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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
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 | |.
On August 5, 2002, 31,878,525 shares of Registrant's Common Stock were
outstanding.
Page 1 of 21 pages
The Exhibit Index is on page 21
ALTEON INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 2002 and
December 31, 2001........................................... 3
Statements of Operations for the three and
six months ended June 30, 2002 and 2001..................... 4
Statements of Cash Flows for the six months
ended June 30, 2002 and 2001................................ 5
Notes to Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 4. Submission of Matters to a Vote of Security-Holders........... 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES ............................................................ 20
INDEX TO EXHIBITS ..................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2002 2001
------------- -------------
Current Assets:
Cash and cash equivalents .................................................. $ 9,382,914 $ 4,249,439
Short-term investments ..................................................... 12,946,000 6,476,384
Other current assets ....................................................... 539,649 1,394,765
------------- -------------
Total current assets ..................................................... 22,868,563 12,120,588
Property and equipment, net ................................................ 822,099 1,109,676
Deposits and other assets .................................................. -- 2,815
------------- -------------
Total assets .................................................................. $ 23,690,662 $ 13,233,079
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................... $ 984,944 $ 307,153
Accrued expenses ........................................................... 3,107,231 2,054,980
------------- -------------
Total current liabilities ................................................ 4,092,175 2,362,133
------------- -------------
Stockholders' Equity:
Preferred Stock, $0.01 par value, 1,993,329 shares authorized, and 1,034 and
992 of Series G and 3,106 and 2,980 of Series H shares issued and
outstanding, as of June 30, 2002 and
December 31, 2001, respectively .......................................... 41 40
Common Stock, $0.01 par value, 80,000,000 shares authorized, and 31,878,525
and 27,314,846 shares issued and outstanding, as of
June 30, 2002 and December 31, 2001, respectively ........................ 318,785 273,148
Additional paid-in capital ................................................. 178,562,832 159,596,934
Accumulated deficit ........................................................ (159,286,150) (149,008,641)
Accumulated other comprehensive income ..................................... 2,979 9,465
------------- -------------
Total stockholders' equity ............................................... 19,598,487 10,870,946
------------- -------------
Total liabilities and stockholders' equity .................................... $ 23,690,662 $ 13,233,079
============= =============
The accompanying notes are an integral part of these unaudited statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Investment income ....................................... $ 116,980 $ 100,118 $ 252,644 $ 252,646
------------ ------------ ------------ ------------
Expenses:
Research and development (which includes non-cash
variable stock compensation (benefit)/expense of
$(46,678) and $(101,482) for the three months ended
June 30, 2002 and June 30, 2001, respectively, and
$(93,516) and $136,155, for the six months ended June
30, 2002 and June 30, 2001, respectively) ............ 4,364,157 1,990,639 7,651,414 4,201,180
General and administrative (which includes non-cash
variable stock compensation (benefit)/expense of
$(728,528) and $(757,899) for the three months ended
June 30, 2002 and June 30, 2001, respectively, and
$(1,315,635) and $73,289 for the six months ended June
30, 2002 and June 30, 2001, respectively) ............ 597,028 415,864 1,187,020 2,385,984
------------ ------------ ------------ ------------
Total expenses ..................................... 4,961,185 2,406,503 8,838,434 6,587,164
------------ ------------ ------------ ------------
Net loss ................................................... $ (4,844,205) $ (2,306,385) $ (8,585,790) $ (6,334,518)
Preferred stock dividends .............................. 859,304 789,985 1,691,719 1,555,250
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders ..................................... $ (5,703,509) $ (3,096,370) $(10,277,509) $ (7,889,768)
============ ============ ============ ============
Basic/diluted net loss per share
to common stockholders .................................. $ (0.18) $ (0.14) $ (0.32) $ (0.35)
============ ============ ============ ============
Weighted average common shares used
in computing basic/diluted net loss per share ........... 31,838,057 22,599,826 31,656,256 22,545,183
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months
Ended June 30,
---------------------------
2002 2001
------------ -----------
Cash Flows from Operating Activities:
Net loss ........................................................... $ (8,585,790) $(6,334,518)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ...................................... 317,337 322,258
Amortization of deferred compensation .............................. 3,237 89,315
Non-cash compensation (benefit)/expense related to
variable plan employee stock options ............................. (1,409,151) 209,444
Changes in operating assets and liabilities:
Other assets ....................................................... 857,931 1,027,484
Accounts payable and accrued expenses .............................. 1,730,042 111,637
------------ -----------
Net cash used in operating activities ............................ (7,086,394) (4,574,380)
------------ -----------
Cash Flows from Investing Activities:
Capital expenditures ............................................... (29,760) (21,966)
Purchases of marketable securities ................................. (11,979,102) (6,250,423)
Sales and maturities of marketable securities ...................... 5,503,000 8,249,000
------------ -----------
Net cash (used in)/provided by investing activities .............. (6,505,862) 1,976,611
------------ -----------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock ......................... 18,725,731 283,920
------------ -----------
Net increase/(decrease) in cash and cash equivalents .................. 5,133,475 (2,313,849)
Cash and cash equivalents, beginning of period ........................ 4,249,439 3,600,328
------------ -----------
Cash and cash equivalents, end of period .............................. $ 9,382,914 $ 1,286,479
============ ===========
Non-cash transactions:
Preferred stock dividends .......................................... $ 1,691,719 $ 1,555,250
The accompanying notes are an integral part of these unaudited statements.
5
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of Management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
six months ended June 30, 2002, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The Company's 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 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.
The Company anticipates that at its current spending level, existing
available cash and cash equivalents and short-term investments will be adequate
to satisfy working capital requirements for its current operations through the
second quarter of 2003. Alteon will require substantial additional funding in
order to continue the research, product development, pre-clinical testing and
clinical trials of its product candidates and to bring such products to
commercialization. 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.
NOTE 2 - CASH, 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 value, as determined by quoted market value, with changes in fair value
recorded as a component of accumulated other comprehensive income. As of June
30, 2002 and December 31, 2001, 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:
June 30, December 31,
2002 2001
----------- ----------
U.S. government agency funds $12,946,000 $5,479,434
Corporate obligations ....... -- 996,950
----------- ----------
$12,946,000 $6,476,384
=========== ==========
NOTE 3 - NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
outstanding during the period. Diluted loss per share is the same as basic loss
per share, since the assumed exercise of stock options and warrants and the
conversion of preferred stock would be antidilutive. The amount of common stock
equivalents excluded from the calculation as of June 30, 2002, was 25,342,161.
6
NOTE 4 - COMPREHENSIVE INCOME/(LOSS)
The following sets forth comprehensive income/(loss) for the three and six
months ended June 30, 2002 and 2001:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Loss ................... $(4,844,205) $(2,306,385) $(8,585,790) $(6,334,518)
Net Unrealized Gain/(Loss)
on Short-Term Investments 11,868 (6,789) (6,486) 4,551
----------- ----------- ----------- -----------
Comprehensive Loss ......... $(4,832,337) $(2,313,174) $(8,592,276) $(6,329,967)
=========== =========== =========== ===========
NOTE 5 - STOCK COMPENSATION
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 occurred prior to the effective date. Under the
interpretation, stock options that are repriced must be accounted for as
variable-plan arrangements. This interpretation requires the Company to record
compensation expense or benefit, which is adjusted every quarter, for increases
or decreases in the fair value of the repriced options based on changes in our
stock price from the value at July 1, 2000, 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 (benefit)/expense resulting from
the repricing for the three months ended June 30, 2002 and June 30, 2001, is
$(775,206) and $(859,381), respectively, and for the six months ended June 30,
2002 and June 30, 2001, is $(1,409,151) and $209,444, respectively.
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement of Financial Accounting
Standards ("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 adopted the standard on January 1, 2002, and the adoption of
SFAS No. 144 did not have a material effect on the Company's results of
operations or financial position.
During June 2001, the FASB issued SFAS 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 adopted SFAS No. 142
as of January 1, 2002.
The adoption of this pronouncement did not have any impact on the
Company's results of operations, cash flows or financial position.
NOTE 7 - STOCKHOLDERS' EQUITY
In January 2002, Alteon completed a public offering of 4,450,000 shares of
common stock at $4.25 per share, which provided net proceeds of $18,610,521.
7
Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock. For the three months ended June
30, 2002 and June 30, 2001, preferred stock dividends were $859,304 and
$789,985, respectively, and for the six months ended June 30, 2002 and June 30,
2001, preferred stock dividends were $1,691,719 and $1,555,250, respectively.
NOTE 8 - SUBSEQUENT EVENT
Alteon and Yamanouchi Pharmaceutical Co, Ltd. ("Yamanouchi") have entered
into a letter agreement, which terminated their License Agreement dated as of
June 16, 1989, effective as of August 5, 2002. Pursuant to the letter agreement,
for a period of fifteen years, (i) Alteon will pay Yamanouchi royalties on any
sales of pimagedine or pimagedine products in the territory covered by the
License Agreement and (ii) Alteon will have the option to purchase from
Yamanouchi all or any part of its common stock owned by Yamanouchi.
8
ITEM 2. 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 slow down diseases of
aging and complications of diabetes. 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
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 and diastolic heart
failure ("DHF"). We have completed a Phase IIa trial to evaluate the effect of
ALT-711 on cardiovascular compliance. Based on positive results that
demonstrated the ability of ALT-711 to increase the elasticity of the
cardiovascular system, we have 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 being evaluated in a Phase
IIa trial in DHF, the DIAMOND (Distensibility Improvement And ReMOdeliNg in
Diastolic Heart Failure) trial, as well as a Phase I program in end-stage renal
disease patients undergoing peritoneal dialysis.
We have exceeded the targeted enrollment of 180 patients in the SILVER
trial, but will continue to enroll patients in this trial until we have enrolled
450 patients in the SAPPHIRE trial, which is expected to be in the fourth
quarter 2002. Data from both trials, as well as the data from the DIAMOND trial
of 20 patients, will be unblinded in 2003.
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 $159,286,000 as of June 30, 2002, 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 net operating loss carryforwards.
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 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
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Total revenues for the three months ended June 30, 2002, and the three
months ended June 30, 2001, were $117,000 and $100,000, respectively. Revenues
were derived from interest earned on cash and cash equivalents and short-term
investments. The 17.0% increase in income was attributable to larger investment
balances, partially offset by the decrease in short-term interest rates.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Our total expenses were $4,961,000 for the three months ended June 30,
2002, compared to $2,407,000 for the three months ended June 30, 2001, and in
each year consisted primarily of research and development expenses. Research and
development expenses included 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
facility expenses. Research and development expenses were $4,364,000 for the
three months ended June 30, 2002 and primarily consisted of $1,771,000 in
clinical trial expenses related to the Phase IIb SAPPHIRE and SILVER trials,
$764,000 related to manufacturing (process development, tablet manufacturing and
packaging) and drug stability studies, $191,000 in pre-clinical expenses,
$881,000 in personnel and personnel-related expenses and a non-cash variable
stock compensation (benefit)/expense of $(47,000). Research and development
expenses for the three months ended June 30, 2001, were $1,991,000, and
primarily consisted of $131,000 in clinical trial expenses related to the close
of a Phase I pharmacokinetic study of ALT-711, $694,000 of manufacturing
expenses and drug stability studies associated with the ALT-711 programs,
$515,000 in personnel and personnel-related expenses and a non-cash variable
stock compensation (benefit)/expense of $(101,000).
Excluding the non-cash variable stock compensation benefit, research and
development expenses increased by $2,319,000, or 110.8%, primarily due to the
Phase IIb SAPPHIRE and SILVER clinical trials. These trials were initiated
during the second half of 2001, and are now actively enrolling patients. The
release of data for these trials is targeted for 2003.
The development and successful commercialization of ALT-711 are subject to
substantial risks described in this Report. See, for example, "Forward-Looking
Statements and Cautionary Statements--If we do not successfully develop any
products, we may not derive any revenues."
General and administrative expenses increased to $597,000 for the three
months ended June 30, 2002, compared to $416,000 for the same period in 2001,
and included a non-cash variable stock compensation (benefit)/expense of
$(729,000) and $(758,000), respectively, which resulted from a decline in our
stock price. Excluding the non-cash variable stock compensation, general and
administrative expenses increased $152,000, or 12.9%, primarily due to an
increase in patent expense.
Our net loss applicable to common stockholders increased to $5,704,000 for
the three months ended June 30, 2002, compared to $3,096,000 in the same period
in 2001, an increase of 84.2%. This was primarily a result of increased clinical
trial expenses due to the ongoing Phase IIb SAPPHIRE and SILVER trials,
decreased interest rates on investment balances and increased preferred stock
dividends. Included in the net loss applicable to common stockholders are
preferred stock dividends of approximately $859,000 and $790,000 for the three
months ended June 30, 2002 and 2001, respectively.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Total revenues for the six months ended June 30, 2002, and the six months
ended June 30, 2001, were $253,000 and $253,000, respectively. Revenues were
derived from interest earned on cash and cash equivalents and short-term
investments. Total revenues were unchanged due to larger investment balances,
offset by a significant decrease in short-term interest rates.
Our total expenses were $8,838,000 for the six months ended June 30, 2002,
compared to $6,587,000 for the six months ended June 30, 2001, and in each year
consisted primarily of research and development expenses. Research and
development expenses for the six months ended June 30, 2002 were $7,651,000 and
primarily consisted of $2,822,000 in clinical trial expenses related to the
Phase IIb SAPPHIRE and SILVER trials, $1,634,000 related to the manufacturing of
the active ingredient for ALT-711, process development, packaging, tablet
manufacturing and drug stability studies, $420,000 in pre-clinical expenses,
$1,549,000 in personnel and personnel-related expenses and a non-cash variable
stock compensation (benefit)/expense of $(94,000). Research and development
expenses for the six months ended June 30, 2001, were $4,201,000 and primarily
consisted of $257,000 in clinical trial expenses related to a Phase I
pharmacokinetic study of ALT-711, $1,292,000 of manufacturing expenses and drug
stability studies associated with the ALT-711 programs, $1,335,000 in personnel
and personnel-related expenses and a non-cash variable stock compensation
(benefit)/expense of $136,000.
Excluding the non-cash variable stock compensation (benefit)/expense),
research and development expenses increased by $3,680,000, or 90.5%, primarily
due to the Phase IIb SAPPHIRE and SILVER clinical trials. These trials were
initiated during the second half of 2001, and are now actively enrolling
patients. The release of data for these trials is targeted for 2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The development and successful commercialization of ALT-711 are subject to
substantial risks described in this Report. See, for example, "Forward-Looking
Statements and Cautionary Statements--If we do not successfully develop any
products, we may not derive any revenues."
General and administrative expenses decreased to $1,187,000 for the six
months ended June 30, 2002, compared to $2,386,000 for the same period in 2001,
and included a non-cash variable stock compensation (benefit)/expense of
$(1,316,000) and $73,000, respectively. Excluding the non-cash variable stock
compensation (benefit)/expense, general and administrative expenses increased
$190,000, or 8.2%, primarily due to increased patent and recruiting fees.
Our net loss applicable to common stockholders increased to $10,278,000
for the six months ended June 30, 2002, compared to $7,890,000 in the same
period in 2001, an increase of 30.3%. This was primarily a result of increased
research and development expenses due to increased enrollment in the Phase IIb
SAPPHIRE and SILVER clinical trials and increased preferred stock dividends,
offset by a non-cash stock compensation benefit. Included in the net loss
applicable to common stockholders are preferred stock dividends of approximately
$1,692,000 and $1,555,000 for the six months ended June 30, 2002 and 2001,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short-term investments at June 30, 2002,
of $22,329,000, compared to $10,726,000 at December 31, 2001. This is an
increase in cash and cash equivalents and short-term investments for the six
months ended June 30, 2002, of $11,603,000. This consisted of $18,611,000 of net
proceeds from a public offering of common stock and $115,000 of proceeds from
stock option exercises. This was offset by $7,086,000 of cash used in
operations, net of $1,187,000 in proceeds from the sale of our NOLs, and
consisted primarily of research and development expenses, personnel-related
costs and facility expenses, and approximately $30,000 in capital expenditures.
In January 2002, we completed a public offering of 4,450,000 shares of
common stock at $4.25 per share, which provided net proceeds of approximately
$18,611,000.
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 New Jersey 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 tax credit carryforwards of
approximately $5,100,000 and New Jersey 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 become limited by federal income tax regulations if a
cumulative change in ownership of more than 50% occurs within a three-year
period.
In December 2001, we sold $6,243,000 of our gross New Jersey net operating
loss carryforwards and $802,000 of our New Jersey 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 were $1,187,000 and were
recorded as a tax benefit in the December 31, 2001 statement 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 of New Jersey may renew the Program annually and limits the
aggregate proceeds to $10,000,000. We cannot be certain if we will be able to
sell any of the carryforwards in the future.
We anticipate that at our current spending level, our existing available
cash and cash equivalents and short-term investments will be adequate to satisfy
our working capital requirements for our current operations through the second
quarter of 2003. If it becomes necessary, we have the ability to reduce the cash
burn rate, as we have limited fixed commitments. Any such reduction may require
us to curtail or discontinue the research, product development, pre-clinical
testing and clinical trials of some or all of our product candidates. In
addition, we will require substantial new funding in order to continue the
research, product development, pre-clinical testing and clinical trials of
ALT-711, other A.G.E. Crosslink Breakers and A.G.E.-Formation Inhibitors. 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 continued development of
ALT-711, our lead A.G.E. Crosslink Breaker candidate, and determining the
optimal course for the continued development of additional A.G.E. Crosslink
Breaker compounds and A.G.E.-Formation Inhibitors. 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 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.
CRITICAL ACCOUNTING POLICIES
In December 2001, the U.S. Securities and Exchange Commission issued a
statement concerning certain views of the Commission regarding the appropriate
amount of disclosure by publicly held companies with respect to their critical
accounting policies. In particular, the Commission expressed its view that in
order to enhance investor understanding of financial statements, companies
should explain the effects of critical accounting policies as they are applied,
the judgments made in the application of these policies and the likelihood of
materially different reported results if different assumptions or conditions
were to prevail. We have since carefully reviewed the disclosures included in
its filings with the Commission, including, without limitation, our Annual
Report on Form 10-K for the year ended December 31, 2001, and accompanying
audited financial statements and related notes thereto, as well as our
definitive proxy statement for the 2002 Annual Meeting. We believe the effect of
the following accounting policy is significant to our results of operations and
financial condition.
Based on the performance of our stock, we repriced certain employee stock
options on February 2, 1999. 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. Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair 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. As a
result, net income applicable to common stockholders and net loss per share to
common stockholders may be subject to volatility.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-Q 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-Q. 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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 at our current spending level, our existing available
cash and cash equivalents and short-term investments will be adequate to satisfy
our working capital requirements for our current operations through the second
quarter of 2003. While we expect to apply a portion of the proceeds of our
recent stock offering to the ongoing ALT-711 clinical development program, the
timing and extent of ALT-711's future 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 ALT-711, other A.G.E. Crosslink
Breakers and A.G.E.-Formation Inhibitors. 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 longer-term capital and operating requirements.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, WE MAY NOT DERIVE ANY REVENUES.
We have not yet requested or received regulatory approval for any product
from the FDA or any other regulatory body. All of our product candidates are
still 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.
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.
CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND
TIME-CONSUMING, AND THEIR OUTCOME IS UNCERTAIN.
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 effective for use in each
target indication. The length of time necessary to complete clinical trials
varies significantly and may be difficult to predict. Factors which can cause
delay or termination of our clinical trials include: (i) slower than expected
patient enrollment due to the nature of the protocol, the proximity of patients
to clinical sites, the eligibility criteria for the study, competition with
clinical trials for other drug candidates or other factors; (ii) lower than
expected retention rates of patients in a clinical trial; (iii) inadequately
trained or insufficient personnel at the study site to assist in overseeing and
monitoring clinical trials; (iv) delays in approvals from a study site's review
board; (v) longer treatment time required to demonstrate effectiveness or
determine the appropriate product dose; (vi) lack of sufficient supplies of the
product candidate; (vii) adverse medical events or side effects in treated
patients; (viii) lack of effectiveness of the product candidate being tested;
and (ix) regulatory changes.
Even if we obtain positive results from pre-clinical or clinical trials
for a particular product, we may not achieve the same success in future trials
of that product. 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.
Our product development costs will increase if we have delays in testing or
approvals, if we need to perform more or larger clinical trials than planned or
if our trials are not successful. Delays in our clinical trials may harm our
financial results and the commercial prospects for our products.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 June 30, 2002, we had an accumulated deficit of $159,286,000. 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 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 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.
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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 be successful in developing marketing and sales
capabilities. 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 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.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and our potential products are subject to this uncertainty.
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 that have an effect on A.G.E.s. or the
formation of A.G.E. crosslinks. 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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 or better treatments for cardiovascular disease
and/or diabetes. 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
pharmaceutical franchises focusing on cardiovascular disease, diabetic
nephropathy, neuropathy, retinopathy and related conditions. It is possible that
one or more of these initiatives may reduce or eliminate the market for some of
our products.
A broad range of cardiovascular and antidiabetic drugs are 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 other compounds, exposes us to liability claims resulting from the use of
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment in short-term marketable securities. We do not use
derivative financial instruments. Our investments consist primarily of debt
instruments of the U.S. government, government agencies, financial institutions
and corporations with strong credit ratings. We prepared a detailed market risk
disclosure of these investments in our 2001 Annual Report on Form 10-K. There
have been no material changes in our market risk position since December 31,
2001.
17
PART II - OTHER INFORMATION
ITEM 1. 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 filed a
notice of 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 directed that oral argument on this appeal be heard en banc. On
April 23, 2002, the Supreme Court of Delaware heard the appeal, and on July 19,
2002, affirmed the judgment of the Court of Chancery, dismissing the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of Stockholders of Alteon (the "Meeting") was held on
June 5, 2002. The following matter was voted upon at the Meeting: the election
of three directors.
The following table sets forth the names of the nominees who were elected
to serve as directors and the number of votes cast for or withheld from the
election of such nominee:
Name Votes For Votes Withheld
---- --------- --------------
Kenneth I. Moch 26,575,183 390,404
Edwin D. Bransome, Jr., M.D. 26,799,336 166,251
George M. Naimark, Ph.D. 26,798,848 166,739
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Restated Certificate of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly 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 filed for the year ended December 31, 2000.)
3.3 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.)
3.4 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.)
3.5 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.)
3.6 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.)
3.7 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.)
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.)
18
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 filed 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 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.)
4.4 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.)
4.5 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.)
4.6 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.)
4.7 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.)
4.8 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.)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) The following report on Form 8-K was filed during the quarter ended June
30, 2002:
On May 30, 2002, the Company filed a Current Report on Form 8-K, dated May
30, 2002, announcing the dismissal of Arthur Andersen LLP and the engagement of
KPMG LLP as the Company's principal independent accountants for the fiscal year
ending December 31, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2002
ALTEON INC.
By: /s/Kenneth I. Moch
---------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
(principal executive officer)
By: /s/Elizabeth A. O'Dell
---------------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
(principal accounting officer)
20
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Restated Certificate of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly 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 filed for the year ended December 31, 2000.)
3.3 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.)
3.4 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.)
3.5 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.)
3.6 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.)
3.7 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.)
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.)
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 filed 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 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.)
4.4 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.)
4.5 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.)
4.6 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.)
4.7 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.)
4.8 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.)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
21