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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 2, 2004, 48,472,898 shares of the registrant's Common Stock were
outstanding.
Page 1 of 22 pages
The Exhibit Index is on page 22
ALTEON INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets as of September 30, 2004
and December 31, 2003............................................. 3
Condensed Statements of Operations for the three and
nine months ended September 30, 2004 and 2003..................... 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003................................. 5
Notes to Condensed Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 9
Item 3. Qualitative and Quantitative Disclosures about Market Risk........... 20
Item 4. Controls and Procedures.............................................. 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................. 20
Item 6. Exhibits............................................................. 20
SIGNATURES...................................................................... 21
INDEX TO EXHIBITS............................................................... 22
2
PART I - FINANCIAL INFORMATION
ITEM I. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
ALTEON INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2004 2003
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 14,124,668 $ 16,678,582
Other current assets.................................................... 433,392 225,439
------------- -------------
Total current assets................................................. 14,558,060 16,904,021
Property and equipment, net............................................. 125,062 100,964
Restricted cash......................................................... 250,000 250,000
------------- -------------
Total assets............................................................... $ 14,933,122 $ 17,254,985
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................ $ 416,058 $ 470,841
Accrued expenses........................................................ 1,777,980 1,399,712
------------- -------------
Total current liabilities............................................ 2,194,038 1,870,553
------------- -------------
Stockholders' Equity:
Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,250 and 1,174 shares
of Series G and 3,755 and 3,525 shares of Series H
issued and outstanding, as of September 30, 2004 and
December 31, 2003, respectively...................................... 50 47
Common Stock, $0.01 par value,
175,000,000 shares authorized, and 48,472,898 and
40,467,148 shares issued and outstanding, as of
September 30, 2004 and December 31, 2003, respectively............... 484,729 404,671
Additional paid-in capital ............................................. 213,182,784 202,598,573
Accumulated deficit..................................................... (200,928,479) (187,618,859)
------------- -------------
Total stockholders' equity........................................... 12,739,084 15,384,432
------------- -------------
Total liabilities and stockholders' equity................................. $ 14,933,122 $ 17,254,985
============= =============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
ALTEON INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
Income:
Investment income....................................... $ 55,198 $ 35,623 $ 121,614 $ 139,521
Other income............................................ -- -- 151,822 --
------------ ----------- ------------ ------------
Total income....................................... $ 55,198 $ 35,623 $ 273,436 $ 139,521
------------ ----------- ------------ ------------
Expenses:
Research and development
(which includes non-cash variable stock
compensation expense/(benefit) of $0 and
$(63,620) for the three months ended
September 30, 2004 and 2003, respectively,
and $0 and $20,019, for the nine months ended
September 30, 2004 and 2003, respectively)........... 2,131,879 2,165,182 7,261,576 8,330,120
General and administrative
(which includes non-cash variable
stock compensation expense/(benefit) of $0
and $(1,475,917) for the three months ended
September 30, 2004 and 2003, respectively)........... 933,414 (422,294) 3,258,749 3,801,197
------------ ----------- ------------ ------------
Total expenses..................................... 3,065,293 1,742,888 10,520,325 12,131,317
------------ ----------- ------------ ------------
Net loss................................................... (3,010,095) (1,707,265) (10,246,889) (11,991,796)
Preferred stock dividends............................ 1,049,920 965,004 3,062,731 2,805,168
------------ ----------- ------------ ------------
Net loss applicable to common stockholders................. $ (4,060,015) $(2,672,269) $(13,309,620) $(14,796,964)
============ =========== ============ ============
Basic/diluted net loss per share
applicable to common stockholders....................... $ (0.08) $ (0.07) $ (0.31) $ (0.42)
============ =========== ============ ============
Weighted average common shares used
in computing basic/diluted net loss per share
applicable to common stockholders....................... 48,298,985 35,961,899 43,100,121 35,173,908
============ =========== ============ ============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
ALTEON INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months
Ended September 30,
-------------------------------
2004 2003
------------ -------------
Cash Flows from Operating Activities:
Net loss........................................................................ $(10,246,889) $ (11,991,796)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 56,548 479,638
Amortization of deferred compensation........................................... 15,138 26,106
Non-cash compensation expense related to
variable plan employee stock options......................................... -- 20,019
Changes in operating assets and liabilities:
Other assets.................................................................... (207,953) (253,447)
Accounts payable and accrued expenses........................................... 323,485 (1,422,676)
------------ -------------
Net cash used in operating activities........................................ (10,059,671) (13,142,156)
------------ -------------
Cash Flows from Investing Activities:
Capital expenditures............................................................ (80,646) (50,941)
Purchases of marketable securities.............................................. -- (3,010,716)
Maturities of marketable securities............................................. -- 3,000,000
------------ -------------
Net cash used in investing activities........................................ (80,646) (61,657)
------------ -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock...................................... 7,581,318 7,655,945
Net proceeds from exercise of employee stock options............................ 5,085 33,046
------------ -------------
Net cash provided by financing activities.................................... 7,586,403 7,688,991
------------ -------------
Net decrease in cash and cash equivalents.......................................... (2,553,914) (5,514,822)
Cash and cash equivalents, beginning of period..................................... 16,678,582 14,452,413
------------ -------------
Cash and cash equivalents, end of period........................................... $ 14,124,668 $ 8,937,591
============ =============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
ALTEON INC.
NOTES TO CONDENSED 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 adjustments) considered necessary for a
fair presentation have been included. Operating results for the three and nine
months ended September 30, 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 $200,928,479 as of September 30, 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 September 30, 2004, the Company had working capital of $12,364,022,
including $14,124,668 of cash and cash equivalents. The Company's net cash used
in operations for the nine months ended September 30, 2004, was $10,059,671, and
for the year ended December 31, 2003 was $15,906,230.
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of $7,581,318. The
Stock Purchase Agreement provides that the Company will sell a total of
3,200,000 additional shares of common stock at $1.50 per share for $4,800,000 in
gross proceeds to the investors who elect to purchase shares by no later than
December 31, 2004. The investors are not obligated and at their discretion may
elect not to purchase additional shares.
The Company expects to utilize cash and cash equivalents to fund its
operations, including the Phase 2 SPECTRA (Systolic Pressure EffiCacy and Safety
TRial of Alagebrium) and PEDESTAL (Patients with Impaired Ejection Fraction and
Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium) 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 and therefore will require
additional funding. The Company believes that its existing cash and cash
equivalents will be adequate to satisfy its working capital requirements for its
current operations into the second quarter of 2005. As a result, the Company
will monitor its liquidity position and the status of its clinical trials and
will continue actively to pursue fund-raising possibilities through the sale of
its equity securities. If the Company is unsuccessful in its efforts to raise
additional funds through the sale of its 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.
The Company believes that such curtailment actions, if needed, will enable
Alteon to fund its operations beyond 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 number and
characteristics of product candidates that we pursue, 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.
6
Selling securities to satisfy Alteon's short-term and long-term capital
requirements may have the effect of materially diluting the current holders of
the Company's outstanding common stock. The Company may also seek additional
funding through corporate collaborations and other financing vehicles. 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. There was
no non-cash stock compensation expense/(benefit) in 2004. The total non-cash
stock compensation (benefit)/expense resulting from the 1999 repricing for the
three months ended September 30, 2003 was $(1,539,537), and for the nine months
ended September 30, 2003 was $20,019. As of September 30, 2004, there were
545,484 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 and
nine months ended September 30, 2004 and 2003, would be as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
Net loss, as reported........................ $ (3,010,095) $ (1,707,265) $ (10,246,889) $ (11,991,796)
Add: Variable non-cash employee and
director stock compensation
(benefit)/expense recognized in
the Statements of Operations.......... -- (1,539,537) -- 20,019
Less: Total stock-based employee
and director compensation
benefit/(expense) determined
under fair value method............... 125,580 (305,775) (604,087) (948,719)
------------- -------------- ------------- --------------
Pro forma net loss........................... (2,884,515) (3,552,577) (10,850,976) (12,920,496)
Preferred stock dividends.................... 1,049,920 965,004 3,062,731 2,805,168
------------- -------------- ------------- --------------
Pro forma net loss applicable to
common stockholders........................ $ (3,934,435) $ (4,517,581) $ (13,913,707) $ (15,725,664)
============= ============== ============= ==============
Earnings per share applicable to
common stockholders:
Basic/diluted, as reported.......... $ (0.08) $ (0.07) $ (0.31) $ (0.42)
Basic/diluted, pro forma............ $ (0.08) $ (0.13) $ (0.32) $ (0.45)
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.
7
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 due to
the Company's losses. The amount of potentially issuable shares of common stock
excluded from the calculation as of September 30, 2004 and 2003, was 59,061,487
and 28,218,949, respectively.
NOTE 6 - COMPREHENSIVE LOSS
The following sets forth comprehensive loss for the three and nine months
ended September 30, 2004 and 2003:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Net Loss........................................... $(3,010,095) $(1,707,265) $(10,246,889) $(11,991,796)
Net Unrealized Loss on
Short-Term Investments.......................... -- (1,642) -- (816)
----------- ----------- ------------ ------------
Comprehensive Loss................................. $(3,010,095) $(1,708,907) $(10,246,889) $(11,992,612)
=========== =========== ============ ============
NOTE 7 - STOCKHOLDERS' EQUITY
A Special Meeting of the Stockholders of the Company was held on September
15, 2004. The stockholders voted to amend the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock from
100,000,000 to 175,000,000.
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of $7,581,318, and
issued warrants to purchase 400,000 shares of common stock at an exercise price
of $1.30 per share. The Stock Purchase Agreement provides that the Company will
sell a total of 3,200,000 additional shares of common stock at $1.50 per share
for $4,800,000 in gross proceeds to the investors who elect to purchase shares
by no later than December 31, 2004. The investors are not obligated and at their
discretion may elect not to purchase additional shares. In connection with this
offering, certain previously issued warrants were repriced to $1.00 per share
pursuant to antidilution provisions connected to the warrants.
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 prices of the common stock, as reported on the American
Stock Exchange, for the 20 business days immediately preceding the date of
conversion. For the three months ended September 30, 2004 and 2003, preferred
stock dividends were $1,049,920 and $965,004, respectively, and for the nine
months ended September 30, 2004 and 2003, preferred stock dividends were
$3,062,731 and $2,805,168, respectively.
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 it to be the only A.G.E. Crosslink Breaker in advanced human clinical
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 uncontrolled
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 the compound's safety
profile in humans, 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), a Phase 2 trial, was
initiated in March 2004, and PEDESTAL (Patients with Impaired Ejection Fraction
and Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium), a Phase 2
trial, was initiated in April 2004. We are conducting a Phase 2 trial of
alagebrium in endothelial dysfunction at Johns Hopkins University School of
Medicine under grants from the National Heart, Lung and Blood Institute and the
Society of Geriatric Cardiology.
Our primary priorities are to continue the clinical development of
alagebrium in systolic hypertension and 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 alagebrium and other A.G.E.
Crosslink Breakers in additional indications where A.G.E.s and A.G.E.
crosslinking contribute to disease. Recent pre-clinical evidence has
demonstrated the beneficial effects of alagebrium on erectile dysfunction,
kidney disease, atherosclerosis and other disorders.
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 $200,928,479 as of September 30, 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 those 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 SEPTEMBER 30, 2004 AND 2003
Total income for the three months ended September 30, 2004 and 2003, was
$55,198 and $35,623, respectively. Income consisted of interest earned on cash
and cash equivalents, which increased in the three months ended September 30,
2004, compared to the same period in the prior year, due to higher investment
balances and an increase in short-term interest rates.
Our total expenses were $3,065,293 for the three months ended September
30, 2004, compared to $1,742,888 for the three months ended September 30, 2003,
and in each period consisted primarily of research and development expenses.
Research and development expenses were relatively flat as compared to the
three months ended September 30, 2003. They included higher clinical trial costs
associated with SPECTRA and PEDESTAL, offset by lower manufacturing costs.
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 $2,131,879 for the three months ended September 30, 2004, as
compared to $2,165,182 for the same period in 2003. In 2004, they consisted of
$978,054 in personnel and personnel-related expenses, $787,433 in clinical trial
expenses, primarily related to SPECTRA, and $206,034 in pre-clinical expenses,
including the completion of a two-year carcinogenicity study. In 2003, they
primarily consisted of $1,023,128 in personnel and personnel-related expenses,
$350,848 in clinical trial expenses, including $240,113 related to the Phase 2
SAPPHIRE/SILVER trial, $151,090 related to process development and drug
stability studies and $145,516 in pre-clinical expenses.
General and administrative expenses increased to $933,414 for the three
months ended September 30, 2004, compared to $(422,294) for the same period in
2003, which included a non-cash variable stock compensation benefit of
$(1,475,917). Non-cash variable stock compensation expense/(benefit) is directly
related to changes in our stock price (see Note 3). Excluding the non-cash
variable stock compensation, general and administrative expenses were $933,414
and $1,053,623 in 2004 and 2003, respectively, and in 2003 included increased
facility expenses related to the termination of our lease in Ramsey, New Jersey.
Our net loss applicable to common stockholders was $4,060,015 for the
three months ended September 30, 2004, compared to $2,672,269 in the same period
in 2003, an increase of 51.9%, primarily related to non-cash variable stock
compensation and the effect of expense/(benefit) relating thereto. Included in
the net loss applicable to common stockholders are preferred stock dividends of
$1,049,920 and $965,004 for the three months ended September 30, 2004 and 2003,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Total income for the nine months ended September 30, 2004 and 2003 was
$273,436 and $139,521, respectively. The income consisted of interest earned on
cash and cash equivalents, which decreased in the nine months ended September
30, 2004, compared to the same period in the prior year due to lower investment
balances. In 2004, income also included approximately $52,000 in other income
derived from the sale of fully depreciated laboratory equipment and supplies,
and a reimbursement of $100,000 for improvements made to our former Ramsey
facility.
Our total expenses were $10,520,325 for the nine months ended September
30, 2004, compared to $12,131,317 for the nine months ended September 30, 2003,
and in each year consisted primarily of research and development expenses.
Research and development expenses for the nine months ended September 30, 2004
were $7,261,576, and included $2,767,114 in personnel and personnel-related
expenses, $2,268,038 in clinical trial expenses, of which approximately
$2,000,000 related to SPECTRA, $925,966 related to manufacturing (packaging and
tableting), $360,110 in pre-clinical expenses, consisting of the completion of a
carcinogenicity study, $361,955 of facility and other overhead related costs and
$269,810 in third-party consulting. Research and development expenses for the
nine months ended September 30, 2003 were $8,330,120 and included $3,352,234 in
personnel and personnel-related expenses, $2,022,375 in clinical trial expenses,
of which $1,637,197 related to the Phase 2 SAPPHIRE/SILVER trial, $628,574 in
pre-clinical expenses (including toxicity and range-finding studies),
manufacturing costs of $583,697, primarily related to tablet manufacturing and
drug stability studies, $350,747 in third-party consulting, a non-cash variable
stock compensation expense of $20,019 and $1,039,362 of facility and other
overhead related costs.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Research and development expenses for the nine months ended September 30,
2004 decreased by $1,068,544 or 12.8%, as compared to the nine months ended
September 30, 2003. The decrease was primarily attributed to lower personnel and
personnel-related expenses and lower facility expenses in the nine months ended
September 30, 2004, offset by higher clinical trial and manufacturing costs
associated with SPECTRA and PEDESTAL.
General and administrative expenses decreased to $3,258,749 for the nine
months ended September 30, 2004, compared to $3,801,197 for the same period in
2003. General and administrative expenses in 2003 included higher business
development and marketing research costs associated with the unblinding of the
SAPPHIRE/SILVER trial and higher facility costs related to the termination of
our lease in Ramsey, New Jersey.
Our net loss applicable to common stockholders decreased to $13,309,620
for the nine months ended September 30, 2004, compared to $14,796,964 in the
same period in 2003, a decrease of 10.0%. Included in the net loss applicable to
common stockholders are preferred stock dividends of $3,062,731 and $2,805,168
for the nine months ended September 30, 2004 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents at September 30, 2004, of $14,124,668,
compared to $16,678,582 at December 31, 2003. This is a decrease in cash and
cash equivalents of $2,553,914 and is attributed to $10,059,671 of cash used in
operations consisting primarily of research and development expenses, personnel
related costs and facility expenses, $80,646 of capital expenditures and
$7,586,403 of cash provided by financing. At September 30, 2004, we had working
capital of $12,364,022.
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of $7,581,318. The
Stock Purchase Agreement provides that the Company will sell a total of
3,200,000 additional shares of common stock at $1.50 per share for $4,800,000 in
gross proceeds to the investors who elect to purchase shares by no later than
December 31, 2004. The investors are not obligated and at their discretion may
elect not to purchase additional shares.
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 ongoing Phase 2 trials. The remaining cost of these trials,
exclusive of our internal cost, is currently estimated to be approximately
$7,700,000 for both the systolic hypertension trial and the first phase of the
heart failure trial. This cost is higher than previously estimated as a result
of our decision to increase the number of clinical sites for SPECTRA to
facilitate our ability to meet projected timelines. 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 and therefore will require additional funding. We believe
that our existing cash and cash equivalents will be adequate to satisfy our
working capital requirements for our current operations into the second quarter
of 2005. As a result, we will monitor our liquidity position and the status of
our clinical trials and will continue actively to pursue fund-raising
possibilities through the sale of our equity securities. 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 beyond 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 number and characteristics of product
candidate that we pursue, 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Selling securities to satisfy our short-term and long-term capital
requirements 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. 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 (in systolic hypertension and in heart
failure) 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 for the year ended December 31, 2003, and the
accompanying audited financial statements and related notes thereto. We believe
the effect of the following accounting policy is critical 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 September 30, 2004, there were 545,484 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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of September 30, 2004, we had working capital of $12,364,022, including
$14,124,668 of cash and cash equivalents. Our cash used in operations for the
nine months ended September 30, 2004 was $10,059,671. We believe that our lead
compound, alagebrium chloride (formerly ALT-711), is the only A.G.E. Crosslink
Breaker in advanced human testing. Several Phase 2 clinical trials have been
completed: the DIAMOND trial in diastolic dysfunction in heart failure, the
SAPPHIRE/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 the compound's 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 ongoing Phase 2 trials of our lead compound, alagebrium chloride.
The first of these Phase 2 trials, SPECTRA, was initiated in March 2004, and the
second, PEDESTAL, 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 and
therefore will require additional funding. We believe that our existing cash and
cash equivalents will be adequate to satisfy our working capital requirements
for our current operations into the second quarter of 2005. As a result, we will
monitor our liquidity position and the status of our clinical trials and will
continue actively to pursue fund-raising possibilities through the sale of our
equity securities. 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 beyond
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 number and characteristics of product candidates that we pursue,
the conduct of pre-clinical tests and clinical trials, the status and timelines
of regulatory submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales capabilities,
our ability to complete strategic collaborations 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
and 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.
Selling securities to satisfy our short-term and long-term capital
requirements 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. 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 and 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, OR ARE UNABLE TO DERIVE REVENUES
FROM PRODUCT SALES, WE WILL 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,
and there can be no assurance that we will ever be profitable.
At September 30, 2004, we had an accumulated deficit of $200,928,479. We
anticipate that we will incur substantial, potentially greater, losses in the
future as we continue our research, development and clinical trials. We have not
yet requested or received regulatory approval for any product from the United
States Food and Drug Administration ("FDA") or any other regulatory body. All of
our product candidates, including our lead candidate, alagebrium, are still in
research, pre-clinical 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. Adverse results of any pre-clinical or clinical study
could cause us to materially modify our clinical development programs, resulting
in delays and increased
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
expenditures, or cease development for all or part of our ongoing programs of
alagebrium. 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. Success in pre-clinical studies of a product candidate may
not be predictive of similar results in humans during clinical trials. Before a
clinical trial may commence in the United States, we must submit an
investigational new drug application ("IND") containing pre-clinical studies,
chemistry, manufacturing, control and other information and a study protocol to
the FDA. If the FDA does not object within 30 days after submission of the IND,
then the trial may commence. If commenced, we, the FDA, other applicable
regulatory authorities or institutional review boards may delay, suspend or
terminate clinical trials of a product candidate at any time if, among other
reasons, we or they believe the subjects or patients participating in the
clinical trials are being exposed to unacceptable health risks or for other
reasons.
If we do not prove in clinical trials that our product candidates are safe
and effective, we will not obtain marketing approvals from the FDA and other
applicable regulatory authorities. In particular, one or more of our product
candidates may not exhibit the expected medical benefits in humans, may cause
harmful side effects or may have other unexpected characteristics that preclude
regulatory approval for any or all indications of use or limit commercial use if
approved.
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:
- 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;
- lower than expected retention rates of patients in a clinical
trial;
- inadequately trained or insufficient personnel at the study site to
assist in overseeing and monitoring clinical trials;
- delays in approvals from a study site's review board;
- longer treatment time required to demonstrate effectiveness or
determine the appropriate product dose;
- lack of sufficient supplies of the product candidate;
- adverse medical events or side effects in treated patients;
- lack of effectiveness of the product candidate being tested, and
- 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 intend to enter into these
arrangements, especially in target indications in which our potential
collaborator has particular therapeutic expertise or that involve a market that
must be served by large sales and marketing organizations. The potential
market, pre-clinical and clinical trial results and safety profile of our
product candidates may not be attractive to potential corporate partners. We
face significant competition in seeking appropriate collaborators and these
collaborations are complex and time-consuming to negotiate and document. We may
not be able to negotiate collaborations on acceptable terms, or at all. If that
were to occur, we may have to curtail the development of a particular product
candidate, reduce or delay its development program or one or more of our other
development programs, delay its potential commercialization or reduce the scope
of our sales or marketing activities, or increase our expenditures and undertake
development or commercialization activities at our own expense. If we elect to
increase our expenditures to fund development or commercialization activities on
our own, we may need to obtain additional capital, which may not be available to
us on acceptable terms or at all. If we do not have sufficient funds, we will
not be able to bring our product candidates to market and generate product
revenue.
IF WE ARE ABLE TO FORM 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, in some cases, will make us
dependent upon outside partners to conduct pre-clinical testing and clinical
trials and to provide adequate funding for our development programs.
In general, collaborations involving our product candidates pose the
following risks to us:
- collaborators have significant discretion in determining the efforts and
resources that they will apply to these collaborations;
- collaborators may not pursue further development and commercialization
of our product candidates or may elect not to continue or renew research and
development programs based on pre-clinical or clinical trial results, changes in
their strategic focus or available funding, or external factors such as an
acquisition that diverts resources or creates competing priorities;
- collaborators may delay clinical trials, provide insufficient funding
for a clinical trial program, stop a clinical trial or abandon a product
candidate, repeat or conduct new clinical trials or require a new formulation of
a product candidate for clinical testing;
- collaborators could independently develop, or develop with third
parties, products that compete directly or indirectly with our products or
product candidates if the collaborators believe that competitive products are
more likely to be successfully developed or can be commercialized under terms
that are more economically attractive;
- a collaborator with marketing and distribution rights to one or more
products may not commit enough resources to their marketing and distribution;
- collaborators may not properly maintain or defend our intellectual
property rights or may use our proprietary information in such a way as to
invite litigation that could jeopardize or invalidate our proprietary
information or expose us to potential litigation;
- disputes may arise between us and the collaborators that result in the
delay or termination of the research, development or commercialization of our
product candidates or that result in costly litigation or arbitration that
diverts management attention and resources; and
- collaborations may be terminated and, if terminated, may result in a
need for additional capital to pursue further development of the applicable
product candidates.
In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a
reduced number of potential future collaborators. If a present or future
collaborator of ours were to be involved in a business combination, the
continued pursuit and emphasis on our product development program could be
delayed, diminished or terminated.
15
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 current Good Manufacturing Practice ("cGMP") regulations
promulgated by the FDA. In the event that we are unable to obtain or retain
third-party manufacturing for our products, we will not be able to commercialize
such products as planned. Our reliance on third-party manufacturers will expose
us to risks that could delay or prevent the initiation or completion of our
clinical trials, the submission of applications for regulatory approvals, the
approval of our products by the FDA or the commercialization of our products or
result in higher costs or lost product revenues. In particular, contract
manufacturers:
- could encounter difficulties in achieving volume production, quality
control and quality assurance and suffer shortages of qualified personnel, which
could result in their inability to manufacture sufficient quantities of drugs to
meet our clinical schedules or to commercialize our product candidates;
- could terminate or choose not to renew the manufacturing agreement,
based on their own business priorities, at a time that is costly or inconvenient
for us;
- could fail to establish and follow FDA-mandated current good
manufacturing practices, or cGMPs, required for FDA approval of our product
candidates or fail to document their adherence to cGMPs, either of which could
lead to significant delays in the availability of material for clinical study
and delay or prevent filing or approval of marketing applications for our
product candidates; and
- could breach, or fail to perform as agreed, under the manufacturing
agreement.
Changing any manufacturer that we engage for a particular product or
product candidate may be difficult, as the number of potential manufacturers is
limited and we will have to compete with third parties for access to those
manufacturing facilities. cGMP manufacturing processes and procedures typically
must be reviewed and approved by the FDA and changing manufacturers may require
re-validation of any new facility for cGMP compliance, which would likely be
costly and time-consuming. We may not be able to engage replacement
manufacturers on acceptable terms quickly or at all. In addition, our contract
manufacturers located in foreign countries may be subject to import limitations
or bans. As a result, if any of our contract manufacturers is unable, for
whatever reason, to supply the contracted amounts of our products that we
successfully bring to market, a shortage would result which would have a
negative impact on our revenues.
Drug manufacturers are subject to ongoing periodic unannounced inspection
by the FDA, the United States Drug Enforcement Agency and corresponding state
and foreign agencies to ensure strict compliance with cGMPs, other government
regulations and corresponding foreign standards. While we are obligated to
audit the performance of third-party contractors, we do not have control over
our third-party manufacturers' compliance with these regulations and standards.
Failure by our third-party manufacturers or us to comply with applicable
regulations could result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of the government to grant pre-market
approval of drugs, delays, suspension or withdrawal of approvals, seizures or
recalls of product, operating restrictions and criminal prosecutions. 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
The FDA may delay, limit or deny approval of any of our product candidates
for many reasons. For example:
- ongoing pre-clinical or clinical trial results may indicate that the
product candidate is not safe or effective;
- the FDA may interpret our pre-clinical or clinical trial results to
indicate that the product candidate is not safe or effective, even if we
interpret the results differently; or
- the FDA may deem the processes and facilities that we, our collaborative
partners or our third-party manufacturers propose to use in connection with the
manufacture of the product candidate to be unacceptable.
Data obtained from pre-clinical and clinical activities is susceptible to
varying interpretations that could delay, limit or prevent regulatory approval.
In addition, we may encounter delays or rejections based upon changes in FDA
policy for drug approval during the period of product development and FDA
regulatory review of each submitted new drug application ("NDA"). We may
encounter similar delays in foreign countries. We may not obtain regulatory
approval for the drugs we develop. Moreover, regulatory approval may entail
limitations on the indicated uses of the drug. Further, even if we obtain
regulatory approval, a marketed drug and its manufacturer are subject to
continuing review and discovery of previously unknown problems with a product or
manufacturer which may have adverse effects on our business, financial condition
and results of operations, including withdrawal of the product from the market.
Violations of regulatory requirements at any stage, including pre-clinical
testing, clinical trials, the approval process or post-approval, may result in
various adverse consequences, including the FDA's delay in approving, or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of criminal penalties against the manufacturer and NDA
holder. None of our products has been approved for commercialization in the
United States or elsewhere. We may not be able to obtain FDA approval for any
products. 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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUR PRODUCT CANDIDATES WILL REMAIN SUBJECT TO ONGOING REGULATORY REVIEW EVEN IF
THEY RECEIVE MARKETING APPROVAL. IF WE FAIL TO COMPLY WITH CONTINUING
REGULATIONS, WE COULD LOSE THESE APPROVALS AND THE SALE OF OUR PRODUCTS COULD BE
SUSPENDED.
Even if we receive regulatory approval to market a particular product
candidate, the approval could be conditioned on us conducting additional costly
post-approval studies or could limit the indicated uses included in our
labeling. Moreover, the product may later cause adverse effects that limit or
prevent its widespread use, force us to withdraw it from the market or impede or
delay our ability to obtain regulatory approvals in additional countries. In
addition, the manufacturer of the product and its facilities will continue to be
subject to FDA review and periodic inspections to ensure adherence to applicable
regulations. After receiving marketing approval, the manufacturing, labeling,
packaging, adverse event reporting, storage, advertising, promotion and record
keeping related to the product will remain subject to extensive regulatory
requirements. We may be slow to adapt, or we may never adapt, to changes in
existing regulatory requirements or adoption of new regulatory requirements.
If we fail to comply with the regulatory requirements of the FDA and other
applicable United States and foreign regulatory authorities or previously
unknown problems with our products, manufacturers or manufacturing processes are
discovered, we could be subject to administrative or judicially imposed
sanctions, including:
- restrictions on the products, manufacturers or manufacturing
processes;
- warning letters;
- civil or criminal penalties;
- fines;
- injunctions;
- product seizures or detentions;
- import bans;
- voluntary or mandatory product recalls and publicity requirements;
- suspension or withdrawal of regulatory approvals;
- total or partial suspension of production; and
- refusal to approve pending applications for marketing approval of
new drugs or supplements to approved applications.
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 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash and cash equivalents are invested primarily in money market
accounts. We do not use derivative financial instruments. Accordingly, we
believe we have limited exposure to market risk for changes in interest rates.
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) identified in connection with the evaluation of such internal
control that occurred 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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
A Special Meeting of Stockholders of Alteon (the "Meeting") was held on
September 15, 2004. stockholders voted upon a proposal to amend our Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 100,000,000 to 175,000,000.
The number of votes cast for, against and abstaining from the proposal to
amend our Restated Certificate of Incorporation, was as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
41,680,732 1,447,730 79,812
ITEM 6. EXHIBITS
Exhibits
See Exhibit Index on page 22 for Exhibits filed with this Quarterly Report
on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 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)
21
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Certificate of Amendment to Restated Certificate of Incorporation of Alteon Inc., dated September 17, 2004.
3.2 Amended Certificate of Designations of Series G Preferred Stock of Alteon Inc., dated October 6, 2004.
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.
22