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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------------------------- TO ------------------
Commission file 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
On November 5, 2003, 40,467,148 shares of the registrant's Common Stock were
outstanding.
Page 1 of 23 pages
The Exhibit Index is on page 22
ALTEON INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 2003 and
December 31, 2002..................................................... 3
Statements of Operations for the three and
nine months ended September 30, 2003 and 2002......................... 4
Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002..................................... 5
Notes to Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 19
Item 4. Controls and Procedures................................................. 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 20
SIGNATURES ...................................................................... 21
INDEX TO EXHIBITS ............................................................... 22
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2003 2002
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents ................................... $ 8,937,591 $ 14,452,413
Short-term investments ...................................... 2,996,100 2,986,200
Other current assets ........................................ 396,571 143,124
-------------- --------------
Total current assets ...................................... 12,330,262 17,581,737
Property and equipment, net ................................. 88,926 517,623
-------------- --------------
Total assets ................................................... $ 12,419,188 $ 18,099,360
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $ 819,894 $ 537,394
Accrued expenses ............................................ 1,553,553 3,258,729
-------------- --------------
Total current liabilities ................................. 2,373,447 3,796,123
-------------- --------------
Stockholders' Equity:
Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,149 and 1,079
of Series G and 3,451 and 3,241 of Series H shares
issued and outstanding, as of September 30, 2003 and
December 31, 2002, respectively ........................... 46 43
Common Stock, $0.01 par value,
80,000,000 shares authorized, and 35,988,922 and
33,600,841 shares issued and outstanding, as of
September 30, 2003 and December 31, 2002, respectively .... 359,889 336,008
Additional paid-in capital .................................. 193,857,816 183,341,416
Accumulated deficit ......................................... (184,172,558) (169,375,594)
Accumulated other comprehensive income ...................... 548 1,364
-------------- --------------
Total stockholders' equity ................................ 10,045,741 14,303,237
-------------- --------------
Total liabilities and stockholders' equity ..................... $ 12,419,188 $ 18,099,360
============== ==============
The accompanying notes are an integral part of these unaudited statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Revenues:
Investment income .................................. $ 35,623 $ 93,376 $ 139,521 $ 346,020
-------------- -------------- -------------- --------------
Expenses:
Research and development
(which includes non-cash variable
stock compensation (benefit)/expense
of $(63,620) and $0 for the three months
ended September 30, 2003 and 2002,
respectively, and $20,019 and $(93,516) for
the nine months ended September 30, 2003
and 2002, respectively) .......................... 2,165,182 4,330,899 8,330,120 11,982,313
General and administrative
(which includes non-cash variable
stock compensation (benefit)/expense
of $(1,475,917) and $0 for the three months
ended September 30, 2003 and 2002,
respectively, and $0 and $(1,315,635) for the
nine months ended September 30, 2003
and 2002, respectively) .......................... (422,294) 975,540 3,801,197 2,162,560
-------------- -------------- -------------- --------------
Total expenses ................................ 1,742,888 5,306,439 12,131,317 14,144,873
-------------- -------------- -------------- --------------
Net loss .............................................. (1,707,265) (5,213,063) (11,991,796) (13,798,853)
-------------- -------------- -------------- --------------
Preferred stock dividends ......................... 965,004 887,158 2,805,168 2,578,877
-------------- -------------- -------------- --------------
Net loss applicable to
common stockholders ................................ $ (2,672,269) $ (6,100,221) $ (14,796,964) $ (16,377,730)
============== ============== ============== ==============
Basic/diluted net loss per share
applicable to common stockholders .................. $ (0.07) $ (0.19) $ (0.42) $ (0.52)
============== ============== ============== ==============
Weighted average common shares used
in computing basic/diluted net loss per share ...... 35,961,899 31,878,525 35,173,908 31,731,160
============== ============== ============== ==============
The accompanying notes are an integral part of these unaudited statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months
Ended September 30,
---------------------------------
2003 2002
-------------- --------------
Cash Flows from Operating Activities:
Net loss ...................................................................... $ (11,991,796) $ (13,798,853)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ................................................. 479,638 477,261
Amortization of deferred compensation ......................................... 26,106 20,332
Non-cash compensation expense/(benefit) related to
variable plan employee stock options ........................................ 20,019 (1,409,151)
Changes in operating assets and liabilities:
Other assets .................................................................. (253,447) 988,183
Accounts payable and accrued expenses ......................................... (1,422,676) 2,177,815
-------------- --------------
Net cash used in operating activities ....................................... (13,142,156) (11,544,413)
-------------- --------------
Cash Flows from Investing Activities:
Capital expenditures .......................................................... (50,941) (37,389)
Purchases of marketable securities ............................................ (3,010,716) (15,018,675)
Maturities of marketable securities ........................................... 3,000,000 15,503,000
-------------- --------------
Net cash (used in)/provided by investing activities ......................... (61,657) 446,936
-------------- --------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock .................................... 7,655,945 18,610,521
Net proceeds from exercise of employee stock options .......................... 33,046 115,210
-------------- --------------
Net cash provided by financing activities ................................... 7,688,991 18,725,731
-------------- --------------
Net (decrease)/increase in cash and cash equivalents ............................. (5,514,822) 7,628,254
Cash and cash equivalents, beginning of period ................................... 14,452,413 4,249,439
-------------- --------------
Cash and cash equivalents, end of period ......................................... $ 8,937,591 $ 11,877,693
============== ==============
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 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 nine months
ended September 30, 2003, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2003. 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, 2002, filed
with the Securities and Exchange Commission.
NOTE 2 - LIQUIDITY
Alteon has incurred an accumulated deficit of $184,172,558 as of
September 30, 2003, and expects to incur operating losses, potentially greater
than losses in prior years, for a number of years. The Company has devoted
substantially all of its resources to research, drug discovery and development
programs. To date, it has not generated any revenues from the sale of products
and does not expect to generate any such revenues for a number of years, if at
all.
The Company has financed its operations through proceeds from the sale
of common and preferred equity securities, revenue from collaborative
relationships, reimbursement of certain of its research and development expenses
by its collaborative partners, investment income earned on cash balances and
short-term investments and the sale of a portion of its New Jersey net operating
loss carryforwards.
As of September 30, 2003, the Company had working capital of
$9,956,815, including $11,933,691 of cash and cash equivalents and short-term
investments. The Company's net cash used in operations for the nine months ended
September 30, 2003, was $13,142,156 and for the year ended December 31, 2002 was
$14,931,030. The Company raised $7,655,945 of net proceeds through the sale of
common stock in March 2003 (see Note 7 to the unaudited financial statements).
Pursuant to a Stock Purchase Agreement dated October 15, 2003, as
amended, the Company sold 4,457,146 shares of common stock to a number of
unaffiliated institutional investors at a purchase price of $1.75 per share for
approximately $7,760,000 in net proceeds. The Stock Purchase Agreement provides
that the Company will sell up to a total of 1,559,456 additional shares of
common stock at $1.85 per share for $2,884,994 in gross proceeds to such of the
investors who elect to purchase shares during the period ending 120 business
days after the initial closing. The investors are not obligated, and at their
discretion may elect not to purchase additional shares. The shares were offered
through a prospectus supplement pursuant to the Company's effective shelf
registration statement.
Alteon's lead compound, ALT-711 is the only Advanced Glycation
End-Product ("A.G.E.") Crosslink Breaker in advanced human testing. Several
Phase 2 clinical trials have been completed: the DIAMOND (Distensibility
Improvement and Remodeling in Diastolic Heart Failure) trial in diastolic heart
failure ("DHF"); the SAPPHIRE (Systolic And Pulse Pressure Hemodynamic
Improvement by Restoring Elasticity) and SILVER (Systolic Hypertension
Interaction with Left VEntricular Remodeling) trial in systolic hypertension;
and a trial in cardiovascular compliance. Based on evidence of ALT-711's
demonstrated efficacy and biological activity in these Phase 2 trials, as well
as a strong and consistent safety profile, the Company is proceeding with Phase
2 development of ALT-711 in two major cardiovascular indications, systolic
hypertension and heart failure. Alteon continues to work with its external
advisors to determine the appropriate clinical development strategy, timeline
and related costs. The Company believes it currently has adequate resources,
including the proceeds received in connection with the October 15, 2003 Stock
Purchase Agreement, as amended, to sustain its operations, exclusive of the full
cost of the clinical trials, into early 2005. The Company will require
additional new funding to complete the contemplated Phase 2 development of
ALT-711 and any other clinical trials it may initiate in the first half of 2004.
Alteon will continue to monitor its liquidity position and continue to
explore fund-raising alternatives. The Company has the ability to quickly and
significantly reduce its cash burn rate, if necessary, as it has limited fixed
commitments. Depending upon the results of any attempts made by the Company to
raise additional funds through the
6
sale of additional equity securities or through strategic collaborations, the
Company may be required to further reduce or curtail its research and product
development activities and other operations (including any new clinical trials)
if cash and cash equivalents fall below pre-determined levels.
The amount and timing of Alteon's future capital requirements will
depend on numerous factors, including the progress of its discovery research
programs, the initiation of pre-clinical tests and clinical trials, the
development of regulatory submissions, the costs associated with protecting
patents and other proprietary rights and the development of marketing and sales
capabilities.
The Company will require, over the long-term, substantial new funding
to pursue development and commercialization of ALT-711 and its other product
candidates to continue its operations. The Company believes that satisfying
these capital requirements over the long-term will require successful
commercialization of its product candidates. However, it is uncertain whether
any products will be approved or will be commercially successful.
Because of Alteon's near-term and long-term capital requirements, the
Company will seek access to the public or private equity markets whenever
conditions are favorable. This may have the effect of materially diluting the
current holders of the Company's outstanding stock. The Company 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 Alteon. If adequate funds are not
available, the Company may be required to curtail significantly one or more of
its research or development programs. If Alteon obtains funds through
arrangements with collaborative partners or others, the Company may be required
to relinquish rights to certain of its technologies or product candidates.
NOTE 3 - 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 value, as determined by quoted market values, with changes in fair value
recorded as a component of accumulated other comprehensive income. Premiums or
discounts on the purchase of short-term debt securities are amortized to
interest income. As of September 30, 2003 and December 31, 2002, short-term
investments were invested in debt instruments of the U.S. government and
government agencies. They consist of the following:
September 30, December 31,
2003 2002
------------- ------------
U.S. government agency funds....................... $ 2,996,100 $ 2,986,200
============= ============
NOTE 4 - NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
outstanding during the period. For the three- and nine-month periods ended
September 30, 2003 and 2002, 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 September 30, 2003 and 2002, was
28,218,949 and 29,427,473, respectively.
NOTE 5 - STOCK 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"), "Accounting for Stock Issued to Employees," and
related interpretations, under which no compensation cost (excluding those
options granted below fair value) has been recognized. Stock option awards
issued to consultants and contractors are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." In March 2000, the Financial Accounting Standards
Board ("FASB") released Interpretation No. 44 ("FIN 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 (benefit)/expense resulting from the 1999
repricing for the three months ended September 30, 2003 and 2002, is
$(1,539,537) and $0, respectively, and for the nine months ended September 30,
2003 and 2002, is $20,019 and $(1,409,151), respectively. As of September 30,
2003, there were 569,489 repriced options outstanding, which expire on various
dates through January 2008.
7
If the Company had applied the fair value recognition provisions of
SFAS No. 123 to all of its option grants, the Company's pro forma net loss and
net loss per share applicable to common stockholders for the three and nine
months ended September 30, 2003 and 2002, would be as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net loss, as reported ................................. $ (1,707,265) $ (5,213,063) $ (11,991,796) $ (13,798,853)
Add: Variable non-cash stock
compensation (benefit)/
expense included in reported
net loss ...................................... (1,539,537) -- 20,019 (1,409,151)
Less: Total stock-based employee
compensation expense
determined under fair value
method ........................................ (305,775) (413,185) (948,719) (1,335,356)
-------------- -------------- -------------- --------------
Pro forma net loss .................................... (3,552,577) (5,626,248) (12,920,496) (16,543,360)
Preferred stock dividends ............................. 965,004 887,158 2,805,168 2,578,877
-------------- -------------- -------------- --------------
Pro forma net loss applicable to
common stockholders ................................... $ (4,517,581) $ (6,513,406) $ (15,725,664) $ (19,122,237)
============== ============== ============== ==============
Earnings per share applicable to
common stockholders:
Basic/diluted, as reported .................... $ (0.07) $ (0.19) $ (0.42) $ (0.52)
Basic/diluted, pro forma ...................... $ (0.13) $ (0.20) $ (0.45) $ (0.60)
NOTE 6 - COMPREHENSIVE LOSS
The following sets forth comprehensive loss for the three and nine
months ended September 30, 2003 and 2002:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net Loss .............................................. $ (1,707,265) $ (5,213,063) $ (11,991,796) $ (13,798,853)
Net Unrealized Loss
on Short-Term Investments .......................... (1,642) (2,073) (816) (8,559)
-------------- -------------- -------------- --------------
Comprehensive Loss .................................... $ (1,708,907) $ (5,215,136) $ (11,992,612) $ (13,807,412)
============== ============== ============== ==============
NOTE 7 - STOCKHOLDERS' EQUITY
In March 2003, Alteon completed a public offering of 2,300,000 shares
of common stock at $3.50 per share, which provided net proceeds of $7,655,945,
after deducting $394,055 of offering costs.
Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock 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 the 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. For the three months ended
September 30, 2003 and 2002, preferred stock dividends were $965,004 and
$887,158, respectively, and for the nine months ended September 30, 2003 and
2002, preferred stock dividends were $2,805,168 and $2,578,877, respectively.
NOTE 8 - SUBSEQUENT EVENT
The Company's lease for its office and laboratory space in Ramsey, New
Jersey, expired on November 1, 2003, and has been extended through December 31,
2003. Alteon has signed a three-year lease, commencing December 1, 2003, for
10,800 square feet of office space in Parsippany, New Jersey. Annual rent over
the term of the lease ranges from approximately $260,000 in the first year to
$280,000 in the third year. As a provision of the lease, Alteon is required to
provide a letter of credit, which is collateralized with a $250,000 restricted
certificate of deposit.
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. Our lead compound is
in clinical development; several others are in earlier development stages. These
pharmaceutical candidates were developed as a result of our research on the
Advanced Glycation End-product ("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 the only A.G.E. Crosslink Breaker in
advanced human testing. Several Phase 2 clinical trials have been completed: the
DIAMOND (Distensibility Improvement and Remodeling in Diastolic Heart Failure)
trial in diastolic heart failure ("DHF"); the SAPPHIRE (Systolic and Pulse
Pressure Hemodynamic Improvement by Restoring Elasticity) and SILVER (Systolic
Hypertension Interaction with Left VEntricual Remodeling) trial in systolic
hypertension; and a trial in cardiovascular compliance. Based on evidence of
ALT-711's demonstrated efficacy and biological activity in these Phase 2 trials,
as well as a strong and consistent safety profile, we are proceeding with Phase
2 development of ALT-711 in two major cardiovascular indications, systolic
hypertension and heart failure. We continue to work with our external advisors
to determine the appropriate clinical development strategy, timeline and related
costs. We believe we currently have adequate resources, including the proceeds
received in connection with the October 15, 2003 Stock Purchase Agreement, as
amended, to sustain our operations, exclusive of the full cost of the clinical
trials, into early 2005. We will require additional new funding to complete the
contemplated Phase 2 development of ALT-711 and any other clinical trials we may
initiate in the first half of 2004.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of ALT-711 and our other product candidates to
continue our operations. We believe that satisfying these capital requirements
over the long-term will require successful commercialization of our product
candidates. However, it is uncertain whether any products will be approved or
will be commercially successful. The amount and timing of our future capital
requirements will depend on numerous factors, including the progress of our
research and development programs, the initiation of pre-clinical tests and
clinical trials, the development of regulatory submissions, the costs associated
with protecting patents and other proprietary rights and the development of
marketing and sales capabilities.
Because of our near-term and long-term capital requirements, we will
seek access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. 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.
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. We believe
that ALT-711 may address the cardiovascular, diabetes and primary care physician
markets.
We will continue to explore the use of topical A.G.E. Crosslink
Breakers in skin and photo aging, as a result of our recent evaluation of
ALT-744's positive activity in this area. We will focus efforts on bringing
forward other crosslink breaker compounds with more attractive formulation
characteristics than those of ALT-744 to address the pharmaceutical market for
skin and photo aging, and will discontinue research on the ALT-744 prototype.
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 $184,172,558 as of September 30, 2003, 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, subsequent public offerings of common stock,
private placements of common and preferred equity securities, revenue from
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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Our business is subject to significant risks, which are described in
this Report, including under the heading "Forward-Looking Statements and
Cautionary Statements."
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenues for the three months ended September 30, 2003 and 2002,
were $35,623 and $93,376, respectively. Revenues were derived from interest
earned on cash and cash equivalents and short-term investments. Total revenues
decreased due to lower investment balances and a decrease in short-term interest
rates.
Our total expenses were $1,742,888 for the three months ended September
30, 2003, compared to $5,306,439 for the three months ended September 30, 2002,
and in each period consisted primarily of research and development expenses.
Research and development expenses includes 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 $2,165,182 for the three months ended September 30, 2003, as
compared to $4,330,899 for the same period in 2002. In 2003, they primarily
consisted of $1,023,128 in personnel and personnel-related expenses, $350,848 in
clinical trial expenses, including $240,113 related to the Phase 2b SAPPHIRE and
SILVER open-label trial, $151,090 related to process development and drug
stability studies, $145,516 in pre-clinical expenses and non-cash variable stock
compensation benefit of $63,620. Research and development expenses for the three
months ended September 30, 2002, primarily consisted of $2,204,190 in clinical
trial expenses related to the Phase 2b SAPPHIRE and SILVER trial, $867,745 in
personnel and personnel-related expenses, $410,548 of manufacturing expenses
(process development and packaging) and drug stability studies associated with
the ALT-711 programs, and $148,626 in pre-clinical expenses.
Research and development expenses decreased by $2,165,717, or 50.0%, as
compared to the three months ended September 30, 2002. The decrease was
primarily attributed to lower clinical costs associated with the completion of
the SAPPHIRE and SILVER trial in the second quarter of 2003 and lower
manufacturing costs. These decreased costs were partially offset by higher
personnel and personnel-related costs, including temporary help related to
accumulating and assessing the data of the SAPPHIRE and SILVER trial.
General and administrative expenses decreased to $(422,294) for the
three months September 30, 2003, compared to $975,540 for the same period in
2002 and in each period included a non-cash variable stock compensation benefit
of $(1,475,917) and $0, respectively. Non-cash variable stock compensation
expense/(benefit) is directly related to changes in our stock price (see Note 5
to the unaudited financial statements). Exclusive of the 2003 benefit, general
and administrative expenses were $1,053,623. General and administrative expenses
in 2003 included an increase in business development and marketing research
costs associated with the unblinding of the SAPPHIRE and SILVER trial.
Our net loss applicable to common stockholders was $2,672,269 for the
three months ended September 30, 2003, compared to $6,100,221 in the same period
in 2002, a decrease of 56.2%, primarily related to variable non-cash stock
compensation benefit, decreased clinical trial expenses and lower manufacturing
expenses. Included in the net loss applicable to common stockholders are
preferred stock dividends of $965,004 and $887,158 for the three months ended
September 30, 2003 and 2002, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenues for the nine months ended September 30, 2003 and 2002,
were $139,521 and $346,020, respectively. Revenues were derived from interest
earned on cash and cash equivalents and short-term investments. Total revenues
decreased due to lower investment balances and a decrease in short-term interest
rates.
Our total expenses were $12,131,317 for the nine months ended September
30, 2003 compared to $14,144,873 for the nine months ended September 30, 2002,
and in each year consisted primarily of research and development expenses.
Research and development expenses for the nine months ended September 30, 2003
were $8,330,120, and included $3,352,234 in personnel and personnel-related
expenses, $2,022,374 in clinical trial expenses, of which $1,637,197 related to
the Phase 2b SAPPHIRE and SILVER trial, $628,574 in pre-clinical expenses,
manufacturing costs of $583,697, primarily related to drug stability studies and
tablet manufacturing, $350,747 in third-party consulting, a non-cash variable
stock compensation expense of $20,019 and $1,039,362 of facility and other
overhead related costs. Research and development expenses for the nine months
ended September 30, 2002 were $11,982,313 and included $5,147,849 in clinical
trial expenses related to the Phase 2b SAPPHIRE and SILVER trial, $2,045,336
related to manufacturing (process development, tablet manufacturing and
packaging) and drug stability studies, $568,270 in pre-
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
clinical expenses, $2,510,416 in personnel and personnel-related expenses and a
non-cash variable stock compensation benefit of $93,516.
Research and development expenses decreased by $3,652,193 or 30.5%,
primarily due to decreased clinical trial and manufacturing costs associated
with the completion of the Phase 2b SAPPHIRE and SILVER clinical trial in 2003,
partly offset by higher personnel and personnel-related costs, including
temporary help related to accumulating and assessing the data of the SAPPHIRE
and SILVER trial.
General and administrative expenses increased to $3,801,197 for the
nine months ended September 30, 2003, compared to $2,162,560 for the same period
in 2002 and includes a non-cash variable stock compensation benefit of $0 and
$(1,315,635), respectively. In addition to the non-cash variable stock
compensation benefit recorded in 2002, general and administrative expenses
increased primarily due to higher business development and marketing research
costs in 2003.
Our net loss applicable to common stockholders decreased to $14,796,964
for the nine months ended September 30, 2003, compared to $16,377,730 in the
same period in 2002, a decrease of 9.7%. This was primarily a result of
decreased research and development expenses and lower manufacturing expenses due
to completion of the Phase 2b SAPPHIRE and SILVER clinical trial. Included in
the net loss applicable to common stockholders are preferred stock dividends of
$2,805,168 and $2,578,877 for the nine months ended September 30, 2003 and 2002,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents and short-term investments at
September 30, 2003, of $11,933,691, compared to $17,438,613 at December 31,
2002. This is a decrease in cash and cash equivalents and short-term investments
of $5,504,922. Cash increased during the nine months ended September 30, 2003 by
$7,655,945 from the net proceeds from a public offering of 2,300,000 shares of
common stock at $3.50 per share in March 2003. This was more than offset by
$13,142,156 of net cash used in operations, consisting primarily of research and
development expenses, personnel-related costs and facility expenses and $50,941
of cash used in capital expenditures during the nine months ended September 30,
2003. At September 30, 2003, we had working capital of $9,956,815.
Pursuant to a Stock Purchase Agreement dated October 15, 2003, as
amended, we sold 4,457,146 shares of common stock to a number of unaffiliated
institutional investors at a purchase price of $1.75 per share for approximately
$7,760,000 in net proceeds. The Stock Purchase Agreement provides that we will
sell up to a total of 1,559,456 additional shares of common stock at $1.85 per
share for $2,884,994 in gross proceeds to such of the investors who elect to
purchase shares during the period ending 120 business days after the initial
closing. The investors are not obligated, and at their discretion may elect not
to purchase additional shares. The shares were offered through a prospectus
supplement pursuant to our effective shelf registration statement.
At December 31, 2002, we had available federal net operating loss
carryforwards, which expire in various amounts from the years 2006 through 2022,
of approximately $152,365,000 and New Jersey net operating loss carryforwards,
which expire in the years 2004 through 2009, of approximately $106,771,000. In
addition, we had federal research and development tax credit carryforwards of
approximately $7,048,000 and New Jersey research and development tax credit
carryforwards of approximately $811,000 at December 31, 2002. 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 2002, we sold $1,839,000 of our gross New Jersey net
operating loss carryforwards and $578,000 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 2002 were $647,000 and were
recorded as a tax benefit in the December 31, 2002 statement of operations. 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.
Our lead compound, ALT-711 is the only A.G.E. Crosslink Breaker in
advanced human testing. Several Phase 2 clinical trials have been completed: the
DIAMOND (Distensibility Improvement and Remodeling in Diastolic Heart Failure)
trial in diastolic heart failure ("DHF"); the SAPPHIRE (Systolic And Pulse
Pressure Hemodynamic Improvement by Restoring Elasticity) and SILVER (Systolic
Hypertension Interaction with Left VEntricular Remodeling) trial in systolic
hypertension; and a trial in cardiovascular compliance. Based on evidence of
ALT-711's demonstrated efficacy and biological activity in these Phase 2 trials,
as well as a strong and consistent safety profile, we are proceeding with Phase
2 development of ALT-711 in two major cardiovascular indications, systolic
hypertension and heart failure. We continue to work with our external advisors
to determine the appropriate clinical development strategy, timeline and related
costs. We believe we currently have adequate resources, including the proceeds
received in connection with the October 15, 2003 Stock Purchase Agreement, as
amended, to sustain our operations, exclusive of the full cost of the clinical
trials, into early 2005. We will require additional new funding to complete the
contemplated Phase 2 development of ALT-711 and any other clinical trials we may
initiate in the first half of 2004.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
We will continue to monitor our liquidity position and continue to
explore fund-raising alternatives. We have the ability to quickly and
significantly reduce the cash burn rate, if necessary, as we have limited fixed
commitments. Depending upon the results of any attempts made by us to raise
additional funds through the sale of additional equity securities or through
strategic collaborations, we may be required to further reduce or curtail our
research and product development activities and other operations (including any
new clinical trials) if cash and cash equivalents fall below pre-determined
levels.
The amount and timing of our future capital requirements will depend on
numerous factors, including the progress of our discovery research programs, the
initiation 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 near-term and long-term capital requirements, we will
seek access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. 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 are
evaluating potential corporate partnerships for further development and ultimate
marketing of the compound in territories throughout the world. We plan to retain
development and marketing rights for one or several indications in the United
States. As described above, we believe that additional development of this
compound and other product candidates will require us to find additional sources
of funding.
Our lease for office and laboratory space in Ramsey, New Jersey,
expired on November 1, 2003, and has been extended through December 31, 2003. We
have signed a three-year lease, commencing December 1, 2003, for 10,800 square
feet of office space in Parsippany, New Jersey. Annual rent over the term of the
lease ranges from approximately $260,000 in the first year to $280,000 in the
third year. As a provision of the lease, we are required to provide a letter of
credit, which is collateralized with a $250,000 restricted certificate of
deposit.
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
our filings with the Commission, including, without limitation, our Annual
Report on Form 10-K for the year ended December 31, 2002, and accompanying
audited financial statements and related notes thereto. We believe the effect of
the following accounting policy is significant to our results of operations and
financial condition.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
We account for options granted to employees and directors in accordance
with APB Opinion No. 25, and related interpretations. As such, compensation
expense is recorded on fixed stock grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. 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 loss applicable to common stockholders and net loss per share to
common stockholders may be subject to volatility. Had we accounted for repricing
of stock option grants in accordance with SFAS No. 123, the expense related to
the vested options would have been recorded at the repricing date, and the
expense related to non-vested options would have been recorded over the vesting
period. As of September 30, 2003, there were 569,489 repriced options
outstanding, which expire on various dates through January 2008.
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.
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.
As of September 30, 2003, we had working capital of $9,956,815,
including $11,933,691 of cash and cash equivalents and short-term investments.
Our cash used in operations for the nine months ended September 30, 2003 was
$13,142,156, and for the year ended December 31, 2002 was $14,931,030. In
October 2003, we sold 4,457,146 shares of common stock, raising net proceeds of
approximately $7,760,000.
Our lead compound, ALT-711 is the only A.G.E. Crosslink Breaker in
advanced human testing. Several Phase 2 clinical trials have been completed:
the DIAMOND (Distensibility Improvement and Remodeling in Diastolic Heart
Failure) trail in diastolic heart failure ("DHF"); the SAPPHIRE (Systolic And
Pulse Pressure Hemodynamic Improvement by Restoring Elasticity) and SILVER
(Systolic Hypertension Interaction with Left VEntricular Remodeling) trial in
systolic hypertension; and a trial in cardiovascular compliance. Based on
evidence of ALT-711's demonstrated efficacy and biological activity in these
Phase 2 trials, as well as a strong and consistent safety profile, we are
proceeding with Phase 2 development of ALT-711 in two major cardiovascular
indications, systolic hypertension and heart failure. We continue to work with
our external advisors to determine the appropriate clinical development
strategy, timeline and related costs. We believe we currently have adequate
resources, including the proceeds received in connection with the October 15,
2003 Stock Purchase Agreement, as amended, to sustain our operations, exclusive
of the full cost of the clinical trials, into early 2005. We will require
additional new funding to complete the contemplated Phase 2 development of
ALT-711 and any other clinical trials we may initiate in the first half of 2004.
We will continue to monitor our liquidity position and continue to
explore fund-raising alternatives. We have the ability to quickly and
significantly reduce the cash burn rate, if necessary, as we have limited fixed
commitments. Depending upon the results of any attempts made by us to raise
additional funds through the sale of additional equity securities or through
strategic collaborations, we may be required to further reduce or curtail our
research and product development activities and other operations (including any
new clinical trials) if cash and cash equivalents fall below pre-determined
levels.
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
We will require, over the long-term, substantial new funding to pursue
development and commercialization of ALT-711 and our other product candidates to
continue our operations. We believe that satisfying these capital requirements
over the long-term will require successful commercialization of our product
candidates. However, it is uncertain whether any products will be approved or
will be commercially successful.
Because of our near-term and long-term capital requirements, we will
seek access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. 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.
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 United States Food and Drug Administration ("FDA") or any other
regulatory body. All of our product candidates, including our lead candidate,
ALT-711, 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, to be commercially available for a number of years, if at all.
CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE 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.
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 September 30, 2003, we had an accumulated deficit of $184,172,558.
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
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
profit. We expect to incur substantial additional operating expenses over the
next several years as our research, development and clinical trial activities
continue. 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 the Financial Accounting Standards Board ("FASB")
Interpretation No. 44 ("FIN 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. The options
expire at various dates through January 2008.
IF WE ARE UNABLE TO FORM 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 are seeking to establish these
relationships to provide the funding necessary for continuation of our product
development, but if such efforts may not be successful, our programs may suffer
and we may be unable to develop products.
IF WE ARE ABLE TO FORM OUR COLLABORATIVE RELATIONSHIPS, BUT ARE UNABLE TO
MAINTAIN THEM, OUR PRODUCT DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS
TO TECHNOLOGY MAY RESULT.
We may form collaborative relationships that will, in some cases, make
us dependent upon outside partners to conduct pre-clinical testing and clinical
trials and to provide adequate funding for our development programs. Such
corporate partners, if any, 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 agreement
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, results of operations and liquidity.
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, results of
operations and liquidity.
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.
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
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 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 current Good Manufacturing Practice ("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 United States 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 United States 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.
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 United States 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 new drug application ("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, 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 United States or
elsewhere. We may not be able to obtain FDA approval for any products.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, results of operations and liquidity.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES,
DIABETES 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 better treatments for cardiovascular disease, or
diabetes and its related complications. Several large companies have initiated
or expanded research, development and licensing efforts to build pharmaceutical
franchises focusing on these medical conditions. It is possible that one or more
of these initiatives may reduce or eliminate the market for some of our
products. In addition, other companies have initiated research in the inhibition
or crosslink breaking of A.G.E.s.
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTHCARE, 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 United
States, 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 United States 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 healthcare 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
attempting to contain healthcare 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. Claims could be made directly by
participants in our clinical trials, 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, results of
operations and liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 healthcare 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, results of operations and liquidity.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investments 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 2002 Annual Report on Form 10-K. There
have been no material changes in our market risk position since December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Our Chief
Executive Officer and our Vice President, Finance, evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based
upon that evaluation, the Chief Executive Officer and the Vice President,
Finance, have concluded that as of the end of such fiscal quarter, our current
disclosure controls and procedures are adequate and effective to ensure that
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported on a timely basis.
b) Changes in internal control over financial reporting. There was no
change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) during the fiscal quarter covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibit Index on page 22 for Exhibits filed with this Quarterly
Report on Form 10-Q.
b) The following report on Form 8-K was filed during the quarter ended
September 30, 2003:
On July 23, 2003, the Company filed a Current Report on Form 8-K,
dated July 17, 2003, announcing initial results from its Phase 2b
SAPPHIRE and SILVER clinical trial.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2003
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)
21
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 Report on Form 10-Q
filed on November 10, 1999, S.E.C. File Number 000-19529.)
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 Alteon Inc. (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2000, S.E.C. File Number 001-16043.)
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, S.E.C. File Number
000-19529.)
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,
S.E.C. File Number 000-19529.)
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, S.E.C. File Number 000-19529.)
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,
S.E.C. File Number 000-19529.)
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, S.E.C.
File Number 000-19529.)
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, S.E.C.
File Number 001-16043.)
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, S.E.C. File Number 001-16043.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, S.E.C. File Number 001-16043.)
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, S.E.C.
File Number 001-16043.)
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, S.E.C.
File Number 000-19529.)
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, S.E.C. File Number
000-19529.)
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, S.E.C. File Number 000-19529.)
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,
S.E.C. File Number 000-19529.)
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, S.E.C. File Number
001-16043.)
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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, S.E.C. File Number 001-16043.)
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, S.E.C. File Number 001-16043.)
4.9 Notice of Appointment, dated August 29, 2002, of The American
Stock Transfer & Trust Company as successor Rights Agent, pursuant
to Stockholders' Rights Agreement dated as of July 27, 1995.
(Incorporated by reference to Exhibit 4.4 of the Company's Report
on Form 10-Q filed on November 13, 2002, S.E.C. File Number
001-16043.)
10.1 Stock Purchase Agreement, dated October 15, 2003. (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed on October 20, 2003, S.E.C. File Number 001-16043.)
10.2 Amendment to Stock Purchase Agreement, dated October 24, 2003.
10.3 Lease, dated October 21, 2003, between Alteon Inc. and Mack-Cali
Realty Corporation.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
23