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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, 1998 File Number 0-12957
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 11, 1998 was approximately $150,277,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class of
voting stock.
As of September 11, 1998, there were 35,359,384 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 28.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 1, 1998, 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.
1998 Form 10-K Annual Report
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 20
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 28
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The following trademarks and service marks appear in this Annual Report:
ADAGEN(R) and ONCASPAR(R) are registered trademarks of Enzon, Inc.;
PROTHECAN(TM) is a trademark of Enzon, Inc.; SCA(R) is a registered
trademark of Enzon Labs Inc.; Elspar(R) is a registered trademark of Merck
& Co., Inc; INTRON(R) A registered trademarks of Schering-Plough
Corporation; Hycamtin(TM) is a trademark of SmithKline Beecham plc;
Camptosar(R) is a registered trademark of Rhone-Poulenc Rorer
Pharmaceuticals Inc.; Roferon(R) is a registered trademark of Hoffmann-La
Roche. REBETOL(R) is a registered trademark of ICN Pharmaceuticals, Inc.
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PART I
Item 1. BUSINESS
Overview
Enzon, Inc. ("Enzon" or the "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for life-threatening
diseases through the application of its two proprietary technologies: (i)
polyethylene glycol ("PEG") Modification and (ii) single-chain antigen-binding
SCA(R) proteins. Enzon is focusing its research activities primarily in the area
of oncology and is applying its proprietary technologies to compounds of known
therapeutic efficacy in order to enhance the performance of these compounds. The
Company is commercializing its proprietary technologies by developing products
internally and in cooperation with strategic partners. To date, the Company and
its partners have successfully commercialized two products, ONCASPAR(R) and
ADAGEN(R) (described below). The Company currently has two products under
development internally and has established more than 20 strategic alliances and
license relationships for the development of products using the Company's
proprietary technologies. The Company believes that its partners are dedicating
substantial resources to the development of products which incorporate Enzon's
proprietary technologies. These efforts include the development of PEG-Intron A,
a PEG modified version of Schering-Plough Corporation's ("Schering-Plough")
product, INTRON(R) A (interferon alfa 2b), a genetically-engineered
anticancer-antiviral drug, for which Schering-Plough is currently conducting
Phase III clinical trials.
PEG Technology
The PEG process involves chemically attaching PEG, a relatively
non-reactive and non-toxic polymer, to proteins, chemicals and certain other
pharmaceuticals for the purpose of enhancing their therapeutic value (the "PEG
Process" or "PEG Modification"). The attachment of PEG helps to disguise the
compound and reduce the recognition of the compound by the immune system,
generally lowering potential immunogenicity and extending the life of such
compounds in the circulatory system. The PEG Process also increases the
solubility of the modified compound which enhances the delivery of the native
compound. To date, Enzon's commercialized products are PEG modified proteins.
Through enhancements, Enzon is seeking to apply its PEG technology to more
traditional organic compounds.
The Company has made significant improvements to the original PEG Process,
collectively referred to as "Second Generation PEG Technology", and has applied
for and received certain patents covering some improvements. One of the
components of the Second Generation PEG Technology is new linker chemistries;
the chemical binding of PEG to unmodified proteins. These new linkers provide an
enhanced binding of the PEG to the protein resulting in a more stable compound
with increased circulation life and may result in more activity of the modified
protein.
The Company also has developed a Third Generation PEG Technology that is
designed to enable the technology to be expanded to certain organic compounds
and would give such PEG modified compounds "Pro Drug" attributes. This is
accomplished by attaching PEG to a compound by means of a covalent bond that is
designed to break down over time, thereby releasing the active ingredient in the
proximity of the targeted tissues. The Company believes that the "Pro
Drug/Transport Technology" has much broader usefulness in that it can be applied
to a wide range of small molecules, such as cancer chemotherapy agents,
antibiotics, anti-fungals and immunosuppressants, as well as to proteins and
peptides, including enzymes and growth factors, although there can be no
assurance that such application will result in safe, effective, or commercially
viable pharmaceutical products.
Marketed PEG Products
The Company has received marketing approval from the United States Food and
Drug Administration ("FDA") for two First Generation PEG technology products:
(i) ONCASPAR, the PEG formulation of L-asparaginase, for the indication of acute
lymphoblastic leukemia ("ALL") in patients who are hypersensitive to
3
native forms of L-asparaginase and (ii) ADAGEN, the PEG formulation of adenosine
deaminase ("ADA"), the first successful application of enzyme replacement
therapy for an inherited disease to treat a rare form of Severe Combined
Immunodeficiency Disease ("SCID"), commonly known as the "Bubble Boy Disease."
ADAGEN is marketed by Enzon on a worldwide basis. ONCASPAR is marketed in
the U.S. and Canada by Rhone-Poulenc Rorer Pharmaceuticals, Inc. and certain of
its affiliated entities ("RPR") and in Europe by Medac GmbH ("Medac"). The
Company has also granted exclusive licenses to RPR to sell ONCASPAR in Mexico
and 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 Company is entitled to royalties
on the sales of ONCASPAR in North America by RPR, as well as manufacturing
revenue from the production of ONCASPAR. The Company's agreements with RPR for
the Pacific Rim and with Medac require the partners to purchase ONCASPAR from
the Company at a set price which increases over the term of the agreements. In
addition, the agreements provide for minimum purchase quantities. The Company
manufactures both ADAGEN and ONCASPAR in its South Plainfield, New Jersey
facility.
PEG Products under Development
The Company currently has three products that utilize its Second and Third
Generation PEG Technology in clinical and preclinical trials. The first is
PEG-Intron A, a PEG modified version of Schering-Plough's product, INTRON A
(interferon alfa 2b), a genetically-engineered anticancer-antiviral drug, for
which Schering-Plough is currently conducting Phase III clinical trials for use
in the treatment of hepatitis C and malignant melanoma. The second product under
development is PEG-hemoglobin, a proprietary bovine hemoglobin-based
oxygen-carrier being developed for the radiosensitization of solid hypoxic
tumors, for which the Company recently concluded a Phase Ib clinical trial. The
third product under development is PROTHECAN(TM), a PEG-modified version of
camptothecin, a potent topoisomerase-1 inhibitor, for use in certain cancers,
which is currently in preclinical studies.
PEG-Intron A was developed by the Company in conjunction with
Schering-Plough to have longer lasting properties and the potential for an
enhanced safety profile compared to currently marketed forms of alpha
interferon. PEG-Intron A is currently in Phase III clinical trials in hepatitis
C patients in the United States and Europe and has recently entered Phase III
clinical trials for malignant melanoma. Other indications being pursued include
chronic myelogenous leukemia, solid tumors, as well as combination treatment
with Schering-Plough's product, REBETOL(R), for the treatment of hepatitis C. It
is expected that PEG-Intron A will be administered once a week, compared to the
current regimen for unmodified INTRON A of three times a week. Moreover, the
Company believes that PEG-Intron A may provide an improved side effect profile
and an improved therapeutic index for hepatitis C patients.
Pursuant to an agreement with Schering-Plough, the Company will receive
royalties on worldwide sales of PEG-Intron A, as well as milestone payments. The
Company also has the option to be the exclusive manufacturer of PEG-Intron A for
the U.S. market. Schering-Plough's sales of INTRON A were approximately $598
million in 1997 for all approved indications. The worldwide market for alpha
interferon products is estimated to be in excess of $1 billion for all approved
indications. The Company's PEG technology patents which cover PEG-Intron A
extend until at least 2015.
SCA Technology
The Company also has an extensive licensing program for its second
proprietary technology, SCA protein technology. SCA proteins are genetically
engineered proteins designed to overcome the problems hampering the diagnostic
and therapeutic use of conventional monoclonal antibodies. Preclinical studies
have shown that certain SCA proteins target and penetrate tumors more readily
than conventional monoclonal antibodies. In addition to these advantages,
because SCA proteins are developed at the gene level, they are better suited for
targeted delivery of gene therapy vectors; also fully-human SCA proteins can be
isolated directly, with no need for costly "humanization" procedures. In
addition, many gene therapy methods require that proteins be produced in an
active
4
form inside cells. SCA proteins can be produced through intracellular expression
(inside cells) more readily than monoclonal antibodies.
Currently, there are ten SCA proteins that have either completed or are in
Phase I or II clinical trials by various corporations and institutions. Three of
these corporations and institutions have existing licenses with the Company with
respect to SCA proteins and others are expected to require similar licenses.
Some of the areas being explored are cancer therapy, cardiovascular indications
and AIDS. The Company has granted non-exclusive SCA licenses to more than a
dozen companies, including Bristol-Myers Squibb Company, Baxter Healthcare
Corporation, Eli Lilly & Co., Alexion Pharmaceuticals Inc., and the Gencell
division of RPR. These licenses generally provide for upfront payments,
milestone payments and royalties on sales of FDA approved products.
Information contained in this Annual Report, including without limitation
the discussion of year 2000 compliance in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", 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 Exhibit 99.0 hereto and elsewhere in this Annual Report 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.
Products on the Market
The Company has received U.S. marketing approval from the FDA for two First
Generation PEG Technology products, ONCASPAR and ADAGEN. The Company received
approval from the FDA for ONCASPAR in February 1994 and for ADAGEN in March
1990.
ONCASPAR
ONCASPAR, the enzyme L-asparaginase modified by the PEG Process, is
currently approved in the United States, Canada and Germany, for use in
conjunction with other chemotherapeutics to treat patients with ALL who are
hypersensitive (allergic) to native (unmodified) forms of L-asparaginase.
ONCASPAR is also approved in Russia for therapeutic use in a broad range of
cancers. ONCASPAR is marketed in the U.S. and Canada by RPR and in Europe by
MEDAC.
L-asparaginase is an enzyme which depletes the amino acid asparagine, a
non-essential amino acid upon which certain leukemic cells are dependent for
survival. Accordingly, the depletion of plasma asparagine levels selectively
starves these leukemic cells. L-asparaginase is a component of standard
pediatric ALL remission induction therapies. Unmodified L-asparaginase is
currently marketed in the U.S. as Elspar(R).
The therapeutic value of unmodified L-asparaginase is limited by two
inherent aspects of the enzyme. First, its short half-life in blood (less than
1.5 days) requires every-other-day injections, causing significant discomfort
and inconvenience to patients. Secondly, the enzyme's non-human source makes it
inherently immunogenic, resulting in a high incidence of allergic reactions,
some of which may be severe, necessitating the discontinuance of the
L-asparaginase therapy.
Through PEG Modification, Enzon believes ONCASPAR offers significant
therapeutic advantages over unmodified L-asparaginase. ONCASPAR has a
significantly increased half-life in blood (greater than five days), allowing
every-other-week administration, making its use more tolerable to patients than
unmodified
5
L-asparaginase. PEG Modification also disguises the enzyme's foreign nature,
generally reducing its immunogenicity, and enabling its use in patients who are
allergic to unmodified L-asparaginase.
In addition to pediatric ALL, native L-asparaginase sold by other companies
is used in Europe to treat adult ALL and non-Hodgkins lymphoma. RPR is currently
conducting clinical trials to expand the use of ONCASPAR in ALL treatment beyond
the hypersensitive label indication, and in other additional indications,
including non-Hodgkin's lymphoma. These indications represent larger patient
populations and revenue potential than the limited current approved indication.
The Company expects MEDAC to initiate similar trials in the near future.
RPR Agreements
ONCASPAR was launched in the United States by RPR during March 1994. The
Company has granted RPR an exclusive license (the "Amended RPR U.S. License
Agreement") in the United States to sell ONCASPAR, and any other
PEG-asparaginase product (the "Product") developed by Enzon or RPR during the
term of the Amended RPR U.S. License Agreement. Under this agreement, Enzon has
received licensing payments totaling $6,000,000 and is entitled to a base
royalty of 23.5% until 2008 on net sales of ONCASPAR up to agreed upon amounts.
Additionally, the Amended RPR U.S. License Agreement provides for a super
royalty of 43.5% until 2008 on net sales of ONCASPAR which exceed certain agreed
upon amounts, with the limitation that the total royalties earned for any such
year shall not exceed 33% of net sales. The Amended RPR 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 base royalties to Enzon under the Amended RPR 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 RPR under the
original RPR U.S. License Agreement and interest expense. Super royalties will
be paid to the Company when earned. 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, 1998 and 1997. The royalty
advance will be reduced as base royalties are recognized under the agreement.
The Amended RPR U.S. License Agreement prohibits RPR from selling a
competing PEG-asparaginase product anywhere in the world during the term of such
agreement and for five years thereafter. The agreement terminates in December
2008, subject to early termination by either party due to a default by the other
or by RPR at any time upon one year's prior notice to Enzon. Upon any
termination all rights under the Amended RPR U.S. License Agreement revert to
Enzon.
During December 1997, RPR received marketing approval for ONCASPAR in
Canada. Under a separate license, the Company granted RPR the exclusive right to
sell ONCASPAR in Canada and Mexico. These agreements provide for RPR 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. A separate
supply agreement with RPR requires RPR to purchase from Enzon all Product
requirements for sales in North America.
During May 1998, the Company entered into an additional license agreement
with RPR for the Pacific Rim. The agreement provides for RPR 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, RPR
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.
6
MEDAC Agreement
The Company has also granted an exclusive license to MEDAC to sell ONCASPAR
in Europe and Russia. The agreement 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 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.
ADAGEN
ADAGEN, the Company's first FDA approved product, is currently being used
to treat 53 patients in seven countries. ADAGEN represents the first successful
application of enzyme replacement therapy for an inherited disease. ADAGEN, the
enzyme ADA modified through the PEG Process, was developed by the Company for
the treatment of ADA deficiency associated with SCID, commonly known as the
"Bubble Boy Disease". SCID is a congenital disease that results in children
being born without fully functioning immune systems, leaving them susceptible to
a wide range of infectious diseases. Injections of unmodified ADA would not be
effective because of its short circulating life (less than thirty 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.
ADAGEN is being marketed on a worldwide basis and sold in the United States
by Enzon. Distribution of ADAGEN in Europe and Japan is being handled by a
European firm. Enzon believes many newborns with ADA-deficient SCID go
undiagnosed and is therefore focusing its marketing efforts for ADAGEN on new
patient identification. The Company's marketing efforts include educational
presentations and publications designed to encourage early diagnosis and
subsequent ADAGEN treatment.
Sales of ADAGEN for the fiscal years ended June 30, 1998, 1997 and 1996
were $10,107,000, $8,935,000 and $8,696,000, respectively. Currently, the only
alternative to ADAGEN treatment is a well matched bone marrow transplant.
Patients who are unable to receive successful bone marrow transplants are
expected to require ADAGEN injections for the rest of their lives. Sales of
ADAGEN are expected to continue to be limited due to the small patient
population worldwide.
Research and Development
The Company's primary source of new products is its internal research and
development activities. Research and development expenses for the fiscal years
ended June 30, 1998, 1997 and 1996 were approximately $8,654,000, $8,520,000 and
$10,124,000, respectively.
The Company's research and development activities during fiscal 1998
concentrated primarily on the continued development of PEG-hemoglobin,
preclinical work on PEG-camptothecin, the Company's first product to use Third
Generation Pro Drug/Transport Technology, and continued research and development
of the Company's proprietary technologies.
Technologies and Capabilities
The Company's technologies are focused in the area of drug delivery. The
Company's PEG Modification technology is able to lower the potential
immunogenicity, extend the circulating life and enhance solubility of the
modified compound. The Company believes its SCA and Pro Drug/Transport
Technologies may be able to achieve targeting of the modified compound to a
desired site in the body. It is believed that this will result in less toxicity
to the surrounding tissue and increased therapeutic effect due to a high
concentration of the compound in the targeted
7
tissue. The Company is currently applying its technologies to compounds with
known therapeutic efficacy that suffer from delivery problems. This encompasses
undeveloped compounds as well as products already on the market.
PEG Modification
Enzon's proprietary technology, PEG Modification or the PEG Process,
involves chemically attaching PEG to therapeutic proteins or chemical compounds
that are difficult to deliver. PEG is a relatively non-reactive and non-toxic
polymer that is used in many food and pharmaceutical products. Attachment of PEG
disguises the protein and reduces its recognition by the immune system, thereby
generally lowering potential immunogenicity and extending its circulating life,
in some cases from minutes to days. Chemical compounds have an added drawback in
that they are typically water-insoluble, which makes delivery difficult, or in
some cases, impossible. The Company believes the attachment of PEG to chemical
substances not only disguises the chemical, thereby lowering potential
immunogenicity and extending its circulatory life, but also greatly increases
the solubility of these compounds. Enzon believes that compounds modified by the
PEG Process may offer significant advantages over their unmodified forms. These
advantages include: (i) extended circulating life, (ii) reduced incidence of
allergic reactions, (iii) reduced dosages with corresponding lower toxicity
without diminished efficacy, (iv) increased drug stability and (v) enhanced drug
solubility. Modification of proteins with the PEG Process often causes these
proteins to have characteristics that significantly improve their therapeutic
performance, and in some cases enables proteins to be therapeutically effective
which, in their unmodified forms, have proven to be non-efficacious.
The Company has developed proprietary know-how, collectively referred to as
Second Generation PEG Technology, which significantly improves the PEG Process
over that described in the original broad patent covering this technology which
expired in late 1996. This proprietary know-how enables the Company to tailor
the PEG Process in order to produce the desired results for the particular
substance being modified. This know-how includes, among other things,
proprietary linkers for the attachment of PEG to compounds, the selection of the
appropriate attachment sites on the surface of the compound, and the amount and
type of PEG used. These improvements allow PEG to bind to different parts of the
molecules, which may result in more activity of the modified protein. Attachment
of PEG to the wrong site on the protein can result in a loss of its activity or
therapeutic effect. The main objective of the First and Second Generation
technology is to permanently attach PEG to the unmodified protein. Currently,
there are two Second Generation products in clinical trials, including a PEG
modified version of Schering-Plough's INTRON A, which is in Phase III clinical
trials. See "Strategic Alliances and License Agreements - Schering". The Company
has received patents for numerous improvements to the PEG Process. See
"Patents".
Pro Drug/Transport Technology
The Company recently has developed a Third Generation PEG technology that
gives PEG-modified compounds "Pro Drug" attributes. This is accomplished by
attaching PEG to a compound by means of a covalent bond that is designed to
deteriorate over time, thereby releasing the therapeutic moiety in the proximity
of the target tissue. These attributes could significantly enhance the
therapeutic value of new chemicals, as well as drugs already marketed by others.
The Company believes that this technology has broad usefulness and that it can
be applied to a wide range of drugs, such as cancer chemotherapy agents,
antibiotics, anti-fungals and immunosuppressants, as well as to proteins and
peptides, including enzymes and growth factors. The markets for these drugs and
biologicals have large potential patient populations.
The Company is currently applying its Pro Drug/Transport Technology to
cancer chemotherapy agents and anti-fungals. One such compound, a PEG-modified
version of camptothecin, a topo-1 inhibitor, is in preclinical studies in
preparation for an anticipated Investigational New Drug Application ("IND")
filing during the second half of calendar year 1998. The Company believes that
the covalent attachment of PEG can inactivate the drug's toxic mechanisms, while
allowing the drug to circulate in the bloodstream for longer periods of time,
thereby allowing the
8
compound to accumulate in the proximity of the tumor site. Preliminary animal
studies have shown that a compound modified with the Company's Third Generation
PEG Technology accumulates in tumors. The covalent bond used to attach the PEG
to the drug in the Third Generation Peg Technology is designed to deteriorate
over time, resulting in the PEG falling off and allowing the compound to resume
its activity. Animal studies conducted by the Company thus far have demonstrated
increases in the therapeutic index of compounds modified by the Company's Pro
Drug/Transport Technology. However, there can be no assurance that these
advantages can be attained in humans or that drugs based on this technology will
be approved by the FDA.
The Company has several patent applications relating to its Pro
Drug/Transport Technology that have been issued or are under review. See
"Patents".
Single-Chain Antigen-Binding (SCA) Proteins
Enzon's proprietary SCA proteins are genetically engineered proteins
designed to overcome the problems associated with the therapeutic uses of
monoclonal antibodies. SCA proteins have the binding specificity and affinity of
monoclonal antibodies, but Enzon believes that SCA proteins offer at least five
significant advantages over conventional monoclonal antibodies: (i) greater
tumor penetration for cancer imaging and therapy, (ii) more specific
localization to target sites in the body, (iii) a significant decrease in the
immunogenic problems associated with monoclonals due to the SCA protein's small
size and rapid clearance from the body, (iv) easier and more cost effective
scale-up for manufacturing and (v) enhanced screening capabilities which allow
for the testing of SCA proteins for desired specificities using simple screening
methods. In addition to these advantages, because SCA proteins are developed at
the gene level, they are better suited for targeted delivery of gene therapy
vectors and fully-human SCA proteins can be isolated directly, with no need for
costly "humanization" procedures. Also, many gene therapy methods require that
proteins be produced in active form inside cells. SCA proteins can be produced
through intracellular expression (inside cells) more readily than monoclonal
antibodies.
The binding specificity of SCA proteins has been demonstrated through the
preparation and in vitro testing of more than a dozen different SCA proteins by
Enzon. In addition, the Company, in collaboration with Dr. Jeffrey Schlom of the
Laboratory of Tumor Immunology and Biology at the National Cancer Institute
("NCI"), has shown in published preclinical studies that SCA proteins localize
to specific tumors and rapidly penetrate the tumors.
Currently, there are ten SCA proteins that have either completed or are in
Phase I or II clinical trials by various organizations, including licensees of
the Company and academic institutions. Some of the areas being explored are
cancer therapy, cardiovascular indications and AIDS. The Company believes that
those organizations who have not yet licensed this technology will have to
obtain a license from Enzon to commercialize these products, but there can be no
assurance that this will prove to be the case. The following are some examples
of research being conducted in the SCA area:
Scientists at the University of Alabama are conducting research
utilizing SCA proteins produced inside the body at the cell level, in gene
therapy for ovarian cancer. SCA proteins produced in an intracellular
environment (inside the cell) via gene therapy are known as intrabodies.
Animal data generated from these studies has revealed that SCA proteins
produced through intracellular expression increased the response of several
prevalent human cancers (e.g., breast, lung, ovarian, stomach) to
chemotherapy. A clinical protocol has been published by these investigators
for this application.
The Company's licensee, Alexion Pharmaceuticals, Inc. has developed an
SCA protein application using a monomeric humanized SCA protein directed
against complement protein C5, which causes inflammation in cardiopulmonary
bypass and myocardial infarction patients. Alexion's compound is designed
to block C5 production, which causes inflammation. Alexion is currently
conducting a Phase IIb clinical trial in coronary bypass patients. Earlier
Phase I/II trials
9
showed that the drug was well tolerated and showed biological efficacy.
Another application of the Company's SCA technology is in the area of
"T-Bodies". T-Cells are one of the body's natural defenses against cancer
and infections. T-Body technology is the adding of the gene code of an SCA
protein to a T-cell which has been removed from the body. The T-Cells can
be modified through recombinant technology to have the SCA receptors
targeting a certain antigen, thereby concentrating the T-Cell on a specific
area. Cell Genesys, an Enzon licensee, has had success in applying T-Bodies
in preclinical studies with the CC49 SCA protein.
SCA proteins are also being used in antibody engineering, through the
use of phage display library technology, for isolation of antibody
specificities. Using phage display technology, it is possible to
conveniently isolate a human high-affinity SCA protein specific to
virtually any target antigen, including anti-self specificities. Cambridge
Antibody Technology Ltd. ("CAT"), a pioneer in the development of
combinatorial antibody libraries (the "Phage Antibody System"), currently
has several licensing agreements with global pharmaceutical and
biotechnology companies for use of this library. Because CAT licenses
Enzon's SCA technology for this library, Enzon should receive royalties on
any SCA protein products developed with this technology.
The Company believes it has a dominant patent position in SCA protein
technology and has received numerous patents, the most recent of which expires
in 2013. See "Patents".
The Company is currently evaluating the feasibility of licensing in several
SCA protein compounds for development internally, in addition to licensing the
technology to other companies. To date, the Company has granted SCA licenses to
more than a dozen companies, including Bristol-Myers Squibb, Baxter Healthcare,
Eli Lilly and RPR/Gencell. These licenses generally provide for upfront
payments, milestone payments and royalties on sales of FDA approved products.
See "Strategic Alliances and License Agreements".
Products Under Development
There are currently three products that utilize the Company's Second and
Third Generation PEG Technology in clinical and preclinical development. The
first is PEG-Intron A, a PEG modified version of Schering-Plough's product,
INTRON A (interferon alfa 2b), a genetically-engineered anticancer-antiviral
drug, for which Schering-Plough is currently conducting Phase III clinical
trials for use in the treatment of hepatitis C and has recently entered Phase
III clinical trials for malignant melanona. The second product under development
is PEG-hemoglobin, a proprietary bovine hemoglobin-based oxygen-carrier being
developed for the radiosensitization of solid hypoxic tumors, for which the
Company recently concluded a Phase Ib clinical trial. The third product under
development is PROTHECAN, a PEG-modified version of camptothecin, a potent
topoisomerase-1 inhibitor, for use in certain cancers, which is currently in
preclinical studies.
PEG-Intron A
PEG-Intron A was developed by the Company in conjunction with
Schering-Plough to have longer lasting properties and the potential for an
enhanced safety profile compared to currently marketed forms of alpha
interferon. PEG-Intron A is currently in Phase III clinical trials in hepatitis
C patients and has recently entered Phase III clinical trials for malignant
melanoma. Other indications being pursued include chronic myelogenous leukemia,
solid tumors, as well as trials of PEG-Intron A in combination with REBETOL for
hepatitis C. It is expected that PEG-Intron A will be administered once a week,
compared to the current regimen for unmodified INTRON A of three times a week.
Moreover, the Company believes that in addition to the more convenient dosing
schedule, the product may provide an improved side effect profile and an
improved therapeutic index for hepatitis C patients.
10
Schering-Plough's sales of INTRON A were approximately $598 million in 1997
for all approved indications. The worldwide market for alpha interferon products
is estimated to be in excess of $1 billion for all approved indications. The
Company's PEG technology patents which cover PEG-Intron A extend until at least
2015.
Hemoglobin-Based Oxygen-Carrier
The Company is currently developing a hemoglobin-based oxygen-carrier,
PEG-hemoglobin, for use as a radiosensitizer, in conjunction with radiation
treatment of solid hypoxic tumors. Over the last three years, the Company has
focused its development on those indications for which donated whole blood is
not effective. This is due to the relative safety, adequate supply and low cost
of the current donated blood supply.
Preclinical studies conducted at Enzon, the University of Wisconsin School
of Veterinary Medicine and Dana Farber Cancer Institute, indicate that
PEG-hemoglobin may be useful in treating solid tumors which are generally
hypoxic or under-oxygenated. These studies suggest that PEG-hemoglobin delivers
oxygen to solid hypoxic tumors, thereby enhancing the effects of radiation
therapy and significantly decreasing the size of these tumors. Preclinical
studies at Dana Farber Cancer Institute have suggested that PEG-hemoglobin may
also sensitize solid hypoxic tumors to chemotherapy.
The Company has recently concluded a Phase Ib, multi-dose, multi-center
clinical trial of PEG-hemoglobin in cancer patients receiving radiation
treatment. Patients received once-a-week infusions of PEG-hemoglobin followed by
five days of radiation treatment. The protocol for this study called for the
regimen to be repeated for three weeks. The primary purpose of this trial was to
evaluate safety related to multiple doses of PEG-hemoglobin and radiation
therapy. The trial demonstrated that the compound was well tolerated by the
majority of the 34 patients. The patients in this trial received three weekly
infusions at doses ranging from 2ml/kg to 8ml/kg. The 8ml/kg exceeds the
expected efficacious dose based on the Company's preclinical animal studies. It
is estimated that approximately 800,000 cases of solid hypoxic tumors, such as
head and neck, lung, mammary, colon, prostate, bladder, fibrous histiocytoma and
glioma are diagnosed each year in the United States.
The Company believes that one of the significant advantages that
PEG-hemoglobin has over other products currently being developed is its long
circulating life. The Company believes that hemoglobin, modified through its PEG
Process, will overcome the well-documented problems of toxicity and short
circulating life associated with other forms of hemoglobin-based oxygen-carriers
that have been developed. The Company's Phase Ia trial demonstrated that
PEG-hemoglobin, in its active form, circulates in the blood for approximately
eleven days. The extended circulating life demonstrated in the Phase I safety
study should enable PEG-hemoglobin to be administered once a week for the
radiation treatment protocol. Enzon has chosen to develop PEG-hemoglobin
utilizing bovine hemoglobin, based upon its superior oxygen-carrying properties,
relative stability, availability and low cost.
Enzon presently produces PEG-hemoglobin in a recently upgraded pilot plant
at its facility in South Plainfield, New Jersey. This plant is expected to
supply the quantities of PEG-hemoglobin needed for all ongoing research and
development through Phase III clinical trials.
The Company estimates that development of a PEG-hemoglobin product will
take several years and require substantial additional funds. There can be no
assurance that a PEG-hemoglobin product can be successfully developed and
brought to market. Due to the significant costs associated with the development
and marketing of this product, the Company is currently looking for a medical
institution or commercial partner to bring this product into Phase II clinical
trials. To date, no such agreements have been concluded and there can be no
assurance that any such agreements will be consummated. Furthermore, there can
be no assurance of market acceptability of a hemoglobin-based oxygen-carrier
produced from bovine hemoglobin.
11
PEG-camptothecin
PEG-camptothecin or PROTHECAN(TM) is the first product to utilize the
Company's Third Generation-Pro/Drug Transport Technology. The compound, a PEG
modified version of camptothecin, a topo-1 inhibitor, is being developed as an
oncolytic. Camptothecin, which was originally developed at the NIH and no longer
has patent protection, is believed be the most potent of the topo-1 inhibitors.
For many years camptothecin has been known to be a very efficacious
oncolytic agent with drug delivery problems. Recently, camptothecin derivatives,
Hycamtin(TM) and Camptosar(R), have been approved by the FDA. While these two
products improved the solubility of camptothecin, their efficacy is relatively
low. The Company believes that camptothecin modified by its Pro Drug/Transport
Technology has additional delivery advantages and increased therapeutic value
over the camptothecin compounds on the market.
The Company believes that the covalent attachment of PEG can be used to
inactivate the compound's toxic mechanism, while allowing it to circulate in the
bloodstream for long periods of time, thereby allowing the compound to
accumulate in the proximity of tumor sites. Preliminary animal tests have shown
that Third Generation PEG modified compounds accumulate in tumors. The covalent
bond used to attach PEG to camptothecin is designed to break down over time,
resulting in the PEG falling off the compound, allowing the compound to resume
its activity.
The Company plans to file an IND on this product during the second half of
calendar 1998.
Single-Chain Antigen-Binding (SCA) Proteins
The Company is currently evaluating the feasibility of licensing in, for
internal development, several SCA compounds currently under development.
Currently, there are ten SCA proteins that have either completed or are in
Phase I or II clinical trials by various corporations and institutions,
including a product developed by one of the Company's licensees, Alexion
Pharmaceuticals, Inc. which is in a Phase IIb clinical trial. Some of the areas
being explored with SCA's are cancer therapy, cardiovascular indications and
AIDS.
Strategic Alliances and License Agreements
In addition to internal product development, the Company utilizes joint
development and licensing arrangements with other pharmaceutical and
biopharmaceutical companies, to expand the pipeline of products utilizing its
proprietary PEG and SCA protein technologies. Enzon believes that its
technologies can be used to improve products which are already on the market or
that are under development, thus producing therapeutic products which will
provide a safer, more effective and more convenient therapy. Currently, the
Company's partners have two products in late stages of the approval progress,
PEG-Intron A and a recombinant Human Serum Albumin ("rHSA"), as well as several
SCA compounds in Phase I and Phase II clinical trials.
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 A (interferon alfa 2b), a genetically-engineered
anticancer and antiviral drug with longer activity. A PEG-modified version of
INTRON A is currently in Phase III clinical trials for hepatitis C and has
recently entered Phase III clinical trials for malignant melanona. It is
expected that PEG-Intron A will be administered once a week as compared to the
current regimen for unmodified INTRON A of three times a week. Other indications
currently being pursued by Schering include
12
chronic myelogenous leukemia, solid tumors, as well as combination trials with
REBETOL for the treatment of Hepatitis C. PEG-Intron A utilizes the Company's
Second Generation PEG Technology.
INTRON A is currently approved in the United States for use in chronic
hepatitis B, chronic hepatitis C, AIDS-related Kaposi's sarcoma, venereal warts,
hairy cell leukemia and malignant melanoma. It is marketed worldwide for use in
16 major disease indications. Schering-Plough reported 1997 INTRON A sales of
$598 million worldwide.
Under the license agreement, which was amended in 1995, the Company will
receive royalties on worldwide sales of PEG-Intron A, if any. Schering is
responsible for conducting and funding the clinical studies, obtaining
regulatory approval and marketing the product worldwide on an exclusive basis.
Enzon also has the option to become Schering's exclusive manufacturer of
PEG-Intron A for the United States market upon FDA approval of such product.
Enzon is also entitled to receive future sequential payments, subject to
the achievement of certain milestones in the product's development program.
During August 1997, Enzon received $2,500,000 in milestone payments from
Schering as a result of the product moving into Phase III clinical trials. Enzon
is entitled to an additional $3,000,000 in payments from Schering, subject to
the achievement of certain additional milestones in the product's development.
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 the product does not meet
specifications, if Enzon fails to obtain or maintain the requisite product
liability insurance, or if Schering makes certain payments to Enzon. If Schering
terminates the agreement because the product does not meet specifications, Enzon
may be required to refund certain of the milestone payments.
Green Cross Agreement
The Company has a license agreement with Green Cross Corporation ("Green
Cross") (which was recently acquired by Yoshitomi Pharmaceutical, Inc.) for the
development of a recombinant Human Serum Albumin ("rHSA"), as a blood volume
expander. Green Cross has reported that it filed for marketing approval of this
product in Japan in November 1997. The agreement, which the Company acquired as
part of the acquisition of Genex Corporation in 1991, entitles Enzon 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. The royalty is payable under the agreement for the
first fifteen years of commercial sales. The parties are currently in
arbitration to resolve a dispute regarding the royalty rate called for in the
agreement. Green Cross has filed papers in the arbitration taking the position
that no royalty will be due to Enzon. Enzon does not believe that the provisions
in the license agreement support such a position and intends to vigorously
pursue its claim to a royalty in the arbitration. There can be no assurance that
Enzon will prevail in the arbitration.
13
SCA Protein Technology Licenses
The Company's SCA protein licenses are primarily on a non-exclusive basis,
and in most cases, provide for the partner to pay for all development costs and
to market the products. Enzon receives a royalty on the sale of any SCA protein
product developed, as well as, in most cases, payments based on the achievement
of certain milestones in the development of the product. The Company has more
than 15 non-exclusive SCA protein licenses. The following is a partial list of
the Company's SCA protein licenses.
Corporate Partner Agreement Date Product Disease or Indication Program Status
- ----------------- -------------- -------- --------------------- --------------
Alexion Pharmaceuticals, Inc. May 1996 Complement Cardiopulmonary Phase IIb
Protein C5 bypass and myocar-
dial infarction
Baxter Healthcare Corporation November 1992 SCA proteins Cancer Research
Bristol-Myers Squibb Company September 1993/July 1994 SCA proteins All Therapeutics Research
Seattle Genetics September 1998* BR96 Cancer Phase I
Cambridge Antibody Technology Ltd. September 1996 Phage Display Library All Therapeutics Research
Cell Genesys, Inc. November 1993 SCA/Receptor Technology Colon Cancer Phase I/II
Eli Lilly and Co. December 1992 SCA proteins Undetermined Research
Gencell Division of RPR December 1995 SCA proteins Gene Therapy Research
*Bristol-Myers Squibb sublicensed BR96 SCI to Seattle Genetics. This is the only
compound that is sublicensed under the Bristol-Myers Agreement.
Marketing
Other than ADAGEN, which the Company markets on a worldwide basis to a
small patient population, the Company does not engage in the direct commercial
marketing of any of its products and therefore does not have an established
sales force. For certain of its products, the Company has provided exclusive
marketing rights to its corporate partners in return for royalties on sales.
With respect to ONCASPAR, the Company has granted exclusive marketing rights to,
(i) RPR for North America and the Pacific Rim, (ii) MEDAC for Europe and Russia
and (iii) Tzamal Pharma Ltd. for Israel, pursuant to the agreements described in
"Products on the Market - ONCASPAR".
The Company expects to evaluate whether to create a sales force to market
certain products in the United States or to continue to enter into license and
marketing agreements with others for the United States and foreign markets.
These agreements generally provide that all or a significant portion of the
marketing of these products will be conducted by the Company's licensees or
marketing partners. In addition, under certain of these agreements, the
Company's 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 its products, the Company couples activated forms of
PEG to the unmodified proteins. In the case of PEG, the Company does not have a
long-term supply agreement, but maintains what it believes to be an adequate
inventory which should provide the Company sufficient time to find an alternate
supplier of PEG, in the event it becomes necessary, without material disruption
of its business.
The Company manufactures its two FDA approved products, ADAGEN and
ONCASPAR, in its South Plainfield, New Jersey facility. On a continuing basis,
the Company's facility is inspected by two branches of the
14
FDA, the Center for Drugs Evaluation and Research and the Center for Biologics
Evaluation and Research, for compliance with the FDA's current Good
Manufacturing Practices. The facility has also been inspected by the Canadian
Health Protection Branch and the German Federal Institute for Drugs and Medical
Devices, the equivalent of the FDA in those countries. The manufacturing
facility was granted an establishment license by the FDA in February 1994.
Except for PEG-hemoglobin, the Company purchases the unmodified compounds
utilized in its approved products and products under development from outside
suppliers. The Company has a supply contract with an outside supplier for the
unmodified ADA used in the manufacture of ADAGEN and the unmodified
L-asparaginases used in the manufacture of ONCASPAR. The Company purchases the
unmodified L-asparaginase used in the production of ONCASPAR for the European
market from a different supplier than that used for the U.S. market.
Recently the Company's quality assurance department has observed increased
levels of particulates in certain batches of ONCASPAR which it manufactures.
These batches were not shipped and the Company's recent rejection rate for the
manufacture of this product is significantly higher than it has been
historically. The Company is engaged in an extensive review of its manufacturing
procedures for this product and believes that the problem may be related to
certain materials which are used in the filling process, although this has not
yet been determined. The Company has been in discussions with the FDA regarding
this problem and expects to have further discussions shortly with the FDA. It is
possible that the FDA may not allow the Company to ship ONCASPAR until this
problem is resolved. However, it is also possible that the FDA may permit the
Company to ship units of ONCASPAR which the Company determines are free from
particulates, including units currently on hand. This problem may result in a
temporary or extended disruption in the distribution of ONCASPAR. An extended
disruption could have a material adverse impact on future ONCASPAR sales.
The Company currently obtains its raw hemoglobin from a small colony of
animals which are isolated and receive regular veterinary care and testing. This
should insure that the animals remain disease free. In addition to keeping the
animals disease free, the Company's manufacturing process provides or will
provide virus removal, inactivation and filtration steps. Enzon believes it can
supply the potential market demand for PEG-hemoglobin through a relatively small
number of animals.
Schering is required under the Schering Agreement to provide the Company
with unmodified INTRON A if the Company exercises its option to manufacture
PEG-Intron A for the United States market.
Delays in obtaining or an inability to obtain any unmodified compound which
the Company does not produce, including unmodified ADA or L-asparaginase, could
have a material adverse effect on the Company. In the event the Company is
required to locate an alternate supplier for an unmodified compound utilized in
a product which is being sold commercially or which is in clinical development,
the Company will likely be required to do additional testing, which could cause
delay and additional expense, to demonstrate that the alternate supplier's
material is biologically and chemically equivalent to the unmodified compound
previously used. Such evaluations could include one or all of the following:
chemical, preclinical and clinical studies. Requirements for such evaluations
would be determined by the stage of the product's development and the reviewing
division of the FDA. If such alternate material is not demonstrated to be
chemically and biologically equivalent to the previously used unmodified
compound, the Company will likely be required to repeat some or all of the
preclinical and clinical trials with such 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 may require the Company to conduct additional
clinical trials with such alternate material.
Government Regulation
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the Federal Food, Drug and
Cosmetic Act. Similar approvals by comparable agencies are required in
15
most foreign countries. The FDA has established mandatory procedures and safety
standards which apply to the clinical testing, manufacture and marketing of
pharmaceutical products. Obtaining FDA approval for a new therapeutic may take
several years and involve substantial expenditures. Pharmaceutical manufacturing
facilities are also regulated by state, local and other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are conducted in animal models to assess a drug's efficacy and to
identify potential safety problems. The results of these studies are submitted
to the FDA as a part of the IND, which is filed to obtain approval to begin
human clinical testing. The human clinical testing program may involve up to
three phases. Data from human trials are submitted to the FDA in a New Drug
Application ("NDA") or Biologic or Product License Application ("PLA").
Preparing an NDA or PLA involves considerable data collection, verification and
analysis.
ADAGEN was approved by the FDA in March 1990. ONCASPAR was approved for
marketing in the U.S. and Germany in 1994 and in Canada in December 1997 for
patients with ALL 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 the Company's other products have been approved for
sale and use in humans in the United States or elsewhere. Difficulties or
unanticipated costs may be encountered by the Company or its licensees or
marketing partners in their respective efforts to secure necessary governmental
approvals, which could delay or preclude the Company or its licensees or
marketing partners from marketing their products.
With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which the Company will
have the exclusive right to exploit them. See "Patents".
Competition
Many established biotechnology and pharmaceutical companies with greater
resources than the Company are engaged in activities that are competitive with
those of Enzon and may develop products or technologies which compete with those
of the Company. Although Enzon believes that the experience of its personnel in
biotechnology, the patents which have been licensed by or issued to the Company
and the proprietary know-how developed by the Company provide it with a
competitive advantage in its field, there can be no assurance that the Company
will be able to maintain any competitive advantage, should it exist, in view of
the greater size and resources of many of the Company's competitors.
Enzon is aware that other companies are conducting research on and
developing chemically modified therapeutic proteins and that certain companies
are modifying pharmaceutical products, including proteins, by attaching PEG.
Other than the Company's products ONCASPAR and ADAGEN, the Company is unaware of
any PEG-modified therapeutic proteins which are currently available commercially
for therapeutic use, although it is aware of PEG-modified therapeutic proteins
currently in clinical trials. Nevertheless, other drugs or treatment modalities
which are currently available or that may be developed in the future, and which
treat the same diseases as those which the Company's products are designed to
treat, may be competitive with the Company's products.
Prior to the development of ADAGEN, the Company's first FDA approved
product, 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 Institute of Health ("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
permanently and at normal levels, adenosine deaminase, the deficient enzyme in
people afflicted with ADA deficient SCID. To date, patients in gene therapy
clinical trials have not been able to stop ADAGEN treatment and therefore, the
trial has been inconclusive.
16
Current standard treatment of patients with ALL 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, the
Company's PEG-modified L-asparaginase product, is used to treat patients with
ALL who are hypersensitive to unmodified forms of L-asparaginase. The long-term
survival and cure of ALL patients generally depends upon achieving a sustainable
first remission. Currently, there is one unmodified form of L-asparaginase
available in the United States (Elspar) and several available in Europe. The
Company believes that ONCASPAR has two advantages over these unmodified forms of
L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.
The current market for INTRON A, Schering Plough's interferon alpha 2b
product, is highly competitive, with Schering, Hoffmann-La Roche, Inc.
("Hoffmann-La Roche") and Amgen, Inc. as well as several other companies selling
similar products. The Company believes that its PEG modified INTRON A will have
several potential advantages over the interferon products currently on the
market, principally once a week dosing versus the current three times a week
dosing, with an improved side effect profile. It has also been reported that
Hoffmann-La Roche also has a potentially longer lasting version of its
interferon product, Roferon(R), in Phase III clinical trials.
Several companies are actively pursuing the development of agents to
increase the oxygen level in solid tumors and thereby enhance the efficacy of
radiation and/or chemotherapy that could compete with PEG-hemoglobin. Some of
these agents are also being tested in clinical trials. In addition, many
conventional cytotoxic agents are currently used in combination with each other
and/or with radiation to give additive or synergistic anti-cancer effects.
Compounds that decrease the affinity of hemoglobin for oxygen and thereby
increase the level of free oxygen in the blood have been known for some time.
These "synthetic allosteric modifier" compounds are currently being studied in
clinical trials for their ability to increase the level of oxygen in tumors,
which could enhance the efficacy of radiation therapy and/or chemotherapy.
Compounds that inhibit the ability of cancer cells to repair radiation damage to
their DNA are also known, and one such compound is reportedly in clinical trials
as an adjunct to radiation therapy.
Companies are also actively pursuing the development of hemoglobin-based
oxygen-carriers for use as a blood substitute and certain of these products are
currently being tested in clinical trials. Currently, the Company believes that
none of the other companies developing hemoglobin-based oxygen-carriers as blood
substitutes are pursuing a radiosensitization indication. The Company believes
that PEG-hemoglobin, due to its long circulating life, will deliver more oxygen
to hypoxic tumors than the products currently under development and therefore,
in combination with radiation, should result in a greater reduction in tumor
size.
There are several technologies which compete with the Company's 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: (i) those modifying the monoclonal antibody to minimize immunological
reaction to a foreign protein, which is the strategy employed with chimerics,
humanized antibodies and human monoclonal antibodies and (ii) those creating
smaller portions of the monoclonal antibody which are more specific to the
target and have fewer side effects, as is the case with Fab fragments and low
molecular weight peptides. Enzon believes that the smaller size of its 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. The Company believes that
its patent position on SCA proteins will require companies that have not
licensed its SCA protein patents to obtain licenses from Enzon in order to
commercialize their products, but there can be no assurance that this will prove
to be the case.
17
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, 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. The Company is aware of certain issued patents and patent
applications, and there may be other patents and applications, containing
subject matter which the Company or its licensees or collaborators may require
in order to research, develop or commercialize at least some of the Company's
products. There can be no assurance that licenses under such patents will be
available on acceptable terms. In certain cases, the Company has obtained
opinions of patent counsel that certain of such patents, including patents
relevant to PEG hemoglobin held by Biopure Inc. and patents relevant to PEG
alpha interferon held by Hoffmann-La Roche, are not infringed by the products of
the Company or its collaborators or would not be held to be valid if litigated.
Such opinions have been relied upon by the Company and its collaborators in
continuing to pursue development of the subject product. Such opinions are not
binding on any court and there can be no assurance that such opinions 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 the Company or its collaborator does
not infringe such patents. The Company expects that there may be significant
litigation in the industry regarding patents and other proprietary rights and,
if Enzon were to become involved in such litigation, it could consume a
substantial amount of the Company's resources. In addition, the Company relies
heavily on its proprietary technologies for which pending patent applications
have been filed and on unpatented know-how developed by the Company. Insofar as
the Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. Although the Company
has taken steps to protect its trade secrets and unpatented know-how,
third-parties nonetheless may gain access to such information.
The original PEG Process patent, which was licensed from Research
Technologies Corp., expired in December 1996. The Company has made significant
improvements to the original PEG Process and has applied for and received
numerous patents for such improvements. The Company believes, based on new
patents received and applications pending, that the expiration of the original
PEG Process patent will not have a material impact on its business.
In the field of SCA proteins, the Company has 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. ("Creative") provoked an interference with the patent and on
June 28, 1991, the United States Patent and Trademark Office entered summary
judgment terminating the interference proceeding and upholding the Company's
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, Enzon and Creative signed collaborative agreements in the
field of Enzon's SCA protein technology and Creative's Biosynthetic Antibody
Binding Site (BABS(TM)) 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 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. Enzon has 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
18
agreement also provides 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.
Employees
As of June 30, 1998, Enzon employed 83 persons, of whom 33 were engaged in
research and development activities, 32 were engaged in manufacturing, and 18
were engaged in administration and management. As of June 30, 1998, the Company
had 14 employees who hold Ph.D. degrees. The Company believes that it has been
successful in attracting skilled and experienced scientific personnel; however,
competition for such personnel is intensifying. None of the Company's employees
are covered by a collective bargaining agreement. All of the Company's employees
are covered by confidentiality agreements. Enzon considers relations with its
employees to be good.
Item 2. Properties
The Company owns no real property. The following are all of the facilities
that Enzon currently leases:
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
40 Cragwood Road Warehousing 88,000 446,000(2) December 31, 1998
S. Plainfield, NJ
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.
(2) Amount represents the rent due for the period from July 1, 1998 through
termination of the lease on December 31, 1998, net of sub-rental income of
$110,000. The sublease is for approximately 27,412 square feet. The Company
has consolidated the operations of this facility into its remaining two
facilities and does not intend to renew this lease.
The Company believes that its facilities are well maintained and generally
adequate for its present and future anticipated needs.
Item 3. Legal Proceedings
The Company is being sued, in the United States District Court for the
District of New Jersey, by a former financial advisor, LBC Capital Resources
Inc. ("LBC"), which is asserting that under the May 2, 1995 letter agreement
("Letter Agreement") between Enzon and LBC, LBC was entitled to a commission in
connection with the Company's January and March 1996 private placements,
comprised of $500,000 and warrants to purchase 1,000,000 shares of Enzon Common
Stock at an exercise price of $2.50 per share. LBC has also asserted that it is
entitled to an additional fee of $175,000 and warrants to purchase 250,000
shares of Enzon Common Stock when and if any of the warrants obtained pursuant
to the private placements are exercised. LBC has claimed $3,000,000 in
compensatory damages, plus punitive damages, counsel fees and costs for the
alleged breach of the Letter Agreement. The Company believes that no such
commission was due under the Letter Agreement and denies any liability under the
Letter Agreement. The Company intends to defend this lawsuit vigorously.
19
There is no other pending material litigation to which the Company is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
20
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The 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 the Common
Stock for the years ended June 30, 1998 and 1997, 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, 1998
First Quarter 5 3/16 2
Second Quarter 7 1/4 4 3/4
Third Quarter 7 3/16 5 1/8
Fourth Quarter 6 7/8 4 9/16
Year Ended June 30, 1997
First Quarter 3 1/2 2 1/16
Second Quarter 3 1/4 2 1/8
Third Quarter 3 1/2 2 3/8
Fourth Quarter 3 1/16 2 1/8
As of September 11, 1998 there were 2,573 holders of record of the Common
Stock.
The Company has paid no dividends on its Common Stock since its inception
and does not plan to pay dividends on its Common Stock in the foreseeable
future. Except as may be utilized to pay dividends payable on the Company's
outstanding Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Shares" or "Series A Preferred Stock"), any earnings which the Company may
realize will be retained to finance the growth of the Company. In addition, no
dividends may be paid or set apart for payment on the Common Stock unless the
Company shall 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
Shares.
21
Item 6. Selected Financial Data
Set forth below is the selected financial data for the Company for the five
fiscal years ended June 30, 1998.
Consolidated Statement of Operations Data:
Year Ended June 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $14,644,032 $12,727,052 $12,681,281 $15,826,437 $14,797,499
Net Loss $(3,617,133) $(4,557,025) $(5,175,279) $(6,291,491) $(16,495,226)
Net Loss per Share $(0.12) $(0.16) $(.20) $(.26) $(.71)
Dividends on
Common Stock None None None None None
Consolidated Balance Sheet Data:
June 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total Assets $13,741,378 $16,005,278 $21,963,856 $19,184,042 $20,543,252
Long-Term
Obligations $ -- $ -- $1,728 $4,076 $115,733
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal Years Ended June 30, 1998, 1997 and 1996
Revenues. Revenues for the year ended June 30, 1998 increased to
$14,644,000 as compared to $12,727,000 for fiscal 1997. The components of
revenues are sales, which consist of sales of the Company's products and
royalties on the sale of such products by others, and contract revenues. Sales
increased by 6% to $12,313,000 for the year ended June 30, 1998 as compared to
$11,596,000 for the prior year. The increase was due to an increase in ADAGEN
sales of approximately 13%, resulting from an increase in patients receiving
ADAGEN treatment. Net sales of ADAGEN, which is marketed by Enzon, for the years
ended June 30, 1998 and 1997 were $10,107,000 and $8,935,000, respectively.
ONCASPAR, the Company's other approved product, is marketed in the U.S. and
Canada by RPR and in Europe by MEDAC. ONCASPAR revenues are comprised of
manufacturing revenues, as well as royalties on sales of ONCASPAR by RPR.
ONCASPAR revenues decreased due to a decline in manufacturing revenue resulting
from difficulties encountered in the Company's manufacturing process, as
described below. The decrease in manufacturing revenue was partially offset by
increased royalties due to an increase in sales of ONCASPAR by RPR.
Recently the Company's quality assurance department has observed increased
levels of particulates in certain batches on ONCASPAR which it manufactures.
These batches were not shipped and the Company's recent rejection rate for the
manufacture of this product is significantly higher than it has been
historically. The Company is engaged in an extensive review of its manufacturing
procedures for this product and believes that the problem may be related to
certain materials which are used in the filling process, although this has not
yet been determined. The Company has been in discussions with the FDA regarding
this problem and expects to have further discussions shortly with the FDA. It is
possible that the FDA may not allow the Company to ship ONCASPAR until this
problem is resolved. However, it is also possible that the FDA may permit the
Company to ship units of ONCASPAR which the Company determines are free from
particulates, including units currently on hand. This problem may result in a
temporary or extended disruption in the distribution of ONCASPAR. An extended
disruption could have a material adverse impact on future ONCASPAR sales.
22
The Company expects sales of ADAGEN to increase at comparable rates as
those achieved during the last two years as additional patients are treated. The
Company also anticipates moderate growth of ONCASPAR sales to its partners and
increased royalties on RPR sales of ONCASPAR for the currently approved
indication. RPR and MEDAC are conducting clinical trials to expand the use of
ONCASPAR beyond its current approved indication which could also result in
additional revenues from this product, subject to the manufacturing issue
discussed in the preceeding paragraph. There can be no assurance that any
particular sales levels of ONCASPAR or ADAGEN will be achieved or maintained.
Contract revenue for the year ended June 30, 1998 increased to $2,331,000,
as compared to $1,131,000 for fiscal 1997. The increase was principally due to
an increase in milestone payments received under the Company's licensing
agreement for PEG-Intron A with Schering-Plough Corporation ("Schering-Plough").
During the year ended June 30, 1998, the Company recognized $2,200,000 in
milestone payments received as a result of Schering-Plough advancing PEG-Intron
A into a Phase III clinical trial. PEG-Intron A is a modified form of
Schering-Plough's INTRON(R) A (interferon alfa-2b, recombinant), developed by
Enzon to have longer-acting properties. INTRON A is a genetically engineered
anticancer and antiviral agent, developed and marketed worldwide by
Schering-Plough. Sales of INTRON A by Schering-Plough were $598 million in 1997.
The worldwide market for alpha interferon is estimated to be in excess of $1
billion. Under the Company's licensing agreement, Enzon is entitled to royalties
on product sales and has the option to become Schering-Plough's exclusive
manufacturer of PEG-Intron A for the U.S. market. During the prior year, the
Company received a $1,000,000 milestone payment under the same licensing
agreement with Schering-Plough. During the years ended June 30, 1998 and 1997,
the Company had export sales of $2,641,000 and $2,377,000, of these amounts,
sales in Europe were $2,117,000 and $1,937,000, respectively.
Revenues for the year ended June 30, 1997 increased to $12,727,000 as
compared to $12,681,000 for fiscal 1996. Sales increased by 10% to $11,596,000
for the year ended June 30, 1997 as compared to $10,502,000 for the prior year.
The increase was due to an increase in ONCASPAR revenues and an increase in
ADAGEN sales of approximately 3%, resulting from an increase in patients
receiving ADAGEN treatment. Net sales of ADAGEN, which is marketed by Enzon, for
the years ended June 30, 1997 and 1996 were $8,935,000 and $8,696,000,
respectively. ONCASPAR, the Company's other approved product, is marketed in the
U.S. by RPR and in Europe by MEDAC. ONCASPAR revenues increased due to an
increase in sales of ONCASPAR by RPR as well as an increase in the royalty rate
under the RPR agreement during the second half of fiscal 1996, to 23.5% as
compared to the former rate of 10.0%. The increase was also due to the
commencement of shipments during fiscal 1997 of ONCASPAR to MEDAC for the
European market. Contract revenue for the year ended June 30, 1997 decreased by
48% to $1,131,000, as compared to $2,179,000 for fiscal 1996. The decrease was
principally due to the one-time gain, in fiscal 1996, related to the exercise of
warrants received from Neoprobe Corporation and sale of the underlying
securities. The warrants were consideration related to a licensing agreement for
the Company's SCA protein technology. During the years ended June 30, 1997 and
1996, the Company had export sales of $2,377,000 and $2,270,000, of these
amounts, sales in Europe were $1,937,000 and $1,858,000, respectively.
Cost of Sales. Cost of sales, as a percentage of sales, decreased to 30%
for the year ended June 30, 1998 as compared to 33% for fiscal 1997. The
decrease was primarily due to the prior year's expense of excess ONCASPAR raw
material and purchase commitments related to the Company's supply agreement for
this material. During the fiscal year ended January 1998, the Company amended
its supply agreement for this material which extended the period available for
the Company to accept delivery of its remaining purchase commitment through
1999, in exchange for a $1,300,000 advance payment of the remaining purchase
commitment. (See Note 3 to the Consolidated Financial Statements).
Cost of sales, as a percentage of sales, decreased to 33% for the year
ended June 30, 1997 as compared to 34% for fiscal 1996. The decrease was due to
a reduction in the write-off of excess raw material used in the production of
ONCASPAR. While it is possible that the Company may incur similar losses on its
remaining purchase commitments under the amended supply agreement (see Note 3 to
the Consolidated Financial Statements), the Company does not consider such
losses probable, nor can the amount of any loss which may be incurred in the
future presently be estimated due to a number of factors, including but not
limited to potential increased demand for
23
ONCASPAR from RPR or expansion into additional markets outside the U.S.
Research and Development. Research and development expenses for the year
ended June 30, 1998 remained relatively unchanged at $8,654,000 as compared to
$8,520,000 for fiscal 1997. The Company's research and development efforts were
focused on the continued development of its Third Generation Pro Drug/Transport
Technology, which included preclinical activities in preparation for the filing
of an Investigational New Drug Application (IND) for PEG-camptothecin, as well
as a clinical trial for PEG-hemoglobin.
Research and development expenses decreased by 16% for the year ended June
30, 1997 as compared to the prior year. The decrease was primarily due to (i)
reductions in personnel made during fiscal 1996, principally in the clinical and
research administration areas, and related costs, such as payroll taxes and
benefits and (ii) other cost containment measures resulting from the narrowing
of the Company's research efforts to focus on technologies and products with
large revenue potential.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1998 increased by 16% to
$6,426,000 as compared to $5,528,000 fiscal 1997. The increase was due to (i)
increased investor and public relations activities, and (ii) consulting fees
related to the development of a strategic business plan for the Company's SCA
protein technology.
Selling, general and administrative expenses for the year ended June 30,
1997 decreased by 8% to $5,528,000 from $6,011,000 for fiscal 1996. The decrease
was due to (i) reductions in personnel and related costs, such as payroll taxes
and benefits, and (ii) other cost containment measures taken by the Company.
Other Income/Expense. Other income/expense decreased by $141,000 to
$464,000 for the year ended June 30, 1998 as compared to $605,000 last year. The
decrease was due principally to a decline in interest income due to a decrease
in interest bearing investments.
Other income/expense decreased by $1,218,000 to $605,000 for the year ended
June 30, 1997 as compared to $1,823,000 for the year ended June 30, 1996. The
decrease was due to the recognition of approximately $1,313,000 as other income
during the year ended June 30, 1996. The $1,313,000 represented the unused
portion of an advance received under a development and license agreement with
Sanofi Winthrop.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" and No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information." In accordance with the effective dates, the Company will
adopt SFAS 130 and SFAS 131 for the fiscal year ending June 30, 1999. The
Company is currently evaluating the impact of the disclosure requirements for
SFAS 130 and SFAS 131. These statements are not expected to have a material
impact on the Company's Consolidated Financial Statements.
Liquidity and Capital Resources
Total cash reserves, including cash and cash equivalents as of June 30,
1998 were $6,478,000. The Company completed a private placement during July
1998, in which the Company sold 3,983,000 shares of Common Stock to a small
group of investors resulting in net proceeds of approximately $17,600,000. Total
cash reserves, as of June 30, 1998, after giving proforma effect to this
financing, were approximately $24,078,000. The Company invests its excess cash
in a portfolio of high-grade marketable securities and United States
government-backed securities.
The Company's Amended RPR U.S. License Agreement for ONCASPAR provides for
a payment of $3,500,000 in advance royalties which was received from RPR in
January 1995. Royalties due under the Amended RPR U.S. License Agreement will be
offset against an original credit of $5,970,000, which represents the royalty
24
advance plus reimbursement of certain amounts due RPR 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 will be reduced as royalties are recognized under the
agreement. Through June 30, 1998, an aggregate of $4,256,000 in royalties
payable by RPR has been offset against the original credit.
As of June 30, 1998, 942,808 shares of Series A Preferred Shares had been
converted into 3,097,955 shares of Common Stock. Accrued dividends on the
converted Series A Preferred Shares in the aggregate of $1,824,000 were settled
by the issuance of 235,231 shares of Common Stock. The Company does not
presently intend to pay cash dividends on the Series A Preferred Shares. As of
June 30, 1998, there were accrued and unpaid dividends totaling $1,770,000 on
the Series A Preferred Shares. These dividends are payable in cash or Common
Stock at the Company's option and accrue on the outstanding Series A Preferred
Shares at the rate of $214,000 per year.
To date, the Company's sources of cash have been the proceeds from the sale
of its stock through public and private placements, sales of ADAGEN, sales of
ONCASPAR, sales of its products for research purposes, contract research and
development fees, technology transfer and license fees and royalty advances. The
Company's current sources of liquidity are its cash, cash equivalents and
interest earned on such cash reserves, proceeds from the recently completed
private placement of Common Stock, sales of ADAGEN, sales of ONCASPAR, sales of
its products for research purposes and license fees. Based upon its currently
planned research and development activities and related costs and its current
sources of liquidity, the Company anticipates its current cash reserves will be
sufficient to meet its capital and operational requirements for the foreseeable
future.
Upon exhaustion of the Company's current cash reserves, the Company's
continued operations will depend on its ability to realize significant revenues
from the commercial sale of its products, raise additional funds through equity
or debt financing, or obtain significant licensing, technology transfer or
contract research and development fees. There can be no assurance that these
sales, financings or revenue generating activities will be successful.
In management's opinion, the effect of inflation on the Company's past
operations has not been significant.
Year 2000
The Company has completed a review of its business systems, including its
computer systems and manufacturing equipment, and has queried its customers and
vendors as to their progress in identifying and addressing problems that their
systems may face in correctly interpreting and processing date information as
the year 2000 approaches and is reached. Based on this review, the Company has
implemented a plan to achieve year 2000 compliance. The Company believes that it
will achieve year 2000 compliance no later than September 1999 in a manner which
will be non-disruptive to its operations. In addition, the Company has commenced
work on various types of contingency planning to address potential problem areas
with internal systems and with suppliers and other third parties, although such
plans have not yet been determined. Year 2000 compliance should not have a
material adverse effect on the Company, including the Company's financial
condition, results of operations or cash flow. The Company estimates the cost
(including historical costs to date) of its year 2000 efforts to be
approximately $400,000. The total cost estimate is based on management's current
assessment and is subject to change.
However, the Company may encounter problems with suppliers and or revenue
sources which could adversely affect the Company's financial condition, results
of operations or cash flow. The Company cannot accurately predict the occurrence
and or outcome of any such problems, nor can the dollar amount of any such
problem be estimated. In addition, there can be no assurance that the failure to
ensure year 2000 compliance by a third party would not have a material adverse
effect on the Company.
25
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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.
26
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 Company's Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on December 1, 1998.
27
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 By
Number Description Reference
------ ----------- ----------------
3(i) Certificate of Incorporation, as amended ^
3(ii) By-laws, as amended *(4.2)
3(iii) Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock ^^^^3(iii)
3(iv) Amendment to Certificate of Incorporation dated January 5, 1998 ###3(iv)
10.0 Employment Agreement dated March 25, 1994 with Peter G. Tombros #(10.17)
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
April 5, 1997 ^^^^(10.15)
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)
28
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)
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. o
21.0 Subsidiaries of Registrant. o
23.0 Independent Auditor's Consent o
27.0 Financial Data Schedule o
99.0 Factors to Consider in Connection with Forward-Looking Statements o
o 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 Current Report on Form
8-K dated April 5, 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, 1994 and incorporated
herein by reference thereto.
29
### 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.
~~ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 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 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.
(b) Reports on Form 8-K
On June 30, 1998, the Company filed with the Commission a Current Report on
Form 8-K dated April 14, 1998 related to the following items: (i) the
appointment of Richard P. Voss to the newly created position of Vice President,
Business Development, (ii) arbitration proceedings between the Company and
Yoshitomi Pharmaceuticals Industries, Ltd. ("Yoshitomi"), related to the
resolution of a dispute over the extent of royalties payable to the Company for
a research and license agreement for the development of a recombinant Human
Serum Albumin ("rHSA"), and (iii) a Notice of Allowance from the U.S. Patent and
Trademark Office for a patent on the Company's Pro Drug/Transport Technology.
30
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENZON, INC.
Dated: September 28, 1998 /s/ Peter G. Tombros
-----------------------
By: 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, 1998
- --------------------------- Officer and Director
Peter G. Tombros (Principal Executive Officer)
/s/ Kenneth J. Zuerblis Vice President, Finance September 28, 1998
- --------------------------- and Chief Financial Officer
Kenneth J. Zuerblis (Principal Financial and
Accounting Officer)
/s/ Randy H. Thurman Chairman of the Board September 28, 1998
- ---------------------------
Randy H. Thurman
/s/ Rolf A. Classon Director September 28, 1998
- ---------------------------
Rolf A. Classon
/s/ Rosina B. Dixon Director September 28, 1998
- ---------------------------
Rosina B. Dixon
/s/ David W. Golde Director September 28, 1998
- ---------------------------
David W. Golde
/s/ Robert LeBuhn Director September 28, 1998
- ---------------------------
Robert LeBuhn
/s/ A.M. "Don" MacKinnon Director September 28, 1998
- ----------------------------
A.M. "Don" MacKinnon
ENZON, INC. AND SUBSIDIARIES
Index
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 1998 and 1997 F-3
Consolidated Statements of Operations - Years ended
June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 1998, 1997 and 1996 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 8, 1998
F-2
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
1998 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,478,459 $ 8,315,752
Accounts receivable 2,300,046 2,433,762
Inventories 1,022,530 859,873
Prepaid expenses and other current assets 447,952 87,732
------------- -------------
Total current assets 10,248,987 11,697,119
------------- -------------
Property and equipment 15,134,075 15,676,525
Less accumulated depreciation and amortization 13,368,330 12,923,802
------------- -------------
1,765,745 2,752,723
------------- -------------
Other assets:
Investments 69,002 78,293
Deposits and deferred charges 464,747 34,575
Patents, net 1,192,897 1,442,568
------------- -------------
1,726,646 1,555,436
------------- -------------
Total assets $ 13,741,378 $ 16,005,278
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,711,856 $ 1,910,737
Accrued expenses 4,375,822 3,504,966
------------- -------------
Total current liabilities 6,087,678 5,415,703
------------- -------------
Accrued rent 727,160 870,012
Royalty advance - RPR -- 1,177,682
------------- -------------
727,160 2,047,694
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares; issued and
outstanding 107,000 shares in 1998 and 109,000 in 1997 (liquidation
preferences aggregating $2,675,000 in 1998
and $2,725,000 in 1997) 1,070 1,090
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 31,341,353 shares in 1998 and
30,797,735 shares in 1997 313,414 307,977
Additional paid-in capital 123,453,874 121,426,159
Accumulated deficit (116,841,818) (113,193,345)
------------- -------------
Total stockholders' equity 6,926,540 8,541,881
------------- -------------
Total liabilities and stockholders' equity $ 13,741,378 $ 16,005,278
============= =============
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, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Revenues:
Sales $ 12,312,730 $ 11,595,985 $ 10,501,985
Contract revenue 2,331,302 1,131,067 2,179,296
------------ ------------ ------------
Total revenues 14,644,032 12,727,052 12,681,281
------------ ------------ ------------
Costs and expenses:
Cost of sales 3,645,281 3,840,198 3,545,341
Research and development expenses 8,653,567 8,520,366 10,123,525
Selling, general and administrative expenses 6,426,241 5,528,174 6,010,639
------------ ------------ ------------
Total costs and expenses 18,725,089 17,888,738 19,679,505
------------ ------------ ------------
Operating loss (4,081,057) (5,161,686) (6,998,224)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 460,922 584,384 449,855
Interest expense (13,923) (14,891) (12,886)
Other 16,925 35,168 1,385,976
------------ ------------ ------------
463,924 604,661 1,822,945
------------ ------------ ------------
Net loss ($ 3,617,133) ($ 4,557,025) ($ 5,175,279)
============ ============ ============
Basic and diluted loss per common share ($ 0.12) ($ 0.16) ($ 0.20)
============ ============ ============
Weighted average number of common
shares outstanding during the period 31,092,369 29,045,605 26,823,142
============ ============ ============
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, 1998, 1997 and 1996
Preferred stock Common Stock
---------------------------------- --------------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
Balance, July 1, 1995 -- 109,000 $1,090 26,328,874 $263,289
Common stock issued for exercise of
non-qualified stock options -- -- -- $2.54 15,980 160
Issuance of common stock warrants -- -- -- -- -- --
Proceeds from Private Placement,
January 1996 $100.00 40,000 400 2.74 1,094,890 10,949
Proceeds from Private Placement,
March 1996 100.00 20,000 200 3.75 266,667 2,666
Consulting expense for issuance of stock
options -- -- -- -- -- --
Donation of common stock -- -- -- -- (15) --
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1996 169,000 $1,690 27,706,396 $277,064
Common stock issued for exercise of
non-qualified stock options -- -- -- 2.36 11,219 112
Common stock issued for Independent
Directors' Stock Plan -- -- -- 2.97 25,903 259
Consulting expense for issuance of stock
options -- -- -- -- -- --
Common stock issued on conversion of
Series B Preferred Stock 1.95 (40,000) (400) 1.95 2,038,989 20,390
Common stock issued on conversion of
Series D Preferred Stock 1.97 (20,000) (200) 1.97 1,015,228 10,152
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1997, carried forward 109,000 $1,090 30,797,735 $307,977
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
Balance, July 1, 1995 $111,494,180 ($103,461,041) $8,297,518
Common stock issued for exercise of
non-qualified stock options 40,376 -- 40,536
Issuance of common stock warrants 246,000 -- 246,000
Proceeds from Private Placement,
January 1996 6,661,006 -- 6,672,355
Proceeds from Private Placement,
March 1996 2,768,920 -- 2,771,786
Consulting expense for issuance of stock
options 61,542 -- 61,542
Donation of common stock -- -- --
Net loss -- (5,175,279) (5,175,279)
------------ ------------- -----------
Balance, June 30, 1996 $121,272,024 ($108,636,320) $12,914,458
Common stock issued for exercise of
non-qualified stock options 26,499 -- 26,611
Common stock issued for Independent
Directors' Stock Plan 76,598 -- 76,857
Consulting expense for issuance of stock
options 80,984 -- 80,984
Common stock issued on conversion of
Series B Preferred Stock (19,993) -- (3)
Common stock issued on conversion of
Series D Preferred Stock (9,953) -- (1)
Net loss -- (4,557,025) (4,557,025)
------------ ------------- -----------
Balance, June 30, 1997, carried forward $121,426,159 ($113,193,345) $8,541,881
The accompanying notes are an integral part of these
consolidated financial statements.
(continued)
F-5
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 1998, 1997 and 1996
Preferred stock Common Stock
---------------------------------- --------------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
Balance, June 30, 1997, brought forward 109,000 $1,090 -- 30,797,735 $307,977
Common stock issued for exercise of non-
qualified stock options -- -- -- 2.23 505,072 5,051
Common stock issued on conversion of
Preferred Stock 25.00 (2,000) (20) 11.00 4,544 45
Dividends issued on Preferred stock -- -- -- 11.00 2,848 29
Common stock issued for Independent
Directors' Stock Plan -- -- -- 4.11 16,904 169
Common stock issued to consultants -- -- -- 4.77 14,259 143
Consulting expense for issuance of stock
options -- -- -- -- -- --
Donation of Common Stock -- -- -- -- (9) --
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1998 107,000 $1,070 31,341,353 $313,414
======= ====== ========== ========
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
Balance, June 30, 1997, brought forward $121,426,159 ($113,193,345) $8,541,881
Common stock issued for exercise of non-
qualified stock options 1,653,557 -- 1,658,608
Common stock issued on conversion of
Preferred Stock (42) -- (17)
Dividends issued on Preferred stock 31,300 (31,340) (11)
Common stock issued for Independent
Directors' Stock Plan 69,231 -- 69,400
Common stock issued to consultants 67,854 -- 67,997
Consulting expense for issuance of stock
options 205,815 -- 205,815
Donation of Common Stock -- -- --
Net loss -- (3,617,133) (3,617,133)
------------ ------------- ----------
Balance, June 30, 1998 $123,453,874 ($116,841,818) $6,926,540
============ ============= ==========
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, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net loss ($3,617,133) ($4,557,025) ($5,175,279)
Adjustments to reconcile net loss to net cash used in
operating activities:
Decrease in liability recognized pursuant to Sanofi Agreement -- -- (1,312,829)
Depreciation and amortization 1,217,423 1,653,331 2,051,735
Loss (gain) on retirement of assets 97,037 (35,168) 69,444
Non-cash expense for issuance of common stock and stock options
options 343,212 157,841 61,542
Changes in assets and liabilities, excluding acquisition items:
Decrease (increase) in accounts receivable 133,716 (310,071) 238,586
(Increase) decrease in inventories (162,657) 125,505 (192,925)
(Increase) decrease in prepaid expenses and other current
assets (360,220) 346,586 (249,092)
(Increase) decrease in other assets (430,172) 21,370 (8,995)
(Decrease) increase in accounts payable (198,881) (168,187) 516,956
Increase (decrease) in accrued expenses 796,403 (522,761) 102,700
Decrease in accrued rent (142,852) (110,896) (25,600)
Decrease in royalty advance - RPR (1,101,501) (780,081) (867,922)
Decrease in other liabilities -- (1,728) (2,348)
------------ ------------ ------------
Net cash used in operating activities (3,425,625) (4,181,284) (4,794,027)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (160,940) (873,754) (136,789)
Proceeds from sale of equipment 83,129 680,481 11,283
Decrease in investments 9,291 -- --
------------ ------------ ------------
Net cash used in investing activities (68,520) (193,273) (125,506)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, preferred stock
and warrants 1,658,580 26,607 9,484,677
Principal payments of obligations under capital leases (1,728) (2,348) (2,083)
------------ ------------ ------------
Net cash provided by financing activities 1,656,852 24,259 9,482,594
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,837,293) (4,350,298) 4,563,061
Cash and cash equivalents at beginning of period 8,315,752 12,666,050 8,102,989
------------ ------------ ------------
Cash and cash equivalents at end of period $6,478,459 $8,315,752 $12,666,050
============ ============ ============
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, 1998, 1997 and 1996
(1) Company Overview
Enzon, Inc. ("Enzon" or the "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), sales of ONCASPAR(R), 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.
(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
have been 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
Cash equivalents include investments which consist primarily of debt
securities and time deposits. The Company invests its excess cash in a portfolio
of marketable securities of institutions with strong credit ratings and U.S.
Government backed securities.
The Company classifies its investment securities as held-to-maturity.
Held-to-maturity securities are those securities which the Company has the
ability and intent to hold to maturity. Held-to-maturity securities are recorded
at cost which approximates the fair value of the investments at June 30, 1998
and 1997.
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.
F-8
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 Enzon Labs 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, 1998 and 1997 was
$956,000 and $875,000, 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 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.
F-9
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenues from the sale of the Company's other products 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 agreement with Rhone-Poulenc Rorer
Pharmaceuticals, Inc. ("RPR") (See Note 11), related to the sale of ONCASPAR by
RPR, are recognized when earned.
Research and Development
Research and development costs are expensed as incurred.
Stockholders' Equity
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.
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, 1998, 2,000 shares of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock" or "Series A Preferred
Shares") 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 totalling $28 for
fractional shares. There were no conversions of Series A Preferred Stock for the
years ended June 30, 1997 and 1996.
Cash payments for interest were approximately $14,000, $15,000 and $13,000
for the years ended June 30, 1998, 1997 and 1996, respectively. There were no
income tax payments made for the years ended June 30, 1998, 1997 and 1996.
As part of the commission due to the real estate broker in connection with
the termination of the Company's lease at 40 Kingsbridge Road, the Company
issued 150,000 five-year warrants to purchase the Company's Common Stock at
$2.50 per share during the year ended June 30, 1996. Also, in connection with
the Company's private placements of Common Stock, Series B Convertible Preferred
Stock ("Series B Preferred Shares" or "Series B Preferred Stock") and Series C
Convertible Preferred Stock ("Series C Preferred Shares" or "Series C Preferred
Stock"), the Company issued an aggregate of 50,000 five-year warrants to
purchase the Company's Common Stock, at $4.11 per share as a finder's fee,
during the year ended June 30, 1996. These transactions are non-cash financing
activities.
F-10
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Upon exhaustion of the Company's current cash reserve including its
financing in July 1998 (see note), the Company's continued operations will
depend on its ability to realize significant revenues from the commercial sale
of its products, raise additional funds through equity or debt financing, or
obtain significant licensing, technology transfer or contract research and
development fees. There can be no assurance that these sales, financings or
revenue generating activities will be successful.
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 $216,000, $218,000 and $218,000 for the years ended June 30, 1998,
1997 and 1996, 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 dilutive potential common
shares is not included, due to the net loss recorded for the years ended June
30, 1998, 1997 and 1996. As of June 30, 1998, the Company had 6,788,000 dilutive
potential common shares outstanding that could potentially dilute future diluted
earnings per share calculations.
Reclassifications
Certain prior year balances were reclassified to conform to the 1998
presentation.
(3) Commitments and Contingencies
The Company has a long-term supply agreement for unmodified L-asparaginase,
one of the raw materials used in ONCASPAR produced for the U.S. market, under
which the Company is required to purchase minimum quantities of this raw
material on an annual basis. Under the agreement, the Company was required to
purchase $1,300,000 of raw material for the year ended December 31, 1997. During
the fiscal years ended June 30, 1997 and 1996, the Company expensed
approximately $592,000 and $701,000, respectively, related to the satisfaction
of the minimum purchase requirements for unmodified L-asparaginase under this
supply contract. During the year ended June 30, 1998, the parties amended this
agreement. The amendment extended the term of the supply agreement and the time
for the Company to fulfill the remaining $1,300,000 of minimum purchase
commitments until December 31, 1999. In consideration for the extension, the
Company paid $75,000, and made an advance payment for the remaining minimum
purchase commitment of $1,300,000. During the year ended June 30, 1998, the
Company made purchases of approximately $621,000, which were applied against the
advance payment. The remaining advance payment is shown as a long term other
asset with the corresponding current portion included in other current assets in
the accompanying consolidated balance sheet as of June 30, 1998. The supplier
will deliver the prepaid inventory at the Company's request through December 31,
1999. Any inventory that is not taken by the Company by December 31, 1999 will
be forfeited. While it is possible that the Company may incur similar losses on
its remaining purchase commitments under this supply agreement, the Company does
not consider such losses probable, nor can the amount of any loss which may be
incurred in the future presently be estimated due to a number of factors,
including, but not limited to, potential increased demand for ONCASPAR from RPR,
expansion into additional markets outside the U.S. and the possibility that the
Company could renegotiate the level of required purchases.
F-11
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company has agreements with certain members of its upper management
that provide for payments following a termination of employment occurring after
a change in control of the Company. The Company also has a 3-year employment
agreement, dated April 5, 1997, with President and Chief Executive Officer which
provides for severance payments in addition to the change in control provisions
discussed above.
The Company is being sued by a former financial advisor, LBC Capital
Resources Inc. ("LBC"), which is asserting that under a May 2, 1995, letter
agreement ("Letter Agreement") between Enzon and LBC Capital Resources ("LBC"),
LBC was entitled to a commission in connection with the Company's January and
March 1996 private placements, comprised of $500,000 and warrants to purchase
1,000,000 shares of Enzon common stock at an exercise price of $2.50 per share.
LBC has also asserted that it is entitled to an additional fee of $175,000 and
warrants to purchase 250,000 shares of Enzon common stock when and if any of the
warrants obtained pursuant to the private placements are exercised. LBC has
claimed $3,000,000 in compensatory damages, plus punitive damages, counsel fees
and costs for the alleged breach of the Letter Agreement. The Company believes
that no such commission was due under the Letter Agreement and denies any
liability under the Letter Agreement. The Company intends to defend this lawsuit
vigorously.
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). Recently, the Company's quality assurance department has observed
increased levels of particulates in certain batches of ONCASPAR which it
manufactured. These batches were not shipped and the Company's recent rejection
rate for the manufacture of this product is significantly higher than it has
been historically. The Company is engaged in an extensive review of its
manufacturing procedures of this product and believes that the problem may be
related to certain materials which are used in the filling process. Accordingly,
the Company has been in discussions with the FDA regarding this problem and
expects to have further discussions with the FDA. The Company is unable to
predict what, if any, impact this matter will have on future sales and
manufacturing of ONCASPAR.
(4) Inventories
Inventories consist of the following:
June 30,
--------------------------
1998 1997
---- ----
Raw materials $510,000 $269,000
Work in process 398,000 269,000
Finished goods 115,000 322,000
---------- ----------
$1,023,000 $860,000
========== ==========
(5) Property and Equipment
Property and equipment consist of the following:
June 30,
---------------------------- Estimated
1998 1997 useful lives
----------- ----------- ------------
Equipment $8,647,000 $9,108,000 3-7 years
Furniture and fixtures 1,501,000 1,530,000 7 years
Vehicles 29,000 29,000 3 years
Leasehold improvements 4,957,000 5,010,000 3-15 years
----------- -----------
$15,134,000 $15,677,000
=========== ===========
Depreciation and amortization charged to operations, relating to property
and equipment, totaled $1,063,000, $1,499,000 and $1,891,000 for the years ended
June 30, 1998, 1997 and 1996, respectively.
F-12
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Stockholders' Equity
In July 1998, the Company sold 3,983,000 shares of Common Stock to a small
group of investors resulting in gross proceeds of approximately $18,919,000 via
a private placement. Net proceeds of approximately $17,600,000 were received by
the Company.
In January 1996, the Company completed a private placement of 1,094,890
shares of Common Stock and 40,000 Series B Preferred Shares resulting in gross
proceeds of $7,000,000. In March 1996, the Company completed a private placement
of 266,667 shares of Common Stock and 20,000 Series C Preferred Shares resulting
in gross proceeds of $3,000,000. The two private placements resulted in net cash
proceeds of approximately $9,444,000 after payment of related expenses and a
finder's fee.
In connection with the January 1996 and March 1996 private placements, the
Company issued five-year warrants to purchase 638,686 shares of Common Stock at
$4.11 per share and 200,000 shares of Common Stock at $5.63 per share,
respectively. The Company paid a finder's fee in cash and issued five-year
warrants to purchase 50,000 shares of Common Stock at $4.11 per share related to
the 1996 private placements.
During the year ended June 30, 1997, all of the outstanding shares of
Series B Preferred Stock were converted into Common Stock. The 40,000 shares of
Series B Preferred Stock which were converted resulted in the issuance of
2,038,989 shares of Common Stock.
During March 1997, all of the outstanding Series C Preferred Stock was
exchanged for newly issued Series D Preferred Stock. The Series D Preferred
Stock contained the same provisions as the Series C Preferred Stock, with the
exception of the elimination of a restriction on the maximum number of shares
which could be held by the holding institution. During March 1997, all of the
outstanding Series D Preferred Stock was converted into Common Stock. The 20,000
shares of Series D Preferred Stock which were converted resulted in the issuance
of 1,015,228 shares of Common Stock.
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, 1998 and 1997, undeclared accrued
dividends in arrears were $1,770,000 or $16.54 per share and $1,585,000 or
$14.54 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-13
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During the year ended June 30, 1998, 2,000 shares of Series A Preferred
Shares were converted to 4,544 shares of Common Stock. Accrued dividends of
$31,000 were settled by issuing 2,848 shares of Common Stock and cash payments
totaling $28 for fractional shares. There were no conversions of Series A
Preferred Shares during the years ended June 30, 1997 or 1996.
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, 1998, the Company has reserved its common shares for special
purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 404,000
Shares issuable upon exercise of outstanding warrants 1,039,000
Shares issuable for private placement 3,983,000
Non-Qualified Stock Option Plan 5,345,000
----------
10,771,000
==========
Common Stock Warrants
During the year ended June 30, 1996, as part of the commission due to the
real estate broker in connection with the termination of the Company's former
lease at 40 Kingsbridge Road, the Company issued 150,000 five-year warrants to
purchase the Company's Common Stock at $2.50 per share.
Series B and C Preferred Stock Warrants
As of June 30, 1998 and 1997, warrants to purchase 688,686 shares of common
stock at $4.11 and 200,000 shares of common stock at $5.63, issued in connection
with the private placements of Series B and C Preferred Shares, respectively,
were outstanding.
(7) 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 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 Directors
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 the
years ended June 30, 1998 and 1997, the Company issued 16,904 and 25,903 shares
of Common Stock, respectively, to non-executive directors, pursuant to the
Independent Directors' Stock Plan.
F-14
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) 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"). As of June 30, 1998, 5,345,000
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 of Directors,
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 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
using the Black-Scholes option-pricing model.
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 prescribed by SFAS No. 123.
1998 1997 1996
------------- ------------- -------------
Net loss - as reported ($3,617,000) ($4,557,000) ($5,175,000)
Net loss - pro forma ($5,638,000) ($5,927,000) ($5,645,000)
Loss per share - as reported ($0.12) ($0.16) ($0.20)
Loss per share - pro forma ($0.19) ($0.21) ($0.22)
The pro forma effect on the loss for each of the years in the three-year
period ended June 30, 1998 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, 1998 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) expected volatility of 84%, 82% and 78%,
and (iv) a risk-free interest rate of 5.57%, 6.45% and 6.09% for the years ended
June 30, 1998, 1997, and 1996, respectively. The weighted average fair value at
the date of grant for options granted during the years ended June 30, 1998, 1997
and 1996 was $5.85, $2.78 and $3.51 per share, respectively.
F-15
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, 1995 3,603,000 $4.95 $1.88 to $14.88
Granted at exercise prices which exceeded the
fair market value on the date of grant 4,000 3.38 $3.38
Granted at exercise prices which equaled the
fair market value on the date of grant 763,000 3.51 $2.38 to $4.75
Exercised (16,000) 2.54 $2.09 to $2.81
Cancelled (796,000) 4.50 $2.09 to $11.00
---------
Outstanding at June 30, 1996 3,558,000 4.75 $1.88 to $14.88
Granted at exercise prices which exceeded the
fair market value on the date of grant 3,000 2.81 $2.81
Granted at exercise prices which equaled the
fair market value on the date of grant 1,469,000 2.78 $2.31 to $3.41
Exercised (11,000) 2.37 $2.00 to $2.63
Cancelled (822,000) 6.26 $2.00 to $14.25
---------
Outstanding at June 30, 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
Cancelled (189,000) 6.69 $2.09 to $14.88
---------
Outstanding at June 30, 1998 4,422,000 4.06 $1.88 to $10.88
=========
As of June 30, 1998, the Stock Option 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 to $2.56 570,000 7.46 $2.26 461,000 $2.19
$2.63 to $2.75 663,000 7.34 $2.68 563,000 $2.68
$2.81 to $2.94 845,000 8.13 $2.86 389,000 $2.85
$2.95 to $4.00 556,000 6.91 $3.51 535,000 $3.51
$4.06 to $5.38 675,000 5.83 $4.73 672,000 $4.73
$5.44 to $6.00 643,000 8.88 $5.88 31,000 $5.85
$6.13 to $10.88 470,000 2.48 $7.50 404,000 $7.70
--------- ---------
$1.88 to $10.88 4,422,000 6.93 $4.06 3,055,000 $3.92
========= =========
F-16
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for 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, 1998 and 1997, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as
follows:
1998 1997
------------ ------------
Deferred tax assets:
Inventories $111,000 $50,000
Investment valuation reserve 86,000 86,000
Contribution carryover 19,000 17,000
Compensated absences 115,000 111,000
Excess of financial statement over tax depreciation 827,000 627,000
Royalty advance - RPR 402,000 842,000
Non-deductible expenses 543,000 301,000
Federal and state net operating loss carryforwards 42,133,000 40,385,000
Research and development and investment tax credit carryforwards 7,447,000 6,912,000
------------ ------------
Total gross deferred tax assets 51,683,000 49,331,000
Less valuation allowance (50,977,000) (48,625,000)
------------ ------------
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
============ ============
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, 1998 and 1997 was
an increase of $2,221,000 and $2,218,000, 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, 1998 of $1,071,000 relating
to the valuation allowance for deferred tax assets will be allocated to
additional paid-in capital.
F-17
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At June 30, 1998, the Company had federal net operating loss carryforwards
of approximately $107,313,000 for tax reporting purposes, which expire in the
years 1998 to 2013. The Company also has investment tax credit carryforwards of
approximately $10,000 and research and development tax credit carryforwards of
approximately $6,292,000 for tax reporting purposes which expire in the years
1998 to 2013.
As part of the Company's acquisition of Enzon Labs Inc., the Company
acquired the net operating loss carryforwards of Enzon Labs Inc. As of June 30,
1998, the Company had a total of $61,493,000 acquired Enzon Labs, Inc. net
operating loss carryforwards, which expire between December 31, 1998 and October
31, 2006. As a result of the change in ownership, the utilization of these
carryforwards is limited to $613,000 per year. If utilized, the benefit will be
recorded as a reduction in the carrying value of patents, net.
(11) Significant Agreements
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough Corporation, entered into an agreement in November 1990 (the
"Schering Agreement") to apply the Company's PEG Process to develop a modified
form of Schering's INTRON(R) A (interferon alfa 2b), a genetically-engineered
anticancer and antiviral drug with longer lasting activity.
Under the license agreement, which was amended in 1995, the Company
transferred proprietary manufacturing rights for PEG-Intron A to Schering for
$3,000,000, of which $2,000,000 was paid on June 30, 1995 and $1,000,000 was
paid during the year ended June 30, 1997. In connection with the amendment, the
Company also sold to Schering 847,000 shares of unregistered, newly issued
Common Stock for $2,000,000 in gross proceeds. Under the current Schering
Agreement, Enzon retained an option to become Schering's exclusive manufacturer
of PEG-Intron A for the United States market upon FDA approval of such product.
Under the Schering Agreement, Enzon is entitled to receive sequential
payments, totaling approximately $5,500,000, subject to the achievement of
certain milestones in the product's development program, of which two payments
totaling $2,500,000 were received in August 1997 related to the commencement of
a Phase III clinical trial. The Company will also receive royalties on worldwide
sales of PEG-Intron A, if any. Schering will be responsible for conducting and
funding the clinical studies, obtaining regulatory approval and marketing the
product worldwide on an exclusive basis.
The Schering Agreement terminates, on a country-by-country basis, upon the
final expiration 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 the product does not meet specifications, or if
Enzon fails to obtain or maintain the requisite product liability insurance, or
if Schering makes certain payments to Enzon. If Schering terminates the
agreement because the product does not meet specifications, Enzon may be
required to refund certain of the milestone payments.
F-18
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Rhone-Poulenc Rorer Agreement
The Company has granted RPR an exclusive license ("the Amended RPR License
Agreement") in the United States to sell ONCASPAR and any other PEG-asparaginase
product (the "Product") developed by Enzon or RPR during the term of the License
Agreement. Under this agreement, Enzon received licensing payments totaling
$6,000,000 and was entitled to a base royalty of 10% for the year ended December
31, 1995 and will earn 23.5% thereafter, until 2008, on net sales of ONCASPAR up
to agreed upon amounts. Additionally, the Amended RPR License Agreement provides
for a super royalty of 23.5% for the year ended December 31, 1995 and 43.5%
thereafter, until 2008 on net sales of ONCASPAR which exceed the agreed upon
amounts, with the limitation that the total royalties earned for any such year
shall not exceed 33% of net sales. The Amended RPR License Agreement also
provides for a payment of $3,500,000 in advance royalties, which was received in
January 1995.
Base royalties due under the amended agreement will be offset against a
credit of $5,970,000 (which represents the royalty advance plus reimbursement of
certain amounts due to RPR under the previous agreement and interest expense)
before cash payments for base royalties will be made. Super royalties will be
paid to the Company when earned. 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, 1998 and 1997. The royalty
advance will be reduced as base royalties are recognized under the agreement.
The Amended RPR License Agreement prohibits RPR from selling a competing
PEG-asparaginase product anywhere in the world during the term of the License
Agreement and for five years thereafter. The Agreement terminates in December
2008, subject to early termination by either party due to a default by the other
or by RPR at any time on one year's prior notice to Enzon. Upon any termination,
all rights under the License Agreement revert to Enzon.
The Company has also granted RPR exclusive licenses to sell ONCASPAR in
Canada and Mexico. These agreements provide for RPR 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. A separate supply agreement with
RPR requires RPR to purchase from Enzon all of RPR's requirements for the
Product for sales in North America.
During May 1998, the Company entered into an additional license agreement
with RPR 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 RPR 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, RPR 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.
F-19
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
MEDAC Agreement
During October 1996, the Company entered into an exclusive license
agreement with Medac GmbH ("MEDAC") to sell ONCASPAR in Europe and Russia. The
agreement provides for MEDAC to purchase ONCASPAR from the Company at certain
established prices which increase over the initial term of the five year
agreement. Under the 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.
(12) Leases
The Company has several leases for office, warehouse, production and
research facilities and equipment. Future minimum lease payments for
noncancellable operating leases with initial or remaining lease terms in excess
of one year as of June 30, 1998 are as follows:
Year ending Operating
June 30, leases
----------- ---------
1999 1,505,000
2000 979,000
2001 952,000
2002 819,000
2003 765,000
Later years, through 2007 2,935,000
----------
Total minimum lease payments $7,955,000
==========
Rent expense amounted to $1,768,000, $1,608,000 and $1,469,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
The Company currently subleases a portion of its facilities. For the years
ended June 30, 1998, 1997 and 1996, rent expense is net of sublease income of
$221,000, $233,000 and $249,000, respectively.
(13) 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. Prior to August
9, 1996, the Company's match was 25% of the employee's contribution of up to 6%
of compensation, as defined. Effective January 1, 1995, 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, 1998, 1997 and
1996 were $100,000, $105,000 and $63,000, respectively.
F-20
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Accrued Expenses
Accrued expenses consist of:
June 30,
------------------------
1998 1997
---- ----
Accrued wages and vacation $695,000 $484,000
Accrued Medicaid rebates 1,083,000 989,000
Current portion of royalty
advance - RPR 1,006,000 930,000
Accrual for commitments -- 340,000
Other 1,592,000 762,000
---------- ----------
$4,376,000 $3,505,000
========== ==========
(15) Sales Information
During the years ended June 30, 1998, 1997 and 1996, the Company had export
sales of $2,641,000, $2,377,000 and $2,105,000, of these amounts, sales to
Europe represented $2,117,000, $1,937,000 and $1,858,000, respectively.
ADAGEN sales represent approximately 82% of the Company's total net sales
for the year ended June 30, 1998. 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 48%, 54% and 46% of the Company's ADAGEN sales for the
years ended June 30, 1998, 1997 and 1996, respectively, were made to Medicaid
patients.
(16) Other Income
During the year ended June 30, 1996, the Company recognized as other income
approximately $1,313,000 representing the unused portion of an advance received
under a development and license agreement with Sanofi Winthrop, Inc. ("Sanofi").
Under the agreement with Sanofi, Enzon transferred all responsibility for the
development and regulatory approval in the United States for PEG-superoxide
dismutase ("PEG-SOD") in return for 40% of the net profits from sales of PEG-SOD
in the United States. During October 1995, the Company learned that Sanofi
intended to cease development of PEG-SOD (Dismutec(TM)) due to the product's
failure to show a statistically significant difference between the treatment
group and the control group in a pivotal Phase III trial. Due in part to this
product failure, the Company believes it has no further obligations under its
agreement with Sanofi with respect to the $1,313,000 advance and therefore, the
Company has recognized as other income the amount due Sanofi previously recorded
as a current liability.
F-21
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
10.28 Placement Agent Agreement dated June 25, 1998 E1
21.0 Subsidiaries of Registrant E22
23.0 Consent of KPMG Peat Marwick LLP E23
27.0 Financial Data Schedule E24
99.0 Additional Exhibits E25
E-1