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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------- TO -----------
Commission file number 001-16043
ALTEON INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 CAMPUS DRIVE, PARSIPPANY, NEW JERSEY 07054
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201) 934-5000
-----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
On May 6, 2004, 40,472,898 shares of the registrant's Common Stock were
outstanding.
Page 1 of 21 pages
The Exhibit Index is on page 20
ALTEON INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2004 and
December 31, 2003.................................................................... 3
Statements of Operations for the three months
ended March 31, 2004 and 2003........................................................ 4
Statements of Cash Flows for the three months
ended March 31, 2004 and 2003........................................................ 5
Notes to Financial Statements.......................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................... 9
Item 4. Controls and Procedures................................................................ 17
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K and Exhibits....................................................... 18
SIGNATURES ...................................................................................... 19
INDEX TO EXHIBITS ............................................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2004 2003
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 13,115,192 $ 16,678,582
Other current assets......................................... 435,888 225,439
--------------- ---------------
Total current assets....................................... 13,551,080 16,904,021
Property and equipment, net.................................. 157,346 100,964
Restricted cash.............................................. 250,000 250,000
--------------- ---------------
Total assets.................................................... $ 13,958,426 $ 17,254,985
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 895,232 $ 470,841
Accrued expenses............................................. 1,405,611 1,399,712
--------------- ---------------
Total current liabilities.................................. 2,300,843 1,870,553
--------------- ---------------
Stockholders' Equity:
Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,199 and 1,174 shares of
Series G and 3,600 and 3,525 shares of Series H issued
and outstanding, as of March 31, 2004 and
December 31, 2003, respectively........................... 48 47
Common Stock, $0.01 par value,
80,000,000 shares authorized, and 40,472,898 and 40,467,148
shares issued and outstanding, as of March 31, 2004
and December 31, 2003, respectively........................ 404,729 404,671
Additional paid-in capital .................................. 203,602,511 202,598,573
Accumulated deficit.......................................... (192,349,705) (187,618,859)
---------------- ----------------
Total stockholders' equity................................. 11,657,583 15,384,432
--------------- ---------------
Total liabilities and stockholders' equity...................... $ 13,958,426 $ 17,254,985
=============== ===============
The accompanying notes are an integral part of these unaudited
financial statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2004 2003
------------- -------------
Income:
Investment income..................................... $ 37,366 $ 48,723
Other Income ......................................... 51,821 ---
------------ -----------
Total income..................................... $ 89,187 $ 48,723
Expenses:
Research and development
(which includes non-cash variable stock compensation
expense of $0 and $61,970 for the three months ended
March 31, 2004 and 2003, respectively).............. 2,684,135 2,904,843
General and administrative
(which includes non-cash variable
stock compensation expense of $0 and $965,929
for the three months ended March 31, 2004
and 2003, respectively)............................. 1,140,045 2,366,937
------------ ------------
Total expenses................................... 3,824,180 5,271,780
------------ ------------
Net loss................................................. $ (3,734,993) $ (5,223,057)
Preferred stock dividends............................ 995,853 905,458
------------ ------------
Net loss applicable to common stockholders............... $ (4,730,846) $ (6,128,515)
============ ============
Basic/diluted net loss per share applicable to
common stockholders................................... $ (0.12) $ (0.18)
============ ============
Weighted average common shares used
in computing basic/diluted net loss per share......... 40,471,349 33,626,397
============ ============
The accompanying notes are an integral part of these unaudited
financial statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months
Ended March 31,
------------------------------------
2004 2003
------------- --------------
Cash Flows from Operating Activities:
Net loss............................................................ $ (3,734,993) $(5,223,057)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 19,934 160,720
Amortization of deferred compensation............................... 3,059 15,445
Non-cash compensation expense related to variable
plan employee stock options....................................... --- 1,027,899
Changes in operating assets and liabilities:
Other assets........................................................ (210,449) (285,701)
Accounts payable and accrued expenses............................... 430,290 (257,091)
------------- -------------
Net cash used in operating activities............................. (3,492,159) (4,561,785)
------------- -------------
Cash Flows from Investing Activities:
Capital expenditures................................................ (76,316) (37,100)
Purchases of marketable securities.................................. --- (9,750)
------------- -------------
Net cash used in investing activities............................. (76,316) (46,850)
------------- -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock.......................... --- 7,655,500
Net proceeds from exercise of employee stock options................ 5,085 ---
------------- -------------
Net cash provided by financing activities......................... 5,085 7,655,500
------------- -------------
Net (decrease)/increase in cash and cash equivalents................... (3,563,390) 3,046,865
Cash and cash equivalents, beginning of period......................... 16,678,582 14,452,413
------------- -------------
Cash and cash equivalents, end of period............................... $13,115,192 $17,499,278
=========== ===========
The accompanying notes are an integral part of these unaudited
financial statements.
5
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003, filed with the
Securities and Exchange Commission.
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 an
accumulated deficit of $192,349,705 as of March 31, 2004, 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 collaborative
relationships, reimbursement of certain of its research and development expenses
by its collaborative partners, investment income earned on cash balances and
short-term investments and the sale of a portion of its New Jersey net operating
loss carryforwards.
As of March 31, 2004, the Company had working capital of $11,250,237,
including $13,115,192 of cash and cash equivalents. The Company's net cash used
in operations for the three months ended March 31, 2004, was $3,492,159 and for
the year ended December 31, 2003 was $15,906,230
Alagebrium chloride (formerly ALT-711) is the Company's lead product
candidate and Alteon believes the only A.G.E. Crosslink Breaker in advanced
human testing. In February 2004, the United States Adopted Name (USAN) Council
approved alagebrium chloride as the generic name of the chemical compound
formerly known as ALT-711.
The Company believes that alagebrium works through a unique mechanism
of action that directly reverses the stiffening of the vasculature that leads to
systolic hypertension and heart failure, two cardiovascular indications for
which there are clear, unmet medical needs. Several Phase 2 clinical trials of
alagebrium have been completed in heart failure and systolic hypertension: 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 further Phase 2 development of alagebrium in systolic
hypertension and heart failure. SPECTRA (Systolic Pressure Efficacy and Safety
Trial of Alagebrium), the first of these Phase 2 trials, was initiated in March
2004, and the second, PEDESTAL (Patients with Impaired Ejection Fraction and
Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium), was initiated
in April 2004.
The Company expects to utilize cash and cash equivalents to fund its
operations, including the new Phase 2 trials. Based on the projected spending
levels for the Company, including these trials, which are expected to continue
into 2005, 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. As a result, throughout 2004, the
Company will monitor its liquidity position and the status of its clinical
trials. The Company is actively pursuing fund-raising possibilities through the
sale of its equity securities at the current time. 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 falls 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, which include executed, but
cancelable, agreements with outside organizations for the newly initiated
trials. The Company believes that such curtailment actions, if needed, will
enable Alteon to fund its operations into early 2005.
6
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.
NOTE 3 - STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation and awards
issued to non-employee directors under Accounting Principles Board Opinion No.
25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations, under which no compensation cost (excluding those
options granted below fair value) has been recognized. Stock option awards
issued to consultants and contractors are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" 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.
On February 2, 1999, the Company repriced certain stock options. The
total non-cash stock compensation expense resulting from the 1999 repricing for
the three months ended March 31, 2004 and 2003, is $0 and $1,027,899,
respectively. As of March 31, 2004, there were 548,409 repriced options
outstanding, which expire on various dates through January 2008.
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 the three
months ended March 31, 2004 and 2003, would be as follows:
Three Months Ended March 31,
2004 2003
------------- -------------
Net loss, as reported...................................... $ (3,734,993) $ (5,223,057)
Add: Variable non-cash employee and director
stock compensation expense/(benefit)/ -- 1,027,899
recognized in the Statements of Operations.........
Less: Total stock-based employee and director
stock compensation expense determined
under fair value method............................ (373,436) (329,227)
------------ ------------
Pro forma net loss......................................... $ (4,108,429) $ (4,524,385)
Preferred stock dividends.................................. 995,853 905,458
------------ ------------
Pro forma net loss applicable to common
stockholders........................................... $ (5,104,282) $ (5,429,843)
============ ============
Net loss per share applicable to common stockholders:
Basic/diluted, as reported........................... $ (0.12) $ (0.18)
Basic/diluted, pro forma............................. $ (0.13) $ (0.16)
7
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments,
which have a maturity of less than three months at the time of purchase.
NOTE 5 - 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 period. 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 March 31,
2004 and 2003, was 32,182,486 and 18,041,617 shares, respectively.
NOTE 6 - COMPREHENSIVE LOSS
The following sets forth comprehensive loss for the three months ended
March 31, 2004 and 2003:
Three Months Ended March 31,
-------------------------------
2004 2003
----------- -----------
Net Loss................................................ $(3,734,993) $(5,223,057)
Net Unrealized Loss on Short-Term Investments........... -- (750)
----------- -----------
Comprehensive Loss...................................... $(3,734,993) $(5,223,807)
=========== ===========
NOTE 7 - STOCKHOLDERS' EQUITY
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. For the three months ended March 31, 2004 and 2003, preferred stock
dividends of $995,853 and $905,458, respectively, were recorded.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Alagebrium chloride (formerly ALT-711) is our lead product candidate
and we believe the only A.G.E. Crosslink Breaker in advanced human testing. In
February 2004, the United States Adopted Name (USAN) Council approved alagebrium
chloride as the generic name of the chemical compound formerly known as ALT-711.
We believe that alagebrium works through a unique mechanism of action
that directly reverses the stiffening of the vasculature that leads to systolic
hypertension and heart failure, two cardiovascular indications for which there
are clear, unmet medical needs. Several Phase 2 clinical trials of alagebrium
have been completed in heart failure and systolic hypertension: 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 further Phase 2 development of alagebrium in systolic
hypertension and heart failure. SPECTRA (Systolic Pressure Efficacy and Safety
Trial of Alagebrium), the first of these Phase 2 trials, was initiated in March
2004, and the second, PEDESTAL (Patients with Impaired Ejection Fraction and
Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium), was initiated
in April 2004.
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 $192,349,705 as of March 31, 2004, and expect to incur
operating losses, potentially greater than losses in prior years, for a number
of years.
We have financed our operations through proceeds from an initial public
offering of common stock in 1991, subsequent public offerings of common stock,
private placements of common and preferred equity securities, revenue from
collaborative relationships, reimbursement of certain of our research and
development expenses by our collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey net operating loss carryforwards.
Our business is subject to significant risks, which are described in
this Report, including under the heading "Forward-Looking Statements and
Cautionary Statements."
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Total income for the three months ended March 31, 2004 and 2003, was
$89,000 and $49,000, respectively. In 2004, income included approximately
$52,000 in other income derived from the sale of fully depreciated laboratory
equipment and supplies. Income was also derived from interest earned on cash and
cash equivalents.
Our total expenses were $3,824,000 for the three months ended March 31,
2004, compared to $5,272,000 for the three months ended March 31, 2003, and in
each period consisted primarily of research and development expenses. Research
and development expenses included third-party expenses associated with
pre-clinical and clinical studies, manufacturing costs, including the
development and preparation of clinical supplies, personnel and
personnel-related expenses and facility expenses. Research and development
expenses were $2,684,000 for the three months ended March 31, 2004, as compared
to $2,905,000 for the same period in 2003. In 2004, they primarily consisted of
$821,000 in personnel and personnel-related expenses, $764,000 in clinical trial
expenses, primarily related to the start-up of SPECTRA, $534,000 related to
manufacturing (tableting and packaging) and $152,000 in pre-clinical expenses.
Research and development expenses for the three months ended March 31, 2003,
primarily consisted of $1,100,000 in personnel and personnel-related expenses,
$811,000 in clinical trial expenses related to the Phase 2b SAPPHIRE and SILVER
trial, $307,000 in pre-clinical expenses, $144,000 related to manufacturing
(assay validation and development) and drug stability studies, and non-cash
variable stock compensation expense of $62,000.
Research and development expenses decreased by $221,000, or 7.6%, as
compared to the three months ended March 31, 2003. The decrease was primarily
attributed to lower clinical costs and personnel and personnel-related expenses
associated with the completion of the SAPPHIRE and SILVER trial in 2003 as
compared to the start-up of SPECTRA in 2004, partially offset by higher
manufacturing costs for tableting and packaging in preparation for SPECTRA.
General and administrative expenses decreased to $1,140,000 for the
three months March 31, 2004, compared to $2,367,000 for the same period in 2003
and included a non-cash variable stock compensation expense of $966,000 in 2003.
Non-cash variable stock compensation expense/(benefit) is directly related to
changes in our stock price (see Note 3). Exclusive of the 2003 non-cash variable
stock compensation expense, general and administrative expenses were $1,401,000
for the three months ended March 31, 2003. The remaining decrease of $261,000 is
primarily related to personnel and personnel-related costs, business development
and marketing costs incurred during the first quarter of 2003 associated with
the SAPPHIRE and SILVER trial.
Our net loss applicable to common stockholders was $4,731,000 for the
three months ended March 31, 2004, compared to $6,129,000 in the same period in
2003, a decrease of 22.8%, primarily related to a decline in variable non-cash
stock compensation expense and decreased clinical trial expenses partially
offset by higher manufacturing expenses. Included in the net loss applicable to
common stockholders are preferred stock dividends of $996,000 and $905,000 for
the three months ended March 31, 2004 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents at March 31, 2004, of $13,115,000,
compared to $16,679,000 at December 31, 2003. The decrease is attributed to
$3,492,000 of cash used in operations, consisting primarily of research and
development expenses, personnel-related costs and facility expenses and $76,000
in capital expenditures, offset by $5,000 in cash received for the exercise of
employee stock options. At March 31, 2004, we had working capital of
$11,250,000.
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, we had federal research and development tax credit carryforwards of
approximately $6,401,000 and State research and development tax credit
carryforwards of approximately $1,600,000 at December 31, 2003. 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In December 2003, we sold $2,083,000 of our gross State net operating
loss carryforwards and $209,000 of our State research and development tax credit
carryforwards under the State of New Jersey's Technology Business Tax
Certificate Transfer Program (the "Program"). The Program allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
net operating loss carryforwards and defined research and development tax
credits for cash. The proceeds from the sale in 2003 were $345,000 and were
recorded as a tax benefit in the December 31, 2003 statement of operations. The
State renews the Program annually and limits the aggregate proceeds to
$10,000,000. We cannot be certain if we will be able to sell any or all of these
carryforwards under the Program.
We do not have any approved products and currently derive cash from
sales of our equity 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 and cash equivalents to fund our operations,
including the new Phase 2 trials. The remaining cost of these trials, exclusive
of our internal cost, is currently estimated to be approximately $7.6 million
for the systolic hypertension trial and $0.2 million for the first phase of the
diastolic dysfunction trial. The cost includes executed, but cancelable
agreements with outside organizations. Based on the projected spending levels
for the Company, 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. As a result, throughout 2004, we will monitor our liquidity
position and the status of our clinical trials. The Company is actively pursuing
fund-raising possibilities through the sale of our equity securities at the
current time. 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 the trials, and other operations if
our level of cash and cash equivalents falls 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, which include
executed, but cancelable, agreements with outside organizations for the newly
initiated trials. 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 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.
CRITICAL ACCOUNTING POLICIES
In December 2001, the United States Securities and Exchange Commission
issued a statement concerning certain views of the Commission regarding the
appropriate amount of disclosure by publicly held companies with respect to
their critical accounting policies. In particular, the Commission expressed its
view that in order to enhance investor understanding of financial statements,
companies should explain the effects of critical accounting policies as they are
applied, the judgments made in the application of these policies and the
likelihood of materially different reported results if different assumptions or
conditions were to prevail. We have since carefully reviewed the disclosures
included in our filings with the Commission, including, without limitation, our
Annual Report on Form 10-K
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
for the year ended December 31, 2003, and accompanying audited financial
statements and related notes thereto. We believe the effect of the following
accounting policy is significant to our results of operations and financial
condition.
We account for options granted to employees and directors in accordance
with APB Opinion No. 25, and related interpretations. As such, compensation
expense is recorded on fixed stock grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. Based on
the performance of our stock, we repriced certain employee stock options on
February 2, 1999. As a result of this repricing, options to purchase 1.06
million shares of stock were repriced and certain vesting periods related to
these options were modified or extended. Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire. As a
result, net loss applicable to common stockholders and net loss per share to
common stockholders may be subject to volatility. Had we accounted for repricing
of stock option grants in accordance with SFAS No. 123, the expense related to
the vested options would have been recorded at the repricing date, and the
expense related to non-vested options would have been recorded over the vesting
period. As of March 31, 2004, there were 548,409 repriced options outstanding,
which expire on various dates through January 2008.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth in this section and elsewhere in this Form
10-Q. These factors include, but are not limited to, the risks set forth below.
The forward-looking statements represent our judgment and expectations
as of the date of this Report. We assume no obligation to update any such
forward-looking statements.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of March 31, 2004, we had working capital of $11,250,000, including
$13,115,000 of cash and cash equivalents. Our cash used in operations for the
three months ended March 31, 2004 was $3,492,000. 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 expect to utilize cash and cash equivalents to fund our operations,
including the new Phase 2 trials. The remaining cost of these trials, exclusive
of our internal cost, is currently estimated to be approximately $7.6 million
for the systolic hypertension trial and $0.2 million for the first phase of the
diastolic dysfunction trial. The cost includes executed, but cancelable
agreements with outside organizations. The first of these Phase 2 trials was
initiated in March 2004, SPECTRA (Systolic Pressure Efficacy and Safety Trial of
Alagebrium) and the second, PEDESTAL (Patients with Impaired Ejection Fraction
and Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium), was
initiated in April 2004. 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. We are actively pursuing fund-raising
possibilities through the sale of our equity securities at the current time. 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 falls 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
12
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
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 short-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.
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 interest income. We have not received any revenues from
product sales. We may not realize product revenues on a timely basis, if at all.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
At March 31, 2004, we had an accumulated deficit of $192,350,000. 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.
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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. 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
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer and our Vice President, Finance, evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based
upon that evaluation, the Chief Executive Officer and the Vice President,
Finance, have concluded that as of the end of such fiscal quarter, our current
disclosure controls and procedures are adequate and effective to ensure that
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported on a timely basis.
b) Changes in Internal 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 fiscal quarter covered by this Quarterly Report on Form
10-Q that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8-K AND EXHIBITS
a) The following reports on Form 8-K were filed during the quarter
ended March 31, 2004:
On March 15, 2004, we filed a current report on Form 8-K, dated
March 12, 2004, regarding our financial condition and results of
operations for the year ended December 31, 2003.
On March 12, 2004, we filed a current report on Form 8-K, dated
March 10, 2004, announcing the initiation of SPECTRA, a trial of
alagebrium chloride (ALT-711) in patients with systolic hypertension.
b) Exhibits
See the "Exhibit Index" on page 20 for exhibits required to be
filed with this Quarterly Report on Form 10-Q.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 2004
ALTEON INC.
By: /s/Kenneth I. Moch
-------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
(principal executive officer)
By: /s/Elizabeth A. O'Dell
-------------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
(principal accounting officer)
19
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 to the Company's Report on
Form 10-Q filed on November 10, 1999, S.E.C. File Number 000-19529.)
3.2 Certificate of the Voting Powers, Designations, Preference and
Relative Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Series F Preferred
Stock Alteon Inc. (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000, S.E.C. File Number 001-16043.)
3.3 Certificate of Retirement dated September 10, 2000, of Alteon
Inc. (Incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q filed on November 10, 1999, S.E.C. File Number
000-19529.)
3.4 Certificate of Designations of Series G Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
S.E.C. File Number 000-19529.)
3.5 Certificate of Amendment of Certificate of Designations of
Series G Preferred Stock of Alteon Inc. (Incorporated by reference
to Exhibit 3.4 to the Company's Report on Form 10-Q filed on August
14, 1998, S.E.C. File Number 000-19529.)
3.6 Certificate of Designations of Series H Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
S.E.C. File Number 000-19529.)
3.7 Amended Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the
Company's Report on Form 10-Q filed on August 14, 1998, S.E.C. File
Number 000-19529.)
3.8 Certificate of Retirement dated November 20, 2000, of Alteon
Inc. (Incorporated by reference to Exhibit 3.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
S.E.C. File Number 001-16043.)
3.9 Certificate of Amendment to Restated Certificate of Incorporation
of Alteon Inc., dated June 7, 2001. (Incorporated by reference to
Exhibit 3.8 to the Company's Report on Form 10-Q filed on August 14,
2001, S.E.C. File Number 001-16043.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.10
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, S.E.C. File Number 001-16043.)
4.1 Stockholders' Rights Agreement dated as of July 27, 1995, between
Alteon Inc. and Registrar and Transfer Company, as Rights Agent.
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C.
File Number 001-16043.)
4.2 Amendment to Stockholders' Rights Agreement dated as of April 24,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K filed on May 9, 1997, S.E.C.
File Number 000-19529.)
4.3 Registration Rights Agreement dated as of April 24, 1997, between
Alteon Inc. and the investors named on the signature page thereof.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on May 9, 1997, S.E.C. File Number
000-19529.)
4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on
May 9, 1997, S.E.C. File Number 000-19529.)
4.5 Amendment to Stockholders' Rights Agreement dated as of December 1,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on December 10, 1997,
S.E.C. File Number 000-19529.)
4.6 Registration Rights Agreement dated September 29, 2000.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 5, 2000, S.E.C. File Number
001-16043.)
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4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.9 Notice of Appointment, dated August 29, 2002, of The American Stock
Transfer & Trust Company as successor Rights Agent, pursuant to
Stockholders' Rights Agreement dated as of July 27, 1995.
(Incorporated by reference to Exhibit 4.4 of the Company's Report on
Form 10-Q filed on November 13, 2002, S.E.C. File Number 001-16043.)
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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