or our licensees or
collaborators may require in order to research, develop or commercialize at
least some of our products. We cannot assure you that we will be able to obtain
a license to such subject matter on acceptable terms, or at all.
In addition to the litigations described above, we expect that there may be
significant litigation in the industry regarding patents and other proprietary
rights and, to the extent we become involved in such litigation, it could
consume a substantial amount of our resources. An adverse decision in any such
litigation could subject us to significant liabilities. In addition, we rely
heavily on our proprietary technologies for which pending patent applications
have been filed and on unpatented know-how developed by us. Insofar as we rely
16
on trade secrets and unpatented know-how to maintain our competitive
technological position, we cannot assure you that others may not independently
develop the same or similar technologies. Although we have taken steps to
protect our trade secrets and unpatented know-how, third parties nonetheless may
gain access to such information.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval and promotion of our
products. All of our products will require regulatory approval before
commercialization. In particular, therapeutic products for human use are subject
to rigorous pre-clinical and clinical testing and other requirements of the
Federal Food, Drug, and Cosmetic Act and the Public Health Service Act,
implemented by the FDA, as well as similar statutory and regulatory requirements
of foreign countries. Obtaining these marketing approvals and subsequently
complying with ongoing statutory and regulatory requirements is costly and time
consuming. Any failure by us or our collaborators, licensors or licensees to
obtain, or any delay in obtaining, regulatory approval or in complying with
other requirements, could adversely affect the commercialization of products
that we are then developing and our ability to receive product or royalty
revenues.
The steps required before a new drug or biological product may be
distributed commercially in the United States generally include:
o conducting appropriate pre-clinical laboratory evaluations of the
product's chemistry, formulation and stability, and animal studies to
assess the potential safety and efficacy of the product,
o submitting the results of these evaluations and tests to the FDA,
along with manufacturing information and analytical data, in an
Investigational New Drug Application, or IND,
o making the IND effective after the resolution of any safety or
regulatory concerns of the FDA,
o obtaining approval of Institutional Review Boards, or IRBs, to
introduce the drug or biological product into humans in clinical
studies,
o conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the drug or biological product
candidate for the intended use, typically in the following three
sequential, or slightly overlapping stages:
Phase I. The drug or biologic is initially introduced into
healthy human subjects or patients and tested for safety, dose
tolerance, absorption, metabolism, distribution and excretion,
Phase II. The drug or biologic is studied in patients to identify
possible adverse effects and safety risks, to determine dose
tolerance and the optimal dosage, and to collect initial efficacy
data,
Phase III. The drug or biologic is studied in an expanded patient
population at multiple clinical study sites, to confirm efficacy
and safety at the optimized dose, by measuring a primary endpoint
established at the outset of the study,
17
o submitting the results of preliminary research, pre-clinical studies,
and clinical studies as well as chemistry, manufacturing and control
information on the drug or biological product to the FDA in a New Drug
Application, or NDA, for a drug product, or BLA for a biological
product, and
o obtaining FDA approval of the NDA or BLA prior to any commercial sale
or shipment of the drug or biological product.
An NDA or BLA must contain, among other things, data derived from
nonclinical laboratory and clinical studies which demonstrate that the product
meets prescribed standards of safety, purity and potency, and a full description
of manufacturing methods. The biological product may not be marketed in the U.S.
until a biological license is issued.
The approval process can take a number of years and often requires
substantial financial resources. The results of pre-clinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may be subject to additional costs, delays
or modifications due to a number of factors, including the difficulty in
obtaining enough patients, clinical investigators, drug supply, or financial
support. The FDA has issued regulations intended to accelerate the approval
process for the development, evaluation and marketing of new therapeutic
products intended to treat life-threatening or severely debilitating diseases,
especially where no alternative therapies exist. If applicable, this procedure
may shorten the traditional product development process in the United States.
Similarly, products that represent a substantial improvement over existing
therapies may be eligible for priority review with a target lapsed approval time
of six months. Nonetheless, approval may be denied or delayed by the FDA or
additional trials may be required. The FDA also may require testing and
surveillance programs to monitor the effect of approved products that have been
commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
Upon approval, a drug product may be marketed only in those dosage forms and for
those indications approved in the NDA or BLA, although information about
off-label indications may be distributed in certain circumstances.
In addition to obtaining FDA approval for each indication to be treated
with each product, each domestic drug product manufacturing establishment must
register with the FDA, list its drug products with the FDA, comply with Current
Good Manufacturing Practices and permit and pass inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing drug products for distribution in the United States also must list
their products with the FDA and comply with Current Good Manufacturing
Practices. They also are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.
Any products manufactured or distributed by us pursuant to FDA approvals
are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and a requirement to report adverse experiences with
the drug. In addition to continued compliance with standard regulatory
requirements, the FDA also may require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse experiences
with the product must be reported to the FDA. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product are discovered following approval.
The Federal Food, Drug, and Cosmetic Act also mandates that drug products
be manufactured consistent with Current Good Manufacturing Practices. In
complying with the FDA's regulations on Current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
record-keeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure compliance
with Current Good Manufacturing Practices. Failure to comply subjects the
manufacturer to possible FDA action, such as:
18
o warning letters,
o suspension of manufacturing,
o seizure of the product,
o voluntary recall of a product,
o injunctive action, or
o possible civil or criminal penalties.
To the extent we rely on third parties to manufacture our compounds and
products, those third parties will be required to comply with Current Good
Manufacturing Practices.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. If we propose any modifications to the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, an NDA or BLA supplement may be required to be submitted to the
FDA.
Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of product manufacture and marketing. Such requirements can vary
significantly from country to country. As part of our strategic relationships
our collaborators may be responsible for the foreign regulatory approval process
of our products, although we may be legally liable for noncompliance.
We are also subject to various federal, state and local laws, rules,
regulations and policies 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 and infectious disease agents, used in connection with our research
work. Although we believe that our safety procedures for handling and disposing
of such materials comply with current federal, state and local laws, rules,
regulations and policies, the risk of accidental injury or contamination from
these materials cannot be entirely eliminated.
We cannot predict the extent of government regulation which might result
from future legislation or administrative action. In this regard, although the
Food and Drug Administration Modernization Act of 1997 modified and created
requirements and standards under the Federal Food, Drug, and Cosmetic Act with
the intent of facilitating product development and marketing, the FDA is still
in the process of developing regulations implementing the Food and Drug
Administration Modernization Act of 1997. Consequently, the actual effect of
these developments on our business is uncertain and unpredictable.
Moreover, we anticipate that Congress, state legislatures and the private
sector will continue to review and assess controls on health care spending. Any
such proposed or actual changes could cause us or our collaborators to limit or
eliminate spending on development projects and may otherwise impact us. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation that might result from future legislative or administrative action,
either in the United States or abroad. Additionally, in both domestic and
foreign markets, sales of our proposed products will depend, in part, upon the
availability of reimbursement from third-party payors, such as government health
administration authorities, managed care providers, private health insurers and
other organizations. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products. In addition,
third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. There can be no assurance that our proposed
products will
19
be considered cost-effective or that adequate third-party reimbursement will be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development.
ADAGEN was approved by the FDA in March 1990. PEG-INTRON was approved in
Europe in May 2000 for treatment of adult patients with chronic hepatitis C.
ONCASPAR was approved for marketing in the U.S. and Germany in 1994 and in
Canada in December 1997 for patients with acute lymphoblastic leukemia who are
hypersensitive to native forms of L-asparaginase, and in Russia in April 1993
for therapeutic use in a broad range of cancers. Except for these approvals,
none of our other products has been approved for sale and use in humans in the
U.S. or elsewhere.
With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which we will have the
exclusive right to exploit them.
Competition
Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors. These factors include the
availability of patent and other protection of technology and products, the
ability to commercialize technological developments and the ability to obtain
governmental approval for testing, manufacturing and marketing. We compete with
specialized biopharmaceutical firms in the United States, Europe and elsewhere,
as well as a growing number of large pharmaceutical companies that are applying
biotechnology to their operations. These companies, as well as academic
institutions, governmental agencies and private research organizations, also
compete with us in recruiting and retaining highly qualified scientific
personnel and consultants.
We are aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. Other than
PEG-INTRON and our ONCASPAR and ADAGEN products, we are not aware of any
PEG-modified therapeutic proteins that are currently available commercially for
therapeutic use. Nevertheless, other drugs or treatments that are currently
available or that may be developed in the future, and which treat the same
diseases as those that our products are designed to treat, may compete with our
products.
Prior to the development of ADAGEN, the only treatment available to
patients afflicted with ADA-deficient SCID was a bone marrow transplant.
Completing a successful transplant depends upon finding a matched donor, the
probability of which is low. More recently, researchers at the National
Institutes of Health, or NIH, have been attempting to treat SCID patients with
gene therapy, which if successfully developed, would compete with, and could
eventually replace ADAGEN as a treatment. The patients in these trials are also
receiving ADAGEN treatment in addition to the gene therapy. The theory behind
gene therapy is that cultured T-lymphocytes that are genetically engineered and
injected back into the patient will express adenosine deaminase, the deficient
enzyme in people afflicted with ADA-deficient SCID, permanently and at normal
levels. To date, patients in gene therapy clinical trials have not been able to
stop ADAGEN treatment and, therefore, the trials have been inconclusive.
Current standard treatment of patients with acute lymphoblastic leukemia
includes administering unmodified L-asparaginase along with the drugs
vincristine, prednisone and daunomycin. Studies have shown that long-term
treatment with L-asparaginase increases the disease-free survival in high risk
patients. ONCASPAR, our PEG-modified L-asparaginase product, is used to treat
patients with acute lymphoblastic leukemia who are hypersensitive to unmodified
forms of L-asparaginase. Currently, there is one unmodified form of
L-asparaginase (Elspar) available in the United States and several available in
Europe. We believe that ONCASPAR has two advantages over these unmodified forms
of L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.
20
The current market for INTRON A, Schering-Plough's interferon alpha-2b
product, is highly competitive, with Hoffmann-La Roche, Amgen, Inc. and several
other companies selling similar products. We believe that PEG-INTRON may have
several potential advantages over the interferon products currently on the
market, including:
o once per week dosing versus the current three times per week dosing,
o an improved side effect profile, and
o increased efficacy.
It has also been reported that Hoffmann-La Roche's Pegasys product is a
longer lasting version of its interferon product, Roferon-A. Hoffman-La Roche
filed for U.S. marketing approval for Pegasys in May 2000. We believe that this
product infringes a patent which covers one of our second generation PEG
technologies, called Branched PEG. We have initiated patent infringement
litigation against Hoffman-La Roche and the supplier of the PEG technology used
in Hoffmann-La Roche's Pegasys, Shearwater Polymers Inc., and are seeking to
block this product from entering the market in the United States.
There are several technologies which compete with our SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into two
areas:
o those modifying monoclonal antibodies to minimize immunological
reaction to a foreign protein, which is the strategy employed with
chimerics, humanized antibodies and human monoclonal antibodies, and
o those creating smaller portions of monoclonal antibodies, which are
more specific to the target and have fewer side effects, as is the
case with Fab fragments and low molecular weight peptides.
We believe that the smaller size of our SCA proteins should permit better
penetration into the tumor, result in rapid clearance from the blood and cause a
significant decrease in the immunogenic problems associated with conventional
monoclonal antibodies. A number of organizations have active programs in SCA
proteins. We believe that our patent position on SCA proteins will likely
require companies that have not licensed our SCA protein patents to obtain
licenses from us in order to commercialize their products, but there can be no
assurance that this will prove to be the case.
Employees
As of June 30, 2000, we employed 90 persons, including 17 persons with
Ph.D. degrees. At that date, 45 employees were engaged in research and
development activities, 26 were engaged in manufacturing, and 19 were engaged in
administration and management. None of our employees are covered by a collective
bargaining agreement. All of our employees are covered by confidentiality
agreements. We consider our relations with our employees to be good.
21
Item 2. Properties
We own no real property. The following are all of the facilities that we
currently lease:
Approx. Approx.
Principal Square Annual Lease
Location Operations Footage Rent Expiration
-------- ---------- ------- ---- ----------
20 Kingsbridge Road Research & Development 56,000 $496,000(1) June 15, 2007
Piscataway, NJ and Administrative
300 Corporate Ct Manufacturing 24,000 183,000 March 31, 2007
S. Plainfield, NJ
(1) Under the terms of the lease, annual rent increases over the remaining term
of the lease from $496,000 to $581,000.
We believe that our facilities are well maintained and generally adequate
for our present and future anticipated needs.
Item 3. Legal Proceedings
In December 1998, we filed a patent infringement suit against Shearwater
Polymers Inc., a company that has reportedly developed a Branched PEG, or U-PEG,
used in Hoffmann-La Roche's Pegasys product, a PEG-modified version of its
alpha-interferon product called Roferon-A. We believe that Pegasys utilizes a
type of Branched PEG for which we have been granted a patent in the U.S. and
have similar patents pending in Europe, Japan and Canada. Shearwater has filed a
counter-claim in this litigation alleging that our Branched PEG patent is
invalid and unenforceable. During September 2000, we filed a similar
infringement suit in Federal Court in New Jersey against Hoffman-La Roche under
a newly issued related patent.
In January 2000, Hoffmann-La Roche filed lawsuits in both the U.S. and
France against Schering-Plough alleging that PEG-INTRON infringes certain
patents held by Hoffmann-La Roche. The validity and scope of Hoffmann-La Roche's
patents in this segment of the industry could be judicially determined during
these proceedings. If Schering-Plough does not prevail in this litigation,
Hoffmann-La Roche may completely block Schering-Plough from commercializing
PEG-INTRON. Among other things, the outcome will likely depend not only upon
whether the patents are determined valid and infringed, but also upon the
reasoning behind such determinations. We are presently unable to predict either
the effect or degree of effect this litigation will have on our business and
financial condition.
There is no other pending material litigation to which we are a party or to
which any of our property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Our Company's Common Stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market under the trading symbol "ENZN".
The following table sets forth the high and low sale prices for our Common
Stock for the years ended June 30, 2000 and 1999, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.
High Low
---- ---
Year Ended June 30, 2000
First Quarter 34.63 20.08
Second Quarter 46.25 26.63
Third Quarter 70.50 37.69
Fourth Quarter 47.63 25.69
Year Ended June 30, 1999
First Quarter 7.13 3.97
Second Quarter 13.94 5.13
Third Quarter 16.69 13.25
Fourth Quarter 20.56 11.50
As of September 18, 2000 there were 1,937 holders of record of our Common
Stock.
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth of
our business. Holders of our Series A preferred stock are entitled to an annual
dividend of $2.00 per share, payable semiannually, but only when and if declared
by our board of directors, out of funds legally available. As of June 30, 2000
there were 7,000 shares of Series A preferred stock issued and outstanding.
Dividends on the Series A preferred stock are cumulative and accrue and
accumulate but will not be paid, except in liquidation or upon conversion, until
such time as the board of directors deems it appropriate in light of our then
current financial condition. No dividends are to be paid or set apart for
payment on our common stock, nor are any shares of common stock to be redeemed,
retired or otherwise acquired for valuable consideration unless we have paid in
full or made appropriate provision for the payment in full of all dividends
which have then accumulated on the Series A preferred stock.
23
Item 6. Selected Financial Data
Set forth below is our selected financial data for the five fiscal years
ended June 30, 2000.
Consolidated Statement of Operations Data:
Year Ended June 30
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues 17,017,797 $ 13,158,207 $ 14,644,032 $ 12,727,052 $ 12,681,281
Net Loss (6,306,464) $ (4,919,208) $ (3,617,133) $ (4,557,025) $ (5,175,279)
Net Loss per Share (0.17) $ (0.14) $ (0.12) $ (0.16) $ (0.20)
Dividends on
Common Stock None None None None None
Consolidated Balance Sheet Data:
June 30,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total Assets $130,252,250 $ 34,916,315 $ 13,741,378 $ 16,005,278 $ 21,963,856
Long-Term Obligations $ -- $ -- $ -- $ -- $ 1,728
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal Years Ended June 30, 2000, 1999 and 1998
Revenues. Revenues for the year ended June 30, 2000 increased to $17,018,000 as
compared to $13,158,000 for fiscal 1999. The components of revenues are sales,
which consist of our sales of products and royalties on the sale of such
products by others, and contract revenues. Sales increased by 21% to $15,591,000
for the year ended June 30, 2000 as compared to $12,856,000 for the prior year
due to increased ONCASPAR and ADAGEN sales. ONCASPAR sales for the year ended
June 30, 2000 increased due to the lifting in November 1999 of some of the
temporary labeling and distribution restrictions which were placed on ONCASPAR
by the FDA as a result of certain difficulties encountered in our manufacturing
process discussed below. The increase was also due to an increase in ADAGEN
sales of approximately 8%, resulting from an increase in patients receiving
ADAGEN treatment. Net sales of ADAGEN, which we market, for the years ended June
30, 2000 and 1999 were $12,159,000 and $11,246,000, respectively. We market
ADAGEN internally and ONCASPAR through marketing agreements in the U.S. and
Canada with Aventis Pharmaceuticals and in Europe with MEDAC GmbH.
During 1998, we began to experience manufacturing problems with ONCASPAR.
The problems were due to an increase in the levels of particulates in batches of
ONCASPAR which resulted in an increased rejection rate for this product. During
fiscal 1999, as a result of these manufacturing problems, we agreed with the FDA
to temporary labeling and distribution restrictions for ONCASPAR. Aventis
stopped distributing ONCASPAR and we took over distribution of ONCASPAR directly
to patients on an as-needed basis. We also instituted additional inspection and
labeling procedures prior to distribution of the product. In addition, during
May 1999, the FDA required us to limit distribution of the product to only those
patients who are hypersensitive to native L-asparaginase. In November 1999, the
FDA lifted this distribution restriction.
We have been able to manufacture several batches of ONCASPAR, which contain
acceptable levels of particulates, and have submitted modifications to our
manufacturing process to the FDA. We
24
anticipate a final resolution of the problem during fiscal 2001. It is expected
that Aventis will resume distribution of ONCASPAR at that time. We cannot assure
you that this solution will be acceptable to the FDA or Aventis. If we are
unable to resolve this problem the FDA may not permit us to continue to
distribute ONCASPAR. An extended disruption in the marketing and distribution of
ONCASPAR may have a material adverse effect on future sales of the product.
We expect sales of ADAGEN to increase at rates comparable to those achieved
during the last two years as additional patients are treated. We also anticipate
ONCASPAR sales will remain at reduced levels until we resolve the manufacturing
problem and Aventis resumes normal distribution of the product. We cannot assure
you that any particular sales levels of ADAGEN or ONCASPAR will be achieved or
maintained. During June 2000, we began recording royalties on sales of
PEG-INTRON by Schering-Plough. PEG-INTRON received marketing authorization in
the European Union in May 2000 and was launched in several European countries
during June 2000. Launches in additional European countries are expected to
occur during the next quarter.
During the years ended June 30, 2000 and 1999, we had export sales of
$4,104,000 and $3,075,000, respectively. Of these amounts, sales in Europe were
$3,584,000 and $2,559,000 for the years ended June 30, 2000 and 1999,
respectively.
Contract revenues for the year ended June 30, 2000 increased by $1,124,000,
as compared to the prior year. The increase in contract revenues was principally
due to a $1,000,000 milestone payment from our development partner for
PEG-INTRON, Schering-Plough. The payment was a result of the FDA's acceptance in
January 2000 of Schering-Plough's U.S. marketing application for the use of
PEG-INTRON in the treatment of chronic hepatitis C.
Revenues for the year ended June 30, 1999 decreased to $13,158,000 as
compared to $14,644,000 for the year ended June 30, 1998 due to a decrease in
contract revenue. Our sales increased by 4% to $12,856,000 for the year ended
June 30, 1999 as compared to $12,313,000 for the year ended June 30, 1998. The
increase was due to an increase in ADAGEN sales of approximately 11%, resulting
from an increase in patients receiving ADAGEN treatment. Net sales of ADAGEN,
which we market, were $11,246,000 for the year ended June 30, 1999 and
$10,107,000 for the year ended June 30, 1998. We market our other approved
product, ONCASPAR, through marketing agreements in the U.S. and Canada with
Aventis and in Europe with MEDAC. ONCASPAR revenues are comprised of
manufacturing revenues, as well as royalties on sales of ONCASPAR by Aventis.
ONCASPAR revenues for fiscal 1999 decreased due to a decline in manufacturing
and royalty revenues resulting from difficulties encountered in our
manufacturing process and the resulting changes in labeling and distribution.
Contract revenue for the year ended June 30, 1999 decreased to $302,000, as
compared to $2,331,000 for the year ended June 30, 1998. The decrease was
principally due to the fact that we received milestone payments in 1998 under
our licensing agreement for PEG-INTRON with Schering-Plough and we did not
receive any such payments in 1999. During the year ended June 30, 1998, we
recognized $2,200,000 in milestone payments we received when Schering-Plough
advanced PEG-INTRON into a PHASE III clinical trial.
Cost of Sales. Cost of sales, as a percentage of sales, for the year ended
June 30, 2000 was 31% as compared to 34% in 1999. During each of the years ended
June 30, 2000 and 1999, we recorded a charge related to a write-off of ONCASPAR
finished goods on hand. The write-offs of ONCASPAR finished goods were
attributable to the manufacturing problems previously discussed. The write-off
recorded in the fourth quarter of fiscal 2000 represents certain batches of
ONCASPAR which will become obsolete if the FDA approves our proposed
manufacturing modification for ONCASPAR. This manufacturing modification was
designed to correct the previously discussed ONCASPAR manufacturing problems.
Cost of sales, as a percentage of sales, increased to 34% for the year
ended June 30, 1999 as
25
compared to 30% for the year ended June 30, 1998. The increase was primarily due
to a charge taken in the first quarter of fiscal 1999 related to a write-off of
ONCASPAR finished goods on hand and in the distribution pipeline, as well as
increased ONCASPAR production costs. The increased write-off of ONCASPAR
finished goods was attributable to the manufacturing problems previously
discussed.
Research and Development. Research and development expenses for the year
ended June 30, 2000 increased by 23% to $8,383,000 as compared to $6,836,000 in
1999. The increase in research and development expenses resulted from an
increase in expenses related to the clinical development of PROTHECAN
(PEG-Camptothecin) and other PEG products in pre-clinical development. We expect
research and development expense to continue to increase significantly as
PROTHECAN advances to Phase II clinical trials, an additional PEG compound
enters Phase I clinical trials and increased pre-clinical testing on additional
products under development.
Research and development expenses for the year ended June 30, 1999
decreased by 21% to $6,836,000 from $8,654,000 for the year ended June 30, 1998.
The decrease in research and development expenses resulted from a decrease in
facility costs resulting from the elimination of a leased facility and the
consolidation of research and development operations and a decline in clinical
trial costs. The decrease in clinical trial costs was a result of the completion
of a Phase Ib clinical trial for PEG-hemoglobin in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2000 increased by 59% to
$12,956,000, as compared to $8,133,000 in 1999. The increase in selling general
and administrative cost was principally due to a net charge to earnings recorded
in the third quarter included in selling, general and administrative expenses of
$2,600,000. This net charge was the result of a $6,000,000 payment we made,
pursuant to a binding arbitration in a previously disclosed lawsuit brought by
LBC Capital Resources Inc., a former financial advisor, for fees related to our
1996 private placement, partially offset by the reversal of certain other
contingency reserves. The increase was also due to an increase in legal fees
associated with patent filing and defense costs.
Selling, general and administrative expenses for the year ended June 30,
1999 increased by 27% to $8,133,000, as compared to $6,426,000 for the year
ended June 30, 1998. The increase was primarily due to an increase in marketing
and distribution costs for ONCASPAR. Due to the changes in distribution
previously discussed, we were responsible for all marketing and distribution for
this product in 1999. During the prior year, these costs were the responsibility
of Aventis.
Other Income/Expense. Other income/expense increased by $1,702,000 to
$2,903,000 for the year ended June 30, 2000, as compared to $1,201,000 for last
year. The increase was attributable to an increase in interest income due to an
increase in interest bearing investments.
Other income/expense increased by $737,000 to $1,201,000 for the year ended
June 30, 1999, as compared to $464,000 for the year ended June 30, 1998. This
increase was due to an increase in interest income due to an increase in
interest bearing investments.
Liquidity and Capital Resources
Our total cash reserves, including cash and interest bearing investments,
as of June 30, 2000 were $118,413,000, as compared to $24,674,000 as of June 30,
1999. The increase in total cash reserves was due to the completion of a public
offering during March 2000, in which we sold 2,300,000 shares of Common Stock at
a gross offering price of $44.50 per share resulting in net proceeds of
$95,670,000. We invest our excess cash in a portfolio of high-grade marketable
securities and United States government-backed securities.
Our Aventis License Agreement, as amended, for ONCASPAR provided for a
payment of
26
$3,500,000 in advance royalties which was received from Aventis in January 1995.
Royalties due under the amended agreement will be offset against an original
credit of $5,970,000, which represents the royalty advance plus reimbursement of
certain amounts due Aventis under the previous agreement and interest expense,
before cash payments will be made under the agreement. The royalty advance is
shown as a long-term liability, with the corresponding current portion included
in accrued expenses on the consolidated balance sheets and to be reduced as
royalties are recognized under the agreement. Through June 30, 2000, an
aggregate of $4,313,000 in royalties payable by Aventis has been offset against
the original credit.
As of June 30, 2000, 1,043,000 shares of Series A Preferred Shares had been
converted into 3,325,000 shares of Common Stock. Accrued dividends on the
converted Series A Preferred Shares in the aggregate of $3,770,000 were settled
by the issuance of 235,000 shares of Common Stock and cash payments of
$1,947,000. As of June 30, 2000, there were accrued and unpaid dividends
totaling $144,000 on the 7,000 shares of Series A Preferred Shares currently
outstanding. These dividends are payable in cash or Common Stock at our option
and accrue on the outstanding Series A Preferred Shares at the rate of $14,000
per year.
During August 2000, we made a $1.5 million payment to Aventis to settle a
disagreement over the purchase price of ONCASPAR under the supply agreement and
to settle Aventis' claim that we should be responsible for its lost profits
while ONCASPAR is under the temporary labeling and distribution modifications
previously discussed.
To date, our sources of cash have been the proceeds from the sale of our
stock through public and private placements, sales and royalties of ADAGEN,
ONCASPAR and PEG-INTRON, sales of our products for research purposes, contract
research and development fees, technology transfer and license fees and royalty
advances. Our current sources of liquidity are our cash, cash equivalents and
interest earned on such cash reserves, sales and royalties of ADAGEN, ONCASPAR
and PEG-INTRON, sales of our products for research purposes and license fees.
Based upon our currently planned research and development activities and related
costs and our current sources of liquidity, we anticipate our current cash
reserves will be sufficient to meet our capital and operational requirements for
the foreseeable future.
We may seek additional financing, such as through future offerings of
equity or debt securities or agreements with collaborators with respect to the
development and commercialization of products, to fund future operations. We
cannot assure you, however, that we will be able to obtain additional funds on
acceptable terms, if at all.
Year 2000
In 1999, we completed a review of our business systems, including computer
systems and manufacturing equipment, and queried our customers and vendors as to
their progress in identifying and addressing problems that their systems may
face in correctly interrelating and processing date information in the year
2000. To date, we have not experienced any significant problems related to the
year 2000 problem, either in our systems or the systems of our vendors or
customers.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and subsequently
amended by SFAS No. 138. This statement standardizes the accounting for
derivative instruments including certain derivative instruments embedded in
other contracts. The effective date of SFAS No. 133 was delayed to fiscal year
2001 by the issuance of SFAS No. 137. We will adopt this statement as of July 1,
2000. We have determined this statement will not have a material impact on our
Consolidated Financial Statements.
Risk Factors
We have a history of losses and we may never be profitable.
We have incurred substantial losses since our inception. As of June 30,
2000, we had an accumulated deficit of approximately $130 million. We expect to
incur operating losses for the foreseeable future. The size of these losses will
depend primarily on the receipt and timing of regulatory approval of PEG-INTRON
and Schering-Plough's effective marketing of PEG-INTRON, as well as on the rate
of growth in our other product sales or royalty revenue and on the level of our
expenses. Our two FDA-approved products are not generating significant revenues
because neither product has become widely used due to a small patient population
base and limitations on their indicated uses. Our ability to achieve long-term
profitability will depend upon our or
27
our licensees' ability to obtain regulatory approvals for additional product
candidates. Even if our product candidates receive regulatory approval, we
cannot assure you that our products will achieve market acceptance or will be
commercialized successfully or that our operations will be profitable.
Our near term success is heavily dependent on FDA approval of PEG-INTRON and
Schering-Plough's effective marketing of PEG-INTRON.
Under our agreement with Schering-Plough, pursuant to which we applied our
PEG technology to develop a modified form of Schering-Plough's INTRON A, we will
receive royalties on worldwide sales of PEG-INTRON, if any. Schering-Plough is
responsible for conducting and funding the clinical studies, obtaining
regulatory approval and marketing the product worldwide on an exclusive basis.
In May 2000, Schering-Plough announced that it had received a Marketing
Authorization from the European Agency for the Evaluation of Medicinal Products,
or EMEA, for PEG-INTRON in the European Union for the treatment of hepatitis C.
In December 1999, Schering-Plough completed submission of a Biologics License
Application, or BLA, to the FDA seeking marketing approval of PEG-INTRON for the
treatment of hepatitis C. Schering-Plough had requested priority review status
from the FDA of this BLA. In February 2000, the FDA accepted Schering-Plough's
BLA for PEG-INTRON for standard review, rather than priority review. Standard
review typically takes 12 months from the date of filing. We have not had access
to Schering-Plough's BLA, nor have we been able to review the BLA. If
Schering-Plough does not receive marketing approval from the FDA in a timely
manner, or at all, it will have a material adverse effect on our business,
financial condition and results of operation.
Schering-Plough currently markets INTRON A together with REBETOL as
combination therapy for the treatment of hepatitis C and INTRON A as a
stand-alone treatment for hepatitis C. If the current BLA is approved by the
FDA, Schering-Plough will be able to market PEG-INTRON only as a stand-alone or
monotherapy treatment for hepatitis C. Schering-Plough is conducting a Phase III
clinical trial of PEG-INTRON as combination therapy with REBETOL for hepatitis C
and Phase III clinical trials of PEG-INTRON for the treatment of chronic
myelogenous leukemia and malignant melanoma. If those trials are successful,
PEG-INTRON may be the subject of future BLAs for those indications. We cannot
assure you that Schering-Plough will seek or obtain marketing approval to sell
PEG-INTRON for these additional indications or for combination therapy. Although
Schering-Plough is obligated under our agreement to use commercial efforts to
market PEG-INTRON, we cannot assure you that Schering-Plough will be successful
in marketing PEG-INTRON or that Schering-Plough will not continue to market
INTRON A, either as a stand-alone product or in combination therapy with
REBETOL, even if PEG-INTRON receives FDA approval. The amount and timing of
resources dedicated by Schering-Plough to the development and marketing of
PEG-INTRON is not within our control. If Schering-Plough breaches or terminates
its agreement with us, or fails to work diligently toward FDA approval of the
product for additional indications, the commercialization of PEG-INTRON could be
slowed or blocked completely. Our revenues will be negatively affected if
Schering-Plough continues to market INTRON A in competition with PEG-INTRON or
if it cannot meet the manufacturing demands of the market. If Schering-Plough
does not use commercial efforts to market PEG-INTRON, or it otherwise breaches
the agreement, a dispute may arise between us. A dispute would be both expensive
and time-consuming and may result in delays in the development and
commercialization of PEG-INTRON, which would likely have a material adverse
effect on our business, financial condition and results of operations.
There is currently patent litigation, which could have a significant adverse
impact on our business.
Hoffmann-La Roche has sued Schering-Plough and claimed that the PEG
technology used in PEG-INTRON infringes a patent held by Hoffmann-La Roche. The
litigation is at a very early stage, and we cannot predict its outcome. Prior to
the commencement of this litigation we obtained an opinion of patent counsel
that the patent held by Hoffmann-La Roche is invalid. However, this opinion is
not binding on any court or the U.S. Patent and Trademark Office. We cannot
assure you that the patent opinion will prove to be correct and that a court
would find any of the claims of such patents to be invalid or that the product
developed by us or our
28
collaborator does not infringe such patents. If this litigation is not resolved
favorably for Schering-Plough and Schering-Plough is prevented from marketing
PEG-INTRON, we would not receive any royalties on sales of PEG-INTRON. This
would have a material adverse effect on our business, financial condition and
results of operations.
In December 1998, we filed a patent infringement suit against Shearwater
Polymers, a company that has reportedly developed a Branched PEG, or U-PEG, used
in Hoffmann-La Roche's Pegasys product, a PEG-modified version of its
alpha-interferon product called Roferon-A. We believe that Pegasys utilizes a
type of Branched PEG, for which we have been granted a patent in the United
States and have similar patents pending in Europe, Japan and Canada. Shearwater
has filed a counterclaim in this litigation alleging that our Branched PEG
patent is invalid and unenforceable. In September 2000 we filed a similar patent
infringement suit against Hoffman-La Roche in New Jersey under a new
continuation in part patent related to our original Branched PEG patent. While
an adverse outcome in this litigation will not prevent Schering-Plough from
commercializing PEG-INTRON, if we are not successful in our infringement suits
or if our patent is held to be invalid, we may not be able to preclude
Shearwater from selling its Branched PEG or preclude Hoffmann-La Roche from
commercializing Pegasys if it obtains regulatory approval. If we are unable to
enforce our patent rights in this area against others, it may have a material
adverse effect on our business, financial condition and results of operations.
During the course of our litigation proceedings with Shearwater Polymers
and Hoffman-La Roche and Schering-Plough's litigation with Hoffmann-La Roche,
interim information about the status of each of these litigations may be
released. Although these interim releases may differ from the final
determinations in these litigations, such information may have a material
adverse effect on the market price of our common stock.
We are subject to extensive regulation. Compliance with these regulations can be
costly, time consuming and subject us to unanticipated delays in developing our
products.
The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
prior approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. ADAGEN was approved
by the FDA in 1990. ONCASPAR was approved in the United States and in Germany in
1994, and in Canada in 1997, in each case for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase. ONCASPAR was
approved in Russia in April 1993 for therapeutic use in a broad range of
cancers. PEG-INTRON was approved in Europe for the treatment of hepatitis C in
May 2000. Except for these approvals, none of our other products has been
approved for sale and use in humans in the United States or elsewhere.
We cannot assure you that we or our licensees will be able to obtain FDA or
other relevant marketing approval for any of our other products. In addition,
any approved products are subject to continuing regulation. If we or our
licensees fail to comply with applicable requirements it could result in:
o criminal penalties,
o civil penalties,
o fines,
o recall or seizure,
o injunctions requiring suspension of production,
29
o orders requiring ongoing supervision by the FDA, or
o refusal by the government to approve marketing or export applications
or to allow us to enter into supply contracts.
If we or our licensees fail to obtain or maintain requisite governmental
approvals or fail to obtain or maintain approvals of the scope requested, it
will delay or preclude us or our licensees or marketing partners from marketing
our products. It could also limit the commercial use of our products. Any such
failure or limitation may have a material adverse effect on our business,
financial condition and results of operations.
We have experienced problems complying with the FDA's regulations for
manufacturing our products, and we may not be able to resolve these problems.
Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include quality control and quality
assurance requirements as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding state agencies, including unannounced
inspections, and must be licensed as part of the product approval process before
they can be used in commercial manufacturing. We or our present or future
suppliers may be unable to comply with the applicable good manufacturing
practice regulations and other FDA regulatory requirements.
During 1998, we began to experience manufacturing problems with one of our
FDA-approved products, ONCASPAR. The problems were due to increased levels of
white particulates in batches of ONCASPAR, which resulted in an increased
rejection rate for this product. During fiscal 1999, we agreed with the FDA to
temporary labeling and distribution restrictions for ONCASPAR and instituted
additional inspection and labeling procedures prior to distribution. During May
1999, the FDA required us to limit distribution of ONCASPAR to only those
patients who are hypersensitive to native L-asparaginase. In November 1999, the
FDA withdrew this distribution restriction.
In July 1999, the FDA conducted an inspection of our manufacturing facility
in connection with our product license for ADAGEN. Following that inspection,
the FDA documented several deviations from Current Good Manufacturing Practices,
known as cGMP, in a Form 483 report. We provided the FDA with a corrective
action plan. In November 1999, the FDA issued a warning letter citing the same
cGMP deviations listed in the July 1999 Form 483, but it also stated that the
FDA was satisfied with our proposed corrective actions. As a result of the
deviations, the FDA decided not to approve product export requests from us for
ONCASPAR until it determines that all noted cGMP deviations have been corrected.
This restriction was removed in August 2000.
In January 2000, the FDA conducted another inspection of our manufacturing
facility relating to the ONCASPAR product license and as a follow-up to the July
1999 inspection relating to ADAGEN. Following this most recent inspection, the
FDA issued a Form 483 report, citing deviations from cGMP in the manufacture of
ONCASPAR and two cGMP deviations for ADAGEN. We have responded to the FDA with a
corrective action plan to the January 2000 Form 483. However, we cannot assure
you that the FDA will not issue a warning letter with respect to the manufacture
of ONCASPAR or that the FDA will approve product export requests that we may
make in the future.
While we expect to resolve these manufacturing problems by the end of
fiscal 2001, we cannot be certain that the solution will be acceptable to the
FDA. If we cannot satisfactorily resolve these problems, the FDA may not permit
us to continue to distribute ONCASPAR or ADAGEN. If we cannot market and
distribute ONCASPAR or ADAGEN for an extended period, future sales of the
products may suffer, which could adversely affect our financial results.
30
Schering-Plough will be responsible for the manufacture of PEG-INTRON.
Our clinical trials could take longer to complete and cost more than we expect.
We will need to conduct clinical studies of all of our product candidates.
These studies are costly, time consuming and unpredictable. Any unanticipated
costs or delays in our clinical studies could harm our business, financial
condition and results of operations.
Schering-Plough is conducting clinical trials of our lead product
candidate, PEG-INTRON, which is in Phase III trials as combination therapy with
REBETOL for treatment of hepatitis C and as stand-alone therapy for two cancer
indications. We are currently conducting early stage clinical trials of our next
PEG product, PROTHECAN. Clinical trials can be very costly and time-consuming.
The rate of completion of clinical trials depends upon many factors, including
the rate of enrollment of patients. If we or Schering-Plough are unable to
accrue sufficient clinical patients in our respective trials during the
appropriate period, such trials may be delayed and will likely incur significant
additional costs. In addition, FDA or institutional review boards may require us
to delay, restrict, or discontinue our clinical trials on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
o the order and timing of clinical indications pursued,
o the extent of development and financial support from corporate
collaborators,
o the number of patients required for enrollment,
o the difficulty of obtaining clinical supplies of the product
candidate, and
o the difficulty in obtaining sufficient patient populations and
clinicians.
All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm our
business, financial condition and results of operations.
In some cases, we rely on corporate collaborators or academic institutions
to conduct some or all aspects of clinical trials involving our product
candidates. We will have less control over the timing and other aspects of these
clinical trials than if we conducted them entirely on our own. We cannot assure
you that these trials will commence or be completed as we expect or that they
will be conducted successfully.
If pre-clinical and clinical trials do not yield positive results, our products
will fail.
If pre-clinical and clinical testing of one or more of our product
candidates do not demonstrate the safety and efficacy of the desired
indications, those potential products will fail. Numerous unforeseen events may
arise during, or as a result of, the testing process, including the following:
o the results of pre-clinical studies may be inconclusive, or they may
not be indicative of results that will be obtained in human clinical
trials,
o potential products may not have the desired effect or may have
undesirable side effects or other characteristics that preclude
regulatory approval or limit their commercial use if approved,
31
o results attained in early human clinical trials may not be indicative
of results that are obtained in later clinical trials, and
o after reviewing test results, we or our corporate collaborators may
abandon projects which we might previously have believed to be
promising.
Clinical testing is very costly and can take many years. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development would delay or prevent regulatory approval, which could adversely
affect our business and financial performance.
Even if we obtain regulatory approval for our products, they may not be
accepted in the marketplace.
The commercial success of our products will depend upon their acceptance by
the medical community and third-party payors as clinically useful,
cost-effective and safe. Even if our products obtain regulatory approval, we
cannot assure you that they will achieve market acceptance of any kind. The
degree of market acceptance will depend on many factors, including:
o the receipt, timing and scope of regulatory approvals,
o the timing of market entry in comparison with potentially competitive
products,
o the availability of third-party reimbursement, and
o the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics.
If any of our products do not achieve market acceptance, we will likely
lose our entire investment in that product.
We depend on our collaborative partners. If we lose our collaborative partners
or they do not apply adequate resources to our collaborations, our product
development and financial performance may suffer.
We rely heavily and will depend heavily in the future on collaborations
with corporate partners, primarily pharmaceutical companies, for one or more of
the research, development, manufacturing, marketing and other commercialization
activities relating to many of our product candidates. If we lose our
collaborative partners, or if they do not apply adequate resources to our
collaborations, our product development and financial performance may suffer.
The amount and timing of resources dedicated by our collaborators to their
collaborations with us is not within our control. If any collaborator breaches
or terminates its agreements with us, or fails to conduct its collaborative
activities in a timely manner, the commercialization of our product candidates
could be slowed or blocked completely. We cannot assure you that our
collaborative partners will not change their strategic focus or pursue
alternative technologies or develop alternative products as a means for
developing treatments for the diseases targeted by these collaborative programs.
Our collaborators could develop competing products. In addition, our revenues
will be affected by the effectiveness of our corporate partners in marketing any
successfully developed products.
We cannot assure you that our collaborations will be successful. Disputes
may arise between us and our collaborators as to a variety of matters, including
financing obligations under our agreements and ownership of intellectual
property rights. These disputes may be both expensive and time-consuming and may
result in delays in the development and commercialization of products.
32
We are dependent upon a single outside supplier for each of the crucial raw
materials necessary to the manufacture of each of our products and product
candidates.
We cannot assure you that sufficient quantities of our raw material
requirements will be available to support the continued research, development or
manufacture of our products. We purchase the unmodified compounds utilized in
our approved products and products under development from outside suppliers. We
may be required to enter into supply contracts with outside suppliers for
certain unmodified compounds. We do not produce the unmodified adenosine
deaminase used in the manufacture of ADAGEN or the unmodified forms of
L-asparaginase used in the manufacture of ONCASPAR. We have a supply contract
with an outside supplier for the supply of each of these unmodified compounds.
If we experience a delay in obtaining or are unable to obtain any unmodified
compound, including unmodified adenosine deaminase or unmodified L-asparaginase,
on reasonable terms, or at all, it could have a material adverse effect on our
business, financial condition and results of operations.
If we are required to obtain an alternate source for an unmodified compound
utilized in a product, the FDA and relevant foreign regulatory agencies will
likely require that we perform additional testing to demonstrate that the
alternate material is biologically and chemically equivalent to the unmodified
compound previously used in our clinical trials. This testing could delay or
stop development of a product, limit commercial sales of an approved product and
cause us to incur significant additional expenses. If we are unable to
demonstrate that the alternate material is chemically and biologically
equivalent to the previously used unmodified compound, we will likely be
required to repeat some or all of the pre-clinical and clinical trials conducted
for the compound. The marketing of an FDA approved drug could be disrupted while
such tests are conducted. Even if the alternate material is shown to be
chemically and biologically equivalent to the previously used compound, the FDA
or relevant foreign regulatory agency may require that we conduct additional
clinical trials with the alternate material.
The United States and foreign patents upon which our original PEG technology was
based have expired. We depend on patents and proprietary rights, which may offer
only limited protection against potential infringement and the development by
our competitors of competitive products.
Research Corporation Technologies, Inc. held the patent upon which our
original PEG technology was based and had granted us a license under such
patent. Research Corporation's patent contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties will be permitted to make, use or
sell products covered by the claims of the Research Corporation patent, subject
to other patents, including those which we hold. We have obtained several
patents with claims covering improved methods of attaching or linking PEG to
therapeutic compounds. We cannot assure you that any of these patents will
enable us to prevent infringement or that competitors will not develop
alternative methods of attaching PEG to compounds potentially resulting in
competitive products outside the protection that may be afforded by our patents.
We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. We cannot assure that the
expiration of the Research Corporation patent or other patents related to PEG
that have been granted to third parties will not have a material adverse effect
on our business, financial condition and results of operations.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
in other countries. We have been licensed, and been issued, a number of patents
in the United States and other countries, and we have other patent applications
pending to protect our proprietary technology. Although we believe that our
patents provide certain protection from competition, we cannot assure you that
such patents will be of substantial protection or commercial benefit to us, will
afford us adequate protection from competing products, or will not be challenged
or declared invalid. In addition we cannot assure you that additional United
33
States patents or foreign patent equivalents will be issued to us. The scope of
patent claims for biotechnological inventions is uncertain and our patents and
patent applications are subject to this uncertainty.
To facilitate development of our proprietary technology base, we may need
to obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed or blocked.
We are aware that certain organizations are engaging in activities that
infringe certain of our PEG and SCA technology patents. We cannot assure you
that we will be able to enforce our patent and other rights against such
organizations.
We expect that there will continue to be significant litigation in the
biotechnology and pharmaceutical industries regarding patents and other
proprietary rights. We have become involved in patent litigation, and we may
likely become involved in additional patent litigation in the future. We may
incur substantial costs in asserting any patent rights and in defending suits
against us related to intellectual property rights. Such disputes could
substantially delay our product development or commercialization activities, and
could have a material adverse effect on our business, financial condition and
results of operations. As discussed in "Business -- Legal Proceedings," there
are three pending litigation matters either involving or affecting our products
and patents. The adverse disposition of either of these litigations will
adversely affect our business, financial condition and results of operations.
We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements and we may
not be able to successfully protect our rights to unpatented trade secrets and
know-how. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how.
We have limited sales and marketing experience, which makes us dependent on our
marketing partners.
Other than ADAGEN, which we market on a worldwide basis to a small patient
population, we have not engaged in the direct commercial marketing of any of our
products and therefore we do not have significant experience in sales, marketing
or distribution. For some of our products, we have provided exclusive marketing
rights to our corporate partners in return for milestone payments and royalties
to be received on sales. To the extent that we enter into licensing arrangements
for the marketing and sale of our products, any revenues we receive will depend
primarily on the efforts of these third parties. We will not control the amount
and timing of marketing resources that such third parties devote to our
products. In addition, if we market products directly, significant additional
expenditures and management resources would be required to increase the size of
our internal sales force. In any sales or marketing effort, we would compete
with many other companies that currently have extensive and well-funded sales
operations. Our marketing and sales efforts may be unable to compete
successfully against other such companies.
We may need to obtain additional financing to meet our future capital needs and
this financing may not be available when we need it.
Our current development projects require substantial capital. We may
require substantial additional funds to conduct research activities,
pre-clinical studies, clinical trials and other activities relating to the
successful commercialization of potential products. In addition, we may seek to
acquire additional technologies. We do not expect to achieve significant sales
or royalty revenue from our current FDA-approved products, ADAGEN and ONCASPAR.
In addition, we cannot be sure that we will obtain significant revenue from
PEG-INTRON in the near future, or ever. Additional funds from other sources may
not be available on acceptable terms, if at all. If adequate funds are
unavailable from operations or additional sources of financing,
34
we may have to delay, reduce the scope of or eliminate one or more of our
research or development programs which would materially and adversely affect our
business, financial condition and operations.
While we believe that our cash, cash equivalents and investments, will be
adequate to satisfy our capital needs for the foreseeable future, our actual
capital requirements will depend on many factors, including:
o the level of revenues we receive from our FDA-approved products and
product candidates,
o continued progress of our research and development programs,
o our ability to establish additional collaborative arrangements,
o changes in our existing collaborative relationships,
o progress with pre-clinical studies and clinical trials,
o the time and costs involved in obtaining regulatory clearance for our
products,
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims,
o competing technological and market developments, and
o our ability to market and distribute our products and establish new
collaborative and licensing arrangements.
We may seek to raise any necessary additional funds through equity or debt
financings, collaborative arrangements with corporate partners or other sources
which may be dilutive to existing stockholders. We cannot assure you that we
will be able to obtain additional funds on acceptable terms, if at all. If
adequate funds are not available, we may be required to:
o delay, reduce the scope or eliminate one or more of our development
projects,
o obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to technologies,
product candidates or products that we would otherwise seek to develop
or commercialize ourselves, or
o license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be available.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our business.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. There
is intense competition for qualified personnel in the pharmaceutical field.
Therefore, we may not be able to attract and retain the qualified personnel
necessary for the development of our business. The loss of the services of
existing personnel, as well as the failure to recruit additional key scientific,
technical and managerial personnel in a timely manner would harm our research
and development programs and our business.
The failure of computer systems to be year 2000 compliant could negatively
impact our business.
In 1999, we completed a review of our business systems, including computer
systems and manufacturing equipment, and queried our customers and vendors as to
their progress in identifying and addressing problems that their systems may
face in correctly interrelating and processing date information in the year
2000. To date, we have not experienced any significant problems related to the
year 2000 problem, either in our systems or the systems of our vendors or
customers. The failure of our computer systems to be year 2000 compliant could
negatively impact our business.
35
Risks Related To Our Industry
We face rapid technological change and intense competition, which could harm our
business and results of operations.
The biopharmaceutical industry is characterized by rapid technological
change. Our future success will depend on our ability to maintain a competitive
position with respect to technological advances. Rapid technological development
by others may result in our products and technologies becoming obsolete.
We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that are
pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. Many of our competitors have substantially greater research and
development capabilities and experiences and greater manufacturing, marketing
and financial resources than we do. Accordingly, our competitors may develop
technologies and products that are superior to those we or our collaborators are
developing and render our technologies and products or those of our
collaborators obsolete and noncompetitive. In addition, many of our competitors
have much more experience than we do in pre-clinical testing and human clinical
trials of new drugs, as well as obtaining FDA and other regulatory approval. If
we cannot compete effectively, our business and financial performance would
suffer.
We may be sued for product liability.
Because our products and product candidates are new treatments, with
limited, if any, past use on humans, their use during testing or after approval
could expose us to product liability claims. We maintain product liability
insurance coverage in the total amount of $10.0 million for claims arising from
the use of our products in clinical trials prior to FDA approval and for claims
arising from the use of our products after FDA approval. We cannot assure you
that we will be able to maintain our existing insurance coverage or obtain
coverage for the use of our other products in the future. Also, this insurance
coverage and our resources may not be sufficient to satisfy any liability
resulting from product liability claims and a product liability claim may have a
material adverse effect on our business, financial condition or results of
operations.
Sales of our products could be adversely affected if the costs for these
products are not reimbursed by third-party payors.
In recent years, there have been numerous proposals to change the health
care system in the United States. Some of these proposals have included measures
that would limit or eliminate payments for medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the coverage and the level of reimbursement
of drug products. Consequently, significant uncertainty exists as to the
reimbursement status of newly-approved health care products.
Our ability to commercialize our products will depend, in part, on the
extent to which reimbursement for the cost of the products and related
treatments will be available from third-party payors. If we or any of our
collaborators succeeds in bringing one or more products to market, we cannot
assure you that third-party payors will establish and maintain price levels
sufficient for realization of an appropriate return on our investment in product
development. In addition, lifetime limits on benefits included in most private
health plans may force patients to self-pay for treatment. For example, patients
who receive ADAGEN are expected to require injections for their entire lives.
The cost of this treatment may exceed certain plan limits and cause patients to
self-fund further treatment. Furthermore, inadequate third-party coverage may
lead to reduced market acceptance of our products. Significant changes in the
health care system in the United States or elsewhere could have a material
adverse effect on our business and financial performance.
36
Risks Related To Our Stock Price
The price of our common stock has been, and may continue to be, volatile.
Historically, the market price of our common stock has fluctuated over a
wide range and it is likely that the price of our common stock will fluctuate in
the future. The market price of our common stock could be impacted due to a
variety of factors, including:
o the results of pre-clinical testing and clinical trials by us, our
corporate partners or our competitors,
o announcements of technical innovations or new products by us, our corporate
partners or our competitors,
o the status of corporate collaborations and supply arrangements entered into
by us, our corporate partners or our competitors,
o regulatory approvals of our products or those of our competitors,
o changes in government regulation,
o developments in the patents or other proprietary rights owned or licensed
by us or our competitors,
o public concern as to the safety and efficacy of products developed by us or
others,
o litigation, and
o general market conditions in our industry.
In addition, due to one or more of the foregoing factors in one or more
future quarters, our results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of our common
stock could be materially and adversely affected.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and healthcare-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock.
Events with respect to our share capital could cause the price of our common
stock to decline.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. As of June 30, 2000, we have 40,838,115 shares of common stock
outstanding, excluding shares reserved for issuance upon the exercise of
outstanding stock options and warrants, and the conversion of outstanding
preferred stock. The following securities that may be exercised for, or are
convertible into, shares of our common stock were issued and outstanding as of
June 30, 2000:
o Options. Stock options to purchase 3,205,736 shares of our common
stock at a weighted average exercise price of approximately $7.35 per
share; of this total, 2,662,958 were exercisable at a weighted average
exercise price of $4.21 per share as of such date.
o Warrants. Various warrants to purchase 100,068 shares of our common
stock, all of which were exercisable, at a weighted average exercise
price of $5.92 per share as of such date.
o Series A preferred stock. 7,000 shares of our Series A preferred
stock, all of which were convertible into 15,909 shares of our common
stock as of such date.
The shares of our common stock that may be issued under the warrants and
options are either currently registered with the SEC, or will be registered with
the SEC before the shares are purchased by the holders of the warrants and
options. The shares of common stock that may be issued upon conversion of the
37
Series A preferred stock are eligible for sale without any volume limitation
pursuant to Rule 144(k) under the Securities Act of 1933, as amended.
The exercise of outstanding registration rights held by holders of our common
and preferred stock may have an adverse effect on the market price for our
common stock and may impair our ability to raise additional funds.
As of June 30, 2000, there are demand and/or piggyback registration rights
on an aggregate of 1,267,597 shares of our outstanding common stock and common
stock underlying outstanding warrants. We granted Schering-Plough piggyback
registration rights with respect to 847,489 shares of our common stock. In
addition, two persons affiliated with Evolution Capital have piggyback and
demand registration rights aggregating 160,239 shares with respect to common
stock and common stock underlying warrants to purchase our common stock. The
demand rights give these warrant holders a one-time right to require us to
register, upon their request, that number of shares underlying such warrants. We
granted the Carson Group, Inc. and two of its principals, piggyback registration
rights on a aggregate of 51,581 shares of common stock and common stock
underlying warrants as consideration for finder's services that were provided to
us. Transferees of Clearwater Fund IV were also granted piggyback registration
rights under a registration rights agreement with us with respect to an
aggregate of 208,288 shares of common stock and common shares underlying
warrants, which are currently covered by an effective registration statement.
Absent any contractual limitations, the holders of these rights could cause a
significant number of shares of our common stock to be registered and sold in
the public market. Such sales, or the perception that these sales could occur,
may have an adverse effect on the market price for our common stock and could
impair our ability to raise capital through an offering of equity securities.
We originally registered the resale of approximately 3,983,000 shares of
our common stock owned by stockholders who purchased such shares in a private
placement of our common stock that closed in July 1998.
We originally registered the resale of approximately 4,122,317 shares of
our common stock owned by stockholders who purchased such shares in a private
placement of our common stock that closed in January and March 1996. We are
required to maintain the effectiveness of this registration statement until the
earlier of the date that all of the shares are sold or March 15, 2004.
Our charter documents and Delaware law may discourage a takeover of our
company.
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire or merge with us, even
if doing so would be beneficial to our stockholders.
Our board of directors has the authority to issue up to 3,000,000 shares of
our preferred stock, par value $0.01 per share, and to determine the price and
terms, including preferences and voting rights, of those shares without
stockholder approval. Although we have no current plans to issue additional
shares of our preferred stock, any such issuance could:
o have the effect of delaying, deferring or preventing a change in
control of our company,
o discourage bids for our common stock at a premium over the market
price, or
o adversely affect the market price of and the voting and other rights
of the holders of our common stock.
In addition, certain provisions of our certificate of incorporation
establishing a classified board of directors, and our agreements with our
executive officers that provide significant payments to them following a change
in control of our company, could each have the effect of discouraging potential
takeover attempts.
38
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities, and
time deposits. All such instruments are classified as securities held to
maturity. We do not invest in portfolio equity securities or commodities or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily pending use in our business and operations. We
manage these funds accordingly. We seek reasonable assuredness of the safety of
principal and market liquidity by investing in rated fixed income securities
while at the same time seeking to achieve a favorable rate of return. Our market
risk exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest the majority of our investments in the shorter-end
of the maturity spectrum, and at June 30, 2000 all of our holdings were in
instruments maturing in two and a half years or less.
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of June 30,
2000.
2001 2002 2003 Total Fair Value
-------------- ----------- ----------- ------------ ------------
Fixed Rate $ 35,668,000 $54,487,000 -- $90,155,000 $90,096,000
Average Interest Rate 6.29% 6.69% -- 6.41% --
Variable Rate -- 4,997,000 10,008,000 15,005,000 15,081,000
Average Interest Rate -- 6.37% 6.44% 6.56% --
-------------- ----------- ----------- ------------ ------------
$ 35,668,000 $59,484,000 $10,008,000 $105,160,000 $105,177,000
============== =========== =========== ============ ============
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Not applicable.
39
PART III
The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management; and Item 13 - Certain Relationships
and Related Transactions is incorporated into Part III of this Annual Report on
Form 10-K by reference to the Proxy Statement for our Annual Meeting of
Stockholders scheduled to be held on December 5, 2000.
40
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
Page Number
or
Exhibit Incorporation
Number Description By Reference
------ ----------- -------------
3(i) Certificate of Incorporation as amended ~~
3(ii) By laws, as amended *(4.2)
3(iv) Amendment to Certificate of Incorporation dated January 5, 1998 ##3(iv)
10.1 Form of Change of Control Agreements dated as of January 20, 1995
entered into with the Company's Executive Officers ###(10.2)
10.2 Lease - 300-C Corporate Court, South Plainfield, New Jersey ***(10.3)
10.4 Lease Termination Agreement dated March 31, 1995 for
20 Kingsbridge Road and 40 Kingsbridge Road, Piscataway,
New Jersey ###(10.6)
10.5 Option Agreement dated April 1, 1995 regarding 20 Kingsbridge
Road, Piscataway, New Jersey ###(10.7)
10.6 Form of Lease - 40 Cragwood Road, South Plainfield, New Jersey ****(10.9)
10.7 Lease 300A-B Corporate Court, South Plainfield, New Jersey ++(10.10)
10.8 Stock Purchase Agreement dated March 5, 1987 between the
Company and Eastman Kodak Company ****(10.7)
10.9 Amendment dated June 19, 1989 to Stock Purchase Agreement
between the Company and Eastman Kodak Company **(10.10)
10.10 Form of Stock Purchase Agreement between the Company
and the purchasers of the Series A Cumulative
Convertible Preferred Stock +(10.11)
10.11 Amendment to License Agreement and Revised License Agreement
Between the Company and RCT dated April 25, 1985 +++(10.5)
10.12 Amendment dated as of May 3, 1989 to Revised License Agreement
Dated April 25, 1985 between the Company and Research
Corporation **(10.14)
10.13 License Agreement dated September 7, 1989 between the Company
and Research Corporation Technologies, Inc. **(10.15)
10.14 Master Lease Agreement and Purchase Leaseback Agreement dated
October 28, 1994 between the Company and Comdisco, Inc. #(10.16)
10.15 Employment Agreement with Peter G. Tombros dated as of
August 10, 2000 @
10.16 Stock Purchase Agreement dated as of June 30, 1995 ~(10.16)
10.17 Securities Purchase Agreement dated as of January 31, 1996 ~(10.17)
10.18 Registration Rights Agreements dated as of January 31, 1996 ~(10.18)
10.19 Warrants dated as of February 7, 1996 and issued pursuant to the
Securities Purchase Agreement dated as of January 31, 1996 ~(10.19)
10.20 Securities Purchase Agreement dated as of March 15, 1996 ~~(10.20)
10.21 Registration Rights Agreement dated as of March 15, 1996 ~~(10.21)
41
10.22 Warrant dated as of March 15, 1996 and issued pursuant to the
Securities Purchase Agreement dated as of March 15, 1996 ~~ (10.22)
10.23 Amendment dated March 25, 1994 to License Agreement dated
September 7, 1989 between the Company and Research
Corporation Technologies, Inc. ~~~(10.23)
10.24 Independent Directors' Stock Plan ~~~(10.24)
10.25 Stock Exchange Agreement dated February 28, 1997, by and between
the Company and GFL Performance Fund Ltd ^(10.25)
10.26 Agreement Regarding Registration Rights Under Registration Rights
Agreement dated March 10, 1997, by and between the Company
and Clearwater Fund IV LLC ^(10.26)
10.27 Common Stock Purchase Agreement dated June 25, 1998 ^^^(10.27)
10.28 Placement Agent Agreement dated June 25, 1998 with SBC Warburg
Dillon Read, Inc. ^^^^(10.28)
10.29 Underwriting Agreement dated March 20,2000 with Morgan
Stanley & Co. Inc., CIBC World Markets Corp., and SG
Cowen Securities Corporation /(10.29)
21.0 Subsidiaries of Registrant @
23.0 Consent of KPMG LLP @
27.0 Financial Data Schedule @
@ Filed herewith.
* Previously filed as an exhibit to the Company's Registration
Statement on Form S-2 (File No. 33-34874) and incorporated herein by
reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1989 and incorporated herein
by reference thereto.
*** Previously filed as an exhibit to the Company's Registration
Statement on Form S-18 (File No. 2-88240-NY) and incorporated herein
by reference thereto.
**** Previously filed as exhibits to the Company's Registration Statement
on Form S-1 (File No. 2-96279) filed with the Commission and
incorporated herein by reference thereto.
+ Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-39391) filed with the Commission
and incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993 and incorporated
herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1985 and incorporated
herein by reference thereto.
# Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994 and incorporated
herein by reference thereto.
## Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997 and incorporated
herein by reference thereto.
### Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 and incorporated
herein by reference thereto.
42
~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995 and incorporated
herein by reference thereto.
~~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996 and incorporated
herein by reference thereto.
~~~ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996 and incorporated
herein by reference thereto.
^ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated
herein by reference thereto.
^^ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997 and incorporated herein
by reference thereto.
^^^ Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-58269) filed with the Commission
and incorporated herein by reference thereto.
^^^^ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 and incorporated herein
by reference thereto.
/ Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-30818) filed with the Commission
and incorporated herein by reference thereto.
(b) Reports on Form 8-K.
On June 7, 2000, we filed with the Commission a Current Report on Form 8-K
dated May 30, 2000, related to the European Union's Commission of the European
Communities granting Schering-Plough marketing authorization to PEG-INTRON as a
once-weekly monotherapy for adult patients with chronic hepatitis C.
On May 12, 2000, we filed with the Commission a Current Report on Form 8-K
dated May 1, 2000, related to Schering-Plough's results of a Phase II dose
ranging study of PEG-INTRON(TM) combined with Ribavirin.
On April 19, 2000, we filed with the Commission a Current Report on Form
8-K dated April 18, 2000, related to the results from a Phase III clinical
trial comparing the safety and efficacy of PEG-INTRON(TM) Injection and
INTRON(R) A Injection, as monotherapy for the treatment of hepatitis C.
43
ENZON, INC.
Dated: September 28, 2000 by: /S/ Peter G. Tombros
----------------------
Peter G. Tombros
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/S/ Peter G. Tombros President, Chief Executive September 28, 2000
- ------------------------ Officer and Director
Peter G. Tombros (Principal Executive Officer)
/S/ Kenneth J. Zuerblis Vice President, Finance, September 28, 2000
- ------------------------ Chief Financial Officer and
Kenneth J. Zuerblis Corporate Secretary
(Principal Financial and
Accounting Officer)
/S/ Randy H. Thurman Chairman of the Board September 28, 2000
- -----------------------
Randy H. Thurman
Director
- -----------------------
David S. Barlow
/S/ Rolf A. Classon Director September 28, 2000
- -----------------------
Rolf A. Classon
/S/ Rosina B. Dixon Director September 28, 2000
- -----------------------
Rosina B. Dixon
/S/ David W. Golde Director
- -----------------------
David W. Golde
/S/ Robert LeBuhn Director September 28, 2000
- -----------------------
Robert LeBuhn
/S/ A.M. "Don" MacKinnon Director September 28, 2000
- -----------------------
A.M. "Don" MacKinnon
ENZON, INC. AND SUBSIDIARIES
Index
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 2000 and 1999 F-3
Consolidated Statements of Operations - Years ended
June 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 2000, 1999 and 1998 F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enzon, Inc.:
We have audited the consolidated financial statements of Enzon, Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon, Inc. and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Short Hills, New Jersey
September 5, 2000
F-2
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
ASSETS 2000 1999
------------- -------------
Current assets:
Cash and cash equivalents $ 31,935,410 $ 24,673,636
Short-term investments 16,986,278 --
Accounts receivable 5,442,455 4,604,847
Inventories 946,717 1,326,601
Prepaid expenses and other current assets 2,269,884 1,034,327
------------- -------------
Total current assets 57,580,744 31,639,411
------------- -------------
Property and equipment 12,439,729 12,054,505
Less accumulated depreciation and amortization 10,650,859 10,649,661
------------- -------------
1,788,870 1,404,844
------------- -------------
Other assets:
Investments 69,557,482 68,823
Deposits and deferred charges 426,731 753,683
Patents, net 898,423 1,049,554
------------- -------------
70,882,636 1,872,060
------------- -------------
Total assets $ 130,252,250 $ 34,916,315
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,465,360 $ 1,716,089
Accrued expenses 5,706,811 6,261,640
------------- -------------
Total current liabilities 8,172,171 7,977,729
------------- -------------
Accrued rent 607,914 634,390
Royalty advance - Aventis 510,001 728,977
------------- -------------
1,117,915 1,363,367
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 7,000 shares in 2000 and 107,000
shares in 1999
(liquidation preference aggregating $319,000 in 2000 and
$4,659,000 in 1999) 70 1,070
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 40,838,115 shares in 2000 and
36,488,684 shares in 1999 408,381 364,886
Additional paid-in capital 50,567,774 146,970,289
Accumulated deficit (130,014,061) (121,761,026)
------------- -------------
Total stockholders' equity 120,962,164 25,575,219
------------- -------------
Total liabilities and stockholders' equity $ 130,252,250 $ 34,916,315
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Revenues:
Sales $ 15,591,488 $ 12,855,995 $ 12,312,730
Contract revenue 1,426,309 302,212 2,331,302
------------ ------------ ------------
Total revenues 17,017,797 13,158,207 14,644,032
------------ ------------ ------------
Costs and expenses:
Cost of sales 4,888,357 4,309,956 3,645,281
Research and development expenses 8,382,772 6,835,521 8,653,567
Selling, general and administrative expenses 12,956,118 8,133,366 6,426,241
------------ ------------ ------------
Total costs and expenses 26,227,247 19,278,843 18,725,089
------------ ------------ ------------
Operating loss (9,209,450) (6,120,636) (4,081,057)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 2,943,311 1,145,009 460,922
Interest expense (4,051) (8,348) (13,923)
Other (36,274) 64,767 16,925
------------ ------------ ------------
2,902,986 1,201,428 463,924
------------ ------------ ------------
Net loss ($ 6,306,464) ($ 4,919,208) ($ 3,617,133)
============ ============ ============
Basic and diluted net loss per common share ($ 0.17) ($ 0.14) ($ 0.12)
============ ============ ============
Weighted average number of common
shares outstanding 38,172,515 35,699,133 31,092,369
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2000, 1999 and 1998
Preferred stock Common stock
---------------- -----------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
Balance, July 1, 1997 109,000 $1,090 30,797,735 $307,977
Common stock issued for exercise at
non-qualified stock options -- -- -- 2.23 505,072 5,051
Common stock issued on conversion of
Series A Preferred Stock 25.00 (2,000) (20) 11.00 4,544 45
Dividends issued on Series A Preferred Stock -- -- -- 11.00 2,848 29
Common stock issued for Independent
Directors' Stock Plan -- -- -- 4.11 16,904 169
Common stock issued for consulting services -- -- -- 4.77 14,250 143
Consulting expense for issuance of stock
options -- -- -- -- -- --
Net Loss -- -- -- -- -- --
--------- ---------- ------------ ------------
Balance, June 30, 1998 107,000 $1,070 31,341,353 $313,414
Common stock issued for exercise of
non-qualified stock options -- -- -- 4.40 1,000,919 10,009
Common stock issued on exercise of
Common stock warrants -- -- -- 2.50 150,000 1,500
Net proceeds from Private Placement,
July 1998 -- -- -- 4.75 3,983,000 39,830
Common stock issued for Independent
Directors' Stock Plan -- -- -- 8.88 8,514 84
Common stock options and warrants issued
for consulting services -- -- -- -- -- --
Common stock issued for consulting services -- -- -- 6.13 4,898 49
Net loss -- -- -- -- -- --
--------- ---------- ------------ ------------
Balance, June 30, 1999, carried forward 107,000 $1,070 36,488,684 $364,886
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
Balance, July 1, 1997 $121,426,159 ($113,193,345) $8,541,881
Common stock issued for exercise at
non-qualified stock options 1,653,557 -- 1,658,608
Common stock issued on conversion of
Series A Preferred Stock (42) -- (17)
Dividends issued on Series A Preferred Stock 31,300 (31,340) (11)
Common stock issued for Independent
Directors' Stock Plan 69,231 -- 69,400
Common stock issued for consulting services 67,854 -- 67,997
Consulting expense for issuance of stock
options 205,815 -- 205,815
Net Loss -- (3,617,133) (3,617,133)
------------- ------------- ------------
Balance, June 30, 1998 $123,453,874 ($116,841,818) $6,926,540
Common stock issued for exercise of
non-qualified stock options 4,396,477 -- 4,406,486
Common stock issued on exercise of
Common stock warrants 373,500 -- 375,000
Net proceeds from Private Placement,
July 1998 17,510,265 -- 17,550,095
Common stock issued for Independent
Directors' Stock Plan 75,539 -- 75,623
Common stock options and warrants issued
for consulting services 1,130,683 -- 1,130,683
Common stock issued for consulting services 29,951 -- 30,000
Net loss -- (4,919,208) (4,919,208)
------------- ------------- ------------
Balance, June 30, 1999, carried forward $146,970,289 ($121,761,026) $25,575,219
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 2000, 1999 and 1998
Preferred stock Common stock
---------------- -------------------------------- Additional
Amount Number of Par Amount Number of Par paid-in
per share Shares Value per share Shares Value capital
--------- ------ ----- --------- ------ ----- -------
Balance, June 30, 1999, brought forward 107,000 $ 1,070 36,488,684 $364,886 $ 146,970,289
Common stock issued for exercise of
non-qualified stock options -- -- -- 4.25 807,181 8,072 3,286,246
Common stock issued on conversion of
Series A Preferred Stock 25.00 (100,000) (1,000) 11.00 227,271 2,273 (1,273)
Dividends issued on Series A Preferred Stock -- -- -- -- -- -- --
Common stock issued on exercise of
common stock warrants -- -- -- 4.57 1,012,116 10,121 4,395,803
Net Proceeds from Common stock offering 44.50 2,300,000 23,000 95,647,262
Common stock issued for Independent
Directors' Stock Plan -- -- -- 30.82 2,863 29 88,208
Consulting expense for issuance for stock
options -- -- -- -- -- -- 181,239
Net loss -- -- -- -- -- -- --
-------- ------- ---------- -------- -------------
Balance, June 30, 2000 7,000 $ 70 40,838,115 $408,381 $ 250,567,774
======== ======= ========== ======== =============
Accumulated
Deficit Total
------- -----
Balance, June 30, 1999, brought forward ($121,761,026) $ 25,575,219
Common stock issued for exercise of
non-qualified stock options -- 3,294,318
Common stock issued on conversion of
Series A Preferred Stock -- --
Dividends issued on Series A Preferred Stock (1,946,571) (1,946,571)
Common stock issued on exercise of
common stock warrants -- 4,405,924
Net Proceeds from Common stock offering -- 95,670,262
Common stock issued for Independent
Directors' Stock Plan -- 88,237
Consulting expense for issuance for stock
options -- 181,239
Net loss (6,306,464) (6,306,464)
------------- -------------
Balance, June 30, 2000 ($130,014,061) $ 120,962,164
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------- ------------ -----------
Cash flows from operating activities:
Net loss ($ 6,306,464) ($ 4,919,208) ($3,617,133)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 499,245 835,503 1,217,423
Loss (gain) on retirement of assets 36,274 (38,521) 97,037
Non-cash expense for issuance of common
stock, warrants, and options 269,476 1,236,306 343,212
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (837,608) (2,304,801) 133,716
Decrease (increase) in inventories 379,884 (304,071) (162,657)
Increase in prepaid expenses and other
current assets (1,232,483) (586,375) (360,220)
Decrease (increase) in deposits and deferred
charges 326,952 (288,936) (430,172)
(Decrease) increase in accounts payable 749,271 4,233 (198,881)
Increase (decrease) in accrued expenses (473,442) 2,691,353 796,403
Decrease in accrued rent (26,476) (92,770) (142,852)
Decrease in royalty advance - Aventis (300,363) (76,558) (1,101,501)
------------- ------------ -----------
Net cash used in operating activities (6,915,734) (3,843,845) (3,425,625)
------------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (768,415) (424,670) (160,940)
Proceeds from sale of equipment -- 131,932 83,129
Purchase of investments (90,478,010) -- --
Maturities of investments 4,000,000 -- --
Decrease in long-term investments -- 179 9,291
------------- ------------ -----------
Net cash used in investing activities (87,246,425) (292,559) (68,520)
------------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and
warrants 103,370,504 22,331,581 1,658,580
Preferred stock dividends paid (1,946,571) -- --
Principal payments of obligations under
capital lease -- -- (1,728)
------------- ------------ -----------
Net cash provided by financing activities 101,423,933 22,331,581 1,656,852
------------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents 7,261,774 18,195,177 (1,837,293)
Cash and cash equivalents at beginning of year 24,673,636 6,478,459 8,315,752
------------- ------------ -----------
Cash and cash equivalents at end of year $ 31,935,410 $ 24,673,636 $ 6,478,459
============= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 2000, 1999 and 1998
(1) Company Overview
Enzon, Inc. ("Enzon" or "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies. The Company was originally incorporated in 1981. To date, the
Company's sources of cash have been the proceeds from the sale of its stock
through public offerings and private placements, sales of ADAGEN(R), and
ONCASPAR(R), royalties on sales of PEG-INTRON, sales of its products for
research purposes, contract research and development fees, technology
transfer and license fees and royalty advances. The manufacturing and
marketing of pharmaceutical products in the United States is subject to
stringent governmental regulation, and the sale of any of the Company's
products for use in humans in the United States will require the prior
approval of the United States Food and Drug Administration ("FDA"). To
date, ADAGEN and ONCASPAR are the only products of the Company which have
been approved for marketing by the FDA. PEG-INTRON is approved for
marketing in the European Union.
(2) Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions
and balances are eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
The Company classifies its debt and marketable equity securities into
held-to-maturity or available-for-sale categories. Debt securities are
classified as held-to-maturity when the Company has the intent and ability
to hold the securities to maturity. Debt securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available for sale. Held-to-maturity securities are recorded as either
short-term or long-term on the balance sheet based on contractual maturity
date and are stated at amortized cost. Debt and marketable equity
securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair market value, with the
unrealized gains and losses, net of tax, included in the determination of
comprehensive income and reported in stockholders' equity.
The fair value of substantially all securities is determined by quoted
market prices. The estimated fair value of securities for which there are
no quoted market prices is based on similar types of securities that are
traded in the market. Gains or losses on securities sold are based on the
specific identification method.
The amortized cost and fair value for securities held to maturity by major
security type at June 30, 2000 and 1999, were as follows:
June 30, 2000 June 30, 1999
------------- -------------
Amortized Fair Market Amortized Fair Market
Cost Value Cost Value
U.S. government debt $ 3,630,000 $ 3,630,000 $ 7,431,000 $ 7,471,000
U.S. corporate debt 87,881,000 87,984,000 15,267,000 15,230,000
Foreign corporate debt 13,649,000 13,563,000
------------ ------------------------------------------
$105,160,000 $105,177,000 $22,698,000 $22,701,000
============ ==========================================
Maturities of debt securities classified as held to maturity were as
follows at June 30, 2000:
Years ended June 30,
Amortized Fair Market
Cost Value
2001 $ 35,668,000 $ 35,647,000
2002 59,484,000 59,474,000
2003 10,008,000 10,056,000
2004 -- --
2005 and thereafter -- --
------------ ------------
$105,160,000 $105,177,000
============ ============
Included in cash and cash equivalents were $18,681,000 of debt securities
which mature prior to October 30, 2000.
F-8
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Inventory Costing and Idle Capacity
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method and includes the cost of
raw materials, labor and overhead.
Costs associated with idle capacity at the Company's manufacturing
facility are charged to cost of sales as incurred.
Patents
The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending
to protect its proprietary technology. Although the Company believes that
its patents provide adequate protection for the conduct of its business,
there can be no assurance that such patents will be of substantial
protection or commercial benefit to the Company, will afford the Company
adequate protection from competing products, or will not be challenged or
declared invalid, or that additional United States patents or foreign
patent equivalents will be issued to the Company. The degree of patent
protection to be afforded to biotechnological inventions is uncertain, and
the Company's products are subject to this uncertainty.
Patents related to the acquisition of SCA Ventures, Inc., formerly
Genex Corporation, were recorded at their fair value at the date of
acquisition and are being amortized over the estimated useful lives of the
patents ranging from 8 to 17 years. Accumulated amortization as of June 30,
2000 and 1999 was $1,230,000 and $1,099,000, respectively.
Costs related to the filing of patent applications related to the
Company's products and technology are expensed as incurred.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is recognized in operations
for the period. The cost of repairs and maintenance is charged to
operations as incurred; significant renewals and betterments are
capitalized.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows and measures the impairment, if any, using
discounted cash flows.
Revenue Recognition
Reimbursement from third party payors for ADAGEN is handled on an
individual basis due to the high cost of treatment and limited patient
population. Because of the uncertainty of
F-9
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
reimbursement and the Company's commitment of supply to the patient
regardless of whether or not the Company will be reimbursed, revenues for
the sale of ADAGEN are recognized when reimbursement from third party
payors becomes likely.
Revenues from the sale of the Company's other products that are sold
are recognized at the time of shipment and provision is made for estimated
returns.
Contract revenues are recorded as the earnings process is completed.
Royalties under the Company's license agreements with third parties
are recognized when earned.
Research and Development
Research and development costs are expensed as incurred.
Stock Compensation
The Company maintains a Non-Qualified Stock Option Plan (the "Stock
Option Plan") for which it applies Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for the Stock Option Plan. Stock options
issued to employees are granted with an exercise price equal to the market
price and in accordance with APB No. 25, compensation expense is not
recognized. The Company records compensation expense equal to the value of
stock options granted for consulting services rendered to the Company by
non-employees. The value of the options granted to non-employees is
determined by the Black-Scholes option-pricing model.
Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents.
During the year ended June 30, 2000, 100,000 shares of Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock" or
"Series A Preferred Shares") were converted to 227,271 shares of Common
Stock. Accrued dividends of $1,947,000 on the Series A Preferred Shares
that were converted, were settled by cash payments. Additionally, cash
payments totaling $19 were made for fractional shares related to the
conversions. There were no conversions of Series A Preferred Stock for the
year ended June 30, 1999.
During the year ended June 30, 1998, 2,000 shares of Series A
Preferred Stock were converted to 4,544 shares of Common Stock. Accrued
dividends of $31,000 on the Series A Preferred Shares that were converted
were settled by issuing 2,848 shares of Common Stock and cash payments
totaling $19 for fractional shares.
Cash payments for interest were approximately $4,000, $8,000 and
$14,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
There were no income tax payments made for the years ended June 30, 2000,
1999 and 1998.
F-10
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net Loss Per Common Share
Basic and diluted loss per common share is based on the net loss for
the relevant period, adjusted for cumulative, undeclared Series A Preferred
Stock dividends of $14,000, $214,000 and $216,000 for the years ended June
30, 2000, 1999 and 1998, respectively, divided by the weighted average
number of shares issued and outstanding during the period. For purposes of
the diluted loss per share calculation, the exercise or conversion of all
potential common shares is not included because the effect is antidilutive
due to the net loss recorded for the years ended June 30, 2000, 1999 and
1998. As of June 30, 2000, the Company had approximately 5,364,000
potentially dilutive common shares outstanding that could potentially
dilute future earnings per share calculations.
Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS 130 had no
impact on the Company's results of operations for the years ended June 30,
2000, 1999 and 1998. The net loss is equal to the comprehensive loss for
those periods.
(3) Inventories
Inventories consist of the following:
June 30,
--------------------------
2000 1999
---- ----
Raw materials $283,000 $503,000
Work in process 504,000 548,000
Finished goods 160,000 276,000
----------- ------------
$947,000 $1,327,000
(4) Property and Equipment
Property and equipment consist of the following:
June 30,
---------------- Estimated
2000 1999 useful lives
---- ---- ------------
Equipment $8,356,000 $8,024,000 3-7 years
Furniture and fixtures 1,440,000 1,438,000 7 years
Vehicles 24,000 24,000 3 years
Leasehold improvements 2,619,000 2,569,000 3-15 years
----------- -----------
$12,439,000 $12,055,000
=========== ===========
During the years ended June 30, 2000 and 1999, the Company's fixed
asset disposals were approximately $383,000 and $3,504,000, respectively.
The disposals in 1999 were primarily attributable to the Company's
consolidation of research operations and the elimination of its leased
facility at 40 Cragwood Road.
F-11
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Depreciation and amortization charged to operations relating to
property and equipment totaled $348,000, $692,000 and $1,063,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
(5) Stockholders' Equity
During the year ended June 30, 2000, the Company sold 2,300,000 shares
of Common Stock in a public offering at a gross offering price of $44.50
per share. The offering resulted in gross proceeds of approximately
$102,350,000 and net proceeds of approximately $95,670,000.
During the year ended June 30, 1999, the Company sold 3,983,000 shares
of Common Stock in a private placement to a small group of investors. The
private placement resulted in gross proceeds of approximately $18,919,000
and net proceeds of approximately $17,550,000.
The board of directors has the authority to issue up to 3,000,000
shares of preferred stock, par value $0.01 per share, and to determine the
price and terms, including preferences and voting rights, of those shares
without stockholder approval.
Series A Preferred Stock
The Company's Series A Preferred Shares are convertible into Common
Stock at a conversion rate of $11 per share. The value of the Series A
Preferred Shares for conversion purposes is $25 per share. Holders of the
Series A Preferred Shares are entitled to an annual dividend of $2 per
share, payable semiannually, but only when and if declared by the Board of
Directors, out of funds legally available. Dividends on the Series A
Preferred Shares are cumulative and accrue and accumulate but will not be
paid, except in liquidation or upon conversion, until such time as the
Board of Directors deems it appropriate in light of the Company's then
current financial condition. No dividends are to be paid or set apart for
payment on the Company's Common Stock, nor are any shares of Common Stock
to be redeemed, retired or otherwise acquired for valuable consideration
unless the Company has paid in full or made appropriate provision for the
payment in full of all dividends which have then accumulated on the Series
A Preferred Shares. Holders of the Series A Preferred Shares are entitled
to one vote per share on matters to be voted upon by the stockholders of
the Company. As of June 30, 2000 and 1999, undeclared accrued dividends in
arrears were $144,000 or $20.54 and $1,984,000 or $18.54 per share,
respectively. All Common Shares are junior in rank to the Series A
Preferred Shares, with respect to the preferences as to dividends,
distributions and payments upon the liquidation, dissolution or winding up
of the Company.
F-12
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Common Stock
Holders of shares of Common Stock are entitled to one vote per share
on matters to be voted upon by the stockholders of the Company.
As of June 30, 2000, the Company has reserved its common shares for special
purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 29,000
Shares issuable upon exercise of outstanding warrants 100,000
Non-Qualified Stock Option Plan 5,235,000
---------
5,364,000
=========
Common Stock Warrants
During the year ended June 30, 2000, warrants were exercised to
purchase 1,012,000 shares of the Company's Common Stock at an average price
of $4.57 per share. Of this amount, 702,000 warrants were issued in
connection with our January 1996 private placement and 134,000 were issued
during the year ended June 30, 1999 as compensation for consulting
services. These exercises resulted in net proceeds of $4,406,000. The
exercise price of and the number of shares issuable under these warrants
were adjusted under standard anti-dilution provisions, as defined in the
warrants.
During the year ended June 30, 1999, 150,000 warrants were exercised
to purchase 150,000 shares of the Company's Common Stock at $2.50 per
share. These warrants were issued during the year ended June 30, 1996, as
part of the commission due to a real estate broker in connection with the
termination of the Company's former lease at 40 Kingsbridge Road.
As of June 30, 2000, warrants to purchase 100,000 shares of Common
Stock at an average exercise price of $5.92 per share were outstanding.
During the year ended June 30, 1999, the Company issued 200,000
five-year warrants to purchase its Common Stock at $6.50 per share, the
closing price of the Common Stock on the date of grant. The warrants are
consideration for consulting services to be rendered through February 2002.
The estimated fair value of the warrants of approximately $917,000 is being
amortized over the service period of three years. The unamortized portion
is included as a component of other assets with the corresponding current
portion included in other current assets on the consolidated balance sheet
as of June 30, 2000 and 1999.
(6) Independent Directors' Stock Plan
On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the
form of quarterly grants of Common Stock to non executive, independent
directors serving on the Company's Board of Directors. Each independent
director is granted shares of Common Stock equivalent to $2,500 per quarter
plus $500 per Board of Director's meeting attended. The number of shares
issued is based on the fair market value of Common Stock on the last
trading day of the applicable quarter. During
F-13
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the years ended June 30, 2000, 1999 and 1998, the Company issued 3,000,
9,000 and 17,000 shares of Common Stock, respectively, to independent
directors, pursuant to the Independent Directors' Stock Plan.
(7) Non-Qualified Stock Option Plan
In November 1987, the Company's Board of Directors adopted a
Non-Qualified Stock Option Plan (the "Stock Option Plan"). The number of
shares reserved for issuance under the Company's Stock Option Plan was
increased from 6,200,000 to 7,900,000 during December 1999. As of June 30,
2000, 5,235,000 shares of Common Stock were reserved for issuance pursuant
to options which may be granted to employees, non-employee directors or
consultants to the Company. The exercise price of the options granted must
be at least 100% of the fair market value of the stock at the time the
option is granted. Options may be exercised for a period of up to ten years
from the date they are granted. The other terms and conditions of the
options generally are to be determined by the Board of Directors, or an
option committee appointed by the Board, at their discretion.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". The Company continues to use APB No. 25,
"Accounting for Stock Issued to Employees," to account for the Stock Option
Plan. All options granted under the Stock Option Plan are granted with
exercise prices which equal or exceed the fair market value of the stock at
the date of grant. Accordingly, there is no compensation expense recognized
for options granted to employees.
The following pro forma financial information shows the effect and the
Company's net loss and loss per share, had compensation expense been
recognized consistent with the fair value method of SFAS No. 123.
2000 1999 1998
---- ---- ----
Net loss - as reported ($6,306,000) ($4,919,000) ($3,617,000)
Net loss - pro forma ($10,008,000) ($7,289,000) ($5,638,000)
Loss per share - as reported ($0.17) ($0.14) ($0.12)
Loss per share - pro forma ($0.26) ($0.21) ($0.19)
The pro forma effect on the loss for the three years ended June 30,
2000 is not necessarily indicative of the pro forma effect on earnings in
future years since it does not take into effect the pro forma compensation
expense related to grants made prior to the year ended June 30, 1996. The
fair value of each option granted during the three years ended June 30,
2000 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (i) dividend yield of
0%, (ii) expected term of five years, (iii) volatility of 84%, 86% and 84%
and (iv) a risk-free interest rate of 6.19%, 5.06% and 5.57% for the years
ended June 30, 2000, 1999 and 1998, respectively. The weighted average fair
value at the date of grant for options granted during the years ended June
30, 2000, 1999 and 1998 was $33.78, $9.68 and $5.85 per share,
respectively.
F-14
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of the activity in the Company's Stock Option
Plan:
Weighted
Average
Exercise Range of
Shares Price Prices
------ ----- ------
Outstanding at July 1, 1997 4,197,000 3.77 $ 1.88 to $14.88
Granted at exercise prices which equaled the
fair market value on the date of grant 719,000 5.85 $ 2.03 to $6.56
Exercised (305,000) 2.73 $ 2.06 to $5.13
Canceled (189,000) 6.69 $ 2.09 to $14.88
----------
Outstanding at June 30, 1998 4,422,000 4.06 $ 1.88 to $10.88
Granted at exercise prices which equaled
the fair market value on the date of grant 475,000 9.68 $ 4.88 to $15.75
Exercised (1,001,000) 4.40 $ 2.00 to $9.88
Canceled (172,000) 7.25 $ 2.81 to $14.50
----------
Outstanding at June 30, 1999 3,724,000 4.51 $ 1.88 to $15.75
Granted at exercise prices which equaled
the fair market value on the date of grant 302,000 33.78 $21.50 to $69.50
Exercised (809,000) 38.71 $20.06 to $70.75
Canceled (11,000) 20.53 $ 6.00 to $37.38
----------
Outstanding at June 30, 2000 3,206,000 7.35 $ 1.88 to $69.50
==========
As of June 30, 2000, the Plan had options outstanding and exercisable by
price range as follows:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$1.88 - $2.69 682,000 5.89 $2.49 682,000 $2.49
$2.75 - $2.94 626,000 5.73 $2.85 626,000 $2.85
$3.06 - $3.56 280,000 5.37 $3.51 280,000 $3.51
$3.75 - $5.50 509,000 4.33 $4.59 507,000 $4.59
$5.88 - $6.50 607,000 7.73 $6.23 471,000 $6.15
$7.50 - $22.31 311,000 8.25 $17.08 87,000 $13.83
$24.00 - $51.56 184,000 9.02 $39.28 10,000 $32.88
$61.00 - $69.50 7,000 9.70 $61.75 -- --
--------- --------- ---------
3,206,000 6.33 $7.35 2,663,000 $4.21
========= ========= =========
F-15
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Income Taxes
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
At June 30, 2000 and 1999, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities are
as follows:
2000 1999
---- ----
Deferred tax assets:
Inventories $ 603,000 $ 272,000
Investment valuation reserve 86,000 86,000
Contribution carryover 28,000 20,000
Compensated absences 157,000 127,000
Excess of financial statement over tax depreciation 924,000 1,031,000
Royalty advance - Aventis 395,000 371,000
Non-deductible expenses 1,025,000 1,497,000
Federal and state net operating loss carryforwards 50,808,000 44,531,000
Research and development and investment tax credit
carryforwards 8,860,000 8,176,000
------------ ------------
Total gross deferred tax assets 62,886,000 56,111,000
Less valuation allowance (62,180,000) (55,405,000)
------------ ------------
Net deferred tax assets 706,000 706,000
------------ ------------
Deferred tax liabilities:
Step up in basis of assets related to acquisition of Enzon
Labs Inc. (706,000) (706,000)
------------ ------------
Total gross deferred tax liabilities (706,000) (706,000)
------------ ------------
Net deferred tax $ 0 $ 0
============ ============
F-16
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
net change in the total valuation allowance for the years ended June 30,
2000 and 1999 was an increase of $6,775,000 and $4,428,000, respectively.
The tax benefit assumed using the Federal statutory tax rate of 34% has
been reduced to an actual benefit of zero due principally to the
aforementioned valuation allowance. Subsequently recognized tax benefits as
of June 30, 2000 of $3,540,000 relating to the valuation allowance for
deferred tax assets will be allocated to additional paid-in capital.
At June 30, 2000, the Company had federal net operating loss
carryforwards of approximately $132,917,000 for tax reporting purposes,
which expire in the years 2001 to 2020. The Company also has investment tax
credit carryforwards of approximately $3,200 and research and development
tax credit carryforwards of approximately $7,159,000 for tax reporting
purposes which expire in the years 2001 to 2020. The Company's ability to
use such net operating loss, investment and research and development tax
credits carryforwards are subject to certain limitations due to ownership
changes, as defined by rules pursuant to Section 382 of the Internal
Revenue Code of 1986, and as amended.
In addition, the net operating loss carryfoward of $132,917,000
includes $47,864,000 from the acquisition of Enzon, Labs, Inc. which is
subject to an annual limitation of $613,000.
(9) Significant Agreements
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough, entered into an agreement in November 1990 (the "Schering
Agreement") to apply the Company's PEG Process to develop a modified form
of Schering-Plough's INTRON(R)A (interferon alfa 2b), a
genetically-engineered anticancer and antiviral drug with longer activity.
During December 1999, Schering-Plough submitted a U.S. marketing
application to the FDA for the use of PEG-INTRON in the treatment of
chronic hepatitis C. In May 2000, PEG-INTRON was granted marketing
authorization in the European Union for the treatment of adult patients
with chronic hepatitis C. Schering-Plough is conducting a Phase III
clinical trial of PEG-INTRON as combination therapy with REBETOL for
hepatitis C and Phase III clinical trials of PEG-INTRON for the treatment
of chronic myelogenous leukemia and malignant melanoma. Earlier stage
clinical trials of PEG-INTRON are being conducted for various solid tumors,
as well as HIV, hepatitis B, and multiple sclerosis.
Under the license agreement, which was amended in 1995 and 1999, the
Company will receive royalties on worldwide sales of PEG-INTRON, if any.
Schering is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing the product worldwide on an
exclusive basis. During 1999, the Company and Schering amended the
agreement that resulted in an increase in the effective royalty rate in
return for Enzon's exclusive U.S. manufacturing rights for the product and
a license under one of the Company's Second Generation PEG patents for
Branched or U-PEG. The license for Branched PEG gives Schering the ability
to sublicense the patent for a competing interferon product.
F-17
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company may be entitled to additional payments subject to the
achievement of certain milestones. During February 2000, $1,000,000 was
received and recognized as revenue, related to the filing for FDA approval
of PEG-INTRON. Enzon may be entitled to an additional $2,000,000 milestone
payment from Schering. The Schering Agreement terminates, on a
country-by-country basis, upon the expiration of the last to expire of any
future patents covering the product which may be issued to Enzon, or 15
years after the product is approved for commercial sale, whichever shall be
the later to occur. This agreement is subject to Schering's right of early
termination if Enzon fails to obtain or maintain the requisite product
liability insurance.
Aventis Agreement
Under the Company's Amended Aventis Pharmaceuticals, (formerly Phone
Poulenc Rorer Pharmaceuticals, Inc.) U.S. License Agreement, Enzon granted
an exclusive license to Aventis to sell ONCASPAR in the U.S. Enzon has
received licensing payments totaling $6,000,000 and is entitled to
royalties on net sales of ONCASPAR. During July 2000 the Company further
amended the license agreement with Aventis to increase the base royalty
payable to the Company on net sales of ONCASPAR from 23.5% to 27.5% on
annual sales up to $10 million and 25% on annual sales exceeding $10
million. These royalty payments, will include Aventis' cost of purchasing
ONCASPAR under the supply agreement. The agreement was also extended until
2016. Additionally, the amended license agreement eliminated the super
royalty of 43.5% on net sales of ONCASPAR which exceed certain agreed-upon
amounts. The Amended Aventis U.S. License Agreement also provides for a
payment of $3,500,000 in advance royalties, which was received in January
1995.
The payment of royalties to Enzon under the Amended Aventis U.S.
License Agreement will be offset by an original credit of $5,970,000, which
represents the royalty advance plus reimbursement of certain amounts due to
Aventis under the original Aventis U.S. License Agreement and interest
expense. The royalty advance is shown as a long term liability, with the
corresponding current portion included in accrued expenses on the
Consolidated Balance Sheets as of June 30, 2000 and 1999. The royalty
advance will be reduced as royalties are recognized under the agreement.
Through June 30, 2000 an aggregate of $4,313,000 in royalties payable by
Aventis has been offset against the original credit.
The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the
agreement or, if the agreement is terminated earlier, five years after
termination. The agreement terminates in December 2016 but automatically
renews for additional one-year periods unless either party notifies the
other in writing that it intends not to renew the agreement at least three
months prior to the end of the current term. It can be terminated earlier
by either party due to a default by the other. In addition, Aventis may
terminate the agreement at any time upon one year's prior notice to us or
if we are unable to supply product for more than 60 days under our separate
supply agreement with Aventis. When the amended license agreement
terminates, all rights granted to Aventis under the agreement will revert
to Enzon. Under a separate supply agreement, Aventis is required to
purchase from Enzon all of its product requirements for sales of ONCASPAR
in North America. If the Company is unable to supply product to Aventis,
under the supply
F-18
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
agreement for more than 60 days for any reason other than a force majeure
event, Aventis may terminate the supply agreement and the Company will be
required to exclusively license Aventis the know-how required to
manufacture ONCASPAR for the period of time during which the agreement
would have continued had the license agreement not been terminated.
During August 2000 the Company made a $1.5 million payment to Aventis
which was accrued at June 30, 2000 to settle a disagreement over the
purchase price of ONCASPAR under the supply agreement and to settle
Aventis' claim that Enzon should be responsible for Aventis' lost profits
while ONCASPAR is under the temporary labeling and distribution
modifications.
Further beginning in May 2000, for each month that expires prior to
the Company's receipt of FDA approval to allow marketing and distribution
of ONCASPAR without such labeling and distribution modifications, the
Company shall pay to Aventis $100,000. The Company had not received such
approval as of September 15, 2000.
Under a separate license, Aventis has exclusive rights to sell
ONCASPAR in Canada and Mexico. These agreements provide for Aventis to
obtain marketing approval of ONCASPAR in Canada and Mexico and for the
Company to receive royalties on sales of ONCASPAR in these countries, if
any. These agreements expire 10 years after the first commercial sale of
ONCASPAR in each country, but automatically renew for consecutive five-year
periods unless either party elects to terminate at least three months prior
to the end of the current term. Aventis may terminate these agreements on
one year's prior notice to the Company.
The Company also has a license agreement with Aventis for the Pacific
Rim region, specifically, Australia, New Zealand, Japan, Hong Kong, Korea,
China, Taiwan, Philippines, Indonesia, Malaysia, Singapore, Thailand and
Viet Nam, (the "Pacific Rim"). The agreement provides for Aventis to
purchase ONCASPAR for the Pacific Rim from the Company at certain
established prices which increase over the ten year term of the agreement.
Under the agreement, Aventis is responsible for obtaining additional
approvals and indications in the licensed territories. The agreement also
provides for minimum purchase requirements for the first four years of the
agreement.
MEDAC Agreement
The Company also granted an exclusive license to MEDAC to sell
ONCASPAR and any PEG-asparaginase product developed by us or MEDAC during
the term of the agreement in Western Europe, Turkey and Russia. The
Company's supply agreement with MEDAC provides for MEDAC to purchase
ONCASPAR from the Company at certain established prices, which increase
over the initial five-year term of the agreement. Under the license
agreement, MEDAC is responsible for obtaining additional approvals and
indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Under the agreement, MEDAC is
required to meet certain minimum purchase requirements. The MEDAC license
terminates in October 2001, but automatically renews for successive
two-year periods unless either party elects to terminate at least nine
months prior to the end of the current term. MEDAC may terminate the
agreement after providing the Company with one year's prior notice.
F-19
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Commitments and Contingencies
In January 2000, Hoffmann-La Roche filed lawsuits in both the U.S. and
France against Schering-Plough alleging that PEG-Intron infringes certain
patents held by Hoffmann-La Roche. The validity and scope of Hoffmann-La
Roche's patents in this segment of the industry could be judicially
determined during these proceedings.
The litigation is at a very early stage and the Company is not in a
position to predict its outcome. If Schering-Plough does not prevail in
this litigation, Hoffmann-La Roche may completely block Schering-Plough
from commercializing PEG-INTRON and the Company will not receive any
royalties on the sales of PEG-INTRON. This would have a material adverse
effect on the Company's business, financial condition and results of
operations.
In the course of normal operations, the Company is subject to the
marketing and manufacturing regulations as established by the Food and Drug
Administration ("FDA"). The Company has agreed with the FDA to temporary
labeling and distribution modifications for ONCASPAR due to increased
levels of particulates in certain batches of ONCASPAR, which the Company
manufactured. The Company, rather than its marketing partner, Aventis, will
temporarily distribute ONCASPAR directly to patients, on an as needed
basis. The Company will conduct additional inspection and labeling
procedures prior to distribution.
The Company anticipates a final resolution of the problem during
fiscal 2001. It is expected that Aventis will resume distribution of
ONCASPAR at that time. There can be no assurance that this solution will be
acceptable to the FDA or Aventis. If the Company cannot resolve this
problem it is possible that the FDA may not permit the Company to continue
to distribute this product. An extended disruption in the marketing and
distribution of ONCASPAR could have a material adverse impact on future
ONCASPAR sales.
The Company maintains a separate supply agreement with Aventis, under
which The Company is responsible for the supply of all of Aventis'
requirements for ONCASPAR.
During August 2000, the Company made a $1.5 million payment to Aventis
which was accrued for at June 30 to settle a disagreement over the purchase
price of ONCASPAR under the supply agreement and to settle Aventis' claim
that the Company should be responsible for Aventis' lost profits while
ONCASPAR is under the temporary labeling and distribution modifications
described above. Further beginning in May 2000 and for each month that
expires prior to the Company's receipt of FDA approval to allow marketing
and distribution of ONCASPAR without such labeling and distributions
modifications, the Company shall pay to Aventis $100,000. The Company had
not received such approval as of September 15, 2000.
During April 2000, the Company agreed to binding arbitration to settle
a lawsuit, filed by LBC Capital Resources, Inc. ("LBC") a former financial
advisor, in the United States District Court for the District of New
jersey. The arbitrator awarded LBC a $6,000,000 judgment. In its suit LBC
claimed that under a May 2, 1995 letter agreement between LBC and the
Company, LBC was entitled to a commission in connection with the Company's
January and March 1996 private placements, comprised of $675,000 and
warrants to purchase 1,250,000 shares of the Company's common
F-20
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
stock at an exercise price of $2.50 per share. As a result of the
arbitration award, the Company recognized a net charge to selling, general
and administrative expenses of approximately $2,600,000 during the third
quarter of the year ended June 30, 2000. The charge represents the net
profit and loss effect of the incremental reserves provided specifically
for this litigation, offset by the reduction during the quarter of
$2,900,000 of other contingency accruals that were deemed to not be
required for certain other contingencies.
The Company has agreements with certain members of its upper
management which provide for payments following a termination of employment
occurring after a change in control of the Company. The Company also has an
employment agreement, dated August 10, 2000, with its Chief Executive
Officer which provides for severance payments in addition to the change in
control provisions discussed above.
(11) Leases
The Company has several leases for office, warehouse, production and
research facilities and equipment.
Future minimum lease payments, net of subleases, for noncancelable
operating leases with initial or remaining lease terms in excess of one
year as of June 30, 2000 are:
Year ending Operating
June 30, leases
-------- ------
2001 1,003,000
2002 834,000
2003 779,000
2004 765,000
2005 765,000
Later years, through 2007 1,987,000
-----------
Total minimum lease payments $6,133,000
===========
Rent expense amounted to $1,055,000, $1,394,000 and $1,768,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
For the years ended June 30, 1999 and 1998, rent expense is net of
subrental income of $110,000 and 221,000 respectively. As of June 30, 1999,
the Company no longer subleases a portion of its facilities.
(12) Retirement Plans
The Company maintains a defined contribution, 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. The
Company's match is invested solely in a fund which purchases the Company's
Common Stock in the open market. Total company contributions for the years
ended June 30, 2000, 1999 and 1998 were $128,000, $115,000 and $100,000,
respectively.
F-21
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Accrued Expenses
Accrued expenses consist of:
June 30,
-------------------------
2000 1999
---- ----
Accrued wages and vacation $1,238,000 $1,074,000
Accrued Medicaid rebates 962,000 1,114,000
Current portion of royalty
advance - Aventis 854,000 200,000
Contract and legal accrual 1,500,000 3,328,000
Other 1,153,000 546,000
--------- -------
$5,707,000 $6,262,000
========== ==========
(14) Business and Geographical Segments
The Company is managed and operated as one business. The entire
business is comprehensively managed by a single management team that
reports to the Chief Executive Officer. The Company does not operate
separate lines of business or separate business entities with respect to
any of its products or product candidates. In addition, the Company does
not conduct any of its operations outside of the United States.
Accordingly, the Company does not prepare discrete financial information
with respect to separate product areas or by location and does not have
separately reportable segments as defined by SFAS No. 131.
During the years ended June 30, 2000, 1999 and 1998, the Company had
export sales of $4,104,000, $3,075,000 and $2,641,000, respectively. Of
these amounts, sales to Europe represented $3,584,000, $2,559,000 and
$2,117,000 during the years ended June 30, 2000, 1999 and 1998,
respectively. Included as a component of European sales are sales to France
which were $1,201,000, $1,108,000 and $994,000 and sales to Italy which
were $1,285,000, $1,201,000, $879,000 for the years ended June 30, 2000,
1999 and 1998.
ADAGEN sales represent approximately 78%, 90% and 82% of the Company's
total net sales for the year ended June 30, 2000, 1999 and 1998,
respectively. ADAGEN's Orphan Drug designation under the Orphan Drug Act
expired in March 1997. The Company believes the expiration of ADAGEN's
Orphan Drug designation will not have a material impact on the sales of
ADAGEN. Approximately 46%, 49% and 48% of the Company's ADAGEN sales for
the years ended June 30, 2000, 1999 and 1998, respectively, were made to
Medicaid patients.
F-22
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
- ------- ----------- ------
10.15 Employment Agreement with E1
Peter G. Tombros dated as of
August 10, 2000 E24
21.0 Subsidiaries of Registrant E25
23.0 Consent of KPMG LLP E26
27.0 Financial Data Schedule E27
F-23