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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 001-16043
ALTEON INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 CAMPUS DRIVE, PARSIPPANY, NEW JERSEY 07054
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(Address of principal executive offices)
(Zip Code)
(201) 934-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, Par Value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the American Stock Exchange closing
price of the common stock ($4.85 per share), as of June 30, 2003, was
$173,745,192
At March 5, 2004, 40,472,898 shares of the registrant's common stock, par value
$.01 per share, were outstanding.
PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a product-based biopharmaceutical company engaged in the
discovery and development of small molecule 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-Products ("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.
A.G.E.s are glucose/protein complexes that form as a result of
circulating blood glucose reacting with proteins. These A.G.E. complexes
subsequently interact and bond (crosslink) with other proteins, resulting in
"hardened" (stiffened) arteries, toughened tissues and impaired flexibility and
function of many body organs. In healthy individuals, this pathological
A.G.E.-formation process occurs slowly as the body ages. In diabetic patients,
the rate of A.G.E. accumulation and the extent of protein crosslinking are
accelerated because of high glucose levels.
Our research and drug development activities targeting the A.G.E.
pathway have taken three directions: the breaking of A.G.E. crosslinks between
proteins in order to reverse damage ("A.G.E. Crosslink Breakers"); the
prevention or inhibition of A.G.E. formation ("A.G.E.-Formation Inhibitors") and
the reduction of the A.G.E. burden through a novel class of anti-hyperglycemic
agents, Glucose Lowering Agents ("GLA"). We believe that we were the first
company to focus on the development of compounds to treat diseases caused by
A.G.E. formation and crosslinking. Since our inception, we have created an
extensive library of novel compounds targeting the A.G.E. pathway, and have
actively pursued patent protection for these discoveries.
The primary focus of our research and development activities is
alagebrium chloride (formerly ALT-71l), which is our lead product candidate and
we believe the only A.G.E. Crosslink Breaker in advanced clinical development.
In February, the United States Adopted Name (USAN) Council approved alagebrium
chloride as the generic name of the chemical compound formerly known as ALT-711.
Alagebrium offers the possibility of the first therapeutic approach to
"breaking" A.G.E. crosslinks, the benefit of which may be to reverse tissue
damage caused by aging and diabetes, thereby restoring flexibility and function
to tissues, blood vessels and organs of the body. Alagebrium has demonstrated
safety and efficacy in three Phase 2 trials and several Phase 1 studies in which
over 800 patients received alagebrium in clinical trials. We are actively
developing the compound for the treatment of cardiovascular diseases including
systolic hypertension and heart failure. In July 2003, we announced initial
results from the Phase 2b SAPPHIRE (Systolic And Pulse Pressure Hemodynamic
Improvement by Restoring Elasticity) and SILVER (Systolic Hypertension
Interaction with Left VEntricular Remodeling) trial that focused on patients
with systolic hypertension. Alagebrium was safe and well tolerated at all doses
tested. Results from this 768 patient, six-month, placebo-controlled,
dose-ranging study showed that although the pre-specified primary endpoint of
reduction of systolic blood pressure by office cuff pressure measurement did not
demonstrate statistical significance, as compared to placebo, pre-specified
secondary analyses of ambulatory blood pressure measurements ("ABPM") in all
patients who completed the study demonstrated a blood pressure lowering effect
at lower doses of approximately 4 mm Hg net of placebo. In February 2004, we
announced the partial results of a post hoc analysis which showed that
alagebrium treatment resulted in significant lowering of systolic blood
pressures in patients with a baseline systolic ABPM of > or = 140 mm Hg, with
little concurrent effect on diastolic blood pressure readings. The treatment
effects were greatest in patients with higher starting systolic blood pressure
readings.
The DIAMOND (Distensibility Improvement And ReMOdeliNg in Diastolic
Heart Failure) open-label, single dose trial of alagebrium was conducted in 23
patients with diastolic heart failure ("DHF"). Treatment with alagebrium over 16
weeks demonstrated a statistically significant reduction in left ventricular
mass and a marked improvement in left ventricular diastolic filling. The trial
also showed statistically significant improvements in multiple quality of life
measurements. Pre-specified primary endpoint data was not evaluable. Patients
with Class III heart failure at baseline, the sickest patients in the study,
appeared to benefit the most from alagebrium treatment. Side effects were as
expected for a similar patient population of this size and severity. In 2001, we
conducted a Phase 2a clinical trial, in which 93 patients received alagebrium or
placebo tablets once daily for eight weeks. Study results showed that alagebrium
patients experienced a statistically significant and clinically meaningful
reduction in pulse pressure (p<0.02), defined as the difference between systolic
and diastolic blood pressures. Results also
2
showed a statistically significant increase in large artery compliance (p<0.03),
an indicator of greater vascular flexibility and volume capacity. Additionally,
the drug was well tolerated. This Phase 2a data was published as "breakthrough
information" in the September 26, 2001 issue of the peer-reviewed journal,
Circulation: Journal of the American Heart Association.
In March 2004, we initiated SPECTRA (Systolic Pressure Efficacy and
Safety Trial of Alagebrium), a Phase 2b trial in patients with systolic
hypertension. An additional Phase 2 trial in diastolic dysfunction in heart
failure is expected to be initiated in the first half of 2004.
We continue to evaluate potential pre-clinical studies and clinical
trials in other cardiovascular and therapeutic indications where A.G.E.
Crosslink Breaker compounds may address significant unmet needs. In addition, we
plan to continue to explore the use of topical A.G.E. Crosslink Breakers in skin
and photoaging, following our recent evaluation of ALT-744. We intend to
identify other crosslink breaker compounds in our research and development
portfolio with more attractive characteristics than those of ALT-744 to further
explore the pharmaceutical applications of our compounds for skin and
photoaging.
We were incorporated in Delaware in October 1986 under the name
Geritech Inc. Our name was changed to Alteon Inc. in August 1991. We recently
moved our headquarters to 6 Campus Drive, Parsippany, New Jersey 07054. Our web
address is www.alteon.com, and our telephone number is (201) 934-5000. We make
available free of charge through our internet website our annual reports on
Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K
and amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with the United States Securities
and Exchange Commission ("SEC").
OUR BUSINESS STRATEGY
Our strategy is to develop drug candidates from our proprietary
portfolio of new chemical entities. Because of their novel mechanism of action,
these compounds address large medical needs that are unmet by existing
therapies. We will seek, as appropriate, to selectively out-license or
co-develop our drug candidates with corporate partners. As we continue clinical
development of alagebrium, we may elect to retain development and marketing
rights for one or several indications in North America, while at the same time
continuing to evaluate potential corporate partnerships for the further
development and ultimate marketing of the compound. In addition to alagebrium,
we have identified compounds in multiple chemical classes that may warrant
further evaluation and potential development.
MARKETS OF OPPORTUNITY
Our research and development efforts have led us to an initial focus on
cardiovascular diseases, including hypertension and heart failure, as well as
complications of diabetes. Targeting the A.G.E. pathway may have an impact on a
number of medical disorders related to aging and diabetes and the progressive
stiffening of tissues, vessels and organs, thus potentially broadening our
markets of opportunity. Importantly, there are no currently marketed
cardiovascular drugs that work directly on the stiffening of the vasculature
that leads to systolic hypertension and heart failure. Angiotensin converting
enzyme (ACE) inhibitors and aldosterone antagonists indirectly affect these
pathways.
The pre-clinical and clinical data generated to date on our A.G.E.
Crosslink Breakers and A.G.E.-Formation Inhibitors demonstrate clear and
consistent findings across several species, including rats, dogs, non-human
primates and man.
Cardiovascular Disease
According to the American Heart Association, more than 64 million
Americans have one or more types of cardiovascular disease, with 50 million
Americans estimated to have high blood pressure. Cardiovascular disease has been
the number one killer of Americans since the early 1900's. The latest World
Health Organization - International Society of Hypertension guidelines for the
management of hypertension emphasize the importance of pulse pressure (the
difference between systolic and diastolic pressures) and arterial stiffness as
predictors of overall cardiovascular risk. Currently available antihypertensive
agents commonly reduce pressure on the vessel wall in such a manner as to lower
both systolic and diastolic blood pressures and may not significantly affect
pulse pressure. Pharmacologic intervention targeting the stiffness of the
cardiovascular system may decrease the incidence and severity of complications
such as left ventricular hypertrophy ("LVH"), a thickening and stiffening of the
heart tissue, and congestive heart failure. Published studies have shown that a
10 mm Hg reduction in pulse pressure correlates with approximately a 35%
reduction in cardiovascular mortality.
3
Systolic Hypertension
Systolic hypertension, defined as elevated systolic blood pressure
greater than 140 mm Hg, is the most common form of hypertension in those over
the age of 50, with an estimated prevalence of nearly 25 million Americans. It
is associated with a significantly increased risk of overall mortality,
cardiovascular mortality and congestive heart failure. According to the American
Heart Association, it is the type of hypertension least likely to be well
treated. The potential ability of alagebrium to decrease pulse pressure and
increase large artery compliance offers an opportunity to provide a treatment
option specifically for systolic hypertension. See "--A.G.E. Crosslink Breakers
- - Alagebrium." Although currently marketed antihypertensive agents are being
used to treat the disease, it is not adequately treated by these therapies. We
believe that alagebrium is the first drug to show direct activity by targeting
the stiff vessels that are associated with systolic hypertension. We believe
that alagebrium will provide additional benefit because it exerts its activity
by a mechanism unique from currently marketed anti-hypertension drugs, and it
appears to be well tolerated to patients with hypertension.
Diastolic Dysfunction in Heart Failure
Diastolic dysfunction is the impaired ability of the heart to relax and
fill properly after a contraction, in part due to the stiffening of the
myocardial tissue. When the ventricles (the heart's lower pumping chambers) do
not relax and fill normally, increased pressure and fluid in the blood vessels
of the lungs may be a result (pulmonary congestion), resulting in shortness of
breath. Diastolic dysfunction can also cause increased pressure and fluid in the
blood vessels returning to the heart (systemic congestion). Diastolic
dysfunction is common to both systolic and diastolic heart failure in a group
that collectively numbers about five million in the United States alone. DHF,
which is estimated to account for 30-50% of all heart failure cases, is an
especially poorly treated medical condition. Alagebrium offers promise as a
novel therapy for cardiovascular diseases related to diastolic dysfunction
because currently available therapies do not specifically target the stiffening
heart and vessel walls.
Left Ventricular Hypertrophy
LVH refers to the thickening of the left ventricle that can occur
progressively with hypertension. It can lead to decreased cardiac output, the
inability to meet the circulatory needs of the body and to heart failure itself.
It is a condition associated with many cardiovascular diseases, including
systolic hypertension and DHF. In the DIAMOND trial, a statistically significant
reduction of left ventricular mass was noted in DHF patients treated with
alagebrium. Additionally, in several pre-clinical studies, alagebrium has been
shown to reduce the thickening of the left ventricle and induce reverse
remodeling of the heart.
Complications of Diabetes
The Diabetes Control and Complications Trial, a multi-center clinical
trial conducted by the National Institutes of Health, demonstrated that elevated
blood glucose levels significantly increase the rate of progression of eye,
kidney, blood vessel and nerve complications from diabetes. More than 50% of
people with diabetes in the United States develop diabetic complications that
range from mild to severe.
Overt Nephropathy and ESRD
Kidney disease is a significant cause of morbidity and mortality in
patients with Type 1 and Type 2 diabetes. It is a chronic and progressive
disease that affects approximately one third of patients with Type 1 diabetes.
Approximately 10-15% of patients with Type 2 diabetes develop nephropathy. One
of the early signs of kidney damage is microalbuminuria (characterized by
leakage of small amounts of protein into the urine), which progresses to overt
nephropathy (characterized by leakage of large amounts of protein into the
urine) and ultimately to End-Stage Renal Disease ("ESRD").
In addition, we have conducted a Phase 1 safety study of alagebrium in
the critically ill ESRD patient population undergoing peritoneal dialysis, and
are evaluating the next steps as part of this Phase 1 program.
In the Phase 2/3 ACTION (A Clinical Trial In Overt Nephropathy) trial
in Type 1 diabetic patients with overt nephropathy, therapy with our first
A.G.E.-Formation Inhibitor, pimagedine, showed a statistically significant
reduction in 24-hour total urinary protein excretion (<0.001), although it did
not reach statistical significance in its primary endpoint, the time to doubling
of serum creatinine. In addition, glomerular filtration rate decreased more
4
slowly in pimagedine patients (p=0.04 to 0.03), and fewer patients experienced a
progression in retinopathy. See "--Retinopathy." Though pimagedine is no longer
in active clinical development, the ACTION trial provided the first clinical
proof-of-concept that inhibiting A.G.E. formation can result in clinically
important attenuation of the serious complications of diabetes mellitus Type 1.
ALT-946, another A.G.E.-Formation Inhibitor, has demonstrated the ability to
slow the progression of overt nephropathy in a pre-clinical study.
Cardiovascular Complications
A significant portion of diabetic individuals develops cardiovascular
diseases and complications due to the high levels of blood glucose and A.G.E.s
within the body. According to the American Diabetes Association, heart disease
is the leading cause of diabetes-related deaths. Heart disease death rates are
two to four times higher in adults with diabetes than adults without diabetes.
The risk of stroke is also two to four times higher in those with diabetes.
Retinopathy
Approximately nine out of 10 people with diabetes eventually develop
retinopathy, a complication that affects the blood vessels inside the eye and
can lead to blindness. Each year, approximately 12,000 to 24,000 people lose
their sight because of diabetes. The incidence and severity of retinopathy
increases with the duration of diabetes. Pre-clinical evidence suggests that
alagebrium and other compounds from the A.G.E. Crosslink Breaker class may have
a positive impact on retinopathy. In a secondary endpoint in the Phase 2/3
ACTION trial, pimagedine therapy did result in a statistically significant
reduction in the progression of retinopathy. Fewer pimagedine patients (p=0.03)
experienced a three-step or greater progression of retinopathy (Early Treatment
of Diabetic Retinopathy Study).
Skin Aging
We plan to continue to explore the use of topical A.G.E. Crosslink
Breakers in skin and photoaging, following our recent evaluation of ALT-744. We
intend to identify other compounds in our research and development portfolio
with more attractive characteristics than those of ALT-744 to further explore
the pharmaceutical applications for our compounds in skin and photoaging.
Other Diseases
A.G.E.s have been shown to cause or contribute to many disorders beyond
cardiovascular diseases and complications of diabetes, such as
arthritis/inflammation, ophthalmic diseases, respiratory diseases, stroke and
urological diseases, among others. We continue to evaluate potential indications
for our compounds.
OUR TECHNOLOGY: THE A.G.E. PATHWAY IN AGING AND DIABETES
The harmful consequences of A.G.E. formation in man was proposed in the
1980's by our scientific founders as an outgrowth of a research effort focused
on diabetes. The foundation for our technology is the experimental evidence that
intervention along the A.G.E. pathway provides significant benefit in slowing or
reversing the development of serious diseases in the diabetic and aging
populations. We are the pioneers in A.G.E. technology, and we have built an
extensive patent estate covering our discoveries and compounds.
A.G.E.s are permanent structures that form when simple sugars such as
glucose bind to the surface of proteins. As the body ages, A.G.E. complexes form
on proteins continuously and naturally, though slowly throughout life, at a rate
dependent upon glucose levels and on the body's natural ability to clear these
pathological structures. A.G.E. complexes subsequently crosslink to other
proteins, causing a progressive loss of flexibility and function in various
tissues, blood vessels and organs.
The formation and crosslinking of A.G.E.s is a well-known process in
food chemistry, where it is called the Maillard Reaction. The browning and
toughening of food during the cooking process occurs, in part, as a result of
the formation of A.G.E. complexes between sugars and the amino acids of
proteins. The A.G.E. crosslink has been found to be unique in biology and is
prevalent in animal models of aging and diabetes. Scientific literature suggests
that the formation and subsequent crosslinking of A.G.E.s is an inevitable part
of the aging process and diabetes that leads to a loss of flexibility and
function in body tissues, organs and vessels.
5
The A.G.E. pathway may provide the scientific explanation for how and
why many of the medical complications of the aging process occur with higher
frequency and earlier in life in diabetic patients. Diabetic individuals form
excessive amounts of A.G.E.s earlier in life than do non-diabetic individuals,
due primarily to higher levels of blood sugar. For this reason, diabetes may be
viewed as an accelerated form of aging.
A.G.E.s and A.G.E. crosslinks are considered to be likely causative
factors in the development of many age-related and diabetic disorders, including
those associated with the cardiovascular and renal systems. For example,
proteins in the body, such as collagen and elastin, which play an important role
in maintaining the elasticity of the cardiovascular system, are prime targets
for A.G.E. crosslinking. This stiffening process can impair the normal function
of contractile organs, such as blood vessels, which depend on flexibility for
normal function. A loss of flexibility of the vasculature is associated with a
number of cardiovascular disorders, including systolic hypertension, diastolic
dysfunction and LVH, and ultimately may lead to heart failure.
Studies conducted in animal models of diabetes and aging at numerous
independent institutions worldwide demonstrate that A.G.E.s are a major factor
contributing to many of the disorders of aging and diabetes, including
cardiovascular, kidney and eye diseases, as well as atherosclerosis. Recent
human clinical studies we performed confirm that targeting the A.G.E. pathway
can have beneficial effects on these diseases.
The following chart illustrates the process of A.G.E. formation and
crosslinking and is qualified by the more detailed description in the text. It
also highlights those areas within the A.G.E. pathway where we are developing
pharmaceutical agents to intervene therapeutically.
OUR TECHNOLOGY PLATFORM
[OUR TECHNOLOGY PLATFORM FLOW CHART]
Glucose + Proteins A.G.E.s Crosslinked A.G.E.s
- - 1 Chemical Class - 9 Chemical Classes - 17 Chemical Classes
(51 Compounds) (852 Compounds) (675 Compounds)
- - Mechanism - Mechanism - Mechanism
- Improves pancreas function - Blocks A.G.E. cascade - Breaks A.G.E. crosslinks
- Increases insulin production - Improves renal - Restores vascular
- Restores insulin sensitivity function function
- Restores heart function
- Activity unlike any known
drug
We incurred research and development expenditures of approximately
$9,930,000, $14,992,000 and $8,461,000 for the years ended December 31, 2003,
2002 and 2001, respectively.
A.G.E. Crosslink Breakers
By "breaking" A.G.E. crosslinks, these novel classes of compounds may
have an impact on a number of medical disorders where loss of flexibility or
elasticity leads to a loss in function. Our lead clinical candidate, alagebrium,
has demonstrated the ability to reverse tissue damage and restore function to
the cardiovascular system in Phase 2 clinical trials, in cardiovascular
compliance and diastolic heart failure.
Additionally, we are evaluating the development of several compounds in
the breaker class for other indications where A.G.E. crosslinking leads to
abnormal function. The scientific literature also points to the possible utility
of breaker compounds in ophthalmic and dermatological conditions, stiff joint
disorders and treatment of complications in patients undergoing peritoneal
dialysis.
6
We have identified 17 potential chemical classes of A.G.E. Crosslink
Breakers, and have a library of more than 650 compounds.
Alagebrium
Through its unique mechanism of action, alagebrium is the first
compound that breaks A.G.E. crosslinks between proteins, both in vitro and in
vivo. Alagebrium is a small, easily synthesized compound with a rapid mode of
action. It is well absorbed from an oral tablet formulation. The compound is
under Phase 2 clinical evaluation in cardiovascular diseases and is being
evaluated in various pre-clinical models to assess its potential in a number of
other disease states.
In July 2003, we announced the initial results of the SAPPHIRE and
SILVER trial, a 768 patient, six-month, placebo-controlled, dose-ranging study.
The pre-specified primary endpoint of reduction of systolic blood pressure by
office cuff pressure measurement at the highest of the four active dose levels,
210 mg per day, did not demonstrate statistical significance as compared to
placebo. The data analysis was confounded by a 6-10 mm Hg drop in systolic blood
pressures in all arms of the SAPPHIRE and SILVER trial, including placebo,
during the first two weeks after patient randomization. However, patients in the
SAPPHIRE "intent-to-treat" population demonstrated efficacy, net of placebo, in
the 2-3 mm Hg range by cuff pressure at the lower end of the alagebrium dosing
range. As reported at that time, a pre-specified secondary analysis of ABPM
measurements in all patients who completed the study demonstrated a blood
pressure lowering effect of approximately 4 mm Hg net of placebo at lower doses.
There was no significant placebo effect noted in the ABPM measurements.
In February 2004, we announced the partial results of a post hoc
analysis which showed that alagebrium treatment resulted in significant lowering
of systolic blood pressures in patients with a baseline systolic ABPM of > or =
140 mm Hg, with little concurrent effect on diastolic blood pressure readings.
Trends were similar for both three and six months. The treatment effects were
greatest in patients with higher starting systolic blood pressure readings, with
no statistically meaningful effect in patients with a systolic blood pressure
below 140 mm Hg. In patients with starting blood pressures of > or = 140 mm Hg
on multiple medications, systolic blood pressure was reduced by an average of 6
mm Hg (p < or = 0.01). In patients who were on two or more medications with
starting systolic blood pressures of > or = 150 mm Hg, a difficult to treat
group of patients, clinically significant systolic pressure reductions were
maintained. Furthermore, alagebrium's effect was persistent in the presence of
increasing numbers of background medicines, rather than reduced as is generally
seen with current incremental therapies. These findings further support the
hypothesis that alagebrium works best in patients with more serious baseline
hypertension via a mechanism of action unlike any currently marketed high blood
pressure drug.
In January 2003, we announced positive results from an analysis of the
first 17 patients in the Phase 2a DIAMOND clinical trial evaluating alagebrium
in DHF patients. The trial was conducted at Wake Forest University Baptist
Medical Center and the Medical University of South Carolina in patients at least
60 years of age with isolated DHF. In the DIAMOND trial, 23 patients received
210 mg of alagebrium twice daily on an open-label outpatient basis for 16 weeks
in addition to their current medications. Primary endpoints included changes in
exercise tolerance and aortic stiffness; effects on LVH, diastolic filling and
quality of life were also assessed. Patients who received alagebrium for 16
weeks experienced a statistically significant reduction in left ventricular
mass, as well as a marked improvement in left ventricular diastolic filling.
Additionally, the drug was well tolerated and had a positive effect on patients'
quality of life. Measurements of exercise tolerance and aortic distensibility
proved to be more variable than anticipated for a study of this size and were
not reportable.
In January 2001, we announced successful results from a Phase 2a
clinical trial of alagebrium evaluating the effects of the compound on the
cardiovascular system. This trial, conducted at nine United States clinical
sites, was a double-blind, placebo-controlled study evaluating the safety,
efficacy and pharmacology of alagebrium. The trial enrolled 93 patients over the
age of 50 with measurably stiffened large vessels, including systolic blood
pressure of at least 140 mm Hg and pulse pressure of at least 60 mm Hg. Patients
were randomized to receive oral doses of either 210 mg of alagebrium or placebo
once daily for eight weeks. Patients were evaluated for cardiovascular
elasticity and function as measured by pulse pressure, cardiovascular
compliance, pulse wave velocity, a measure of vascular stiffness and cardiac
output. Under this protocol, alagebrium treatment was in addition to the best
available therapeutic regimen chosen by the treating physicians. Study results
showed that patients who received alagebrium experienced a statistically
significant (p<0.02) and clinically meaningful reduction in the arterial pulse
pressure, defined as the difference between systolic and diastolic blood
pressure. Results also showed a statistically significant increase in large
artery compliance (p<0.03), an indicator of greater vascular flexibility and
volume capacity, using a traditional measurement of the ratio of stroke volume
to pulse pressure.
7
Additionally, the drug was well tolerated. This Phase 2a data was presented at
the Special Sessions Presentation of "Late Breaking Clinical Trials" at the
American College of Cardiology Annual Scientific Session in March 2001, and
published as "breakthrough information" in the September 26, 2001 issue of the
peer-reviewed journal, Circulation: Journal of the American Heart Association.
In March 2004, we initiated, SPECTRA, a Phase 2b clinical trial in
patients with systolic hypertension. SPECTRA is designed to evaluate
alagebrium's ability to lower systolic blood pressure in patients with a
systolic blood pressure reading of 140 mm Hg, building upon positive data from
previous Phase 2 trials. Alagebrium's activity in prior clinical trials
demonstrated the drug's safety and ability to lower systolic blood pressure and
pulse pressure in aging and diabetic patients, especially in the
difficult-to-treat hypertensive patient population.
In SPECTRA, alagebrium will be tested in approximately 390 patients at
over 50 clinical sites throughout the United States. The trial will include male
and female patients of at least 45 years of age. Recruited patients will undergo
a wash-out period, when they are weaned from their existing antihypertensive
treatment, followed by a run-in phase during which they will be stabilized on a
diuretic. They will then receive alagebrium tablets or placebo once a day for 12
weeks.
SPECTRA is designed to further extend the range of effective dosing
defined in previous Phase 2 testing. The study will consist of four treatment
arms, comprising three different dose levels of alagebrium (10, 50 or 150 mg)
or placebo. Patients enrolled in the trial must have systolic blood pressure of
> or = 140 mm Hg as measured by ABPM, as well as additional qualifications.
Automated office blood pressures (oscillometric), as well as ABPM pressures,
will be taken at scheduled time points. Change from baseline in mean 24-hour
systolic ABPM pressure after 12 weeks of dosing (as compared to placebo) will
be evaluated as the primary measure of efficacy. Secondary endpoints will
include changes in diastolic, pulse and arterial pressures.
An additional Phase 2 trial in diastolic dysfunction in heart failure
is expected to be initiated in the first half of 2004.
We have also completed a Phase 1 trial assessing the safety of
alagebrium and the way the drug is metabolized in ESRD patients undergoing
peritoneal dialysis. This patient population has a limited five-year survival
(less than 30%) and significant cardiovascular complications, which are the
primary cause of death. We are evaluating next steps as part of this Phase 1
program.
Alagebrium data is consistent across species. Studies in animal models
in several laboratories around the world have demonstrated rapid reversal of
impaired cardiovascular functions with alagebrium. In these pre-clinical models,
alagebrium reverses the stiffening of arteries, as well as the stiffening of the
heart, that accompanies the development of aging and diabetes. Pre-clinical
studies of alagebrium conducted by researchers from the National Institute on
Aging and Johns Hopkins Geriatric Center demonstrated the ability of the
compound to significantly reduce arterial stiffness in elderly Rhesus monkeys.
In a pre-clinical study of alagebrium in aged dogs, administration of alagebrium
for one month resulted in an approximate 40% decrease in age-related ventricular
stiffness, or hardening of the heart, with an overall improvement in cardiac
function. Reductions in blood pressure that have been observed in animal models
of diabetic hypertension suggest that alagebrium may prove beneficial in the
treatment of systolic hypertension in the elderly or in the diabetic.
Additionally, in several pre-clinical studies, alagebrium has been shown to
normalize the thickening of the left ventricle and to reduce remodeling of the
heart.
In addition to several Phase 2 human trials, a series of Phase 1 safety
and dose escalation studies were conducted. These trials have shown the drug to
be safe and well tolerated.
A.G.E.-Formation Inhibitors
A.G.E.-Formation Inhibitors are designed to prevent glucose/protein
formation and crosslinking. This class of compounds may have broad applications
in slowing down the key complications of diabetes.
We have identified nine distinct chemical classes of A.G.E.-Formation
Inhibitors, encompassing a library in excess of 850 compounds.
8
Pimagedine
Pimagedine was the lead compound in the A.G.E.-Formation Inhibitor
class, but is not in active clinical development.
In November 1998, we announced results of an analysis of data from the
ACTION 1 trial of pimagedine in diabetic patients with overt nephropathy.
Although the results showed that pimagedine reduced the risk of doubling of
serum creatinine, the study's primary endpoint, the data did not reach
statistical significance. However, pimagedine therapy did result in a
statistically significant and clinically meaningful reduction of urinary protein
excretion. Pimagedine also reduced, to a statistically significant extent,
cholesterol and triglycerides, as well as the progression of retinopathy.
Additional data suggested a trend toward improvements in other measures of
kidney function, including estimated creatinine clearance and glomerular
filtration rate. The drug was generally well tolerated. Though pimagedine is no
longer in active clinical development because of resource allocation priorities,
the ACTION trial served as a proof-of-concept study demonstrating the potential
of compounds that target the A.G.E. pathway in the treatment of diabetic kidney
disease and a broad range of diabetic complications. The study also suggests
that other pharmacologic compounds that target the A.G.E. pathway could have an
impact on diabetic conditions. A.G.E. Crosslink Breakers have the potential to
reverse damage caused by A.G.E.s and potentially are much faster acting than
pimagedine and other A.G.E. Inhibitors.
We are continuing to evaluate the A.G.E. Inhibitors in our patent
portfolio in order to identify pre-clinical leads for further development.
Glucose Lowering Agents
High glucose levels (hyperglycemia of diabetes) accelerate the rate of
A.G.E. formation and crosslinking. Controlling glucose levels has been shown to
slow the rate of progression of diabetic complications. The GLA program arose
from a search of plant-derived natural products that would exhibit a beneficial
profile of glucose and lipid lowering of Type 2 diabetes. Several pre-clinical
candidates that display these beneficial properties have been evaluated. They
have demonstrated the ability to lower glucose and lipids, restore insulin
sensitivity and stimulate increased insulin production.
We have identified one chemical class of GLA, which includes more than
50 compounds.
MANUFACTURING
We have no manufacturing facilities for either production of bulk
chemicals or the manufacturing of pharmaceutical dosage forms. We rely on
third-party contract manufacturers to produce the raw materials and chemicals
used as the active drug ingredients in our products used in clinical trials, and
we expect to rely on third parties to perform the tasks necessary to process,
package and distribute these products in finished form.
We will inspect third-party contract manufacturers and their
consultants to confirm compliance with current Good Manufacturing Practice
("cGMP") required for pharmaceutical products. We believe we will obtain
sufficient quantities of bulk chemicals at reasonable prices to satisfy
anticipated needs. There can be no assurance, however, that we can continue to
meet our needs for supply of bulk chemicals or that manufacturing limitations
will not delay clinical trials or possible commercialization.
MARKETING AND SALES
We retain worldwide marketing rights to our A.G.E. Crosslink Breaker
compounds. We believe that alagebrium may address the cardiovascular, diabetes
and primary care physician markets. We plan to market and sell our products, if
successfully developed and approved, directly or through co-promotion or other
licensing arrangements with third parties. Such arrangements may be exclusive or
nonexclusive and may provide for marketing rights worldwide or in a specific
market.
9
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for our product candidates, processes and
know-how is important to our business. We aggressively file and prosecute
patents covering our proprietary technology, and, if warranted, will defend our
patents and proprietary technology. As appropriate, we seek patent protection
for our proprietary technology and products in the United States and Canada and
in key commercial European and Asia/Pacific countries. We also rely upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain our competitive position. In addition to
our own patent filings, we have licensed or obtained technology and patent
portfolios from others relating to the A.G.E.-formation and crosslinking
technology currently under development by us.
As of the date of this report, our patent estate of owned and/or
licensed patent rights consisted of 85 issued United States patents, none of
which expire prior to 2005, and 24 pending patent applications in the United
States, the majority of which are A.G.E.-related. We also own or have exclusive
rights to 68 issued patents in Europe, Japan, Australia and Canada. These
patents and additional patent applications cover compounds, compositions and
methods of treatment for several chemical classes of crosslink breaker
compounds, including alagebrium.
Effective as of August 5, 2002, we entered into a letter agreement with
Yamanouchi Pharmaceutical Co, Ltd. ("Yamanouchi"), which terminated its License
Agreement dated as of June 16, 1989. Pursuant to the letter agreement, for a
period of fifteen years, we will pay Yamanouchi royalties on any sales of
pimagedine or pimagedine products in Japan, South Korea, Taiwan and The People's
Republic of China covered by the License Agreement.
In 1987, we acquired an exclusive, royalty-free, worldwide license
(including the right to sub-license to others) to Rockefeller University's
issued patents, patent applications and trade secrets relating to
A.G.E.-formation and crosslinking technology currently under development by us.
In addition, we previously exclusively licensed from The Picower Institute for
Medical Research ("The Picower Institute") certain patentable inventions and
discoveries relating to A.G.E. technology. This license agreement was terminated
as of April 15, 2002, when we entered into a Termination Agreement, pursuant to
which The Picower Institute assigned to us all of its patents, patent
applications and other technology related to A.G.E.s. We agreed to prosecute and
maintain the patents and patent applications and will pay to the trustee for The
Picower Institute royalties on any sales of products falling within the claims
of these patents and patent applications until they expire or are allowed to
lapse.
We have entered into an exclusive licensing arrangement with Roche
Diagnostics GmbH for our technology for diagnostic applications, and we have
also entered into clinical testing and distribution agreements with Gamida for
Life ("Gamida"), which grant Gamida the exclusive right to distribute
pimagedine, if successfully developed and approved for marketing, in Israel,
Bulgaria, Cyprus, Jordan and South Africa.
We believe that our licensed and owned patents provide a substantial
proprietary base that will allow us and our collaborative partners to
commercialize products in this field. We believe our research and development
plans will expand and broaden our rights within our technological and patent
base. We are also prepared to in-license additional technology that may be
useful in building our proprietary position. There can be no assurance, however,
that pending or future applications will issue, that the claims of any patents
which do issue will provide any significant protection of our technology or that
our directed discovery research will yield compounds and products of therapeutic
and commercial value.
Where appropriate, we utilize trade secrets and unpatentable
improvements to enhance our technology base and improve our competitive
position. We require all employees, scientific consultants and contractors to
execute confidentiality agreements as a condition of engagement. There can be no
assurance, however, that we can limit unauthorized or wrongful disclosures of
unpatented trade secret information.
We believe that our estate of licensed and owned issued patents, if
upheld, and pending applications, if granted and upheld, will be a substantial
factor in our success. The patent positions of pharmaceutical firms, including
ours, are generally uncertain and involve complex legal and factual questions.
Consequently, even though we are currently prosecuting such patent applications
in the United States and foreign patent offices, we do not know whether any of
such applications will result in the issuance of any additional patents or, if
any additional patents are issued, whether the claims thereof will provide
significant proprietary protection or will be circumvented or invalidated.
10
Competitors or potential competitors have filed for or have received
United States and foreign patents and may obtain additional patents and
proprietary rights relating to compounds or processes competitive with those of
ours. Accordingly, there can be no assurance that our patent applications will
result in patents being issued or that, if issued, the claims of the patents
will afford protection against competitors with similar technology; nor can
there be any assurance that others will not obtain patents that we would need to
license or circumvent. See "--Competition."
Our success will depend, in part, on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing on the proprietary rights of third parties. There can be no assurance
that our current patent estate will enable us to prevent infringement by third
parties or that competitors will not develop competitive products outside the
protection that may be afforded by the claims of such patents. To the extent we
rely on trade secrets and unpatented know-how to maintain our competitive
technological position, there can be no assurance that others may not develop
independently the same or similar technologies. Failure to maintain our current
patent estate or to obtain requisite patent and trade secret protection, which
may become material or necessary for product development, could delay or
preclude us or our licensees or marketing partners from marketing their products
and could thereby have a material adverse effect on our business, financial
condition and results of operations.
GOVERNMENT REGULATION
We and our products are subject to comprehensive regulations by the
United States Food and Drug Administration ("FDA") and by comparable authorities
in other countries. These national agencies and other federal, state and local
entities regulate, among other things, the pre-clinical and clinical testing,
safety, effectiveness, approval, manufacturing, labeling, marketing, export,
storage, record keeping, advertising and promotion of our products.
The process required by the FDA before our products may be approved for
marketing in the United States generally involves (i) pre-clinical new drug
laboratory and animal tests, (ii) submission to the FDA of an investigational
new drug application ("IND"), which must become effective before clinical trials
may begin, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug for its intended indication, (iv) submission
to the FDA of a new drug application ("NDA"), and (v) FDA review of the NDA in
order to determine, among other things, whether the drug is safe and effective
for its intended uses. There is no assurance that the FDA review process will
result in product approval on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Certain pre-clinical tests are subject to FDA
regulations regarding current Good Laboratory Practices. The results of the
pre-clinical tests are submitted to the FDA as part of an IND and are reviewed
by the FDA prior to the commencement of clinical trials or during the conduct of
the clinical trials, as appropriate.
Clinical trials are conducted under protocols that detail such matters
as the objectives of the study, the parameters to be used to monitor safety and
the efficacy criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND. Further, each protocol must be reviewed and approved by
an institutional review board.
Clinical trials are typically conducted in three sequential phases,
which may overlap. During Phase 1, when the drug is initially given to human
subjects, the product is tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. Phase 2 involves studies in a limited
patient population to (i) evaluate preliminarily the efficacy of the product for
specific targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Phase 3
trials are undertaken in order to further evaluate clinical efficacy and to
further test for safety within an expanded patient population. The FDA may
suspend clinical trials at any point in this process if it concludes that
clinical subjects are being exposed to an unacceptable health risk.
We will need FDA approval of our products, including a review of the
manufacturing processes and facilities used to produce such products, before
such products may be marketed in the United States. The process of obtaining
approvals from the FDA can be costly, time-consuming and subject to
unanticipated delays. There can be no assurance that the FDA will grant
approvals of our proposed products, processes or facilities on a timely basis,
if at all. Any delay or failure to obtain such approvals would have a material
adverse effect on our business, financial
11
condition and results of operations. Moreover, even if regulatory approval is
granted, such approval may include significant limitations on indicated uses for
which a product could be marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's operating procedures conform to cGMP requirements,
which must be followed at all times. In complying with those requirements,
manufacturers (including a drug sponsor's third-party contract manufacturers)
must continue to expend time, money and effort in the area of production and
quality control to ensure compliance. Domestic manufacturing establishments are
subject to periodic inspections by the FDA in order to assess, among other
things, cGMP compliance. To supply a product for use in the United States,
foreign manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by regulatory authorities in certain of such
countries under reciprocal agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer
and the holder of the NDA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the pre-clinical and clinical testing process, the approval process,
or thereafter (including after approval) may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market and/or the imposition
of criminal penalties against the manufacturer and/or NDA holder. In addition,
later discovery of previously unknown problems may result in restrictions on
such product, manufacturer or NDA holder, including withdrawal of the product
from the market. Also, new government requirements may be established that could
delay or prevent regulatory approval of our products under development.
The FDA has implemented accelerated approval procedures for certain
pharmaceutical agents that treat serious or life-threatening diseases and
conditions, especially where no satisfactory alternative therapy exists. We
cannot predict the ultimate impact, however, of the FDA's accelerated approval
of procedures on the timing or likelihood of approval of any of our potential
products or those of any competitor. In addition, the approval of a product
under the accelerated approval procedures may be subject to various conditions,
including the requirement to verify clinical benefit in post-marketing studies,
and the authority on the part of the FDA to withdraw approval under streamlined
procedures if such studies do not verify clinical benefit.
For marketing outside the United States, we will have to satisfy
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and diagnostic products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. We do not currently have any facilities or
personnel outside of the United States.
COMPETITION
A.G.E.s have been shown to contribute to many of the disorders of aging
and diabetes, including cardiovascular, kidney and eye diseases. We are aware of
several companies that have research and development activities in the A.G.E.
field. Many companies are pursuing research and development of compounds for
cardiovascular and kidney diseases and the lowering of glucose levels.
Many of our potential competitors have substantially greater financial,
technical and human resources than ours and may be better equipped to develop,
manufacture and market products. In addition, many of these companies have
extensive experience in pre-clinical testing and human clinical trials. These
companies may develop and introduce products and processes competitive with or
superior to ours.
Our competition will be determined, in part, by the potential
indications for which our compounds are developed and ultimately approved by
regulatory authorities. For certain of our potential products, an important
factor in competition may be the timing of market introduction of our or our
competitors' products. Accordingly, the relative speed with which we can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market are important competitive
factors. We expect that competition among products approved for sale will be
based on, among other things, product efficacy, safety, reliability,
availability, price and patent position. Our competitive position also depends
upon our ability to attract and retain qualified personnel, obtain protection or
otherwise develop proprietary products or processes and secure sufficient
capital resources.
We are competing in an industry in which technologies can become
obsolete over time, thereby reducing or eliminating the market for any
pharmaceutical product. For example, competitive drugs based on other
therapeutic
12
mechanisms may be efficacious in treating cardiovascular disease or diabetic
complications. The development by others of non-A.G.E.-related treatment
modalities could render our products non-competitive. Therapeutic approaches
being pursued by others include curing cardiovascular disease or diabetic
complications via gene therapy or cell transplantation, as well as
pharmaceutical intervention with agents such as the aldose reductase inhibitors.
Angiotensin converting enzyme inhibitors, angiotensin receptor
blockers, calcium channel blockers, (alpha)-2 agonists, (alpha)(1) blocker,
aldosterone inhibitors, beta-blockers and diuretics are effective treatments for
essential hypertension, a disease characterized by increased peripheral vascular
resistance (essential hypertension closely related to diastolic blood pressure).
Systolic hypertension, characterized by increased stiffness of the large
arteries, is not usually associated with increased peripheral vascular
resistance. In the absence of any marketed products that address the underlying
pathology of systolic hypertension patients, treatments approved for essential
hypertension are currently being prescribed to treat hypertension in these
patients.
MEDICAL AND CLINICAL ADVISORS
Our Medical and Clinical Advisors consist of individuals with
recognized expertise in the medical and pharmaceutical science and related
fields who advise us about present and long-term scientific planning, research
and development. These advisors consult and meet with our management informally
on a frequent basis. All advisors are employed by employers other than us, who
may also be competitors of ours, and may have commitments to, or consulting or
advisory agreements with, other entities that may limit their availability to
us. The advisors have agreed, however, not to provide any services to any other
entities that might conflict with the activities that they provide us. Each
member also has executed a confidentiality agreement for our benefit.
The following persons are Medical and Clinical Advisors:
George L. Bakris, M.D., F.A.C.P., F.C.P., Professor of Preventive and
Internal Medicine, Vice Chairman, Department of Preventive Medicine and
Director, Hypertension/Clinical Research Center, Rush University
Medical Center; immediate Past-President, American College of Clinical
Pharmacology.
Leslie Z. Benet, Ph.D., Professor, University of California San
Francisco, School of Pharmacy, Department of Biopharmaceutical
Sciences; Chairman of the Board, AvMax, Inc.; Past-Chairman, Department
of Biopharmaceutical Sciences of the University of California San
Francisco.
Edward D. Frohlich, M.D., Alton Ochsner Distinguished Scientist of the
Ochsner Clinic Foundation; Professor of Medicine and Physiology at
Louisiana State University; Clinical Professor of Medicine and Adjunct
Professor of Pharmacology at Tulane University; President, Society of
Geriatric Cardiology; Past-President, American Society for Clinical
Pharmacology and Therapeutics; Past-Chairman, Council for High Blood
Pressure Research (American Heart Association); immediate
Past-Editor-in-Chief of Hypertension journal.
Norman K. Hollenberg, M.D., Ph.D., Professor of Medicine, Harvard
Medical School; Director of Physiologic Research, Brigham and Women's
Hospital, Boston; served as an Editor of the New England Journal of
Medicine.
Peter R. Kowey, M.D., Full Professor, Medicine and Clinical
Pharmacology, Jefferson Medical College; President and Chief of the
Division of Cardiovascular Diseases, Main Line health Heart Center,
Lankenau Hospital; Fellow of the American Heart Association, the
American College of Cardiology, the American College of Physicians, the
College of Physicians of Philadelphia, the American College of Chest
Physicians and the American College of Clinical Pharmacology.
Craig M. Pratt, M.D., Professor of Medicine, Baylor College of
Medicine; Director of Research, Methodist DeBakey Heart Center;
Director, Coronary Intensive Care Unit, The Methodist Hospital; Member,
Continuing Medical Education Advisory Board, Discovery International;
Fellow, American College of Cardiology.
13
EMPLOYEES
As of February 29, 2004, we employed 34 persons; 23 were engaged in
research and development, and 11 were engaged in administration and management.
Five of those employed held a Ph.D., M.D. or other advanced degree. We believe
that we have been successful in attracting skilled and experienced personnel.
Our employees are not covered by collective bargaining agreements, but all
employees are covered by confidentiality agreements. We believe that our
relationship with our employees is good.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-K that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth in this section and elsewhere in this Form
10-K. These factors include, but are not limited to, the risks set forth below.
The forward-looking statements represent our judgment and expectations
as of the date of this Report. We assume no obligation to update any such
forward-looking statements.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of December 31, 2003, we had working capital of $15,033,000,
including $16,679,000 of cash and cash equivalents. Our cash used in operations
for the year ended December 31, 2003 was $15,906,000.
We believe that our lead compound, alagebrium, is the only A.G.E.
Crosslink Breaker in advanced human testing. Several Phase 2 clinical trials
have been completed: the DIAMOND, the SAPPHIRE and SILVER trial in systolic
hypertension and a trial in cardiovascular compliance. Based on evidence of
alagebrium'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 alagebrium 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 and
timeline.
We expect to utilize cash to fund our operations and to initiate new
Phase 2 trials in systolic hypertension and diastolic dysfunction in heart
failure during the first half of 2004. The first of the Phase 2 trials was
initiated in March 2004, SPECTRA, a Phase 2b trial in patients with systolic
hypertension. Based on our projected spending levels, including these trials,
which are expected to continue into 2005, we do not currently have adequate cash
and cash equivalents to complete the trials or complete the 2004 fiscal year and
therefore will require additional funding during 2004. As a result, throughout
2004 and 2005, we will monitor our liquidity position and the status of our
clinical trials. If we are unsuccessful in our efforts to raise additional funds
through the sale of additional equity securities, we will be required to
significantly reduce or curtail our research and product development activities,
including the number of patients enrolled in our trials, and other operations if
our level of cash and cash equivalents fall below pre-determined levels. We have
the intent and ability to quickly and significantly reduce the cash burn rate,
if necessary, as we have limited fixed commitments. We believe that such
curtailment actions, if needed, will enable us to fund our operations into early
2005.
The amount and timing 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.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of alagebrium and our other product candidates
to continue our operations. We believe that satisfying these capital
14
requirements over the long-term will require successful commercialization of our
product candidates, particularly alagebrium. 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 are unable to obtain the necessary funding, we may need to
cease operations.
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, including our lead candidate, alagebrium, are still in research or
clinical development. We may not succeed in the development and marketing of any
therapeutic or diagnostic product. We do not have any product other than
alagebrium in active clinical development, and there can be no assurance that we
will be able to bring any other compound into clinical development. 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
alagebrium, 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.
15
IF WE ARE UNABLE TO DERIVE REVENUES FROM PRODUCT SALES, WE MAY NEVER BE
PROFITABLE.
All of our revenues to date have been generated from collaborative
research agreements and financing activities or interest income earned on these
funds. We have not received any revenues from product sales. We may not realize
product revenues on a timely basis, if at all.
At December 31, 2003, we had an accumulated deficit of $187,619,000. 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 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 and in order to bolster employee
retention, 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. 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 and results of operations.
16
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.
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 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 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.
17
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 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. 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 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.
18
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
alagebrium or other compounds, expose 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 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 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.
ITEM 2. PROPERTIES.
Our lease for office and laboratory space in Ramsey, New Jersey,
expired on November 1, 2003, but was extended through January 31, 2004. We
signed a three-year lease, commencing December 1, 2003, for 10,800 square feet
of office space in Parsippany, New Jersey.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock has traded on the American Stock Exchange since August
7, 2000, under the symbol "ALT."
2003 High Low
---- ---- ---
First Quarter.................... $ 4.37 $ 1.95
Second Quarter................... 5.65 3.17
Third Quarter.................... 7.50 1.25
Fourth Quarter................... 2.18 1.41
2002 High Low
---- ---- ---
First Quarter.................... $ 5.90 $ 3.40
Second Quarter................... 3.84 1.77
Third Quarter.................... 2.25 1.38
Fourth Quarter................... 2.45 1.00
As of February 27, 2004, there were 337 holders of the common stock. On
February 27, 2004, the last sale price reported on the American Stock Exchange
for the common stock was $2.09 per share.
We have neither paid nor declared dividends on our common stock since
our inception and do not plan to pay dividends in the foreseeable future. Any
earnings that we may realize will be returned to finance our growth.
The market prices for securities of biotechnology and pharmaceutical
companies, including ours, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors, such as fluctuations in our operating results, announcements
of technological innovations or new therapeutic products by us or others,
clinical trial results, developments concerning agreements with collaborators,
governmental regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by us or others, future sales
of substantial amounts of common stock by existing stockholders and general
market conditions, can have an adverse effect on the market price of the common
stock.
The information called for by Item 201(d) of Regulation S-K is provided
in response to Item 12 of this Annual Report on Form 10-K, which is incorporated
herein by reference.
20
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in
conjunction with the audited financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. The selected financial data for
the five years ended December 31, 2003 has been derived from our audited
financial statements.
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Investment income ......................... $ 179 $ 410 $ 452 $ 570 $ 835
Other income .............................. -- -- -- -- 600
--------- --------- --------- --------- ---------
Total revenues .......................... 179 410 452 570 1,435
Expenses:
Research and development
(which includes non-cash variable stock
compensation expense/(benefit) in
2003, 2002, 2001 and 2000 of $20, $(94),
$165 and $353, respectively) .............. 9,930 14,992 8,461 6,375 10,598
General and administrative
(which includes non-cash variable stock
compensation expense/(benefit) in 2003,
2002, 2001 and 2000 of $0, $(1,316), $657
and $891, respectively) ................... 5,046 2,946 4,761 5,313 4,357
--------- --------- --------- --------- ---------
Total expenses ....................... 14,976 17,938 13,222 11,688 14,955
--------- --------- --------- --------- ---------
Loss before income tax benefit ............... (14,797) (17,528) (12,770) (11,118) (13,520)
Income tax benefit ........................... 345 647 1,187 1,548 2,588
--------- --------- --------- --------- ---------
Net loss ..................................... (14,452) (16,881) (11,583) (9,570) (10,932)
Preferred stock dividends .................... 3,791 3,485 3,204 2,945 2,707
Common stock warrant deemed dividends -- -- 210 -- --
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders ............................. $ (18,243) $ (20,366) $ (14,997) $ (12,515) $ (13,639)
========= ========= ========= ========= =========
Basic/diluted net loss per share applicable
to common stockholders ................... $ (0.50) $ (0.64) $ (0.61) $ (0.63) $ (0.72)
========= ========= ========= ========= =========
Weighted average common shares used in
computing basic/diluted net loss per share 36,190 31,793 24,556 19,861 19,055
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments .................... $ 16,679 $ 17,439 $ 10,726 $ 9,955 $ 12,370
Working capital .............................. 15,033 13,786 9,758 9,754 10,425
Total assets ................................. 17,255 18,099 13,233 13,389 15,021
Accumulated deficit .......................... (187,619) (169,376) (149,009) (134,011) (121,496)
Total stockholders' equity ................... 15,384 14,303 10,871 11,453 12,827
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We are a product-based biopharmaceutical company primarily engaged in
the discovery and development of small molecule 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 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.
Alagebrium chloride (formerly ALT-71l) is our lead product candidate
and we believe the only A.G.E. Crosslink Breaker in advanced human testing. In
February, the United States Adopted Name (USAN) Council approved alagebrium
chloride as the generic name of the chemical compound formerly known as ALT-711.
Several
21
Phase 2 clinical trials have been completed: the DIAMOND trial in diastolic
heart failure, the SAPPHIRE and SILVER trial in systolic hypertension and a
trial in cardiovascular compliance. Based on evidence of alagebrium's
demonstrated efficacy and biological activity in these Phase 2 trials, as well
as a strong and consistent safety profile, additional Phase 2 trials are planned
in two major cardiovascular indications, systolic hypertension and diastolic
dysfunction in heart failure in the first half of 2004. The first of the Phase 2
trials was initiated in March 2004, SPECTRA, a Phase 2b trial in patients with
systolic hypertension. Importantly, there are no currently marketed
cardiovascular drugs that can work directly on the stiffening of the vasculature
that leads to systolic hypertension and heart failure.
Our primary priorities are to continue the clinical development of
alagebrium in systolic hypertension and diastolic dysfunction in heart failure
and to ensure that we have the funding and personnel necessary to accomplish
this objective.
As we continue clinical development of alagebrium, 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 alagebrium may address the cardiovascular, diabetes and primary care
physician markets.
We plan to continue to explore the use of topical A.G.E. Crosslink
Breakers in skin and photoaging, as a result of our recent evaluation of
ALT-744. 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 photoaging.
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 $187,619,000 as of December 31, 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, public offerings of common stock, private
placements of common and preferred equity securities, revenue from former
collaborative relationships, reimbursement of certain of our research and
development expenses by our collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey State net operating loss carryforwards.
Our business is subject to significant risks including, but not limited
to, (i) the 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 healthcare 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
Years Ended December 2003, 2002, 2001
Revenues
Total revenues for 2003, 2002 and 2001 were $179,000, $410,000 and
$452,000, respectively. Revenues were derived from interest earned on cash and
cash equivalents and short-term investments. The decrease in revenues in 2003
over 2002 was attributed to decreased investment balances and decreased interest
rates. The decrease in revenues in 2002 over 2001 was attributed to decreased
interest rates, partially offset by larger investment balances.
22
Operating Expenses
Total expenses decreased to $14,976,000 in 2003 from $17,938,000 in
2002, and increased from $13,222,000 in 2001, and in each year consisted
primarily of research and development expenses. Research and development
expenses were $9,930,000 in 2003, $14,992,000 in 2002 and $8,461,000 in 2001,
and included non-cash variable stock compensation expense/(benefit) of $20,000,
$(94,000) and $165,000, respectively. Research and development expenses
consisted primarily of third-party expenses associated with clinical and
pre-clinical studies, manufacturing costs, including the development and
preparation of clinical supplies, personnel and personnel-related expenses and
an allocation of facility expense.
Research and development expenses decreased in 2003 from 2002 by
$5,062,000, or 33.8%. This was primarily related to decreased clinical trial
costs associated with the crosslink breaker program. In 2003, approximately
$1,788,000 of total research and development expenditures was related to the
Phase 2b SAPPHIRE and SILVER trial. The equivalent amount in 2002 was
$6,631,000. This reduction is a result of the completion of the Phase 2b
SAPPHIRE and SILVER trial in July 2003. The 2003 results also included
approximately $4,147,000 in personnel and personnel-related costs, $1,279,000 in
facility allocation, $751,000 in pre-clinical expenses, $672,000 of
manufacturing costs (tableting, drug stability studies and active pharmaceutical
ingredient development) and $432,000 in consulting expense.
Research and development expenses increased in 2002 from 2001 by
$6,531,000, or 77.2%. This was primarily related to increased clinical trial
costs associated with the crosslink breaker program. In 2002, approximately
$6,631,000 of total research and development expenditures was related to the
Phase 2b SAPPHIRE and SILVER trial and the Phase 2a DIAMOND trial, as compared
to approximately $971,000 in 2001, the year the trials were initiated. The 2002
results also included approximately $3,250,000 in personnel and
personnel-related costs, $683,000 in pre-clinical expenses and approximately
$1,872,000 of manufacturing costs. These manufacturing costs included finalizing
the development of manufacturing processes for the production of clinical trial
supplies and potential commercialization of alagebrium, drug stability studies
and drug packaging.
General and administrative expenses were $5,046,000 in 2003, increased
from $2,946,000 in 2002 and from $4,761,000 in 2001. The changes in general and
administrative expenses consisted primarily of non-cash variable stock
compensation expense/(benefit) of $0, $(1,316,000) and $657,000 in 2003, 2002
and 2001, respectively. Excluding the non-cash variable stock compensation,
general and administrative expenses were $5,046,000, $4,262,000 and $4,104,000
in 2003, 2002 and 2001, respectively. The increase in 2003 over 2002 is
primarily related to $550,000 of business development and marketing costs
incurred during the first half of 2003 associated with the unblinding of data
from the SAPPHIRE and SILVER trial in July 2003.
At December 31, 2003, we had available federal net operating loss
carryforwards, which expire in various amounts from the years 2006 through 2023,
of approximately $144,952,000 and State net operating loss carryforwards, which
expire in the years 2004 through 2010, of approximately $91,343,000. In
addition, at December 31, 2003, we had federal research and development credit
carryforwards of approximately $6,401,000 and State research and development tax
credit carryforwards of approximately $1,600,000.
Net Loss
We had net losses of $14,452,000 in 2003, $16,882,000 in 2002 and
$11,584,000 in 2001. Included in our net loss in 2003, 2002 and 2001 was the
sale of approximately $2,083,000, $1,839,000 and $6,243,000, respectively, of
our gross State net operating loss carryforwards and approximately $209,000,
$578,000 and $802,000, respectively, of our State research and development tax
credit carryforwards. The proceeds from the sale in 2003, 2002 and 2001 were
approximately $345,000, $647,000 and $1,187,000, respectively.
Included in the net loss applicable to common stockholders for 2003,
2002 and 2001 were preferred stock dividends of approximately $3,791,000,
$3,485,000 and $3,204,000, respectively, and common stock deemed dividends of
$210,000 in 2001.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents and short-term investments at December
31, 2003, of $16,679,000 compared to $17,439,000 at December 31, 2002, a
decrease of $760,000. Cash used in operations for the year ended December 31,
2003, totaled $15,906,000 (net of $345,000 of cash received for the sales of our
New Jersey State net operating loss carryforwards and State
23
research and development tax credit carryforwards) and consisted primarily of
research and development expenses, personnel and related costs, and facility
expenses. Cash used in investing activities for the year ended December 31,
2003, included approximately $86,000 of capital expenditures and restricted
cash of $250,000 associated with our new facility lease. This was partially
offset by $15,484,000 of cash provided by financing activities for the year
ended December 31, 2003, related to public offerings of common stock and
proceeds from stock option exercises. In October 2003, we completed a public
offering of 4,457,146 shares of common stock at $1.75 per share, which provided
net proceeds of approximately $7,772,000. The Stock Purchase Agreement, as
amended, provides that the we could sell up to a total of 1,559,456 additional
shares of common stock at $1.85 per share for approximately $2,885,000 in gross
proceeds to such of the investors who elect to purchase shares on April 20,
2004, which is 120 business days after the initial closing. The investors are
not obligated and at their discretion may elect not to purchase additional
shares. In March 2003, we completed a public offering of 2,300,000 shares of
common stock at $3.50 per share, which provided net proceeds of $7,656,000.
In 2003, 2002 and 2001, we sold $2,083,000, $1,839,000 and $6,243,000,
respectively, of our gross State net operating loss carryforwards and $209,000,
$578,000 and $802,000, respectively, of our State research and development tax
credit carryforwards under the State Program. The proceeds from the sale in
2003, 2002 and 2001 were $345,000, $647,000 and $1,187,000, respectively, and
such amounts were recorded as a tax benefit in the statements of operations. As
of December 31, 2003, we had State net loss carryforwards and State research and
development tax credit carryforwards available for sale of approximately
$92,944,000. The State renews the Program annually and limits the aggregate
benefit to $10,000,000. We cannot be certain if we will be able to sell any or
all of these carryforwards under the Program.
We do not have any approved products and currently derive cash from
sales of our securities, sales of our New Jersey operating loss carryforwards
and interest on cash and cash equivalents. We are highly susceptible to
conditions in the global financial markets and in the pharmaceutical industry.
Positive and negative movement in those markets will continue to pose
opportunities and challenges to us. Previous downturns in the market valuations
of biotechnology companies and of the equity markets more generally have
restricted our ability to raise additional capital on favorable terms.
We expect to utilize cash to fund our operations and to initiate new
Phase 2 trials in systolic hypertension and diastolic dysfunction in heart
failure during the first half of 2004. The first of the Phase 2 trials was
initiated in March 2004, SPECTRA, a Phase 2b trial in patients with systolic
hypertension. The cost of these trials, exclusive of our internal cost, is
currently estimated to be approximately $8.2 million for the systolic
hypertension trial and $0.5 million for the first phase of the diastolic
dysfunction trial. The cost includes executed, but cancelable, agreements with
outside organizations. Based on our projected spending levels, including these
trials, which are expected to continue into 2005, we do not currently have
adequate cash and cash equivalents to complete the trials or complete the 2004
fiscal year and therefore will require additional funding during 2004. As a
result, throughout 2004 and into 2005, we will monitor our liquidity position
and the status of our clinical trials. If we are unsuccessful in our efforts to
raise additional funds through the sale of additional equity securities, we will
be required to significantly reduce or curtail our research and product
development activities, including the number of patients enrolled in our trials
and other operations, if our level of cash and cash equivalents fall below
pre-determined levels. We have the intent and ability to quickly and
significantly reduce the cash burn rate, if necessary, as we have limited fixed
commitments. We believe that such curtailment actions, if needed, will enable us
to fund our operations into early 2005.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of alagebrium and our other product candidates
and 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 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 short-term and long-term capital requirements, we, as
stated above, may seek access to the public or private equity markets. 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 we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our
24
technologies or product candidates. If we are unable to obtain the necessary
funding, we may need to cease operations.
Our current priorities and the focus of our resources are the
evaluation and continued development of alagebrium and determining the optimal
course for the development of other compounds in our patent estate. As we
continue clinical development of alagebrium, 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. As described above, we believe
that additional development of this compound and other product candidates will
require us to obtain additional funding.
COMMITMENTS
The table below presents our contractual obligations as of December 31,
2003:
Payments Due by Period
--------------------------------------------------------------------
Within 1 1-3 4-5 After 5
Total Year Years Years Years
-------- -------- -------- ------ -----
Contractual Obligations:
Operating lease commitments........... $ 946,870 $303,377 $639,244 $4,249 $ --
Employment agreements(1).............. 800,616 (1) (1) (1) (1)
---------- -------- -------- ------ -----
Total contractual obligations...... $1,747,486 $303,377 $639,244 $4,249 $ --
========== ======== ======== ====== =====
(1) We have employment agreements with key executives, which provide that
either party may terminate the agreement upon 30 days' prior written notice. If
we terminate all of the agreements without cause, we are subject to a salary
continuation obligation totaling $800,616.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC 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, 2003, and accompanying audited financial statements
and related notes thereto, as well as our definitive Proxy Statement for the
2003 Annual Meeting. We believe the effect of the following accounting policy is
significant to our results of operations and financial condition.
We account for options granted to employees and directors in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," 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. Financial Accounting Standards Board
("FASB") Interpretation No. 44 ("FIN 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 applicable to common stockholders may
be subject to volatility. Had we accounted for repricing of stock option grants
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates
primarily to our investment in marketable securities. We do not use derivative
financial instruments in our investments. Our investments consist primarily of
debt instruments of the United States government, government agencies, financial
institutions and corporations with strong credit ratings. The table below
presents principal amounts and related weighted average interest rates as of
December 31, 2003 for our investment portfolio. There are no maturities after
2003, and our exposure is limited based on the short-term nature of these
investments.
25
December 31,
Assets 2003
- ------ ----
Cash equivalents:
Fixed rate......................... 16,678,582
Average interest rate.............. .96%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) The financial statements required to be filed pursuant to this Item
8 are appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Index to Financial Statements and
Schedules" on page 38.
(b) The unaudited quarterly financial data for the two-year period
ended December 31, 2003 is as follows:
Net Loss
Loss Before Applicable to
Income Tax Common Basic/Diluted
Revenues Expenses Benefit Stockholders Loss Per Share
-------- -------- -------- ------------ --------------
(in thousands, except per share amounts)
2003
- --------------
First Quarter $ 49 $ 5,272 $ (5,223) $ (6,128) $ (0.18)
Second Quarter 55 5,117 (5,062) (5,997) (0.17)
Third Quarter 36 1,743 (1,707) (2,672) (0.07)
Fourth Quarter 39 2,844 (2,805) (3,446) (0.08)
-------- -------- -------- -------- --------
Total Year $ 179 $ 14,976 $(14,797) $(18,243) $ (0.50)
2002
- --------------
First Quarter $ 136 $ 3,878 $ (3,742) $ (4,574) $ (0.15)
Second Quarter 117 4,961 (4,844) (5,703) (0.18)
Third Quarter 93 5,307 (5,214) (6,101) (0.19)
Fourth Quarter 64 3,792 (3,728) (3,988) (0.12)
-------- -------- -------- -------- --------
Total Year $ 410 $ 17,938 $(17,528) $(20,366) $ (0.64)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On May 30, 2002, we dismissed Arthur Andersen LLP ("Andersen") as our
principal independent accountants and engaged KPMG LLP ("KPMG") to serve as our
principal independent accountants for the fiscal year ending December 31, 2002.
Andersen's reports on our financial statements, as of and for the years
ended December 31, 2001 and 2000, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and the period from
December 31, 2001 to the date of dismissal of Andersen, (i) there were no
disagreements with Andersen on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter of the disagreement(s) in
connection with its report, and (ii) there were no "reportable events," as such
term is defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. 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 year covered by this Annual Report on Form 10-K. Based upon
that evaluation, the Chief Executive Officer and the Vice President, Finance,
have concluded that as of the end of such fiscal year, 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.
26
(b) Changes in Internal Controls. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) during the last quarter of the year ended December 31, 2003 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to our certificate of incorporation, the Board of Directors is
divided into three classes, each of which serves a term of three years. Class A
consists of Ms. Breslow, Mr. Dalby and Mr. Moore, whose terms will expire at the
Annual Meeting of Stockholders in 2004. Class B consists of Mr. Moch, Dr.
Bransome and Dr. Naimark, whose terms will expire at the Annual Meeting of
Stockholders in 2005. Class C consists of Mr. McCurdy and Dr. Novitch, whose
terms will expire at the Annual Meeting of Stockholders in 2006.
The current Board of Directors, including the nominees, is comprised of
the following persons:
Served as a
Name Age Director Since Positions with Alteon
- ---- --- -------------- ---------------------
Kenneth I. Moch.......................... 49 1998 Chairman of the Board, President and
Chief Executive Officer
Edwin D. Bransome, Jr., M.D. ............ 70 1999 Director
Marilyn G. Breslow....................... 59 1988 Director
Alan J. Dalby............................ 67 1994 Director
David McCurdy............................ 53 1997 Director
Thomas A. Moore.......................... 53 2001 Director
George M. Naimark, Ph.D.................. 79 1999 Director
Mark Novitch, M.D........................ 71 1994 Director
The principal occupations and business experience, for at least the
past five years, of each director are as follows:
Kenneth I. Moch, Chairman of the Board, President and Chief Executive
Officer, joined the Company in February 1995, as Senior Vice President, Finance
and Business Development and Chief Financial Officer. Mr. Moch became President,
Chief Executive Officer and a director of the Company in December 1998. In June
2001, he was named Chairman of the Board. From 1990 to 1995, Mr. Moch serviced
as President and Chief Executive Officer of Biocyte Corporation, a cellular
therapy company that pioneered the use of cord blood stem cells in
transplantation therapy. Mr. Moch was a founder and the Managing General Partner
of Catalyst Ventures, a seed venture capital partnership, and was a founder of
The Liposome Company, Inc. in Princeton, New Jersey, where he served as Vice
President from 1982 to 1988. Previously, he was a management consultant with
McKinsey & Company, Inc. and a biomedical technology consultant with Channing,
Weinberg & Company, Inc. Mr. Moch received an A.B. in Biochemistry from
Princeton University, and an M.B.A. with emphasis in Finance and Marketing from
the Stanford Graduate School of Business.
Edwin D. Bransome, Jr., M.D., has been a Director of the Company since
July 1999. He is a Professor of Medicine and Physiology Emeritus at the Medical
College of Georgia. He retired as Chief of the Section of Endocrinology and
Metabolism in 2000, is the Past-President of the United States Pharmacopoeial
Convention and has been a member of the USP Board of Trustees since 1990. He
served on the Georgia Department of Medical Assistance (Medicaid) Drug
Utilization Board from 1992-2000 and was its first Chairman. Currently, Dr.
Bransome is in medical practice as a consultant in Endocrinology. He is a member
of the editorial board of the journal, Diabetes Care. Dr. Bransome has had
faculty positions at the Scripps Clinic and Research Foundation, MIT and the
Harvard University School of Medicine. He received his A.B. in 1954 from Yale
University and received his M.D. from Columbia University College of Physicians
and Surgeons in 1958. His post-graduate training in Internal Medicine and
Clinical Endocrinology fellowship was at the Peter Bent Brigham Hospital in
Boston and in Biochemistry at Columbia University College of Physicians and
Surgeons.
27
Marilyn G. Breslow has been a Director of the Company since June 1988.
She has been a Portfolio Manager/Analyst for W. P. Stewart & Co., Inc., the
research subsidiary of W. P. Stewart & Co., Ltd., an investment advisory firm,
since 1990, and is President of the New York office of WPS, Inc. She was a
General Partner of Concord Partners and a Vice President of Dillon, Read & Co.,
Inc. from 1984 to 1990. Prior to Dillon, Read & Co., she worked at Polaroid
Corporation from 1973 to 1984 and was with Peat, Marwick, Mitchell and Company
from 1970 to 1972 and ICF, Inc. from 1972 to 1973. Ms. Breslow holds a B.S.
degree from Barnard College and an M.B.A. from the Harvard Graduate School of
Business Administration.
Alan J. Dalby has been a Director of the Company since December 1994.
He is the former Chairman of Reckitt Benckiser plc, a household products
company, and former Chairman, Chief Executive Officer and a founder of Cambridge
NeuroScience, Inc. He was Executive Vice President and member of the Board of
Directors for SmithKline Beckman Corporation, retiring in 1987. Mr. Dalby is a
Director of Acambis plc.
David McCurdy, has been a Director of the Company since June 1997. He
is currently the President of Electronic Industries Alliance ("EIA"), the
premier trade organization representing more than 2,100 of the world's leading
electronics manufacturers. Before becoming President of EIA in November 1998,
Mr. McCurdy was Chairman and Chief Executive Officer of the McCurdy Group
L.L.C., a business consulting and investment firm focused on high-growth
companies in the fields of healthcare, high technology and international
business, which he formed in 1995. Prior to forming the McCurdy Group, Mr.
McCurdy served for 14 years in the United States House of Representatives from
the fourth district of Oklahoma. He attained numerous leadership positions,
including Chairman of the House Intelligence Committee and subcommittee chairs
in both the House Armed Services Committee and the Science and Space Committee.
He held a commission in the United States Air Force Reserve attaining the rank
of major and serving as a Judge Advocate General (JAG). A 1972 graduate of the
University of Oklahoma, Mr. McCurdy received his J.D. in 1975 from Oklahoma's
Law School. He also studied international economics at the University of
Edinburgh, Scotland, as a Rotary International Graduate Fellow.
Thomas A. Moore has been a Director of the Company since October 2001.
He was President and Chief Executive Officer of Biopure Corporation, a leading
developer, manufacturer and marketer of oxygen therapeutics for the treatment of
anemia and other applications, from 2002 to 2004. Prior to joining Biopure in
2002, Mr. Moore was President and Chief Executive Officer of Nelson
Communications Worldwide, one of the largest providers of healthcare marketing
services globally. Mr. Moore was President of Procter & Gamble's worldwide
prescription and over-the-counter healthcare products business, and Group Vice
President of the Procter & Gamble Company. He is a trustee of the Institute for
Cancer Prevention, a non-profit organization that researches the nutritional and
environmental factors in cancer and other diseases. Mr. Moore holds a B.A. in
History from Princeton University.
George M. Naimark, Ph.D., has been a Director of the Company since July
1999. He is President of Naimark & Barba, Inc., a management consultancy, since
September 1966, and Naimark & Associates, Inc. a private healthcare consulting
organization, since February 1994. Dr. Naimark has more than 30 years of
experience in the pharmaceutical, diagnostic and medical device industries. His
experience includes management positions in research and development, new
product development and quality control. In addition, Dr. Naimark has authored
books on patent law, communications and business, as well as many articles that
appeared in general business, marketing, scientific and medical journals and was
the editor of a medical journal. He received his Ph.D. from the University of
Delaware in 1951, and received a B.S. and M.S. from Bucknell University in 1947
and 1948, respectively.
Mark Novitch, M.D., has been a Director of the Company since June 1994.
He retired as Vice Chairman and Chief Compliance Officer of the Upjohn Company
in December 1993. Prior to joining Upjohn in 1985, he was Deputy Commissioner of
the United States Food and Drug Administration. Dr. Novitch is a Director of
Guidant Corporation, a supplier of cardiology and minimally invasive surgery
products; Neurogen Corporation, a biopharmaceutical firm focused on central
nervous system disorders; and Kos Pharmaceuticals, Inc., a developer of
pharmaceutical products for cardiovascular and respiratory conditions. He
graduated from Yale University and received his M.D. from New York Medical
College.
Audit Committee of the Board
In 2003, the Audit Committee of the Board of Directors was comprised of
Marilyn G. Breslow, Edwin D. Bransome, Jr., M.D., Alan J. Dalby, David McCurdy,
Thomas A. Moore, George M. Naimark, Ph.D., and Mark Novitch, M.D. All of the
members of the Audit Committee are independent, as such term is defined by
Section 121A of the American Stock Exchange listing standards. The Board of
Directors does not have an "audit committee
28
financial expert," within the meaning of applicable regulations of the SEC,
serving on its Audit Committee. The Board of Directors believes that one or more
members of the Audit Committee satisfy the financial sophistication requirement
of the American Stock Exchange and are capable of (i) understanding generally
accepted accounting principles ("GAAP") and financial statements, (ii) assessing
the application of GAAP in connection with our accounting for estimates,
accruals and reserves, (iii) analyzing and evaluating our financial statements,
(iv) understanding our internal controls and procedures for financial reporting;
and (v) understanding audit committee functions, all of which are attributes of
an audit committee financial expert. However, the Board of Directors believes
that these members may not have obtained these attributes through the experience
specified, and therefore may not qualify as an "audit committee financial
expert."
Executive Officers
The following table identifies our current executive officers:
In Current
Name Age Capacities In Which Served Positions Since
---- --- -------------------------- ---------------
Kenneth I. Moch....................... 49 Chairman of the Board June 2001
President and Chief Executive Officer December 1998
Robert C. deGroof, Ph.D. (1).......... 59 Senior Vice President March 2000
Scientific Affairs
Judith S. Hedstrom (2)................ 47 Senior Vice President February 2002
Corporate Development
Elizabeth A. O'Dell (3)............... 43 Vice President, Finance October 1993
Secretary and Treasurer
- --------------------
(1) Robert C. deGroof, Ph.D., joined Alteon as Senior Vice President,
Scientific Affairs, in March 2000. From April 1990 to February 2000, he
was the President of Keystone Scientific Management. Dr. deGroof
previously served as Director of Regulatory Affairs, World Wide
Development Operations, for Bristol-Myers Squibb from July 1987 to March
1990. From November 1979 to July 1987, he served in various medical and
regulatory positions within Johnson & Johnson. Prior to joining the
industry, Dr. deGroof was an Assistant Professor of Pharmacology at
Jefferson Medical College, Thomas Jefferson University, was the recipient
of a National Institutes of Health postdoctoral fellowship at the
University of Pennsylvania and was a Grass Fellow in Neurophysiology at
the Marine Biological Laboratory, Woods Hole. Dr. deGroof received his
B.S. at the University of Florida in 1967 and his Ph.D. in Physiology and
Pharmacology from Duke University in 1973.
(2) Judith S. Hedstrom was appointed Senior Vice President, Corporate
Development, in February 2002. From January 1996 to February 2002, she
was a leader of the Pharmaceuticals and Medical Products Practice at
McKinsey & Company, Inc., a global consulting firm, where she provided
strategic advice on R&D, marketing, sales and business development
matters to many biotechnology and pharmaceutical clients. Prior to that,
Ms. Hedstrom was Vice President of Business Development at APACHE Medical
Systems from April 1993 to January 1996. From June 1988 to April 1993,
she was a Senior Consultant with The Wilkerson Group, formerly a leading
healthcare consulting firm. Ms. Hedstrom received her B.A. and M.B.A.
degrees from the University of Chicago.
(3) Elizabeth A. O'Dell has been Vice President, Finance, Secretary and
Treasurer since October 1993. She served as Alteon's Director of Finance
from February 1993 to September 1993 and as Controller of Alteon from
February 1992 to February 1993. Ms. O'Dell was the Controller of
Radiodetection Corporation from November 1991 to January 1992. From March
1987 to November 1991, she held various positions at Kratos Analytical,
Inc. Prior to that, she served for five years in public accounting at
PricewaterhouseCoopers LLP and Deloitte & Touche LLP. Ms. O'Dell received
her B.B.A. and M.B.A. from Pace University. She is also a CPA in New
Jersey.
Executive officers are elected annually and serve at the pleasure of the
Board of Directors.
29
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors, and persons who own more than 10% of a
registered class of our equity securities, to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish us with
copies of all Forms 3, 4 and 5 they file.
Based solely on our review of the copies of such forms we have received
and written representations from certain reporting persons that they were not
required to file Forms 5 for specified fiscal years, we believe that all of our
officers, directors, and greater than 10% beneficial owners complied with all
filing requirements applicable to them with respect to transactions during
fiscal 2003.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to
all of our directors, officers and employees, including our principal executive
officer, principal financial officer and principal accounting officer or
controller. We have posted this Code on our website at www.alteon.com.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
annual and long-term compensation for the fiscal years ended December 31, 2003,
2002 and 2001, of our Chief Executive Officer and three other highly compensated
executive officers of Alteon who were serving as executive officers at December
31, 2003, or who served as executive officers during the fiscal year ended
December 31, 2003 (collectively, the "Named Officers"):
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Stock Option Awards
------------------------------- ------------------- All Other
Name and Principal Position Year Salary Bonus (Number of Shares) Compensation
- --------------------------- ---- ------ ----- ------------------ ------------
Kenneth I. Moch................ 2003 $353,600 $200,000(1) 100,000 $ 3,000(2)
President and 2002 340,000 -- 100,000 2,750(2)
Chief Executive Officer 2001 326,025 100,000(3) 500,000 2,625(2)
Robert C. deGroof, Ph.D........ 2003 $234,780 $ 68,333 75,000 $41,385(4)
Senior Vice President 2002 225,750 -- 175,000 43,514(5)
Scientific Affairs 2001 215,000 50,000(3) 75,000 35,253(6)
Judith S. Hedstrom (7)......... 2003 $223,600 $ 78,333(8) 150,000 $ 3,000(2)
Senior Vice President 2002 188,125 15,000(9) 275,000 2,750(2)
Corporate Development
Elizabeth A. O'Dell............ 2003 $176,800 $ 30,000(10) 150,000 $ 3,000(2)
Vice President, Finance 2002 170,000 -- 30,000 2,750(2)
Secretary and Treasurer 2001 150,800 15,000(3) 11,667 2,625(2)
- ---------------------
(1) Includes a $100,000 deferred performance bonus relating to the year
ended December 31, 2003, paid in 2004.
(2) Represents matching 401(k) contributions we paid on behalf of the
executive officer.
(3) Represents a deferred performance bonus relating to the year
ended December 31, 2001, paid in 2002.
(4) Includes a housing allowance of $30,000, medical premiums of $7,885 and
matching 401(k) contributions of $3,500.
(5) Includes a housing allowance of $30,000, medical premiums of $10,514
and matching 401(k) contributions of $3,000.
(6) Includes a housing allowance of $30,000, medical premiums of $2,628 and
matching 401(k) contributions of $2,625.
30
(7) Ms. Hedstrom began serving as Senior Vice President, Corporate
Development, in February 2002.
(8) Includes a $45,000 deferred performance bonus relating to the year
ended December 31, 2003, paid in 2004.
(9) Represents a deferred bonus relating to the year ended 2002, paid in
2003.
(10) Includes a $20,000 deferred performance bonus relating to the year
ended December 31, 2003, paid in 2004.
The following tables set forth certain information concerning grants
and exercises of stock options during the fiscal year ended December 31, 2003,
to and by the Named Officers:
Option Grants in Last Fiscal Year
Percentage Potential Realizable
of Total Value at Assumed Annual
Number of Options Exercise Rates of Stock Price
Securities Granted to or Appreciation for
Underlying Employees in Base Option Term(1)
Options Fiscal Price Per Expiration ------------------------
Name Granted 2003 Share Date 5% 10%
---- ------- ---- ----- -------- ----------- --------
Kenneth I. Moch............. 100,000 13.7% $1.56 12/10/13 $ 98,108 $248,624
Robert C. deGroof, Ph.D. ... 75,000 10.2% 1.56 12/10/13 73,581 186,468
Judith S. Hedstrom.......... 150,000 20.5% 1.56 12/10/13 147,161 372,936
Elizabeth A. O'Dell......... 150,000 20.5% 1.56 12/10/13 147,161 372,936
- ---------------------
(1) The dollar amounts under these columns are the result of calculations
assuming that the price of common stock on the date of the grant of the
option increases at the hypothetical 5% and 10% rates set by the
Securities and Exchange Commission and therefore are not intended to
forecast possible future appreciation, if any, of our stock price over
the option term of 10 years.
Aggregated Option Exercises In Last Fiscal Year
and Fiscal Year-End Option Values
Number of
Shares Securities Underlying Value of
Acquired Unexercised Options at Unexercised
on December 31, 2003 in-the-Money Options at
Exercise Value -------------------------- December 31, 2003(1)
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- --- -------- ----------- ------------- ----------- -------------
Kenneth I. Moch ............ -- -- 605,308 466,667 $211,568 $ 1,000
Robert C. deGroof, Ph.D..... -- -- 309,583 340,417 -- 750
Judith S. Hedstrom ......... -- -- 70,833 354,167 -- 1,500
Elizabeth A. O'Dell ........ 15,500 $ 13,439 343,667 180,000 99,031 1,500
- ----------------
(1) Based on the closing price on the American Stock Exchange at December
31, 2003 ($1.57).
Director Compensation
All of the directors are reimbursed for their expenses for each Board
and committee meeting attended. Directors who are not compensated as Alteon
employees receive $1,500 per meeting attended in person and $1,000 for each
meeting attended by telephone for their service to the Board. Non-compensated
directors also receive, upon the date of their election or re-election to the
Board and on the dates of the next two Annual Meetings of Stockholders (subject
to their continued service on the Board of Directors), a stock option to
purchase 20,000 shares of common stock (subject to adjustment if they received
stock options upon appointment to the Board between Annual Meetings of
Stockholders to fill a vacancy or newly created directorship) at an exercise
price equal to the fair market value of the common stock on the date of grant.
Each of these options will vest and become exercisable on the date of Alteon's
first Annual Meeting of Stockholders following the date of grant, subject to the
director's continued service on the Board.
31
Compensation Committee Interlocks and Insider Participation
The persons who served as members of the Compensation Committee of the
Board of Directors during 2003 were Alan J. Dalby, Edwin D. Bransome, Jr., M.D.,
Marilyn G. Breslow, David McCurdy, Thomas A. Moore, George M. Naimark, Ph.D.,
and Mark Novitch, M.D. None of the members of the Compensation Committee was an
officer, former officer or employee of Alteon or had any relationship with
Alteon requiring disclosure under Item 404 of Regulation S-K under the
Securities Exchange Act of 1934, as amended. No executive officer has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity whose executive officers served as a
director of Alteon or a member of our Compensation Committee.
Employment Agreements and Termination of Employment Arrangements with Executive
Officers
Kenneth I. Moch entered into a three-year amended and restated
employment agreement with Alteon as of December 15, 1998. By letter agreement
dated December 3, 2001, the term of Mr. Moch's amended and restated employment
agreement was extended for an additional three years to December 15, 2004.
Pursuant to this letter agreement, Mr. Moch received stock options to purchase
an aggregate of 500,000 shares of our common stock. Under the amended and
restated employment agreement, Mr. Moch serves as our Chief Executive Officer
and is entitled to an annual salary of $300,000 (subject to annual review by the
Board of Directors) plus an annual bonus awarded at the discretion of the Board
of Directors. Based on the provisions of his agreement, in December 2003, the
Board of Directors approved an increase in Mr. Moch's base salary to $367,744.
Robert C. deGroof, Ph.D., entered into a three-year employment
agreement with Alteon as of March 14, 2000. By letter agreement dated March 14,
2003, the term of Dr. deGroof's amended and restated employment agreement was
extended for an additional three years to March 14, 2006. Pursuant to this
letter agreement, Dr. deGroof received stock options to purchase an aggregate of
100,000 shares of our common stock and is entitled to an annual salary of
$234,780 (subject to annual review by the Board of Directors) plus an annual
bonus awarded at the discretion of the Board of Directors. Based on the
provisions of his agreement, in December 2003, the Board of Directors approved
an increase in Dr. deGroof's base salary to $250,000.
Judith S. Hedstrom entered into a three-year employment agreement with
Alteon as of February 11, 2002. Under the employment agreement, Ms. Hedstrom is
entitled to an annual salary of $215,000 (subject to annual review by the Board
of Directors) plus an annual bonus awarded at the discretion of the Board of
Directors. Ms. Hedstrom received stock options to purchase 200,000 shares of our
common stock. Pursuant to the agreement, in December 2003, the Board of
Directors approved an increase in Ms. Hedstrom's base salary to $250,000.
Elizabeth A. O'Dell, by letter agreement dated December 22, 2003,
entered into an amended and restated employment agreement for an additional
three years to December 31, 2006. Pursuant to this letter agreement, Ms. O'Dell
received stock options to purchase an aggregate of 100,000 shares of our common
stock and is entitled to an annual salary of $182,872 (subject to annual review
by the Board of Directors) plus an annual bonus awarded at the discretion of the
Board of Directors.
In addition to provisions in the above-described agreements requiring
each individual to maintain the confidentiality of our information and assign
inventions to us, such executive officers have agreed that during the terms of
their agreements and for one year thereafter, they will not compete with us by
engaging in any capacity in any business that is competitive with our business.
The employment agreements of Mr. Moch, Dr. deGroof, Ms. Hedstrom and Ms. O'Dell
provide that either party may terminate the agreement upon 30 days' prior
written notice, subject to a salary continuation obligation of Alteon if it
terminates the agreements without cause. Mr. Moch and Ms. O'Dell will receive a
12-month salary continuation and Dr. deGroof and Ms. Hedstrom will receive a
six-month salary continuation under such circumstances.
All employment agreements between Alteon and its Vice Presidents
provide that all unvested stock options held by such Vice Presidents will vest
and become exercisable immediately in the event of a change in control of
Alteon.
Change in Control Severance Benefits Plan
In February 1996, we adopted the Alteon Inc. Change in Control
Severance Benefits Plan to protect and retain qualified employees and to
encourage their full attention, free from distractions caused by personal
uncertainties and risks in the event of a pending or threatened change in
control of Alteon. The Severance Plan
32
provides for severance benefits to employees upon certain terminations of
employment after or in connection with a change in control of Alteon as defined
in the Severance Plan. Following a qualifying termination that occurs as a
result of a change in control, officers of Alteon will be entitled to
continuation of (i) their base salary for a period of 24 months, and (ii) all
benefit programs and plans providing for health and insurance benefits for a
period of up to 18 months. In addition, upon a change in control of Alteon, all
outstanding unexercisable stock options held by employees will become
exercisable.
401(k) Plan
We have a tax-qualified employee savings and retirement plan (the
"401(k) Plan") covering all of our employees. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit ($13,000 in 2004) and have the amount of
such reduction contributed to the 401(k) Plan. The 401(k) Plan does not require
that we make additional matching contributions to the 401(k) Plan on behalf of
participants in the 401(k) Plan. However, in 1998, we began making discretionary
contributions at a rate of 25% of employee contributions up to a maximum of 5%
of their base salary. Contributions by employees to the 401(k) Plan and income
earned on such contributions are not taxable to employees until withdrawn from
the 401(k) Plan. The Trustees under the 401(k) Plan, at the direction of each
participant, invest the assets of the 401(k) Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Principal Stockholder Information
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of February 23, 2004, except as
otherwise set forth below, by each (i) person who is known to Alteon to own
beneficially more than 5% of the common stock, and (ii) current director and
Named Officer, including the nominees, and by all current directors and officers
as a group:
Amount and Nature of
Name of Beneficial Owner (1) Beneficial Ownership (1) Percent of Class (2)
---------------------------- ------------------------ --------------------
Charles Livingston Grimes................................... 2,500,000 (3) 6.2%
P.O. Box 136
Mendenhall, PA 19357
William Harris Investors, Inc............................... 2,083,400 (4) 5.1%
2 North LaSalle Street Suite 400
Chicago, IL 60602
Kenneth I. Moch............................................. 649,097 (5) 1.5%
Edwin D. Bransome, Jr., M.D................................. 72,500 (6) *
Marilyn G. Breslow**........................................ 128,467 (7) *
Alan J. Dalby**............................................. 134,998 (8) *
David McCurdy............................................... 106,067 (9) *
Thomas A. Moore**........................................... 59,000 (10) *
George M. Naimark, Ph.D. ................................... 82,337 (11) *
Mark Novitch, M.D........................................... 394,667 (12) *
Robert C. deGroof, Ph.D. ................................... 330,416 (13) *
Judith S. Hedstrom.......................................... 91,666 (14) *
Elizabeth A. O'Dell......................................... 403,667 (15) *
All current directors and officers as a group (11 persons).. 2,452,882 (16) 5.7%
- -----------------------
* Less than one percent.
** Nominee for election to the Board of Directors.
(1) Beneficial ownership is determined in accordance with the rules of the
SEC, and generally includes voting or investment power with respect to
securities. Shares of common stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage
33
ownership of the person holding such options and the percentage
ownership of any group of which the holder is a member, but are not
deemed outstanding for computing the percentage ownership of any other
person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table have
sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(2) Applicable percentage of ownership is based on 40,472,898 shares of
common stock outstanding.
(3) As set forth in Schedule 13D/A, dated August 20, 2003, filed by Mr.
Grimes with the SEC.
(4) As set forth in Schedule 13G, dated February 17, 2004, filed by William
Harris Investors, Inc. with the SEC.
(5) Includes 2,023 shares of common stock and 646,974 shares of common
stock subject to options which were exercisable as of February 23,
2004, or which will become exercisable within 60 days after February
23, 2004, and 100 shares held by Mr. Moch's sons. Does not include
options to purchase 425,001 shares of common stock which will become
exercisable more than 60 days after February 23, 2004, nor options to
purchase 1,150,025 shares of common stock held in trust for Mr. Moch's
minor children, for which Mr. Moch's wife is the trustee and Mr. Moch
disclaims beneficial ownership.
(6) Includes 10,000 shares of common stock held directly by Dr. Bransome,
2,500 shares held by his wife and 60,000 shares of common stock subject
to options that were exercisable as of February 23, 2004, or which will
become exercisable within 60 days after February 23, 2004. Does not
include an option to purchase 20,000 shares of common stock which will
become exercisable more than 60 days after February 23, 2004.
(7) Includes 128,467 shares of common stock subject to options that were
exercisable as of February 23, 2004, or which will become exercisable
within 60 days after February 23, 2004. Does not include an option to
purchase 20,000 shares of common stock which will become exercisable
more than 60 days after February 23, 2004.
(8) Includes 12,467 shares of common stock and 122,531 shares of common
stock subject to options which were exercisable as of February 23,
2004, or which will become exercisable within 60 days after February
23, 2004. Does not include an option to purchase 20,000 shares of
common stock which will become exercisable more than 60 days after
February 23, 2004.
(9) Includes 106,067 shares of common stock subject to options which were
exercisable as of February 23, 2004, or which will become exercisable
within 60 days after February 23, 2004. Does not include an option to
purchase 20,000 shares of common stock which will become exercisable
more than 60 days after February 23, 2004.
(10) Includes 24,000 shares of common stock held directly by Mr. Moore and
35,000 shares of common stock subject to options which were exercisable
as of February 23, 2004, or which will become exercisable within 60
days after February 23, 2004. Does not include an option to purchase
20,000 shares of common stock which will become exercisable more than
60 days after February 23, 2004.
(11) Includes 5,000 shares of common stock held directly by Dr. Naimark,
4,000 shares held jointly by Dr. Naimark and his wife and 73,337 shares
of common stock subject to options which were exercisable as of
February 23 2004, or which will become exercisable within 60 days after
February 23, 2004. Does not include an option to purchase 20,000 shares
of common stock which will become exercisable more than 60 days after
February 23, 2004.
(12) Includes 5,000 shares of common stock held jointly by Dr. Novitch and
his wife and 389,667 shares of common stock subject to options that
were exercisable as of February 23, 2004, or which will become
exercisable within 60 days after February 23, 2004. Does not include an
option to purchase 20,000 shares of common stock which will become
exercisable more than 60 days after February 23, 2004.
(13) Includes 330,416 shares of common stock subject to options which were
exercisable as of February 23, 2004, or which will become exercisable
within 60 days after February 23, 2004. Does not include options to
purchase 319,584 shares of common stock which will become exercisable
more than 60 days after February 23, 2004.
34
(14) Includes 91,666 shares of common stock subject to options that were
exercisable as of February 23, 2004, or which will become exercisable
within 60 days after February 23, 2004. Does not include options to
purchase 333,334 shares of common stock which will become exercisable
more than 60 days after February 23, 2004.
(15) Includes 35,500 shares of common stock held directly by Ms. O'Dell,
2,000 shares of common stock held by Ms. O'Dell's husband and 366,167
shares of common stock subject to options which were exercisable as of
February 23, 2004, or which will become exercisable within 60 days
after February 23, 2004. Does not include options to purchase 167,500
shares of common stock which will become exercisable more than 60 days
after February 23, 2004.
(16) Includes 2,350,292 shares of common stock subject to options which were
exercisable as of February 23, 2004, or which will become exercisable
within 60 days after February 23, 2004.
Equity Compensation Plan Information
The following table sets forth information concerning the number of
outstanding options, the weighted average exercise price of those securities and
the number of securities remaining to be granted under existing equity plans,
whether approved or not approved by security holders, as of December 31, 2003:
Number of Securities Weighted Average Number of Securities
To Be Issued Upon Exercise Price of Remaining Available
Exercise of Outstanding for Future Issuance
Outstanding Options, Options, Warrants Under Existing Equity
Plan Category Warrants and Rights and Rights Compensation Plans
------------- ------------------- ---------- ------------------
Equity compensation plans approved
by security holders..................... 5,979,318 $2.93 2,178,370
Equity compensation plans not
approved by security holders............ N/A N/A N/A
--------- ----- ---------
Total............................. 5,979,318 $2.93 2,178,370
========= ===== =========
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit fees
The following table summarizes the fees paid or payable to KPMG for
services rendered for the fiscal years ended December 31, 2003 and December 31,
2002:
Fiscal Year Ended Fiscal Year Ended
Type of Fees December 31, 2003 December 31, 2002
------------ ----------------- -----------------
Audit Fees .......... $82,700 $53,500
Audit-Related Fees... -- --
Tax Fees ............ 15,250 --
All other Fees ...... -- --
------- -------
Total Fees ....... $97,950 $53,500
======= =======
The caption "audit fees" are fees we paid KPMG for professional
services for the audit of our financial statements included in our Form 10-K,
review of our financial statements included in our Form 10-Qs and for the
issuance of comfort letters and/or consents in connection with registration
statements. "Tax fees" are fees for tax compliance, tax advice and tax planning.
35
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by
Independent Accountants
The Audit Committee pre-approves all audit and legally permissible
non-audit services provided by the independent accountants. The Audit Committee
pre-approved all services performed by the independent accountants during 2002
and 2003.
ITEM 15. FINANCIAL STATEMENTS, REPORTS ON FORM 8-K AND EXHIBITS.
(a) Financial Statements.
Our audited financial statements and the Independent Auditors'
Report are appended to this Annual Report on Form 10-K. Reference is made to the
"Index to Financial Statements" on page 38.
(b) Reports on Form 8-K.
On November 14, 2003, we filed a current report on Form 8-K, dated
November 13, 2003, regarding our financial condition and results of operations
for the quarter ended September 30, 2003.
On November 12, 2003, we filed a current report on Form 8-K, dated
November 10, 2003, reporting the results of a pre-clinical canine study of
alagebrium.
On October 20, 2003, we filed a current report on Form 8-K, dated
October 15, 2003, announcing that we entered into a Stock Purchase Agreement to
sell 6,016,602 shares of common stock.
(c) Exhibits.
The exhibits required to be filed are listed on the "Exhibit
Index" attached hereto, which is incorporated herein by reference.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 12th day of March
2004.
ALTEON INC.
By: /s/ Kenneth I. Moch
------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kenneth I. Moch Chairman of the Board, March 12, 2004
- ------------------------------ President and Chief Executive Officer
Kenneth I. Moch (principal executive officer)
/s/ Elizabeth A. O'Dell Vice President, Finance, Secretary and Treasurer March 12, 2004
- ------------------------------ (principal accounting officer)
Elizabeth A. O'Dell
/s/ Edwin Bransome, Jr., M.D. Director March 12, 2004
- ------------------------------
Edwin Bransome, Jr., M.D.
/s/ Marilyn G. Breslow Director March 12, 2004
- ------------------------------
Marilyn G. Breslow
/s/ Alan J. Dalby Director March 12, 2004
- ------------------------------
Alan J. Dalby
/s/ David McCurdy Director March 12, 2004
- ------------------------------
David McCurdy
/s/ Thomas A. Moore Director March 12, 2004
- ------------------------------
Thomas A. Moore
/s/ George M. Naimark, Ph.D. Director March 12, 2004
- ----------------------------
George M. Naimark, Ph.D.
/s/ Mark Novitch, M.D. Director March 12, 2004
- ------------------------------
Mark Novitch, M.D.
37
Form 10-K - Item 14(a)(1)
Alteon Inc.
Index to Financial Statements
Page
----
Independent Auditors' Report - KPMG LLP............................................. 39
Report of Independent Public Accountants - Arthur Andersen LLP...................... 40
Financial Statements:
Balance Sheets at December 31, 2003 and 2002............................... 41
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001........................................ 42
Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001........................................ 43
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001........................................ 44
Notes to Financial Statements.............................................. 45
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Alteon Inc.:
We have audited the accompanying balance sheets of Alteon Inc. as of December
31, 2003 and 2002, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The statements of
operations, stockholders' equity and cash flows of Alteon Inc. for the year
ended December 31, 2001 were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated January 22, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alteon Inc. as of December 31,
2003 and 2002, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
Short Hills, New Jersey
March 3, 2004
39
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN
LLP ("ANDERSEN"). THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN NOR HAS ANDERSEN
CONSENTED TO ITS INCLUSION IN THIS ANNUAL REPORT ON FORM 10-K. THE ANDERSEN
REPORT REFERS TO THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND
2000 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY AND
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999, WHICH ARE NO LONGER
INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Alteon Inc.:
We have audited the accompanying balance sheets of Alteon Inc. (a Delaware
corporation) as of December 31, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alteon Inc. as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 22, 2002
40
ALTEON INC.
BALANCE SHEETS
December 31, December 31,
2003 2002
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 16,678,582 $ 14,452,413
Short-term investments ......................................... -- 2,986,200
Other current assets ........................................... 225,439 143,124
------------- -------------
Total current assets ......................................... 16,904,021 17,581,737
Property and equipment, net .................................... 100,964 517,623
Restricted cash ................................................ 250,000 --
------------- -------------
Total assets ................................................. $ 17,254,985 $ 18,099,360
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................... $ 470,841 $ 537,394
Accrued expenses ............................................... 1,399,712 3,258,729
------------- -------------
Total current liabilities .................................... 1,870,553 3,796,123
------------- -------------
Stockholders' Equity:
Preferred stock, $0.01 par value,
1,993,329 shares authorized, and 1,174 and 1,079 shares
of Series G and 3,525 and 3,241 shares of Series H
issued and outstanding, as of December 31, 2003 and
December 31, 2002, respectively .............................. 47 43
Common stock, $0.01 par value,
80,000,000 shares authorized, and 40,467,148 and 33,600,841
shares issued and outstanding, as of December 31, 2003 and
December 31, 2002, respectively .............................. 404,671 336,008
Additional paid-in capital ..................................... 202,598,573 183,341,416
Accumulated deficit ............................................ (187,618,859) (169,375,594)
Accumulated other comprehensive income ......................... -- 1,364
------------- -------------
Total stockholders' equity ................................... 15,384,432 14,303,237
------------- -------------
Total liabilities and stockholders' equity ........................ $ 17,254,985 $ 18,099,360
============= =============
The accompanying notes are an integral part of these financial statements.
41
ALTEON INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues:
Investment income ................................. $ 179,006 $ 409,853 $ 451,518
------------ ------------ ------------
Expenses:
Research and development (which includes non-cash
variable stock compensation expense/(benefit)
in 2003, 2002 and 2001 of $20,019, $(93,516)
and $164,988, respectively) ..................... 9,929,704 14,992,418 8,461,476
General and administrative (which includes non-cash
variable stock compensation expense/(benefit) in
2003, 2002 and 2001 of $0, $(1,315,635) and
$657,295, respectively) ......................... 5,046,357 2,945,846 4,760,747
------------ ------------ ------------
Total expenses ............................... 14,976,061 17,938,264 13,222,223
------------ ------------ ------------
Loss before income tax benefit ....................... (14,797,055) (17,528,411) (12,770,705)
Income tax benefit ................................ 344,637 646,500 1,186,921
------------ ------------ ------------
Net loss ............................................. (14,452,418) (16,881,911) (11,583,784)
Preferred stock dividends ......................... 3,790,847 3,485,042 3,203,906
Common stock warrant deemed dividends ............. -- -- 209,528
------------ ------------ ------------
Net loss applicable to common stockholders ........... $(18,243,265) $(20,366,953) $(14,997,218)
============ ============ ============
Basic/diluted net loss per share applicable
to common stockholders ............................ $ (0.50) $ (0.64) $ (0.61)
============ ============ ============
Weighted average common shares used in computing
basic/diluted net loss per share .................. 36,189,655 31,793,466 24,555,885
============ ============ ============
The accompanying notes are an integral part of these financial statements.
42
ALTEON INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Preferred Stock Common Stock Additional Other Total
--------------- -------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Deficit Income/(Loss) Equity
------ ------ ------ ------ ------- ------- ------------- ------
Balances at
DECEMBER 31, 2000 ............... 3,651 $ 37 22,399,660 $ 223,997 $145,241,265 $(134,011,423) $ (870) $ 11,453,006
------------
Net loss ...................... -- -- -- -- -- (11,583,784) -- (11,583,784)
Change in unrealized
gains/(losses) .............. -- -- -- -- -- -- 10,335 10,335
------------
Comprehensive loss ............ (11,573,449)
Issuance of Series G and H
preferred stock dividends .... 321 3 -- -- 3,203,903 (3,203,906) -- --
Exercise of employee stock
options ...................... -- -- 415,186 4,151 428,698 -- -- 432,849
Public offering of common
stock ........................ -- -- 4,500,000 45,000 9,365,080 -- -- 9,410,080
Compensation expense related to
variable plan employee
stock options ................ -- -- -- -- 822,283 -- -- 822,283
Common stock warrant deemed
dividends .................... -- -- -- -- 209,528 (209,528) -- --
Compensation expense
in connection with the
issuance of non-qualified
stock options, stock option
modifications and options
granted to non-employees ..... -- -- -- -- 326,177 -- -- 326,177
----- ----- ---------- --------- ------------ ------------- ------- ------------
DECEMBER 31, 2001 ............... 3,972 40 27,314,846 273,148 159,596,934 (149,008,641) 9,465 10,870,946
------------
Net loss ...................... -- -- -- -- -- (16,881,911) -- (16,881,911)
Change in unrealized
gains/(losses) .............. -- -- -- -- -- -- (8,101) (8,101)
------------
Comprehensive loss ............ (16,890,012)
Issuance of Series G and H
preferred stock dividends .... 348 3 -- -- 3,485,039 (3,485,042) -- --
Exercise of employee stock
options ...................... -- -- 121,710 1,217 120,797 -- -- 122,014
Public offerings of common
stock ........................ -- -- 6,164,285 61,643 21,513,373 -- -- 21,575,016
Compensation benefit related to
variable plan employee stock
options ...................... -- -- -- -- (1,409,151) -- -- (1,409,151)
Compensation expense
in connection with the
issuance of non-qualified
stock options to
non-employees ................ -- -- -- -- 34,424 -- -- 34,424
----- ----- ---------- --------- ------------ ------------- ------- ------------
DECEMBER 31, 2002 ............... 4,320 43 33,600,841 336,008 183,341,416 (169,375,594) 1,364 14,303,237
------------
Net loss ...................... -- -- -- -- -- (14,452,418) -- (14,452,418)
Change in unrealized
gains/(losses) .............. -- -- -- -- -- -- (1,364) (1,364)
------------
Comprehensive loss ............ (14,453,782)
Issuance of Series G and H
preferred stock dividends .... 379 4 -- -- 3,790,843 (3,790,847) -- --
Exercise of employee stock
options ...................... -- -- 51,688 517 54,937 -- -- 55,454
Public offerings of
common stock ................. -- -- 6,757,146 67,571 15,360,705 -- -- 15,428,276
Exercise of warrants .......... -- -- 57,473 575 (575) -- -- --
Compensation expense related
to variable plan employee
stock options ................ -- -- -- -- 20,019 -- -- 20,019
Compensation expense
in connection with the
issuance of non-qualified
stock options
to non-employees ............. -- -- -- -- 31,228 -- -- 31,228
----- ----- ---------- --------- ------------ ------------- ------- ------------
DECEMBER 31, 2003 ............... 4,699 $ 47 40,467,148 $ 404,671 $202,598,573 $(187,618,859) $ -- $ 15,384,432
===== ===== ========== ========= ============ ============= ======= ============
The accompanying notes are an integral part of these financial statements.
43
ALTEON INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss ................................................. $(14,452,418) $(16,881,911) $(11,583,784)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization ............................ 502,826 637,162 636,565
Stock compensation expense ............................... 31,228 34,424 326,177
Non-cash compensation expense/(benefit) related to
variable plan employee stock options .................. 20,019 (1,409,151) 822,283
Changes in operating assets and liabilities:
Other assets ............................................. (82,315) 1,254,456 340,895
Accounts payable and accrued expenses .................... (1,925,570) 1,433,990 425,775
------------ ------------ ------------
Net cash used in operating activities ................. (15,906,230) (14,931,030) (9,032,089)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ..................................... (86,167) (45,109) (50,159)
Purchases of marketable securities ....................... (3,015,164) (18,020,917) (16,743,570)
Maturities of marketable securities ...................... 6,000,000 21,503,000 16,632,000
Restricted cash .......................................... (250,000) -- --
------------ ------------ ------------
Net cash provided by/(used in) investing activities.... 2,648,669 3,436,974 (161,729)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............... 15,428,276 21,575,016 9,410,080
Net proceeds from exercise of employee stock
options ............................................... 55,454 122,014 432,849
------------ ------------ ------------
Net cash provided by financing activities ............. 15,483,730 21,697,030 9,842,929
------------ ------------ ------------
Net increase in cash and cash equivalents ..................... 2,226,169 10,202,974 649,111
Cash and cash equivalents, beginning of year .................. 14,452,413 4,249,439 3,600,328
------------ ------------ ------------
Cash and cash equivalents, end of year ........................ $ 16,678,582 $ 14,452,413 $ 4,249,439
============ ============ ============
The accompanying notes are an integral part of these financial statements.
44
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Alteon Inc. ("Alteon" or the "Company") is a product-based
biopharmaceutical company engaged in the discovery and development of small
molecule drugs to reverse or slow down diseases of aging and complications of
diabetes. The Company's product candidates represent novel approaches to some of
the largest pharmaceutical markets. The Company conducts its business in one
operating segment. Alteon's proprietary technology focuses on Advanced Glycation
End-products ("A.G.E.s"). A.G.E.s ultimately form crosslinks with adjacent
proteins, leading to a loss of flexibility and function in body tissues, vessels
and organs. All of the Company's products are in research or development, and no
revenues have been generated from product sales.
Alagebrium chloride (formerly ALT-71l) is our lead product candidate
and we believe the only A.G.E. Crosslink Breaker in advanced human testing. In
February, the United States Adopted Name (USAN) Council approved alagebrium
chloride as the generic name of the chemical compound formerly known as ALT-711.
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 alagebrium's
demonstrated efficacy and biological activity in these Phase 2 clinical trials,
as well as a strong and consistent safety profile, Alteon is proceeding with
Phase 2 development of alagebrium in two major cardiovascular indications,
systolic hypertension and heart failure in the first half of 2004. The first of
the Phase 2 trials was initiated in March 2004, SPECTRA (Systolic Pressure
Efficacy and Safety Trial of Alagebrium), a Phase 2b trial in patients with
systolic hypertension. Importantly, there are no currently marketed
cardiovascular drugs that can work directly on the stiffening of the vasculature
that leads to systolic hypertension and heart failure.
As Alteon continues clinical development of alagebrium, it 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.
The Company believes that alagebrium may address the cardiovascular, diabetes
and primary care physician markets.
Alteon plans to continue to explore the use of topical A.G.E. Crosslink
Breakers in skin and photoaging, as a result of its recent evaluation of
ALT-744's positive activity in this area. The Company 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 photoaging.
The Company's business is subject to significant risks including, but
not limited to, (i) the ability to obtain funding, (ii) the risks inherent in
its research and development efforts, including clinical trials, (iii)
uncertainties associated with obtaining and enforcing its patents and with the
patent rights of others, (iv) the lengthy, expensive and uncertain process of
seeking regulatory approvals, (v) uncertainties regarding government healthcare
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 the Company's product
candidates appear promising at an early stage of development, they may not reach
the market for numerous reasons. Such reasons include the possibilities that the
products will prove ineffective or unsafe during clinical trials, will fail to
receive necessary regulatory approvals, will be difficult to manufacture on a
large scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and
45
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Estimates are used for, but not limited to: accrued expenses, income
tax valuation allowances and assumptions utilized within the Black Scholes
options pricing model and the model itself. Accounting estimates require the use
of judgment regarding uncertain future events and their related effects and,
accordingly, may change as additional information is obtained.
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 prices, with changes in fair value
recorded as a component of accumulated other comprehensive income/(loss). As of
December 31, 2002, short-term investments totaling $2,986,200 were invested in
debt instruments of the United States government and government agency funds.
The cost of short-term investments was $2,984,836 at December 31, 2002.
Financial Instruments
Financial instruments reflected in the Balance Sheets are recorded at
cost which approximates fair value for cash equivalents, short-term investments,
restricted cash, accounts payable and other current liabilities.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the useful lives
of owned assets, which range from three to five years.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to the future undiscounted net
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets and
would be charged to operations.
Research and Development
Expenditures for research and development are charged to operations as
incurred.
Stock-Based Compensation
The Company accounts for employee stock-based compensation and awards
issued to non-employee directors under APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, under which no compensation
cost (excluding those options granted below fair market value) has been
recognized. Stock option awards issued to consultants and contractors are
accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation" and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments that are Issued To Other Than Employees for Acquiring or In
Conjunction with Selling Goods or Services." 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. (See Note 8.)
46
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
If the Company had applied the fair value recognition provisions of
SFAS No. 123 to its employee and director option grants, the Company's pro forma
net loss and net loss per share applicable to common stockholders for 2003, 2002
and 2001 would be as follows:
Year Ended December 31,
------------------------------------------
2003 2002 2001
---- ---- ----
Net loss, as reported ................................... $(14,452,418) $(16,881,911) $(11,583,784)
Add: Variable non-cash employee
and director stock compensation expense/(benefit)
recognized in the Statements of Operations ...... 20,019 (1,409,151) 822,283
Less: Total stock-based employee and director
compensation expense determined under
fair value method ............................... (1,316,721) (1,892,584) (2,029,445)
------------ ------------ ------------
Pro forma net loss ...................................... $(15,749,120) $(20,183,646) $(12,790,946)
Preferred stock dividends ............................... 3,790,847 3,485,042 3,203,906
Common stock warrant deemed dividends ................... -- -- 209,528
------------ ------------ ------------
Pro forma net loss applicable to common stockholders .... $(19,539,967) $(23,668,688) $(16,204,380)
Net loss per share applicable to common stockholders:
Basic/diluted, as reported ...................... $ (0.50) $ (0.64) $ (0.61)
Basic/diluted, pro forma ....................... $ (0.54) $ (0.74) $ (0.66)
The fair value of each stock option grant, for recognition or
disclosure purposes, is calculated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants in 2003,
2002 and 2001, respectively: weighted average risk free interest rate of 3.24%,
2.90% and 4.0%, respectively; weighted average expected life of 5.31, 4.49 and
4.75 years, respectively, and the contractual life for grants to consultants
and contractors; expected dividend yield of 0%; and weighted average expected
volatility of 132.35%, 108.98% and 110.39%, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and net operating loss and tax credit carryforwards. A valuation allowance
is provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
Net Loss Per Share Applicable to Common Stockholders
Basic net loss per share is computed by dividing net loss applicable to
common stockholders by the weighted average number of shares outstanding during
the year. Diluted net loss per share is the same as basic net loss per share
applicable to common stockholders, 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 December
31, 2003, 2002 and 2001, was 36,969,371, 28,870,120 and 15,135,350 shares,
respectively.
47
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- LIQUIDITY
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. As a result, Alteon has incurred
operating losses since inception, has an accumulated deficit of $187,618,859 at
December 31, 2003, and expects to incur operating losses, potentially greater
than losses in prior years, for a number of years.
The Company has financed its operations through proceeds from the sale
of common and preferred equity securities, revenue from former collaborative
relationships, reimbursement of certain of our research and development expenses
by collaborative partners, investment income earned on cash and cash equivalent
balances and short-term investments and the sale of a portion of the Company's
New Jersey state net operating loss carryforwards.
As of December 31, 2003, the Company had working capital of
$15,033,468, including $16,678,582 of cash and cash equivalents. During 2003,
the Company sold 6,757,146 shares of common stock, raising net proceeds of
$15,428,276. (See Note 8.) In connection with an October 2003 common stock
offering, the Stock Purchase Agreement, as amended, provides that the Company
could 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 the investors who elect to
purchase shares on April 20, 2004, which is 120 business days after the initial
closing. The investors are not obligated and at their discretion may elect not
to purchase additional shares. The Company's cash used in operations for the
years ended December 31, 2003, 2002 and 2001 was $15,906,230, $14,931,030 and
$9,032,089, respectively. The Company expects to utilize cash to fund its
operations and to initiate new Phase 2 trials in systolic hypertension and
diastolic dysfunction in heart failure during the first half of 2004, which are
to continue into 2005. The first of the Phase 2 trials was initiated in March
2004, SPECTRA, a Phase 2b trial in patients with systolic hypertension. Based on
the projected spending levels for the Company, including these trials, the
Company does not currently have adequate cash and cash equivalents to complete
the trials or complete the 2004 fiscal year and therefore will require
additional funding during 2004 and 2005. As a result, throughout 2004, the
Company will monitor its liquidity position and the status of its clinical
trials. If the Company is unsuccessful in its efforts to raise additional funds
through the sale of additional equity securities, Alteon will be required to
significantly reduce or curtail its research and product development activities,
including the number of patients enrolled in the trials and other operations if
its level of cash and cash equivalents fall below pre-determined levels. The
Company has the intent and ability to quickly and significantly reduce the cash
burn rate, if necessary, as it has limited fixed commitments. The Company
believes that such curtailment actions, if needed, will enable Alteon to fund
its operations into early 2005.
The Company will require, over the long-term, substantial new funding
to pursue development and commercialization of alagebrium and its other product
candidates and 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. The amount of
the Company's future capital requirements will depend on numerous factors,
including the progress of its 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 Alteon's short-term and long-term capital requirements, the
Company, as stated above, may seek access to the public or private equity
markets. 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 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. If
the Company is unable to obtain the necessary funding, it may need to cease
operations.
48
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT
December 31,
-------------------------
2003 2002
----------- -----------
Laboratory equipment .............................. $ 24,650 $ 1,183,034
Furniture and equipment ........................... 140,561 699,020
Computer equipment ................................ 138,850 442,145
Leasehold improvements ............................ -- 5,215,069
----------- -----------
304,061 7,539,268
Less: Accumulated depreciation & amortization..... (203,097) (7,021,645)
----------- -----------
$ 100,964 $ 517,623
=========== ===========
Depreciation and amortization expense was $502,826, $637,162 and
$636,565 for the years ended December 31, 2003, 2002 and 2001, respectively. The
leasehold improvements and certain other equipment, all fully depreciated, were
written off at December 31, 2003 at the end of the Company's former facility
lease. (See Note 7.)
NOTE 4 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
On November 6, 2002, Alteon entered into an agreement, effective as of
April 15, 2002, with The Picower Institute for Medical Research ("The Picower
Institute"), which terminated its License Agreement dated as of September 5,
1991. Pursuant to this termination agreement, The Picower Institute assigned to
Alteon all of its patents, patent applications and other technology related to
A.G.E.'s and Alteon agreed to prosecute and maintain the patents and patent
applications. Alteon will pay The Picower Institute royalties on any sales of
products falling within the claims of these patents and patent applications
until they expire or are allowed to lapse.
Effective as of August 5, 2002, Alteon entered into a letter agreement
with Yamanouchi Pharmaceutical Co, Ltd. ("Yamanouchi"), which terminated its
License Agreement dated as of June 16, 1989. Pursuant to the letter agreement,
for a period of fifteen years, Alteon will pay Yamanouchi royalties on any sales
of pimagedine or pimagedine products in the territory covered by the License
Agreement.
NOTE 5 -- OTHER DEVELOPMENT AGREEMENTS
Alteon has entered into a number of licensing and collaboration
agreements relating to the development and distribution of its A.G.E.-related
technology. Pursuant to an agreement with Rockefeller University, the Company
has exclusive, royalty-free, worldwide and perpetual rights to the technology
and inventions relating to A.G.E.s and other protein crosslinking, including
those relating to the complications of aging and diabetes.
Alteon has also entered into an exclusive licensing arrangement with
Roche Diagnostics GmbH for Alteon's technology for diagnostic applications, and
also entered into clinical testing and distribution agreements with Gamida for
Life ("Gamida") which grant Gamida the exclusive right to distribute pimagedine,
if successfully developed and approved for marketing, in Israel, Bulgaria,
Cyprus, Jordan and South Africa. All of these agreements will entitle Alteon to
receive royalties on sales if any products covered by the agreements are
developed and sold.
Alteon's commercial partners may develop, either alone or with others,
products that compete with the development and marketing of the Company's
products. Competing products, either developed by the commercial partners or to
which the commercial partners have rights, may result in their withdrawal of
support with respect to all or a portion of the Company's technology, which
could have a material adverse effect on the Company's future results of
operations.
49
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has also entered into various arrangements with independent
research laboratories to conduct studies in conjunction with the development of
the Company's technology. The Company pays for this research and receives
certain rights to inventions or discoveries that may arise from this research.
NOTE 6 -- ACCRUED EXPENSES
Accrued expenses consisted of the following:
December 31,
----------------------
2003 2002
---------- ----------
Clinical trial expense ......... $ 793,485 $2,706,678
Professional fees .............. 216,537 204,723
Payroll and related expenses.... 239,997 106,629
Rent expense ................... 21,953 45,761
Patent fees .................... 64,608 107,187
Other .......................... 63,132 87,751
---------- ----------
$1,399,712 $3,258,729
========== ==========
NOTE 7 - COMMITMENTS
Commitments
The Company's lease for its office and laboratory space in Ramsey, New
Jersey, expired on November 1, 2003, and was extended through January 31, 2004.
Alteon 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 provided a letter of credit,
which is collateralized with a $250,000 restricted certificate of deposit. As of
December 31, 2003, future minimum rentals under operating leases, including
office equipment, that have initial or remaining non-cancelable terms in excess
of one year are as follows:
Operating Leases
----------------
2004................. $ 303,377
2005................. 314,207
2006................. 325,037
2007................. 4,249
Thereafter........... --
----------
$ 946,870
==========
Rent expense for the years ended December 31, 2003, 2002 and 2001, was
$674,493, $604,690 and $599,655, respectively.
The Company has employment agreements with its executive officers,
which provide for salary continuation if Alteon terminates an agreement without
cause.
NOTE 8 -- STOCKHOLDERS' EQUITY
Common/Preferred Stock Issuances
In October 2003, Alteon completed a public offering of 4,457,146 shares
of common stock at $1.75 per share, which provided net proceeds of $7,772,331.
The Stock Purchase Agreement, as amended, provides that the Company could 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 the investors who elect to purchase shares
on April 20, 2004, which is 120 business days after the initial closing. The
investors are not obligated and at their discretion may elect not to purchase
additional shares.
50
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In July 2003, warrants for 87,462 shares of common stock were exercised
in a "net" exercise transaction in which the exercise price was paid by
cancellation of 29,989 shares of common stock issuable upon the exercise, for a
net issuance of 57,473 shares. The shares canceled in payment of the exercise
were valued at the average of the closing prices on the American Stock Exchange
for the 20 business days prior to the exercise of the warrants.
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.
In December 2002, Alteon completed a public offering of 1,714,285
shares of common stock at $1.75 per share, which provided net proceeds of
$2,964,495. In connection with this offering, certain previously issued warrants
were repriced from $2.25 to $1.75 per share pursuant to antidilution provisions
connected to the warrants.
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.
In July 2001, Alteon completed a public offering of 4,500,000 shares of
common stock at $2.25 per share, which provided net proceeds of $9,410,080. In
connection with this offering, certain previously issued warrants were repriced
from $3.40 to $2.25 per share pursuant to antidilution provisions connected to
the warrants.
In connection with a 2000 offering of common stock, warrants to
purchase 1,133,636 shares of common stock were issued and 1,046,174 are
outstanding as of December 31, 2003. In connection with subsequent offerings,
the exercise price of 953,890 of the warrants was adjusted to $1.75 per share,
which could be adjusted further if more common stock is sold below $1.75 per
share, and the exercise price of 92,284 of the warrants was adjusted to $2.25
per share, which is not subject to further adjustment upon the sale of more
common stock.
In December 1997, the Company and Genentech, Inc. ("Genentech") entered
into a stock purchase agreement pursuant to which Genentech agreed to buy shares
of Common Stock, Series G Preferred Stock and Series H Preferred Stock. In
December 1997, Genentech purchased Common Stock and Series G Preferred Stock for
an aggregate purchase price of $15,000,000. On July 27, 1998 and October 1,
1998, Genentech purchased $8,000,000 and $14,544,000, respectively, of Series H
Preferred Stock. As of December 31, 2003, 2002 and 2001, respectively,
$3,790,847, $3,485,042 and $3,203,906 of Preferred Stockholder dividends were
recorded. Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock at a rate of 8.5% of the
accumulated balance. 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.
In connection with an April 1997 convertible preferred stock offering,
warrants to purchase 60,000 shares of common stock at an exercise price of
$4.025 per share were issued and are outstanding as of December 31, 2003.
Stock Option Plan
The Company has established two stock option plans for its employees,
officers, directors, consultants and independent contractors. Options to
purchase up to 4,192,000 shares of the Company's common stock may be granted
under the first plan, and options to purchase up to 7,000,000 shares of the
Company's common stock may be granted under the second plan.
The plans are administered by a committee of the Board of Directors,
which may grant either non-qualified or incentive stock options. The committee
determines the exercise price and vesting schedule at the time the option is
granted. Options vest over various periods and may expire no later than 10 years
from date of grant. Each option entitles the holder to purchase one share of
common stock at the indicated exercise price. The plans also provide for certain
antidilution and change in control rights, as defined.
51
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the activity in the Company's stock
options:
Weighted
Weighted Average
Average Grant Date
Options Exercise Price Fair Value
------- -------------- ----------
Balance, December 31, 2000.......... 5,254,819 $4.02
Granted at market price............. 873,942 3.13 $1.78
Exercised........................... (415,186) 1.04
Canceled............................ (1,008,269) 8.53
---------- -----
Balance, December 31, 2001.......... 4,705,306 $3.15
Granted at market price............. 676,400 2.94 $1.62
Granted above market price.......... 250,000 1.95 1.06
Granted below market price.......... 10,000 0.01 4.37
Exercised........................... (121,710) 1.02
Canceled............................ (83,717) 4.25
---------- -----
Balance, December 31, 2002.......... 5,436,279 $3.08
Granted at market price............. 812,465 2.41 $1.99
Exercised........................... (51,688) 1.07
Canceled............................ (217,738) 5.13
---------- -----
Balance, December 31, 2003.......... 5,979,318 $2.93
==========
Stock options exercisable at December 31, 2003, 2002 and 2001 were
4,337,316, 3,836,930 and 3,336,159, respectively, at weighted average grant date
exercise prices of $3.06, $3.08 and $2.95, respectively.
The following table summarizes information regarding stock options
outstanding at December 31, 2003:
Options Outstanding at Options Exercisable at
December 31, 2003 December 31, 2003
---------------------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life (Years) Price Exercisable Price
------ ----------- ------------------------ ----- ----------- -----
$ 0.7810 - $ 1.1250 1,785,182 4.54 $ 0.9823 1,785,182 $ 0.9823
1.3600 - 2.6000 1,801,678 8.68 1.9974 660,545 2.1119
2.8750 - 4.6250 1,548,080 6.77 3.8839 1,051,326 3.7781
5.0300 - 15.0000 844,378 3.53 7.2994 840,263 7.3102
--------- ---------
$ 0.7810 - $15.0000 5,979,318 6.22 $ 2.9315 4,337,316 $ 3.0579
Included in options at December 31, 2003 are 1,406,667 options granted
to certain executives with option exercise prices ranging from $0.875 per share
to $4.380 per share, the fair value of the Company's common stock on the date of
grant. Such options vest upon the earlier of five years after grant or upon
achievement of certain Company milestones. Expenses recorded for options granted
to consultants totaled $31,228, $34,424 and $66,567 in 2003, 2002 and 2001,
respectively.
On February 2, 1999, the Company repriced certain stock options. In
accordance with FIN 44, the Company recognized a total non-cash stock
compensation expense/(benefit) resulting from the repricing for the years ended
December 31, 2003, 2002 and 2001 of $20,019, $(1,409,151) and $822,283,
respectively, which included research and development charges of $20,019,
$(93,516) and $164,988 and general and administrative charges of $0,
$(1,315,635) and $657,295, respectively. As of December 31, 2003, there were
548,409 repriced options outstanding, which expire on various dates through
January 2008.
52
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- SAVINGS AND RETIREMENT PLAN
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code which allows eligible employees to annually
contribute a portion of their annual salary to the plan. In 1998, the Company
began making discretionary contributions at a rate of 25% of an employee's
contribution up to a maximum of 5% of the employee's base salary, as defined.
The Company made contributions of $59,183, $54,024 and $38,669 for the years
ended December 31, 2003, 2002 and 2001, respectively.
NOTE 10 -- INCOME TAXES
At December 31, 2003, the Company had available federal net operating
loss carryforwards, which expire in the years 2006 through 2023, of $144,952,000
for income tax purposes and State net operating loss carryforwards, which expire
in the years 2004 through 2010, of $91,343,000. In addition, the Company has
federal research and development tax credit carryforwards of $6,401,000 and
State research and development tax credit carryforwards of $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.
The components of the deferred tax assets and the valuation allowance
are as follows:
December 31,
---------------------------
2003 2002
------------ ------------
Net operating loss carryforwards ............ $ 54,800,000 $ 59,800,000
Research and development credits ............ 8,000,000 7,800,000
Capitalized research and development expenses 8,900,000 --
Other temporary differences ................. 2,200,000 1,200,000
------------ ------------
Gross deferred tax assets ................... 73,900,000 68,800,000
Valuation allowance ......................... (73,900,000) (68,800,000)
------------ ------------
Net deferred tax assets ..................... $ -- $ --
============ ============
During 2003, in connection with filing the Company's 2002 tax return,
the Company elected to capitalize research and development expenses for tax
purposes. For the year ended December 31, 2002, the Company capitalized
$15,085,934 of research and development expenses that were previously recorded
as net operating loss carryforwards. The Company has elected to amortize the
expenses ratably for tax purposes over a 10-year period. For the year ended
2003, the Company will capitalize $9,909,684 of research and development
expenses for tax purposes and elect to amortize the expenses ratably for tax
purposes over a 10-year period.
Given the Company's history of incurring operating losses, management
believes that it is unlikely that any of the deferred tax assets will be
recoverable. As a result, a valuation allowance equal to the gross deferred tax
assets was established. In 2003, 2002 and 2001, the Company sold $2,083,000,
$1,839,000 and $6,243,000, respectively, of its gross State net operating loss
carryforwards and $209,000, $578,000 and $802,000, respectively, of its State
research and development tax credit carryforwards under the State of New
Jersey's Technology Business Tax Certificate Transfer Program (the "Program").
The Program allows qualified technology and biotechnology 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 of the
Company's carryforwards and credits in 2003, 2002 and 2001 were $345,000,
$647,000 and $1,187,000, respectively, and such amounts were recorded as a tax
benefit in the statements of operations. The State of New Jersey renews the
Program annually and limits the aggregate benefit to $10,000,000. Due to the
uncertainty at any time as to the Company's ability to effectuate the sale of
Alteon's available New Jersey net operating losses, and since the Company has no
control or influence over the Program, the benefits are recorded once the
agreement with the counterpart is signed and the sale is approved by the State.
53
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed on
November 10, 1999, SEC 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, SEC 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, SEC 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, SEC 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, SEC
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, SEC 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, SEC 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, SEC 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, SEC
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, SEC 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, SEC 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, SEC 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, SEC 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, SEC 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, SEC 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, SEC File Number 001-16043.)
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, SEC 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, SEC 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, SEC File Number 001-16043.)
10.1+ Amended and Restated 1987 Stock Option Plan. (Incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, SEC File Number 000-19529.)
10.2+ Amended 1995 Stock Option Plan. (Incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, SEC File Number 001-16043.)
10.3 Form of Employee's or Consultant's Invention Assignment, Confidential
Information and Non-Competition Agreement executed by all key employees
and consultants as employed or retained from time to time.
(Incorporated by Reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, SEC File Number 33-42574, which
became effective on November 1, 1991.)
10.4 Lease Agreement dated January 11, 1993, between Ramsey Associates and
Alteon Inc. (Incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, SEC
File No. 001-16043.)
10.5+ Employment Agreement dated as of October 21, 2000, between Alteon Inc.
and Elizabeth O'Dell. (Incorporated by reference to Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2000, SEC File Number 001-16043.)
10.6+ Alteon Inc. Change in Control Severance Benefits Plan. (Incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, SEC File Number 001-16043.)
10.7 Preferred Stock Investment Agreement dated as of April 24, 1997,
between Alteon Inc. and the investors named on the signature page
thereof. (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on May 9, 1997, SEC File Number
000-19529.)
10.8+ Amended and Restated Employment Agreement dated as of December 15,
1998, between Alteon Inc. and Kenneth I. Moch (Incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, SEC File Number 000-19529.)
10.9+ Employment Agreement dated as of March 14, 2000, between Alteon Inc.
and Robert deGroof, Ph.D. (Incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q filed on May 12, 2000, SEC File
Number 001-16043.)
10.10 Common Stock and Warrants Purchase Agreement dated as of September 29,
2000, among Alteon Inc. and EGM Medical Technology Fund, L.P., EGM
Technology Offshore Fund, Narragansett I, L.P., Narragansett Offshore,
Ltd., S.A.C. Capital Associates, LLC, SDS Merchant Fund, LP and Herriot
Tabuteau. (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on October 5, 2000, SEC File Number
001-16043.)
10.11+ Letter Agreement dated December 3, 2001, between Alteon Inc. and
Kenneth I. Moch amending Amended and Restated Employment Agreement
dated as of December 15, 1998. (Incorporated by reference to
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, SEC File Number 001-16043.)
10.12 Stock Purchase Agreement dated January 4, 2002, between Alteon Inc. and
the Purchasers named therein. (Incorporated by reference to the
Company's Current Report on Form 8-K filed on January 7, 2002, SEC File
Number 001-16043.)
10.13+ Employment agreement dated as of February 11, 2002, between Alteon Inc.
and Judith S. Hedstrom. (Incorporated by reference to Exhibit 10.2 of
the Company's Report on Form 10-Q filed on May 14, 2002, SEC File
Number 001-16043.)
10.14 Stock Purchase Agreement dated December 20, 2002, between Alteon Inc.
and the Purchasers named therein. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K filed on December 24,
2002, SEC File Number 001-16043.)
10.15+ Letter Agreement, dated May 5, 2003, between Alteon Inc. and Robert C.
deGroof, Ph.D., amending Employment Agreement, dated as of March 14,
2000. (Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed on May 12, 2003, SEC File Number
001-16043.)
10.16+ Letter Agreement, dated June 5, 2003, between Alteon Inc. and Robert C.
deGroof, Ph.D., amending Amended and Restated Employment Agreement,
dated as of May 5, 2003. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q filed on August 11, 2003,
SEC File Number 001-16043.)
10.17+ Letter Agreement, dated June 5, 2003, between Alteon Inc. and Judith S.
Hedstrom, amending Employment Agreement, dated as of February 11, 2002.
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q filed on August 11, 2003, SEC File Number
001-16043.)
10.18+ Letter Agreement, dated June 5, 2003, between Alteon Inc. and Elizabeth
O'Dell, amending Employment Agreement, dated as of October 21, 2000.
(Incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q filed on August 11, 2003, SEC File Number
001-16043.)
10.19 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, SEC File Number 001-16043.)
10.20 Amendment to Stock Purchase Agreement, dated October 24, 2003.
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q filed on November 13, 2003, SEC File Number
001-16043.)
10.21+ Letter Agreement, dated December 22, 2003, between Alteon Inc. and
Elizabeth O'Dell, amending Amended and Restated Employment Agreement,
dated as of June 5, 2003.
23.1 Consent of KPMG LLP.
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 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- --------------
* Confidentiality has been granted for a portion of this exhibit.
+ Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) to this Form 10-K.