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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-16043
ALTEON INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
170 WILLIAMS DRIVE, RAMSEY, NEW JERSEY 07446
(Address of principal executive offices)
(Zip Code)
(201) 934-5000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Each Class On Which Registered
Common Stock, Par Value $.01 per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the equity stock held by non-affiliates of the
registrant, based on the American Stock Exchange closing price of the Common
Stock ($4.25 per share), as of February 20, 2002, was $134,651,713.
At February 20, 2002, 31,764,846 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated By Reference
Document Where Incorporated
Proxy Statement for 2002 Part III
Annual Meeting of Stockholders
PART 1
ITEM 1. BUSINESS.
OVERVIEW
We are a product-based biopharmaceutical company primarily engaged in
the discovery and development of oral drugs to reverse or inhibit cardiovascular
aging and diabetic complications. Our product candidates represent novel
approaches to some of the largest pharmaceutical markets. Two of our compounds
are in clinical development; several others are in early development. These
pharmaceutical candidates were developed as a result of our research on the
Advanced Glycosylation End-product ("A.G.E.") pathway, a fundamental
pathological process and inevitable consequence of aging and diabetes that
causes or contributes to many medical disorders, including cardiovascular,
kidney and eye diseases.
A.G.E.s are glucose/protein complexes that form as a result of
circulating blood glucose reacting with proteins. These A.G.E. complexes
subsequently interact and bond (crosslink) with other proteins, resulting in
"hardened" (stiffened) arteries, toughened tissues and impaired flexibility and
function of many body organs. In healthy individuals, this pathological
A.G.E.-formation process occurs slowly as the body ages. In diabetic patients,
the rate of A.G.E. accumulation and the extent of protein crosslinking are
accelerated because of high glucose levels.
Our current research and drug development activities targeting the
A.G.E. pathway take three directions: the breaking of A.G.E. crosslinks between
proteins in order to reverse damage ("A.G.E. Crosslink Breakers"); the
prevention or inhibition of A.G.E. formation ("A.G.E.-Formation Inhibitors");
and the reduction of the A.G.E. burden through a novel class of
anti-hyperglycemic agents, Glucose Lowering Agents, ("GLA"). We believe that we
were the first company to focus on the development of compounds to treat
diseases caused by A.G.E. formation and crosslinking. Since our inception, we
have created an extensive library of novel compounds targeting the A.G.E.
pathway, and have actively pursued patent protection for these discoveries. We
have 100 issued U.S. patents and over 80 issued foreign patents focused
primarily on A.G.E. technology.
ALT-711 is an A.G.E. Crosslink Breaker and our lead product candidate.
ALT-711 offers the possibility of the first therapeutic approach to "breaking"
A.G.E. crosslinks, the benefit of which may be to reverse tissue damage caused
by aging and diabetes, thereby restoring flexibility and function to blood
vessels and organs of the body. We are initially developing ALT-711 for the
treatment of cardiovascular diseases. We have completed a 93-patient,
placebo-controlled safety, efficacy and pharmacology trial of ALT-711, known as
a Phase IIa clinical trial, in which patients received ALT-711 or placebo
tablets once daily for eight weeks. Study results showed that ALT-711 patients
experienced a statistically significant and clinically meaningful reduction in
pulse pressure (p<0.02), defined as the difference between systolic and
diastolic blood pressures. Results also showed a statistically significant
increase in large artery compliance (p<0.03), an indicator of greater vascular
flexibility and volume capacity. Additionally, the drug was well tolerated. This
Phase IIa data was published as "breakthrough information" in the September 26,
2001 issue of the peer-reviewed journal, Circulation: Journal of the American
Heart Association.
These positive results suggest that ALT-711 is a novel potential
therapy for systolic hypertension, a disease that occurs as a result of vascular
stiffening due to age or diabetes. As a result, we have initiated two companion
Phase IIb trials, the SAPPHIRE (Systolic And Pulse Pressure Hemodynamic
Improvement by Restoring Elasticity) and SILVER (Systolic Hypertension
Interaction with Left VEntricular Remodeling) trials, to further assess
ALT-711's activity in systolic hypertension. The compound is also under Phase I
investigation in end-stage renal disease ("ESRD") patients undergoing peritoneal
dialysis, a patient population that has significant cardiovascular disease, and
is being evaluated for clinical testing in diastolic dysfunction, a major cause
of heart failure.
A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is being
clinically evaluated in skin aging for cosmetic applications. We continue to
evaluate potential clinical trials in other cardiovascular and therapeutic
indications where A.G.E. Crosslink Breaker compounds may address significant
unmet needs.
We are actively evaluating product development opportunities from other
classes of compounds in our patent estate. Pimagedine, an A.G.E.-Formation
Inhibitor, did not reach statistical significance in its primary endpoint, the
time to doubling of serum creatinine, in a Phase II/III clinical trial. Based on
an ongoing evaluation of that data and positive evidence of activity in key
secondary endpoints, we are actively exploring partnering and regulatory
pathways for the continued development of the drug. In addition, we are
utilizing our technical expertise
2
in the field of diabetes to develop compounds focused on glucose regulation and
control. We are evaluating our lead GLA compounds to determine the optimal
strategy for pre-clinical development.
We were incorporated in Delaware in October 1986 under the name
Geritech Inc. Our name was changed to Alteon Inc. in August 1991. We are
headquartered at 170 Williams Drive, Ramsey, New Jersey 07446. Our web address
is www.alteonpharma.com, and our telephone number is (201) 934-5000.
OUR BUSINESS STRATEGY
Our strategy is to develop drug candidates from our proprietary
portfolio of new chemical entities. Because of their novel mechanism of action,
these compounds address large medical needs that are unmet by existing
therapies. We will seek, as appropriate, to selectively out-license our drug
candidates. As we continue clinical development of ALT-711, we will determine if
it is appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound. In addition to ALT-711, we have identified compounds
in multiple chemical classes that warrant further evaluation and potential
development.
MARKETS OF OPPORTUNITY
Our research and development efforts have led us to an initial focus on
cardiovascular disease, including systolic hypertension, as well as
complications of diabetes. Targeting the A.G.E. pathway may impact a number of
medical disorders related to aging and diabetes, thus potentially broadening our
markets of opportunity.
The pre-clinical and clinical data generated to date on our A.G.E.
Crosslink Breakers and A.G.E.-Formation Inhibitors demonstrates clear and
consistent findings across several species, including rats, dogs, non-human
primates and man.
Cardiovascular Disease
According to the American Heart Association, nearly 62 million
Americans have one or more types of cardiovascular disease. Cardiovascular
disease has been the number one killer of Americans since the early 1900's. The
latest World Health Organization - International Society of Hypertension
guidelines for the management of hypertension emphasize the importance of pulse
pressure (the difference between systolic and diastolic pressures) and arterial
stiffness as predictors of general cardiovascular risk. Currently available
anti-hypertensive agents reduce pressure on the vessel wall in such a manner as
to lower both systolic and diastolic blood pressures without significantly
affecting pulse pressure. Our approach rapidly increases large artery
elasticity, thereby reducing pulse pressure beyond what would be expected from
restoring the dynamic range of the vessel wall with a reduction in blood
pressure alone. Pharmacologic intervention targeting the stiffness of the
cardiovascular system may decrease the incidence and severity of complications
such as left ventricular hypertrophy ("LVH"), a thickening and stiffening of the
heart tissue, and congestive heart failure. Published studies have shown that a
10mm Hg reduction in pulse pressure correlates with a 35% reduction in
cardiovascular mortality.
Systolic Hypertension
Systolic hypertension, defined as elevated systolic blood pressure
greater than 140mm Hg, is the most common form of hypertension in those over the
age of 50, with an estimated prevalence of nearly 20 million Americans. It is
associated with a significantly increased risk of overall mortality,
cardiovascular mortality and congestive heart failure. According to the American
Heart Association, it is the type of hypertension least likely to be well
treated. The ability of ALT-711 to decrease pulse pressure and increase large
artery compliance (see "A.G.E. Crosslink Breakers - ALT-711") offers an
opportunity to provide a treatment option specifically for systolic
hypertension. Although currently marketed anti-hypertensive agents are being
used to treat the disease, it is not adequately treated by these therapies.
ALT-711 is the first drug to show direct activity by targeting the stiff vessels
that cause systolic hypertension. We believe that ALT-711 will provide
additional benefit because it exerts its activity by a mechanism unique from
currently marketed anti-hypertension drugs.
3
End-Stage Renal Disease/Left Ventricular Hypertrophy
As an important component of our clinical strategy in developing
ALT-711 for cardiovascular disease, we are currently conducting a Phase I safety
study of ALT-711 in the critically ill ESRD patient population undergoing
peritoneal dialysis. ESRD is a condition in which the kidneys no longer
function, resulting in an increase of waste products in the body that contribute
to a number of cardiovascular complications. Peritoneal dialysis is a method of
dialysis that uses the patient's peritoneum (a membrane in the abdomen) to
filter out waste products. Latest statistics show that almost 25,000 of the
400,000 Americans living with ESRD are undergoing peritoneal dialysis. The ESRD
patient population has a limited five-year survival (less than 30%) and
significant cardiovascular complications, including LVH. LVH can lead to
decreased cardiac output, the inability to meet the circulatory needs of the
body, and to heart failure itself.
Diastolic Dysfunction
Diastolic dysfunction is characterized by an impaired ability of the
heart to relax after a contraction. When the ventricles (the heart's lower
pumping chambers) do not relax normally, increased pressure and fluid in the
blood vessels of the lungs may be a result (pulmonary congestion). It can also
cause increased pressure and fluid in the blood vessels coming back to the heart
(systemic congestion). Diastolic dysfunction is a major contributor to
congestive heart failure.
Complications of Diabetes
The Diabetes Control and Complications Trial ("DCCT"), a multi-center
clinical trial conducted by the National Institutes of Health, demonstrated that
elevated blood glucose levels significantly increase the rate of progression of
eye, kidney, blood vessel and nerve complications from diabetes. More than 50%
of people with diabetes in the U.S. develop diabetic complications that range
from mild to severe.
Overt Nephropathy
Kidney disease is a significant cause of morbidity and mortality in
patients with Type 1 and Type 2 diabetes. It is a chronic and progressive
disease. One of the early signs of kidney damage is microalbuminuria
(characterized by leakage of small amounts of protein into the urine), which
progresses to overt nephropathy (characterized by leakage of large amounts of
protein into the urine) and ultimately to ESRD. Approximately 34% of patients
with Type 1 diabetes and approximately 10-15% of patients with Type 2 diabetes
develop nephropathy.
In a Phase II/III trial in diabetic patients with overt nephropathy,
the ACTION trial (A Clinical Trial In Overt Nephropathy), pimagedine therapy
showed a statistically significant reduction in urinary protein excretion,
although it did not reach statistical significance in its primary endpoint, the
time to doubling of serum creatinine. ALT-946, another A.G.E.-Formation
Inhibitor, has demonstrated the ability to slow the progression of overt
nephropathy in a pre-clinical study.
Retinopathy
Approximately nine out of 10 people with diabetes eventually develop
retinopathy, a complication that affects the blood vessels inside the eye and
can lead to blindness. Each year, approximately 12,000 to 24,000 people lose
their sight because of diabetes. The incidence and severity of retinopathy
increases with the duration of diabetes. Though not a primary endpoint in the
Phase II/III trial, pimagedine therapy did result in a statistically significant
reduction in the progression of retinopathy. Pre-clinical evidence suggests that
ALT-711 may have a positive impact on retinopathy.
Cardiovascular Complications
A significant portion of diabetic individuals develops cardiovascular
diseases and complications due to the high levels of blood glucose and A.G.E.s
within the body. According to the American Diabetes Association, heart disease
is the leading cause of diabetes-related deaths. Heart disease death rates are
two to four times higher in adults with diabetes than that of adults without
diabetes. The risk of stroke is also two to four times higher in those with
diabetes.
4
Skin Aging
Pre-clinical data has demonstrated the potential of A.G.E. Crosslink
Breaker compounds to increase skin hydration and elasticity. A topical
formulation of ALT-744, an A.G.E. Crosslink Breaker, is being clinically
evaluated in skin aging for cosmetic applications.
Other Diseases
A.G.E.s have been shown to cause or contribute to many disorders beyond
cardiovascular diseases and complications of diabetes, such as
arthritis/inflammation, ophthalmic diseases, respiratory diseases and urological
diseases, among others. We continue to evaluate potential indications for our
compounds.
OUR TECHNOLOGY: THE A.G.E. PATHWAY IN AGING AND DIABETES
The harmful consequences of A.G.E. formation in man was proposed in
1986 by our scientific founders as an outgrowth of a research effort focused on
diabetes. The foundation for our technology is the experimental evidence that
intervention along the A.G.E. pathway provides significant benefit in slowing or
reversing the development of serious diseases in the diabetic and aging
populations. We are the pioneer in A.G.E. technology, and we have built an
extensive patent estate covering our discoveries and compounds.
A.G.E.s are permanent structures that form when simple sugars such as
glucose bind to the surface of proteins. As the body ages, A.G.E. complexes form
on proteins continuously and naturally, though slowly throughout life, at a rate
dependent upon glucose levels and on the body's natural ability to clear these
pathological structures. A.G.E. complexes subsequently crosslink to other
proteins, causing a progressive loss of flexibility and function in various
tissues, blood vessels and organs.
The formation and crosslinking of A.G.E.s is a well-known process in
food chemistry, where it is called the Maillard Reaction. The browning and
toughening of food during the cooking process occurs, in part, as a result of
the formation of A.G.E. complexes between sugars and the amino acids of
proteins. The A.G.E. crosslink has been found to be unique in biology and is
prevalent in animal models of aging and diabetes. Scientific literature suggests
that the formation and subsequent crosslinking of A.G.E.s is an inevitable part
of the aging process and diabetes that leads to a loss of flexibility and
function in body tissues, organs and vessels.
The A.G.E. pathway may provide the scientific explanation for how and
why many of the medical complications of the aging process occur with higher
frequency and earlier in life in diabetic patients. Diabetic individuals form
excessive amounts of A.G.E.s earlier in life than do non-diabetic individuals,
due primarily to higher levels of blood sugar. For this reason, diabetes may be
viewed as an accelerated form of aging.
A.G.E.s and A.G.E. crosslinks are considered to be likely causative
factors in the development of many age-related and diabetic disorders, including
those associated with the cardiovascular and renal systems. For example,
proteins in the body, such as collagen and elastin, which play an important role
in maintaining the elasticity of the cardiovascular system, are prime targets
for A.G.E. crosslinking. This stiffening process can impair the normal function
of contractile organs, such as blood vessels, which depend on flexibility for
normal function. Loss of flexibility of the vasculature may lead to a number of
cardiovascular disorders, including systolic hypertension, diastolic dysfunction
and LVH, and ultimately may lead to heart failure.
Studies conducted in animal models of diabetes and aging at numerous
independent institutions worldwide demonstrate that A.G.E.s are a major factor
contributing to many of the disorders of aging and diabetes, including
cardiovascular, kidney and eye diseases, as well as atherosclerosis. Recent
human clinical studies we performed confirm that impacting the A.G.E. pathway
can have beneficial effects on these diseases.
5
The following chart illustrates the process of A.G.E. formation and
crosslinking and is qualified by the more detailed description in the text. It
also highlights those areas within the A.G.E. pathway where we are developing
pharmaceutical agents to intervene therapeutically.
OUR TECHNOLOGY PLATFORM AND PRODUCT PIPELINE
Glucose + Proteins --> A.G.E.s --> Crosslinked A.G.E.s
I I I
Glucose Lowering A.G.E. Formation A.G.E. Crosslink
Agents and Crosslink Breakers
Innhibitors
- - New Chemical Class - 9 New Chemical Classes - 6 New Chemical Classes
(51 Compounds) (852 Compounds) (391 Compounds)
- - New Mechanism - New Mechanism - New Mechanism
- Improves pancreas function - Blocks A.G.E. cascade - Breaks A.G.E. crosslinks
- Increases insulin production - Improves renal function - Restores vascular function
- Restores insulin sensitivity - Effects additive to - Restores heart function
conventional therapies - Activity unlike any known drug
- Effects additive to conventional
therapies
Key Products in Development:
Lead Identification Pimagedine ALT-711
- ------------------- ---------- -------
- - Ongoing Phase II/III Phase II
- - Type 2 Diabetes - Diabetic Kidney Disease - Systolic Hypertension
Phase I
- ESRD
ALT-744
-------
Clinical Evaluation
- Skin Aging
We incurred research and development expenditures of $8,461,000,
$6,375,000, and $10,598,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
A.G.E. Crosslink Breakers
By "breaking" A.G.E. crosslinks, these novel classes of compounds may
have an impact on a number of medical disorders where loss of flexibility or
elasticity leads to a loss in function. Our lead clinical candidate, ALT-711,
has demonstrated in a Phase IIa trial the ability to reverse tissue damage and
restore function to the cardiovascular system.
Additionally, we are evaluating the development of several compounds in
the breaker class for other indications where A.G.E. crosslinking leads to
abnormal function. Early clinical experience in human studies of ALT-711
suggests that urinary elastic dysfunction (leading to urinary incontinence) is a
potential therapeutic target. The scientific literature also points to the
possible utility of breaker compounds in ophthalmic and dermatological
conditions, stiff joint disorders and treatment of complications in patients
undergoing peritoneal dialysis.
We have identified six distinct chemical classes of A.G.E. Crosslink
Breakers, and have a library of more than 390 compounds.
6
ALT-711
Through its unique mechanism of action, ALT-711 is the first compound
that breaks A.G.E. crosslinks between proteins, both in vitro and in vivo. The
compound is under Phase II clinical evaluation in cardiovascular disease, as
well as in Phase I evaluation in ESRD patients undergoing peritoneal dialysis.
ALT-711 is being evaluated in various pre-clinical models to assess its
potential in a number of disease states.
In January 2001, we announced successful results from a Phase IIa
clinical trial of ALT-711 evaluating the effects of the compound on the
cardiovascular system. This trial, conducted at nine U.S. clinical sites, was a
double blind, placebo-controlled study evaluating the safety, efficacy and
pharmacology of ALT-711. The trial enrolled 93 patients over the age of 50 with
measurably stiffened large vessels, including systolic blood pressure of at
least 140mm Hg and pulse pressure of at least 60mm Hg. Patients were randomized
to receive oral doses of either 210mg of ALT-711 or placebo once daily for eight
weeks. Patients were evaluated for cardiovascular elasticity and function as
measured by pulse pressure, cardiovascular compliance, pulse wave velocity and
cardiac output. Under this protocol, ALT-711 treatment was in addition to the
best available therapeutic regimen chosen by the treating physicians.
Study results showed that patients who received ALT-711 experienced a
statistically significant (p<0.02) and clinically meaningful reduction in the
arterial pulse pressure, defined as the difference between systolic and
diastolic blood pressures. Results also showed a statistically significant
increase in large artery compliance (p<0.03), an indicator of greater vascular
flexibility and volume capacity, using a traditional measurement of the ratio of
stroke volume to pulse pressure. Additionally, the drug was well tolerated. This
Phase IIa data was presented at the Special Sessions Presentation of "Late
Breaking Clinical Trials" at the American College of Cardiology Annual
Scientific Session in March 2001, and published as "breakthrough information" in
the September 26, 2001 issue of the peer-reviewed journal, Circulation: Journal
of the American Heart Association.
Based on the positive results of this trial, we initiated two Phase IIb
efficacy trials of ALT-711 in systolic hypertension, the SAPPHIRE and SILVER
trials. These trials further evaluate ALT-711's ability to lower systolic blood
pressure and pulse pressure in aging and diabetic patients and extend the range
of doses and the dosing period of ALT-711 used in the Phase IIa trial.
In the SAPPHIRE trial, ALT-711 will be tested in 450 patients at more
than 60 sites throughout the U.S. Recruited patients will receive ALT-711
tablets once a day for six months, in addition to their existing medications.
The study will consist of five treatment arms, comprised of four different dose
levels of ALT-711 plus placebo. Patients enrolled in the trial must be older
than 50 years of age and have systolic blood pressure of greater than 150mm Hg
and diastolic blood pressure of less than 90mm Hg. The trial will include male
and female, non-diabetic and diabetic patients.
The SILVER trial is designed as a companion trial to the SAPPHIRE
trial, and is being conducted at the same clinical sites. Entry criteria are
similar to that in the SAPPHIRE trial, except that patients will have LVH in
addition to systolic hypertension. LVH is a thickening of the left ventricle of
the heart that may result from hypertension. The trial will evaluate the blood
pressure lowering effects of ALT-711 in approximately 180 patients who will be
randomized to one of two treatment arms, ALT-711 or placebo.
The primary endpoints of both studies will be the change in systolic
blood pressure and change in pulse pressure (the difference between the systolic
and diastolic blood pressure). In addition, secondary endpoints will include
additional blood pressure measurements and change in certain urological
characteristics.
During 2001, we also initiated a Phase I trial assessing the safety of
ALT-711 and the way the drug is metabolized in ESRD patients undergoing
peritoneal dialysis. This patient population has a limited five-year survival
(less than 30%) and significant cardiovascular complications, which are the
primary cause of death. The Phase I study is an important component of our
clinical strategy in developing ALT-711 for cardiovascular disease, and will
provide data necessary for us to plan a Phase IIa trial of ALT-711 in these
critically ill patients.
ALT-711 data is consistent across species. Studies in animal models in
several laboratories around the world have demonstrated rapid reversal of
impaired cardiovascular functions with ALT-711. In these pre-clinical models,
ALT-711 reverses the stiffening of arteries, as well as stiffening of the heart,
that accompanies the development of aging and diabetes. Pre-clinical studies of
ALT-711 conducted by researchers from the National Institute on Aging and Johns
Hopkins Geriatric Center demonstrated the ability of the compound to
significantly
7
reduce arterial stiffness in elderly Rhesus monkeys. In a pre-clinical study of
ALT-711 in aged dogs, administration of ALT-711 for one month resulted in an
approximate 40% decrease in age-related ventricular stiffness, or hardening of
the heart, with an overall improvement in cardiac function. Reductions in blood
pressure that have been observed in animal models of diabetic hypertension
suggest that ALT-711 may prove beneficial in the treatment of systolic
hypertension in the elderly or in the diabetic.
ALT-711 is a small, easily synthesized compound with a rapid mode of
action. It is well absorbed from an oral tablet formulation. In addition to the
Phase IIa trial, a series of Phase I safety and dose escalation studies were
conducted. These trials have shown the drug to be well tolerated.
Additional A.G.E. Crosslink Breakers
ALT-744 is another A.G.E. Crosslink Breaker in a topical formulation.
It is being clinically evaluated in skin aging for cosmetic applications. We
continue to evaluate other A.G.E. Crosslink Breakers from our library of
compounds.
A.G.E.-Formation Inhibitors
A.G.E.-Formation Inhibitors are designed to prevent glucose/protein
formation and crosslinking. This class of compounds may have broad applications
in slowing down the key complications of diabetes.
We have identified nine distinct chemical classes of A.G.E.-Formation
Inhibitors, encompassing a library in excess of 850 compounds.
Pimagedine
Pimagedine is our lead compound in the A.G.E.-Formation Inhibitor
class. We conducted a randomized double-blind, placebo-controlled, multi-center,
Phase II/III clinical trial to evaluate the safety and efficacy of pimagedine in
Type 1 diabetic patients with overt nephropathy, the ACTION I trial. The primary
objective of the trial was to evaluate the safety and efficacy of pimagedine in
preserving kidney function in Type 1 patients. The trial enrolled 690 patients
at 56 investigational sites in the U.S. and Canada. Patients were treated for a
minimum of two years and received twice daily oral doses of pimagedine, adjusted
for kidney function. Under this protocol, pimagedine treatment was in addition
to the best available therapeutic regimen chosen by the treating physicians.
In November 1998, we announced results of an analysis of data from the
ACTION I trial. Although the results showed that pimagedine reduced the risk of
doubling of serum creatinine, the study's primary endpoint, the data did not
reach statistical significance. However, pimagedine therapy did result in a
statistically significant and clinically meaningful reduction of urinary protein
excretion. Pimagedine also reduced, to a statistically significant extent,
cholesterol and triglycerides as well as the progression of retinopathy.
Additional data suggested a trend toward improvements in other measures of
kidney function, including estimated creatinine clearance and glomerular
filtration rate. The drug was generally well tolerated.
Based on an ongoing evaluation of that data and positive evidence of
activity in key secondary endpoints, we are actively exploring partnering and
regulatory pathways for the continued development of the drug.
Second-Generation A.G.E. Inhibitors
We are continuing to evaluate the A.G.E. Inhibitors in our patent
portfolio in order to identify pre-clinical leads for further development.
Glucose Lowering Agents
High glucose levels (hyperglycemia of diabetes) accelerate the rate of
A.G.E. formation and crosslinking. Controlling glucose levels has been shown to
slow the rate of progression of diabetic complications. The GLA program arose
from a search of plant-derived natural products that would exhibit a beneficial
profile of glucose and lipid lowering of Type 2 diabetes. Several pre-clinical
candidates that display these beneficial properties have been evaluated. They
have demonstrated the ability to lower glucose and lipids, restore insulin
sensitivity and stimulate increased insulin production.
8
We have identified one chemical class of GLA, which includes more than
50 compounds.
COLLABORATIVE ARRANGEMENTS AND LICENSE AGREEMENTS
We have entered into a number of licensing and collaboration agreements
relating to the development and distribution of our A.G.E-related technology. We
granted to Yamanouchi Pharmaceutical Co., Ltd. an exclusive license to
commercialize our A.G.E.-Formation Inhibitor, pimagedine, in Japan, South Korea,
Taiwan and The People's Republic of China. We have entered into an exclusive
licensing arrangement with Roche Diagnostics GmbH for our technology for
diagnostic applications, and we have also entered into clinical testing and
distribution agreements with Gamida for Life which grant Gamida the exclusive
right to distribute pimagedine, if successfully developed and approved for
marketing, in Israel, Bulgaria, Cyprus, Jordan and South Africa. We have a
license and supply agreement with IDEXX Laboratories, Inc. pursuant to which we
licensed pimagedine to IDEXX as a potential therapeutic in companion animals
(dogs, cats and horses) and our A.G.E. diagnostics technology for companion
animal use. All of these agreements will entitle us to receive royalties on
sales if any products covered by the agreements are developed and sold.
In October 2000, we entered into an agreement with HemoMax, LLC
("HemoMax") for the development of a novel technology designed to increase the
delivery of oxygen to tissues in the body through enhanced blood circulation. On
February 9, 2002, HemoMax advised us that because of uncertainties regarding its
ability to receive patents adequate to support commercialization of the
technology, it has decided to cease operations and liquidate.
We have also entered into a number of academic research and license
agreements. Pursuant to an agreement with Rockefeller University, we have
exclusive, royalty-free, worldwide and perpetual rights to the technology and
inventions relating to A.G.E.s and other protein crosslinking, including those
relating to the complications of aging and diabetes. See "--Patents, Trade
Secrets and Licenses." We have also obtained an exclusive, worldwide,
royalty-bearing license from Washington University for patents covering the use
of pimagedine as an inhibitor of inducible nitric oxide synthase. In addition we
received from The Picower Institute for Medical Research ("The Picower
Institute") an exclusive worldwide, royalty-bearing license for certain
commercial health care applications of A.G.E.-related inventions. See
"--Patents, Trade Secrets and Licenses."
MANUFACTURING
We have no manufacturing facilities for either production of bulk
chemicals or the manufacturing of pharmaceutical dosage forms. We rely on
third-party contract manufacturers to produce the raw materials and chemicals
used as the active drug ingredients in our products used in clinical trials, and
we expect to rely on third parties to perform the tasks necessary to process,
package and distribute these products in finished form.
We will inspect third-party contract manufacturers and their
consultants to confirm compliance with current Good Manufacturing Practice
("cGMP") required for pharmaceutical products. We believe we will obtain
sufficient quantities of bulk chemicals at reasonable prices to satisfy
anticipated needs. There can be no assurance, however, that we can continue to
meet our needs for supply of bulk chemicals or that manufacturing limitations
will not delay clinical trials or possible commercialization. See
"--Collaborative Arrangements and License Agreements."
MARKETING AND SALES
We retain worldwide marketing rights to our A.G.E. Crosslink Breaker
compounds. We plan to market and sell our products, if successfully developed
and approved, directly or through co-promotion or other licensing arrangements
with third parties. Such arrangements may be exclusive or nonexclusive and may
provide for marketing rights worldwide or in a specific market.
For certain of our products, we have licensed exclusive marketing
rights, formed joint marketing arrangements or granted distribution rights
within specified territories with our corporate partner, Roche. See
"--Collaborative Arrangements and License Agreements."
9
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for our product candidates, processes and
know-how is important to our business. We aggressively file and prosecute
patents covering our proprietary technology, and, if warranted, will defend our
patents and proprietary technology. As appropriate, we seek patent protection
for our proprietary technology and products in the U.S. and Canada and in key
commercial European and Asia/Pacific countries. We also rely upon trade secrets,
know-how, continuing technological innovation and licensing opportunities to
develop and maintain our competitive position.
As of December 31, 2001, our patent estate of owned and/or licensed
patent rights consisted of 100 issued U.S. patents and one allowed US patent
application, none of which expire prior to 2005, and 28 pending patent
applications in the U.S., the majority of which are A.G.E.-related. We also own
or have exclusive rights to over 80 issued patents in Europe, Japan, Australia
and Canada.
We have five issued U.S. patents and five issued foreign patents,
including one from the European Patent Office, as well as 21 pending patent
applications in the U.S., covering certain novel compounds in the A.G.E.
Crosslink Breaker category. These patents and additional patent applications
contain compound, composition and method of treatment claims for several
chemical classes of Crosslink Breaker compounds.
Pimagedine is not protected by a composition-of-matter patent but is
protected by a series of use patents. In 1992, a U.S. patent on the use of
pimagedine was issued to Rockefeller University and subsequently exclusively
licensed to us with claims relating to the inhibition of A.G.E. formation. The
patent claims the new use of a known agent for the treatment of the
complications of aging and diabetes. In 1994, corresponding patents were granted
in France, Germany, Italy, the United Kingdom and other European countries. A
corresponding patent was issued in Japan in 1995. We continue to pursue and
patent chemical analogs of known A.G.E.-Formation Inhibitors, as well as novel
compounds having potential inhibitory properties.
We believe that our licensed and owned patents provide a substantial
proprietary base that will allow us and our collaborative partners to
commercialize products in this field. There can be no assurance, however, that
pending or future applications will issue, that the claims of any patents which
do issue will provide any significant appreciation of our technology or that our
directed discovery research will yield compounds and products of therapeutic and
commercial value.
In 1987, we acquired an exclusive, royalty-free, worldwide license
(including the right to sub-license to others) to issued patents, patent
applications and trade secrets from Rockefeller University relating to the
A.G.E.-formation and crosslinking technology currently under development by us.
Additional patent applications have since been filed on discoveries made in
support of the technology from research conducted at Rockefeller University, The
Picower Institute and our laboratories. Pursuant to our agreement with The
Picower Institute, certain patentable inventions and discoveries relating to
A.G.E. technology have been licensed exclusively to us. On December 31, 2001,
The Picower Institute ceased operations, and we expect to assume all
responsibility and costs for the worldwide filing and prosecution of patent
applications and maintenance of patents for such inventions.
We intend to continue to focus our research and development efforts on
the synthesis of novel compounds and on the search for additional therapeutic
applications to expand and broaden our rights within our technological and
patent base. We are also prepared to in-license additional technology that may
be useful in building our proprietary position.
Where appropriate, we utilize trade secrets and unpatentable
improvements to enhance our technology base and improve our competitive
position. We require all employees, scientific consultants and contractors to
execute confidentiality agreements as a condition of engagement. There can be no
assurance, however, that we can limit unauthorized or wrongful disclosures of
unpatented trade secret information.
We believe that our estate of licensed and owned issued patents, if
upheld, and pending applications, if granted and upheld, will be a substantial
factor in our success. The patent positions of pharmaceutical firms, including
ours, are generally uncertain and involve complex legal and factual questions.
Consequently, even though we are currently prosecuting such patent applications
in the U.S. and foreign patent offices, we do not know whether any of such
applications will result in the issuance of any additional patents or, if any
additional patents are issued, whether the claims thereof will provide
significant proprietary protection or will be circumvented or invalidated.
10
Competitors or potential competitors have filed for or have received
U.S. and foreign patents and may obtain additional patents and proprietary
rights relating to compounds or processes competitive with those of ours.
Accordingly, there can be no assurance that our patent applications will result
in patents being issued or that, if issued, the claims of the patents will
afford protection against competitors with similar technology; nor can there be
any assurance that others will not obtain patents that we would need to license
or circumvent. See "--Competition."
Our success will depend, in part, on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing on the proprietary rights of third parties. There can be no assurance
that our current patent estate will enable us to prevent infringement by third
parties or that competitors will not develop competitive products outside the
protection that may be afforded by the claims of such patents. To the extent we
rely on trade secrets and unpatented know-how to maintain our competitive
technological position, there can be no assurance that others may not develop
independently the same or similar technologies. Failure to maintain our current
patent estate or to obtain requisite patent and trade secret protection, which
may become material or necessary for product development, could delay or
preclude us or our licensees or marketing partners from marketing their products
and could thereby have a material adverse effect on our business, financial
condition and results of operations.
GOVERNMENT REGULATION
We and our products are subject to comprehensive regulations by the FDA
in the U.S. and by comparable authorities in other countries. These national
agencies and other federal, state and local entities regulate, among other
things, the pre-clinical and clinical testing, safety, effectiveness, approval,
manufacturing, labeling, marketing, export, storage, record keeping, advertising
and promotion of our products.
The process required by the FDA before our products may be approved for
marketing in the U.S. generally involves (i) pre-clinical new drug laboratory
and animal tests, (ii) submission to the FDA of an investigational new drug
application ("IND"), which must become effective before clinical trials may
begin, (iii) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication, (iv) submission to
the FDA of a new drug application ("NDA") and (v) FDA review of the NDA in order
to determine, among other things, whether the drug is safe and effective for its
intended uses. There is no assurance that the FDA review process will result in
product approval on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Certain pre-clinical tests are subject to FDA
regulations regarding current Good Laboratory Practices. The results of the
pre-clinical tests are submitted to the FDA as part of an IND and are reviewed
by the FDA prior to the commencement of clinical trials or during the conduct of
the clinical trials, as appropriate.
Clinical trials are conducted under protocols that detail such matters
as the objectives of the study, the parameters to be used to monitor safety and
the efficacy criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND. Further, each protocol must be reviewed and approved by
an institutional review board.
Clinical trials are typically conducted in three sequential phases,
which may overlap. During Phase I, when the drug is initially given to human
subjects, the product is tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. Phase II involves studies in a limited
patient population to (i) evaluate preliminarily the efficacy of the product for
specific targeted indications, (ii) determine dosage tolerance and optimal
dosage and (iii) identify possible adverse effects and safety risks. Phase
II/III trials are undertaken in order to further evaluate clinical efficacy and
to further test for safety within an expanded patient population. The FDA may
suspend clinical trials at any point in this process if it concludes that
clinical subjects are being exposed to an unacceptable health risk.
We will need FDA approval of our products, including a review of the
manufacturing processes and facilities used to produce such products before such
products may be marketed in the U.S. The process of obtaining approvals from the
FDA can be costly, time-consuming and subject to unanticipated delays. There can
be no assurance that the FDA will grant approvals of our proposed products,
processes or facilities on a timely basis, if at all. Any delay or failure to
obtain such approvals would have a material adverse effect on our business,
financial condition and results of operations. Moreover, even if regulatory
approval is granted, such approval may include significant limitations on
indicated uses for which a product could be marketed.
11
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's operating procedures conform to cGMP requirements,
which must be followed at all times. In complying with those requirements,
manufacturers (including a drug sponsor's third-party contract manufacturers)
must continue to expend time, money and effort in the area of production and
quality control to ensure compliance. Domestic manufacturing establishments are
subject to periodic inspections by the FDA in order to assess, among other
things, cGMP compliance. To supply a product for use in the U.S., foreign
manufacturing establishments must comply with cGMP and are subject to periodic
inspection by the FDA or by regulatory authorities in certain of such countries
under reciprocal agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer
and the holder of the NDA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the pre-clinical and clinical testing process, the approval process,
or thereafter (including after approval) may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market and/or the imposition
of criminal penalties against the manufacturer and/or NDA holder. In addition,
later discovery of previously unknown problems may result in restrictions on
such product, manufacturer or NDA holder, including withdrawal of the product
from the market. Also, new government requirements may be established that could
delay or prevent regulatory approval of our products under development.
The FDA has implemented accelerated approval procedures for certain
pharmaceutical agents that treat serious or life-threatening diseases and
conditions, especially where no satisfactory alternative therapy exists. We
cannot predict the ultimate impact, however, of the FDA's accelerated approval
of procedures on the timing or likelihood of approval of any of our potential
products or those of any competitor. In addition, the approval of a product
under the accelerated approval procedures may be subject to various conditions,
including the requirement to verify clinical benefit in post-marketing studies,
and the authority on the part of the FDA to withdraw approval under streamlined
procedures if such studies do not verify clinical benefit.
For marketing outside the U.S., we will have to satisfy foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs and diagnostic products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. We do not currently have any facilities or personnel outside
of the U.S.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Our research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any such liability could exceed our resources.
COMPETITION
A.G.E.s have been shown to contribute to many of the disorders of aging
and diabetes, including cardiovascular, kidney and eye diseases. We are aware of
several companies that have research and development activities in the A.G.E.
field. Many companies are pursuing research and development of compounds for
cardiovascular and kidney diseases and the lowering of glucose levels.
Many of our potential competitors have substantially greater financial,
technical and human resources than ours and may be better equipped to develop,
manufacture and market products. In addition, many of these companies have
extensive experience in pre-clinical testing and human clinical trials. These
companies may develop and introduce products and processes competitive with or
superior to ours.
Our competition will be determined, in part, by the potential
indications for which our compounds are developed and ultimately approved by
regulatory authorities. For certain of our potential products, an important
factor in competition may be the timing of market introduction of our or our
competitors' products. Accordingly, the relative speed with which we can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market are important competitive
factors. We expect that competition among products approved for sale will be
based on, among other things, product efficacy, safety,
12
reliability, availability, price and patent position. Our competitive position
also depends upon our ability to attract and retain qualified personnel, obtain
protection or otherwise develop proprietary products or processes and secure
sufficient capital resources.
We are competing in an industry in which technologies can become
obsolete over time, thereby reducing or eliminating the market for any
pharmaceutical product. For example, competitive drugs based on other
therapeutic mechanisms may be efficacious in treating cardiovascular disease or
diabetic complications. The development by others of non-A.G.E.-related
treatment modalities could render our products non-competitive. Therapeutic
approaches being pursued by others include curing cardiovascular disease or
diabetic complications via gene therapy or cell transplantation, as well as
pharmaceutical intervention with agents such as the aldose reductase inhibitors.
Angiotensin converting enzyme inhibitors, angiotensin receptor
blockers, calcium channel blockers, beta-blockers and diuretics are effective
treatments for essential hypertension, a disease characterized by increased
peripheral vascular resistance (essential hypertension closely related to
diastolic blood pressure). Systolic hypertension, characterized by increased
stiffness of the large arteries, is not usually associated with increased
peripheral vascular resistance. In the absence of any marketed products that
address the underlying pathology of systolic hypertension patients, treatments
approved for essential hypertension are currently being prescribed to treat
hypertension in these patients. However, these agents are of limited value where
stiffness of the large arteries is the underlying pathology.
Results of the DCCT showed that tight glucose control reduced the
incidence of diabetic complications. Numerous companies are pursuing other
methods to manage glucose control and to reduce the incidence of diabetic
complications. In addition, several companies have initiated research with drugs
that inhibit vascularization as a potential treatment of diabetic retinopathy.
In the event one or more of these initiatives are successful, the market for
some of our products may be reduced or eliminated.
MEDICAL AND CLINICAL ADVISORS
Our Medical and Clinical Advisors consist of individuals with
recognized expertise in the medical and pharmaceutical science and related
fields who advise us about present and long-term scientific planning, research
and development. These advisors consult and meet with our management informally
on a frequent basis. All advisors are employed by employers other than us and
may have commitments to, or consulting or advisory agreements with, other
entities that may limit their availability to us. These companies may also be
competitors of ours. The advisors have agreed, however, not to provide any
services to any other entities that might conflict with the activities that they
provide us. Each member also has executed a confidentiality agreement for our
benefit.
The following persons are Medical and Clinical Advisors:
George L. Bakris, M.D., F.A.C.P., F.C.P., Professor of Preventive and
Internal Medicine, Vice Chairman, Department of Preventive Medicine and
Director, Hypertension/Clinical Research Center, Rush-Presbyterian/St.
Luke's Medical Center; President, American College of Clinical
Pharmacology.
Leslie Z. Benet, Ph.D., Professor, University of California San
Francisco, School of Pharmacy, Department of Biopharmaceutical
Sciences; Chairman of the Board, AvMax, Inc.; former Chairman,
Department of Biopharmaceutical Sciences of University of California
San Francisco.
Michael A. Brownlee, M.D., Anita and Jack Saltz Professor of Diabetes
Research, Departments of Medicine and Pathology, Albert Einstein
College of Medicine.
Edward D. Frohlich, M.D., Distinguished Scientist of the Alton Ochsner
Clinic Foundation; Professor of Medicine and Physiology at Louisiana
State University; Clinical Professor of Medicine and Adjunct Professor
of Pharmacology at Tulane University; President, Society of Geriatric
Cardiology.
Richard J. Glassock, M.D., M.A.C.P., Professor Emeritus, University of
California Los Angeles, School of Medicine; Past-President, National
Kidney Foundation; Past-President, American Society of Nephrology.
Jan Lessem, M.D., Ph.D., F.A.C.C., Chief Medical Officer and Vice
President, Clinical Research and Development, OraPharma, Inc.; former
Vice President and Corporate Officer, Drug Strategy and Medical
13
Director, Takeda America, Inc.; former Director of Clinical
Investigations, SmithKline Beecham Pharmaceuticals.
Lawrence Resnick, M.D., Professor of Medicine, Division of
Cardiovascular Pathophysiology, Hypertension Center, New York
Presbyterian Hospital/Weill Medical College of Cornell Medical Center.
EMPLOYEES
As of February 20, 2002, we employed 33 persons (six of whom held a
Ph.D., M.D. or other advanced degree), of whom 20 were engaged in research and
development and 13 were engaged in administration and management. We believe
that we have been successful in attracting skilled and experienced personnel.
Our employees are not covered by collective bargaining agreements, but all
employees are covered by confidentiality agreements. We believe that our
relationship with our employees is good.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-K that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth in this section and elsewhere in this Form
10-K. These factors include, but are not limited to, the risks set forth below.
The forward-looking statements represent our judgment and expectations as of the
date of this Report. We assume no obligation to update any such forward-looking
statements.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
We anticipate that our existing available cash and cash equivalents and
short-term investments will be adequate to satisfy our working capital
requirements for our current operations into 2003. While we expect to apply a
portion of the proceeds of our recent financings to the Phase IIb trials of
ALT-711, the timing and extent of ALT-711's clinical development will be
determined by our ability to secure additional financing. In addition, we will
require substantial new funding in order to continue the research, product
development, pre-clinical testing and clinical trials of our other product
candidates, including ALT-711 and pimagedine. We will also require additional
funding for operating expenses, the pursuit of regulatory approvals for our
product candidates and the establishment of marketing and sales capabilities.
Our future capital requirements will depend on many factors, including
continued scientific progress in our research and development programs, the size
and complexity of these programs, progress with pre-clinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the establishment of additional
collaborative arrangements, the cost of manufacturing arrangements,
commercialization activities and the cost of product in-licensing and strategic
acquisitions, if any. Our cash reserves and other liquid assets may not be
adequate to satisfy our capital and operating requirements.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, WE MAY NOT DERIVE ANY REVENUES.
All of our product candidates are in research or clinical development.
We may not succeed in the development and marketing of any therapeutic or
diagnostic product. To achieve profitable operations, we must, alone or with
others, successfully identify, develop, introduce and market proprietary
products. Such products will require significant additional investment,
development and pre-clinical and clinical testing prior to potential regulatory
approval and commercialization.
We have not yet requested or received regulatory approval for any
product from the FDA or any other regulatory body. Before obtaining regulatory
approvals for the commercial sale of any of our products under development, we
must demonstrate through pre-clinical studies and clinical trials that the
product is safe and
14
effective for use in each target indication. The results from pre-clinical
studies and early clinical trials may not be predictive of results that will be
obtained in large-scale testing. In addition, some or all of the clinical trials
we undertake may not demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals, which could prevent the creation of marketable
products.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found ineffective or cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. We may not be able to
undertake additional clinical trials. In addition, our product development
efforts may not be successfully completed, we may not obtain regulatory
approvals, and our products, if introduced, may not be successfully marketed or
achieve customer acceptance. We do not expect any of our products, including
ALT-711 and pimagedine, to be commercially available for a number of years, if
at all.
IF WE ARE UNABLE TO DERIVE REVENUES FROM PRODUCT SALES, WE MAY NEVER BE
PROFITABLE.
All of our revenues to date have been generated from collaborative
research agreements and financing activities, or interest income earned on these
funds. We have not received any revenues from product sales. We may not realize
product revenues on a timely basis, if at all.
At December 31, 2001, we had an accumulated deficit of $149,009,000. We
anticipate that we will incur substantial, potentially greater losses in the
future. Our products under development may not be successfully developed and our
products, if successfully developed, may not generate revenues sufficient to
enable us to earn a profit. We expect to incur substantial additional operating
expenses over the next several years as our research, development and clinical
trial activities increase. We do not expect to generate revenues from the sale
of products, if any, for a number of years. Our ability to achieve profitability
depends, in part, on our ability to enter into agreements for product
development, obtain regulatory approval for our products and develop the
capacity, or enter into agreements, for the manufacture, marketing and sale of
any products. We may not obtain required regulatory approvals, or successfully
develop, manufacture, commercialize and market product candidates, and we may
never achieve product revenues or profitability.
PRIOR STOCK OPTION REPRICING MAY HAVE AN ADVERSE EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Based on the performance of our stock, we repriced certain employee
stock options on February 2, 1999, in order to bolster employee retention. As a
result of this repricing, options to purchase 1.06 million shares of stock were
repriced and certain vesting periods related to these options were modified or
extended. This repricing may have a material adverse impact on future financial
performance based on Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation, An Interpretation of APB Opinion No. 25." This
interpretation requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair market value of
the repriced options based on changes in our stock price from the value at July
1, 2000, until the repriced options are exercised, forfeited or expire.
IF WE ARE NOT ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE
TO DEVELOP PRODUCTS.
Our strategy for developing and deriving revenues from our products
depends, in large part, upon entering into arrangements with research
collaborators, corporate partners and others.
We have established collaborative arrangements with Yamanouchi
Pharmaceutical Co., Ltd., Roche Diagnostics GmbH, IDEXX laboratories, Inc. and
Gamida for Life with respect to the development of drug therapies and
diagnostics utilizing our scientific platforms. To succeed, we will have to
develop additional relationships. We are seeking to establish new collaborative
relationships to provide the funding necessary for continuation of our product
development, but such effort may not be successful. If we are unable to enter
into or manage additional collaborations, our programs may suffer and we may be
unable to develop products.
15
IF WE ARE UNABLE TO MAINTAIN OUR COLLABORATIVE RELATIONSHIPS, OUR PRODUCT
DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS TO TECHNOLOGY MAY RESULT.
We will, in some cases, be dependent upon outside partners to conduct
pre-clinical testing and clinical trials and to provide adequate funding for our
development programs. Our corporate partners may have all or a significant
portion of the development and regulatory approval responsibilities. Failure of
the corporate partners to develop marketable products or to gain the appropriate
regulatory approvals on a timely basis, if at all, would have a material adverse
effect on our business, financial condition and results of operations.
In most cases, we will not be able to control the amount and timing of
resources that our corporate partners devote to our programs or potential
products. If any of our corporate partners breached or terminated its agreements
with us or otherwise failed to conduct its collaborative activities in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed, and we would be required to
devote additional resources to product development and commercialization or
terminate certain development programs.
Disputes may arise in the future with respect to the ownership of
rights to any technology we develop with third parties. These and other possible
disagreements between us and collaborators could lead to delays in the
collaborative research, development or commercialization of product candidates
or could require or result in litigation or arbitration, which would be
time-consuming and expensive and would have a material adverse effect on our
business, financial condition and results of operations.
Any corporate partners we have may develop, either alone or with
others, products that compete with the development and marketing of our
products. Competing products, either developed by the corporate partners or to
which the corporate partners have rights, may result in their withdrawal of
support with respect to all or a portion of our technology, which would have a
material adverse effect on our business, financial condition and results of
operations.
IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN
SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR
ABILITY TO DELIVER PRODUCTS MAY BE IMPAIRED.
For certain of our products, we have licensed exclusive marketing
rights to our corporate partners or formed collaborative marketing arrangements
within specified territories in return for royalties to be received on sales, a
share of profits or beneficial transfer pricing. These agreements are terminable
at the discretion of our partners upon as little as 90 days' prior written
notice. If the licensee or marketing partner terminates an agreement or fails to
market a product successfully, our business, financial condition and results of
operations may be adversely affected.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any approved product, we
must either develop a marketing and sales force or, where appropriate or
permissible, enter into arrangements with third parties to market and sell our
products. We might not develop successfully marketing and sales experience.
Further, we may not be able to enter into marketing and sales agreements with
others on acceptable terms, and any such arrangements, if entered into, may be
terminated. If we develop our own marketing and sales capability, it will
compete with other companies that currently have experienced, well funded and
larger marketing and sales operations. To the extent that we enter into
co-promotion or other sales and marketing arrangements with other companies,
revenues will depend on the efforts of others, which may not be successful.
IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD
PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO
DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED.
We have no experience in manufacturing products for commercial purposes
and do not have manufacturing facilities. Consequently, we are dependent on
contract manufacturers for the production of products for development and
commercial purposes. The manufacture of our products for clinical trials and
commercial purposes is subject to cGMP regulations promulgated by the FDA. In
the event that we are unable to obtain or retain third-party manufacturing for
our products, we will not be able to commercialize such products as planned. We
may not be able to enter into agreements for the manufacture of future products
with manufacturers whose facilities and procedures comply with cGMP and other
regulatory requirements. Our current dependence upon
16
others for the manufacture of our products may adversely affect our profit
margin, if any, on the sale of future products and our ability to develop and
deliver such products on a timely and competitive basis.
IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD
SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET.
Our success will depend on our ability to obtain patent protection for
our products, preserve our trade secrets, prevent third parties from infringing
upon our proprietary rights and operate without infringing upon the proprietary
rights of others, both in the U.S. and abroad.
Competitors may develop competitive products outside the protection
that may be afforded by the claims of our patents. We are aware that other
parties have been issued patents and have filed patent applications in the U.S.
and foreign countries with respect to other agents which impact A.G.E. or the
formation of A.G.E. crosslinks.
The degree of patent protection afforded to pharmaceutical inventions
is uncertain and our potential products are subject to this uncertainty.
Pimagedine is not a novel compound and is not covered by a composition-of-matter
patent. The patents covering pimagedine are use patents containing claims
covering therapeutic indications and the use of pimagedine to inhibit the
formation of A.G.E.s. Competitors may develop and commercialize pimagedine or
pimagedine-like products for indications outside of the protection provided by
the claims of our use patents. Physicians, pharmacies and wholesalers could then
substitute for our pimagedine products. Substitution for our pimagedine products
would have a material adverse effect on our business, financial condition and
results of operations. Use patents may afford a lesser degree of protection in
certain foreign countries due to their patent laws. In addition, although we
have several patent applications pending to protect proprietary technology and
potential products, these patents may not be issued, and the claims of any
patents, which do issue, may not provide significant protection of our
technology or products. In addition, we may not enjoy any patent protection
beyond the expiration dates of our currently issued patents.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to maintain, develop and expand
our competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement. Binding agreements may be breached, and we may not have adequate
remedies for such breach. In addition, our trade secrets may become known to or
be independently discovered by competitors.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THE COMMERCIAL USE
OF OUR PRODUCTS WILL BE LIMITED.
Our research, pre-clinical testing and clinical trials of our product
candidates are, and the manufacturing and marketing of our products will be,
subject to extensive and rigorous regulation by numerous governmental
authorities in the U.S. and in other countries where we intend to test and
market our product candidates.
Prior to marketing, any product we develop must undergo an extensive
regulatory approval process. This regulatory process, which includes
pre-clinical testing and clinical trials and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and can require the expenditure of substantial resources. Data
obtained from pre-clinical and clinical activities is susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, we may encounter delays or rejections based upon changes in FDA policy
for drug approval during the period of product development and FDA regulatory
review of each submitted NDA. We may encounter similar delays in foreign
countries. We may not obtain regulatory approval for the drugs we develop.
Moreover, regulatory approval may entail limitations on the indicated uses of
the drug. Further, even if we obtain regulatory approval, a marketed drug and
its manufacturer are subject to continuing review and discovery of previously
unknown problems with a product or manufacturer which may have adverse effects
on our business, financial condition and results of operations, including
withdrawal of the product from the market. Violations of regulatory requirements
at any stage, including pre-clinical testing and clinical trials, the approval
process or post-approval, may result in various adverse consequences including
the FDA's delay in approving, or its refusal to approve, a product withdrawal of
an approved product from the market and the imposition of criminal penalties
against the manufacturer and NDA holder. None of our products has been approved
for commercialization in the U.S. or elsewhere. We may not be able to obtain FDA
approval for any products. Failure to obtain requisite governmental approvals or
failure to obtain approvals of the scope requested
17
will delay or preclude our licensees or marketing partners from marketing our
products or limit the commercial use of such products and will have a material
adverse effect on our business, financial condition and results of operations.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR DIABETES, CARDIOVASCULAR
DISEASES AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO DEVELOP PRODUCTS, WE MAY
NOT BE ABLE TO CONTINUE OUR OPERATIONS.
We are engaged in pharmaceutical fields characterized by extensive
research efforts and rapid technological progress. Many established
pharmaceutical and biotechnology companies with resources greater than ours are
attempting to develop products that would be competitive with our products.
Other companies may succeed in developing products that are safer, more
efficacious or less costly than any we may develop and may also be more
successful than us in production and marketing. Rapid technological development
by others may result in our products becoming obsolete before we recover a
significant portion of the research, development or commercialization expenses
incurred with respect to those products.
Certain technologies under development by other pharmaceutical
companies could result in a cure for diabetes or the reduction of the incidence
of diabetes and its complications. For example, a number of companies are
investigating islet cell transplantation as a possible cure for Type 1 diabetes.
Results of a study conducted by the National Institutes of Health, known as the
Diabetes Control and Complications Trial, published in 1993, showed that tight
glucose control reduced the incidence of diabetic complications. Several
pharmaceutical companies have introduced new products for glucose control for
the management of hyperglycemia in Type 2 diabetes. In addition, several large
companies have initiated or expanded research, development and licensing efforts
to build a diabetic pharmaceutical franchise focusing on diabetic nephropathy,
neuropathy, retinopathy and related conditions. An example of this is research
seeking anti-angiogenesis drugs for the potential treatment of diabetic
retinopathy. It is possible that one or more of these initiatives may reduce or
eliminate the market for some of our products.
In addition, a broad range of cardiovascular drugs is under development
by many pharmaceutical and biotechnology companies. It is possible that one or
more of these initiatives may reduce or eliminate the market for some of our
products.
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTH CARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS SUCCESSFULLY.
In certain foreign markets, pricing and/or profitability of
prescription pharmaceuticals are subject to government control. In the U.S., we
expect that there will continue to be federal and state initiatives to control
and/or reduce pharmaceutical expenditures. In addition, increasing emphasis on
managed care in the U.S. will continue to put pressure on pharmaceutical
pricing. Cost control initiatives could decrease the price that we receive for
any products we may develop and sell in the future and have a material adverse
effect on our business, financial condition and results of operations. Further,
to the extent that cost control initiatives have a material adverse effect on
our corporate partners, our ability to commercialize our products may be
adversely affected.
Our ability to commercialize pharmaceutical products may depend, in
part, on the extent to which reimbursement for the products will be available
from government health administration authorities, private health insurers and
other third-party payers. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and third-party payers, including
Medicare, are increasingly challenging the prices charged for medical products
and services. Third-party insurance coverage may not be available to patients
for any products developed by us. Government and other third-party payers are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products and by refusing in
some cases to provide coverage for uses of approved products for disease
indications for which the FDA has not granted labeling approval. If adequate
coverage and reimbursement levels are not provided by government and other
third-party payers for our products, the market acceptance of these products
would be adversely affected.
IF THE USERS OF THE PRODUCTS WE DEVELOP CLAIM THAT OUR PRODUCTS HAVE HARMED
THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY LITIGATION,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The use of any of our potential products in clinical trials and the
sale of any approved products, including the testing and commercialization of
ALT-711 or pimagedine, exposes us to liability claims resulting from the use of
18
products or product candidates. A claim, which was subsequently settled, was
made by a participant in one of our clinical trials, and additional claims might
be made directly by other such participants, consumers, pharmaceutical companies
or others. We maintain product liability insurance coverage for claims arising
from the use of our products in clinical trials. However, coverage is becoming
increasingly expensive, and we may not be able to maintain or acquire insurance
at a reasonable cost or in sufficient amounts to protect us against losses due
to liability that could have a material adverse effect on our business,
financial conditions and results of operations. We may not be able to obtain
commercially reasonable product liability insurance for any product approved for
marketing in the future and insurance coverage and our resources may not be
sufficient to satisfy any liability resulting from product liability claims. A
successful product liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition and results
of operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS
DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD
SUFFER.
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these personnel could impede
the achievement of our development objectives. Furthermore, recruiting and
retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may not be able to
attract and retain personnel on acceptable terms given the competition between
pharmaceutical and health care companies, universities and non-profit research
institutions for experienced scientists. In addition, we rely on consultants to
assist us in formulating our research and development strategy. All of our
consultants are employed outside of us and may have commitments to or consulting
or advisory contracts with other entities that may limit their availability to
us.
OUR OPERATIONS INVOLVE A RISK OF INJURY OR DAMAGE FROM HAZARDOUS MATERIALS, AND
IF AN ACCIDENT WERE TO OCCUR, WE COULD BE SUBJECT TO COSTLY AND DAMAGING
LIABILITY CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. Although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held liable for any damages or fines that
result. Such liability could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 2. PROPERTIES.
We lease a 37,000 square foot building in Ramsey, New Jersey, which
contains our executive and administrative offices and research laboratory space.
The lease, which commenced on November 1, 1993, has a 10-year term. In addition,
the lease has two five-year renewal options.
ITEM 3. LEGAL PROCEEDINGS.
On October 20, 2000, Charles L. Grimes, one of our stockholders, and
his wife, Jane Gillespie Grimes, filed a complaint against us in the Court of
Chancery in Delaware, claiming breach of an alleged agreement with us which
would have purportedly entitled Mr. Grimes to purchase 10% of our private
placement of $6,235,000 of common stock and warrants in September 2000. We filed
a motion to dismiss stating that Mr. and Mrs. Grimes had failed to state a claim
as a matter of law. Pursuant to a decision and order of the Delaware Chancery
Court, the case was dismissed on April 12, 2001. Mr. and Mrs. Grimes have filed
an appeal to the Supreme Court of Delaware. On January 16, 2002, the Supreme
Court of Delaware heard oral argument on the appeal of Mr. and Mrs. Grimes, and
the court has directed that oral argument on this appeal be heard en banc at a
later date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock traded on the American Stock Exchange ("Amex") since
August 7, 2000, under the symbol "ALT." Prior to August 7, 2000, our Common
Stock was traded on the Over-the-Counter Bulletin Board ("OTCBB") under the
symbol "ALTN." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for our Common Stock on Amex or
OTCBB, as applicable:
2001 High Low
---- -------- --------
First Quarter.......................... $ 6.5000 $ 3.1500
Second Quarter......................... 4.7100 2.7000
Third Quarter.......................... 3.4900 2.2500
Fourth Quarter......................... 4.9300 2.3300
2000 High Low
---- -------- --------
First Quarter.......................... $ 5.0000 $ 0.9062
Second Quarter......................... 3.6250 1.5000
Third Quarter.......................... 3.5625 2.1250
Fourth Quarter......................... 8.3125 2.8750
As of February 20, 2002, there were 316 holders of the common stock. On
February 20, 2002, the last sale price reported on the Amex for the common stock
was $4.25 per share.
We have neither paid nor declared dividends on our common stock since
our inception and do not plan to pay dividends in the foreseeable future. Any
earnings that we may realize will be returned to finance our growth.
The market prices for securities of biotechnology and pharmaceutical
companies, including ours, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors, such as fluctuations in our operating results, announcements
of technological innovations or new therapeutic products by us or others,
clinical trial results, developments concerning agreements with collaborators,
governmental regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by us or others, future sales
of substantial amounts of common stock by existing stockholders and general
market conditions, can have an adverse effect on the market price of the common
stock.
20
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in
conjunction with the audited financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. The selected financial data, for
the five years ended December 31, 2001, has been derived from our audited
financial statements.
Year Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Investment income $ 452 $ 570 $ 835 $ 1,321 $ 1,510
Other income -- -- 600 -- --
--------- --------- --------- --------- ---------
Total revenues 452 570 1,435 1,321 1,510
Expenses:
Research and development
(which includes non-cash stock
compensation expense in 2001 and 2000
of $165 and $353, respectively) 8,461 6,375 10,598 24,592 23,264
Elimination of previously accrued
loss contingency -- -- -- (1,771) --
General and administrative
(which includes non-cash stock
compensation expense in 2001 and 2000
of $657 and $891, respectively) 4,761 5,313 4,357 4,842 3,633
Interest -- -- -- 4 25
--------- --------- --------- --------- ---------
Total expenses 13,222 11,688 14,955 27,667 26,922
--------- --------- --------- --------- ---------
Loss before income tax benefit (12,770) (11,118) (13,520) (26,346) (25,412)
Income tax benefit 1,187 1,548 2,588 -- --
--------- --------- --------- --------- ---------
Net loss (11,583) (9,570) (10,932) (26,346) (25,412)
Preferred stock dividends 3,204 2,945 2,707 2,207 1,091
Common stock warrant deemed dividends 210 -- -- -- --
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders $ (14,997) $ (12,515) $ (13,639) $ (28,553) $ (26,503)
--------- --------- --------- --------- ---------
Basic/diluted loss per share to
common stockholders $ (0.61) $ (0.63) $ (0.72) $ (1.57) $ (1.60)
--------- --------- --------- --------- ---------
Weighted average common shares used in
computing basic/diluted loss per share 24,556 19,861 19,055 18,211 16,566
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 10,726 $ 9,955 $ 12,370 $ 24,132 $ 28,974
Working capital 9,758 9,754 10,425 20,093 22,390
Total assets 13,233 13,389 15,021 27,652 33,508
Accumulated deficit (149,009) (134,011) (121,496) (107,857) (79,303)
Stockholders' equity 10,871 11,453 12,827 23,338 26,455
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We are a product-based biopharmaceutical company primarily engaged in
the discovery and development of oral drugs to reverse or inhibit cardiovascular
aging and diabetic complications. Our product candidates represent novel
approaches to some of the largest pharmaceutical markets. Two of our compounds
are in clinical development; several others are in early development. These
pharmaceutical candidates were developed as a result of our research on A.G.E.
pathway, a fundamental pathological process and inevitable consequence of aging
that causes or contributes to many medical disorders, including cardiovascular,
kidney and eye diseases.
Our lead compound, ALT-711, is initially being developed for
cardiovascular indications, including systolic hypertension. We have completed a
Phase IIa trial to evaluate the effect of ALT-711 on cardiovascular compliance.
Based on the positive results of this trial, we have initiated two Phase IIb
efficacy trials of ALT-711,
21
the SAPPHIRE and SILVER trials. The compound is also under Phase I investigation
in ESRD patients undergoing peritoneal dialysis.
As we continue clinical development of ALT-711, we will determine if it
is appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound in other territories throughout the world.
A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is being
clinically evaluated in skin aging for cosmetic applications. We continue to
evaluate product development opportunities from among our A.G.E. Crosslink
Breaker compounds and other classes of compounds in our patent estate.
Since our inception in October 1986, we have devoted substantially all
of our resources to research, drug discovery and development programs. To date,
we have not generated any revenues from the sale of products and do not expect
to generate any such revenues for a number of years, if at all. We have incurred
an accumulated deficit of $149,009,000 as of December 31, 2001, and expect to
incur operating losses, potentially greater than losses in prior years, for a
number of years.
We have financed our operations through proceeds from an initial public
offering of common stock in 1991, public offerings of common stock, private
placements of common and preferred equity securities, revenue from present and
former collaborative relationships, reimbursement of certain of our research and
development expenses by our collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey State Net Operating Losses carryforwards.
In January 2002, we completed a public offering of 4,450,000 shares of
common stock, which provided net proceeds of approximately $18,588,000.
In July 2001, we completed a public offering of 4,500,000 shares of
common stock, which provided net proceeds of approximately $9,365,000. In
connection with this offering, certain previously issued warrants were repriced
pursuant to antidilution provisions connected to the warrants.
In March 2000, the Financial Accounting Standards Board ("FASB")
released Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, An Interpretation of APB Opinion No. 25." The interpretation
became effective on July 1, 2000, but in some circumstances applies to
transactions that occur prior to the effective date. Under the interpretation,
stock options that are repriced must be accounted for as variable-plan
arrangements until the options are exercised, forfeited or expire. This
requirement applies to any options repriced after December 15, 1998. On February
2, 1999, we repriced certain stock options. The total compensation expense
resulting from the repricing and included in net loss for the years ended
December 31, 2001 and December 31, 2000 is $822,000 and $1,244,000,
respectively. As of December 31, 2001, there are approximately 605,000 repriced
options outstanding.
In 2001, 2000 and 1999, we sold $6,243,000, $14,129,000 and
$27,687,000, respectively, of our gross State net operating loss carryforwards
and $802,000, $590,000 and $645,000, respectively, of our State research and
development tax credit carryforwards under the State of New Jersey's Technology
Business Tax Certificate Transfer Program (the "Program"). The Program allows
qualified technology and biotechnology business in New Jersey to sell unused
amounts of net operating loss carryforwards and defined research and development
tax credits for cash. The proceeds from the sale in 2001, 2000 and 1999 were
approximately $1,187,000, $1,548,000 and $2,588,000, respectively, and such
amounts were recorded as a tax benefit in the statements of operations. The
proceeds from the sale of the net operating loss carryforwards and the research
and development tax credit carryforwards sold in 2001 were received on January
4, 2002.
Our business is subject to significant risks including, but not limited
to, (i) our ability to obtain funding, (ii) the risks inherent in our research
and development efforts, including clinical trials, (iii) uncertainties
associated with obtaining and enforcing our patents and with the patent rights
of others, (iv) the lengthy, expensive and uncertain process of seeking
regulatory approvals, (v) uncertainties regarding government reforms and product
pricing and reimbursement levels, (vi) technological change and competition,
(vii) manufacturing uncertainties and (viii) dependence on collaborative
partners and other third parties. Even if our product candidates appear
promising at an early stage of development, they may not reach the market for
numerous reasons. Such reasons include the possibilities that the products will
prove ineffective or unsafe during clinical trials, will fail to receive
necessary
22
regulatory approvals, will be difficult to manufacture on a large scale, will be
uneconomical to market or will be precluded from commercialization by
proprietary rights of third parties. These risks and others are discussed under
the heading "Forward-Looking Statements and Cautionary Statements."
RESULTS OF OPERATIONS
Years Ended December 2001, 2000, 1999
Revenues
Total revenues for 2001, 2000 and 1999 were $452,000, $570,000 and
$1,435,000, respectively. Revenues were derived from interest earned on cash and
cash equivalents and short-term investments, and in 1999, the $600,000 payment
under an option agreement with Taisho Pharmaceutical Co., Ltd., pursuant to
which they were granted an option by us (which expired without being exercised)
to acquire a license to ALT-711 in certain territories. The decrease in revenues
in 2001 over 2000 was attributed to a decrease in cash and cash equivalents and
short-term investment balances, as well as decreased interest rates.
Operating Expenses
Total expenses increased to $13,222,000 in 2001 from $11,688,000 in
2000, and decreased from $14,954,000 in 1999, and in each year consisted
primarily of research and development expenses. Research and development
expenses were $8,461,000 in 2001, $6,375,000 in 2000 and $10,598,000 in 1999,
and include non-cash stock compensation expense of $165,000, $353,000 and $0,
respectively. Research and development expenses consist primarily of third-party
expenses associated with pre-clinical and clinical studies, manufacturing costs,
including the development and preparation of clinical supplies, personnel and
personnel-related expenses and an allocation of facility expense.
Research and development expenses increased in 2001 from 2000 by
$2,086,000, or 32.7%. This increase was primarily related to the increase in
manufacturing costs and additional expenditures for the Crosslink Breaker
program. In 2001, approximately $1,730,000 was spent on third-party costs
related to the Crosslink Breaker program, which included various pre-clinical
and clinical programs and the initiation of the Phase IIb trials. The 2001
results also included manufacturing costs of approximately $1,916,000. These
costs included the production costs of supplies for the ongoing clinical
programs, and finalizing the development of manufacturing processes for the
production of Phase III clinical trials and potential commercialization of
ALT-711. The Phase IIb SAPPHIRE and SILVER trials were initiated during 2001,
and are currently enrolling patients. The release of the data from these trials
is targeted for year-end 2002. In 2000, approximately $2,115,000 of third-party
costs were incurred on the Crosslink Breaker program, which included the Phase
IIa trial. The Phase IIa trial was completed in 2000, and the data was released
in 2001. The development and successful commercialization of ALT-711 are subject
to substantial risks which are described in this Report. See, for example,
"Forward-Look Statements and Cautionary Statements -- If we do not successfully
develop any products, we may not derive any revenues."
Research and development expenses decreased in 2000, from 1999, by
$4,223,000, or 39.8%, primarily due to decreased expenses related to the
pimagedine program, conclusion of the ACTION I trial and the closure of the ESRD
trials and related personnel expenses. Third-party costs associated with those
programs were approximately $3,697,000 in 1999. The ACTION I trial was completed
in 1998. Although the results showed that pimagedine reduced the risk of
doubling of serum creatinine, the study's primary endpoint, the data did not
reach statistical significance. However, pimagedine therapy did result in a
statistically significant and clinically meaningful reduction of urinary protein
excretion. Pimagedine also reduced, to a statistically significant extent,
cholesterol and triglycerides as well as the progression of retinopathy.
Additional data suggested a trend toward improvements in other measures of
kidney function, including estimated creatinine clearance and glomerular
filtration rate. The ESRD trial was closed in April 1999, after the Company
evaluated the program as part of the overall evaluation of pimagedine. Data for
the study was inconclusive.
General and administrative expenses were $4,761,000 in 2001, decreased
from $5,313,000 in 2000 and increased from $4,356,000 in 1999. The changes in
general and administrative expenses consist primarily of non-cash stock
compensation expense of $657,000, $891,000 and $0, in 2001, 2000 and 1999,
respectively.
23
Net Loss
At December 31, 2001, we had available Federal net operating loss
carryforwards, which expire in various amounts from the years 2006 through 2020,
of approximately $135,500,000 and State net operating loss carryforwards, which
expire in the years 2002 through 2007, of approximately $85,100,000. In
addition, we had Federal research and development credit carryforwards of
approximately $5,100,000 and State research and development tax credit
carryforwards of approximately $1,600,000. We had net losses of $11,584,000 in
2001, $9,570,000 in 2000 and $10,932,000 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short-term investments at December
31, 2001 of $10,726,000 compared to $9,955,000 at December 31, 2000. This is an
increase in cash, cash equivalents and short-term investments for the 12 months
ended December 31, 2001, of $771,000. This consisted of $9,843,000 of financing
activities related to a public offering of common stock and proceeds from stock
option exercises. This was offset by $9,032,000 of cash used in operations,
consisting primarily of research and development expenses, personnel and related
costs, facility expenses and approximately $50,000 of capital expenditures.
In January 2002, we completed a public offering of 4,450,000 shares of
common stock, which provided net proceeds of approximately $18,588,000.
In July 2001, we completed a public offering of 4,500,000 shares of
common stock, which provided net proceeds of approximately $9,365,000. In
connection with this offering, certain previously issued warrants were repriced
pursuant to antidilution provisions connected to the warrants.
In 2001, 2000 and 1999, we sold $6,243,000, $14,129,000 and
$27,687,000, respectively, of our gross State net operating loss carryforwards
and $802,000, $590,000 and $645,000, respectively, of our State research and
development tax credit carryforwards under the State of New Jersey's Technology
Business Tax Certificate Transfer Program (the "Program"). The Program allows
qualified technology and biotechnology businesses in New Jersey to sell unused
amounts of net operating loss carryforwards and defined research and development
tax credits for cash. The proceeds from the sale in 2001, 2000 and 1999 were
$1,187,000, $1,548,000 and $2,588,000, respectively, and such amounts were
recorded as a tax benefit in the statements of operations. The proceeds from the
sale of the net operating loss carryforwards and the research and development
tax credit carryforwards sold in 2001 were received on January 4, 2002. As of
December 31, 2001, we had State net loss carryforwards and State research and
development tax credit carryforwards available for sale of approximately
$85,100,000 and $1,600,000, respectively. The State renews the Program annually
and limits the aggregate proceeds to $10,000,000. We cannot be certain if we
will be able to sell any or all of these carryforwards under the Program.
We anticipate that our existing available cash and cash equivalents and
short-term investments will be adequate to satisfy our working capital
requirements for our current operations into 2003.
The amount of our future capital requirements will depend on numerous
factors, including the progress of our research and development programs, the
conduct of pre-clinical tests and clinical trials, the development of regulatory
submissions, the costs associated with protecting patents and other proprietary
rights, the development of marketing and sales capabilities and the availability
of third-party funding.
Because of our long-term capital requirements, we may seek access to
the public or private equity markets whenever conditions are favorable. We may
also seek additional funding through corporate collaborations and other
financing vehicles, potentially including off-balance sheet financing through
limited partnerships or corporations. There can be no assurance that such
funding will be available at all or on terms acceptable to us. If adequate funds
are not available, we may be required to curtail significantly one or more of
our research or development programs. If we obtain funds through arrangements
with collaborative partners or others, we may be required to relinquish rights
to certain of our technologies or product candidates.
Our current priorities are the evaluation and possible continued
development of ALT-711, our lead A.G.E. Crosslink Breaker candidate, and
determining the optimal course for the continued development of pimagedine. We
are focusing our resources on the development of ALT-711. As we continue
clinical development of ALT-711, we will determine if it is appropriate to
retain development and marketing rights for one or several indications in North
America, while at the same time, continuing to evaluate potential corporate
partnerships for the further development
24
and ultimate marketing of the compound throughout the world. In addition, we are
actively exploring partnering and regulatory pathways for the continued
development of pimagedine. As described above, we believe that additional
development of this compound and other product candidates will require us to
find additional sources of funding.
Effective August 7, 2000, our Common Stock was approved for listing on
the American Stock Exchange under the symbol "ALT."
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The adoption of SAB 101 had no impact on the accompanying financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which is
effective for fiscal years beginning after December 15, 2001, and addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB No. 30"), for the disposal
of a segment of a business. We plan to adopt the standard on January 1, 2002,
and do not expect that the adoption of SFAS No. 144 will have a material effect
on our results of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates
primarily to our investment in marketable securities. We do not use derivative
financial instruments in our investments. Our investments consist primarily of
debt instruments of the U.S. government, government agencies, financial
institutions and corporations with strong credit ratings. The table below
presents principal amounts and related weighted average interest rates expected
by maturity date for our investment portfolio. There are no maturities after
2002, and our exposure is limited based on the short-term nature of these
investments.
Assets 2001
------ ----
Cash equivalents:
Fixed rate............................... $ 4,249,439
Average interest rate.................... 2.06%
Short-term investments:
Fixed rate............................... $ 6,476,384
Average interest rate.................... 2.96%
-----------
Total investment securities................ $10,725,823
Average interest rate.................... 2.64%
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a) The financial statements required to be filed pursuant to
this Item 8 are appended to this Annual Report on Form 10-K. A list of the
financial statements filed herewith is found at "Index to Financial Statements
and Schedules" on page 29.
b) The unaudited quarterly financial data for the two-year
period ended December 31, 2001 is as follows:
Net Loss
Loss Before Applicable to
Income Tax Common Basic/Diluted
Revenues Expenses Benefit Stockholders Loss Per Share
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
2001
First Quarter $ 153 $ 4,181 $ (4,028) $ (4,793) $ (0.21)
Second Quarter 101 2,407 (2,306) (3,096) (0.14)
Third Quarter 107 2,321 (2,214) (3,239) (0.13)
Fourth Quarter 91 4,313 (4,222) (3,869) (0.13)
-------- -------- -------- -------- --------
Total Year $ 452 $ 13,222 $(12,770) $(14,997) $ (0.61)
2000
First Quarter $ 166 $ 2,762 $ (2,596) $ (3,305) $ (0.17)
Second Quarter 143 2,402 (2,259) (2,983) (0.15)
Third Quarter 110 3,339 (3,229) (3,977) (0.20)
Fourth Quarter 151 3,185 (3,034) (2,250) (0.11)
-------- -------- -------- -------- --------
Total Year $ 570 $ 11,668 $(11,118) $(12,515) $ (0.63)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information called for by Item 10 is incorporated by reference from
the information under the caption "Election of Directors," "Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy
Statement for our 2002 Annual Meeting of Stockholders to be held on June 5,
2002.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by Item 11 is incorporated by reference from
the information under the caption "Executive Compensation" in our Proxy
Statement for our 2002 Annual Meeting of Stockholders to be held on June 5,
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by Item 12 is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in our Proxy Statement for our 2002 Annual Meeting of
Stockholders to be held on June 5, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements:
Our audited financial statements, financial statement
schedules and the Report of Independent Public Accountants are appended to this
Annual Report on Form 10-K. Reference is made to the "Index to Financial
Statements and Schedules" on page 29.
(b) Reports on Form 8-K.
On December 18, 2001, we filed a current report on Form 8-K,
dated December 10, 2001, announcing the issuance of a key patent covering
glucose lowering agents.
On November 13, 2001, we filed a current report on Form 8-K,
dated November 7, 2001, announcing the initiation of a Phase I human testing of
ALT-711 in ESRD patients undergoing peritoneal dialysis.
On October 25, 2001, we filed a current report on Form 8-K,
dated October 23, 2001, announcing the initiation of a second Phase IIb trial of
ALT-711 in systolic hypertension.
On October 19, 2001, we filed a current report on Form 8-K,
dated October 18, 2001, announcing the appointment of Thomas A. Moore to the
Board of Directors.
(c) Exhibits.
The exhibits required to be filed are listed on the Index to
Exhibits attached hereto, which is incorporated herein by reference.
27
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 this 6th
day of March 2002.
ALTEON INC.
By: /s/ Kenneth I. Moch
-------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kenneth I. Moch Chairman of the Board, March 6, 2002
- ----------------------------------------
Kenneth I. Moch President and Chief Executive Officer
(principal executive officer)
/s/ Elizabeth O'Dell Vice President, Finance, Secretary and Treasurer
- ---------------------------------------- (principal accounting officer) March 6, 2002
Elizabeth O'Dell
/s/ Edwin Bransome, Jr., M.D. Director March 6, 2002
- ----------------------------------------
Edwin Bransome, Jr., M.D.
/s/ Marilyn G. Breslow Director March 6, 2002
- ----------------------------------------
Marilyn G. Breslow
/s/ Alan J. Dalby Director March 6, 2002
- ----------------------------------------
Alan J. Dalby
/s/ David McCurdy Director March 6, 2002
- ----------------------------------------
David McCurdy
/s/ Thomas A. Moore Director March 6, 2002
- ----------------------------------------
Thomas A. Moore
/s/ George M. Naimark, Ph.D. Director March 6, 2002
- ----------------------------------------
George M. Naimark, Ph.D.
/s/ Mark Novitch, M.D. Director March 6, 2002
- ----------------------------------------
Mark Novitch, M.D.
28
Form 10-K - Item 14(a)(1)
Alteon Inc.
Index to Financial Statements and Schedules
Page
----
Report of Independent Public Accountants - Arthur Andersen LLP.................................................... 30
Financial Statements:
Balance Sheets at December 31, 2001 and 2000.......................................................... 31
Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.................................................................. 32
Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999.................................................................. 33
Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.................................................................. 34
Notes to Financial Statements......................................................................... 35
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Alteon Inc.:
We have audited the accompanying balance sheets of Alteon Inc. (a Delaware
corporation) as of December 31, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the U.S. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alteon Inc. as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the U.S.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 22, 2002
30
ALTEON INC.
BALANCE SHEETS
ASSETS
December 31, December 31,
2001 2000
------------- -------------
Current Assets:
Cash and cash equivalents ................................................ $ 4,249,439 $ 3,600,328
Short-term investments ................................................... 6,476,384 6,354,479
Other current assets ..................................................... 1,394,765 1,735,660
------------- -------------
Total current assets .................................................. 12,120,588 11,690,467
Property and equipment, net .............................................. 1,109,676 1,696,082
Deposits and other assets ................................................ 2,815 2,815
------------- -------------
Total assets ................................................................. $ 13,233,079 $ 13,389,364
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................................... $ 307,153 $ 304,779
Accrued expenses ......................................................... 2,054,980 1,631,579
------------- -------------
Total current liabilities ............................................. 2,362,133 1,936,358
------------- -------------
Commitments and Contingencies ................................................ -- --
Stockholders' Equity:
Preferred stock, $0.01 par value, 1,993,329 shares authorized, and 992 and
912 of Series G and 2,980 and 2,739 of Series H shares issued and
outstanding, as of December 31, 2001 and December 31, 2000,
respectively .......................................................... 40 37
Common stock, $0.01 par value,
40,000,000 shares authorized, and 27,314,846 and
22,399,660 shares issued and outstanding, as of
December 31, 2001 and December 31, 2000, respectively ................. 273,148 223,997
Additional paid-in capital ............................................... 159,596,934 145,241,265
Accumulated deficit ...................................................... (149,008,641) (134,011,423)
Accumulated other comprehensive income/(loss) ............................ 9,465 (870)
------------- -------------
Total stockholders' equity ............................................ 10,870,946 11,453,006
------------- -------------
Total liabilities and stockholders' equity ................................... $ 13,233,079 $ 13,389,364
============= =============
The accompanying notes are an integral part of these balance sheets.
31
ALTEON INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Investment income .............................. $ 451,518 $ 570,444 $ 834,661
Other income ................................... -- -- 600,000
------------ ------------ ------------
Total revenues ......................... 451,518 570,444 1,434,661
------------ ------------ ------------
Expenses:
Research and development
(which includes non-cash variable stock
compensation expense in 2001 and 2000 of
$164,988 and $353,065, respectively) ........ 8,461,476 6,375,380 10,598,008
General and administrative
(which includes non-cash variable stock
compensation expense in 2001 and 2000 of
$657,295 and $890,604, respectively) ........ 4,760,747 5,312,750 4,356,447
Total expenses ......................... 13,222,223 11,688,130 14,954,455
------------ ------------ ------------
Loss before income tax benefit .................... (12,770,705) (11,117,686) (13,519,794)
Income tax benefit ............................ 1,186,921 1,547,763 2,588,210
------------ ------------ ------------
Net loss .......................................... (11,583,784) (9,569,923) (10,931,584)
Preferred stock dividends ..................... 3,203,906 2,945,451 2,707,844
Common stock warrant deemed dividends ......... 209,528 -- --
------------ ------------ ------------
Net loss applicable to common stockholders ........ $(14,997,218) $(12,515,374) $(13,639,428)
============ ============ ============
Basic/diluted loss per share to common stockholders $ (0.61) $ (0.63) $ (0.72)
============ ============ ============
Weighted average common shares used in computing
basic/diluted loss per share ................... 24,555,885 19,860,847 19,054,750
============ ============ ============
The accompanying notes are an integral part of these statements.
32
ALTEON INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
Shares Amount Shares Amount
------------- ------------- ------------- -------------
Balances at
DECEMBER 31, 1998 ................... 3,086 $ 31 18,814,740 $ 188,147
Net loss .......................... -- -- -- --
Change in unrealized gains/(losses) -- -- -- --
Comprehensive loss ................ -- -- -- --
Issuance of Series G and H
preferred stock dividends ....... 271 3 -- --
Exercise of employee stock
options ......................... -- -- 374,961 3,750
Compensation expense
in connection with the issuance
of non-qualified stock options,
stock option modifications and
options granted to non-employees -- -- -- --
------------- ------------- ------------- -------------
DECEMBER 31, 1999 ................... 3,357 34 19,189,701 191,897
Net loss .......................... -- -- -- --
Change in unrealized gains/(losses) -- -- -- --
Comprehensive loss ................ -- -- -- --
Issuance of Series G and H
preferred stock dividends ....... 294 3 -- --
Exercise of employee stock
options ......................... -- -- 375,871 3,759
Private placement of common
stock and warrants .............. -- -- 2,834,088 28,341
Compensation expense related to
variable plan employee
stock options ................... -- -- -- --
Compensation expense
in connection with the issuance
of non-qualified stock options,
stock option modifications and
options granted to non-employees -- -- -- --
------------- ------------- ------------- -------------
DECEMBER 31, 2000 ................... 3,651 37 22,399,660 223,997
Net loss .......................... -- -- -- --
Change in unrealized gains/(losses) -- -- -- --
Comprehensive loss ................ -- -- -- --
Issuance of Series G and H
preferred stock dividends ....... 321 3 -- --
Exercise of employee stock
options ......................... -- -- 415,186 4,151
Public offering of common stock ... -- -- 4,500,000 45,000
Compensation expense related to
variable plan employee
stock options ................... -- -- -- --
Common stock warrant deemed
dividends ....................... -- -- -- --
Compensation expense
in connection with the issuance
of non-qualified stock options,
stock option modifications and
options granted to non-employees -- -- -- --
------------- ------------- ------------- -------------
DECEMBER 31, 2001 ................... 3,972 $ 40 27,314,846 $ 273,148
============= ============= ============= =============
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Stockholders'
Capital Deficit Income/(Loss) Equity
------------ ------------- ------------- -------------
Balances at
DECEMBER 31, 1998 ................... $131,005,033 $(107,856,621) $ 1,768 $ 23,338,358
Net loss .......................... -- (10,931,584) -- (10,931,584)
Change in unrealized gains/(losses) -- -- (475) (475)
-------------
Comprehensive loss ................ -- -- -- (10,932,059)
-------------
Issuance of Series G and H
preferred stock dividends ....... 2,707,841 (2,707,844) -- --
Exercise of employee stock
options ......................... 162,691 -- -- 166,441
Compensation expense
in connection with the issuance
of non-qualified stock options,
stock option modifications and
options granted to non-employees 253,948 -- -- 253,948
------------ ------------- ------------- -------------
DECEMBER 31, 1999 ................... 134,129,513 (121,496,049) 1,293 12,826,688
Net loss .......................... -- (9,569,923) -- (9,569,923)
Change in unrealized gains/(losses) -- -- (2,163) (2,163)
-------------
Comprehensive loss ................ -- -- -- (9,572,086)
-------------
Issuance of Series G and H
preferred stock dividends ....... 2,945,448 (2,945,451) -- --
Exercise of employee stock
options ......................... 500,786 -- -- 504,545
Private placement of common
stock and warrants .............. 6,103,151 -- -- 6,131,492
Compensation expense related to
variable plan employee
stock options ................... 1,243,669 -- -- 1,243,669
Compensation expense
in connection with the issuance
of non-qualified stock options,
stock option modifications and
options granted to non-employees 318,698 -- -- 318,698
------------ ------------- ------------- -------------
DECEMBER 31, 2000 ................... 145,241,265 (134,011,423) (870) 11,453,006
Net loss .......................... -- (11,583,784) -- (11,583,784)
Change in unrealized gains/(losses) -- -- 10,335 10,335
-------------
Comprehensive loss ................ -- -- -- (11,573,449)
-------------
Issuance of Series G and H
preferred stock dividends ....... 3,203,903 (3,203,906) -- --
Exercise of employee stock
options ......................... 428,698 -- -- 432,849
Public offering of common stock ... 9,365,080 -- -- 9,410,080
Compensation expense related to
variable plan employee
stock options ................... 822,283 -- -- 822,283
Common stock warrant deemed
dividends ....................... 209,528 (209,528) -- --
Compensation expense
in connection with the issuance
of non-qualified stock options,
stock option modifications and
options granted to non-employees 326,177 -- -- 326,177
------------ ------------- ------------- -------------
DECEMBER 31, 2001 ................... $159,596,934 $(149,008,641) $ 9,465 $ 10,870,946
============ ============= ============= =============
The accompanying notes are an integral part of these statements.
33
ALTEON INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss ....................................................... $(11,583,784) $ (9,569,923) $(10,931,584)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization .................................. 636,565 765,601 743,820
Stock compensation expense ..................................... 326,177 318,698 253,948
Non-cash compensation expense related to
variable plan employee stock options ....................... 822,283 1,243,669 --
Changes in operating assets and liabilities:
Other current assets ........................................... 340,895 (1,486,677) 25,162
Other assets ................................................... -- -- 257,265
Accounts payable and accrued expenses .......................... 425,775 (257,844) (2,119,073)
------------ ------------ ------------
Net cash used in operating activities ...................... (9,032,089) (8,986,476) (11,770,462)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ........................................... (50,159) (62,377) (157,969)
Purchases of marketable securities ............................. (16,743,570) (11,550,202) (54,461,475)
Sales and maturities of marketable securities .................. 16,632,000 12,227,817 60,719,408
------------ ------------ ------------
Net cash (used in) provided by investing activities ........ (161,729) 615,238 6,099,964
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock ..................... 9,842,929 6,636,037 166,441
------------ ------------ ------------
Net cash provided by financing activities .................. 9,842,929 6,636,037 166,441
------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents .................. 649,111 (1,735,201) (5,504,057)
Cash and cash equivalents, beginning of period ........................ 3,600,328 5,335,529 10,839,586
------------ ------------ ------------
Cash and cash equivalents, end of period .............................. $ 4,249,439 $ 3,600,328 $ 5,335,529
============ ============ ============
Non-cash transactions:
Preferred stock dividends ......................................... 3,203,906 2,945,451 2,707,844
Common stock warrant deemed dividends ............................. 209,528 -- --
The accompanying notes are an integral part of these statements.
34
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Alteon Inc. ("Alteon" or the "Company") is a product-based
biopharmaceutical company engaged in the discovery and development of oral drugs
to reverse or inhibit cardiovascular aging and diabetic complications. The
Company's product candidates represent novel approaches to some of the largest
pharmaceutical markets, such as cardiovascular and kidney diseases. The Company
conducts its business in one operating segment. Alteon's proprietary technology
focuses on Advanced Glycosylation End-products ("A.G.E.s"). A.G.E.s ultimately
form crosslinks with adjacent proteins, leading to a loss of flexibility and
function in body tissues, vessels and organs. All of the Company's products are
in research or development, and no revenues have been generated from product
sales.
The Company's lead A.G.E. Crosslink Breaker compound, ALT-711, is
initially being developed for cardiovascular indications, including systolic
hypertension. Alteon completed a Phase IIa trial to evaluate the effect of
ALT-711 on cardiovascular compliance. Based on the positive results of this
trial, Alteon initiated two Phase IIb efficacy trials of ALT-711, the SAPPHIRE
(Systolic And Pulse Pressure Hemodynamic Improvement by Restoring Elasticity)
and SILVER (Systolic Hypertension Interaction with Left VEntricular Remodeling)
trials. The compound is also under Phase I investigation in end-stage renal
disease ("ESRD") patients undergoing peritoneal dialysis.
A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is
being clinically evaluated in skin aging for cosmetic applications. The Company
continues to evaluate product development opportunities from its A.G.E.
Crosslink Breaker compounds and other classes of compounds in its patent estate.
The Company's business is subject to significant risks including,
but not limited to, (i) its ability to obtain funding, (ii) its uncertainty of
future profitability, (iii) the risks inherent in its research and development
efforts, including clinical trials, (iv) uncertainties associated with obtaining
and enforcing its patents and with the patent rights of others, (v) the lengthy,
expensive and uncertain process of seeking regulatory approvals, (vi)
uncertainties regarding government reforms and product pricing and reimbursement
levels, (vii) technological change and competition, (viii) manufacturing
uncertainties and (ix) dependence on collaborative partners and other third
parties. Even if the Company's product candidates appear promising at an early
stage of development, they may not reach the market for numerous reasons. Such
reasons include the possibilities that the products will prove ineffective or
unsafe during clinical trials, will fail to receive necessary regulatory
approvals, will be difficult to manufacture on a large scale, will be
uneconomical to market or will be precluded from commercialization by
proprietary rights of third parties. Alteon will require substantial additional
funding in order to continue the research, product development, pre-clinical
testing and clinical trials of its product candidates. If adequate funding is
not available, the Company may be required to curtail significantly one or more
of its research or development programs and other Company activities.
Pervasiveness of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. 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.
35
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include cash and highly liquid
investments, which have a maturity of less than three months at the time of
purchase. Short-term investments are considered available-for-sale and are
recorded at fair market value, as determined by quoted market value. As of
December 31, 2001 and 2000, short-term investments were invested in debt
instruments of the U.S. government, government agencies, financial institutions
and corporations with strong credit ratings. They consist of the following:
December 31,
------------------------------
2001 2000
---------- ----------
U.S. government agency funds $5,479,434 $2,651,255
Corporate obligations ...... 996,950 3,703,224
---------- ----------
$6,476,384 $6,354,479
========== ==========
The amortized cost of short-term investments was $6,466,919 and
$6,355,349 at December 31, 2001 and December 31, 2000, respectively. Gross
unrealized gains or losses are not significant.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the useful lives
of owned assets, which range from three to five years. Leasehold improvements
and equipment under capital leases are amortized using the straight-line method
over the shorter of the lease term or the useful life of the assets.
Research and Development
Expenditures for research and development are charged to operations
as incurred.
Stock-Based Compensation
The Company accounts for employee stock-based compensation and
awards issued to non-employee directors under Accounting Principles Board
Opinion No. 25 ("APB Opinion No. 25") and related interpretations. Stock option
awards issued to consultants and contractors are accounted for in accordance
with the provision of Statement of Financial Accounting Standard No. 123 ("SFAS
No. 123"), which requires options issued to these parties to be valued at their
fair market value when computing compensation.
Net Loss Per Share
Basic loss per share is computed by dividing net loss applicable to
common stockholders by the weighted average number of shares outstanding during
the year. Diluted loss per share is the same as basic loss per share, as the
inclusion of common stock equivalents would be antidilutive.
Comprehensive Income/(Loss)
The only comprehensive income/(loss) items the Company has are
unrealized gains/(losses) on available-for-sale investments and net loss.
36
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Revenue Recognition
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The adoption of SAB 101 had no impact on the accompanying financial
statements.
Recently Issued Accounting Standards
In August 2001, Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"), which is effective for fiscal years beginning after December
15, 2001, and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121"), and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
No. 30"), for the disposal of a segment of a business. Alteon plans to adopt the
standard on January 1, 2002, and does not expect that the adoption of SFAS No.
144 will have a material effect on the Company's results of operations or
financial position.
During June 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141") and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 changes
the accounting for business combinations, requiring that all business
combinations be accounted for using the purchase method and that intangible
assets be recognized as assets apart from goodwill if they arise from
contractual or other legal rights, or if they are separable or capable of being
separated from the acquired entity and sold, transferred, licensed, rented or
exchanged. SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001. SFAS No. 142 specifies the financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets that have indefinite useful lives will not be amortized, but
rather will be tested at least annually for impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001, be reassessed and the remaining
amortization periods adjusted accordingly. Previously recognized intangible
assets deemed to have indefinite lives shall be tested for impairment. Goodwill
recognized on or before June 30, 2001, shall be assigned to one or more
reporting units and shall be tested for impairment as of the beginning of the
fiscal year in which SFAS No. 142 is initially applied in its entirety. The
Company is required to and will adopt SFAS No. 142 as of January 1, 2002. Based
on the Company's current activities, the Company does not believe the adoption
of these pronouncements will have an impact on the Company's results of
operations, cash flows or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform to
current year presentation.
37
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- PROPERTY AND EQUIPMENT
December 31,
---------------------------
2001 2000
----------- -----------
Laboratory equipment ......................... $ 1,183,034 $ 1,167,780
Furniture and equipment ...................... 686,560 686,560
Computer equipment ........................... 409,496 374,589
Leasehold improvements ....................... 5,215,069 5,215,069
----------- -----------
7,494,159 7,443,998
Less: Accumulated depreciation & amortization (6,384,483) (5,747,916)
----------- -----------
$ 1,109,676 $ 1,696,082
=========== ===========
Depreciation and amortization expense was $636,565, $765,601 and
$743,820 for the years ended December 31, 2001, 2000 and 1999, respectively.
NOTE 3 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
In December 1997, Alteon and Genentech, Inc. ("Genentech") entered
into a stock purchase agreement and a development collaboration and license
agreement providing for the development and marketing of pimagedine, a
second-generation A.G.E.-Formation Inhibitor. Pursuant to the stock purchase
agreement, Genentech purchased Common Stock, Series G Preferred Stock and Series
H Preferred Stock for an aggregate purchase price of $37,544,000 (See Note 7).
Genentech's obligations to purchase shares of Alteon's stock terminated December
31, 1998. Pursuant to a letter agreement dated February 11, 1999, between Alteon
and Genentech, the development collaboration and license agreement terminated
effective June 30, 1999.
NOTE 4 -- OTHER DEVELOPMENT AGREEMENTS
Alteon has entered into a number of licensing and collaboration
agreements relating to the development and distribution of its A.G.E-related
technology. The Company granted to Yamanouchi Pharmaceutical Co., Ltd. an
exclusive license to commercialize our A.G.E.-Formation Inhibitor, pimagedine,
in Japan, South Korea, Taiwan and The People's Republic of China. Alteon has
entered into an exclusive licensing arrangement with Roche Diagnostics GmbH for
Alteon's technology for diagnostic applications, and we have also entered into
clinical testing and distribution agreements with Gamida for Life which grant
Gamida the exclusive right to distribute pimagedine, if successfully developed
and approved for marketing, in Israel, Bulgaria, Cyprus, Jordan and South
Africa. Alteon has a license and supply agreement with IDEXX Laboratories, Inc.
pursuant to which the Company licensed pimagedine to IDEXX as a potential
therapeutic in companion animals (dogs, cats and horses) and Alteon's A.G.E.
diagnostics technology for companion animal use. All of these agreements will
entitle Alteon to receive royalties on sales if any products covered by the
agreements are developed and sold.
In October 2000, Alteon entered into an agreement with HemoMax, LLC
("HemoMax") for the development of a novel technology designed to increase the
delivery of oxygen to tissues in the body through enhanced blood circulation. On
February 9, 2002, HemoMax advised Alteon that because of uncertainties regarding
its ability to receive patents adequate to support commercialization of the
technology, it has decided to cease operations and liquidate.
In August 1999, Alteon and Taisho Pharmaceutical Co., Ltd.
("Taisho") entered into an agreement under which Taisho was granted an exclusive
option through December 31, 1999, to acquire a license to Alteon's lead A.G.E.
Crosslink Breaker, ALT-711, for Japan, South Korea, Taiwan and The People's
Republic of China for a non-refundable option fee of $600,000. This amount is
reflected in other income in the statement of operations. The option expired on
December 31, 1999.
38
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Alteon has also entered into a number of academic research and
license agreements. Pursuant to an agreement with Rockefeller University, we
have exclusive, royalty-free, worldwide and perpetual rights to the technology
and inventions relating to A.G.E.s and other protein crosslinking, including
those relating to the complications of aging and diabetes. The Company also
obtained an exclusive, worldwide, royalty-bearing license from Washington
University for patents covering the use of pimagedine as an inhibitor of
inducible nitric oxide synthase. In addition Alteon received from The Picower
Institute for Medical Research ("The Picower Institute") an exclusive worldwide,
royalty-bearing license for certain commercial health care applications of
A.G.E.-related inventions. On December 31, 2001, The Picower Institute ceased
operations, and we expect to assume all responsibility and costs for the
worldwide filing and prosecution of patent applications and maintenance of
patents for such inventions.
Alteon's commercial partners may develop, either alone or with
others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the commercial
partners or to which the commercial partners have rights, may result in their
withdrawal of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has also entered into various arrangements with
independent research laboratories to conduct studies in conjunction with the
development of the Company's technology. The Company receives certain rights to
inventions or discoveries that may arise from this research.
NOTE 5 -- ACCRUED EXPENSES
December 31,
----------------------------
2001 2000
---------- ----------
Clinical trial expense ..... $1,379,693 $ 848,745
Professional fees .......... 191,000 291,000
Payroll and related expenses 224,287 167,680
Rent expense ............... 100,673 155,585
Patent fees ................ 85,571 111,529
Other ...................... 73,756 57,040
---------- ----------
$2,054,980 $1,631,579
========== ==========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases its headquarters and research facility and
related equipment and furniture under non-cancelable operating leases. As of
December 31, 2001, future minimum rentals under operating leases that have
initial or remaining non-cancelable terms in excess of one year are as follows:
Operating
Leases
--------
2002 ................ $536,500
2003 ................ 447,000
Thereafter........... --
--------
$983,500
========
Rent expense for each of the years in the three-year period ended
December 31, 2001 was $599,655, $586,294 and $573,962, respectively.
39
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Contingencies
The Company is party to various claims and lawsuits arising in the
normal course of business. In the opinion of management, these suits and claims
will not result in judgments or settlements which, in the aggregate, would have
a material adverse effect on the Company's condition or the results of
operations.
NOTE 7 -- STOCKHOLDERS' EQUITY
Common/Preferred Stock Issuances
In July 2001, Alteon completed a public offering of 4,500,000 shares
of common stock, which provided net proceeds of approximately $9,365,000. In
connection with this offering, certain previously issued warrants were repriced
from $3.40 to $2.25 per share pursuant to antidilution provisions connected to
the warrants. Such repricing resulted in a $209,528 deemed dividend on the
underlying common stock.
In September 2000, Alteon entered into an agreement with several
investors pursuant to which Alteon sold, in a private placement, an aggregate of
2,834,088 shares of common stock and warrants to purchase 1,133,636 shares of
common stock (the "Warrants") for an aggregate purchase price of $6,235,000. The
adjusted exercise price of the Warrants is $2.25 per share, while the term is
seven years.
In December 1997, the Company and Genentech entered into a stock
purchase agreement pursuant to which Genentech agreed to buy shares of Common
Stock, Series G Preferred Stock and Series H Preferred Stock (See Note 3). In
December 1997, Genentech purchased Common Stock and Series G Preferred Stock for
an aggregate purchase price of $15,000,000. On July 27, 1998 and October 1,
1998, Genentech purchased $8,000,000 and $14,544,000 respectively, of Series H
Preferred Stock. As of December 31, 2001, 2000 and 1999 respectively,
approximately $3,204,000, $2,945,000 and $2,708,000 of Preferred Stockholder
Dividends were recorded. Series G Preferred Stock and Series H Preferred Stock
Dividends are payable quarterly in shares at a rate of 8.5%. Each share of
Series G Preferred Stock and Series H Preferred Stock is convertible upon 70
days' prior written notice into a number of shares of common stock determined by
dividing $10,000 by the average of the closing sales price of the common stock,
as reported on the American Stock Exchange for the 20 business days immediately
preceding the date of conversion.
In connection with an April 1997 offering, warrants to purchase
60,000 shares of common stock at an exercise price of $4.025 per share are still
outstanding.
Stock Option Plan
The Company has established two stock option plans for its
employees, officers, directors, consultants and independent contractors. Options
to purchase up to 4,192,000 shares of common stock may be granted under the
first plan and options to purchase up to 7,000,000 shares of common stock may be
granted under the second plan.
The plans are administered by a committee of the Board of Directors,
which may grant either non-qualified or incentive stock options. The committee
determines the exercise price and vesting schedule at the time the option is
granted. Options vest over various periods and may expire no later than 10 years
from date of grant. Each option entitles the holder to purchase one share of
common stock at the indicated exercise price. The plans also provide for certain
antidilution and change in control rights, as defined.
40
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the activity in the Company's stock
options:
Exercise Weighted Average
Price Range Exercise Price
Options Per Share Per Share
--------------- --------------- ---------------
Balance, December 31, 1998 4,799,260 $5.39
Granted .................. 1,928,701 $0.780 - $1.125 0.99
Exercised ................ (374,961) 0.300 - 0.600 0.44
Canceled ................. (1,277,804) 0.810 - 15.000 3.88
----------- -----
Balance, December 31, 1999 5,075,196 $3.40
Granted .................. 1,105,820 $1.630 - $7.000 4.57
Exercised ................ (375,871) 0.600 - 5.130 1.34
Canceled ................. (550,326) 0.600 - 9.500 1.12
----------- -----
Balance, December 31, 2000 5,254,819 $4.02
Granted .................. 873,942 $2.600 - $4.150 3.13
Exercised ................ (415,186) 0.844 - 1.125 1.04
Canceled ................. (1,008,269) 0.813 - 11.150 8.53
------------
-----
Balance, December 31, 2001 4,705,306 $3.15
============ =====
The following table summarizes information regarding stock options
outstanding at December 31, 2001:
Options Outstanding at Options Exercisable at
December 31, 2001 December 31, 2001
---------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Range of Average Average Number of Average
Exercise Number of Remaining Exercise Shares Exercise
Prices Shares Contractual Life Price Exercisable Price
- ------------------ --------- ------- ------- --------- -------
$0.7810 - $1.0630 1,493,512 6.15 $0.9500 1,433,356 $0.9532
$1.1250 - $3.5200 1,179,593 8.81 $1.9770 585,156 $1.2970
$3.5625 - $5.1250 1,238,076 7.76 $3.9428 725,235 $4.0525
$5.3750 - $15.0000 794,125 5.49 $7.7841 592,412 $8.0511
- ------------------ --------- ------- ------- --------- -------
$0.7810 - $15.0000 4,705,306 7.13 $3.1484 3,336,159 $2.9476
The weighted average fair value of the options granted was $3.13,
$2.54 and $0.53 during 2001, 2000 and 1999, respectively. Included in options at
December 31, 2001, are 1,095,000 options granted to certain executives with
option prices ranging from $0.875 per share to $3.90 per share, the fair market
value on the date of grant. Such options vest upon the earlier of five years
after grant or upon achievement of certain Company milestones.
The Company accounts for its stock option plans for options granted
to employees and non-employee directors under APB Opinion No. 25, under which no
compensation cost (excluding those options granted below fair market value) has
been recognized. Had compensation costs for these plans been determined
consistent with SFAS No. 123, the Company's pro forma net loss and loss per
share applicable to common stockholders for 2001, 2000 and 1999 would have been
$16,507,000, $13,651,000 and $13,935,000, and $0.67, $0.69 and $0.73,
respectively. Stock option awards issued to consultants and contractors have
been accounted for in accordance with SFAS No. 123. The 2001, 2000 and 1999 pro
forma net loss and loss per share applicable to common stockholders reflects a
benefit of $53,000, $157,000 and $1,458,000, respectively, for the reversal of
previously recognized pro forma compensation costs on options forfeited.
Consistent with SFAS No. 123, the Company elected not to estimate these
forfeitures in the prior period pro forma compensation cost calculation. Because
SFAS No. 123 has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation cost may not be representative of that to
be expected in future years.
41
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Under SFAS No. 123, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 2001, 2000 and 1999, respectively;
risk free interest rates ranging from 2.04% to 5.30%, 5.24% to 6.64% and 4.73%
to 6.07%, respectively; expected life of 2.02 years over the vesting periods;
expected dividend yield of 0%; and expected volatility of 70%.
In March 2000, the FASB released Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25". The interpretation became effective on July 1, 2000, but in
some circumstances applies to transactions that occurred prior to the effective
date. Under the interpretation, stock options that are repriced must be
accounted for as variable-plan arrangements until the options are exercised,
forfeited or expire. This requirement applies to any options repriced after
December 15, 1998. On February 2, 1999, the Company repriced certain stock
options. The total non-cash stock compensation expense resulting from the
repricing for the years ended December 31, 2001 and December 31, 2000 is
$822,283 and $1,243,669 respectively, which includes research and development
charges of $164,988 and $353,065, and general and administrative charges of
$657,295 and $890,604, respectively. As of December 31, 2001, there are
approximately 605,000 repriced options outstanding.
NOTE 8 -- SAVINGS AND RETIREMENT PLAN
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code which allows eligible employees to annually
contribute a portion of their annual salary to the plan. In 1998, the Company
began making discretionary contributions at a rate of 25% of an employee's
contribution up to a maximum of 5% of the employee's base salary. The Company
made contributions of $38,669, $30,530 and $49,000 for the years ended December
31, 2001, 2000 and 1999, respectively.
NOTE 9 -- RELATED PARTY TRANSACTIONS
Since the Company's inception, the Company has entered into certain
collaborative agreements with organizations with which Dr. Anthony Cerami, a
former member of the Company's Board of Directors, was affiliated. These
organizations included The Picower Institute, The Rockefeller University, Cerami
Consulting Corporation and the Kenneth S. Warren Laboratories, Inc. The Company
paid to the organizations $0, $0 and $243,000 in 2001, 2000, and 1999,
respectively. In addition, the Company paid patent maintenance fees for
technology related to the organizations of $17,000, $120,000 and $73,000 in
2001, 2000 and 1999, respectively. Although the Company has terminated its
collaborative relationship with The Picower Institute, the Company has a royalty
obligation on all net sales and other revenues associated with certain
technologies developed, payable to The Picower Institute's successor. Effective
May 17, 1999, the Company terminated its consulting agreement with Cerami
Consulting Corporation and its research agreement with Kenneth S. Warren
Laboratories, Inc. In addition, Dr. Cerami resigned from the Company's Board of
Directors on April 19, 1999.
Prior to 2000, the Company had a Scientific Advisory Board. The
Chairman and two other Scientific Advisory Board members provided consulting
services to the Company. Consulting fees paid to these members totaled $55,000
in 1999.
NOTE 10 -- INCOME TAXES
At December 31, 2001, the Company had available Federal net
operating loss carryforwards, which expire in the years 2006 through 2020, of
approximately $135,500,000 for income tax purposes and State net operating loss
carryforwards, which expire in the years 2002 through 2007, of approximately
$85,100,000. In addition, the Company has Federal research and development tax
credit carryforwards of approximately $5,100,000 and State research and
development tax credit carryforwards of approximately $1,600,000. The amount of
Federal net operating loss and research and development tax credit carryforwards
which can be utilized in any one period may
42
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
become limited by Federal income tax regulations if a cumulative change in
ownership of more than 50% occurs within a three-year period.
The components of the deferred tax assets and the valuation
allowance are as follows:
December 31,
------------------------------
2001 2000
------------ ------------
Net operating loss carryforwards $ 51,300,000 $ 47,700,000
Research and development credit 6,700,000 7,100,000
Other temporary differences .... 4,100,000 2,400,000
------------ ------------
Gross deferred tax assets ...... 62,100,000 57,200,000
Valuation allowance ............ (62,100,000) (57,200,000)
------------ ------------
Net deferred tax assets ........ $ -- $ --
============ ============
A valuation allowance was established since the realization of the
Company's deferred tax assets is uncertain. In 2001, 2000 and 1999, the Company
sold $6,243,000, $14,129,000 and $27,687,000, respectively, of its gross State
net operating loss carryforwards and $802,000, $590,000 and $645,000,
respectively, of its State research and development tax credit carryforwards
under the State of New Jersey's Technology Business Tax Certificate Transfer
Program (the "Program"). The Program allows qualified technology and
biotechnology business in New Jersey to sell unused amounts of net operating
loss carryforwards and defined research and development tax credits for cash.
The proceeds from the sale in 2001, 2000 and 1999 were approximately $1,187,000,
$1,548,000 and $2,588,000, respectively, and such amounts were recorded as a tax
benefit in the statements of operations. The proceeds from the sale of the net
operating loss carryforwards and the research and development tax credit
carryforwards sold in 2001 were received on January 4, 2002. The State renews
the Program annually and limits the aggregate proceeds to $10,000,000. Due to
the uncertainty at any time as to the Company's ability to effectuate the sale
of Alteon's available State net operating losses, since the Company has no
control or influence over the program, the benefits are recorded once the
agreement with the counterpart is signed and the sale is approved by the State.
NOTE 11 - SUBSEQUENT EVENT
In January 2002, Alteon completed a public offering of 4,450,000
shares of common stock, which provided net proceeds of approximately
$18,588,000.
43
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed
on November 10, 1999).
3.2 Certificate of the Voting Powers, Designations, Preference and
Relative Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Series F Preferred
Stock of the Company. (Incorporated by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2000).
3.3 Certificate of Retirement dated September 10, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's Report on
Form 10-Q filed on November 10, 1999).
3.4 Certificate of Designations of Series G Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
3.5 Certificate of Amendment of Certificate of Designations of Series G
Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit
3.4 to the Company's Report on Form 10-Q filed on August 14, 1998).
3.6 Certificate of Designations of Series H Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
3.7 Amended Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the
Company's Report on Form 10-Q filed on August 14, 1998).
3.8 Certificate of Retirement dated November 20, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000).
3.9 Certificate of Amendment to Restated Certificate of Incorporation of
Alteon Inc., dated June 7, 2001 (Incorporated by reference to
Exhibit 3.8 to the Company's Report on Form 10-Q filed on August 14,
2001).
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.7 to
the Company's Report on Form 10-Q filed on May 12, 1999).
4.1 Stockholders' Rights Agreement dated as of July 27, 1995, between
Alteon Inc. and Registrar and Transfer Company, as Rights Agent.
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000).
4.2 Amendment to Stockholders' Rights Agreement dated as of April 24,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K filed on May 9, 1997).
4.3 Registration Rights Agreement dated as of April 24, 1997, between
Alteon Inc. and the investors named on the signature page thereof.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on May 9, 1997).
4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May
9, 1997).
4.5 Amendment to Stockholders' Rights Agreement dated as of December 1,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on December 10, 1997).
4.6 Registration Rights Agreement dated September 29, 2000.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 5, 2000).
4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on October 5, 2000).
4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed on October 5, 2000).
10.1+ Amended and Restated 1987 Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.2+ Amended 1995 Stock Option Plan.
10.3 Form of Employee's or Consultant's Invention Assignment,
Confidential Information and Non-Competition Agreement executed by
all key employees and consultants as employed or retained from time
to time. (Incorporated by Reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File Number 33-42574), which
became effective on November 1, 1991).
10.4 Amendment and Assignment of Research and Option Agreement dated as
of September 25, 1987, among Telos Development Corporation
("Telos"), The Rockefeller University ("The Rockefeller"), the
Company and Anthony Cerami. (Incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1 (File
Number 33-42574), which became effective on November 1, 1991).
10.5 License Agreement dated as of September 25, 1987, among Telos,
Applied Immune Sciences, Inc., the Company and The Rockefeller, as
amended by letter agreement dated September 25, 1987, and letter
agreement dated August 15, 1991. (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-1
(File Number 33-42574), which became effective on November 1, 1991).
10.6* License Agreement dated as of June 16, 1989, between the Company and
Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"). (Incorporated by
reference to Exhibit 10.17 to the Company's Registration Statement
on Form S-1 (File Number 33-42574), which became effective on
November 1, 1991).
10.7* Research and License Agreement dated as of September 5, 1991,
between the Company and The Picower Institute for Medical Research.
(Incorporated by reference to Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (File Number 33-42574), which
became effective on November 1, 1991).
10.8 Lease Agreement dated January 11, 1993, between Ramsey Associates
and the Company. (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
10.9* License Agreement dated as of December 30, 1994, between the Company
and Corange International Limited. (Incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.10* Research Collaboration and License Agreement dated as of June 2,
1995, between Washington University and the Company. (Incorporated
by reference to Exhibit 10.10 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000).
10.11 Distribution Agreement dated September 25, 1995, between the Company
and Eryphile BV. (Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
10.12+ Employment Agreement dated as of October 21, 2000, between the
Company and Elizabeth O'Dell. (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.13+ Alteon Inc. Change in Control Severance Benefits Plan. (Incorporated
by reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000).
10.14 Preferred Stock Investment Agreement dated as of April 24, 1997,
between Alteon Inc. and the investors named on the signature page
thereof. (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on May 9, 1997).
10.15* License and Supply Agreement dated June 17, 1997, between IDEXX
Laboratories, Inc. and Alteon Inc. (Incorporated by reference to
Exhibit 10.1 to the Company's Report on Form 10-Q filed on August
13, 1997).
10.16 Stock Purchase Agreement dated as of December 1, 1997, between
Alteon Inc. and Genentech, Inc. (Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
December 10, 1997).
10.17+ Amended and Restated Employment Agreement dated as of December 15,
1998, between the Company and Kenneth I. Moch (Incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.18 Letter Agreement dated February 11, 2000, between the Company and
Genentech, Inc. (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on February 19, 1999).
10.19+ Consulting Agreement dated as of December 15, 1998, between the
Company and Mark Novitch, M.D., as amended by letter agreement dated
as of January 18, 2001. (Incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.20+ Employment Agreement dated as of March 14, 2000, between the Company
and Robert deGroof, Ph.D. (Incorporated by reference to Exhibit 10.1
to the Company's Report on Form 10-Q filed on May 12, 2000).
10.21 Common Stock and Warrants Purchase Agreement dated as of September
29, 2000, among Alteon Inc. and EGM Medical Technology Fund, L.P.,
EGM Technology Offshore Fund, Narragansett I, L.P., Narragansett
Offshore, Ltd., S.A.C. Capital Associates, LLC, SDS Merchant Fund,
LP and Herriot Tabuteau. (Incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on October 5,
2000).
10.22* Development Services Agreement dated September 25, 2000.
(Incorporated by reference to Exhibit 10.2 to the Company's Report
on Form 10-Q filed on November 13, 2000).
10.23+ Letter Agreement dated December 3, 2001 between the Company and
Kenneth I. Moch amending Amended and Restated Employment Agreement
dated as of December 15, 1998.
23.1.1 Consent of Independent Public Accountants.
- ---------------
* Confidentiality has been granted for a portion of this exhibit.
+ Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) to this Form 10-K.