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CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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 No. 0-19529
ALTEON INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3304550
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
170 Williams Drive, Ramsey, New Jersey 07446
(Address of principal executive offices) (zip code)
(201) 934-5000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
2
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $75,671,295 at February 28, 1997 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of February 28, 1997:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 15,709,825
Documents incorporated by reference
The Proxy Statement to be filed with respect to the Annual Meeting of
Shareholders to be held on June 10, 1997 is incorporated by reference into Part
III.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Alteon Inc. ("Alteon" or the "Company") is engaged in the discovery and
development of pharmaceutical products for the treatment of the complications of
diabetes and age-related diseases. The Company's efforts have focused primarily
on developing its lead compound, pimagedine, to inhibit or block abnormal
glucose/protein complexes that lead to diabetic complications such as kidney
disease and dyslipidemia. The Company has expanded the potential indications and
dosage forms of pimagedine beyond the complications of diabetes to take
advantage of its activity in the inhibition of specific inflammatory responses,
and is pursuing development of pimagedine for inflammatory skin diseases and
stroke. The Company is conducting four clinical trials evaluating pimagedine as
a treatment for the complications of diabetes, including two pivotal Phase III
clinical trials for diabetic kidney disease.
This document includes certain forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The words "believes," "anticipates," "expects" and similar expressions are
intended to identify such forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated by the statements made by the Company.
Factors described in this Annual Report of Form 10-K, including without
limitation those identified in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Overview" could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by the Company.
BACKGROUND
The human body is composed of a complex network of cells which interact
and communicate with each other through the actions of proteins, hormones and
other chemical messengers to carry out and maintain bodily functions. This
interactive network incorporates various tissue and organ systems in the body,
including the nervous system, the endocrine (hormone) system and the immune
system. Changes in the balance of, and the interactions in, these systems occur
in a variety of disease states including diabetes and inflammatory conditions.
In healthy individuals, physiological glucose levels are tightly
regulated by the opposing actions of two hormones--insulin, which lowers blood
glucose, and glucagon, which elevates blood glucose. Diabetes arises from either
1) a severe decrease of insulin production and subsequent uptake and utilization
of glucose, generally referred to as Type I or Insulin Dependent Diabetes
Mellitus ("IDDM"), or 2) a loss in response to insulin, generally referred to as
Type II or Non-Insulin Dependent Diabetes Mellitus ("NIDDM"). Concurrently, the
ability to moderate the glucose-elevating effects of glucagon is diminished,
leading to the persistent hyperglycemic (excess blood sugar) state of diabetes.
In both cases, glucose levels rise significantly and, if not brought under
control, increase the rate of formation of irreversible protein/glucose
complexes known as advanced glycosylation end-products ("A.G.E.s").
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BACKGROUND (CONTINUED)
These A.G.E. complexes form continuously over time at a rate dependent
upon glucose levels, subsequently cross-link to other proteins and ultimately
accumulate in various tissues. As the rate of accumulation increases, A.G.E.
cross-linked proteins, normally flexible and separate, become rigid and
aggregated. It is this process which the Company believes results in progressive
loss of function of certain organs, blood vessels and nerves. In healthy
individuals this process occurs naturally, though slowly, as the body ages. In
diabetic patients, the rate of A.G.E. accumulation and the extent of protein
cross-linking is accelerated. The Company believes that this is a major factor
contributing to diabetic complications. The Diabetes Control and Complications
Trial (the "DCCT"), a multi-center investigation conducted under the auspices of
the National Institutes of Health, demonstrated that elevated blood glucose
levels significantly increase the rate of progression of eye, kidney, blood
vessel and nerve complications from diabetes. In 1994, an estimated 1.3 million
people in the United States suffered from these diabetic complications.
Studies conducted in animal models at numerous independent institutions
worldwide suggest that A.G.E.s are responsible for diabetic complications
including kidney disease (nephropathy), eye disease (retinopathy), nerve disease
(neuropathy) and hardening of the arteries (atherosclerosis). More recent
studies implicate A.G.E.s in age-related disorders such as Alzheimer's disease
and stroke. Alteon believes certain complications, such as atherosclerosis and
the progressive decline in renal function that occur eventually in
non-diabetics, are also A.G.E.-related, as this pathological process is
cumulative in effect over the lifetime of any individual.
Alteon's lead compound, pimagedine, has also been shown to inhibit
certain inflammatory conditions. The Company believes that this is due to
pimagedine's inhibitory effect on the enzyme responsible for synthesis of nitric
oxide ("NO"), a naturally occurring molecule which, when overproduced, may lead
to or result in serious complications. There is increasing evidence that NO
plays a significant role in acute and chronic inflammation, and results in
inflammatory diseases such as inflammatory bowel disease, rheumatoid arthritis,
asthma and inflammatory skin conditions. Inhibition of the inducible enzyme
responsible for formation of NO, inducible nitric oxide synthase ("iNOS"), has
been shown in animal models to mitigate the inflammatory disease process.
TECHNOLOGY
A.G.E.-Formation Inhibitors
Alteon's most advanced therapeutic program is the development of drugs
that inhibit A.G.E.-formation. These compounds are designed to prevent major
diabetic and age-related complications by blocking the formation of A.G.E.s and
the subsequent cross-linking of A.G.E.s to other proteins. Alteon's lead
compound, pimagedine, has been shown to inhibit A.G.E.-formation and subsequent
cross-link formation in preclinical models. Alteon and its commercial partners
are developing pimagedine to slow the progression of various complications of
diabetes, such as diabetic nephropathy and retinopathy.
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TECHNOLOGY (CONTINUED)
Alteon is engaged in research programs on second-generation
A.G.E.-formation inhibitors which may produce compounds that have advantages
over pimagedine, such as lesser potential side effects as well as increased
efficacy. The Company has selected one compound, ALT-946, for further
development and is looking for additional candidates.
A.G.E. Cross-link Breakers
The Company is pursuing development of compounds that chemically break
A.G.E. cross-linked proteins. These compounds are being evaluated for their
potential in reversing certain complications of diabetes and aging. One
application of this technology may be for the treatment of Alzheimer's disease,
where it has been demonstrated that the brain tissues of Alzheimer's patients
have significantly higher levels of A.G.E.s associated with (beta) amyloid
plaque deposits than normal brain tissues. Other possible applications for this
technology may include treatment of patients exhibiting cardiovascular
complications as well as certain ophthalmic diseases.
Glucose Lowering Technology
The inability to utilize glucose effectively in Type II diabetes is due
to a defect in the response of glucose utilizing tissues (e.g. skeletal muscle)
to insulin. The Company has identified a novel class of orally available
compounds that lowers blood glucose and free fatty acid levels in animal models
of Type II diabetes. This class of drugs, collectively called the Glucose
Lowering Agents ("G.L.A."), is chemically distinct from, and is believed to have
a different mechanism of action than, the thiazolidinedione compounds, a class
of compounds that has been the focus of many pharmaceutical companies because of
its beneficial effects on glucose and triglyceride levels. Analysis of plasma
lipids suggests that the regulation of fat metabolism leads to improved glucose
utilization and may be an important feature in the mechanism of action for the
G.L.A. class. This series of compounds prevents weight gain in obese/diabetic
animal models suggesting a potential for use in treatment of obesity. The
Company is actively pursuing preclinical studies with these compounds in order
to advance the most promising compound to clinical lead status.
iNOS Technology
Pimagedine is a preferential inhibitor of iNOS, thereby decreasing the
formation of NO, a molecule which has been shown in animal models to play a role
in acute and chronic inflammation. Independent researchers have reported that
treatment with pimagedine in animals reduces inflammation. Pimagedine has also
been shown to decrease the migration of macrophages (inflammatory cells) to the
site of tissue damage and prevents the release of cytokines and the consequent
release of NO. The Company is developing a topical formulation of pimagedine for
treatment of inflammatory skin diseases.
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PRINCIPAL PRODUCTS UNDER DEVELOPMENT
The following table summarizes Alteon's products in research and
development:
PRODUCT TARGET MECHANISM DEVELOPMENT MARKETING
CANDIDATE/INDICATIONS OF ACTION STATUS(1) RIGHTS(2)
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Pimagedine Oral
Diabetic Complications A.G.E. Alteon/Gamida/
Yamanouchi
Overt Nephropathy (Type I) Phase III
Overt Nephropathy (Type II) Phase III
End-Stage Renal Disease Phase II
Dyslipidemia Phase II
Pimagedine Intravenous
Stroke (4) Preclinical Alteon(3)/Gamida
Pimagedine Topical
Dermatological iNOS Alteon(3)/Gamida
Contact Dermatitis Preclinical
Eczema Preclinical
ALT-946
Diabetic Complications A.G.E. Preclinical Alteon/
Yamanouchi
A.G.E. Cross-link Breakers A.G.E. Alteon/
Yamanouchi
Alzheimer's Disease Discovery
Research
Atherosclerosis Discovery
Research
Ophthalmic Discovery
Research
Glucose Lowering Agents (4) Discovery Alteon
Research
Notes:
(1) "Phase III" clinical trials indicate that Alteon is testing the compound in
humans for safety and efficacy in an expanded patient population at multiple
clinical sites. "Phase II" clinical trials indicate that Alteon is testing the
compound in humans for safety and efficacy in a limited patient population.
"Preclinical" includes toxicological assessment of candidate compounds and
formulation of a product in an appropriate dosage form. "Discovery Research"
includes identification and evaluation of compounds in vitro and in animal
models. See "--Government Regulation".
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PRINCIPAL PRODUCTS UNDER DEVELOPMENT (CONTINUED)
(2) Where indicated, the Company's commercial partner Yamanouchi Pharmaceutical
Co., Ltd. ("Yamanouchi") has rights, or under certain circumstances the option
to acquire rights, to market products in Japan, South Korea, Taiwan and The
People's Republic of China. Where indicated, the Company's commercial partner
Gamida For Life ("Gamida") has rights to market products in Israel, Jordan,
South Africa, Cyprus and Bulgaria. See "--Strategic Alliances".
(3) In June 1995, Alteon obtained a license under patents from Washington
University, St. Louis, covering the use of pimagedine to inhibit iNOS and,
together with its commercial partner, Yamanouchi, is currently determining
marketing rights for certain potential products based upon this mechanism of
action.
(4) Mechanism not fully elucidated.
The Company incurred research and development expenditures of
$9,638,000, $11,648,000 and $18,720,000 for the years ended December 31, 1994,
1995 and 1996, respectively. Expenditures were reduced by reimbursements from
corporate partners in these periods of $1,065,000, $1,643,000 and $1,226,000,
respectively.
Diabetic Kidney Disease
Kidney disease is a significant cause of morbidity and mortality in
patients with Type I and Type II diabetes. It is a chronic and progressive
disease. One of the early signs of kidney damage is microalbuminuria
(characterized by leakage of small amounts of protein into the urine) which
progresses to overt nephropathy (characterized by leakage of large amounts of
protein into the urine) and ultimately to end-stage renal disease (advanced
renal disease requiring dialysis). Approximately 35% of patients with Type I
diabetes and approximately 5-10% of patients with Type II diabetes develop
nephropathy. As of 1994, there were approximately 650,000 diabetics diagnosed
with kidney disease in the United States. The only product approved to treat
nephropathy in patients with Type I diabetes is captopril, an
angiotensin-converting enzyme ("A.C.E.") inhibitor which, as an
antihypertensive, lowers filtration pressure in the kidney and has a beneficial
effect on this organ. The Company believes that pimagedine acts through a
mechanism different from captopril and therefore if used in conjunction with
captopril may have a complementary therapeutic effect. See "--Competition".
Overt Nephropathy
The Company is conducting two randomized double-blind,
placebo-controlled, multi-center, Phase III clinical trials to evaluate the
safety and efficacy of pimagedine, the ACTION (A Clinical Trial In Overt
Nephropathy) trials. The first Phase II/III trial of pimagedine in patients with
Type I diabetes and overt nephropathy was initiated in January 1994. In August
1994, an external safety monitoring committee determined that certain Phase II
nested gastro-intestinal safety parameters had been satisfied. The primary
objective of this trial is to evaluate the safety
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PRINCIPAL PRODUCTS UNDER DEVELOPMENT (CONTINUED)
and efficacy of pimagedine in preserving renal function in Type I patients.
Enrollment in this trial was completed in September 1996 with 690 patients
randomized into this study from 56 investigational sites in the United States
and Canada. Patients will be treated for a minimum of two years, and will
receive twice daily oral doses of pimagedine, adjusted for kidney function.
The second Phase III trial of pimagedine, in patients with Type II diabetes
and overt nephropathy, was initiated in July 1995 and uses a trial design
similar to the Type I clinical trial. The objective of this study is to evaluate
the safety and efficacy of pimagedine in preserving renal function in these
patients. In December 1996, the Company amended the protocol for this trial
because of dose-related adverse events seen in a number of older, more fragile
Type II diabetic patients. Pursuant to the amended protocol, patients on the
high-dose arm of the trial were converted to the low-dose arm and enrollment of
new patients ceased. The Company has enrolled 598 patients in this trial at over
80 sites in the United States and Canada. Patients in this program will be
treated for a minimum of two and one-half years, and will receive twice daily
oral doses of pimagedine, adjusted for kidney function.
No assurance can be given that these clinical trials can be
successfully completed.
Microalbuminuria
In July 1996, Hoechst Marion Roussel, Inc. ("HMRI") and the Company
terminated their Phase II clinical trial in patients with Type I diabetes and
persistent microalbuminuria. Following the termination of its collaboration with
its former commercial partner, HMRI, the Company concluded that termination of
this trial was warranted due to the slow rate of enrollment and the probable
time frame for completion of the study.
End-Stage Renal Disease (ESRD)
As kidneys fail, there is a significant increase in circulating A.G.E.s
because of the patient's inability to clear these compounds. This occurs to a
greater degree in diabetic patients because of their more rapid rate of
A.G.E.-formation. A.G.E.s are not removed to a significant degree by dialysis in
part due to the large size of certain A.G.E. proteins. The high A.G.E. burden in
diabetic patients is thought to be responsible for the rapid progression of
diabetic complications in dialysis patients. The Company believes that elevated
A.G.E. levels also contribute to higher levels of cardiovascular morbidity and
mortality in diabetic patients. Approximately 15,000 diabetics are affected by
ESRD annually in the United States. Diabetics with ESRD have a cardiovascular
mortality (myocardial infarction and cerebral vascular mortality) which is 2-3
times the rate of other patient groups with renal failure. There is no known
agent useful for treatment of ESRD. However, erythropoietin (EPO) is often used
to treat the anemia resulting from loss of kidney function.
The Company is conducting a double-blind, placebo-controlled,
multi-center, Phase II clinical trial to evaluate the safety and efficacy of
pimagedine in diabetic patients with ESRD on
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PRINCIPAL PRODUCTS UNDER DEVELOPMENT (CONTINUED)
hemodialysis, a form of dialysis used by approximately 80% of dialysis patients
in the United States. This Phase II clinical trial, which was initiated in
December 1995, is intended to enroll approximately 120 patients who will receive
oral doses of pimagedine three times per week in conjunction with their dialysis
treatment, and who will be treated for a minimum of six months.
The primary objective of this study is to assess safety and look at
short-term measurements such as lipid profiles and validate dosing for this
patient population. As of December 31, 1996, 102 patients have been enrolled in
this trial.
No assurance can be given that enrollment in any of these clinical
trials can be achieved on a timely basis, if at all, or that this clinical trial
can be successfully completed.
Dyslipidemia
Dyslipidemia is a condition characterized by an abnormal lipid profile.
The elevation of one lipid component, low-density lipoprotein, is known to be a
significant risk factor in cardiovascular disease. Diabetic patients are twice
as likely as nondiabetic individuals to die from coronary artery disease, and
the annual incidence of cardiovascular complications is increased significantly
in patients with Type II diabetes. There are numerous, potentially competitive,
products currently available on the market for the treatment of dyslipidemia.
However, the Company believes pimagedine may offer certain advantages to
diabetic dyslipidemia patients because it may reduce lipid A.G.E.s and
subsequent formation of atherosclerotic plaque.
In December 1995, Alteon and Gamida initiated a randomized,
double-blind, placebo-controlled, Phase II clinical trial to evaluate the effect
of pimagedine on plasma lipid levels and A.G.E.s in patients with diabetes and
elevated serum cholesterol levels. This Phase II clinical trial is intended to
enroll approximately 90 patients in Israel who will be treated for a minimum of
three months and who will receive twice daily oral doses of pimagedine, adjusted
for kidney function. The primary objective of this study is to evaluate the
safety and efficacy of pimagedine in reducing levels of low-density lipoproteins
("LDL"s) in Type II diabetic patients with varying degrees of renal function and
elevated LDLs. See "--Strategic Alliances". As of December 31, 1996, 89 patients
were enrolled.
No assurance can be given that this clinical trial can be successfully
completed.
Stroke
Every year approximately 500,000 persons in the United States suffer a
stroke and approximately one-third of these individuals die, making stroke the
third leading cause of death by disease. According to the American Heart
Association, in 1994 the economic cost of stroke due to healthcare expense and
loss of productivity was estimated to be nearly $20 billion. Individuals at
increased risk for stroke include those with hypertension, smokers, obese
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PRINCIPAL PRODUCTS UNDER DEVELOPMENT (CONTINUED)
individuals, diabetics and those with hyperlipidemia. There is no therapy
currently available to reduce the extent of neurological tissue damage following
stroke. However, several pharmaceutical and biopharmaceutical companies are
conducting preclinical studies and clinical trials on numerous compounds.
Animal studies have demonstrated that pimagedine, when given prior to
or after induction of stroke by occlusion of the middle cerebral artery, reduced
the volume of tissue death by 30%.
Alteon has completed acute toxicity studies in animals with an
intravenous formulation of pimagedine. The Company has filed an Investigational
New Drug Application ("IND") with the Food and Drug Administration ("FDA") and
has obtained approval for initiation of a Phase I program. The Company is
seeking a marketing partner for the compound prior to initiating these clinical
trials.
There can be no assurance that results obtained in animal studies will
be predictive of results obtained in humans, and no assurance can be given that
the Company will commence clinical trials in the near term, if at all.
Inflammatory Skin Disease
Because the Company believes pimagedine affects the inflammatory
process through the iNOS mechanism, pimagedine may have a therapeutic benefit in
certain inflammatory skin diseases such as contact dermatitis and eczema.
Currently, topical steroids are the treatment of choice for these indications
but are contraindicated for prolonged use. A topical formulation of pimagedine
is under development. The Company intends to file an IND for these indications,
although no assurance can be given that clinical trials will commence in the
near term, if at all.
Diagnostic Programs
Alteon is utilizing its A.G.E. technology to develop diagnostic tests
that may be used to assess A.G.E. levels and monitor drug therapy in diabetic
patients. Because the levels of circulating and tissue-bound A.G.E.s are
correlated with the pathology of diabetes and aging, measurement of A.G.E.
levels could provide valuable information on the stage of disease prior to the
appearance of clinical signs. The Company believes these tests, if developed,
will complement its drug products by enabling physicians to better diagnose and
treat patients with the potential to develop significant diabetic complications
before progression of their disease to a more advanced state.
Prevention of A.G.E.-formation/Staining of Teeth
The anti-plaque agent, chlorhexidine, discolors teeth. Alteon believes
that A.G.E.-formation may be responsible for such discoloration and preclinical
studies have demonstrated
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PRINCIPAL PRODUCTS UNDER DEVELOPMENT (CONTINUED)
that A.G.E.-formation inhibitors, as well as A.G.E. cross-link breakers, reduce
such staining. Alteon is pursuing the development of a dentifrice or mouthwash
to prevent such tooth staining.
A.G.E. Cross-link Breakers
Several novel compounds have been identified which are capable of
breaking the cross-links formed as a result of A.G.E. accumulation. These
compounds are currently under evaluation in various animal models to assess
their potential for treatment of a variety of diseases including
atherosclerosis, Alzheimer's disease and various ophthalmic disease states.
Following completion of these studies, the most promising drug candidate, if
any, will be moved ahead to clinical lead status and additional studies
initiated to prepare to file an IND.
Glucose Lowering Agents
The Company is currently investigating the glucose lowering potential
of several compounds identified from a natural product screening program. These
compounds, which are structurally different than the thiazolidinediones, have
been identified as having antidiabetic activity similar to the
thiazolidinediones without their associated side effect profile. Additional
mechanistic studies on these compounds will be done prior to taking the lead
compound to clinical lead status.
There can be no assurance that any of the products discussed above or
resulting from the Company's research programs will be successfully developed,
prove to be safe and efficacious in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at reasonable
costs or be successfully marketed.
STATUS OF CLINICAL TRIALS
The Company began clinical trials in 1987. Seven Phase I clinical
trials have been completed to assess the safety and pharmacokinetics of
pimagedine. Single and multiple-dose studies were conducted. Pimagedine was
administered to a total of 127 human subjects in this program, including healthy
subjects, diabetic patients with normal renal function, diabetic patients with
varying degrees of renal impairment and diabetic patients in hemodialysis
programs. No serious side effects were reported. The most commonly observed side
effects were headaches, heartburn, nausea, lightheadedness and drowsiness.
In addition, in 1989, two 28-day safety studies were completed in
diabetic patients with varying degrees of renal insufficiency as well as in
healthy subjects. Thirty-seven patients received pimagedine. The most common
side effects reported were nausea, vomiting and other gastro-intestinal
disturbances.
In view of the gastro-intestinal side effects seen in preliminary
studies and earlier trials, the FDA required the Company to modify its Phase
II/III protocols to include certain gastric
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STATUS OF CLINICAL TRIALS (CONTINUED)
function tests, including endoscopy. In August 1994, based on such tests in the
first 31 patients receiving pimagedine, an independent safety committee
recommended and the FDA allowed removal of the endoscopy requirement. At the
same time, the FDA permitted the inclusion of women of childbearing potential in
the trial.
Concurrently with its Phase I and Phase II/III clinical trials, the
Company conducted and recently completed a two-year dosing study in animal
models to test the carcinogenic potential of high doses of pimagedine. The final
results of this study were submitted to the FDA during the fourth quarter of
1996.
As of December 31, 1996, in the Company's Phase III clinical trials, of
the 690 patients who were enrolled in the overt nephropathy Type I study,
approximately 194 have been in the study for a minimum of six months, an
additional 144 have been in the study for 12 months and an additional 295 have
been in the study for 18 months. Pursuant to the study design, two-thirds of the
patients in the study receive pimagedine. As of December 31, 1996, of the 598
patients who were enrolled in the overt nephropathy Type II study, approximately
274 have been in the study for a minimum of six months, an additional 152 have
been in the study for 12 months and an additional 12 have been in the study for
18 months. Approximately 400 of the patients in the Type II study receive
pimagedine.
As of December 31, 1996, in the Company's Phase II clinical trials, 102
patients were enrolled in the ESRD trial and 89 were in enrolled in the
dyslipidemia trial. See "--End-Stage Renal Disease" and "--Dyslipidemia".
Delays in completion of the trials may occur as a result of
difficulties in retaining patients in the trials, preliminary safety data
analysis which requires changes in the protocols and delays in approval of the
trials by institutional review boards at the trial sites. Accordingly, no
assurance can be given that clinical trials can be successfully completed within
any particular time frame or at all.
In 1996, the Company retained Quintiles, Inc. to provide clinical trial
services to support the Phase III ACTION trials. The major areas of service
include project management, clinical site monitoring and data management.
STRATEGIC ALLIANCES
Yamanouchi Pharmaceutical Co., Ltd.
In July 1989, Alteon and Yamanouchi entered into a series of agreements
pursuant to which the parties formed a strategic alliance to develop and
commercialize Alteon's A.G.E.-related technology in Japan, South Korea, Taiwan
and The People's Republic of China (the "Yamanouchi Territory"). Under this
arrangement, the parties agreed to collaborate on further research and
development, Yamanouchi purchased 233,531 shares of Alteon's Preferred Stock
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STRATEGIC ALLIANCES (CONTINUED)
for $3.0 million, which was converted into 784,665 shares of Common Stock in
1991 upon Alteon's initial public offering of its Common Stock, and Alteon
granted to Yamanouchi an exclusive license to commercialize Alteon's technology
in the Yamanouchi Territory in exchange for royalty payments on net sales, if
any. Yamanouchi has the right to terminate the agreement upon 90 days prior
written notice to Alteon. This license expires as to each product in each
licensed country upon the later of 15 years from the date of the agreement, the
expiration of the last patent applicable to the product or five years after the
first commercial sale of the product in the country.
Pursuant to the license agreement, Alteon granted Yamanouchi the right
to manufacture pimagedine bulk material for sale in the Yamanouchi Territory.
With respect to certain second-generation A.G.E.-formation inhibitors, Alteon
has the option to supply all of Yamanouchi's reasonable requirements of active
ingredient bulk materials for sale within the Yamanouchi Territory.
Alteon and Yamanouchi also entered into a research and development
collaboration agreement to provide for joint collaboration on further research
and development, specifically Alteon's A.G.E.-formation and protein
cross-linking technology. Pursuant to such agreement, and in consideration of
Alteon's past costs and efforts in the research and development of the
technologies subject to the license agreement, Yamanouchi paid Alteon $7.0
million in 1989. Yamanouchi also agreed to fund preclinical studies, including
most toxicology studies, on pimagedine and any other products that the parties
jointly agree to develop including a second-generation A.G.E.-formation
inhibitor and a macrophage stimulator. The collaboration agreement provides that
any joint development program is terminable by either party upon 60 days prior
written notice. The agreement terminates in June 1999, unless otherwise
extended. In September 1992, Alteon and Yamanouchi amended the research and
development collaboration agreement to clarify their relative responsibilities
for patent prosecution and payment thereof.
Pursuant to the agreement, Yamanouchi has provided financial support
for most of the preclinical toxicity studies and has completed Phase I clinical
trials on pimagedine in Japan. Yamanouchi has not yet initiated any Phase II
clinical trials in Japan.
Hoechst Marion Roussel, Inc.
In December 1990, Alteon and Marion Merrell Dow, Inc., which was
subsequently acquired by an affiliate of Hoechst AG and renamed Hoechst Marion
Roussel, Inc., formed a strategic alliance to develop and commercialize Alteon's
A.G.E. technology for therapeutics in the areas of diabetic and aging
complications. The arrangements included a research and development
collaboration to conduct clinical trials jointly, including funding by HMRI of
trials on pimagedine, an agreement for the joint promotion and sale in the
United States, Canada and Western Europe of drugs developed pursuant to the
collaboration, and a manufacturing and supply arrangement. In 1996, the parties
ended their collaboration as a result of HMRI's continuing prioritization of its
new product pipeline, and the Company regained all rights granted to HMRI.
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STRATEGIC ALLIANCES (CONTINUED)
As a result of the termination of the strategic alliance with HMRI, the
Company has assumed full responsibility for the continuation of clinical trials
which had been funded by HMRI. These costs amount to approximately $1.4 million
per month. The Company and HMRI are negotiating various open issues arising from
the termination of their collaboration. This includes the rights of the parties
under certain patents and amounts which may be payable by the Company to HMRI
and by HMRI to the Company. HMRI has invoiced the Company certain amounts which
the Company believes are without merit.
The Company is seeking one or more collaborative partners to replace
HMRI. However, there is no assurance that the Company will be able to enter into
an agreement with a new partner or that if such an agreement is reached it will
provide the level of funding which had been provided by HMRI.
Boehringer Mannheim Diagnostics
In December 1994, the Company entered into an exclusive licensing
arrangement with Corange International Ltd., acting through Boehringer Mannheim
Diagnostics ("Boehringer Mannheim") for Alteon's technology for diagnostic
applications. Under this alliance, Alteon received a small initial payment in
January 1995, and will be entitled to receive royalties based on net sales of
research and commercial assays developed by Boehringer Mannheim and based on
Alteon's A.G.E. technology. Boehringer Mannheim will receive exclusive worldwide
rights to the technology for diagnostic applications outside of the territory
covered by the agreement with Yamanouchi for the Yamanouchi Territory.
Under the agreement, Boehringer Mannheim has agreed to develop
immunoassays to detect A.G.E.-hemoglobin, ApoB-A.G.E. and A.G.E.-serum
protein/peptides. Development of research assays was initiated during the first
quarter of 1995. Boehringer Mannheim plans to develop automated commercial
assays to correspond with the projected product launch of pimagedine, if
successfully developed and approved. Boehringer Mannheim may terminate the
license agreement upon 90 days prior written notice.
Gamida
In November 1995, the Company entered into clinical testing and
distribution agreements with Gamida. Under these agreements, Gamida is
conducting, at its own expense, a Phase II multi-site clinical trial in Israel,
in accordance with the protocol developed by Alteon, to evaluate pimagedine in
patients with diabetes and elevated serum cholesterol levels. Gamida will
receive the exclusive right to distribute pimagedine, if successfully developed
and approved for marketing, in Israel, Bulgaria, Cyprus, Jordan and South
Africa. The distribution agreement is for a term ending 10 years after the date
of regulatory approval for the sale of pimagedine in Israel; thereafter, it will
be automatically renewed for successive three-year periods unless terminated by
either party on the last day of the initial or a renewal term. See "--Principal
Products Under Development --Dyslipidemia".
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15
STRATEGIC ALLIANCES (CONTINUED)
Alteon's commercial partners may develop, either alone or with others,
products that compete with the development and marketing of the Company's
products. Competing products, either developed by the commercial partners or to
which the commercial partners have rights, may result in their withdrawal of
support with respect to all or a portion of the Company's technology, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Rockefeller University
Pursuant to an agreement with The Rockefeller University ("Rockefeller
University"), Alteon has exclusive, worldwide and perpetual rights to the
technology and inventions relating to A.G.E.s and protein cross-linking,
including those relating to the complications of diabetes and aging, discovered
by Dr. Cerami and his colleagues during their tenure at Rockefeller University's
Laboratory of Medical Biochemistry. Under this agreement, Alteon contributed
funding to perform research relating to the A.G.E. technology at Rockefeller
University. In October 1991, Dr. Cerami and his research team left Rockefeller
University to join The Picower Institute for Medical Research ("The Picower
Institute"). Upon such departure, Alteon ceased funding Rockefeller University,
and Rockefeller University ceased providing research assistance and laboratory
support to Alteon. The termination of this research program does not affect
Alteon's proprietary rights to the licensed technology. See "--Patents, Trade
Secrets and Licenses".
Although the Company has ended its scientific collaboration with
Rockefeller University, Alteon continues to contribute to the cost of patent
maintenance. In this regard, the Company has provided funding in the amounts of
$235,000, $167,000 and $86,000 in 1994, 1995 and 1996, respectively.
In February 1995, the Company exercised an option it held pursuant to
an Option and License Agreement dated March 31, 1994, with Rockefeller
University to acquire rights for a new technology unrelated to the A.G.E.
mechanism, focused on novel synthetic analogs of the hormone glucagon. Effective
February 1997, the Company elected to terminate this agreement. As a result of
the termination, all of Alteon's rights under the license agreement revert back
to Rockefeller University.
The Picower Institute for Medical Research
In September 1991, the Company entered into a five-year agreement with
The Picower Institute, a not-for-profit biomedical science institution of which
Dr. Cerami was then the President, pursuant to which the Company agreed to
provide funding at a rate of $500,000 per year in support of new A.G.E.-related
research in exchange for an exclusive, worldwide, royalty-bearing license for
all commercial healthcare applications of A.G.E.-related inventions resulting
from The Picower Institute's research programs conducted during the term of the
agreement.
13
16
STRATEGIC ALLIANCES (CONTINUED)
During 1994, 1995 and 1996, Alteon provided funding of $1,241,000, $1,109,000
and $1,006,000, respectively, and reimbursed The Picower Institute for one-half
of its total A.G.E. patent costs. Effective November 30, 1996, the Company
terminated its funding of further research at The Picower Institute because of
Dr. Cerami's retirement from The Picower Institute. The Company expects to
devote the funds previously targeted for The Picower Institute to its existing
projects.
Washington University, St. Louis
In June 1995, the Company obtained an exclusive, worldwide,
royalty-bearing license from Washington University, located in St. Louis,
Missouri, for patents covering the use of pimagedine as an inhibitor of iNOS.
The agreement requires the Company to pay certain licensing fees upon the
attainment of development milestones as well as a royalty on net sales or a
share of sub-licensing profits on products covered by the patents. The license
also covers patents developed through any subsequent research collaboration
between the parties which Alteon agrees to fund.
MANUFACTURING
The Company has no manufacturing facilities for either production of
bulk chemicals or the manufacturing of pharmaceutical dosage forms. The Company
relies on third-party contract manufacturers to produce the raw materials and
chemicals used as the active drug ingredients in its pharmaceutical products.
The Company intends to sell the bulk chemical to its corporate partners for
final formulation.
The Company intends to continue to use third-party contract
manufacturers to produce its bulk chemical requirements for clinical trials and
possible commercial use. Such chemical manufacturers are inspected by the
Company and its consultants to confirm compliance with Good Manufacturing
Practice ("GMP") required for pharmaceutical products. The Company plans to
enter into long-term supply agreements with one or more qualified suppliers of
bulk pharmaceutical chemicals in the United States and in Europe to ensure a
consistent and stable supply of its worldwide chemical requirements for
pimagedine. Based on the cost estimates received from potential suppliers and
with the assistance of its consultants, the Company believes it will be able to
obtain sufficient quantities of bulk chemical at reasonable prices to satisfy
anticipated needs.
There can be no assurance, however, that the Company can continue to
meet its needs for supply of bulk chemicals or that manufacturing limitations
will not delay clinical trials or possible commercialization. See "--Strategic
Alliances".
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17
MARKETING AND SALES
Alteon plans to market and sell its products, if successfully developed
and approved, directly or through co-promotion or other licensing arrangements
with third parties. Such arrangements may be exclusive or nonexclusive and may
provide for marketing rights worldwide or in a specific market.
For certain of its products Alteon has licensed exclusive marketing
rights, formed joint marketing arrangements or granted distribution rights
within specified territories with its commercial partners, Yamanouchi,
Boehringer Mannheim and Gamida. See "--Strategic Alliances".
In cases where Alteon enters into joint marketing arrangements or in
the event that it does not enter into joint marketing or other licensing
arrangements with third parties, it will have to develop a marketing and sales
force with significant technical expertise or, where appropriate or permissible,
enter into arrangements with third parties to market and sell its products.
Alteon has no marketing experience and there can be no assurance that it will
successfully develop such experience or that it will be able to enter into
marketing agreements with others on acceptable terms. To the extent that the
Company enters into co-promotion or other sales and marketing arrangements with
other companies, any revenues to be received by Alteon will be dependent on the
efforts of others and there can be no assurance that such efforts will be
successful.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's product candidates, processes
and know-how is important to its business. Alteon aggressively files and
prosecutes patents covering its proprietary technology, and, if warranted, will
defend its patents and proprietary technology. As appropriate, the Company seeks
patent protection for its proprietary technology and products in the United
States and Canada and in key commercial European and Asia/Pacific countries. The
Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.
Pimagedine is not a novel compound and is not protected by a
composition-of-matter patent. In 1992, a United States patent on the use of
pimagedine was issued to Rockefeller University and subsequently exclusively
licensed to Alteon with claims relating to the inhibition of A.G.E.-formation
and cross-linking. The patent claims the new use of a known agent for the
treatment of the complications of diabetes and aging. In 1994, corresponding
patents were granted in France, Germany, Italy, the United Kingdom and other
European countries. A corresponding patent was issued in Japan in 1995. The
Company continues to pursue and patent chemical analogs of known
A.G.E.-formation inhibitors, as well as novel compounds having potential
inhibitory properties. The Company believes that its patents and licensed
patents provide a substantial proprietary base that will allow Alteon and its
collaborative partners to commercialize products in this field. There can be no
assurance, however, that pending or future applications will issue, that the
claims of any patents which do issue will provide any significant
15
18
PATENTS, TRADE SECRETS AND LICENSES (CONTINUED)
protection of the Company's technology, or that the Company's directed discovery
research will yield compounds and products of therapeutic and commercial value.
In 1987, the Company acquired an exclusive, royalty-free, worldwide
license (including the right to sub-license to others) to issued patents, patent
applications and trade secrets from Rockefeller University relating to the
A.G.E.-formation and cross-linking technology currently under development at
Alteon. The original inventors of the patented technology include Drs. Michael
A. Brownlee, Anthony Cerami and Helen Vlassara, members of Alteon's Scientific
Advisory Board, and Dr. Peter C. Ulrich, formerly the Company's Director of
Chemistry and now at The Picower Institute. Additional patent applications have
since been filed on discoveries made in support of the technology from research
conducted at Rockefeller University, The Picower Institute and the Company's
laboratories.
Pursuant to the Company's agreement with The Picower Institute, certain
patentable inventions and discoveries relating to A.G.E. technology have been
licensed exclusively to the Company. In consultation with the Company, The
Picower Institute is responsible for the worldwide filing and prosecution of
patent applications and maintenance of patents for such inventions. Alteon will
contribute 50% of the cost of such activities.
As of December 1996, the Company's patent estate of owned and/or
licensed patent rights consisted of 61 issued patents or allowed patent
applications, none of which expire prior to 2001, and 75 pending patent
applications in the United States, the majority of which are A.G.E.-related.
Included in Alteon's patent estate are two issued United States patents on the
use of pimagedine for inhibition of iNOS, licensed from Washington University.
The Company intends to continue to focus its research and development
efforts on the synthesis of novel compounds and on the search for additional
therapeutic applications to expand and broaden the Company's rights within its
technological and patent base. The Company is also prepared to in-license
additional technology that may be useful in building its proprietary position.
Where appropriate, the Company utilizes trade secrets and unpatentable
improvements to enhance its technology base and improve its competitive
position. Alteon requires all employees, scientific consultants and contractors
to execute confidential disclosure agreements as a condition of engagement by
the Company. There can be no assurance, however, that the Company can limit
unauthorized or wrongful disclosures of unpatented trade secret information.
The Company believes that its estate of licensed and owned issued
patents, if upheld, and pending applications, if granted and upheld, will be a
substantial factor in the Company's success. The patent positions of
pharmaceutical firms, including Alteon, are generally uncertain and involve
complex legal and factual questions. Consequently, even though Alteon is
currently prosecuting such patent applications in the United States and foreign
patent offices, the Company does not know whether any of such applications will
result in the issuance of any additional
16
19
PATENTS, TRADE SECRETS AND LICENSES (CONTINUED)
patents or, if any additional patents are issued, whether the claims thereof
will provide significant proprietary protection or will be circumvented or
invalidated.
Competitors or potential competitors have filed for or have received
United States and foreign patents and may obtain additional patents and
proprietary rights relating to compounds or processes competitive with those of
the Company. Accordingly, there can be no assurance that the Company's patent
applications will result in patents being issued or that, if issued, the claims
of the patents will afford protection against competitors with similar
technology; nor can there be any assurance that others will not obtain patents
that the Company would need to license or circumvent. See "--Competition".
The Company's success will depend, in part, on its ability to obtain
patent protection for its products, preserve its trade secrets and operate
without infringing on the proprietary rights of third parties. There can be no
assurance that the Company's current patent estate will enable the Company to
prevent infringement by third parties or that competitors will not develop
competitive products outside the protection that may be afforded by the claims
of such patents. To the extent the Company relies on trade secrets and
unpatented know-how to maintain its competitive technological position, there
can be no assurance that others may not develop independently the same or
similar technologies. Failure to maintain its current patent estate or to obtain
requisite patent and trade secret protection, which may become material or
necessary for product development, could delay or preclude the Company or its
licensees or marketing partners from marketing their products and could thereby
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
The Company and its products are subject to comprehensive regulation by
the FDA in the United States and by comparable authorities in other countries.
These national agencies and other federal, state, and local entities regulate,
among other things, the preclinical and clinical testing, safety, effectiveness,
approval, manufacture, labeling, marketing, export, storage, record keeping,
advertising and promotion of the Company's products.
The process required by the FDA before the Company's products may be
approved for marketing in the United States generally involves (i) preclinical
new drug laboratory and animal tests, (ii) submission to FDA of an IND, which
must become effective before clinical trials may begin, (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug for its intended indication, (iv) submission to the FDA of a New Drug
Application ("NDA"), and (v) FDA review of the NDA in order to determine, among
other things, whether the drug is safe and effective for its intended uses.
There is no assurance that FDA review process will result in product approval on
a timely basis, if at all.
Preclinical tests include laboratory evaluation of product
chemistry and formulation, as well as animal studies to assess the potential
safety and efficacy of the product. Certain preclinical tests are subject to FDA
regulations regarding current Good Laboratory Practices.
17
20
GOVERNMENT REGULATION (CONTINUED)
The results of the preclinical tests are submitted to the FDA as part of an IND
and are reviewed by the FDA prior to the commencement of clinical trials.
Clinical trials are conducted under protocols that detail such matters
as the objectives of the study, the parameters to be used to monitor safety and
the efficacy criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND. Further, each protocol must be reviewed by an
institutional review board.
Clinical trials are typically conducted in three sequential phases,
which may overlap. During Phase I, when the drug is initially given to human
subjects, the product is tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. Phase II involves studies in a limited
patient population to (i) evaluate preliminarily the efficacy of the product for
specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Phase III
trials are undertaken in order to further evaluate clinical efficacy and to
further test for safety within an expanded patient population. The FDA may
suspend clinical trials at any point in this process if it concludes that
clinical subjects are being exposed to an unacceptable health risk.
FDA approval of the Company's products, including a review of the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the United States. The process
of obtaining approvals from the FDA can be costly, time consuming and subject to
unanticipated delays. There can be no assurance that approvals of the Company's
proposed products, processes, or facilities will be granted on a timely basis,
if at all. Any failure to obtain or delay such approvals would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, even if regulatory approval is granted, such approval may
include significant limitations on indicated uses for which a product could be
marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's manufacturing procedures conform to GMP requirements,
which must be followed at all times. In complying with those requirements,
manufacturers (including a drug sponsor's third-party contract manufacturers)
must continue to expend time, money and effort in the area of production and
quality control to ensure compliance. Domestic manufacturing establishments are
subject to periodic inspections by the FDA in order to assess, among other
things, GMP compliance. To supply a product for use in the United States,
foreign manufacturing establishments must comply with GMP and are subject to
periodic inspection by the FDA or by regulatory authorities in certain of such
countries under reciprocal agreements with the FDA.
Both before and after approval is obtained, a product, its
manufacturer, and the holder of the NDA for the product are subject to
comprehensive regulatory oversight. Violations of regulatory requirements at any
stage, including the preclinical and clinical testing process, the
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21
GOVERNMENT REGULATION (CONTINUED)
approval process, or thereafter (including after approval) may result in various
adverse consequences, including the FDA's delay in approving or refusal to
approve a product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or NDA holder. In
addition, later discovery of previously unknown problems may result in
restrictions on such product, manufacturer, or NDA holder, including withdrawal
of the product from the market. Also, new government requirements may be
established that could delay or prevent regulatory approval of the Company's
products under development.
The FDA has implemented accelerated approval procedures for certain
pharmaceutical agents that treat serious or life-threatening diseases and
conditions, especially where no satisfactory alternative therapy exists. The
Company believes that certain of its products in development may qualify for
accelerated approval. The Company cannot predict the ultimate impact, however,
of the FDA's accelerated approval procedures on the timing or likelihood of
approval of any of its potential products or those of any competitor. In
addition, the approval of a product under the accelerated approval procedures
may be subject to various conditions, including the requirement to verify
clinical benefit in post-marketing studies, and the authority on the part of FDA
to withdraw approval under streamlined procedures if such studies do not verify
clinical benefit.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and diagnostic products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company does not currently have any
facilities or personnel outside of the United States.
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
COMPETITION
A number of companies are pursuing the research and development of
A.G.E. inhibition technology. The Company is not aware of any other
pharmaceutical company developing an A.G.E.-formation inhibitor which has
reached the clinical development stage. However, Alteon
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22
COMPETITION (CONTINUED)
is aware of many companies which are pursuing research and development of
compounds for the selective inhibition of iNOS.
Many of the Company's potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. In addition, many of these
companies have extensive experience in preclinical testing and human clinical
trials. These companies may develop and introduce products and processes
competitive with or superior to those of the Company.
The Company's competition will be determined in part by the potential
indications for which the Company's compounds are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of its or its competitors' products. Accordingly, the relative
speed with which Alteon can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the products to the
market are important competitive factors. The Company expects that competition
among products approved for sale will be based on, among other things, product
efficacy, safety, reliability, availability, price and patent position.
The development by others of new treatment modalities for diabetes not
based on inhibiting A.G.E.-formation and cross-linking for those indications for
which the Company is developing drug therapies could render pimagedine and other
A.G.E.-formation inhibitors non-competitive or obsolete. Competitive drugs based
on other therapeutic mechanisms may be efficacious in treating diabetic
complications. Aldose reductase inhibitors ("ARIs"), which inhibit formation of
sorbitol, a form of sugar, have been evaluated by a number of large
pharmaceutical companies. A number of companies that were developing ARI drugs
have since abandoned or suspended clinical development of such drugs in the
United States following evaluation of their efficacy and side-effect profiles.
The Company believes that at least one company continues its clinical
development of an ARI drug, the efficacy and side effect profile of which is not
known to Alteon. Outside of the United States, several ARI drugs have been
approved for commercial sale. Other possible therapeutic approaches being
pursued include the cure of diabetes by gene therapy or islet cell
transplantation. Results of the DCCT showed that tight glucose control reduced
the incidence of diabetic complications. Numerous companies are pursuing other
methods to manage glucose control and to reduce the incidence of diabetic
complications. In addition, several large companies are researching aldose
reductase inhibitors as therapeutics for diabetic neuropathy, retinopathy and
related conditions. Several companies have initiated research with drugs that
inhibit vascularization as a potential treatment of diabetic retinopathy. In the
event one or more of these initiatives are successful, the market for the
Company's products may be reduced or eliminated.
The treatment of diabetic complications with use of existing agents
such as lipid lowering agents or A.C.E. inhibitors may also be beneficial. The
A.C.E. inhibitor, captopril, has been
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COMPETITION (CONTINUED)
approved by the FDA for patients with diabetic nephropathy. Alteon's clinical
trials were designed assuming patients' baseline therapy would include A.C.E.
inhibitor treatment.
The Company is aware of the development by several pharmaceutical
companies of thiazolidinedione derivatives ("glitazones") for treatment of Type
II diabetes. In January 1997, Warner-Lambert Company was given approval and
clearance by the U.S. FDA for the marketing of ResulinTM (troglitazone), an
anti-diabetic drug designed to target insulin resistance in Type II diabetes.
The patent covering captopril expired in February 1996. Other
pharmaceutical companies may choose to market and sell this drug which will lead
to a decrease in its price. Sales of captopril may reduce or eliminate the
market for any product developed by the Company for this indication.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of individuals with
recognized expertise in the medical complications of diabetes and aging,
biochemistry and pharmaceutical science and related fields who advise the
Company about present and long-term scientific planning, research and
development. Members of the Scientific Advisory Board consult and meet with
Company management informally on a frequent basis. All members of the Scientific
Advisory Board are employed by employers other than the Company and may have
commitments to, or consulting or advisory agreements with, other entities that
may limit their availability to the Company. These companies may also be
competitors of Alteon. The members of the Scientific Advisory Board have agreed,
however, not to provide any services to any other entities that might conflict
with the activities that they provide as members of the Scientific Advisory
Board. Each member also has executed a confidentiality agreement for the benefit
of the Company. Although members of the Scientific Advisory Board may devote
significant time and energy to the affairs of the Company, except for members of
the Scientific Advisory Board with consulting contracts with Alteon, no members
are expected to devote more than a small portion of their time to Alteon.
The following persons are members of Alteon's Scientific Advisory Board:
Anthony Cerami, Ph.D., the President of Cerami Consulting Corporation.
Michael A. Brownlee, M.D., the Anita and Jack Saltz Chair of Diabetes
Research at the Albert Einstein College of Medicine, and a Professor in the
Department of Medicine and Co-Director of the Diabetes Research Center.
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SCIENTIFIC ADVISORY BOARD (CONTINUED)
Helen Vlassara, M.D., Professor and Head, Laboratory of Diabetes and Aging
at The Picower Institute.
Scott M. Grundy, M.D., Ph.D., Chairman of the Department of Clinical
Nutrition and Director of the Center for Human Nutrition at the University of
Texas Southwestern Medical Center at Dallas, Texas, and a Professor of Internal
Medicine and Biochemistry.
Bruce Merrifield, Ph.D., a Nobel Laureate and a John D. Rockefeller
Professor Emeritus at Rockefeller University.
Leslie Z. Benet, Ph.D., Professor and Chairman, Department of
Biopharmaceutical Sciences, University of California, San Francisco.
Richard Bucala, M.D., Ph.D., Professor and Head, Laboratory of Medical
Biochemistry at The Picower Institute.
EMPLOYEES
As of February 14, 1997, Alteon employed 54 persons (21 of whom held a
Ph.D., M.D. or other advanced degree), of whom 38 were engaged in research and
development and 16 were engaged in administration and management. A significant
number of the Company's management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical product companies.
Alteon believes that it has been successful in attracting skilled and
experienced personnel. None of the Company's employees are covered by collective
bargaining agreements and all employees are covered by confidentiality
agreements. The Company believes that its relationship with its employees is
good.
ITEM 2. FACILITIES.
The Company leases a 37,000 square foot building in Ramsey, New Jersey,
which contains its executive and administrative offices and research
laboratories. The lease, which commenced on November 1, 1993, has a 10-year term
with a cancellation option by Alteon after five years. In addition, the lease
has two five-year renewal options.
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ITEM 3. LITIGATION.
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
under the symbol "ALTN." The following table sets forth, for the calendar
periods indicated, the range of high and low sale prices for the Common Stock of
the Company on the NASDAQ National Market:
YEAR QUARTER HIGH LOW
----------------------------------------------------------
1995 1st $ 7 1/4 $5 1/8
2nd 8 3/8 5 1/4
3rd 15 3/4 7 3/8
4th 16 1/4 7 3/4
1996 1st 15 3/4 9 1/4
2nd 15 5/8 9 5/8
3rd 11 3/8 7 1/4
4th 10 1/4 5 1/4
As of March 1, 1997, there were 293 holders of record, with beneficial
shareholders in excess of 400.
The Company has neither paid nor declared dividends on its capital
stock since its inception and does not plan to pay dividends in the foreseeable
future. Any earnings which the Company may realize will be returned to finance
the growth of the Company.
The market prices for securities of biotechnology and pharmaceutical
companies, including Alteon, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products by the
Company or others, clinical trial results, developments concerning agreements
with collaborators, governmental regulation, developments in patent or other
proprietary rights, public concern as to the safety of drugs developed by the
Company or others, future sales of substantial amounts of Common Stock by
existing stockholders and general market conditions can have an adverse effect
on the market price of the Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in
conjunction with the audited financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. The selected financial data for
the five years ended December 31, 1996 has been derived from the audited
financial statements of the Company.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues:
Investment income............ $ 2,943,721 $ 2,108,183 $ 1,797,032 $ 1,888,496 $ 2,295,394
----------- ----------- ------------ ------------ ------------
Total revenues............... 2,943,721 2,108,183 1,797,032 1,888,496 2,295,394
----------- ----------- ------------ ------------ ------------
Expenses:
Research and development..... 4,290,866 6,719,225 8,573,123 10,004,244 17,494,193
General and administrative... 2,801,607 2,650,974 3,706,137 3,699,210 3,516,599
Interest expense............. 16,607 5,063 42,470 68,435 47,394
----------- ----------- ------------ ------------ ------------
Total expenses............... 7,109,080 9,375,262 12,321,730 13,771,889 21,058,186
----------- ----------- ------------ ------------ ------------
Net loss....................... $(4,165,359) $(7,267,079) $(10,524,698) $(11,883,393) $(18,762,792)
=========== =========== ============ ============ ============
Net loss per share............. $ (.34) $ (.59) $ (.85) $ (.90) $ (1.20)
=========== =========== ============ ============ ============
Weighted average common
shares and common
equivalent shares
outstanding.................. 12,090,759 12,329,196 12,430,798 13,169,968 15,640,399
=========== =========== ============ ============ ============
DECEMBER 31,
-------------------------------------------------------------------------------------------
BALANCE SHEET DATA: 1992 1993 1994 1995 1996
---- ---- ---- ----- ----
Cash, cash equivalents and
short-term investments....... $58,655,931 $ 49,182,679 $ 36,434,862 $ 45,196,711 $ 34,499,523
Working capital................ 58,593,806 48,787,252 35,539,616 44,433,488 26,542,450
Total assets................... 60,553,607 54,345,639 43,612,027 52,216,243 40,138,993
Long-term capital lease
obligations................. 13,575 6,214 749,888 466,899 161,577
Accumulated deficit............ (4,362,321) (11,629,400) (22,154,098) (34,037,491) (52,800,283)
Stockholders' equity........... 59,690,105 52,499,703 41,214,086 49,715,737 31,371,174
24
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in October 1986, Alteon has devoted substantially
all of its resources to its research, drug discovery and development programs.
To date, Alteon has not generated any revenues from the sale of products and
does not expect to generate any such revenues for several years, if at all.
Alteon has incurred a cumulative net loss of $52,800,000 as of December 31,
1996, and expects to incur operating losses, potentially greater than losses in
prior years, for a number of years.
Alteon has financed its operations through proceeds from an initial
public offering of Common Stock in 1991, a follow-on offering of Common Stock
completed in 1995, private placements of preferred equity securities, revenue
from its collaborations with HMRI and Yamanouchi, reimbursement of certain of
Alteon's research and development expenses by its collaborative partners and
investment income earned on cash balances and short-term investments.
Effective August 10, 1996, HMRI and Alteon ended their collaboration,
and Alteon regained all rights granted to HMRI covering the Company's technology
and assumed full responsibility for the continuation of clinical trials which
had been funded by HMRI. HMRI's decision to withdraw from the collaboration was
a result of its continuing prioritization of its new product pipeline. The
Company is seeking one or more collaborative partners to replace HMRI. There is
no assurance that the Company will be able to enter into such an agreement or
that if such an agreement is reached, it will provide the level of funding which
had been provided by HMRI.
Although the Company anticipates increased expenditures in research and
development as it develops products and expands its clinical trials, a portion
of such development expenses is expected to be reimbursed by Alteon's
collaborative partners. Yamanouchi has agreed to fund preclinical studies,
including most toxicology studies, on pimagedine and any other products that the
parties jointly agree to develop including a second-generation A.G.E.-formation
inhibitor and a macrophage stimulator. Gamida is conducting, at its own expense,
a Phase II clinical trial in Israel to evaluate pimagedine in patients with
diabetes and elevated serum cholesterol levels. Yamanouchi and Gamida do not
fund Alteon's research or early product development expenses.
See "Business -- Strategic Alliances."
The Company's business is subject to significant risks including, but
not limited to (i) its ability to obtain funding, (ii) the risks inherent in its
research and development efforts, including clinical trials, (iii) uncertainties
associated both with obtaining and enforcing its patents and with the patent
rights of others, (iv) the lengthy, expensive and uncertain process of seeking
regulatory approvals, (v) uncertainties regarding government reforms of product
pricing and reimbursement levels, (vi) technological change and competition,
(vii) manufacturing uncertainties and dependence on third parties. Even if the
Company's product candidates appear promising at an
25
28
OVERVIEW (CONTINUED)
early stage of development, they may not reach the market for numerous reasons.
Such reasons include the possibilities that the products will be ineffective or
unsafe during clinical trials, will fail to receive necessary regulatory
approvals, will be difficult to manufacture on a large scale, will be
uneconomical to market or will be precluded from commercialization by
proprietary rights of third parties.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES
Total revenues for 1996, 1995 and 1994 were $2,295,000, $1,888,000 and
$1,797,000, respectively. Revenues in 1996, 1995 and 1994 were derived from
interest earned on cash and cash equivalents and short-term investments. The
increase in investment income in 1996 over 1995 was attributed to higher cash
and cash equivalents and short-term investment balances during most of 1996. The
increase in investment income in 1995 over 1994 was attributed to the increase
in cash and cash equivalents and short-term investments primarily related to the
completion of the follow-on offering during the last quarter of 1995. Higher
interest rates were an additional factor during 1995 contributing to the
increase in investment income over 1994.
OPERATING EXPENSES
The Company's total expenses increased to $21,058,000 in 1996, from
$13,772,000 in 1995 and $12,322,000 in 1994, and consisted primarily of research
and development expenses. Research and development expenses, net of
reimbursements from its collaborative partners, were $17,494,000 in 1996,
$10,004,000 in 1995 and $8,573,000 in 1994. Research and development expenses
increased in 1996 from 1995 by $7,490,000, or 74.9%, due to the Company's
assumption of the ACTION trial costs as a result of the termination of the
Company's collaborative agreements with HMRI on August 10, 1996. Research and
development expenses increased in 1995 from 1994 by $1,431,000, or 16.7%, due to
increased clinical research studies and personnel and related costs offset by
reimbursements from the Company's corporate partners. The Company was reimbursed
$1,226,000 in 1996, $1,643,000 in 1995 and $1,065,000 in 1994 by its
collaborative partners for research and development expenditures.
General and administrative expenses were $3,517,000 in 1996 as compared
to $3,699,000 in 1995 and $3,706,000 in 1994. The decrease in 1996 over 1995 was
due to decreased personnel and related costs and decreased depreciation and
amortization expenses.
Interest expense was $47,000 in 1996, $68,000 in 1995 and $42,000 in
1994. The decrease in interest expense was primarily due to a five-year capital
lease arrangement which commenced in June 1994 for leasehold improvements on the
Company's headquarters and research facility.
26
29
RESULTS OF OPERATIONS (CONTINUED)
NET LOSS
At December 31, 1996, the Company had available net operating tax loss
carryforwards, which expire in various amounts from the years 2006 through 2011,
of approximately $53 million for income tax purposes. In addition, the Company
had research and development credit carryforwards of approximately $2.6 million.
The Company had net losses of $18,763,000 in 1996, $11,883,000 in 1995 and
$10,525,000 in 1994.
The Company does not believe that inflation has had a material impact
on the results of its operations.
LIQUIDITY AND CAPITAL RESOURCES
Alteon had cash and cash equivalents and short-term investments at
December 31, 1996, of $34,500,000 compared to $45,197,000 at December 31, 1995.
This is a decrease in cash and cash equivalents and short-term investments of
$10,697,000. The primary components of this decrease were cash used in operating
activities of $10,785,000 and $376,000 of capital expenditures. This was offset
by $357,000 provided by financing activities consisting of employee stock option
exercises, a sales-leaseback transaction for lab equipment, the reclassification
of restricted cash of $103,000 and the reversal of unrealized losses of $4,000,
offset by capital lease obligations. As of December 31, 1996, Alteon had
invested $7,507,000 in capital equipment and leasehold improvements, of which a
cumulative $1,375,000 had been funded through capital leases.
As of December 31, 1996, the Company had restricted cash of $723,800,
which represents the escrow amount related to the Company's leased headquarters
and research facility in Ramsey, New Jersey. The Company may reduce the
originally required escrow amount of $1,034,000 by 10% per year.
The Company's cash used in operations was $10,785,000 in 1996 and
$10,993,000 in 1995. Such activity consisted primarily of operating expenses
reduced by investment income. Capital expenditures amounted to $376,000 in 1996
as compared to $361,000 in 1995.
The Company's research and development expenses, to date, have been
funded primarily by research and development collaborative arrangements and
sales of equity securities. The Company expects to incur substantial additional
research and development costs, including costs related to drug discovery,
preclinical research and clinical trials. The Company anticipates that it will
be able to offset a portion of its research and development expenses and its
clinical development expenses with funding from its collaborative partners.
27
30
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
However, as described above, the Company and one of its collaborative
partners, HMRI, have terminated their collaboration. In addition to the
reimbursement of certain of the Company's research and development expenses,
HMRI had also incurred the significant portion of the expenses of the Company's
clinical trials. The estimated costs of the clinical trials, which is now the
responsibility of the Company, are $1.4 million per month.
Effective November 30, 1996, the Company terminated its funding of
research at The Picower Institute because of Dr. Anthony Cerami's retirement
from The Picower Institute. In light of the number of programs in its existing
pipeline, the Company expects to devote the funds to existing projects.
Alteon anticipates that its existing available cash and cash
equivalents and short-term investments will be adequate to satisfy its working
capital requirements for its current and planned operations into the fourth
quarter of 1997. The Company is in discussions with potential private purchasers
of its debt or equity securities to provide additional financing. There can be
no assurance that such additional financing can be obtained.
Future capital requirements will depend on numerous factors, including
the progress of the Company's research and development programs, the conduct of
preclinical 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 the Company's long-term capital requirements, it may seek
access to the public or private equity markets whenever conditions are
favorable. 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
the Company. If adequate funds are not available, the Company may be required to
curtail significantly one or more of its research or development programs or
obtain funds through arrangements with collaborative partners or others. This
may require the Company to relinquish rights to certain of its technologies or
product candidates.
Alteon's commercial partners may develop, either alone or with others,
products that compete with the development and marketing of the Company's
products. Competing products, either developed by the commercial partners or to
which the commercial partners have rights, may result in their withdrawal of
support with respect to all or a portion of the Company's technology, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
28
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8
are appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
For information concerning this item, see the information under
"Election of Directors" and "Executive Officers" in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held on June 10, 1997, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning this item, see the information under
"Executive Compensation" in the Company's Proxy Statement to be filed with
respect to the Annual Meeting of Shareholders to be held on June 10, 1997, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information concerning this item, see the information under
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be filed with respect to the Annual Meeting of
Shareholders to be held on June 10, 1997, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information concerning this item, see the information under
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held on June 10, 1997, which information is incorporated herein by reference.
29
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
Reference is made to the Index to Financial Statements and Schedules on
page F-1.
(a)(2) Exhibits.
Reference is made to the Index to Exhibits on page 33.
(b) Reports on Form 8-K.
On December 2, 1996, the Company filed a current report on
Form 8-K, under Item 5 which reported that the Company had
amended the protocol for its ACTION II trial.
30
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 27th day of March,
1997.
Alteon Inc.
By: /s/ James J. Mauzey
---------------------
James J. Mauzey
Chairman of the Board and
Chief Executive Officer
31
34
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James J. Mauzey Chairman of the Board, Chief Executive Officer March 27, 1997
- ---------------------- and Director (principal executive officer)
James J. Mauzey
/s/ Jere E. Goyan President, Chief Operating Officer and Director March 27, 1997
- ----------------------
Jere E. Goyan
/s/ Kenneth I. Moch Senior Vice President, Finance and Business March 27, 1997
- ---------------------- Development and Chief Financial Officer
Kenneth I. Moch (principal financial officer)
/s/ Elizabeth O'Dell Vice President, Finance and Administration, March 27, 1997
- ---------------------- Treasurer, and Secretary (principal accounting
Elizabeth O'Dell officer)
/s/ Anthony Cerami Director March 27, 1997
- ----------------------
Anthony Cerami
/s/ Marilyn G. Breslow Director March 27, 1997
- ----------------------
Marilyn G. Breslow
/s/ Mark Novitch Director March 27, 1997
- ----------------------
Mark Novitch
/s/ Louis Fernandez Director March 27, 1997
- ----------------------
Louis Fernandez
/s/ Alan J. Dalby Director March 27, 1997
- ----------------------
Alan J. Dalby
/s/ Robert N. Butler Director March 27, 1997
- ----------------------
Robert N. Butler
32
35
Form 10-K - Item 14(a) (1)
Alteon Inc.
List of Financial Statements
Page
----
The following financial statements of Alteon Inc. are included in Item 8:
Report of independent public accountants - Arthur Andersen LLP.................. F-2
Financial statements:
Balance sheets as of December 31, 1995 and 1996............................. F-3
Statements of operations for the years ended December 31, 1994, 1995
and 1996.................................................................... F-4
Statements of stockholders' equity for the period from December 31, 1994
to December 31, 1996........................................................ F-5
Statements of cash flows for the years ended December 31, 1994, 1995
and 1996.................................................................... F-6
Notes to financial statements .............................................. F-7--F15
F-1
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alteon Inc.:
We have audited the accompanying balance sheets of Alteon Inc. (a Delaware
corporation) as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alteon Inc. as of December 31,
1995 and 1996, and the results of its operations and cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 20, 1997
F-2
37
ALTEON INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 980,010 $31,497,633
Short-term investments ...................................... 44,216,701 3,001,890
Receivables from corporate partner .......................... 602,999 --
Other current assets ........................................ 667,385 649,169
----------- -----------
Total current assets ..................................... 46,467,095 35,148,692
Property and equipment, net ................................... 4,668,651 3,999,530
Deposits and other assets ..................................... 253,297 266,971
Restricted cash ............................................... 827,200 723,800
----------- -----------
Total assets ............................................... $52,216,243 $40,138,993
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................ $ 230,953 $ 1,853,400
Accrued expenses ............................................ 1,519,665 6,447,521
Obligations under capital leases ............................ 282,989 305,321
----------- -----------
Total current liabilities ................................ 2,033,607 8,606,242
----------- -----------
Obligations under capital leases .............................. 466,899 161,577
----------- -----------
COMMITMENTS (NOTES 3 AND 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,998,329 shares authorized,
none issued ............................................... -- --
Common stock, $.01 par value; 30,000,000 shares
authorized and 15,387,985 and 15,702,825 shares issued and
outstanding as of December 31, 1995 and 1996,
respectively.............................................. 153,880 157,028
Additional paid-in capital .................................. 83,607,054 84,018,146
Accumulated deficit ......................................... (34,037,491) (52,800,283)
Unrealized losses on short-term investments ................. (7,706) (3,717)
----------- -----------
Total stockholders' equity ............................... 49,715,737 31,371,174
----------- -----------
Total liabilities and stockholders' equity .................... $52,216,243 $40,138,993
=========== ===========
See accompanying notes to financial statements
F-3
38
ALTEON INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
------------ ------------ ------------
Revenues:
Investment income ........... $ 1,797,032 $ 1,888,496 $ 2,295,394
Expenses:
Research and development .... 8,573,123 10,004,244 17,494,193
General and administrative .. 3,706,137 3,699,210 3,516,599
Interest .................... 42,470 68,435 47,394
------------ ------------ ------------
Total expenses ........... 12,321,730 13,771,889 21,058,186
------------ ------------ ------------
Net loss ...................... $(10,524,698) $(11,883,393) $(18,762,792)
============ ============ ============
Net loss per share ............ $ (0.85) $ (0.90) $ (1.20)
============ ============ ============
Weighted average common shares 12,430,798 13,169,968 15,640,399
============ ============ ============
See accompanying notes to financial statements
F-4
39
ALTEON INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
--------------- --------------------------
Shares Amount Shares Amount
------ ------ ----------- --------
Balance, December 31, 1993 .............................. . -- $-- 12,401,649 $124,016
Exercise of employee stock options .................. -- -- 91,984 920
Deferred compensation expense in connection
with the issuance of non--qualified
stock options.................................... . -- -- -- --
Unrealized losses ................................... -- -- -- --
Net loss ............................................ -- -- -- --
-- --- ---------- --------
Balance, December 31, 1994 .............................. . -- -- 12,493,633 124,936
Exercise of employee stock options .................. -- -- 594,352 5,944
Change in unrealized losses ......................... . -- -- -- --
Follow--on offering of common stock ................. -- -- 2,300,000 23,000
Net loss ............................................ -- -- -- --
-- --- ---------- --------
Balance, December 31, 1995 .............................. . -- -- 15,387,985 153,880
Exercise of employee stock options .................. . -- -- 314,840 3,148
Deferred compensation expense in connection
with the issuance of non--qualified
stock options.................................... .
Change in unrealized losses ......................... . -- -- -- --
Net loss ............................................ -- -- -- --
-- --- ---------- --------
Balance, December 31, 1996 .............................. -- $-- 15,702,825 $157,028
== === ========== ========
Additional Losses Total
Paid-in Accumulated on Short-Term Stockholders'
Capital Deficit Investments Equity
----------- ------------ ------------- ------------
Balance, December 31, 1993 .............................. 64,005,087 $(11,629,400) -- $ 52,499,703
Exercise of employee stock options .................. 43,045 -- -- 43,965
Deferred compensation expense in connection
with the issuance of non--qualified
stock options.................................... 23,177 -- -- 23,177
Unrealized losses ................................... -- -- (828,061) (828,061)
Net loss ............................................ -- (10,524,698) -- (10,524,698)
---------- ------------ --------- ------------
Balance, December 31, 1994 .............................. 64,071,309 (22,154,098) (828,061) 41,214,086
Exercise of employee stock options .................. 524,208 -- -- 530,152
Change in unrealized losses ......................... -- -- 820,355 820,355
Follow--on offering of common stock ................. 19,011,537 -- -- 19,034,537
Net loss ............................................ -- (11,883,393) -- (11,883,393)
---------- ------------ --------- ------------
Balance, December 31, 1995 .............................. 83,607,054 (34,037,491) (7,706) 49,715,737
Exercise of employee stock options .................. 381,560 -- -- 384,708
Deferred compensation expense in connection
with the issuance of non--qualified
stock options.................................... -- -- 29,532 29,532
Change in unrealized losses ......................... -- -- 3,989 3,989
Net loss ............................................ -- (18,762,792) -- (18,762,792)
---------- ------------ --------- ------------
Balance, December 31, 1996 .............................. 84,018,146 $(52,800,283) $ (3,717) $ 31,371,174
========== ============ ========= ============
See accompanying notes to financial statements
F-5
40
ALTEON INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996
------------ ------------- ------------
Cash Flows from Operating Activities:
Net loss .................................................................. $(10,524,698) $ (11,883,393) $(18,762,792)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................... 770,553 861,159 790,770
Amortization of deferred compensation ............................... 23,177 -- 29,532
Changes in operating assets and liabilities:
Receivables from corporate partner ............................... (187,536) (345,364) 602,999
Other current assets ............................................. 879,025 (172,213) 18,216
Other assets ..................................................... 134,494 175,239 (13,674)
Accounts payable and accrued expenses ............................ (452,698) 371,068 6,550,303
------------ ------------- ------------
Net cash used in operating activities ............................ (9,357,683) (10,993,504) (10,784,646)
------------ ------------- ------------
Cash Flows from Investing Activities:
Capital expenditures ...................................................... (3,701,313) (361,188) (376,624)
Purchases of marketable securities ........................................ (40,135,194) (110,536,398) (91,073,563)
Sales and maturities of marketable securities ............................. 54,291,695 100,525,658 132,292,363
Restricted cash ........................................................... 90,572 -- 103,400
------------ ------------- ------------
Net cash provided by (used in) investing activities .............. 10,545,760 (10,371,928) 40,945,576
------------ ------------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock .................................... 43,965 19,564,689 384,708
Payments under capital lease obligations .................................. (131,334) (268,503) (282,990)
Proceeds from sales-leaseback financing ................................... 1,136,037 -- 254,975
------------ ------------- ------------
Net cash provided by financing activities ........................ 1,048,668 19,296,186 356,693
------------ ------------- ------------
Net (decrease)/increase in cash and cash equivalents ........................ 2,236,745 (2,069,246) 30,517,623
Cash and cash equivalents, beginning of period .............................. 812,511 3,049,256 980,010
------------ ------------- ------------
Cash and cash equivalents, end of period .................................... $ 3,049,256 $ 980,010 $ 31,497,633
============ ============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest ........................................... $ 42,470 $ 68,435 $ 47,394
============ ============= ============
Leasehold improvements acquired under capital
lease obligations ........................................... $ 1,136,037 $ -- $ --
============ ============= =============
See accompanying notes to financial statements
F-6
41
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Alteon Inc. (the "Company") was founded in 1986 and is engaged in the
discovery and development of novel therapeutic and diagnostic products to treat
the complications of diabetes and age- related diseases. The company's products
are designed to inhibit, measure and reverse damage to cells, tissues and organs
caused by advanced glycosylation end-product ("A.G.E.") formation and
cross-linking resulting from glucose in the body's circulatory system. Since its
inception, the Company has recognized $17,000,000 of revenues from corporate
partners related to collaborative arrangements. All of the Company's products
are in research or development, and no revenues have been generated from product
sales. The Company is conducting four human clinical trials evaluating its lead
compound, pimagedine, as a treatment for the complications of diabetes,
including two pivotal Phase III clinical trials for diabetic kidney disease.
Operations of the Company are subject to certain risks and
uncertainties including, but not limited to, uncertainties related to clinical
trials, technological uncertainty, uncertainty of future profitability and
access to capital, and dependence on collaborative relationships and key
personnel.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include cash and highly liquid investments
which have a maturity of less than three months at the time of purchase.
Investments are recorded at fair market value and consist of the following:
December 31,
-----------------------------
1995 1996
---- ----
U.S. Government Agency Funds $33,535,861 $3,001,890
Corporate Obligations 10,680,840 --
----------- ----------
$44,216,701 $3,001,890
=========== ==========
F-7
42
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These amounts represent market value which was lower than amortized
cost at December 31, 1995 and higher than amortized cost at December 31, 1996.
The amortized cost of these short-term investments was $44,224,407 and
$2,998,733 at December 31, 1995 and 1996, respectively.
The Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS
115) effective January 1, 1994. As permitted by the statement, the Company did
not retroactively restate prior years' financial statements. This statement
requires the Company to classify its investment securities as (1) held for
investment purposes (held to maturity), (2) available for sale and (3) held for
trading purposes. Unrealized gains and losses of available for sale securities
are charged directly to stockholders' equity, whereas unrealized gains and
losses of trading securities are charged to the statement of operations. At
December 31, 1996, all of the Company's short-term investments were classified
as available for sale.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the useful lives
of owned assets which range from three to five years. Leasehold improvements and
equipment under capital leases are amortized using the straight-line method over
the shorter of the lease term or the useful life of the assets.
Patent Costs
Patent costs are expensed as incurred.
Research and Development
Expenditures for research and development are charged to operations as
incurred. Research and development expenditures were $9,638,210, $11,647,677 and
$18,719,951 for the years ended December 31, 1994, 1995 and 1996, respectively.
Expenditures were reduced by reimbursements from corporate partners in these
periods of $1,065,087 and $1,643,433 and $1,225,758, respectively. (See Note 3.)
Net Loss Per Share
Net loss per share is calculated using the weighted average number of
common shares and common stock equivalents, as applicable, outstanding during
the period. Common stock equivalents are excluded from the computation of loss
per share since their inclusion would be antidilutive.
New Accounting Pronouncements
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" for the year ending December 31, 1996. (See Note 6.)
F-8
43
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2 -- PROPERTY AND EQUIPMENT
December 31,
------------------------------
1995 1996
---- ----
Laboratory equipment .......................................... $ 1,348,593 $ 1,336,211
Furniture and equipment ....................................... 701,322 710,149
Computer equipment ............................................ 495,180 552,255
Leasehold improvements ........................................ 4,883,745 4,908,545
----------- -----------
7,428,840 7,507,160
Less: Accumulated depreciation and amortization .............. (2,760,189) (3,507,630)
----------- -----------
$ 4,668,651 $ 3,999,530
=========== ===========
Laboratory equipment and furniture include approximately $1,395,000 and
$1,375,000 under capital leases at December 31, 1995 and 1996. Accumulated
amortization relating to leased assets totaled approximately $450,000 and
$550,000 at December 31, 1995 and 1996, respectively. (See Note 5.)
NOTE 3 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
The Company and Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi")
entered into a series of agreements pursuant to which the parties formed a
strategic alliance to develop and commercialize the Company's A.G.E. technology.
Under this arrangement, the parties agreed to collaborate on further research
and development, and the Company granted to Yamanouchi an exclusive license to
commercialize the Company's technology in Japan, South Korea, Taiwan and The
People's Republic of China. Yamanouchi paid the Company a non-refundable amount
of $7,000,000 in July 1989, in consideration for the Company's past costs and
efforts in the research and technology associated with the licensing
arrangement. In addition, Yamanouchi purchased 233,531 shares of Alteon's
Preferred Stock for $3,000,000, which was converted into 784,665 shares of
Common Stock in 1991, upon Alteon's initial public offering of its Common Stock.
In December 1990, the Company and Marion Merrell Dow, Inc., which was
subsequently acquired by an affiliate of Hoechst AG and renamed Hoechst Marion
Roussel, Inc. ("HMRI"), formed a strategic alliance to develop and commercialize
the Company's A.G.E. technology for therapeutics in the areas of diabetic and
aging complications. The arrangements included a research and development
collaboration to conduct clinical trials jointly, including funding by HMRI of
trials on pimagedine, an agreement for the joint promotion and sale in the
United States, Canada and Western Europe of drugs developed pursuant to the
collaboration, and a manufacturing and supply agreement. In 1996, HMRI ended the
collaboration as a result of HMRI's continuing prioritization of its new product
pipeline, and the Company regained all rights granted to HMRI covering the
Company's technology.
F-9
44
NOTE 3 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
As a result of the termination of the strategic alliance with HMRI, the
Company has assumed full responsibility for the continuation of clinical trials
which had been funded by HMRI. The estimated costs of the clinical trials are
$1.4 million per month. The Company and HMRI are negotiating various open issues
arising from the termination of their collaboration. This includes the rights of
the parties under certain patents and amounts which may be payable by the
Company to HMRI and by HMRI to the Company. HMRI has invoiced the Company
certain amounts which the Company believes are without merit.
The Company is seeking one or more collaborative partners to replace
HMRI. However, there is no assurance that the Company will be able to enter into
an agreement with a new partner or that if such an agreement is reached, it will
provide the level of funding which had been provided by HMRI.
In November 1995, the Company entered into clinical testing and
distribution agreements with Gamida for Life ("Gamida"), formerly Eryphile BV.
Under these agreements, Gamida is conducting, at its own expense, a Phase II
multi-site clinical trial in Israel, in accordance with the protocol developed
by Alteon, to evaluate pimagedine in patients with diabetes and elevated serum
cholesterol levels. Gamida will receive the exclusive right to distribute
pimagedine, if successfully developed and approved for marketing, in Israel,
Bulgaria, Cyprus, Jordan and South Africa. The distribution agreement is for a
term ending 10 years after the date of regulatory approval for the sale of
pimagedine in Israel; thereafter, it will be automatically renewed for
successive three-year periods unless terminated by either party on the last day
of the initial or a renewal term.
Alteon's commercial partners may develop, either alone or with others,
products that compete with the development and marketing of the Company's
products. Competing products, either developed by the commercial partners or to
which the commercial partners have rights, may result in their withdrawal of
support with respect to all or a portion of the Company's technology, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In September 1991, the Company entered into a five-year agreement with The
Picower Institute for Medical Research ("The Picower Institute"), a newly
formed, not-for-profit biomedical institution of which Dr. Anthony Cerami, a
member of the Company's Board of Directors and Chairman of the Company's
Scientific Advisory Board, was then the President. (See Note 8.)
Under the agreement, the Company received an exclusive, worldwide license for
all commercial healthcare applications of A.G.E.-related inventions resulting
from The Picower Institute research programs conducted during the term of the
agreement. The Company will be required to pay The Picower Institute a royalty
on all net sales and other revenues of any product utilizing the licensed
technology.
Effective November 30, 1996, the Company terminated its funding of
further research at The Picower Institute because of Dr. Cerami's retirement
from The Picower Institute. The Company expects to devote the funds previously
targeted for The Picower Institute to its existing projects.
F-10
45
NOTE 3 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
Pursuant to an agreement with The Rockefeller University ("Rockefeller
University"), the Company has the entire, exclusive, worldwide and perpetual
rights to the technology and inventions relating to A.G.E.'s and protein
cross-linking, including those relating to the complications of diabetes and
aging, discovered by Dr. Cerami and his colleagues during their tenure at
Rockefeller University's Laboratory of Medical Biochemistry. Although the
Company has ended its scientific collaboration with Rockefeller University on
this technology, the Company continues to contribute to the cost of patent
maintenance. In this regard, the Company has provided funding of $235,000,
$167,000 and $86,000 in 1994, 1995 and 1996, respectively.
In February 1995, the Company exercised an option it held pursuant to
an Option and License Agreement dated March 31, 1994, with Rockefeller
University to acquire rights for a new technology unrelated to the A.G.E.
mechanism, focused on novel synthetic analogs of the hormone glucagon. Effective
February 1997, the Company elected to terminate this Agreement. As a result of
the termination, all of Alteon's rights under the license agreement reverted
back to Rockefeller University.
In December 1994, the Company entered into an exclusive licensing
arrangement for Alteon's diagnostic technology with Corange International
Limited, acting through its subsidiary Boehringer Mannheim Diagnostics
("Boehringer Mannheim"). Under the agreement, Boehringer Mannheim will receive
exclusive worldwide rights to Alteon's technology for diagnostics application,
subject to an option held by Yamanouchi for Japan, South Korea, Taiwan and The
People's Republic of China. Yamanouchi is Alteon's exclusive licensee for its
A.G.E. technology in the aforementioned countries. Pursuant to the agreement,
Alteon received an initial payment in January 1995, and will be entitled to
receive ongoing royalties based on net sales of research test kits and
commercial assays developed by Boehringer Mannheim which are based on Alteon's
A.G.E. technology.
In June 1995, the Company obtained an exclusive, worldwide,
royalty-bearing license from Washington University for patents covering the use
of pimagedine as an inhibitor of inducible nitric oxide synthase. The agreement
requires the Company to pay certain licensing fees upon the attainment of
development milestones as well as a royalty on net sales or a share of
sub-licensing profits of products covered by the patents. The license also
covers patents developed through any subsequent research collaboration between
the parties which is funded by Alteon.
The Company has also entered into various arrangements with independent
research laboratories to conduct studies in conjunction with the development of
the Company's technology. The Company receives certain rights to inventions or
discoveries that may arise from this research.
F-11
46
NOTE 4 -- ACCRUED EXPENSES
December 31,
---------------------------
1995 1996
---------- ----------
Accrued clinical trial expense... $ -- $4,422,428
Accrued consultants/contract..... 601,851 929,510
Accrued patent................... 43,492 40,770
Accrued professional............. 164,504 184,130
Accrued relocation............... 69,203 58,578
Accrued rent..................... 366,940 375,235
Other............................ 273,675 436,870
---------- ----------
$1,519,665 $6,447,521
========== ==========
The Company's headquarters and research facility rent is being expensed on
a straight-line basis over the ten-year lease period. (See Note 5.)
NOTE 5 -- LEASES
The Company leases its headquarters and research facility and related
equipment and furniture under non-cancelable capital and operating leases. As of
December 31, 1996, future net minimum lease payments under capital leases and
future minimum rentals under operating leases that have initial or remaining
non-cancelable terms in excess of one year are as follows:
Capital Operating
leases leases
--------- ----------
1997 .......................................... $ 330,382 $ 806,943
1998 .......................................... 165,191 649,512
1999 .......................................... -- 599,284
2000 .......................................... -- 557,781
2001 .......................................... -- 536,500
Thereafter .................................... -- 983,584
--------- ----------
$ 495,573 $4,133,604
==========
Less: imputed interest ....................... (28,675)
---------
Present value of minimum lease payments ....... 466,898
Less: Current portion ........................ (305,321)
---------
$ 161,577
=========
In 1994, the Company entered into a sales-leaseback transaction for
certain headquarters and research facility assets (principally, leasehold
improvements) generating proceeds of $1,136,037. The related lease was accounted
for as a capital lease payable over four years with 7.6% interest.
F-12
47
NOTE 5 -- LEASES (CONTINUED)
Rent expense for each of the years in the three-year period ended
December 31, 1996, was $594,593, $563,721 and $570,612, respectively. As of
December 31, 1996, the Company has restricted cash of $723,800 which represents
the escrow amount related to the Company's leased headquarters and research
facility. The Company may reduce the originally required escrow amount of
$1,034,000 by 10% per year.
NOTE 6 -- STOCKHOLDERS' EQUITY
Common Stock
On November 1, 1991, the Company completed an initial public offering
of Common Stock with net proceeds to the Company of $47,406,581. In conjunction
with the offering, all of the then outstanding shares of Preferred Stock were
converted into 6,725,627 shares of Common Stock.
In October and November 1995, the Company completed a follow-on
offering of Common Stock, which included the sale of 2,000,000 shares and
300,000 shares, respectively, at a price of $9.00 per share which provided net
proceeds to the Company of $19,035,000.
Stock Option Plan
The Company has established two stock option plans for its employees,
officers, directors, consultants and independent contractors. Options to
purchase up to 4,192,000 shares of Common Stock may be granted under the first
plan ("1987 Plan"). In 1995, a second stock option plan ("1995 Plan") was
approved which authorized additional options to purchase 1,000,000 shares of
Common Stock.
The plans are administered by a committee of the Board of Directors,
which may grant either non-qualified or incentive stock options. The committee
determines the exercise price and vesting schedule at the time the option is
granted. Options vest over various periods and may expire no later than 10 years
from date of grant. Each option entitles the holder to purchase one share of
Common Stock at the indicated exercise price. The plans also provide for certain
antidilution and change in control rights, as defined.
F-13
48
NOTE 6 -- STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes the activity in the Company's stock
options:
Weighted Average
Exercise Price Exercise Price
Options Per Share Per Share
------- -------------- ----------------
Balance, December 31, 1993........... 2,520,351
Granted............................. 1,057,100 $4.35 - 9.50
Exercised........................... (91,984) 0.30 - 0.89
Canceled............................ (69,804) 0.89 - 13.75
---------
Balance, December 31, 1994........... 3,415,663
Granted............................. 387,729 6.88 - 14.13 $7.68
Exercised........................... (594,352) .30 - 8.25 .90
Canceled............................ (104,409) 4.36 - 15.00 9.66
--------- -----
Balance, December 31, 1995........... 3,104,631 5.88
Granted............................. 418,083 1.00 - 15.00 6.83
Exercised........................... (314,840) 0.30 - 10.25 1.22
Canceled............................ (47,079) 4.36 - 15.00 8.16
-------- -----
Balance, December 31, 1995 3,160,795 $6.44
=========
At December 31, 1996, 1,926,734 options were exercisable at a weighted
average price of $5.23 per share, and 584,807 shares were available for future
grants. The weighted average fair value of the options granted was $4.13 and
$4.25 during 1996 and 1995, respectively. The outstanding stock options at
December 31, 1996 have a weighted average remaining contractual life of 6.42
years. Included in options at December 31, 1996, are 455,004 options granted to
certain executives with option prices ranging from $5.375 per share to $14.125
per share. Such options vest upon the earlier of 10 years after grant or upon
achievement of certain Company milestones.
The Company accounts for the 1987 and 1995 Stock Option Plans under APB
Opinion No. 25, under which no compensation cost (excluding those options
granted below fair market value) has been recognized. Had compensation costs for
these plans been determined consistent with FASB Statement No. 123, the
Company's pro forma net loss and loss per share for 1995 would have been $12.6
million and $0.95, respectively. In 1996, the Company's pro forma net loss and
loss per share would have been $19.4 million and $1.24, respectively. Because
the FASB Statement No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Under the FASB Statement No. 123, the fair value of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 1995 and 1996,
respectively: risk free interest rates ranging from 5.31% to 7.10% and 5.38% to
6.64%; expected life of 2.02 years over the vesting periods; and expected
volatility of 70%.
F-14
49
NOTE 7 -- SAVINGS AND RETIREMENT PLAN
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code which allows eligible employees to annually
contribute a portion of their annual salary to the plan. The Company may make
discretionary contributions. To date, the Company has not made any
contributions.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
The Chairman of the Company's Scientific Advisory Board, who also
serves as a member of the Company's Board of Directors (See Note 3), and three
other Scientific Advisory Board members provide consulting services to the
Company. Consulting fees paid to these members totaled $190,000 in 1994 and
$178,000 in both 1995 and 1996.
In 1993, a Company officer received a loan which bore interest at a
rate equal to the prime rate, adjusted quarterly, for the purpose of purchasing
a home. The principal amount of the loan together with the interest is included
in deposits and other assets. The loan and related interest are payable at the
end of five years or upon termination of employment. The loan and accrued
interest balance was $221,033, $241,173 and $261,946 as of December 31, 1994,
1995 and 1996, respectively.
NOTE 9 -- INCOME TAXES
At December 31, 1996, the Company had available net operating tax loss
carryforwards, which expire in the years 2006 through 2011, of approximately $53
million for income tax purposes. In addition, the Company has research and
development credit carryforwards of approximately $2.6 million.
The Company accounts for income tax in accordance with Statement of
Financial Accounting Standards No. 109. The components of the deferred tax
assets and the valuation allowance are as follows:
December 31,
--------------------------------
1995 1996
------------ ------------
NOL carryforwards................. $ 13,000,000 $ 21,000,000
Research and development credit... 2,300,000 2,600,000
Other temporary differences....... 800,000 960,000
------------ ------------
Gross deferred tax assets......... 16,100,000 24,560,000
Valuation allowance............... (16,100,000) (24,560,000)
------------ ------------
Net-deferred tax assets........... $ -- $ --
============ ============
A valuation allowance was established since the realization of the
deferred tax assets is uncertain.
F-15
50
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(File Number 33-42574) which became effective on November 1, 1991).
3.2 Certificate of the Voting Powers, Designations, Preference and
Relative Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Series F Preferred
Stock of the Company. (Incorporated by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed on August 4, 1995).
3.3 By-laws, as amended. (Incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K filed on April 22, 1996).
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 Current
Report on Form 8-K filed on August 4, 1995).
10.1 Amended and Restated 1987 Stock Option Plan.
10.2 Amended 1995 Stock Option Plan.
10.3 Form of Employee's or Consultant's Invention Assignment,
Confidential Information and Non-Competition Agreement executed by
all key employees and consultants as employed or retained from time
to time. (Incorporated by Reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File Number 33-42574) which
became effective on November 1, 1991).
10.4 Amendment and Assignment of Research and Option Agreement dated as
of September 25, 1987, among Telos, The Rockefeller, the Company and
Anthony Cerami. (Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File Number 33-42574)
which became effective on November 1, 1991).
10.5 License Agreement dated as of September 25, 1987, among Telos,
Applied Immune Sciences, Inc., the Company and The Rockefeller as
amended by letter agreement dated September 25, 1987 and letter
agreement dated August 15, 1991. (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-1
(File Number 33-42574) which became effective on
33
51
November 1, 1991).
10.6 Consulting Agreement dated April 1, 1989, as modified October 1,
1989, between the Company and Eli A. Friedman, M.D. (Incorporated by
reference to Exhibit 10.14 to the Company's Registration Statement
on Form S-1 (File Number 33-42574) which became effective on
November 1, 1991).
10.7 Stock Purchase Agreement dated as of June 16, 1989, between the
Company and Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi").
(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File Number 33-42574) which
became effective on November 1, 1991).
10.8* License Agreement dated as of June 16, 1989, between the Company and
Yamanouchi. (Incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 (File Number 33-42574)
which became effective on November 1, 1991).
10.9* Research and Development Collaboration Agreement dated as of June
16, 1989, between the Company and Yamanouchi. (Incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement
on Form S-1 (File Number 33-42574) which became effective on
November 1, 1991).
10.10 Letter Agreement dated June 21, 1989 between the Company and
Yamanouchi. (Incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1 (File Number 33-42574)
which became effective on November 1, 1991).
10.11 Consulting Agreement dated April 2, 1990, between the Company and
Michael Brownlee. (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (File Number 33-42574)
which became effective on November 1, 1991).
10.12 Consulting Agreement dated September 1, 1991 between the Company and
Anthony Cerami, Ph.D. (Incorporated by reference to Exhibit 10.27 to
the Company's Registration Statement on Form S-1 (File Number
33-42574) which became effective on November 1, 1991).
10.13* Research and License Agreement dated as of September 5, 1991 between
the Company and The Picower Institute for Medical Research.
(Incorporated by reference to Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (File Number 33-42574) which
became effective on November 1, 1991).
10.14 Amendment dated as of September 17, 1992 to the Research and
Development Collaboration Agreement dated as of June 16, 1989,
between the Company and
34
52
Yamanouchi. (Incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.15 Lease Agreement dated January 11, 1993 between Ramsey Associates and
the Company. (Incorporated by reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.16 Employment Agreement dated July 13, 1993, between the Company and
Jere E. Goyan. (Incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
10.17 Employment Agreement dated as of February 28, 1994, between the
Company and James J. Mauzey. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on March 9,
1994).
10.18 Lease Agreement dated June 30, 1994, between the Company and
Comdisco, Inc. (Incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994).
10.19 Lease Agreement dated June 6, 1994, between the Company and
Financing for Science International, Inc. (Incorporated by reference
to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.20* License Agreement, dated as of December 30, 1994, between the
Company and Corange International Limited. (Incorporated by
reference to Exhibit 10.38 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10.21 Employment Agreement dated as of January 17, 1995, between the
Company and Veronica Mallon. (Incorporated by reference to Exhibit
10.39 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.22 Employment Agreement dated as of February 27, 1995, between the
Company and Kenneth I. Moch. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on March 20,
1995).
10.23 Employment Agreement dated as of March 27, 1995, between the Company
and Kenneth Cartwright. (Incorporated by reference to Exhibit 10.37
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.24* Research Collaboration and License Agreement dated as of June 2,
1995 between Washington University and the Company. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed on August 11, 1995).
10.25 Distribution Agreement dated September 25, 1995 between the Company
and
35
53
Eryphile BV. (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on November 24, 1995).
10.26 Clinical Testing Agreement dated September 25, 1995 between the
Company and Eryphile BV. (Incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K filed on November 24,
1995).
10.27 Employment Agreement dated as of October 21, 1995 between the
Company and Elizabeth O'Dell. (Incorporated by reference to Exhibit
10.42 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.28 Alteon Inc. Change in Control Severance Benefits Plan. (Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed on March 13, 1996).
10.29 Letter Agreement dated July 10, 1996 between the Company and Jere E.
Goyan amending Employment Agreement dated July 13, 1993.
10.30 Letter Agreement dated January 17, 1997 between the Company and
Veronica Mallon amending Employment Agreement dated January 17,
1995.
10.31 Letter Agreement dated January 29, 1997 between the Company and
Kenneth Cartwright amending Employment Agreement dated March 27,
1995.
10.32 Letter Agreement dated January 29, 1997 between the Company and
Elizabeth A. O'Dell amending Employment Agreement dated October 21,
1995.
10.33 Letter Agreement dated January 30, 1997 between the Company and
James J. Mauzey amending Employment Agreement dated February 28,
1994.
10.34 Letter Agreement dated March 27, 1997 between the Company and
Kenneth Cartwright amending Employment Agreement dated March 27,
1995, as amended.
10.35** Clinical Services Agreement dated as of August 11, 1996 between the
Company and Quintiles, Inc.
27 Financial Data Schedule
- ---------------
* Confidentiality has been granted for a portion of this exhibit
** Confidential treatment has been requested for a portion of this exhibit
36