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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-19651
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GENAERA CORPORATION
(Exact name of registrant as specified in its charter.)
Delaware 13-3445668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5110 Campus Drive, Plymouth Meeting, PA 19462
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (610) 941-4020
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None N/A
(Title of each class) (Name of each exchange on which
registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.002 par value per share
(Title of Class)
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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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $78,398,000. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the National Market System of The Nasdaq Stock Market on March 20, 2002. For
purposes of this calculation only, the registrant has defined affiliates as all
directors and executive officers and any stockholder whose ownership exceeds
10% of the shares outstanding. The number of shares of the registrant's common
stock outstanding as of March 20, 2002 was 32,867,386.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 2002 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference
into Part III of this Form 10-K.
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GENAERA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
INDEX
Description Page No.
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Part I
Item 1 Business................................................ 3
Item 2 Properties.............................................. 21
Item 3 Legal Proceedings....................................... 21
Item 4 Submission of Matters to a Vote of Security Holders..... 21
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 22
Item 6 Selected Financial Data................................. 23
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 23
Item 7A Quantitative and Qualitative Disclosure About Market
Risk.................................................... 28
Item 8 Financial Statements and Supplementary Data............. 28
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 28
Part III
Item 10 Directors and Executive Officers of the Registrant...... 29
Item 11 Executive Compensation.................................. 29
Item 12 Security Ownership of Certain Beneficial Owners and
Management.............................................. 29
Item 13 Certain Relationships and Related Transactions.......... 29
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................ 30
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PART I
ITEM 1. Business
Forward-Looking Statements
Our disclosure and analysis in this Annual Report on Form 10-K contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
Such statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "hope," and other words and terms of
similar meaning in connection with any discussion of future operating or
financial performance. In particular, these include statements relating to
present or anticipated scientific progress, development of potential
pharmaceutical products, future revenues, capital expenditures, research and
development expenditures, future financing and collaborations, personnel,
manufacturing requirements and capabilities, the impact of new accounting
pronouncements, and other statements regarding matters that are not historical
facts or statements of current condition.
There are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements,
including those addressed below under "Risk Factors."
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law. You are advised, however, to consult any further
disclosures we make on related subjects in our filings with the U.S. Securities
and Exchange Commission.
Overview
Genaera Corporation is a biopharmaceutical company committed to developing
medicines for serious diseases from genomics and natural products. Our research
and development efforts are focused on anti-angiogenesis, respiratory diseases,
obesity, and infectious diseases. We were incorporated in the State of Delaware
in 1987 as Magainin Pharmaceuticals, Inc. and began operations in 1988. We
changed our name to Genaera Corporation on March 9, 2001.
Research & Development Programs
Natural Products Discovery and Development Programs
Anti-Angiogenesis Program
Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through "angiogenesis," a fundamental
process by which new blood vessels are formed. This growth process primarily
occurs during the first three months of embryonic development. Once the general
network of the blood vessels is complete, certain inhibitory factors balance
and stabilize the stimulators of new blood vessel formation. Although
angiogenesis occurs in human embryonic development, wound healing and certain
reproductive processes in women, angiogenesis is also associated with several
diseases, including cancer and certain eye diseases.
Squalamine is our lead product candidate in anti-angiogenesis. Squalamine
was originally discovered in the tissues of the dogfish shark and is part of a
class of naturally occurring, pharmacologically active small molecules known as
"aminosterols." The shark was initially examined because of its apparent
resistance to infection and cancer. The chemical structure of squalamine
uniquely combines a steroid and a polyamine, two classes of systemic agents
that generally are well tolerated in humans. Squalamine has exhibited
reproducible
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anti-angiogenic properties in a number of in vitro and in vivo assays,
including animal cancer and eye disease models, across multiple independent
laboratories.
Non-Small Cell Lung and Ovarian Cancers
Cancer is the second most common cause of death in the Western world. Cancer
includes many different types of uncontrolled cellular growth. Clusters of
cancer cells, referred to as tumors, may invade and destroy surrounding organs,
impair physiological function and lead to death. To survive, cancer cells
require oxygen and nutrients, which are received from the body's blood supply.
In order to access this blood supply, cancer cells initiate a biochemical
mechanism that stimulates angiogenesis, which provides the blood supply that
nourishes the tumor. As cancer cells grow and metastasize they require
continuous angiogenesis. Anti-angiogenic substances are intended to inhibit the
growth of new blood vessels and thereby suppress tumor growth.
Cancer patients usually are treated with a combination of surgery, radiation
therapy and chemotherapy. Surgery and radiation therapy can be particularly
effective in patients in which the disease has not yet spread to other tissue
or organs. Chemotherapy is the principal treatment for tumors that have spread
from primary to secondary sites, or metastasized. Chemotherapy involves the
administration of cytotoxic drugs designed to kill cancer cells, or the
administration of hormone analogues designed to either reduce the production
of, or block the action of, certain hormones that affect tumor growth. Because
chemotherapeutic agents generally attack rapidly dividing cells
indiscriminately, damaging both normal and cancerous cells, chemotherapy
patients often suffer serious side effects. Additionally, resistance to
chemotherapy often occurs over time.
Squalamine is currently being evaluated in multiple Phase 2 clinical studies
for the treatment of solid tumors. Specifically, we have ongoing clinical
studies in non-small cell lung cancer and ovarian cancer at multiple clinical
sites. These cancer studies will evaluate intravenously administered squalamine
in combination with leading chemotherapeutics in each indication. In May 2001,
we released positive preliminary results on the first Phase 2 clinical trials
in lung and ovarian cancers. With respect to the lung cancer study, objective
responses (defined as a 50% or greater reduction in tumor size) were observed
in 29% of patients (9 of 31) receiving the treatment dose of squalamine (300
mg/m/2//day) in combination with the leading chemotherapeutics for one or more
cycles of therapy. The median survival time has been determined for the first
18 patients in the study as 10.4 months. In comparison, the historical
benchmark objective response rate for this group of patients treated with
standard chemotherapy alone is 15%, with 8.2 months survival, as demonstrated
in a large Eastern Cooperative Oncology Group study published in May 2000 with
a similar design and patient population. With respect to the ovarian cancer
study, objective responses were observed in 39% of patients (7 of 18) receiving
the treatment dose of squalamine (200 mg/m/2//day). We will continue to collect
data from both of these initial Phase 2 studies and expect to release those
updated results in the second quarter of 2002. In November 2001, we commenced a
Phase 2b trial in non-small cell lung cancer investigating weekly dosing of
squalamine in combination with the leading chemotherapeutics. Enrollment on
this study is expected to be completed by the end of 2002 and, upon review of
those results, we will determine whether or not to proceed with the further
development of squalamine as a first line therapy for non-small cell lung
cancer.
We expect to focus our efforts going forward in advanced ovarian cancer,
including recurrent and resistant disease patients, where we have seen
encouraging early objective responses of tumor size reduction. We are preparing
to initiate a Phase 2/3 registration study in ovarian cancer. Additional
clinical trials in ovarian cancer yielding positive results likely will be
needed in the future before we would be in a position to submit a New Drug
Application to the U.S. Food and Drug Administration. During 2001, the U.S.
Food and Drug Administration granted squalamine Orphan Drug designation for the
treatment of ovarian cancer. Orphan Drug designations are granted to applicants
when the prevalence of the disease occurs in less than 200,000 patients in the
United States and entitles applicants to certain exclusive marketing rights,
tax credits and waivers on FDA user fees.
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Age-Related Macular Degeneration
Angiogenesis resulting from age-related macular degeneration (AMD), is the
leading cause of legal blindness among adults age 50 or older in the Western
world, affecting approximately 25 to 30 million people globally. This number is
expected to triple over the next 25 years. AMD appears to come in two types:
the "dry" form and the more severe "wet" form. Dry AMD, the more common and
milder form of AMD, accounts for 85% to 90% of all cases and is characterized
by the collection of small, round, white-yellow, fatty deposits called "drusen"
in the central part of the retina. Dry AMD results in varying forms of sight
loss and may or may not develop into the wet form. Wet AMD accounts for 10% to
15% of all AMD cases. Patients with wet AMD have a much greater chance of
severe sight loss than with dry AMD. Wet AMD is caused by the growth of
abnormal blood vessels, or choroidal neovascularization, under the central part
of the retina, termed the macula, which is required for fine (detailed) vision.
It is responsible for 90% of severe vision loss associated with AMD.
Approximately 500,000 new cases of wet AMD are diagnosed annually worldwide, of
which approximately 200,000 cases are in North America.
Preclinical studies in angiogenic diseases of the eye have demonstrated that
systematic squalamine administration in rodents and mammals, including
primates, leads to inhibition of the development of ocular neovascularization
(the growth of new vessels) and partial regression of abnormal blood vessels.
Based on these results, we are preparing for initial clinical studies in wet
age-related macular degeneration and expect those clinical studies to start in
2002.
Fibrodysplasia Ossificans Progressiva
We also are conducting a small Phase 1 clinical study in fibrodysplasia
ossificans progressiva (FOP), which is a rare genetic disorder of the
musculoskeletal system in which there is a poorly-understood inflammatory
reaction leading to progressive formation of bone in the muscles and other soft
tissues, resulting in progressive immobility and disability. Similar to cancer,
this growth in the swollen tissues is nourished by a network of newly formed
primitive blood vessels resulting from active angiogenesis in the lesions.
There are no preclinical animal models of FOP. However, we believe that because
squalamine has exhibited the ability to block the angiogenic process, it has
the potential to inhibit the abnormal growth of bone in muscles and soft
tissues of patients with FOP.
Obesity Program
Trodulamine, formerly known as produlestan, is our second natural
aminosterol product. Our scientists have demonstrated the ability to reduce the
weight of genetically altered mice, generally very obese mice about 10 times
their normal size, to that of a normal healthy mouse. Body weights of healthy
animals, including animals with diet-induced obesity, also have been reduced
through the administration of trodulamine. Our researchers have shown
preclinical efficacy with trodulamine, and demonstrated that animal food intake
can be regulated in a reversible manner, leading to changes in body weight.
Preclinical data on trodulamine demonstrate it is a potent appetite suppressant
with the ability to normalize fasting blood sugar, as well as high blood
cholesterol levels, resulting from weight loss in obese animals. With
trodulamine, we are targeting the approximately 10 to 12 million Americans who
are classified medically as significantly obese.
While the trodulamine molecule is very different in function, it has a
similar chemical structure to squalamine, and thus enables us to make more
efficient use of internal and external resources already utilized for
squalamine in its development. Clinical development goals for trodulamine
currently are focused on demonstrating safety and early evidence of appetite
suppression in medically significant obesity. We are currently in the process
of conducting Good Laboratory Practice preclinical safety studies which we
currently expect to have completed by the end of 2002; however, we expect that
this program will assume a lower priority than squalamine and the mucoregulator
program described below.
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Genomics-Based Discovery and Development Programs
Respiratory Program
Since 1996, we have maintained a respiratory product development program
designed to discover and develop treatment alternatives for respiratory
diseases. These respiratory diseases have in common the over production of
mucus secretions and an underlying inflammatory process. Through genomics
research, we have concentrated our efforts on determining the manner in which
genes specifically impact respiratory disease. We believe that pharmaceutical
products developed for use against these specific genomics-based targets have
the potential for greater effectiveness and fewer side effects than
pharmaceutical products developed through more traditional processes. More than
50 million patients in the United States suffer from some form of respiratory
disease, including, respiratory allergies, asthma, chronic bronchitis, other
chronic obstructive pulmonary diseases (COPD), and upper airway diseases such
as chronic sinusitis.
IL9 Antibody
Our first genomics-based program is the development of a blocking antibody
to interleukin-9 (IL9) to treat the root cause of asthma. Genetic studies to
identify the root cause of asthma, in both human families and animal models,
have pinpointed IL9 as a mediator of asthma, and functional genomic analyses
have demonstrated the broad role of IL9 in asthma. The IL9 gene varies in
structure and function and as a result may have an important role in the
predisposition to asthma and allergic reactions. Scientific studies indicate
that IL9 controls other well-known factors involved in promoting lung
inflammation in asthma, including a group of proteins that modulate the growth
and functional activities of immune cells. Genaera has developed a patent
position around IL9 having first discovered and documented a role for this
cytokine in asthma which is described below under "Patents, Licenses and
Proprietary Rights."
In April 2001, we entered into a collaborative agreement with MedImmune,
Inc. relating to the development of an IL9 product for asthma, which is
described below under "Commercial Arrangements--MedImmune."
Mucoregulators
Our second genomics-based program has led to our identification of small
molecules, believed to be drug development candidates, to inhibit the
overproduction of mucin. We believe small molecule therapeutics that decrease
abnormal mucin gene production, so-called "mucoregulators," have the potential
to yield novel therapeutics for mucus overproduction in a number of chronic
diseases.
It is generally accepted that there is extensive unmet medical need for a
novel therapy that can prevent abnormal mucus production. Chronic sinusitis is
one of the most common reasons for physician visits in the United States, with
approximately 35 million cases per year. It is believed that many of the
symptoms of chronic sinusitis result from excess mucus production. Among other
respiratory diseases, there are up to an estimated 50 million patients with
conditions exacerbated by excess mucus production where mucoregulator therapy
may be of benefit. Mucus overproduction and small airway plugging is one of the
hallmarks of asthma and is a cause of death from asthma. Excess mucus
production also is associated with COPD and chronic bronchitis. Cystic fibrosis
is the most common fatal genetic disease in the United States, affecting
approximately 30,000 children and young adults. Cystic fibrosis causes the body
to produce abnormally thick, sticky mucus, due to the faulty transport of
sodium and chloride (salt) within cells lining organs such as the lungs,
sinuses, and pancreas, to their outer surfaces. The thick cystic fibrosis mucus
also obstructs the pancreas, preventing enzymes from reaching the intestines to
help break down and digest food. This orphan disease state is another unmet
need where a mucoregulator therapy may be beneficial.
In December 2001, Genaera scientists announced a publication regarding the
discovery of hCLCA1, a chloride channel found in humans, and mCLCA3, an
equivalent chloride channel found in mice. A number of
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studies have shown expression of hCLCA1 localized to mucus producing cells in
the respiratory epithelium. Research has further demonstrated a relationship
between hCLCA1 and abnormal mucus production suggesting a mechanism for the
abnormal mucus production in individuals suffering from a variety of chronic
respiratory conditions. We believe that inhibition of this mucoregulator
target, which regulates abnormal mucus production, has the potential to be an
important new therapeutic target strategy for a variety of respiratory
conditions including asthma, chronic bronchitis, chronic sinusitis and cystic
fibrosis.
Based on the role of the hCLCA1 chloride channel in a variety of respiratory
disorders, the Company has developed LOMUCIN(TM), its second genomics-based
therapeutic. LOMUCIN(TM) is an orally available small molecule intended to
block the hCLCA1-dependent abnormal mucus production associated with a variety
of respiratory conditions. This type of medical intervention is designed to
open the airways, easing the breathing of patients with these conditions.
The first clinical trial for LOMUCIN(TM) in asthma was initiated in Mexico
City during August 2001 and was designed to assess safety. An initial clinical
study, in collaboration with the Cystic Fibrosis Therapeutic Development
Network and experienced investigators outside the United States, is planned in
2002 to assess the safety of LOMUCIN(TM) in patients with cystic fibrosis. The
Company plans to collect other information from both the study in asthma and
the study in cystic fibrosis which will be necessary to plan future clinical
studies. Clinical development in cystic fibrosis is supported by an initial
grant from the U.S. Cystic Fibrosis Foundation which is described below under
"Commercial Arrangements--Cystic Fibrosis Foundation."
Other Programs
Other Aminosterols
In addition to squalamine and trodulamine, our discovery of natural
aminosterols has been complemented by a combinatorial chemistry and biology
program that has produced many synthetic aminosterols. These natural
aminosterols and their synthetic analogues are being developed as a class of
agents that are able to block cellular activation in specific cell types. Our
lead compounds have demonstrated sufficient efficacy in preclinical models to
encourage our pursuit of additional research that could lead to the development
of a new treatment for inflammatory disorders. These anti-inflammatory
aminosterols represent a novel class of compounds with significant potential
for a wide range of systemic and topical anti-inflammatory indications. This
research is supported in part by our Phase II Small Business Innovation
Research program grant of $800,000 from the National Institutes of Health
covering a two-year period beginning in February 2002.
Infectious Disease Program
We have conducted research and development in infectious diseases over many
years. The magainin class of compounds, originally discovered in frogs, has
been shown to have activity against a variety of pathogens, including bacteria,
amoebae, fungi and parasites. Magainins are peptides. A peptide is a chain of 2
to 50 molecules, known as amino acids, which are considered to be one of the
basic building blocks of the human body. Chains of more than 50 amino acids are
referred to as proteins. We have modified natural peptides by rearranging the
order and combination of amino acids, by substituting additional amino acids,
and by deleting amino acids to produce magainins having a broader spectrum of
therapeutic activity and improved potency.
Antibiotic resistance is the process by which antibiotics lose their
effectiveness over time as bacteria, through mutation, develop the means to
produce enzymes capable of diminishing the utility of an antibiotic. We have
not noted the development of any antibiotic resistance to the magainins. We
believe this is due to the unique mechanism of action of the magainins;
magainins puncture the cell membrane and break down the integrity of the cell,
killing bacteria differently than traditional antibiotics.
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Prior to 2000, LOCILEX(TM) Cream, a topical cream antibiotic for the
treatment of infection in diabetic foot ulcers, had been our lead product
development candidate in the peptide program. LOCILEX(TM) Cream did not obtain
approval from the FDA in July 1999, and we have since terminated our
manufacturing agreements required to further develop this product candidate and
refocused our near-term product development efforts on our other programs. We
continue to seek new opportunities that will enable us to capitalize on our
past development efforts in this program.
Other
In prior years, we have conducted feasibility studies in a number of other
areas, including animal-host defense systems and uses for magainin peptides
other than in infectious diseases. We no longer conduct significant research
and development activities in these areas as a result of a reprioritization of
our corporate goals. Any of these programs could become more significant over
the next 12 months; however, there can be no assurance that any of these or our
other programs will generate viable product opportunities.
Research and Development Costs
We have incurred costs of $11.0 million, $10.1 million and $ 9.9 million for
research and development in the years ended December 31, 2001, 2000 and 1999,
respectively.
Commercial Arrangements
We believe collaborations allow us to leverage our scientific and financial
resources and gain access to markets and technologies that would not otherwise
be available to us. In the long term, development and marketing arrangements
with established companies in the markets in which our potential products will
compete may provide us with more efficient development and marketing abilities
and may, accordingly, conserve our resources. We expect that we will seek
additional development and marketing arrangements for most of the products we
may develop. From time to time, we hold discussions with various potential
collaborators.
MedImmune
In April 2001, we entered into a research collaboration and licensing
agreement with MedImmune, Inc. to develop and commercialize therapies related
to our IL9 program. The companies also will collaborate on the creation of
specific assays and respiratory disease models for use in assessing product
candidates developed by MedImmune. MedImmune will be responsible for
development, manufacturing, clinical testing, and marketing of any resulting
product. MedImmune is expected to fund at least $2.5 million for research and
development activities at Genaera through April 2003. In addition to the
research and development funding, MedImmune also will reimburse us for certain
external costs we incur in connection with the IL9 research plan. Under the
agreement, we could receive up to $55.0 million if future milestones are
successfully achieved, plus royalties on any product resulting from this
agreement. As result of our lack of control over the development plan and the
timing of the milestones, we do not expect to complete a substantial portion of
those milestones within the next five years. Each party has the right to
terminate the agreement upon notice to the other party.
Cystic Fibrosis Foundation
In September 2001, we received a contingent award of up to $1.7 million from
an affiliate of the Cystic Fibrosis Foundation under their Therapeutics
Development Program to support early clinical evaluation of LOMUCIN(TM)
involving patients with cystic fibrosis. This award has been granted and shall
be paid to us from time to time upon the achievement of certain development
milestones. Grant amounts received are refundable to the CFF upon marketing
approval by the FDA or upon our election not to enter Phase 3 clinical trials
or to commercialize the product within two years of milestone completion,
assuming efficacy is demonstrated. The
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CFF is also due a royalty on net sales of any resultant product up to 1% based
upon the amount of funding ultimately provided by the CFF through this award.
GlaxoSmithKline
In February 1997, we entered into a development, supply and distribution
agreement in North America with GlaxoSmithKline for LOCILEX(TM) Cream.
GlaxoSmithKline paid us $10,000,000 under this agreement, which we received in
1997. At that time, we had hoped to commercialize LOCILEX(TM) Cream in the
near-term. However, as a result of the FDA's decision, near-term
commercialization of LOCILEX(TM) Cream will not occur, and we will generate no
revenues from LOCILEX(TM) Cream in the near future. The GlaxoSmithKline
agreement also gives GlaxoSmithKline rights to terminate the arrangement, and,
under certain conditions, the right to negotiate for rights to another Genaera
product development candidate. GlaxoSmithKline remains our exclusive sales,
marketing and distribution partner for the North American territory for
LOCILEX(TM) Cream.
Contract Manufacturing
We have no current plans to establish a commercial manufacturing facility.
We depend upon various contract manufacturers for clinical trial manufacturing
of our proposed products and expect to continue to rely on the infrastructure
of third parties for any commercial-scale manufacturing. We require all of our
third-party manufacturers to produce our active pharmaceutical ingredients and
finished products in accordance with all applicable regulatory standards.
Government Regulation
Our development, manufacture, and potential sale of therapeutics are subject
to extensive regulation by United States and foreign governmental authorities.
Regulation of Pharmaceutical Products in the United States
The FDA may regulate our product candidates currently being developed as
drugs or biologics. New drugs are subject to regulation under the Federal Food,
Drug, and Cosmetic Act, and biological products, in addition to being subject
to certain provisions of that Act, are regulated under the Public Health
Service Act. Both statutes and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, and advertising and other promotional practices
involving biologics or new drugs, as the case may be. FDA approval or other
clearances must be obtained before clinical testing, and before manufacturing
and marketing of new biologics and drugs.
Obtaining FDA approval historically has been a costly and time-consuming
process. Generally, in order to gain FDA premarket approval, a developer first
must conduct preclinical studies in the laboratory and in animal model systems
to gain preliminary information on an agent's effectiveness and to identify any
safety problems. The results of these studies are submitted as a part of an
Investigational New Drug application for a drug or biologic which the FDA must
review before human clinical trials of an investigational drug or device can
begin. The IND includes a detailed description of the clinical investigations
to be undertaken.
In order to commercialize any products, we or our collaborators must sponsor
and file an IND and be responsible for initiating and overseeing the clinical
studies to demonstrate the safety, effectiveness, and potency that are
necessary to obtain FDA approval of any such products. For INDs sponsored by us
or our collaborators, we or our collaborators will be required to select
qualified investigators (usually physicians within medical institutions) to
supervise the administration of the products, and ensure that the
investigations are conducted and monitored in accordance with FDA regulations,
including the general investigational plan and protocols contained in the IND.
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Clinical trials of drugs normally are done in three phases, although the
phases may overlap. Phase 1 trials are concerned primarily with the safety and
preliminary effectiveness of the drug, involve a small group typically ranging
from 15 - 40 subjects, and may take from six months to over one year to
complete. Phase 2 trials normally involve 30 - 200 patients and are designed
primarily to demonstrate effectiveness in treating or diagnosing the disease or
condition for which the drug is intended, although short-term side effects and
risks in people whose health is impaired may also be examined. Phase 3 trials
are expanded clinical trials with larger numbers of patients which are intended
to evaluate the overall benefit-risk relationship of the drug and to gather
additional information for proper dosage and labeling of the drug. Phase 3
clinical trials generally take two to five years to complete, but may take
longer. The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension, or termination of
clinical trials if it concludes that an unwarranted risk is presented to
patients, or, in Phase 2 and 3, if it concludes that the study protocols are
deficient in design to meet their stated objectives.
If clinical trials of a new product are completed successfully, the sponsor
of the product may seek FDA marketing approval. If the product is regulated as
a biologic, the FDA will require the submission and approval of a Biologics
License Application before commercial marketing of the biologic. If the product
is classified as a new drug, an applicant must file a New Drug Application with
the FDA and receive approval before commercial marketing of the drug. The BLA
or NDA must include detailed information about the product and its manufacture
and the results of product development, preclinical studies and clinical
trials.
The testing and approval processes require substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. BLAs, and NDAs submitted to the FDA can take up to two to five years
to receive approval. If questions arise during the FDA review process, approval
can take more than five years. Notwithstanding the submission of relevant data,
the FDA may ultimately decide that the BLA or NDA does not satisfy its
regulatory criteria for approval and deny approval, require additional clinical
studies, or require demonstration of compliance with Good Manufacturing
Practices. In addition, the FDA may condition marketing approval on the conduct
of specific post-marketing studies to further evaluate safety and
effectiveness. Even if FDA regulatory clearances are obtained, a marketed
product is subject to continual regulatory requirements and review relating to
GMPs, adverse event reporting, promotion and advertising, and other matters,
and later discovery of previously unknown problems or failure to comply with
the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions.
Orphan Drug Designation
During 2001, the FDA granted squalamine orphan drug designation for the
treatment of ovarian cancer. We may request orphan drug designation for several
indications for our other product candidates under development. Orphan drug
designation may be granted to those products developed to treat diseases or
conditions that affect fewer than 200,000 persons in the United States or that
affect more than 200,000 persons in the United States and for which there is no
reasonable expectation that the cost of developing and making a drug in the
United States for such disease or condition will be recovered from sales in the
United States of such drug. Under the law, the developer of an orphan drug may
be entitled to seven years of market exclusivity following the approval of the
product by the FDA, exemption from user fee payments to the FDA and a tax
credit for the amount of money spent on human clinical trials. However, we must
be the first to receive FDA marketing approval to receive market exclusivity
under the orphan drug statute should there be a competitor with a similar
molecular entity pursuing the same intended clinical use. Although we may get
market exclusivity under the Orphan Drug Act, the FDA will allow the sale of a
molecularly equivalent drug, which is clinically superior to or a molecular
entity different from another approved orphan drug, although for the same
indication, during the seven-year exclusive marketing period. It is also
possible that a competitor might try to undermine any exclusivity provided by
promoting a product for an off-label use that is the otherwise protected
product. We cannot be sure that any of our other product candidates under
development will ultimately receive orphan drug designation, or that the
benefits currently provided by this designation, if we were to receive it,
10
will not subsequently be amended or eliminated. Orphan drug designation does
not convey any advantage in, or shorten the duration of, the regulatory review
and approval process.
Other
In addition to the foregoing, our business is and will be subject to
regulation under various state and federal environmental laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act
and the Toxic Substance Control Act. These and other laws govern our use,
handling and disposal of various biological, chemical and radioactive
substances used in and wastes generated by our operations. We cannot predict
whether state or federal regulators and agencies will impose new regulatory
restrictions on the marketing of biotechnology products.
Patents, Licenses and Proprietary Rights
We actively seek to protect our product candidates and proprietary
information by means of U.S. and foreign patents, trademarks and contractual
arrangements. Our success depends, in part, on our ability to develop and
maintain a strong patent position for our products and technologies both in the
United States and certain other countries where patent laws are enforced and
pharmaceutical markets are deemed to be meaningful to us and our current and
future collaborators. As with most biotechnology and pharmaceutical companies,
our patent position is highly uncertain and involves complex legal and factual
questions.
To date, we own or have licensed on an exclusive basis a total of 72 patent
applications and issued patents in the United States of which we own 56 and we
license on an exclusive basis 16. We have a total of 66 patent applications and
issued patents in countries other than the United States.
We own several patents for the use of squalamine as an anti-angiogenic,
including the patent to the compound's combination therapy with other anti-
cancer agents, the earliest of which expires in 2017. We also own a patent
regarding a specific component of the manufacturing process of squalamine and
trodulamine which expires in 2017. We own a composition of matter patent for
the trodulamine compound, which expires in 2014. We also own a patent for the
use of trodulamine as an anti-obesity agent and other indications which expires
in 2015. We own a patent for the use of anti-IL9 antibodies for the treatment
of asthma and related disorders which expires in 2016. The expiration date of
each of these patents is subject to extension depending upon the future
research and development program timelines. We have filed several other
applications across our research and development programs and intend to file
additional applications, as appropriate, for patents on new compounds, products
or processes discovered or developed through the application of our technology.
We have rights to several patents and patent applications under certain
license agreements pursuant to which we expect to owe royalties on sales of
products that incorporate issued valid patent claims. In particular, we have
licensed from the Ludwig Institute of Cancer Research specific technologies
related to our IL9 program, the earliest of which expires in 2009, and have
licensed from the Children's Hospital of Philadelphia the composition of matter
patent for the squalamine compound which expires in 2010. These patents are
subject to extensions by their owners depending upon the future research and
development program timelines. Additionally, certain of these agreements also
provide that if we elect not to pursue the commercial development of any
licensed technology, or do not adhere to an acceptable schedule of
commercialization, then our exclusive rights to such technology may terminate.
We also fund research at certain institutions, and these relationships may
provide us with technology that is owned, licensed or for which we have an
option to license.
In addition, we rely on unpatented proprietary technologies in the
development of our product candidates. We also depend upon the unpatentable
skills, knowledge and experience of our scientific and technical personnel, as
well as those of our advisors, consultants and other contractors. To help
protect our proprietary know-how that is not patentable, and for inventions for
which patents may be difficult to enforce, we rely on trade secret protection
and confidentiality agreements to protect our interests. To this end, we
require employees, consultants and advisors to enter into agreements that
prohibit the disclosure of confidential
11
information and, where applicable, require disclosure and assignment to us of
the ideas, developments, discoveries and inventions that arise from their
activities for us. These confidentiality agreements require that our employees,
consultants and advisors do not bring to us, or use without proper
authorization, any third party's proprietary technology.
We have trademark protection for the product candidate names LOMUCIN(TM) and
LOCILEX(TM) and are currently seeking U.S. registration of these trademarks.
Competition
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
Most of these entities have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources. We also may face
competition from companies using different or advanced techniques that could
render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Colleges, universities, governmental agencies and other public and
private research organizations are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of
technology that they have developed, some of which may be directly competitive
with our technology. In addition, these institutions, along with pharmaceutical
and specialized biotechnology companies, can be expected to compete with us in
recruiting highly qualified scientific personnel.
Many companies are working to develop and market products intended for the
disease areas being targeted by us, including cancer, AMD, obesity and
respiratory diseases. A number of major pharmaceutical companies have
significant franchises in these disease areas, and can be expected to invest
heavily to protect their interests. With respect to cancer, anti-angiogenic
agents are under development at a number of biopharmaceutical companies,
including British Biotechnology PLC, EntreMed, Inc., Genentech, Inc., and
Imclone Systems, Inc., as well as multiple large pharmaceutical companies. For
AMD, anti-angiogenic agents are under development at a number of
biopharmaceutical companies, including Alcon, Inc., Bausch & Lomb, Inc.,
Miravant Medical Technologies, and QLT, Inc., as well as multiple large
pharmaceutical companies. In obesity, other biopharmaceutical companies are
conducting research and development into anti-obesity compounds, including
Amgen, Inc. and Regeneron Pharmaceuticals, Inc., as well as multiple large
pharmaceutical companies. In the respiratory field, other biopharmaceutical
companies also have reported the discovery of genes relating to asthma and
other respiratory diseases, including Genentech, Inc., Immunex Corporation, and
Vertex Pharmaceuticals, Inc., as well as multiple large pharmaceutical
companies.
Executive Officers
Our current executive officers are as follows:
Name Age Position
---- --- --------
Roy C. Levitt, M.D.............. 48 President and Chief Executive Officer
Kenneth J. Holroyd, M.D......... 43 Executive Vice President and
Chief Operating Officer
David F. Jarosz................. 43 Executive Vice President and
Chief Business Officer
Sean M. Johnston, Ph.D.......... 43 Senior Vice President, Manufacturing
Michael E. Petrone, M.D......... 50 Vice President, Clinical Research
Christopher P. Schnittker....... 33 Vice President and Chief Financial Officer
12
Dr. Levitt has served as our President and Chief Executive Officer since
November 2000. Prior to that, Dr. Levitt served as our Executive Vice President
and Chief Operating Officer since August 1998. Dr. Levitt was appointed our
head of Research and Development and a Director in August 1997. Prior to
joining us on a full-time basis in January 1996, Dr. Levitt served as a
consultant to a number of biotechnology companies including Genaera beginning
in 1995. Dr. Levitt served as a faculty member at Johns Hopkins University in
the Department of Anesthesiology and Critical Care Medicine, from 1986 to 1995,
in Neurological Surgery from 1995 to 1996 and in the Department of
Environmental Health Sciences in the Johns Hopkins School of Public Health and
Hygiene from 1988 to 1996. Dr. Levitt completed his residency training in
internal medicine and anesthesiology and critical care medicine at the John
Hopkins Medical Institutions and genetics training at the National Institutes
of Health. He is board certified in anesthesiology and critical care medicine
and internal medicine.
Dr. Holroyd was promoted to our Executive Vice President and Chief Operating
Officer in February 2002. Prior to that, he had served as our Executive Vice
President and Chief Business Officer since November 2000. Prior to that, Dr.
Holroyd served as Senior Vice President, Clinical Research and Regulatory
Affairs since June 1998. Dr. Holroyd has held various positions, including Vice
President of Respiratory Discovery Research, Product Development and Business
Development, since joining us in February 1997. Prior to joining us, Dr.
Holroyd was a faculty member and head of respiratory care services at Johns
Hopkins University School of Medicine and Hospital in the Departments of
Medicine, and Anesthesiology and Critical Care Medicine. Dr. Holroyd earned his
M.D. and M.B.A. from Johns Hopkins in 1984 and 2000, respectively, and
completed his residency training at Johns Hopkins and at the National Heart,
Lung and Blood Institute.
Mr. Jarosz was appointed as our Executive Vice President and Chief Business
Officer in February 2002. Prior to joining us, Mr. Jarosz spent approximately
15 years in the pharmaceutical and medical device industries at Bausch and
Lomb, Inc., where he most recently held the position of Corporate Vice
President and President, North American Pharmaceuticals since July 1999. From
November 1998 to June 1999, Mr. Jarosz served as Bausch's General Manager,
North American Pharmaceuticals. From January 1997 to October 1998, Mr. Jarosz
served as Bausch's Vice President of Marketing and Sales, North American
Pharmaceuticals and, prior to that, as Vice President of Marketing, North
American Pharmaceuticals from December 1993 to December 1996.
Dr. Johnston has served as our Senior Vice President, Manufacturing since
July 2001. Prior to that, Dr. Johnston served as Vice President, Manufacturing
since joining us in January 1999. Prior to joining us, Dr. Johnston served as
Production Manager at Lonza, Inc. from May 1993 to December 1998. Dr. Johnston
also served as Chemical Development Manager from October 1989 to May 1993 at
Greenwich Pharmaceutical, Inc. From October 1982 to May 1989, Dr. Johnston
served in various process chemistry positions at E.R. Squibb (now Bristol-Myers
Squibb) including Process Manager, Process Chemist and Chemical Process
Investigator. Dr. Johnston earned his MBA from the University College of
Dublin, Ireland in 1988.
Dr. Petrone has served as our Vice President, Clinical Research since
joining us in January 2001. Prior to joining us, Dr. Petrone served as Vice
President, Product Development at Principia Pharmaceutical Corporation from
April 2000 to November 2000. Prior to that, Dr. Petrone served in the following
capacities at Roberts Pharmaceutical Corporation from 1992 to 2000: Vice
President, Medical Affairs from June 1996 to March 2000, Director of Clinical
Research, from October 1994 to October 1996, and Associate Director, Clinical
Research, from October 1992 to October 1994.
Mr. Schnittker has served as our Vice President and Chief Financial Officer
since June 2000. Prior to joining us, Mr. Schnittker served as Director of
Finance from August 1999 to May 2000 and Controller from December 1997 to
August 1999 at Global Sports, Inc. From June 1995 to December 1997, Mr.
Schnittker held the positions of Manager, Finance Policies and Procedures and
Senior Accountant, External Reporting at Rhone-Poulenc Rorer, Inc. Prior to
that, Mr. Schnittker held various positions at Price Waterhouse LLP (now
PricewaterhouseCoopers LLP) from 1990 to 1995. Mr. Schnittker is a certified
public accountant.
Officers are elected or appointed by the board of directors to serve until
the appointment or election and qualification of their successors or their
earlier termination or resignation.
13
Employees
As of December 31, 2001, we had 57 full-time employees. No employees are
covered by collective bargaining agreements, and we consider relations with our
employees to be good.
Risk Factors Related to our Business
Any investment in shares of our common stock involves a high degree of risk.
You should carefully consider the following risk factors, together with the
other information presented in this Annual Report on Form 10-K.
If we do not raise additional capital, we may not be able to continue our
research and development programs and may never commercialize any products.
We maintained cash and investments of $16,078,000 at December 31, 2001. At
December 31, 2001, we had current liabilities of $5,583,000 and long-term
liabilities of $1,579,000. We believe these resources are sufficient to meet
our research and development goals and sustain operations through 2002.
However, we will need to raise substantial additional funds in the future to
continue our research and development programs and to commercialize our
potential products. If we are unable to raise such funds, we may be unable to
complete our development activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings, collaborative arrangements with third parties and other strategic
alliances and business transactions. We currently do not have any commitments
to provide additional funds, and may be unable to obtain sufficient funding in
the future on acceptable terms, if at all. If we cannot obtain funding, we will
need to delay, scale back or eliminate research and development programs or
enter into collaborations with third parties to commercialize potential
products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we raise additional
capital by issuing equity or securities convertible into equity, our
stockholders may experience dilution and our share price may decline. Any debt
financing may result in restrictions on spending or payment of dividends. If we
engage in collaborations, we will receive lower consideration upon
commercialization of such products than if we had not entered into such
arrangements, or if we entered into such arrangements at later stages in the
product development process.
We expect to continue to incur substantial losses in the foreseeable future and
may never generate revenues or become profitable.
To date, we have engaged primarily in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of December 31, 2001, we
had an accumulated deficit of approximately $170.6 million.
Our proposed products are in a relatively early developmental stage and will
require significant research, development and testing. We must obtain
regulatory approvals for any proposed product prior to commercialization of the
product. Our operations also are subject to various competitive and regulatory
risks. As a result, we are unable to predict when or if we will achieve any
product revenues or become profitable. We expect to experience substantial
losses in the foreseeable future as we continue our research, development and
testing efforts.
14
Development and commercial introduction of our products will take several more
years and may not be successful.
We are dedicating substantially all of our resources to research and
development, do not have any marketed products, and have not generated any
product revenue. Because substantially all of our potential products currently
are in research, preclinical development or the early and middle stages of
clinical testing, revenues from sales of any products will not occur for at
least the next several years, if at all. Our technologies are relatively new
fields and may not lead to commercially viable pharmaceutical products. Before
we can commercially introduce any products, we will likely incur substantial
expense for, and devote a significant amount of time to, preclinical testing
and clinical trials. We cannot apply for regulatory approval of our potential
products until we have performed additional research and development testing
and demonstrated in preclinical testing and clinical trials that our product
candidates are safe and effective for use in humans. Some of our product
candidates are in the early stages of research and development, and we may
abandon further development efforts on these product candidates before they
reach clinical trials. Conducting clinical trials is a lengthy, time-consuming
and expensive process. Our clinical trials may not demonstrate the safety and
efficacy of our potential products, and we may encounter unacceptable side
effects or other problems in the clinical trials. Should this occur, we may
have to delay or discontinue development of the potential products. Further,
even if we believe that any product is safe or effective, we may not obtain the
required regulatory approvals, be able to manufacture our products in
commercial quantities or be able to market any product successfully.
If we do not obtain required regulatory approvals, we will not be able to
commercialize any of our product candidates.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign government
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval for pharmaceutical products is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including warning letters,
fines, withdrawal of regulatory approval, product recalls, operating
restrictions, injunctions, and criminal prosecution.
We expect to rely on third parties to market any products we develop and expect
to rely on third parties in connection with the development of our products; if
these parties do not perform as expected, we may never successfully
commercialize our products.
We do not have our own sales and marketing staff. In order to successfully
develop and market our future products, we must enter into marketing and
distribution arrangements with third parties. We also expect to delegate the
responsibility for all, or a significant portion, of the development and
regulatory approval for certain products to third parties. If these parties do
not develop an approvable or marketable product or do not market a product
successfully, we may never generate revenue or become profitable. Additionally,
we may be unable to enter into successful arrangements with other parties for
such products.
We do not have control over the amount and timing of resources to be devoted
to our products by our collaborative partners. Our collaborators may not place
a high priority on their contractual arrangements with us. Collaborators may
develop products independently or through third parties that could compete with
our proposed products. For example, GlaxoSmithKline, a current collaborative
partner, which entered into an agreement with us relating to the development of
LOCILEX(TM), maintains a significant presence in the antibiotic
15
area and currently sells a topical antibiotic product indicated for the
treatment of certain skin infections. In addition, a collaborator may decide to
end a relationship with us. For example, in December 2000, Genentech provided
notice to us of its election to terminate the collaboration agreement covering
the IL9 antibody development program and related respiratory technology.
We also may decide to establish our own sales force to market and sell
certain products. Although some members of our management have limited
experience in marketing pharmaceutical products, we have no experience with
respect to marketing our products. If we choose to pursue this alternative, we
will need to spend significant additional funds and devote significant
management resources and time to establish a successful sales force. This
effort may not be successful. Moreover, because our financial resources are
limited, our sales and marketing expenditures in this area would likely be
modest compared to our competitors.
We face formidable competition with respect to the products we are seeking to
develop and the recruitment of highly trained scientific personnel.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in our fields of interest. Some of these companies are
currently involved in research and development activities focused on the
pathogenesis of disease, and the competition among companies attempting to find
genes responsible for disease is intense. In addition, we are aware that
research on compounds derived from animal host-defense systems is being
conducted by others. We also may face competition from companies using
different or advanced techniques that could render our future products
obsolete. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than we
have.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer, AMD and
chronic obstructive respiratory diseases. A number of major pharmaceutical
companies have significant franchises in these disease areas, and can be
expected to invest heavily to protect their interests. With respect to cancer
and AMD, anti-angiogenic agents are under development at a number of companies.
In the respiratory field, other biopharmaceutical companies also have reported
the discovery of genes relating to asthma and other respiratory diseases.
Many of the companies developing or marketing competing products have
significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.
We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our efforts may not be successful.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.
If we do not develop and maintain relationships with contract manufacturers, we
may not successfully commercialize our products.
We currently do not have the resources, facilities, or technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no plans to establish a
manufacturing facility. We expect to depend upon contract manufacturers for
commercial scale manufacturing of our proposed products in accordance with
regulatory standards. For example, we are currently working with
16
outside contractors for the chemical production of squalamine. This dependence
on contract manufacturers may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis especially because the
number of companies capable of producing our proposed products is limited.
These contract manufacturers generally have multiple projects and they may give
ours a lower priority. As a result of contract manufacture mishaps, our product
could be lost or delivered late delaying our clinical and preclinical programs,
or may not be produced in accordance with all current applicable regulatory
standards. Product not produced in accordance with all current applicable
regulatory standards may lead to adverse outcomes for patients and/or product
recalls. Furthermore, the development of a robust, low-cost manufacturing
process for the commercial production of squalamine and other proposed products
will require significant time and expenditure by us. We may be unable to
maintain arrangements with qualified outside contractors to manufacture
materials at costs that are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer also may require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be more limited.
We depend on our intellectual property and, if we are unable to protect our
intellectual property, our business may be harmed.
Patents
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies, both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. As a result, our
ability to recover these expenditures and realize profits upon
commercialization likely would be diminished.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy by the U.S. Patent and Trademark Office
until a patent issues, and publications in the scientific or patent literature
concerning new technologies occur some time after actual discoveries of the
technologies are made.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. others may not file patents ahead of us in time and prevent the issuing
of our patent claims;
. others will not design around the patented aspects of the technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. an adverse outcome in a suit challenging our patents would not subject
us to significant liabilities to third parties, require rights to be
licensed from third parties, or require us to cease using such
technology.
The cost of litigation related to patents can be substantial, regardless of
the outcome.
17
Other Intellectual Property
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our employees,
consultants, outside scientific collaborators, and other advisors. We may find
that these agreements will be breached, or that our trade secrets have
otherwise become known or independently developed or discovered by our
competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, these contracts require that we pay royalties
on sales of any products that are covered by patent claims. If we are unable to
pay the royalties, we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our rights.
Potential Ownership Disputes
Disputes may arise as to the ownership of our technology. Most of our
research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. These kinds of disputes have occurred in the
past and were resolved. However, we may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.
If we cannot recruit and retain qualified management, we may not be able to
successfully develop and commercialize our products.
We depend to a considerable degree on a limited number of key personnel.
Most significant responsibilities have been assigned to a relatively small
number of individuals. We do not maintain "key man" insurance on any of our
employees. The loss of certain management and technical personnel could
adversely affect our ability to develop and commercialize products.
We are subject to potential product liability claims that could result in
significant costs.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
. our proposed products cause some undesirable side effects or injury
during clinical trials;
. our products cause undesirable side effects or injury in the market; or
. third parties that we have agreed to indemnify incur liability.
While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.
If we do not receive adequate third-party reimbursement for any of our drug
candidates, some patients may be unable to afford our products and sales could
suffer.
In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations, can impact prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for medical products and services, particularly where they
believe that there is only an incremental therapeutic
18
benefit that does not justify the additional cost. If any of our products ever
obtain marketing approval, coverage and reimbursement may not be available for
these products, or, if available, may not be adequate. Without insurance
coverage, many patients may be unable to afford our products, in which case
sales of the product would be adversely affected.
There also has been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals
to implement similar government control. We expect this trend to continue, but
we cannot predict the nature or extent of any reform that results. These
reforms could adversely affect our ability to obtain financing for the
continued development of our proposed products or market any of our products
that are successfully developed. Furthermore, reforms could have a broader
impact by limiting overall growth of health care spending, such as Medicare and
Medicaid spending, which could also adversely affect our business.
The FDA has deemed our NDA for LOCILEX(TM) Cream to be not approvable, and the
product may never be approved.
In July 1999, we received notification from the FDA that our NDA for
LOCILEX(TM) Cream had been deemed not approvable. LOCILEX(TM) Cream, a topical
cream antibiotic for the treatment of infection in diabetic foot ulcers, had
been our lead product development candidate. As a result of the FDA's decision,
near-term commercialization of LOCILEX(TM) Cream will not occur, and we will
generate no revenues from LOCILEX(TM) Cream in the near future, if ever.
In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. As a result of its review of manufacturing of the
cream product, the FDA issued certain observations of deficiencies in
compliance with their current good manufacturing procedures regulations. If any
additional clinical studies are conducted, new batches of the cream product
will need to be manufactured from the bulk drug substance and meet strict
product specifications in compliance with FDA-determined current GMPs. The time
required to conduct such further clinical and manufacturing development efforts
may be lengthy and costly, and the results may ultimately prove unsuccessful.
Our stock price is extremely volatile.
The market prices and trading volumes for securities of biopharmaceutical
and biotechnology companies, including ours, have historically been, and will
likely continue to be, highly volatile. Future events affecting our business,
or that of our competitors, may have a significant impact on our stock price.
Among these events are the following:
. product testing results from us or our competitors;
. technological innovations by us or our competitors;
. new commercial products from us or our competitors;
. government regulations;
. proprietary rights;
. regulatory actions; and
. litigation.
19
We may be unable to maintain the standards for listing on the Nasdaq National
Market, which could adversely affect the liquidity of our common stock and
could subject our common stock to the "penny stock" rules.
Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including a
minimum bid price for shares of a company's stock and a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock may then be conducted on the Nasdaq Small Cap
Market. However, if we are unable to meet the requirements for inclusion in the
Small Cap Market, our common stock would be traded on an electronic bulletin
board established for securities that are not included in Nasdaq or traded on a
national securities exchange or in quotations published by the National
Quotation Bureau, Inc. that are commonly referred to as the "pink sheets." If
this occurs, it could be more difficult to sell our securities or obtain the
same level of market information as to the price of our common stock as is
currently available.
In addition, if our common stock were delisted, it would be subject to the
so-called "penny stock" rules. The U.S. Securities and Exchange Commission has
adopted regulations that define a "penny stock" to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions,
such as any securities listed on a national securities exchange or quoted on
Nasdaq. For any transaction involving a "penny stock," unless exempt, the rules
impose additional sales practice requirements on broker-dealers, subject to
certain exceptions.
For transactions covered by the "penny stock" rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the
transaction. The "penny stock" rules also require broker-dealers to deliver
monthly statements to "penny stock" investors disclosing recent price
information for the "penny stock" held in the account, and information on the
limited market in "penny stocks." Prior to the transaction, a broker-dealer
must provide a disclosure schedule relating to the "penny stock" market. In
addition, the broker-dealer must disclose the following:
. commissions payable to the broker-dealer and the registered
representative; and
. current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it more difficult to trade our common stock and an
investor may find it more difficult to acquire or dispose of our common stock
in the secondary market.
The exercise of options and warrants and other issuances of shares will likely
have a dilutive effect on our stock price.
As of December 31, 2001, there were outstanding options to purchase an
aggregate of approximately 3,745,000 shares of our common stock at prices
ranging from $1.03 per share to $16.75 per share, of which approximately
2,057,000 were exercisable as of such date. Warrants to purchase 417,166 shares
were outstanding, of which warrants to purchase 167,166 shares of our common
stock are currently exercisable at $3.50 per share subject to adjustment under
the anti-dilution provisions of the warrants. Exercise of options and warrants
at prices below the market price of our common stock could adversely affect the
price of our common stock. Additional dilution may result from the issuance of
shares of our capital stock in connection with collaborations or manufacturing
arrangements or in connection with other financing efforts.
Our certificate of incorporation and Delaware law contain provisions that could
discourage a takeover.
Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock. In addition, Section 203 of the Delaware General
Corporation Law
20
contains provisions that impose restrictions on stockholder action to acquire
control of Genaera. The effect of these provisions of our certificate of
incorporation and Delaware law provisions could discourage third parties from
seeking to obtain control, even though the price at which such third parties
seek to acquire our common stock is in excess of the market price for our
stock.
ITEM 2. Properties
We lease approximately 21,000 square feet of office and laboratory space in
a single building in Plymouth Meeting, Pennsylvania. This lease provides for
minimum annual payments of approximately $326,000 in 2002 and is subject to
certain annual increases thereafter. This lease expires in November 2007.
ITEM 3. Legal Proceedings
We are not a party to any material litigation.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the last
quarter of the year ended December 31, 2001.
21
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock currently trades on the National Association of Securities
Dealers Automated Quotation System (Nasdaq) National Market under the symbol
"GENR." From December 12, 1991, the date of our initial public offering, until
March 9, 2001 our common stock was included for quotation on the Nasdaq
National Market under the symbol "MAGN". On March 9, 2001, we changed our name
to Genaera Corporation and, on March 12, 2001, our common stock began inclusion
for quotation on the Nasdaq National Market under the symbol "GENR". The
quarterly ranges of high and low closing bid prices per share of our common
stock are shown below.
Year Ended December 31, 2000 High Low
---------------------------- ------ -----
1st Quarter................................................ $10.50 $1.78
2nd Quarter................................................ $ 5.00 $2.50
3rd Quarter................................................ $ 5.38 $3.06
4th Quarter................................................ $ 4.06 $2.09
Year Ended December 31, 2001 High Low
---------------------------- ------ -----
1st Quarter................................................ $ 3.06 $1.91
2nd Quarter................................................ $ 4.79 $1.82
3rd Quarter................................................ $ 4.65 $2.05
4th Quarter................................................ $ 4.10 $2.11
Dividends
We have not paid any cash dividends since our inception, and we do not
anticipate paying any cash dividends in the foreseeable future. It is the
present policy of the board of directors to retain all earnings, if any, to
finance the development of our business.
Number of Holders of Common Stock
At March 20, 2002, there were approximately 366 stockholders of record and
approximately 9,313 beneficial owners of our common stock.
22
ITEM 6. Selected Financial Data
The following tables summarize certain selected financial data and are
derived from the financial statements that have been audited by KPMG LLP,
independent accountants. The selected financial data below should be read in
conjunction with the financial statements and notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included herein.
Year Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Statement of Operations
Data:
Revenues:
Collaborative research
agreement................ $ 880 $ -- $ -- $ -- $ 10,088
-------- -------- -------- -------- --------
Costs and expenses:
Research and development.. 10,974 10,074 9,876 21,456 22,875
General and
administrative........... 3,423 2,583 2,870 3,292 3,246
-------- -------- -------- -------- --------
14,397 12,657 12,746 24,748 26,121
-------- -------- -------- -------- --------
Loss from operations........ (13,517) (12,657) (12,746) (24,748) (16,033)
Interest income............. 849 883 755 1,640 1,770
Interest expense............ (244) (605) (225) (196) (118)
-------- -------- -------- -------- --------
Net loss.................... (12,912) (12,379) (12,216) (23,304) (14,381)
Dividends on preferred
stock...................... 111 45 -- -- --
-------- -------- -------- -------- --------
Net loss applicable to
common stockholders........ $(13,023) $(12,424) $(12,216) $(23,304) $(14,381)
======== ======== ======== ======== ========
Net loss applicable to
common stockholders per
share--basic and diluted... $ (0.40) $ (0.42) $ (0.52) $ (1.05) $ (0.73)
======== ======== ======== ======== ========
Weighted average shares
outstanding--basic and
diluted.................... 32,711 29,375 23,706 22,235 19,679
======== ======== ======== ======== ========
December 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(In thousands)
Balance Sheet Data:
Cash and investments.... $ 16,078 $ 19,033 $ 10,644 $ 22,871 $ 39,061
Total assets............ 17,816 20,701 12,731 25,891 42,444
Long-term liabilities... 1,579 2,010 3,015 58 1,096
Redeemable convertible
preferred stock........ 1,044 1,233 -- -- --
Accumulated deficit..... (170,591) (157,568) (145,144) (132,928) (109,624)
Stockholders' equity.... 9,610 11,473 6,552 14,680 34,870
Other Data:
Working capital......... 10,713 13,393 7,608 11,897 33,073
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Genaera Corporation is a biopharmaceutical company committed to developing
medicines for serious diseases from genomics and natural products. Our research
and development efforts are focused on anti-angiogenesis, respiratory diseases,
obesity, and infectious diseases. We changed our name from Magainin
Pharmaceuticals Inc. to Genaera Corporation on March 9, 2001.
23
Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities and research and development
collaboration payments and related equity investments. We have incurred a loss
in each year since our inception, and we expect to incur substantial additional
losses for at least the next several years. We expect that losses may
fluctuate, and that such fluctuations may be substantial. At December 31, 2001,
our accumulated deficit was approximately $170,591,000. We will need to raise
additional funds in the future to continue our operations.
The following discussion is included to describe our financial position and
results of operations for each of the previous three years in the period ended
December 31, 2001. The Consolidated Financial Statements and Notes thereto
contain detailed information that should be referred to in conjunction with
this discussion.
Critical Accounting Policies and Estimates
The SEC recently released cautionary advice regarding critical accounting
policies. The SEC has defined critical policies and practices as items that are
both most important to the portrayal of a company's financial condition and
results, and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effects of
matters that are inherently uncertain. The preparation of our financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the
amounts reported in our financial statements and accompanying notes. Actual
results could differ materially from those estimates. The items in our
financial statements requiring significant estimates and judgments are as
follows:
Revenue Recognition
Contract revenue for research and development is recorded as earned based on
the performance requirements of the contract. Non-refundable contract fees for
which no further performance obligations exist, and for which there is no
continuing involvement by us, are recognized on the earlier of when the
payments are received or when collection is assured. Revenue from non-
refundable upfront license fees and certain guaranteed payments where we
continue involvement through development collaboration is recognized on a
straight-line basis over the development period. Revenue associated with
performance milestones is recognized based upon the achievement of the
milestones, as defined in the respective agreements. Revenue under R&D cost
reimbursement contracts or government grants is recognized as the related costs
are incurred. Advance payments received in excess of amounts earned are
classified as liabilities until earned. Payments received that are refundable
also are classified as liabilities until the refund provision expires. We make
an estimate as to the appropriate deferral period for recognition of revenue on
any collaborative fees received. Changes in these estimates, due to the
evolution of the development program, can have a significant effect on the
timing of revenue recorded.
Research and Development Expenses
Research and development expenses include related salaries, contractor fees,
and facility costs. R&D expenses consist of independent R&D contract costs,
contract manufacturing costs and costs associated with collaborative R&D
arrangements. In addition, we fund R&D at other research institutions under
agreements that are generally cancelable. R&D expenses also include external
activities such as investigator-sponsored trials. All such costs are charged to
R&D expense systematically as incurred, which may be measured by percentage of
completion, contract milestones, patient enrollment or the passage of time. At
the initiation of certain contracts, we must make an estimate as to the
duration and expected completion date of the contract, which may require a
change due to accelerations, delays or other adjustments to the contract period
or work performed. Changes in these estimates could have a significant effect
on the amount of R&D costs in a specific period.
24
Stock-Based Compensation
We account for stock-based employee compensation under the intrinsic value-
based method set forth by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Effective January 1, 1996, we adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Stock or other equity-based compensation for non-
employees must be accounted for under the fair value-based method as required
by SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18, Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which is usually the vesting period.
Estimating the fair value of equity securities involves a number of judgments
and variables that are subject to significant change. A change in the fair
value estimate could have a significant effect on the amount of compensation
cost.
Results of Operations
Revenues
We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
third parties. In April 2001, we entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize therapies
related to our IL9 program. MedImmune is expected to fund at least $2.5 million
for our research and development activities through April 2003, payable in
eight equal quarterly installments. For the year ended December 31, 2001, we
recognized $880,000 in revenue related to this agreement.
Research and Development Expenses
We recognized research and development expenses of $11.0 million, $10.1
million and $9.9 million in 2001, 2000 and 1999, respectively. Research and
development expenses consist principally of personnel costs, contract research,
development and manufacturing costs and facility costs. Research and
development expenses increased in the year ended December 31, 2001, as compared
to the same period a year ago, due to ongoing squalamine development efforts as
well as additional preclinical and development activities in our trodulamine
(formerly referred to as produlestan), IL9 antibody and mucoregulator programs.
Research and development expenses increased in the year ended December 31,
2000, as compared to the year ended December 31, 1999, due to increases in
squalamine development, clinical and manufacturing activity as well as
preclinical and development activity in our mucoregulator, IL9 antibody and
trodulamine programs. The level of research and development expenses in future
periods will depend principally upon the progress of our research and
development programs and our capital resources.
General and Administrative Expenses
We recognized general and administrative expenses of $3.4 million, $2.6
million and $2.9 million in 2001, 2000 and 1999, respectively. General and
administrative expenses consist principally of personnel costs, professional
fees and public company expenses. Such expenses have increased in the year
ended December 31, 2001, as compared to the same period a year ago, due
principally to increases in personnel related to general corporate activities,
including business development. General and administrative expenses decreased
marginally in 2000 as compared to the prior year due principally to a moderate
decrease in personnel and professional fees.
Other Income and Expense
We recognized other income of $0.8 million, $0.9 million and $0.8 million in
2001, 2000 and 1999, respectively. We recognized other expenses of $0.2
million, $0.6 million and $0.2 million in 2001, 2000 and
25
1999, respectively. Other income is primarily comprised of interest income
generated from cash and investments. Other expense is primarily comprised of
interest expense related to our indebtedness to a bank and, through February
2001, the recognition of interest expense on the accretion from a discounted
value to face value of the long-term obligation to Abbott Laboratories.
Interest income decreased slightly during the year ended December 31, 2001, as
compared to the same period a year ago, due to declining investment interest
yields, substantially offset by higher average investment balances. Interest
income increased slightly during the year ended December 31, 2000, as compared
to the prior year, due to higher investment balances. Interest expense
decreased during the year ended December 31, 2001, as compared to the prior
year, due to rate decreases and our no longer recognizing additional interest
expense on the long-term obligation to Abbott subsequent to February 2001. This
obligation is now recorded at its face value. Interest expense increased during
the year ended December 31, 2000, as compared to the prior year, due to
recognizing additional interest expense on the long-term obligation to Abbott.
Liquidity and Capital Resources
Cash and investments were $16.1 million at December 31, 2001 as compared to
$19.0 million at December 31, 2000. The primary use of cash was to finance our
operations.
Since inception, we have funded our operations primarily from the proceeds
of public and private placements of our securities totaling approximately
$154.0 million since our initial public offering in December 1991 and including
the following offerings in 1999, 2000 and 2001:
. $ 3,915,000 raised from a public offering completed in October 1999;
. $ 5,447,000 raised from a private placement completed in May 2000;
. $11,678,000 raised from a private placement completed in August 2000;
. $ 688,000 raised from a private placement in December 2000; and
. $ 9,908,000 raised from a private placement completed in April 2001.
In addition to the above, we have funded our operations from contract and
grant revenues, research and development expense reimbursements, interest
income, lease financing and debt financing.
Our goal is to conduct significant research, pre-clinical development,
clinical testing and manufacturing activities over the next several years. We
expect that these activities, together with projected general and
administrative expenses, will result in continued and significant losses.
Current liabilities decreased by $402,000 to $5.6 million at December 31,
2001, due to the $1.4 million payment of our short-term obligation to Abbott in
the first quarter of 2001 offset partially by an increase in accounts payable
and accrued expenses resulting from the timing of our development contracts.
Prior to 1999, we had an agreement with Abbott providing for the purchase of
approximately $10.0 million of bulk drug substance for LOCILEX(TM) Cream. As
FDA approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement
with Abbott in 1999, paying Abbott $4.2 million and receiving partial delivery
of material. An additional $3.4 million was due to Abbott and payable if we
receive in excess of $10.0 million of additional funds in any year beginning in
2000, in which case 15% of such excess over $10.0 million shall be payable to
Abbott. We have no further purchase commitments to Abbott, and Abbott has no
further supply requirements to us. As a result of our financing activities
during 2000 and other cash inflows, $1.4 million of this liability was payable
and paid to Abbott on March 1, 2001. As a result of our financing activities
during 2001 and other cash inflows, $480,000 of this liability becomes payable
to Abbott on March 1, 2002 and thus has been included in current liabilities at
December 31, 2001. The remaining amount of $1.5 million due to Abbott is
included in long-term liabilities as of December 31, 2001.
26
Long-term accrued development expense decreased by $431,000 to $1.6 million
at December 31, 2001 due to the transfer of a portion of the amount owed Abbott
to current liabilities.
Under the terms of our $2.5 million bank debt, we make monthly interest-only
payments at an annual rate of 6.753%, with principal due in June 2002. Our
current intention is to refinance this loan prior to its maturity. We maintain
cash and investments of $2.8 million as collateral for the obligation.
Our capital expenditure requirements will depend upon numerous factors,
including the progress of our research and development programs, the time and
cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions
of products, technologies and companies. We had no significant capital
commitments as of December 31, 2001.
In April 2001, we entered into a research collaboration and licensing
agreement and a preferred stock purchase agreement with MedImmune, Inc.
pursuant to which we received $10.0 million. MedImmune is expected to fund at
least $2.5 million for our research and development activities through April
2003, of which $938,000 has been received through December 31, 2001. Of that
amount, $880,000 was recognized as revenue and the remaining $58,000 was
included in other current liabilities.
We expect our level of research and development spending in 2002 to be
approximately the same as in 2001. After considering the MedImmune transaction,
and in the absence of raising additional funds or significantly reducing
expenses, we believe we will have sufficient resources to sustain operations
through 2002. However, we will need to raise substantial additional funds in
the future to continue our research and development programs beyond 2002 and to
commercialize our potential products. If we are unable to raise such funds, we
may be unable to complete our development activities for any of our proposed
products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings, collaborative arrangements with third parties and other strategic
alliances and business transactions. We currently do not have any commitments
to obtain additional funds, and may be unable to obtain sufficient funding in
the future on acceptable terms. If we cannot obtain funding, we will need to
delay, scale back or eliminate research and development programs or enter into
collaborations with third parties to commercialize potential products or
technologies that we might otherwise seek to develop or commercialize
ourselves, or seek other arrangements. If we engage in collaborations, we may
receive lower consideration upon commercialization of such products than if we
had not entered into such arrangements, or if we entered into such arrangements
at later stages in the product development process. Additional factors that may
impact our ability to raise capital are described under "Risk Factors Related
to Our Business."
27
Contractual Cash Obligations
The table below sets forth our contractual obligations at December 31, 2001
(in thousands):
Cash Payments Due by
Period
-------------------------
Less After
than 1-3 4-5 5
Contractual Cash Obligations Total 1 year years years years
- ---------------------------- ------ ------ ------ ----- -----
Bank debt/1/ ................................ $2,500 $2,500 $ -- $ -- $ --
Abbott settlement/2/ ........................ 2,009 480 1,529 -- --
Operating lease on building/3/ .............. 2,141 327 689 737 388
Operating leases and maintenance contracts on
equipment................................... 421 196 165 57 3
R&D contracts................................ 653 531 90 32 --
Clinical trial contracts..................... 704 704 -- -- --
Manufacturing contracts...................... 549 549 -- -- --
------ ------ ------ ---- ----
Total contractual cash obligations........... $8,977 $5,287 $2,473 $826 $391
====== ====== ====== ==== ====
- --------
/1/We maintain cash and investments of approximately $2,792,000 as collateral
for this obligation. Our current intention is to refinance this obligation
prior to its maturity.
/2/Payable if we receive in excess of $10 million of additional funds in any
year beginning in 2000, in which case 15% of such excess over $10 million
shall be payable to Abbott.
/3/The lease provides for escalations relating to increases in the Consumer
Price Index not to exceed 7% but no less than 3.5% beginning in December
2002. We have assumed a minimum lease payment escalation of 3.5% for the
purposes of this table.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued two statements
as a result of its deliberations on the business combinations project,
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141, which eliminates the use of the pooling-of-interests method of accounting,
is effective for any business combinations initiated after June 30, 2001 and
also includes the criteria for the recognition of intangible assets separately
from goodwill. SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001 and will require that goodwill and certain intangibles not be
amortized, but rather be subject to an impairment test at least annually. SFAS
Nos. 141 and 142 will not have an impact on our historical financial statements
at adoption as we currently do not have any intangible assets or goodwill.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to risks associated with interest rate changes. Our exposure
to market risk for changes in interest rates relates primarily to our
investment portfolio. We invest in only U.S. government debt instruments that
meet high quality credit standards, as specified in our investment policy. The
policy also limits the amount of credit exposure we may have to any one issue,
issuer or type of investment.
As of December 31, 2001, our portfolio investments consisted of $2.0 million
in cash and $14.1 million in U.S government debt instruments having a maturity
of less than one year. Due to the nature of our investment portfolio,
management believes that a sudden change in interest rates would not have a
material effect on the value of the portfolio. Management estimates that if the
average annualized yield of our investments had decreased by 100 basis points,
our interest income for the year ended December 31, 2001 would have decreased
by approximately $196,000. This estimate assumes that the decrease occurred on
the first day of 2001 and reduced the annualized yield of each investment
instrument by 100 basis points. The impact on our future interest income will
depend largely on the gross amount of our investment portfolio.
We do not currently have any significant direct foreign currency exchange
rate risk.
ITEM 8. Financial Statements and Supplementary Data
See the Index to the Consolidated Financial Statements beginning on page F-
1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
28
PART III
This Part incorporates certain information from our Proxy Statement for the
2002 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K. Notwithstanding such incorporation, the
sections of our 2002 Proxy Statement entitled "Report of the Compensation
Committee" and "Performance Graph" shall not be deemed to be "filed" as part of
this Annual Report.
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this item concerning our directors is incorporated
herein by reference to our Proxy Statement for the 2002 Annual Meeting of
Stockholders. Information required by this item concerning executive officers
is included in Part I of this Annual Report.
ITEM 11. Executive Compensation
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 2002 Annual Meeting of Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 2002 Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions
None.
29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Annual Report:
1. Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report...................................... F-2
Consolidated Balance Sheets....................................... F-3
Consolidated Statements of Operations............................. F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss............................................... F-5
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........................ F-7
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the information is shown in the Consolidated Financial Statements
or Notes thereto.
3. Exhibits
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
together with a reference to the filing indicated by footnote.
Exhibit No.
-----------
3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.1)(2)
3.2 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock of Genaera Corporation dated May 8, 2000 (Exhibit
10.2)(10)
3.3 Certificate of Ownership and Merger Merging M Merger Sub, Inc.
with and into Magainin Pharmaceuticals Inc. dated March 9, 2001
(Exhibit 3.5)(12)
3.4 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock of Genaera Corporation dated April 19, 2001
(Exhibit 3.7)(12)
3.5 Certificate of Amendment of the Restated Certificate of
Incorporation of Genaera Corporation dated September 5, 2001
(Exhibit 3.8)(14)
3.6* By-laws of the Registrant
4.1 Specimen copy of stock certificate for shares of Common Stock of
the Registrant (Exhibit 4.1)(12)
10.1# 1992 Stock Option Plan of the Registrant, as amended (Exhibit
A)(3)
10.2# Amended 1998 Equity Compensation Plan (Exhibit 99.1)(13)
10.3# Form of Stock Option Agreement under Stock Option Plans (Exhibit
4.6)(1)
10.4# Consulting Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
10.9)(11)
10.5#* Amended and Restated Consulting Agreement with Michael A. Zasloff,
M.D., Ph.D.
10.6# Employment Agreement with Roy C. Levitt, M.D. (Exhibit
10.24)(4)(15)
10.7# Employment Agreement with Kenneth J. Holroyd, M.D. (Exhibit
10.12)(8)
30
Exhibit No.
-----------
10.8# Employment Agreement with Christopher P. Schnittker (Exhibit
10.13)(11)
10.9# Employment Agreement with Sean M. Johnston, Ph.D. (Exhibit
10.14)(11)
10.10#* Employment Agreement with Michael E. Petrone, M.D.
10.11# Form and Schedule of Stock Awards to Executive Officers (Exhibit
4.7)(7)
10.12* Lease with respect to Plymouth Meeting, Pennsylvania office and
laboratory space dated December 13, 2001
10.13 Patent License Agreement and Sponsored Research Agreement with The
Children's Hospital of Philadelphia (Exhibit 10.15)(1)
10.14 License Agreement with Multiple Peptide Systems, Inc. (Exhibit
10.12)(1)
10.15 Second Amendment to License Agreement with Multiple Peptide
Systems, Inc. (Exhibit 10.30)(5)
10.16 Assignment Agreement between Genaera Corporation, Roy C. Levitt,
M.D. and GeneQuest, Inc. (Exhibit 10.25)(4)(15)
10.17 Development, Supply and Distribution Agreement, effective as of
February 12, 1997 with SmithKline Beecham Corporation (Exhibit
10.29)(6)(15)
10.18 Settlement and Termination Agreement between Abbott Laboratories
Inc. and Magainin Pharmaceuticals Inc., effective September 8,
1999 (Exhibit 99.1)(9)
10.19 Registration Rights Agreement between Genaera Corporation and
Genentech, Inc. dated April 28, 2000 (Exhibit 10.4)(10)
10.20 Amended License Agreement between Genaera Corporation and Ludwig
Institute for Cancer Research dated December 20, 1999 (Exhibit
10.1)(12)(15)
10.21 Second Research Agreement between Genaera Corporation and Ludwig
Institute for Cancer Research dated December 20, 1999 (Exhibit
10.2)(12)(15)
10.22*+ Notice of renewal of Second Research Agreement between Genaera
Corporation and Ludwig Institute for Cancer Research dated October
31, 2001
10.23 Settlement Agreement between Genaera Corporation and Genentech,
Inc. dated April 18, 2001 (Exhibit 10.3)(12)
10.24 Collaboration and License Agreement between Genaera Corporation
and MedImmune, Inc. dated April 19, 2001 (Exhibit 10.4)(12)(15)
10.25* Amendment to Collaboration and License Agreement between Genaera
Corporation and MedImmune, Inc. effective April 19, 2001
10.26 Preferred Stock Purchase Agreement between Genaera Corporation and
MedImmune, Inc. dated April 19, 2001 (Exhibit 10.5)(12)
10.27* Warrants to purchase shares of Genaera Corporation Common Stock by
Ladenburg Thalmann dated December 12, 2001
23.1* Consent of KPMG LLP
24.1* Power of Attorney (included on signature page of this Annual
Report on Form 10-K)
- --------
Explanation of Footnotes to Listing of Exhibits:
* Filed herewith.
# Compensation plans and arrangements for executives and others.
+ Confidential treatment has been requested as to certain portions of this
exhibit. The omitted portions have been separately filed with the
Securities and Exchange Commission.
31
(1) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form
S-1 filed with the Securities and Exchange Commission on October 24,
1991.
(2) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended June 30, 1992 filed with the Securities and Exchange Commission
on September 24, 1992.
(3) Filed as an Exhibit to the Proxy Statement for the 1996 Annual Meeting
of Stockholders.
(4) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Securities and Exchange
Commission on March 29, 1996.
(5) Filed as an Exhibit to the Form 10-Q for the quarter ended September
30, 1996 filed with the Securities and Exchange Commission on November
14, 1996.
(6) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the Securities and Exchange
Commission on March 31, 1997.
(7) Filed as an Exhibit to Registration Statement (No. 333-62073) on Form
S-8 filed with the Securities and Exchange Commission on August 21,
1998.
(8) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year
ended December 31, 1998, filed with the Securities and Exchange
Commission on March 19, 1999.
(9) Filed as an Exhibit to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 28, 1999.
(10) Filed as an Exhibit to the Form 10-Q for the quarter ended June 30,
2000 filed with the Securities and Exchange Commission on August 14,
2000.
(11) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2000, filed with the Securities and Exchange
Commission on March 16, 2001.
(12) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 filed with the Securities and Exchange
Commission on May 11, 2001.
(13) Filed as an Exhibit to Registration Statement (No. 333-69824) on Form
S-8 filed with the Securities and Exchange Commission on September 21,
2001.
(14) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 filed with the Securities and
Exchange Commission on November 2, 2001.
(15) Portions of this Exhibit were omitted and filed separately with the
Securities and Exchange Commission pursuant to an order granting
confidential treatment.
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on November 21, 2001 regarding our
filing of a universal shelf registration statement.
We filed a Current Report on Form 8-K on November 26, 2001 regarding our
letter to Merlin BioMed Group LLC.
32
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.
GENAERA CORPORATION
/s/ Roy C. Levitt
Date: March 26, 2002 By: _________________________________
Roy C. Levitt, M.D.
President, Chief Executive
Officer and Director
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 in the capacities and on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Roy C. Levitt, President and Chief Executive Officer,
his true and lawful attorney-in-fact, in his name, place and stead to execute
and cause to be filed with the Securities and Exchange Commission any or all
amendments to this report.
Signature Title Date
--------- ----- ----
/s/ Michael R. Dougherty Chairman and Director March 26, 2002
- --------------------------------------
Michael R. Dougherty
/s/ Bernard Canavan Director March 26, 2002
- --------------------------------------
Bernard Canavan, M.D.
/s/ R. Frank Ecock Director March 26, 2002
- --------------------------------------
R. Frank Ecock
/s/ Zola P. Horovitz Director March 26, 2002
- --------------------------------------
Zola P. Horovitz, Ph.D.
/s/ Roy C. Levitt President, Chief Executive Officer and March 26, 2002
- -------------------------------------- Director (Principal Executive Officer)
Roy C. Levitt, M.D.
/s/ Charles A. Sanders Director March 26, 2002
- --------------------------------------
Charles A. Sanders, M.D.
/s/ Christopher P. Schnittker Vice President and Chief Financial Officer March 26, 2002
- -------------------------------------- (Principal Financial and Accounting Officer)
Christopher P. Schnittker
/s/ Robert F. Shapiro Director March 26, 2002
- --------------------------------------
Robert F. Shapiro
/s/ James B. Wyngaarden Director March 26, 2002
- --------------------------------------
James B. Wyngaarden, M.D.
33
GENAERA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss...................................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Genaera Corporation:
We have audited the accompanying consolidated balance sheets of Genaera
Corporation (formerly Magainin Pharmaceuticals Inc.) and subsidiary as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity and comprehensive loss and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genaera
Corporation and subsidiary as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Princeton, New Jersey
February 15, 2002
F-2
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,973 $ 599
Short-term investments (NOTE 3).......................... 14,105 18,434
Prepaid expenses and other............................... 218 345
-------- --------
Total current assets................................... 16,296 19,378
Fixed assets, net (NOTE 4)................................. 1,456 1,144
Other assets............................................... 64 179
-------- --------
Total assets......................................... $ 17,816 $ 20,701
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (NOTE 5)........... $ 2,521 $ 2,093
Notes payable (NOTE 6)................................... 2,500 2,500
Accrued development expense--short-term (NOTE 15)........ 480 1,392
Other current liabilities................................ 82 --
-------- --------
Total current liabilities.............................. 5,583 5,985
Accrued development expense--long-term (NOTE 15)........... 1,529 1,967
Other liabilities.......................................... 50 43
Series A redeemable convertible preferred stock
(liquidation value of $1,044 and $1,233 at December 31,
2001 and December 31, 2000, respectively) (NOTE 7)........ 1,044 1,233
Commitments, contingencies and other matters (NOTE 15).....
Stockholders' equity:
Preferred stock--$.001 par value; 9,211 shares
authorized; 0.9 and 1.2 shares issued and outstanding as
Series A redeemable convertible preferred stock at
December 31, 2001 and December 31, 2000, respectively;
10.0 shares issued and outstanding as Series B
convertible preferred stock at December 31, 2001
(liquidation value of $10,000); none issued at December
31, 2000................................................ -- --
Common stock--$.002 par value; 75,000 shares authorized;
32,864 and 32,393 shares issued and outstanding at
December 31, 2001 and December 31, 2000, respectively... 66 65
Additional paid-in capital............................... 180,112 168,967
Accumulated other comprehensive income--unrealized gain
on investments.......................................... 23 9
Accumulated deficit...................................... (170,591) (157,568)
-------- --------
Total stockholders' equity............................. 9,610 11,473
-------- --------
Total liabilities and stockholders' equity........... $ 17,816 $ 20,701
======== ========
See accompanying notes to financial statements.
F-3
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
Collaborative research agreement revenues....... $ 880 $ -- $ --
-------- -------- --------
Costs and expenses:
Research and development...................... 10,974 10,074 9,876
General and administrative.................... 3,423 2,583 2,870
-------- -------- --------
14,397 12,657 12,746
-------- -------- --------
Loss from operations............................ (13,517) (12,657) (12,746)
Interest income................................. 849 883 755
Interest expense................................ (244) (605) (225)
-------- -------- --------
Net loss........................................ (12,912) (12,379) (12,216)
Dividends on preferred stock.................... 111 45 --
-------- -------- --------
Net loss applicable to common stockholders...... $(13,023) $(12,424) $(12,216)
======== ======== ========
Net loss applicable to common stockholders per
share--basic and diluted....................... $ (0.40) $ (0.42) $ (0.52)
======== ======== ========
Weighted average shares outstanding--basic and
diluted........................................ 32,711 29,375 23,706
======== ======== ========
Pro forma amounts assuming the new revenue
recognition principle is applied retroactively:
Net loss...................................... $(11,058)
========
Net loss applicable to common stockholders.... $(11,058)
========
Net loss applicable to common stockholders per
share--basic and diluted..................... $ (0.47)
========
See accompanying notes to financial statements.
F-4
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)
Common Stock Accumulated
---------------- Additional Other Total
Number Paid-in Comprehensive Accumulated Stockholders'
of Shares Amount Capital Income (Loss) Deficit Equity
--------- ------ ---------- ------------- ----------- -------------
Balance at December 31,
1998................... 22,910 $46 $147,553 $ 9 $(132,928) $ 14,680
Exercise of stock
options, issuance of
stock and
compensation expense
under option grants
and stock awards...... 33 -- 195 -- -- 195
Common stock issued
pursuant to public
offering.............. 4,000 8 3,907 -- -- 3,915
Comprehensive loss:
Net loss............. -- -- -- -- (12,216) (12,216)
Carrying value
adjustment.......... -- -- -- (22) -- (22)
------ --- -------- --- --------- --------
Total comprehensive
loss................ -- -- -- -- -- (12,238)
------ --- -------- --- --------- --------
Balance at December 31,
1999................... 26,943 54 151,655 (13) (145,144) 6,552
Exercise of stock
options and
compensation expense
under option grants
and stock awards...... 211 1 697 -- -- 698
Common stock issued
pursuant to
collaboration
agreement............. 1,086 2 4,945 -- -- 4,947
Common stock issued
pursuant to private
placement............. 4,153 8 11,670 -- -- 11,678
Dividends on preferred
stock................. -- -- -- -- (45) (45)
Comprehensive loss:
Net loss............. -- -- -- -- (12,379) (12,379)
Carrying value
adjustment.......... -- -- -- 22 -- 22
------ --- -------- --- --------- --------
Total comprehensive
loss................ -- -- -- -- -- (12,357)
------ --- -------- --- --------- --------
Balance at December 31,
2000................... 32,393 65 168,967 9 (157,568) 11,473
Exercise of stock
options and
compensation expense
under option grants
and stock awards...... 471 1 1,237 -- -- 1,238
Convertible preferred
stock issued.......... -- -- 9,908 -- -- 9,908
Dividends on preferred
stock................. -- -- -- -- (111) (111)
Comprehensive loss:
Net loss............. -- -- -- -- (12,912) (12,912)
Carrying value
adjustment.......... -- -- -- 14 -- 14
------ --- -------- --- --------- --------
Total comprehensive
loss................ -- -- -- -- -- (12,898)
------ --- -------- --- --------- --------
Balance at December 31,
2001................... 32,864 $66 $180,112 $23 $(170,591) $ 9,610
====== === ======== === ========= ========
See accompanying notes to financial statements.
F-5
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
Cash Flows From Operating Activities:
Net loss....................................... $(12,912) $(12,379) $(12,216)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 838 920 1,004
Amortization of investment
discounts/premiums.......................... (663) (654) (493)
Compensation expense on option grants and
equity awards............................... 373 248 195
Receipt and retirement of Series A redeemable
convertible preferred stock................. (300) -- --
Changes in operating assets and liabilities:
Prepaid expenses and other................... 242 (230) (39)
Accounts payable and accrued expenses........ 428 1,429 (7,989)
Accrued development expenses................. (1,350) 397 2,962
Other liabilities............................ 89 (10) (5)
-------- -------- --------
Net cash used in operating activities............ (13,255) (10,279) (16,581)
-------- -------- --------
Cash Flows From Investing Activities:
Purchase of investments........................ (34,173) (30,574) (31,780)
Proceeds from maturities of investments........ 39,179 21,025 41,418
Proceeds from sale of investments.............. -- -- 1,000
Capital expenditures........................... (1,150) (271) (32)
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... 3,856 (9,820) 10,606
-------- -------- --------
Cash Flows From Financing Activities:
Payments of notes payable...................... -- -- (2,500)
Proceeds from notes payable.................... -- -- 2,500
Proceeds from issuance of Series A redeemable
convertible preferred stock................... -- 1,188 --
Net proceeds from issuance of Series B
convertible preferred stock................... 9,908 -- --
Net proceeds from issuance of common stock..... -- 16,625 3,915
Proceeds from exercise of options.............. 865 450 --
-------- -------- --------
Net cash provided by financing activities........ 10,773 18,263 3,915
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 1,374 (1,836) (2,060)
Cash and cash equivalents at beginning of
period.......................................... 599 2,435 4,495
-------- -------- --------
Cash and cash equivalents at end of period....... $ 1,973 $ 599 $ 2,435
======== ======== ========
Supplemental Cash Flow Information:
Cash paid during the period for interest....... $ 208 $ 205 $ 223
======== ======== ========
See accompanying notes to financial statements.
F-6
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. The Company
Genaera Corporation ("Genaera" or the "Company"), a Delaware corporation,
was incorporated on June 29, 1987. Genaera is a biopharmaceutical company
committed to developing medicines for serious diseases from genomics and
natural products. The Company's research and development efforts are focused on
anti-angiogenesis, obesity, infectious diseases and respiratory diseases. On
March 9, 2001, the Company changed its name from Magainin Pharmaceuticals Inc.
to Genaera Corporation.
The Company is managed and operated as one business. A single management
team that reports to the Chief Executive Officer comprehensively manages the
entire business. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location, and does not
have separately reportable segments as defined by Statement of Financial
Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an
Enterprise and Related Information.
NOTE 2. Summary of Significant Accounting Policies
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and related notes. Actual results could
differ from those estimates
Cash and Cash Equivalents--The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.
Investments--Investments purchased with a maturity of more than three
months, and that mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity; however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Available-for-sale
securities are carried at market value with unrealized gains and losses, which
are temporary, reported as a separate component of stockholders' equity. Gross
realized gains and losses on the sales of investment securities are determined
on the specific identification method.
Fixed Assets and Depreciation--Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets including: three (3) years for computers/software, five (5) years
for laboratory and office equipment and seven (7) years for furniture and
fixtures. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective lease,
or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.
Revenue Recognition--In December 1999, the staff of the U.S. Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain of
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements, including the recognition of non-
refundable fees received upon entering into arrangements ("up-front fees"). In
previous years, prior to SAB 101, the Company recognized up-front fees in the
period in which they were received. Post implementation of SAB 101, any
revenues from research and development arrangements are recognized in
accordance with the terms of the related agreements, either as services are
performed or as milestones are achieved. Revenues related to up-front fees are
now deferred and recognized over specified future performance periods.
F-7
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company implemented SAB 101, as amended, effective January 1, 2000. The
adoption of this new accounting principle did not have an impact on the
Company's results of operations for the year ended December 31, 2000. For the
year ended December 31, 1997, the Company recognized revenues of $5,000,000
related to a non-refundable, up-front license fee received in connection with
a collaboration agreement with GlaxoSmithKline for LOCILEX(TM) Cream. On a pro
forma basis under SAB 101, this fee would have been deferred and amortized
over an estimated development period of approximately 29 months. In 1999, as a
result of the Food and Drug Administration's ("FDA") decision not to approve
LOCILEX(TM) Cream, the Company was no longer required to perform development
activities pursuant to this agreement. The pro forma effects of retroactive
application of this new revenue recognition principle on net loss and net loss
applicable to common stockholders, and related per share amounts, for the year
ended December 31, 1999 are presented in the accompanying consolidated
statements of operations.
Research and Development--Research and development ("R&D") expenses include
related salaries, contractor fees, and facility costs. R&D expenses consist of
independent R&D contract costs, contract manufacturing costs and costs
associated with collaborative R&D arrangements. In addition, the Company funds
R&D at other research institutions under agreements that are generally
cancelable. R&D expenses also include external activities such as
investigator-sponsored trials. All such costs are charged to R&D expense
systematically as incurred, which may be measured by contract milestones,
patient enrollment or the passage of time.
Patent Costs--Patent-related costs, including professional fees and filing
fees, are expensed as incurred.
Lease Expense--Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized
over the lease term.
Stock-Based Compensation--The Company accounts for stock-based employee
compensation under the intrinsic value-based method set forth by Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Effective January 1, 1996, the Company
adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-
Based Compensation, for stock-based compensation issued to employees. Stock or
other equity-based compensation for non-employees must be accounted for under
the fair value-based method as required by SFAS No. 123 and Emerging Issues
Task Force (EITF) No. 96-18, Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services, and other related interpretations. Under this method, the equity-
based instrument is valued at either the fair value of the consideration
received or the equity instrument issued on the date of grant. The resulting
compensation cost is recognized and charged to operations over the service
period, which is usually the vesting period.
Income Taxes--The Company accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits
which are not expected to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period in which tax
rate changes are enacted.
Loss Per Share--The Company calculates loss per share under the provisions
of SFAS No. 128, Earnings Per Share. SFAS No. 128 requires a dual presentation
of "basic" and "diluted" loss per share on the face of the income statement.
Basic loss per share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during each period.
Diluted loss per share includes the dilutive effect, if any, from the
potential exercise or conversion of securities, such as stock options and
warrants, which
F-8
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would result in the issuance of shares of common stock. Basic and diluted loss
per share amounts are the same because the Company reported a loss for all
periods presented.
Comprehensive Income--SFAS No. 130, Reporting Comprehensive Income,
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income consists of reported net income or loss and
"other comprehensive income" (i.e., other gains and losses affecting
stockholders' equity that, under generally accepted accounting principals, are
excluded from net income or loss as reported on the statement of operations).
With regard to the Company, other comprehensive income consists of unrealized
gains and losses on marketable securities.
New Accounting Pronouncements--In June 2001, the Financial Accounting
Standards Board issued two statements as a result of its deliberations on the
business combinations project, SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141, which eliminates
the use of the pooling-of-interests method of accounting, is effective for any
business combinations initiated after June 30, 2001 and also includes the
criteria for the recognition of intangible assets separately from goodwill.
SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001 and will require that goodwill and certain intangibles not be amortized,
but rather be subject to an impairment test at least annually. SFAS Nos. 141
and 142 will not have an impact on the Company's historical financial
statements at adoption as the Company currently does not have any intangible
assets or goodwill.
NOTE 3. Investments
The Company invests in securities of the U.S. Treasury and U.S. government
agencies. Excess cash is invested on a short-term basis in U.S. government-
based money market funds. The Company had unrealized gains of $23,000 and
$9,000 at December 31, 2001 and 2000, respectively. The Company has not
realized any losses on its investments during the years ended December 31,
2001, 2000 or 1999.
NOTE 4. Fixed Assets
Fixed assets are stated at cost and are summarized as follows (in
thousands):
December 31, December 31,
2001 2000
------------ ------------
Laboratory and office equipment................... $ 3,862 $ 3,536
Leasehold improvements............................ 1,437 1,149
Construction in progress.......................... 430 --
------- -------
5,729 4,685
Less accumulated depreciation and amortization.... (4,273) (3,541)
------- -------
$ 1,456 $ 1,144
======= =======
F-9
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
December 31, December 31,
2001 2000
------------ ------------
Accounts payable................................... $ 476 $ 190
Manufacturing development costs.................... 549 710
Clinical and regulatory costs...................... 481 444
Employee compensation.............................. 463 --
Professional fees.................................. 249 428
Preclinical costs.................................. 237 222
Other.............................................. 66 99
------ ------
$2,521 $2,093
====== ======
NOTE 6. Note Payable
In the second quarter of 2001, the Company refinanced its $2,500,000 note
payable with the same bank. Under the terms of this arrangement, the Company
makes monthly interest-only payments at an annual rate of 6.753%, with
principal due in June 2002. The Company maintains cash and investments of
approximately $2,792,000 as collateral for the note payable. The Company's
current intention is to refinance this loan prior to its maturity. Interest
expense related to this note payable for the years ended December 31, 2001,
2000 and 1999 was approximately $196,000, $208,000 and $190,000, respectively.
NOTE 7. Preferred Stock
The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of the Company's common stock, and the board of directors has
the power to determine these voting rights. As of December 31, 2001, the
Company's board of directors has designated 80,000 shares of preferred stock as
Series A redeemable convertible preferred stock (the "Series A Preferred
Stock"), 888 shares of which are outstanding and issued to Genentech, Inc., and
10,000 shares of preferred stock as Series B convertible preferred stock (the
"Series B Preferred Stock"), all of which are outstanding and issued to
MedImmune, Inc. The issuances to both Genentech and MedImmune were in
connection with collaborative agreements (see "NOTE 12. Collaborative
Agreements"). The Series B Preferred Stock was purchased by MedImmune in April
2001 for $10,000,000.
The Series A Preferred Stock is convertible, in whole or in part, at the
Company's (subject to defined limitations) or holder's option, into shares of
the Company's common stock at a conversion rate determined by dividing the
original issue price of $1,000 per share ("Original Issue Price") by the 5-day
average closing price of the common stock as of the conversion date. Shares of
the Series A Preferred Stock issued before May 10, 2005 are convertible at any
one date during the six-month period beginning on May 10, 2005. Shares of the
Series A Preferred Stock issued on or after May 10, 2005 are convertible at any
one date during the six-month period beginning on December 31, 2008. In
addition, the Series A Preferred Stock shall also be convertible at the
holder's option after November 10, 2000 (1) in the event of a merger,
consolidation or sale of substantially all of the assets of the Company or (2)
at any time following the first date when the total number of common shares
outstanding, on a fully-diluted and as-converted basis, multiplied by the
preceding 10-day average closing price of such date is less than 500% of the
aggregate Original Issue Price plus accrued and unpaid cumulative dividends on
the Series A Preferred Stock. In any event, the aggregate number of common
shares issued upon conversion of the shares of Series A Preferred Stock shall
not exceed 5,388,595 shares nor
F-10
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shall such aggregate conversions result in Genentech beneficially owning more
than 10% of the Company's common stock. In the event of a conversion which
would exceed these limits, the Company would be required to redeem such shares
at a cash redemption price of $1,000 per share plus accrued and unpaid
cumulative dividends to the date of conversion. The Series A Preferred Stock
may also be redeemed, in whole or in part, at any time at the Company's option
at a cash redemption price of $1,000 per share plus accrued and unpaid
cumulative dividends to the date of redemption. The Series A Preferred Stock
ranks senior to the Company's common stock as to liquidation and dividend
rights. In the event of any liquidation, dissolution or winding up of the
Company, the Series A Preferred Stock has a liquidation preference of $1,000
per share plus accumulated and unpaid cumulative dividends to the date of
liquidation. Cumulative preferred dividends under the Series A Preferred Stock
are payable in arrears on a quarterly basis at an annual rate of the prime rate
plus 2%. Preferred dividends of $156,000 have been accrued as of December 31,
2001 on the Series A Preferred Stock. Holders of the Series A Preferred Shares
have limited voting rights and generally do not have the right to vote on
matters submitted to the holders of the Company's common stock.
Prior to April 19, 2006, the Series B Preferred Stock is convertible, in
whole or in part, at the holder's option, into shares of the Company's common
stock at a conversion rate of 200 shares of common stock for each share of
Series B Preferred Stock. The maximum aggregate number of common shares issued
upon a conversion of all of the shares of Series B Preferred Stock before April
19, 2006 is 2,000,000 shares. The Series B Preferred Stock is convertible after
April 19, 2006, in whole or in part, at the Company's or holder's option, into
shares of the Company's common stock at a conversion rate determined by
dividing the original issue price of $1,000 per share by the lesser of (i)
$5.00 or (ii) the 20-day average closing price of the common stock as of the
conversion date (the "Post-April 19, 2006 Conversion Rate"). However, the
Company may not exercise its option to convert if the closing price of the
common stock is less than $2.15 per share on the day prior to notice of
conversion. In addition, the Series B Preferred Stock shall be automatically
convertible at any time in the event of a merger, consolidation or sale of
substantially all of the assets of the Company (a "Merger Event"), at the Post-
April 19, 2006 Conversion Rate. The maximum aggregate number of common shares
issued upon conversion of all of the shares of Series B Preferred Stock after
April 19, 2006 or at any time as a result of a Merger Event is 4,642,741 shares
of common stock. The Series B Preferred Stock may also be redeemed, in whole or
in part, at any time at the Company's option at a cash redemption price of
$1,000 per share plus accrued and unpaid cumulative dividends to the date of
redemption. Holders of the Series B Preferred Stock have no rights to dividends
other than the right to participate in any dividends that may be declared on
the Company's common stock based on the conversion of such Series B Preferred
Stock shares into common stock. With respect to liquidation and dividend
rights, the Series B Preferred Stock ranks senior to the Company's common stock
and junior to the Company's Series A Preferred Stock. In the event of any
liquidation, dissolution or winding up of the Company, the Series B Preferred
Stock has a liquidation preference of $1,000 per share plus accrued and unpaid
cumulative dividends to the date of liquidation. Holders of the Series B
Preferred Shares have limited voting rights and generally do not have the right
to vote on matters submitted to the holders of the Company's common stock.
NOTE 8. Common Stock
In May 2000, the Company issued 1,085,973 shares of its common stock to
Genentech for approximately $5,000,000 less issuance costs.
In August 2000, the Company sold 4,153,196 shares of its common stock,
through a private placement, at a price of $3.00 per share. Net proceeds to the
Company from the offering totaled approximately $11,678,000, after offering
costs, which included a cash fee paid and warrants (see "NOTE 9. Warrants").
In May 2001, the Company increased the number of shares of its authorized
common stock to 75,000,000 shares.
F-11
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9. Warrants
In connection with its August 2000 private placement, the Company granted to
the placement agent warrants to purchase 167,166 shares of the Company's common
stock at an exercise price of $3.50 per share. These warrants expire on August
17, 2007 and are subject to adjustment under certain circumstances. Such
circumstances include the issuance of shares of common stock by the Company for
a consideration per share less than the exercise price of the warrants, and the
issuance by the Company of securities convertible into shares of common stock
for which the exercise or conversion price, when added to the purchase price of
such convertible securities, is less than the exercise price of the warrants.
All such warrants are currently exercisable.
In connection with the execution of an agreement with an investment bank to
provide future financing to the Company, on December 12, 2001 the Company
granted to the investment bank two separate warrants to purchase 50,000 shares
and 200,000 shares of the Company's common stock at an exercise price of $3.79
per share. The warrant to purchase 50,000 shares vests either (i) equally in
four installments on the first through fourth 3-month anniversaries of the date
of grant or (ii) entirely upon the closing of a financing with aggregate gross
proceeds of not less than $15,000,000. The warrant to purchase 200,000 shares
was cancelled without vesting subsequent to December 31, 2001 as a result of
the investment bank's termination by the Company. The warrant to purchase
50,000 shares of common stock expires on December 12, 2006. The compensation
expense for the warrant to purchase 50,000 shares of common stock granted to
this investment bank is recognized over the respective service period in
accordance with vesting provisions. Compensation expense related to this
warrant for the year ended December 31, 2001 was approximately $13,000
determined using a Black-Scholes valuation model. The amount of compensation
expense recognized in future years is subject to adjustment based upon changes
in the price of the Company's common stock and other measures of fair value.
NOTE 10. Common Stock Options and Restricted Common Stock Awards
In May 1996, the stockholders approved the amended 1992 Stock Option Plan
(the "1992 Plan") which provides for the granting of options for the purchase
of up to 2,500,000 shares of common stock. In May 1998, the stockholders
approved the 1998 Equity Compensation Plan (the "1998 Plan") which provides for
the granting of options and stock awards of up to 1,500,000 shares of common
stock. In May 2001, the stockholders approved an amendment to the Company's
Amended 1998 Equity Compensation Plan to increase the number of shares of
common stock issuable thereunder to 3,500,000 shares.
The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Company's
board of directors. The committee has the authority to determine the term
during which an option may be exercised (provided that no option may have a
term of more than 10 years), the exercise price of an option, and the rate at
which options may be exercised. Incentive stock options may be granted only to
employees of the Company. Nonqualified stock options may be granted to
employees, directors or consultants of the Company. The exercise price of
options under the 1992 Plan and the 1998 Plan cannot be less than the fair
market value of the underlying common stock on the date of the grant.
F-12
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock options as of December 31,
2001, 2000 and 1999, and changes during the years ended on those dates, is
presented below (in thousands, except per share data):
2001 2000 1999
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning
of year................ 3,680 $4.51 3,662 $4.70 3,588 $5.94
Granted................. 832 $3.36 760 $3.89 833 $1.96
Exercised............... (424) $2.05 (171) $2.63 (1) $0.07
Forfeited............... (343) $3.63 (571) $5.67 (758) $7.46
----- ----- -----
Outstanding at end of
year................... 3,745 $4.62 3,680 $4.51 3,662 $4.70
===== ===== =====
Exercisable at end of
year................... 2,057 $5.70 2,109 $5.28 2,141 $4.71
===== ===== =====
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2001 (in thousands, except per share data):
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------------
Weighted Average
Shares Remaining Weighted Average Shares Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
$1.03--$ 2.72........... 727 7.9 Years $1.97 288 $1.84
$2.97--$ 3.50........... 674 7.8 Years $3.19 345 $3.21
$3.61--$ 3.94........... 867 7.6 Years $3.68 250 $3.76
$4.31--$ 5.75........... 705 6.6 Years $4.84 404 $5.07
$7.13--$16.75........... 772 4.5 Years $9.20 770 $9.21
----- -----
$1.03--$16.75........... 3,745 6.9 Years $4.62 2,057 $5.70
===== =====
The Company applies APB Opinion No. 25 and related interpretations in
accounting for options. Accordingly, no compensation cost has been recognized
for employee stock option grants. Had compensation cost for employee stock
option grants been determined based on the fair value at the grant dates for
awards consistent with the method of SFAS No. 123, the Company's net loss and
net loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data):
2001 2000 1999
-------- -------- --------
Net loss applicable to common stockholders:
As reported................................ $(13,023) $(12,424) $(12,216)
Pro forma.................................. $(15,799) $(14,991) $(14,966)
Net loss applicable to common stockholders
per share--basic and diluted:
As reported................................ $ (0.40) $ (0.42) $ (0.52)
Pro forma.................................. $ (0.48) $ (0.51) $ (0.63)
F-13
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The resulting effect on pro forma net loss and pro forma net loss per share
disclosed above may not be representative of the effects on a pro forma basis
in future years. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions:
2001 2000 1999
---------- ---------- ----------
Range of risk free interest rates......... 4.2%--5.2% 5.4%--6.7% 5.0%--6.4%
Dividend yield............................ 0% 0% 0%
Volatility factor......................... 100% 100% 86%
Weighted average expected life of options
(in years)............................... 7.0 7.3 6.0
Weighted average fair value of options
granted during the year.................. $2.81 $3.32 $1.54
The 1998 Plan also provides for the issuance of common stock awards, up to a
maximum of 375,000 shares. Such awards shall be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as a committee of the Company's board of directors
may determine. As of December 31, 2001, a total of 206,000 shares have been
awarded under the 1998 Plan, vesting over a four-year period from the award
date. The cost of these awards will be recognized as expense over the vesting
period. As of December 31, 2001, 117,625 shares have been issued pursuant to
the vesting of these awards. Compensation expense related to these stock awards
for the years ended December 31, 2001, 2000 and 1999 was approximately
$209,000, $194,000 and $158,000, respectively.
The Company granted options to purchase 25,000 and 15,000 shares of the
Company's common stock to consultants in the years ended December 31, 2000 and
1999, respectively. The compensation expense for options granted to consultants
is recognized over the respective service periods ranging up to one year or in
accordance with vesting provisions. Compensation expense related to these
options for the years ended December 31, 2001, 2000 and 1999 was approximately
$70,000, $11,000 and $37,000, respectively. The amount of compensation expense
recognized in future years is subject to adjustment based upon changes in the
price of the Company's common stock and other measures of fair value.
The Company recorded compensation expense of approximately $73,000 and
$18,000 for the years ended December 31, 2001 and 2000, respectively, related
to a former officer who entered into a consulting contract in 2000 with the
Company subsequent to his employment and retained unvested options to purchase
97,500 shares of the Company's common stock after his transition to non-
employee status. The amount of compensation expense recognized in future years
on these unvested options is subject to adjustment based upon changes in the
price of the Company's common stock and other measures of fair value.
NOTE 11. Income Taxes
As of December 31, 2001, the Company has approximately $102,445,000 of net
operating loss ("NOL") carryforwards for federal income tax purposes (expiring
in years 2003 through 2021). In addition, the Company has NOL carryforwards for
state income tax purposes of approximately $66,576,000 (expiring in years 2005
through 2011). Pennsylvania has a $2,000,000 annual limitation on the
utilization of NOL carryforwards, thus the Company is not likely to utilize
most of its state NOL carryforwards. The Company also has approximately
$6,609,000 of research and development tax credits carryforwards available to
offset future federal income tax liability (expiring in years 2005 through
2021). The NOL carryforward differs from the accumulated deficit principally
due to differences in the recognition of certain expenses between financial and
federal tax reporting. Additionally, at December 31, 2001, a portion of the
gross deferred tax asset will reduce equity to the extent that such assets are
realized.
F-14
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Tax Reform Act of 1986, the utilization of a corporation's NOL
carryforward and research and development tax credits are limited following a
change in ownership of greater than 50% within a three-year period. Due to the
Company's prior equity transactions, the Company's net operating loss and tax
credit carryforwards may be subject to an annual limitation generally
determined by multiplying the market value of the Company on the date of the
ownership change by the federal long-term tax-exempt rate. Any amount exceeding
the annual limitation may be carried forward to future years for the balance of
the NOL and tax credit carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax asset, the deferred tax assets are fully offset by a valuation
allowance at December 31, 2001 and 2000. The net change in the valuation
allowance for deferred tax assets at December 31, 2001 and 2000 was an increase
of $3,856,000 and $6,177,000, respectively. The expected tax benefit calculated
using a federal statutory tax rate of 34% has been reduced to an actual benefit
of zero due primarily to the aforementioned valuation allowance.
Significant components of the net deferred tax assets as of December 31,
2001 and 2000 consists of the following (in thousands):
2001 2000
-------- --------
Deferred tax assets:
Net operating losses................................... $ 42,507 $ 36,150
Research credits....................................... 6,609 6,238
Capitalized research and development................... 28,485 30,915
Accrued expenses, reserves and other................... 902 1,272
Depreciation........................................... 243 315
-------- --------
78,746 74,890
Valuation allowance...................................... (78,746) (74,890)
-------- --------
Deferred tax assets, net................................. $ -- $ --
======== ========
NOTE 12. Collaborative Arrangements
In February 1997, the Company entered into a development, supply and
distribution agreement in North America with GlaxoSmithKline for LOCILEX(TM)
Cream (the "GlaxoSmithKline Agreement"). GlaxoSmithKline has paid the Company
$10,000,000 under this agreement. The Company had hoped to commercialize
LOCILEX(TM) Cream in the near-term. However, with the FDA's decision not to
approve LOCILEX(TM) Cream, near-term commercialization will not occur, and the
Company will generate no revenues from LOCILEX(TM) Cream in the near future.
The GlaxoSmithKline Agreement also gives GlaxoSmithKline rights to terminate
the arrangement, and, under certain conditions, the right to negotiate for
rights to another Genaera product development candidate. GlaxoSmithKline
remains the Company's exclusive sales, marketing and distribution partner for
the North American territory for LOCILEX(TM) Cream.
In May 2000, the Company entered into a research, development and
commercialization collaboration agreement with Genentech Inc. related to the
Company's IL9 antibody development program and related
F-15
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respiratory technology (the "Genentech Agreement"), which replaced a December
1998 collaboration agreement. The Company and Genentech simultaneously executed
a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which
the Company received from Genentech approximately $5,000,000 in exchange for
the issuance of 1,085,973 shares of its common stock and $500,000 for the
issuance of 500 shares of its Series A Preferred Stock. In November 2000, the
Company issued 688 of its Series A Preferred Stock to Genentech for $688,000
which represented further development funding. In December 2000, Genentech
provided notice to the Company of its election to terminate the Genentech
Agreement. In April 2001, Genentech and the Company executed a settlement
agreement pursuant to which all licensed technology under the Genentech
Agreement was returned to the Company. At that time, $300,000 in development
expenditures owed to the Company by Genentech were settled by the return to the
Company and cancellation of 300 shares of the Series A Preferred Stock
previously issued to Genentech. This $300,000 was accounted for as a reduction
to research and development expenses for the year ended December 31, 2001.
In April 2001, the Company entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize therapies
related to the Company's IL9 program. The companies also will collaborate on
the creation of specific assays and respiratory disease models for use in
assessing product candidates developed by MedImmune. MedImmune will be
responsible for development, manufacturing, clinical testing, and marketing of
any resulting product. MedImmune is expected to fund at least $2,500,000 for
research and development activities at the Company through April 2003 (the "R&D
Funding"), which will be recognized by the Company as revenues on a straight-
line basis over the two-year period. In addition to the R&D Funding, MedImmune
will also reimburse the Company for certain external costs incurred by the
Company in connection with the IL9 research plan, which will be recognized by
the Company as a reduction to research and development expenses. For the year
ended December 31, 2001, the Company recognized $880,000 as revenue related to
the R&D Funding, which approximated the Company's costs to obtain that revenue,
and $132,000 of external cost reimbursements as an offset to research and
development expenses. The Company could receive up to $55,000,000 if future
milestones are successfully achieved, plus royalties on any product resulting
from this agreement.
In September 2001, the Company received a contingent award of up to
$1,700,000 from an affiliate of the Cystic Fibrosis Foundation ("CFF") to
support early clinical evaluation of LOMUCIN(TM) involving patients with cystic
fibrosis. This award has been granted and shall be paid to the Company from
time to time upon the achievement of certain development milestones. Of this
grant, $50,000 was received as of December 31, 2001 and was recorded as a long-
term liability because it is refundable to the CFF upon marketing approval by
the FDA or upon the Company's election not to enter Phase 3 clinical trials or
to commercialize the product within two years of milestone completion, assuming
efficacy is demonstrated. The CFF is also due a royalty on net sales of any
resultant product up to 1% based upon the amount of funding ultimately provided
by the CFF.
NOTE 13. 401(k) Plan
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such Company contributions have been made during the years ended
December 31, 2001, 2000 or 1999.
F-16
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair market value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions or estimation methodologies may have an effect on the estimated
fair value amounts.
Cash equivalents, accounts payable, accrued expenses and investments are
carried at amounts which reasonably approximate their fair values due to the
short-term nature of these instruments. The estimated fair value of the
Company's note payable is estimated to be approximately equal to its carrying
value of $2,500,000 at December 31, 2001 due to the short-term nature of this
note.
NOTE 15. Commitments, Contingencies and Other Matters
Facility Lease
The Company has entered into an operating lease for its laboratory and
corporate office facilities. Minimum annual rent payments through 2007 are as
follows (in thousands):
Year Ended
December 31,
------------
2002................................................................ $ 327
2003................................................................ 339
2004................................................................ 350
2005................................................................ 362
2006................................................................ 375
2007................................................................ 388
------
$2,141
======
The lease provides for escalations relating to increases in the Consumer
Price Index not to exceed 7% but no less than 3.5%. Rent expense, which
includes the cost of common area maintenance and other building operating
expenses paid to the landlord, was approximately $362,000, $357,000 and
$440,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Equipment Leases
The Company has entered into multiple operating leases for its laboratory
and corporate office equipment. Minimum annual lease payments through 2007 are
as follows (in thousands):
Year Ended
December 31,
------------
2002.................................................................. $149
2003.................................................................. 113
2004.................................................................. 45
2005.................................................................. 45
2006.................................................................. 13
2007.................................................................. 3
----
$368
====
Equipment rental expense was approximately $240,000, $151,000, and $148,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
F-17
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Manufacturing
In January 1999 and prior, the Company entered into several agreements with
Abbott Laboratories providing for the purchase of approximately $10,000,000 of
bulk drug substance to be used in the manufacturing process for LOCILEX(TM)
Cream. As the FDA did not approve LOCILEX(TM) Cream, the Company renegotiated
this agreement with Abbott in September 1999, paying Abbott $4,200,000 at that
time and receiving partial delivery of material. An additional $3,400,000 was
due to Abbott and payable if the Company receives in excess of $10,000,000 of
additional funds (as defined in the agreement) in any year beginning in 2000,
in which case the Company must pay 15% of such excess over $10,000,000 to
Abbott. The Company recorded this conditional obligation as a liability in 1999
at its then present value. As a result of the Company's financing activities
during 2000 and other cash inflows, $1,392,000 of this liability was payable
and paid to Abbott on March 1, 2001. As a result of the Company's financing
activities during 2001 (see "NOTE 7. Preferred Stock") and other cash inflows,
$480,000 of this liability becomes payable to Abbott on March 1, 2002 and thus
has been included in current liabilities at December 31, 2001. The remaining
amount of $1,529,000 due to Abbott is included in long-term liabilities as of
December 31, 2001.
Liquidity
The Company has not generated any revenues from product sales and has funded
operations primarily from the proceeds of public and private placements of its
securities. Substantial additional financing will be required by the Company in
the near-term to fund its continuing research and development activities. No
assurance can be given that any such financing will be available when needed or
that the Company's research and development efforts will be successful.
In April 2001, the Company entered into a research collaboration and
licensing agreement and a preferred stock purchase agreement with MedImmune
under which the Company received $10,000,000. MedImmune is expected to fund at
least $2,500,000 for research and development activities of the Company through
April 2003, of which $937,500 has been received through December 31, 2001.
After considering the MedImmune transaction, and in the absence of raising
additional funds or significantly reducing expenses, the Company believes it
will have sufficient resources to sustain operations through 2002. The Company
regularly explores alternative means of financing its operations and seeks
funding through various sources, including public and private securities
offerings, collaborative arrangements with third parties and other strategic
alliances and business transactions. The Company currently does not have any
commitments to obtain additional funds and may be unable to obtain sufficient
funding in the future on acceptable terms, if at all. If the Company cannot
obtain funding, it will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that it might otherwise seek
to develop or commercialize independently, or seek other arrangements. If the
Company engages in collaborations, it will receive lower consideration upon
commercialization of such products than if it had not entered into such
arrangements or if it entered into such arrangements at later stages in the
product development process.
F-18
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16. Quarterly Results (Unaudited)
The following tables contain selected unaudited Statement of Operations
information for each quarter of the fiscal years ended December 31, 2001 and
2000 (in thousands, except per share amounts). The Company believes that the
following information reflects all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
Year Ended December 31, 2001
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Collaborative research agreement
revenues................................. $ -- $ 250 $ 315 $ 315
======= ======= ======= =======
Net loss.................................. $(2,932) $(2,733) $(3,748) $(3,499)
======= ======= ======= =======
Net loss applicable to common
stockholders............................. $(2,963) $(2,764) $(3,768) $(3,528)
======= ======= ======= =======
Net loss applicable to common stockholders
per share--basic and diluted............. $ (.09) $ (.08) $ (.11) $ (.11)
======= ======= ======= =======
Weighted average shares outstanding--basic
and diluted.............................. 32,397 32,737 32,841 32,863
======= ======= ======= =======
Year Ended December 31, 2000
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Collaborative research agreement
revenues................................. $ -- $ -- $ -- $ --
======= ======= ======= =======
Net loss.................................. $(2,424) $(3,056) $(3,309) $(3,590)
======= ======= ======= =======
Net loss applicable to common
stockholders............................. $(2,424) $(3,063) $(3,325) $(3,612)
======= ======= ======= =======
Net loss applicable to common stockholders
per share--basic and diluted............. $ (.09) $ (.11) $ (.11) $ (.11)
======= ======= ======= =======
Weighted average shares outstanding--basic
and diluted.............................. 26,996 27,743 30,328 32,390
======= ======= ======= =======
F-19