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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
/X/ SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-15006
AVANT IMMUNOTHERAPEUTICS, INC.
(F/K/A T CELL SCIENCES, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 13-3191702
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
119 FOURTH AVENUE, NEEDHAM, MASSACHUSETTS 02494
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 433-0771
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
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 common stock held by non-affiliates as of
March 1, 2001 was $273,936,360 (excludes shares held by directors and executive
officers). Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the actions of the management or policies of the registrant, or that such
person is controlled by or under common control with the registrant. The number
of shares of common stock outstanding at March 1, 2001 was: 57,285,488 shares.
Certain information contained in the registrant's proxy statement relating to
its annual meeting of stockholders to be held on May 10, 2001 is incorporated by
reference in Part III, Items 10, 11, 12 and 13.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: STATEMENTS CONTAINED IN THIS REPORT, INCLUDING PART II, ITEM 5: MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, THAT ARE NOT
HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO A VARIETY
OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY THE REGISTRANT. THESE FACTORS INCLUDE, BUT
ARE NOT LIMITED TO: (I) THE REGISTRANT'S ABILITY TO SUCCESSFULLY COMPLETE
PRODUCT RESEARCH AND DEVELOPMENT, INCLUDING PRE-CLINICAL AND CLINICAL STUDIES,
AND COMMERCIALIZATION; (II) THE REGISTRANT'S ABILITY TO OBTAIN SUBSTANTIAL
ADDITIONAL FUNDING; (III) THE REGISTRANT'S ABILITY TO OBTAIN REQUIRED
GOVERNMENTAL APPROVALS; (IV) THE REGISTRANT'S ABILITY TO ATTRACT MANUFACTURING,
SALES, DISTRIBUTION AND MARKETING PARTNERS AND OTHER STRATEGIC ALLIANCES; AND
(V) THE REGISTRANT'S ABILITY TO DEVELOP AND COMMERCIALIZE ITS PRODUCTS BEFORE
ITS COMPETITORS.
PART I
ITEM 1. BUSINESS
A. GENERAL
As used herein, the terms "we", "us", "our", or "AVANT" refer to AVANT
Immunotherapeutics, Inc., a Delaware corporation organized in 1983. We are a
biopharmaceutical company that uses novel applications of immunology to prevent
and treat diseases caused by both the enemy within (autoimmune diseases,
cardiovascular diseases, and inflammation) and the enemy without (infectious
diseases and organ transplant rejection). The company's most advanced
therapeutic program focuses on compounds with the potential to inhibit
inappropriate activation of the complement cascade, a vital part of the body's
immune defense system. AVANT is also developing on its own a portfolio of oral
vaccines aimed at protecting travelers from diseases endemic in developing
areas, as well as a proprietary therapeutic vaccine for the management of
cholesterol. Through corporate collaborations, the company is additionally
developing a variety of infectious disease vaccines.
On December 1, 2000, we acquired Megan Health, Inc., a Delaware corporation
("Megan"), pursuant to an Agreement and Plan of Merger dated as of November 20,
2000 by and among AVANT, AVANT Acquisition Corp., a Delaware corporation and our
wholly-owned subsidiary, and Megan.
On August 21, 1998, we acquired Virus Research Institute, Inc., a Delaware
corporation ("VRI"), pursuant to an Agreement and Plan of Merger dated as of
May 12, 1998 by and among AVANT, TC Merger Corp., a Delaware corporation and our
wholly-owned subsidiary, and VRI.
One of the benefits of focusing on immunology is that this field of science
spans a large spectrum of medical endeavor, with implications in widely diverse
areas of clinical medicine and public health. Immunology plays a key role in
developing drug therapies for inflammatory and autoimmune illnesses. It is
central to the creation of new vaccines that prevent or treat disease. Moreover,
understanding the immune system is essential to advancing new therapeutic
approaches in transplantation biology and many other areas of medicine. Thus,
developing an understanding of how various components of the immune system
function and interact has allowed AVANT to cultivate a variety of opportunities
for product development.
Using our expertise in immunology, AVANT is building business franchises in
three major disease areas: cardiac surgery, cholesterol management and
travelers' vaccines. Each of our business franchises addresses large market
opportunities for which current therapies are inadequate or non-existent. Some
of these opportunities we have pursued on our own in a highly focused manner. In
other cases, we have leveraged the financial support and development
capabilities of corporate and public sector partners to bring our development
projects to fruition. The research we have so diligently pursued over the past
years has matured into an exciting portfolio of product candidates.
2
Our products derive from a broad set of complementary technologies with the
ability to inhibit the complement system, regulate T and B cell activity, and
enable the creation of preventative and therapeutic vaccines. We are using these
technologies to develop vaccines and immunotherapeutics that prevent or treat
disease caused by infectious organisms, and drugs and treatment vaccines that
modify undesirable activity by the body's own proteins or cells. All of our
products are in various stages of research and development. Below is a table of
our currently active programs:
CURRENT PROGRAMS AND PARTNERSHIPS
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY PRODUCT INDICATION/FIELD PARTNER STATUS
- --------------------------------------------------------------------------------------------------------------------------
Complement TP10 Organ Transplantation Novartis Pharma Phase II
Inhibitors Pediatric Cardiac Surgery -- Phase IIb
Adult Cardiac Surgery -- Phase II
Heart Attacks -- Phase I
TP20 Stroke -- Pre-clinical
- --------------------------------------------------------------------------------------------------------------------------
Immunotherapeutics CETi-1 Vaccine Atherosclerosis -- Phase I
- --------------------------------------------------------------------------------------------------------------------------
Travelers' Cholera Vaccine Cholera -- Phase IIb
Vaccines Typhoid Vaccine Typhoid fever -- Phase I/II
Shigella Vaccine Dysentery -- Pre-clinical
ETEC Vaccine E COLI infection -- Pre-clinical
Campylobacter Vaccine CAMPYLOBACTER infection -- Pre-clinical
- --------------------------------------------------------------------------------------------------------------------------
Anti-Viral Rotarix-TM- Vaccine Rotavirus GlaxoSmithKline Phase II
Vaccines Adjumer-Registered Trademark--RSV Respiratory Syncytial Virus Aventis Pasteur Phase I/II
Vaccine
Therapore-TM- Viral Infection US Army Pre-clinical
-HIV -- Pre-clinical
-Hepatitis
- --------------------------------------------------------------------------------------------------------------------------
B. STRATEGY
AVANT'S strategy is to utilize our expertise to design and develop vaccine
and therapeutic products that have significant and growing market potential; to
establish governmental and corporate alliances to fund development; and to
commercialize our products either through corporate partners or, in appropriate
circumstances, by our own direct selling efforts. Implementation of this
strategy is exemplified by the following lead programs:
COMPLEMENT INHIBITORS: We are developing a new class of therapeutics that
inhibits the complement system, a key triggering mechanism for the body's
inflammatory response. Medical problems that result from excessive complement
activation represent multi-billion dollar market opportunities. These include
reperfusion injury, the vascular and tissue damage that occurs following a heart
attack, stroke or surgical procedure where the patient's blood supply is shut
off and then restored; hyperacute or chronic organ rejection following
transplantation; acute inflammatory injury to the lungs and autoimmune diseases.
We developed a lead compound, TP10, through to early clinical trials before
licensing rights for organ transplant surgery to Novartis Pharma AG
("Novartis"), the world leader in organ transplant drugs. We have elected to
independently develop and commercialize TP10 for pediatric cardiac surgery,
initiating a Phase I/II trial in 1999. Results of this Phase I/II trial were
presented at the American Heart Association's Annual Meeting in November 2000.
AVANT expects to complete two Phase IIb studies of TP10, in pediatric
cardiac surgery utilizing cardiopulmonary bypass in a total of 40-70 patients,
before moving to a pivotal Phase III trial. The first study, which was initiated
at the end of 2000, is enrolling babies born with hypoplastic left heart
3
syndrome, who often have high morbidity and mortality after heart surgery. The
second study, which is being conducted in a lower risk infant population, is
planned to begin shortly and will allow us to further define our clinical
endpoints. We are looking to the results of these trials to support a mortality
endpoint for the high risk infant population in the larger pivotal Phase III
study and to allow for a possible broadening of the potential product label for
TP10 to cover all babies under one year requiring cardiac surgery to repair
congenital heart defects. We believe that this is an appropriate indication for
a small company to pursue for the following reasons:
- Orphan drug status has been received because only 30,000 pediatric cardiac
surgeries are performed each year;
- Because the surgery is life-threatening, we will seek priority review for
the TP10 compound with the FDA; and
- Because such surgery is performed at a limited number of medical centers,
a targeted direct sales and marketing effort should be manageable and
effective.
In addition, in November 2000, AVANT initiated a placebo-controlled
Phase II trial in approximately 600 adult patients undergoing cardiac surgery
utilizing cardiopulmonary bypass. This 30-center study is a dose-ranging study
that will allow us to further define our clinical endpoints in an adult patient
population before moving ahead to a number of pivotal clinical trials. This
adult study is intended to investigate the efficacy and safety, in a population
known to be at high risk, of medically important adverse outcomes that have a
real effect on the long term health of a substantial population. AVANT may
partner the adult program when additional clinical data becomes available.
The objective of these three Phase II studies in infants and adults is to
assess the ability of TP10 to mitigate the injury to the heart, brain and other
organs that occurs when patients are placed on cardiopulmonary bypass (CPB)
circuits, thus potentially improving post-operative outcomes.
CHOLESTEROL TREATMENT VACCINE: Atherosclerosis, the leading cause of
morbidity and mortality in the United States and most of the Western world, is
the accumulation of fatty deposits in the walls of blood vessels. Low blood
levels of high-density lipoprotein (HDL, the so-called "good" cholesterol) are
associated with increased risk of atherosclerosis, which in turn leads to heart
disease and stroke. We are developing a novel, treatment vaccine (CETi-1) aimed
at increasing levels of HDL. The vaccine stimulates the production of antibodies
to cholesteryl ester transfer protein (CETP), which mediates the balance between
HDL and LDL (low-density lipoprotein, or "bad" cholesterol). While billions of
dollars of drugs that lower LDL are sold each year, the few drugs that increase
HDL have failed to achieve market acceptance, largely due to undesirable side
effects. Thus, we believe that a therapeutic vaccine that increases HDL with one
or two injections a year would present a substantial market opportunity. In
pre-clinical studies in rabbits, the CETi-1 vaccine increased HDL levels and
significantly reduced atherosclerotic lesions in blood vessels as compared to an
untreated control group. Our pre-clinical work on the vaccine was partially
funded by almost $1 million in Small Business Innovation Research ("SBIR")
grants.
AVANT completed a Phase I clinical trial in late 2000 and results indicated
that the vaccine was very well tolerated in the 48 adult volunteers who
participated in the study. The only serious adverse reaction reported during the
study (allergic reaction to shower gel) was not related to study medication.
There were no differences in the safety profiles of placebo groups and active
vaccine groups. In addition, there was limited evidence of an immune response in
one subject treated with the highest dose. AVANT recently announced preliminary
results from a double-blinded placebo controlled extension of the earlier
completed Phase I trial of the CETi-1 vaccine in healthy adult volunteers
receiving a second dose of the vaccine. Results from the extension study showed
measurable antibody titers in all dose groups treated with study medication and
suggest a dose-response relationship. These data will be extremely helpful in
designing a Phase II study, which we plan to begin this summer.
4
CETi-1 is being developed for the management of patients with low levels of HDL
(high-density lipoprotein) cholesterol. As clinical data becomes available,
AVANT plans to seek a corporate partner to complete development of and to
commercialize the vaccine.
TRAVELERS' VACCINES: AVANT is developing a series of single-dose,
genetically-attenuated, live bacterial vaccines to prevent travelers' diarrhea
and dysentery. Frost & Sullivan, a leading market research firm, estimated in a
1999 report that the worldwide market for diarrheal vaccines, addressed to the
travelers' market only, would reach almost one billion dollars in 2005. Many of
these vaccines could also meet the healthcare requirements of less developed
countries, where the need for cholera and typhoid vaccines is particularly
acute. We believe that vaccines for the travelers' market are appropriate
indications for a small company such as AVANT to pursue independently with our
own sales and marketing effort.
We are developing a single dose, oral cholera vaccine using a live,
genetically attenuated cholera strain. Based on this technology, developed in
academia, we have developed the vaccine through early Phase II trials. We then
negotiated a collaboration agreement under which a Phase IIb trial will be
performed and funded by the Walter Reed Army Institute of Research ("WRAIR") and
the National Institutes of Health (the "NIH"). This trial, which began in
October 2000 at the Children's Hospital in Cincinnati, will test the safety,
immunogenecity and protective capacity of the vaccine against a challenge with
live virulent cholera. If results from this study are positive, AVANT will move
rapidly to complete the manufacture of cGMP grade clinical material this year
and to initiate a pivotal challenge trial in the first half of 2002. Development
of a safe, effective cholera vaccine is the first step in establishing AVANT's
travelers' vaccine franchise. AVANT has also conducted initial clinical studies
of its single dose, oral typhoid vaccine and has a shigella vaccine in
pre-clinical development. With our acquisition of Megan, AVANT has gained access
to technologies for developing vaccines against CAMPYLOBACTER and E. COLI, two
additional causes of serious diarrheal diseases worldwide.
ROTAVIRUS VACCINE: Rotavirus is a major cause of diarrhea and vomiting in
infants and children. No vaccine against rotavirus is currently on the market.
We licensed from a non-profit institution an oral vaccine for rotavirus, and
initiated a Phase I clinical trial with the goal of licensing the vaccine to a
major vaccine company. After completing Phase I studies and commencing a
Phase II study, we licensed the vaccine to GlaxoSmithKline plc ("SmithKline").
The initial license fee from SmithKline partially funded the Phase II study. In
1999, after the study demonstrated 89% protection in a study involving 215
infants, SmithKline paid us an additional license fee and assumed full
responsibility for funding and performing all remaining clinical development. In
the second half of this year, AVANT expects SmithKline to initiate Phase III
studies of its investigational rotavirus vaccine, Rotarix-TM-, a two-dose oral
rotavirus vaccine which has been shown to be helpful in preventing rotavirus
gastroenteritis (RGE) disease in young children for at least two years following
administration. Assuming product development and commercialization continues
satisfactorily, we expect that SmithKline will pay us additional milestones and
a royalty based on sales.
VACCINES AND IMMUNOTHERAPEUTIC DELIVERY SYSTEMS: The vaccine industry is
changing, with increased emphasis on recombinant antigens, sophisticated
attenuation strategies and use of vaccines therapeutically to treat patients who
are already infected. AVANT is a leader in developing delivery systems that
support these new approaches, including:
- Adjumer-Registered Trademark-, a water soluble polymer intended as an
adjuvant to enhance systemic immune response with fewer injections and
lower antigen doses;
- Micromer-Registered Trademark-, a polymer microsphere adjuvant designed to
enhance systemic and mucosal immune responses to oral or nasal
administration;
- Therapore-TM-, a genetically engineered bacterial protein vector designed
to induce cell-mediated immunity, believed to be particularly important
for therapeutic vaccines; and
5
- VibrioVec-TM-, the attenuated bacterial strain used in the cholera vaccine
which we believe can be used to deliver other, non-cholera bacterial
antigens.
We expect to commercialize these vaccine delivery systems primarily through
commercial partners that have antigens in need of improved delivery, thereby
increasing our potential access to a wide range of antigens and shifting
clinical development expense to the partner. For example, we have licensed to
Aventis Pasteur ("Aventis"), the world's leading vaccine manufacturer, use of
Adjumer-Registered Trademark- and Micromer-Registered Trademark- in a variety of
vaccines, including vaccines for influenza, respiratory syncytial virus (RSV)
and Lyme disease. Aventis has begun clinical trials on both the influenza and
RSV vaccines. In the case of Therapore-TM-, the novelty of the approach is such
that partnering on commercially attractive terms would best be done after the
availability of clinical data. Thus, we have entered into a collaborative
agreement for WRAIR to fund and perform the first clinical trial of
Therapore-TM-, which is expected to begin this year. Although we will focus on
licensing vaccine delivery systems to commercial partners, we will remain alert
for opportunities where we can develop complete vaccines, as was done with
rotavirus.
Because AVANT's strategy ultimately depends on the commercial success of our
products, we assume, among other things, that end users of our products will be
able to pay for them. In the United States and other countries, in most cases,
the volume of sales of products like those we are developing depends on the
availability of reimbursement from third-party payors. These include national
health care agencies, private health insurance plans and health maintenance
organizations. Third-party payors increasingly challenge the prices charged for
medical products and services. Our success in generating revenues from sales of
products may depend on the availability of reimbursement from third-party payors
for the products. Accordingly, if we succeed in bringing products to market,
there is no means to assure their cost effectiveness or the availability of
reimbursement sufficient to sell the products on a profitable basis. If
reimbursement is not available or is insufficient, the level of market
acceptance of our products could suffer significantly.
The health care industry in the United States and in Europe is undergoing
fundamental changes as a result of political, economic and regulatory
influences. Reforms proposed from time to time include mandated basic health
care benefits, controls on health care spending through limitations on the
growth of private health insurance premiums and Medicare and Medicaid spending,
creation of large medical services and products purchasing groups and
fundamental changes to the health care delivery system.
We anticipate ongoing review and assessment of alternative health care
delivery systems and methods of payment in the United States and other
countries. We cannot predict whether any particular reform initiatives will
result or, if adopted, their impact on us. However, we expect that adoption of
any reform proposed will impair our ability to market products at acceptable
prices.
Additional factors that may significantly harm our commercial success, and
ultimately the market price of our common stock, include announcements of
technological innovations or new commercial products by our competitors,
disclosure of unsuccessful results of clinical testing or regulatory proceedings
and governmental approvals, adverse developments in patent or other proprietary
rights, public concern about the safety of products developed by AVANT and
general economic and market conditions.
C. THERAPEUTIC DRUG PROGRAMS
1. COMPLEMENT INHIBITORS
We are developing a new class of therapeutics that inhibit a part of the
immune system called the complement system. The complement system is a series of
proteins that are important initiators of the body's acute inflammatory response
against disease, infection and injury. Excessive complement activation also
plays a role in some persistent inflammatory conditions. When complement is
activated,
6
it helps to identify and eliminate infectious pathogens and damaged tissue. In
some situations, however, excessive complement activation may destroy viable and
healthy tissue and tissue which, though damaged, might recover. This excessive
response compounds the effects of the initial injury or introduces unwanted
tissue destruction in clinical situations such as organ transplants,
cardiovascular surgeries and treatment for heart attacks. Independently
published studies have reported that our lead compound, TP10, a soluble form of
naturally occurring Complement Receptor 1, effectively inhibits the activation
of the complement cascade in animal models. We believe that regulating the
complement system could have therapeutic and prophylactic applications in
several acute and chronic conditions, including reperfusion injury from surgery
or ischemic disease, organ transplant, multiple sclerosis, rheumatoid arthritis,
and myasthenia gravis. In the United States, several million people are
afflicted with these complement-mediated conditions.
We started the complement program in 1988. From 1989 through 1994, TP10 was
under development in a joint program with SmithKline and Yamanouchi
Pharmaceutical Co., Ltd. ("Yamanouchi"). During 1994, AVANT and SmithKline
negotiated various amendments to the agreement and, in 1995, the two companies
agreed to a mutual termination by which we regained all rights to the program
except for co-marketing rights in Japan, which were retained by SmithKline and
Yamanouchi. In December 1999, SmithKline and Yamanouchi returned the marketing
rights for Japan to us.
Under our direction, in 1995 the first Phase I clinical trial of TP10 in 24
patients at risk for acute respiratory distress syndrome (ARDS) was completed.
Results of this trial were presented in October 1995 at The American College of
Chest Physicians meeting. A second Phase I safety trial for reperfusion injury
was completed in late 1995 in 25 patients with first-time myocardial
infarctions. This study was presented at the American Heart Association's Joint
Conference on Thrombosis, Arteriosclerosis and Vascular Biology in
February 1996. In each trial, TP10 demonstrated excellent safety and
pharmacokinetic profiles, had a terminal phase half-life of at least 72 hours
and was able to inhibit complement activity in a dose-dependent manner.
Based on these favorable results, in early 1996, we initiated a Phase IIa
trial in patients with established ARDS. This trial was an open-label,
single-dose feasibility trial to determine the potential for efficacy of TP10 in
reducing neutrophil accumulation in the lungs and improved clinical outcome of
patients with ARDS. During the second half of 1996, we initiated a series of
steps, including broadening enrollment criteria, to modify this trial to improve
the rate of patient accrual. In late 1997, we completed this Phase IIa trial
after it had enrolled nine patients with ARDS arising from a number of different
medical conditions. The trial results showed that patients receiving TP10 tended
towards improved respiratory performance and improved blood oxygenation. Because
the trial included few patients and no placebo control was used, no definitive
claims about efficacy could be made.
In 1996, we began enrollment in a Phase I/II clinical trial in patients
undergoing lung transplantation. A goal of the trial was to determine the
ability of TP10 to reduce reperfusion injury and improve lung function in
patients with end-stage pulmonary disease who were undergoing lung transplant
surgery. This study was a randomized, placebo-controlled, double-blind trial
consisting of single dosages of 10 mg/kg of TP10 as an intravenous infusion over
30 minutes. The trial was conducted at multiple centers in North America and
included a total of 59 patients. In October 1997, we presented positive
preliminary results from the efficacy portion of the trial. In April 1998, we
presented final trial results at the International Society of Heart and Lung
Transplantation conference. The final results showed that TP10 therapy appeared
safe and well tolerated and demonstrated significant efficacy. Treated patients
undergoing cardiopulmonary by-pass as part of the transplantation procedure
showed significantly decreased intubation time and time on ventilation and a
trend toward reduced time in the intensive care unit.
7
In 1997, we entered into a collaborative agreement with Novartis relating to
the development of TP10 for use in xenotransplantation (animal organs into
humans) and allotransplantation (human to human organ transplantation). Under
the agreement, we received annual option fees and supplies of TP10 for clinical
trials in return for granting Novartis a two-year option to license TP10 with
exclusive worldwide (except Japan) marketing rights. In July 1999, Novartis
exercised its option to license TP10 for use in the field of transplantation. In
December 1999, the Novartis agreement was amended to include the marketing
rights for Japan. The decision to license TP10 resulted in a $6 million equity
investment and license fee payment by Novartis which was received by AVANT in
January 2000. Under the agreement, we may receive additional milestone payments
based upon attainment of development and regulatory goals, which have an
approximate aggregate value of up to $14 million. We may also receive funding
for research as well as royalty payments on eventual product sales.
In September 1999, we initiated an open-label, Phase I/II trial of TP10 in
infants undergoing cardiac surgery for congenital heart defects. The trial
evaluated the ability of TP10 to mitigate the injury to the heart and other
organs that occurs when patients are placed on cardiopulmonary bypass circuits.
Results of this Phase I/II trial were presented at the American Heart
Association's Annual Meeting in November 2000.
AVANT expects to complete two Phase IIb studies of TP10, in pediatric
cardiac surgery utilizing cardiopulmonary bypass in a total of 40-70 patients,
before moving to a pivotal Phase III trial. The first study, which was initiated
at the end of 2000, is enrolling babies born with hypoplastic left heart
syndrome who often have high morbidity and mortality after heart surgery. The
second study, which is being conducted in a lower risk infant population, is
planned to begin shortly and will allow us to further define our clinical
endpoints. We are looking to the results of these trials to support a mortality
endpoint for the high risk infant population in the larger pivotal Phase III
study and to allow for a possible broadening of the product label for TP10 to
cover all babies under one year requiring cardiac surgery to repair congenital
heart defects.
In addition, in November 2000, AVANT initiated a placebo-controlled
Phase II trial in approximately 600 adult patients undergoing cardiac surgery
utilizing cardiopulmonary bypass. This 30-center study is a dose-ranging study
that will allow us to further define our clinical endpoints in the adult patient
population before moving ahead to a number of pivotal clinical trials. This
adult study is intended to investigate the efficacy and safety in a population
known to be at high risk of medically important adverse outcomes that have a
real effect on the long term health of a substantial population. AVANT may
partner the adult program when additional clinical data becomes available.
The objective of these three Phase II studies in infants and adults is to
assess the ability of TP10 to mitigate the injury to the heart, brain and other
organs that occurs when patients are placed on cardiopulmonary bypass (CPB)
circuits, thus potentially improving post-operative outcomes.
In addition to TP10, we have identified other product candidates to inhibit
activation of the complement system. The lead candidate under research
evaluation is a form of sCR1 (TP10) that has been modified by the addition of
sialyl Lewis X (sLe(x)) carbohydrate side chains yielding sCR1sLe(x) (TP20).
sLe(x) is a carbohydrate which mediates binding of neutrophils to selectin
proteins, which appear on the surface of activated endothelial cells and
platelets as an early inflammatory event. Selectin-mediated binding of
neutrophils to activated endothelial cells is a critical event in inflammation.
We have confirmed the presence of the desired carbohydrate structures and
confirmed the presence of both anti-complement and selectin-binding functions in
IN VITRO experiments. During 1997, we produced additional TP20 material and
began pre-clinical studies in disease-relevant animal models. Research results
published in the July 1999 issue of SCIENCE showed that the TP20 molecule, which
simultaneously blocks complement activation and cell-mediated inflammatory
events, can significantly limit damage to cerebral tissue in a mouse model of
ischemic stroke.
8
TP20 may create new and expanded opportunities for us in complement- and
selectin-dependent indications such as stroke and myocardial infarction. We
believe that TP20 has the ability to target the complement-inhibiting activity
of sCR1 to the site of inflammation and, at the same time, inhibit the
leukocyte/endothelial cell adhesion process.
2. CHOLESTEROL TREATMENT VACCINE
We are developing a therapeutic vaccine against endogenous cholesteryl ester
transfer protein (CETP), which may be useful in reducing risks associated with
atherosclerosis. CETP is a key intermediary in the balance of HDL and LDL. We
are developing a vaccine (CETi-1) to stimulate an immune response against CETP
which we believe may improve the ratio of HDL to LDL cholesterol and reduce the
progression of atherosclerosis. We have conducted preliminary studies of rabbits
which had been administered the CETi-1 vaccine and fed a high-cholesterol,
high-fat diet. In these studies, vaccine-treated rabbits exhibited reduced
lesions in their blood vessels compared to a control group of untreated rabbits
which developed significant blood vessel lesions. These studies have
demonstrated, in animal models, the ability of CETi-1 vaccine to elevate HDL and
reduce the development of blood vessel lesions.
Atherosclerosis is one of the leading causes of morbidity and mortality in
the United States and most of the Western world. Current pharmacologic
treatments require daily administration and can result in high costs and poor
patient compliance. A vaccine directed at lowering CETP activity, such as the
one we are developing, may offer several advantages over conventional
approaches, including requiring less frequent dosing, lower costs, reduced side
effects, and improved patient compliance.
In 1996, the NIH awarded us a $100,000 Phase I SBIR grant for the
development of a novel transgenic rat atherosclerosis model, affording better
comparison to human atherosclerosis. In early 1997, the NIH awarded us a second
$100,000 Phase I SBIR grant to develop a novel plasmid-based vaccine to prevent
or treat atherosclerosis. In late 1997, the NIH awarded us a $678,000 Phase II
SBIR grant which provided funding over a two year period for the continued
development of the novel transgenic rat model of atherosclerosis. In 1998, we
received a $96,000 Phase I SBIR grant from the NIH for the development of a
novel peptide vaccine to prevent or treat atherosclerosis.
In June 1999, we initiated a double-blinded placebo controlled, Phase I
clinical trial of our CETi-1 vaccine in adult volunteers. The object of the
study was to demonstrate the safety of single administrations of the vaccine at
four different dosage strengths. AVANT completed the Phase I clinical trial in
late 2000 and results indicated that the vaccine was very well tolerated in the
48 adult volunteers who participated in the study. The only serious adverse
reaction reported during the study (allergic reaction to shower gel) was not
related to study medication. There were no differences in the safety profiles of
placebo groups and active vaccine groups. In addition there was limited evidence
of an immune response in one subject treated with the highest dose. AVANT
recently announced preliminary results from a double-blinded placebo controlled
extension of the earlier completed Phase I trial of the CETi-1 vaccine in
healthy adult volunteers receiving a second dose of the vaccine. Results from
the extension study showed measurable antibody titers in all dose groups treated
with study medication and suggest a dose-response relationship. These data will
be extremely helpful in designing a Phase II study, which we plan to begin this
summer. CETi-1 is being developed for the management of patients with low levels
of HDL (high-density lipoprotein) cholesterol. As clinical data becomes
available, AVANT plans to seek a corporate partner to complete development and
to commercialize the vaccine.
9
D. VACCINE DEVELOPMENT PROGRAMS
1. TRAVELERS' VACCINES
AVANT is developing a series of single-dose, genetically-attenuated, live
bacterial vaccines to prevent travelers' diarrhea and dysentery. Frost &
Sullivan, a leading market research firm, estimated in a 1999 report that the
worldwide market for diarrheal vaccines, addressed to the travelers' market
only, would reach almost one billion dollars in 2005. Many of these vaccines
could also meet the healthcare requirements of less developed countries, where
the need for cholera and typhoid vaccines is particularly acute.
We are developing an attenuated form of the bacterium VIBRIO CHOLERAE as a
potential cholera vaccine. In several Phase I/II clinical studies, single oral
doses of the cholera vaccine, Peru-15, were administered to more than 100
subjects and shown to be safe, immunogenic and protective against infection with
the virulent organism. In 1999, we announced the collaboration on a Phase IIb
clinical trial of the Peru-15 vaccine with WRAIR and the NIH. AVANT and the
National Institute of Allergy and Infectious Disease ("NIAID") of the NIH also
signed a Clinical Trial Agreement that allows for the clinical evaluation of the
Peru-15 vaccine formulation at Children's Hospital in Cincinnati. AVANT and
WRAIR have successfully manufactured clinical supplies of the vaccine at WRAIR's
facility for use in the study.
This phase IIb trial, which began in October 2000 at the Children's Hospital
in Cincinnati, will test the safety, immunogenecity and protective capacity of
the vaccine against a challenge with live virulent cholera. It is expected that
the NIH will report results of this trial in the first half of 2001. If results
from this study are positive, AVANT will move rapidly to complete the
manufacture of cGMP grade clinical material this year and to initiate a pivotal
challenge trial in the first half of 2002. Development of a safe, effective
cholera vaccine is the first step in establishing AVANT's travelers' vaccine
franchise. AVANT has also conducted initial clinical studies of its single dose,
oral typhoid vaccine and has a shigella vaccine in pre-clinical development.
With our acquisition of Megan Health, AVANT has gain access to technologies for
developing vaccines against CAMPYLOBACTER and E. COLI, two additional causes of
serious diarrheal diseases worldwide.
2. ROTAVIRUS VACCINE
We are developing a novel vaccine against rotavirus infection. Rotavirus, a
major cause of diarrhea and vomiting in infants, affects approximately 80% of
the approximately 4 million infants born each year in the United States. As a
result, on an annual basis, about 500,000 infants require medical attention and
50,000 are hospitalized. The economic burden in the United States is estimated
at over $1 billion in direct medical and indirect societal costs. We anticipate
that in the United States a vaccine against rotavirus disease will become a
universal pediatric vaccine. We have completed Phase I clinical trials of the
orally delivered live human rotavirus vaccine selected to elicit a broadly
protective immune response to the most prevalent strains of rotavirus. During
1997, we completed a Phase I/II clinical trial designed to define the optimal
vaccine dose and optimal age for immunization. Based on the assessment of the
safety and immunogenicity of the vaccine, we initiated a Phase II efficacy study
in 1997. This trial, conducted at four U.S. medical centers, was designed to
examine the vaccine's ability to prevent rotavirus disease and to further study
the safety of the vaccine. A total of 215 infants were enrolled in the study and
have been immunized with the vaccine. In 1998, we announced positive results
from this trial, which were published in LANCET in July 1999. The results showed
that approximately 90 percent of the vaccinated infants were protected from
rotavirus disease and demonstrated a statistical significance at pLESS
THAN0.001. Examination of the safety data revealed only mild transient symptoms
in a small number of infants.
AVANT and SmithKline are currently collaborating on the development and
commercialization of our oral rotavirus vaccine. As discussed under "F.
Collaborative Agreements", with the successful
10
completion of the Phase II clinical trial and the development by SmithKline of a
viable manufacturing process, SmithKline has assumed financial responsibility
for all subsequent clinical and development activities and paid us a milestone
payment of $500,000. In the second half of this year, AVANT expects SmithKline
to initiate Phase III studies of its investigational rotavirus vaccine,
Rotarix-TM-, a two-dose oral rotavirus vaccine which has been shown to be
helpful in preventing rotavirus gastroenteritis (RGE) disease in young children
for at least two years following administration. Assuming that product
development and commercialization continues satisfactorily, we expect to receive
additional milestones and royalties from SmithKline based on net sales of the
rotavirus vaccine.
3. OTHER HUMAN VACCINE PROGRAMS
We have conducted pre-clinical research and development in vaccines for
genital herpes and anthrax infections. In October 2000, we were awarded a
Phase I Small Business Innovation Research (SBIR) grant to support the
development of a vaccine for genital herpes. The grant was awarded by the
National Institute of Allergy and Infectious Disease (NIAID) of the NIH. The
vaccine, d15-29, utilizes a live, replication-defective mutant of the herpes
virus to induce immunity. As with other live, attenuated vaccines, these
defective herpes viruses are capable of eliciting a strong immune response in
inoculated individuals, but are incapable of replicating themselves and
spreading within the body. Previous studies by AVANT and Harvard Medical School
have shown excellent pre-clinical safety and efficacy results with this vaccine.
The SBIR grant will be used to support work in preparation for manufacturing of
material to be used in human clinical trials. We are allocating only limited
internal resources to these programs so that we may focus on more advanced
projects which are currently in clinical development.
4. ANIMAL HEALTH AND FOOD SAFETY VACCINE PROGRAMS
On December 1, 2000, AVANT acquired all of the outstanding capital stock of
Megan, a company engaged in the discovery and development of human and animal
vaccines using patented gene modification technologies. In connection with our
acquisition of Megan, we entered into a licensing agreement with Pfizer whereby
Pfizer has licensed from us Megan's technology for the development of animal
health and food safety vaccines. In accordance with this agreement, Megan's
existing poultry health and food safety products and development programs fall
outside the Pfizer collaboration.
In addition to developing proprietary and patented bacterial gene
technologies, Megan has commercialized two veterinary vaccines; Argus-TM- SC,
licensed by the USDA in March 1998 and marketed by Intervet, Inc., and
Megan-Registered Trademark-Vac 1, licensed by the USDA in November 1998 and
marketed by Megan.
EXISTING PRODUCTS: Megan-Registered Trademark-Vac 1 is a double
gene-deleted modified vaccine for use in chickens for protection against
multiple species and/or strains of Salmonella bacteria. The vaccine is
administered to chicks at the hatchery in a spray cabinet with a field boost
generally given at around two weeks. The objective of the vaccine is to
eliminate or reduce the overall load of SALMONELLA SPP. in the bird and
environment, thus reducing bacteria levels on broiler carcasses in the
processing plant. While the reduction of SALMONELLA SPP. in the broiler may
provide some direct health benefit to the chicken, the primary purpose of the
vaccine is to increase food safety. Megan-Registered Trademark-Vac 1 is also
registered in New Zealand. Registration activities are underway for South Korea,
Canada, Israel, Turkey, Egypt and the Dominican Republic.
Megan-Registered Trademark-Vac 1 has also been used extensively (off-label)
in commercial table-egg pullets. Pullets generally receive three vaccinations
during the growing period and are protected throughout the lay period without
further vaccination. In the case of table-egg layers, the primary objective is
elimination or reduction of SALMONELLA ENTERITIDIS levels in the eggs, bird, and
poultry house.
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PRODUCTS UNDER DEVELOPMENT: Megan presently has three vaccine programs in
development for the poultry market.
Megan-Registered Trademark-Egg, with USDA licensure expected in 2002, is
from the same master seed as Megan-Registered Trademark-Vac 1 with titer, dosage
recommendations, and product configuration specifically targeting the layer
market.
AntiPath-TM- is a SALMONELLA TYPHIMURIUM strain containing both chromosomal
and plasmid genes derived from pathogenic E. COLI. AntiPath-TM- will be labeled
for prevention of airsacculitis, perihepatitis, and pericarditis (and possibly
cellulitis) caused by E. COLI infection in poultry. Licensure is expected
in 2003.
Megan-Registered Trademark-Vac "Kentucky" is in the research stage and is
focused on the broiler processing plant, where over 30% of the SALMONELLA SPP.
found on broiler carcasses are the SALMONELLA KENTUCKY strain. While
Megan-Registered Trademark-Vac 1 does reduce some type C salmonellae, efficacy
against SALMONELLA KENTUCKY is inadequate in some cases. With current candidates
under development, licensure is expected in 2004.
Because AVANT's focus is on human health care, we are seeking an established
animal health company to take over marketing and distribution of Megan's
currently marketed poultry products and to assume control of the late-stage food
safety and animal health vaccines under development for the commercial poultry
market.
E. VACCINES AND IMMUNOTHERAPEUTIC DELIVERY SYSTEMS
AVANT is developing a portfolio of proprietary vaccine delivery systems
designed to improve the efficacy of existing vaccines, and permit the
development of new vaccines and immunotherapeutics for the prevention and/or
treatment of infectious diseases and some forms of cancers.
ADJUMER-REGISTERED TRADEMARK-: We are developing
Adjumer-Registered Trademark-, a proprietary vaccine delivery system, as an
adjuvant to enhance the immune response to injected intramuscular vaccines. The
water soluble nature of Adjumer-Registered Trademark-, which utilizes a
polyphosphazene polymer (PCPP), facilitates a simple aqueous-based manufacturing
process for vaccines, thereby preserving the integrity of the antigen.
We have licensed to Aventis use of Adjumer-Registered Trademark- and
Micromer-Registered Trademark-, a second proprietary delivery system designed to
facilitate mucosal delivery, in a variety of vaccines, including influenza,
respiratory syncytial virus (RSV) and Lyme disease. During the fourth quarter of
1998, Aventis initiated a Phase I/II trial of an
Adjumer-Registered Trademark--formulated vaccine for RSV. RSV, the major cause
of lower respiratory tract infections in infants and children, hospitalizes
90,000 children and causes 4,500 deaths annually in the United States.
Initiation of the trial resulted in a milestone payment by Aventis.
THERAPORE-TM-: During 1997, we received an exclusive worldwide license to
Therapore-TM- from Harvard College. In 1998, we received a non-exclusive license
from the NIH to further secure our Therapore-TM- technology rights. We believe
that Therapore-TM- will be the core of a novel technology for the development of
immunotherapeutics. We are conducting pre-clinical research to evaluate this
system for the treatment of persistent viral infections, such as Hepatitis B,
Hepatitis C and HIV, and some forms of cancer.
Therapore-TM- is composed of two bacterial proteins that in IN VIVO tests
have delivered peptides to induce potent cell-mediated immune responses. These
responses include the generation of long-lived cytotoxic T-lymphocytes (CTL) and
alterations in the amounts of cellular cytokines produced, which may lead to the
effective treatment of persistent viral infections and the resolution of some
forms of cancer. Potential products utilizing Therapore-TM- technology could
include peptides or proteins from viruses such as Hepatitis B, Hepatitis C and
HIV, all of which cause persistent infections, and from a range of cancers,
including breast, ovarian, melanoma and prostate. Each of these indications
represents a large market with a need for safe and effective treatments.
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Early stage pre-clinical research studies indicate that Therapore-TM- may be
distinguished from other delivery systems. We believe that the therapeutic and
preventative potential of Therapore-TM- is significant for the following two
reasons: (i) the targeting of Therapore-TM- is highly efficient, such that in IN
VIVO tests potent cell-mediated immune responses have been induced by the
delivery of minute quantities of Therapore-TM- constructs; and
(ii) Therapore-TM- has the potential to deliver large peptides and proteins for
processing by normal cellular mechanisms, which may permit broad immune coverage
in humans. As a result of these characteristics, we believe that
Therapore-TM--delivered antigens will be capable of producing an enhanced
cell-mediated response more efficiently and safely than other products currently
under development by our competitors.
We plan to employ Therapore-TM- to develop novel immunotherapeutics for the
treatment of chronic viral infections and cancers. We have entered into a
collaborative agreement for WRAIR to fund and perform the first human clinical
trial of a Therapore-TM--based product, a vaccine candidate under development by
the U.S. Army against the Human Immunodeficiency Virus (HIV). This clinical
trial of Therapore-TM--HIV is expected to begin this year. As clinical data
becomes available, AVANT may seek a corporate partner to develop and to
commercialize Therapore-TM-. We have currently suspended all in-house
development efforts on Therapore-TM- to focus on more advanced programs.
F. COLLABORATIVE AGREEMENTS
NOVARTIS: In 1997, we entered into a collaborative agreement with Novartis
relating to the development of TP10 for use in xenotransplantation (animal
organs into humans) and allotransplantation (human to human organ
transplantation). Under the agreement, we received annual option fees and
supplies of TP10 for clinical trials in return for granting Novartis a two-year
option to license TP10 with exclusive worldwide (except Japan) marketing rights.
In July 1999, Novartis exercised its option to license TP10 for use in the field
of transplantation. The decision to license TP10 resulted in a $6 million equity
investment and license fee payment by Novartis which was received by AVANT in
January 2000. Under the agreement, we may receive additional milestone payments
based upon attainment of development and regulatory goals, which has an
approximate aggregate value of up to $14 million. We may also receive funding
for research as well as royalty payments on eventual product sales.
AVENTIS: We are a party to two license agreements entered into in 1994 and
1995 with Aventis relating to Adjumer-Registered Trademark-- and
Micromer-Registered Trademark--formulated vaccines, respectively, for the
prevention of a variety of infectious diseases. Under the agreements, Aventis
has been granted the exclusive right to make, use and sell
Adjumer-Registered Trademark-- and Micromer-Registered Trademark--formulated
vaccines for prevention of influenza, Lyme disease and diseases caused by
meningococcus and the co-exclusive right (exclusive, except for the right of
AVANT or one other person licensed by us) to make, use and sell
Adjumer-Registered Trademark-- and Micromer-Registered Trademark--formulated
vaccines directed against five other pathogens, including pneumococcus and RSV.
The licenses to Aventis apply to specified territories, including North and
South America, Europe, Africa, Thailand and the countries of the former Soviet
Union. We have retained rights to make, use, sell and license
Adjumer-Registered Trademark-- and Micromer-Registered Trademark--formulated
vaccines against the subject infections in most of the Far East, including China
and Japan, subject to geographical extension rights available to Aventis.
Aventis made a $3.0 million equity investment in AVANT in 1994 upon the
execution of the agreement relating to Adjumer-Registered Trademark-. In
addition, in connection with this collaboration, in 1996 Aventis made milestone
payments of $4.5 million and an additional equity investment of $1.0 million in
AVANT. During 1998, Aventis made a further milestone payment to us upon
initiation of a Phase I trial using an Adjumer-Registered Trademark--formulated
vaccine for RSV. Contingent upon our achieving specified milestones, Aventis has
agreed to pay AVANT up to an additional $6.2 million in connection with the
development of Adjumer-Registered Trademark--formulated vaccines for influenza
and Lyme disease and to make payments, on a product by product basis with
respect to the development of other Adjumer-Registered Trademark-- and
Micromer-Registered Trademark--formulated vaccines. Aventis must fund all costs
associated with the development and
13
commercialization, including the costs of clinical trials, of any vaccines it
elects to develop utilizing our technology. In addition, we will be entitled to
royalties based on net sales of any vaccine products developed and sold by
Aventis pursuant to these agreements.
In connection with our agreement relating to Micromer-Registered Trademark-,
Aventis sponsored research at AVANT into
Micromer-Registered Trademark--formulated vaccines directed against influenza
and parainfluenza virus (PIV). This arrangement, pursuant to which we received
$2.5 million, covered a two-year period that ended in 1997.
Under the agreement relating to Adjumer-Registered Trademark-, we were
required to use commercially reasonable efforts to establish a process capable
of yielding quantities of clinical grade PCPP for use by Aventis in clinical
studies. We have satisfied this requirement. In addition, we have facilitated
the production of commercial grade PCPP in a contractor's current Good
Manufacturing Practice (cGMP) compliant manufacturing facility according to
agreed upon specifications. The Aventis agreement, while reserving to Aventis
the right to manufacture PCPP, anticipates that we will supply PCPP under a
cost-plus supply agreement.
GLAXOSMITHKLINE: During 1997, we entered into an agreement with SmithKline
to collaborate on the development and commercialization of our oral rotavirus
vaccine. Under the terms of the agreement, SmithKline received an exclusive
worldwide license to commercialize our rotavirus vaccine. We were responsible
for continuing the Phase II clinical efficacy study of the rotavirus vaccine,
which was completed in August 1998. Subject to the development by SmithKline of
a viable manufacturing process, SmithKline must assume responsibility for all
subsequent clinical trials and all other development activities. SmithKline made
an initial license payment in 1997 upon execution of the agreement and has
agreed to make further payments upon the achievement of specified milestones. In
addition, we will be entitled to royalties based on net sales of the rotavirus
vaccine. In June 1999, the Company received a milestone payment of $500,000 from
SmithKline for successfully completing the Phase II clinical efficacy study and
establishing a commercially viable process to manufacture the vaccine.
PFIZER: In connection with our acquisition of Megan, we entered into a
licensing agreement with Pfizer whereby Pfizer has licensed Megan's technology
for the development of animal health and food safety vaccines. Upon execution of
the agreement, Pfizer made an initial license payment of $2.5 million together
with a $3 million equity investment. Under the agreement, we may receive
additional milestone payments based upon attainment of specified milestones. We
will also receive research and development funding for up to two years as well
as royalty payments on eventual product sales.
We depend on our collaborative relationships and may enter into more of them
in the future. Some of the above referenced agreements give our collaborator
substantial responsibility to commercialize a product and to make decisions
about the amount and timing of resources that are devoted to developing and
commercializing a product. As a result, we do not have complete control over how
resources are used toward some of our products.
In addition, some of these agreements relate to products in the early stages
of research and development. Others require AVANT and our collaborator to
jointly decide on the feasibility of developing a particular product using our
technologies. In either case, these agreements may terminate without benefit to
us if the underlying products are not fully developed. Moreover, once specific
products are chosen for development, the agreements relating to them may require
AVANT to meet specified milestones, to invest money and other resources in the
development process or to negotiate additional licenses and other agreements,
which may not be possible or advantageous. If we fail to meet our obligations
under those agreements, they could terminate and we might need to enter into
relationships with other collaborators and to spend additional time, money, and
other valuable resources in the process.
14
Moreover, we cannot predict whether our collaborators will continue their
development efforts or, if they do, whether their efforts will achieve success.
Many of our collaborators face the same kinds of risks and uncertainties in
their business that we face. A delay or setback to a collaborator will, at a
minimum, delay the commercialization of any affected products, and may
ultimately prevent it. Moreover, any collaborator could breach its agreement
with us or otherwise not use best efforts to promote our products. A
collaborator may choose to pursue alternative technologies or products that
compete with our technologies or products. In either case, if a collaborator
failed to successfully develop one of our products, we would need to find
another collaborator. Our ability to do so would depend upon our legal right to
do so at the time and whether the product remained commercially viable.
G. RISK FACTORS
You should consider carefully these risk factors together with all of the
information included or incorporated by reference in this Annual Report. This
section includes some forward-looking statements.
OUR HISTORY OF LOSSES AND UNCERTAINTY OF FUTURE PROFITABILITY MAKE OUR COMMON
STOCK A HIGHLY SPECULATIVE INVESTMENT.
We have had no commercial revenues to date from sales of our products and
cannot predict when we will. We have accumulated net operating losses since
inception of approximately $155.3 million, as of December 31, 2000. We expect to
spend substantial funds to continue research and product testing of the
following products we have in the pre-clinical and clinical testing stages of
development:
PRODUCT USE STAGE
- ------- --------------------------- -------------------
TP10 Organ transplantation Clinical phase II
TP10 Pediatric cardiac surgery Clinical phase IIb
TP10 Adult cardiac surgery Clinical phase II
TP10 Heart attacks Clinical phase I
TP20 Stroke Pre-clinical
CETi-1 vaccine Atherosclerosis Clinical phase I
Cholera vaccine Cholera Clinical phase IIb
Typhoid vaccine Typhoid fever Clinical phase I/II
Shigella vaccine Dysentery Pre-clinical
ETEC vaccine E. coli infection Pre-clinical
Campylobacter vaccine Campylobacter infection Pre-clinical
Rotavirus vaccine Rotavirus Clinical phase II
Adjumer-Registered Trademark- Respiratory syncytial virus Clinical phase I/II
Therapore-TM- Hepatitis Pre-clinical
Therapore-TM- HIV Pre-clinical
In anticipation of Food and Drug Administration approval of these products,
we will need to make substantial investments to establish sales, marketing,
quality control, and regulatory compliance capabilities. These investments will
increase if and when any of these products receive FDA approval. We cannot
predict how quickly our lead products will progress through the regulatory
approval process. As a result, we may continue to lose money for several years.
IF WE CANNOT SELL CAPITAL STOCK TO RAISE NECESSARY FUNDS, IT MAY FORCE US TO
LIMIT OUR RESEARCH, DEVELOPMENT AND TESTING PROGRAMS.
We will need to raise more capital from investors to advance our lead
products through the clinical testing and to fund our operations until we
receive final FDA approval and our products begin to
15
generate revenues for us. However, based on our history of losses, we may have
difficulty attracting sufficient investment interest. We may also try to obtain
funding through research grants and agreements with commercial collaborators.
This kind of funding is at the discretion of other organizations and companies
which have limited funds and many companies compete with us for those funds. As
a result, we may not receive any research grants or funds from collaborators.
IF SELLING STOCKHOLDERS CHOOSE TO SELL SHARES IN LARGE VOLUME, THE TRADING PRICE
OF OUR COMMON STOCK COULD SUFFER.
In December 2000, we issued 1,841,236 shares of our common stock at $9.54
per share in connection with our acquisition of Megan Health Inc. and 285,877
shares of our common stock at $10.50 per share in a separate private placement
with Pfizer, Inc. These transactions were the latest of several private
placements of our common stock. Those shares plus among others, 4,650,953 shares
we sold in a July 2000 private placement at $7.85 per share, 5,459,375 shares we
sold in a September 1999 private placement at $1.92 per share, 2,043,494 shares
we sold in a March 1998 private placement at $1.90 per share, 1,433,750 shares
we issued in June 1998 in settlement of a contract dispute with a landlord, and
3,209,289 shares that employees may purchase under stock options at prices
ranging from $0.30 to $24.64 per share, can be resold in the public securities
markets without restriction. These shares in total account for approximately
33.1% of our total common stock outstanding as of December 31, 2000. If large
numbers of shares are sold over a short period of time, the price of our stock
may decline rapidly or fluctuate widely.
IF OUR PRODUCTS DO NOT PASS REQUIRED TESTS FOR SAFETY AND EFFECTIVENESS, WE WILL
NOT BE ABLE TO DERIVE COMMERCIAL REVENUE FROM THEM.
For AVANT to succeed, we will need to derive commercial revenue from the
products we have under development. The FDA has not approved any of our lead
products for sale to date. Our lead drug, TP10, is undergoing phase II clinical
testing for use in pediatric and adult cardiac surgery. TP10 has also undergone
phase I clinical testing for use in treating heart attacks and phase II clinical
testing for organ transplant. Other products in our vaccine programs are in
various stages of pre-clinical and clinical testing. Pre-clinical tests are
performed at an early stage of a product's development and provide information
about a product's safety and effectiveness on laboratory animals. Pre-clinical
tests can last years. If a product passes its pre-clinical tests satisfactorily,
we file an investigational new drug application for the product with the FDA,
and if the FDA gives its approval we begin phase I clinical tests. Phase I
testing generally lasts between 6 and 12 months. If phase I test results are
satisfactory and the FDA gives its approval, we can begin phase II clinical
tests. Phase II testing generally lasts between 6 and 18 months. If phase II
test results are satisfactory and the FDA gives its approval, we can begin phase
III pivotal studies. Phase III studies generally last between 12 and 36 months.
Once clinical testing is completed and a new drug application is filed with the
FDA, it may take more than a year to receive FDA approval.
In all cases we must show that a pharmaceutical product is both safe and
effective before the FDA, or drug approval agencies of other countries where we
intend to sell the product, will approve it for sale. Our research and testing
programs must comply with drug approval requirements both in the United States
and in other countries, since we are developing our lead products with
companies, including Novartis Pharma AG, GlaxoSmithKline plc, Pfizer Inc. and
Aventis Pasteur, which intend to commercialize them both in the U.S. and abroad.
A product may fail for safety or effectiveness at any stage of the testing
process. The key risk we face is that none of our products under development
will come through the testing process to final approval for sale, with the
result that we cannot derive any commercial revenue from them after investing
significant amounts of capital in multiple stages of pre-clinical and clinical
testing.
16
PRODUCT TESTING IS CRITICAL TO THE SUCCESS OF OUR PRODUCTS BUT SUBJECT TO DELAY
OR CANCELLATION IF WE HAVE DIFFICULTY ENROLLING PATIENTS.
As our portfolio of potential products moves from pre-clinical testing to
clinical testing, and then through progressively larger and more complex
clinical trials, we will need to enroll an increasing number of patients with
the appropriate characteristics. At times we have experienced difficulty
enrolling patients and we may experience more difficulty as the scale of our
clinical testing program increases. The factors that affect our ability to
enroll patients are largely uncontrollable and include principally the
following:
- the nature of the clinical test
- the size of the patient population
- the distance between patients and clinical test sites
- the eligibility criteria for the trial
If we cannot enroll patients as needed, our costs may increase or it could
force us to delay or terminate testing for a product.
WE MAY FACE UNEXPECTED DIFFICULTY OR COSTS IN THE INTEGRATION OF MEGAN'S
BUSINESS AND PROGRAMS WITH OUR OWN.
In December 2000, we acquired all of the outstanding stock of Megan
Health, Inc., a company engaged in the discovery and development of human and
food and safety vaccines using patented technologies. We may not be able to
successfully integrate Megan's business, product and/or technology without a
significant expenditure of operating, financial and management resources. In
addition, Megan's acquired technology may require substantial additional
research and development and clinical trials before they can be commercialized,
all of which could adversely affect our results of operations and financial
position.
Although we believe that beneficial synergies will ultimately result from
our acquisition of Megan, there can be no assurance that the long-term
combination of the two companies' businesses will allow AVANT to achieve results
of operations superior to what we could have achieved independently. No
assurance can be given that AVANT will integrate the operations of Megan without
encountering difficulties or experiencing the loss of key Megan personnel or
that the benefits expected from such integration will be realized.
During the integration process, we may encounter unforeseen difficulties and
incur unforeseen costs. Management may have to spend significant time, money and
other resources to integrate these businesses and resolve these difficulties.
AVANT and Megan use complementary but different technologies, have different
capabilities and employ different management styles, all of which may be
barriers to the successful integration of the combined companies. Although
management believes that substantial opportunities exist in the integration of
the businesses of AVANT and Megan, the integration process may prove to be more
difficult or costly than anticipated.
WE DEPEND GREATLY ON THE INTELLECTUAL CAPABILITIES AND EXPERIENCE OF OUR KEY
EXECUTIVES AND SCIENTISTS AND THE LOSS OF ANY OF THEM COULD AFFECT OUR ABILITY
TO DEVELOP OUR PRODUCTS.
The loss of Dr. Una S. Ryan, our president and chief executive officer, or
other key members of our staff could harm us. We have an employment agreement
with Dr. Ryan. We do not have any key-person insurance coverage. We also depend
on our scientific collaborators and advisors, all of whom have outside
commitments that may limit their availability to us. In addition, we believe
that our future success will depend in large part upon our ability to attract
and retain highly skilled scientific, managerial and marketing personnel,
particularly as we expand our activities in clinical trials, the regulatory
approval process and sales and manufacturing. We face significant competition
for this type
17
of personnel from other companies, research and academic institutions,
government entities and other organizations. We cannot predict our success in
hiring or retaining the personnel we require for continued growth.
WE RELY ON OUR CONTRACT MANUFACTURERS. SHOULD THE COST, DELIVERY AND QUALITY OF
CLINICAL AND COMMERCIAL GRADE MATERIALS SUPPLIED BY CONTRACT MANUFACTURERS VARY
TO OUR DISADVANTAGE, OUR BUSINESS OPERATIONS COULD SUFFER SIGNIFICANT HARM.
We are dependent on sourcing from third-party manufacturers for suitable
quantities of clinical and commercial grade materials essential to pre-clinical
and clinical studies currently underway and to planned clinical trials in
addition to those currently being conducted by third parties or us. The
inability to have suitable quality and quantities of these essential materials
produced in a timely manner would result in significant delays in the clinical
development and commercialization of products, which could adversely affect our
business, financial condition and results of operations. We plan to rely on
collaborators and contract manufacturers to manufacture proposed products in
both clinical and commercial quantities in the future. There can be no
assurances that we will be able to enter into any arrangements with such third
party manufacturers on acceptable terms or at all. Further, contract
manufacturers must also operate in compliance with the FDA's Good Manufacturing
Practices, or GMP; failure to do so could result in, among other things, the
disruption of product supplies. Our potential dependence upon third parties for
the manufacture of our products may adversely affect our profit margins and our
ability to develop and deliver products on a timely and competitive basis.
We depend on third party suppliers and manufacturers, including Walter Reed
Army Institute of Research, Lonza Biologics plc, Bioconcepts, Inc., Multiple
Peptide Systems and Maine Biological Laboratories, to provide us with suitable
quantities of materials necessary for clinical tests. If these materials are not
available in suitable quantities of appropriate quality, in a timely manner, and
at a feasible cost, our clinical tests will face delays.
WE RELY ON THIRD PARTIES TO PLAN, CONDUCT AND MONITOR OUR CLINICAL TESTS, AND
THEIR FAILURE TO PERFORM AS REQUIRED WOULD INTERFERE WITH OUR PRODUCT
DEVELOPMENT.
We rely on third parties, including Duke University Medical Center, The
Cleveland Clinic, The Chicago Center for Clinical Research, Pharmaceutical
Research Associates, Inc., PPD Development, LLC, the NIH and
GlaxoSmithKline plc to conduct our clinical tests. If any one of those third
parties fails to perform as we expect or if their work fails to meet regulatory
standards, our testing could be delayed, cancelled or rendered ineffective.
WE DEPEND GREATLY ON THIRD PARTY COLLABORATORS TO LICENSE, DEVELOP AND
COMMERCIALIZE SOME OF OUR PRODUCTS, AND THEY MAY NOT MEET OUR EXPECTATIONS.
We have agreements with other companies, including Novartis Pharma AG,
Aventis Pasteur, GlaxoSmithKline plc, Pfizer Inc., and Innogenetics, Inc., for
the licensing, development and ultimate commercialization of some of our
products. Some of those agreements give substantial responsibility over the
products to the collaborator. Some collaborators may be unable or unwilling to
devote sufficient resources to develop our products as their agreements require.
They often face business risks similar to ours, and this could interfere with
their efforts. Also, collaborators may choose to devote their resources to
products that compete with ours. If a collaborator does not successfully develop
any one of our products, we will need to find another collaborator to do so. Our
search for a new collaborator will depend on our legal right to do so at the
time and whether the product remains commercially viable.
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WE MAY FACE DELAYS, DIFFICULTIES OR UNANTICIPATED COSTS IN ESTABLISHING SALES,
DISTRIBUTION AND MANUFACTURING CAPABILITIES FOR OUR COMMERCIALLY READY PRODUCTS.
We have chosen to retain, rather than license, all rights to some of our
lead products, such as TP10 for pediatric and adult cardiac surgery and our
portfolio of travelers' vaccines. If we proceed with this strategy, we will have
full responsibility for commercialization of these products if and when they are
approved for sale. We currently lack the marketing, sales and distribution
capabilities that we will need to carry out this strategy. To market any of our
products directly, we must develop a substantial marketing and sales force with
technical expertise and a supporting distribution capability. We have little
expertise in this area, and we may not succeed. We may find it necessary to
enter into strategic partnerships on uncertain but potentially unfavorable terms
to sell, market and distribute our products when they are approved for sale.
Some of our products are difficult to manufacture, especially in large
quantities, and we have not yet developed commercial scale manufacturing
processes for any of our products. We do not currently plan to develop internal
manufacturing capabilities to produce any of our products if they are approved
for sale. To the extent that we choose to market and distribute products
ourselves, this strategy will make us dependent on other companies to produce
our products in adequate quantities, in compliance with regulatory requirements,
and at a competitive cost. We may not find third parties capable of meeting
those manufacturing needs.
A DECREASE IN DEMAND FOR MEGAN-REGISTERED TRADEMARK-VAC 1 AND OTHER FUTURE
PRODUCTS COULD ADVERSELY AFFECT OUR REVENUES.
Both demand and ultimately the profitability of
Megan-Registered Trademark-Vac 1, our only current product available for
commercial sales, and future products, are key to our success. The following are
potential factors that may negatively affect the demand for
Megan-Registered Trademark-Vac 1:
- Our competitors may develop, manufacture and market products that are more
effective or less expensive than ours;
- Megan-Registered Trademark-Vac 1 could be replaced by a novel product and
may disappear due to obsolescence;
- Users may not accept such a recently approved product without years of
proven history;
- Our competitors in the food safety market have greater financial and
management resources than we do, and significantly more experience in
bringing products to market; and
- We have no manufacturing or distribution facilities for
Megan-Registered Trademark-Vac 1. Instead, we contract with Maine
Biological Laboratories ("MBL"), a subsidiary of Lohmann Animal Health
International, to manufacture Megan-Registered Trademark-Vac 1 for us.
Any one of these factors could reduce demand for
Megan-Registered Trademark-Vac 1 to a level which may lead to our
discontinuation of the product.
We employ two full time sales people to sell Megan-Registered Trademark-Vac
1. The costs associated with the employment of these two people, as well as the
costs associated with our marketing and distribution of the product could become
prohibitively expensive. Should we be unable to realize acceptable profits from
sales of Megan-Registered Trademark-Vac 1, we may choose to scale back our
commercialization efforts.
Because AVANT's focus is on human health care, we are seeking an established
animal health company to take over marketing and distribution of
Megan-Registered Trademark-Vac 1 and to assume control of the late-stage food
safety and animal health vaccines under development for the commercial poultry
market. If we are unable to find a marketing and distribution partner, or the
partner is unable to continue to distribute Megan-Registered Trademark-Vac 1 in
an effective manner, or if we are unable to maintain sufficient personnel with
the appropriate levels of experience to manage this function, we may be unable
to meet the demand for our products and we may lose potential revenues.
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WE MAY BE UNABLE TO MANAGE MULTIPLE LATE STAGE CLINICAL TRIALS FOR A VARIETY OF
PRODUCT CANDIDATES SIMULTANEOUSLY.
While we believe that we can have materials available for clinical trials
and the initial market launch for our lead product candidates, we will not be
able to commercialize these products until we have acceptable clinical trial
results and regulatory approval from the FDA and/or foreign regulatory
authorities. The FDA and other regulatory authorities require that the safety
and efficacy of a drug be supported by results from adequate and well-controlled
clinical trials before approval for commercial sale. If the results of Phase I
and Phase II clinical trials of our products currently in progress do not
demonstrate that they are safe and effective, we will not be able to initiate
Phase III clinical trials when we currently anticipate or at all and to submit
to the FDA a new drug application or other relevant applications for pre-market
approval. Further, the results of pre-clinical testing and initial clinical
trials do not necessarily predict how safe and effective a product will be when
it is evaluated in large-scale Phase III clinical trials. It is possible that
unacceptable side effects may be discovered at any time. A number of companies
have suffered significant setbacks in advanced clinical trials, despite
promising results in earlier trials.
Even if we believe the clinical trials demonstrate the safety and efficacy
of a product, the FDA and foreign regulatory authorities may not accept our
assessment of the results. The FDA and foreign regulatory authorities may
require us to conduct additional advanced clinical trials beyond those we are
currently planning in order to demonstrate the safety and efficacy of our
products. The rate of completion of our clinical trials depends on, among other
factors, the rate of patient enrollment. Patient enrollment is a function of
many factors, including the size of the patient population, the nature of the
clinical protocol, the proximity of patients to clinical sites and the
eligibility criteria for the trial. Delays in planned patient enrollment may
result in increased costs, delays or termination of clinical trials, which could
have a material adverse effect on our business, financial condition and results
of operations.
Moreover, we have not historically managed multiple late stage clinical
trials simultaneously. During 2001 we expect to have in progress five Phase II
clinical trials. Attracting individuals qualified to administer these and
planned future late stage clinical trials is often difficult due to the
complexity of the protocols and the size of the studies. We may be unable to
find qualified individuals, which could delay our trials or result in increased
costs. We may be unable to complete multiple late stage clinical trials
concurrently as effectively or as quickly as we currently anticipate, which
could have a material adverse effect on our business, financial condition and
results of operations.
OUR RELIANCE ON THIRD PARTIES REQUIRES US TO SHARE OUR TRADE SECRETS, WHICH
INCREASES THE POSSIBILITY THAT A COMPETITOR WILL DISCOVER THEM.
Because we rely on third parties to develop our products, we must share
trade secrets with them. We seek to protect our proprietary technology in part
by confidentiality agreements and, if applicable, inventor's rights agreements
with our collaborators, advisors, employees and consultants. Our competitors may
discover our trade secrets, either through breach of these agreements or through
independent development. A competitor's discovery of our trade secrets would
impair our competitive position. Moreover, we conduct a significant amount of
research through academic advisors and collaborators who are prohibited from
entering into confidentiality or inventor's rights agreements by their academic
institutions.
WE LICENSE TECHNOLOGY FROM OTHER COMPANIES TO DEVELOP OUR PRODUCTS, AND THOSE
COMPANIES COULD RESTRICT OUR USE OF IT.
Companies that license to us technologies we use in our research and
development programs may require us to achieve milestones or devote minimum
amounts of resources to develop products using those technologies. They may also
require us to make significant royalty and milestone payments,
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including a percentage of any sublicensing income, as well as payments to
reimburse them for patent costs. The number and variety of our research and
development programs require us to establish priorities and to allocate
available resources among competing programs. From time to time we may choose to
slow down or cease our efforts on particular products. If in doing so we fail to
perform our obligations under a license fully, the licensor can terminate the
licenses or permit our competitors to use the technology. Moreover, we may lose
our right to market and sell any products based on the licensed technology.
WE HAVE MANY COMPETITORS IN OUR FIELD AND THEY MAY DEVELOP TECHNOLOGIES THAT
MAKE OURS OBSOLETE.
Biotechnology, pharmaceuticals and therapeutics are rapidly evolving fields
in which scientific and technological developments are expected to continue at a
rapid pace. We have many competitors in the U.S. and abroad, including Alexion
Pharmaceutical, Bayer, Merck, Pfizer, Active Biotech, Swiss Serum Vaccine
Institute and Japan Tobacco. Our success depends upon our ability to develop and
maintain a competitive position in the product categories and technologies on
which we focus. Many of our competitors have greater capabilities, experience
and financial resources than we do. Competition is intense and is expected to
increase as new products enter the market and new technologies become available.
Our competitors may:
- develop technologies and products that are more effective than ours,
making ours obsolete or otherwise noncompetitive;
- obtain regulatory approval for products more rapidly or effectively than
us; and
- obtain patent protection or other intellectual property rights that would
block our ability to develop competitive products.
WE RELY ON PATENTS, PATENT APPLICATIONS AND OTHER INTELLECTUAL PROPERTY
PROTECTIONS TO PROTECT OUR TECHNOLOGY AND TRADE SECRETS; THEY ARE EXPENSIVE AND
MAY NOT PROVIDE SUFFICIENT PROTECTION.
Our success depends in part on our ability to obtain and maintain patent
protection for technologies that we use. Biotechnology patents involve complex
legal, scientific and factual questions and are highly uncertain. To date, there
is no consistent policy regarding the breadth of claims allowed in biotechnology
patents, particularly in regard to patents for technologies for human uses like
those we use in our business. We cannot predict whether the patents we seek will
issue. If they do issue, a competitor may challenge them and limit their scope.
Moreover, our patents may not afford effective protection against competitors
with similar technology. A successful challenge to any one of our patents could
result in a third party's ability to use the technology covered by the patent.
We also face the risk that others will infringe, avoid or circumvent our
patents. Technology that we license from others is subject to similar risks and
this could harm our ability to use that technology. If we, or a company that
licenses technology to us, were not the first creator of an invention that we
use, our use of the underlying product or technology will face restrictions,
including elimination.
If we must defend against suits brought against us or prosecute suits
against others involving intellectual property rights, we will incur substantial
costs. In addition to any potential liability for significant monetary damages,
a decision against us may require us to obtain licenses to patents or other
intellectual property rights of others on potentially unfavorable terms. If
those licenses from third parties are necessary but we cannot acquire them, we
would attempt to design around the relevant technology, which would cause higher
development costs and delays, and may ultimately prove impracticable.
OUR BUSINESS REQUIRES US TO USE HAZARDOUS MATERIALS, WHICH INCREASES OUR
EXPOSURE TO DANGEROUS AND COSTLY ACCIDENTS.
Our research and development activities involve the use of hazardous
chemicals, biological materials and radioactive compounds. Although we believe
that our safety procedures for handling and
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disposing hazardous materials comply with the standards prescribed by applicable
laws and regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident, an
injured party will likely sue us for any resulting damages with potentially
significant liability. The ongoing cost of complying with environmental laws and
regulations is significant and may increase in the future. In addition, in
connection with our merger with Virus Research Institute, Inc. in 1998, we
assumed the real property lease at Virus Research Institute, Inc.'s former site.
We understand that this property has a low level of oil-based and other
hazardous material contamination. We believe that the risks posed by this
contamination are low, but we cannot predict whether additional hazardous
contamination exists at this site, or that changes in applicable law will not
require us to clean up the current contamination of the property.
H. COMPETITION
Competition in the biotechnology and vaccine industries is intense. We face
competition from many companies in the United States and abroad, including a
number of large pharmaceutical companies, firms specialized in the development
and production of vaccines, adjuvants and vaccine and immunotherapeutic delivery
systems and major universities and research institutions. Most of our
competitors have substantially greater resources, more extensive experience in
conducting pre-clinical studies and clinical testing and obtaining regulatory
approvals for their products, greater operating experience, greater research and
development and marketing capabilities and greater production capabilities than
those of AVANT. There can be no assurance that our competitors will not develop
technologies and products that are safer or more effective than any which are
being developed by us or which would render our technology and products obsolete
and noncompetitive, and our competitors may succeed in obtaining FDA approval
for products more rapidly than we do. There can be no assurance that the
vaccines and immunotherapeutic products under development by us and our
collaborators will be able to compete successfully with existing products or
products under development by other companies, universities and other
institutions or that they will obtain regulatory approval in the United States
or elsewhere. We believe that the principal competitive factors in the vaccine
and immunotherapeutic market are product quality, measured by efficacy and
safety, ease of administration and price.
Our competitive position will also depend upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.
We will require substantial capital resources to complete development of some or
all of our products, obtain the necessary regulatory approvals and successfully
manufacture and market our products. In order to secure capital resources, we
anticipate having to sell additional capital stock, which would dilute existing
stockholders. We may also attempt to obtain funds through research grants and
agreements with commercial collaborators. However, these types of fundings are
uncertain because they are at the discretion of the organizations and companies
that control the funds. As a result, we may not receive any funds from grants or
collaborations. Alternatively, we may borrow funds from commercial lenders,
likely at high interest rates, which would increase the risk of any investment
in AVANT.
I. MANUFACTURING
We have no manufacturing facilities, no experience in volume manufacturing
and we plan to rely upon collaborators or contractors to manufacture our
proposed products for both clinical and commercial purposes. We believe that
there is currently sufficient capacity worldwide for the production of our
potential products by our collaborators or through contract manufacturers.
To date, we have been arranging with contract manufacturers for the
manufacture of clinical trials supplies of TP10, CETi-1 and our rotavirus
vaccine candidate. We have also contracted for the
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manufacture of PCPP in quantities sufficient for pre-clinical and clinical
studies. Future manufacture of our rotavirus vaccine is the responsibility of
SmithKline, which has received from us a world-wide exclusive license to
commercialize this vaccine.
We have contracted with Lonza Bologics plc for the scale-up and manufacture
of commercial grade TP10 for our planned pivotal Phase III trial in infants
undergoing cardiac surgery. The CETi-1 vaccine is manufactured under contracts
with Multiple Peptide Services and Bioconcepts, Inc. WRAIR has manufactured
Cholera Peru-15 and Bengal-15 vaccines under a collaborative agreement with us.
We have also entered into a collaborative arrangement with WRAIR for the
manufacture of a Therapore-TM--HIV product.
Under the agreement relating to Adjumer-Registered Trademark-, we were
required to use commercially reasonable efforts to establish a process capable
of yielding quantities of clinical grade PCPP for use by Aventis in clinical
studies. We have satisfied this requirement. The Aventis agreement, while
reserving to Aventis the right to manufacture PCPP, anticipates that we may
supply PCPP under a cost-plus supply agreement.
The manufacturing processes for our other vaccine and immunotherapeutic
delivery systems and vaccines utilize known technologies. We believe that the
products we currently have under development can be scaled up to permit
manufacture in commercial quantities. However, there can be no assurance that we
will not encounter difficulties in scaling up the manufacturing processes.
Use of third party manufacturers limits our control over and ability to
monitor the manufacturing process. As a result, we may not be able to detect a
variety of problems that may arise. If third party manufacturers fail to meet
our manufacturing needs in an acceptable manner, we would face delays and
additional costs while it develops internal manufacturing capabilities or finds
alternative third party manufacturers.
We intend to establish manufacturing arrangements with manufacturers that
comply with the FDA's requirements and other regulatory standards, although
there can be no assurance that we will be able to do so. In the future, we may,
if it becomes economically attractive to do so, establish our own manufacturing
facilities to produce any vaccine products that we may develop. In order for us
to establish a manufacturing facility, we will require substantial additional
funds and will be required to hire and retain significant additional personnel
and comply with the extensive cGMP regulations of the FDA applicable to such
facility. The product manufacturing facility would also need to be licensed for
the production of vaccines by the FDA.
J. MARKETING
Under the terms of existing and future collaborative agreements, we rely and
expect to continue to rely on the efforts of our collaborators for the sale and
marketing of our products. There can be no assurance that our collaborators will
market vaccine products incorporating our technologies, or, if marketed, that
such efforts will be successful. The failure of our collaborators to
successfully market products would harm our business.
We have retained, and in the future intend to retain, marketing rights to
some of our product candidates, including vaccine and immunotherapeutic delivery
systems and vaccine candidates, in selected geographic areas and for specified
indications. We intend to seek marketing and distribution agreements and/or
co-promotion agreements for the distribution of our products in these geographic
areas and for these indications. We believe that these arrangements could enable
us to generate greater financial return than might be obtained from early stage
licensing and collaboration agreements. We have no marketing and sales staff and
limited experience relating to marketing and distribution of commercial
products, including vaccines. If we determine in the future to engage in direct
marketing of our products, we will be required to recruit an experienced
marketing group, develop a supporting
23
distribution capability and incur significant additional expenditures. There can
be no assurance that we will be able to establish a successful marketing force.
We may choose or find it necessary to enter into strategic partnerships on
uncertain, but potentially unfavorable, terms to sell, market and distribute our
products. Any delay in the marketing or distribution of our products, whether it
results from problems with internal capabilities or with a collaborative
relationship, could harm the value of an investment in AVANT.
K. PATENTS, LICENSES AND PROPRIETARY RIGHTS
AVANT's policy is to protect our technology by filing patent applications
and obtaining patent rights covering our own technology, both in the United
States and in foreign countries. In addition, we have acquired and will seek to
acquire as needed or desired, exclusive rights of others through assignment or
license to complement our portfolio of patent rights. We also rely on trade
secrets, unpatented know-how and technological expertise and innovation to
develop and maintain our competitive position.
PATENTS: The successful development and marketing of products by AVANT will
depend in part on our ability to create and maintain intellectual property,
including patent rights. We have established a proprietary patent position in
the areas of complement inhibitor technology, vaccine technologies and
diagnostic technologies, and we are the owner or exclusive licensee of numerous
patents and pending applications around the world. Although we continue to
pursue patent protection for our products, no assurance can be given that any
pending application will issue as a patent, that any issued patent will have a
scope that will be of commercial benefit, or that we will be able to
successfully enforce our patent position against competitors.
In the area of complement molecules, we are co-owner with The Johns Hopkins
University and Brigham & Women's Hospital, whose rights AVANT has exclusively
licensed, of patents and applications covering inventions relating to complement
receptor type 1 (CR1). These rights are based in part on the work of
Dr. Douglas Fearon and include U.S. and foreign patents which claim nucleic acid
sequences encoding CR1, sCR1 and active fragments; purification methods; and
therapeutic uses of sCR1. We also own or have rights to a number of other issued
patents and patent applications relating to sCR1, sCR1sLe(x) and other
complement inhibitor molecules and their uses.
In 1996, we licensed portions of our patent and technology rights regarding
CR1 to CytoTherapeutics, Inc. ("CytoTherapeutics") for use in protecting
CytoTherapeutics' proprietary cell-encapsulation products for the delivery of
therapeutic substances to the central nervous system.
In July 1999, we entered into a transfer and sale agreement with
Innogenetics, Inc. ("Innogenetics") in which we conveyed to Innogenetics our
rights in the TRAx-Registered Trademark- technology for detection of cell
surface markers, such as CD4 and CD8 on T cells. This agreement gave
Innogenetics the exclusive rights to sell the TRAx-Registered Trademark- CD4 and
CD8 diagnostic products worldwide, with AVANT receiving payments and the rights
to receive future royalties on sales.
In the area of vaccine technology, we own issued U.S. patents and
corresponding foreign applications directed to the use of vaccines incorporating
both our Adjumer-Registered Trademark- and Micromer-Registered Trademark-
vaccine delivery technology. Further, we own and have licensed other
U.S. patents and patent applications, and corresponding foreign applications,
directed to technology that may be useful for our Micromer-Registered Trademark-
and Adjumer-Registered Trademark- vaccine delivery systems. We have an exclusive
license to a United States patent application, and corresponding foreign
applications, directed to a vector construct that is used in our VibrioVec-TM-
vaccine delivery system and an exclusive license to an issued U.S. patent
directed to a rotavirus strain antigen, which forms the basis of our rotavirus
vaccine. We also have an exclusive license to a U.S. patent application, and
corresponding foreign applications, directed to a defective HSV2 virus for use
in our vaccine directed against genital herpes, an exclusive license to
U.S. patent applications, and a non-exclusive license to U.S. and foreign
patents and applications directed to technology that may be
24
useful for our Therapore-TM- system. We have two issued patents in foreign
countries and additional pending patent applications in the U.S. and selected
foreign countries relating to control of CETP activity through vaccination.
There can be no assurance that patent applications owned by or licensed to
AVANT will result in granted patents or that, if granted, the resultant patents
will afford protection against competitors with similar technology. It is also
possible that third parties may obtain patents or other proprietary rights that
may be necessary or useful to AVANT. In cases where third parties are first to
invent a particular product or technology, it is possible that those parties
will obtain patents that will be sufficiently broad to prevent us from using
important technology or from further developing or commercializing important
vaccine and immunotherapeutic systems and vaccine candidates. If licenses from
third parties are necessary but cannot be obtained, commercialization of the
covered products might be delayed or prevented. Even if these licenses can be
obtained, they would probably require us to pay ongoing royalties and other
costs, which could be substantial.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to validity or as to the
enforceable scope of the patent claims. The validity or enforceability of a
patent after its issuance by the Patent and Trademark Office can be challenged
in litigation. As a business that uses a substantial amount of intellectual
property, we face a heightened risk of intellectual property litigation. If the
outcome of the litigation is adverse to the owner of the patent, third parties
may then be able to use the invention covered by the patent without payment.
There can be no assurance that our issued patents or any patents subsequently
issued to or licensed by us will not be successfully challenged in the future.
In addition, there can be no assurance that our patents will not be infringed or
that the coverage of our patents will not be successfully avoided by competitors
through design innovation.
We are aware that others, including universities and companies, have filed
patent applications and have been granted patents in the United States and other
countries which claim subject matter potentially useful or necessary to the
commercialization of our products. The ultimate scope and validity of existing
or future patents which have been or may be granted to third parties, and the
availability and cost of acquiring rights in those patents necessary to the
manufacture, use or sale of our products presently cannot be determined by
AVANT.
We use a mutated Vibrio cholerae in our VibrioVec-TM- vaccine delivery
system. We are aware of an issued U.S. patent which claims a culture of mutated
Vibrio cholerae. We believe that only one claim (the "Claim") of the patent may
be pertinent to our VibrioVec-TM- system. The remaining claims of the patent
cover other cultures, which we believe are not pertinent to VibrioVec-TM-. We
have received an opinion of counsel from Fish & Richardson, P.C. that, based on
the analysis set forth in their opinion and the facts known to them, the Claim
is invalid. It should be noted that a party challenging the validity of a patent
has the burden of proving invalidity and that the outcome of any litigation
cannot be predicted with certainty. Accordingly, there can be no assurance that,
if litigated, a court would conclude that the Claim is invalid.
In November 2000, we acquired Megan Health, Inc. and by this acquisition
obtained exclusive rights to vaccine technology patents and applications based
on the work of Dr. Roy Curtiss III. These patent rights complement and expand
the patent rights of AVANT in this technological area.
We are aware of an issued U.S. patent relating to herpes virus vaccines that
covers the same technology claimed in an application to which AVANT has been
granted an exclusive license. In January 2000, an interference was declared in
the U.S. Patent and Trademark Office to determine who is entitled to a
U.S. patent on this technology.
In addition to the patents referred to in the previous two paragraphs, there
may be other patent applications and issued patents belonging to competitors
that may require us to alter our vaccine
25
candidates and vaccine and immunotherapeutic delivery systems, pay licensing
fees or cease some of our activities. If our product candidates conflict with
patents that have been or may be granted to competitors, universities or others,
the patent owners could bring legal action against us claiming damages and
seeking to enjoin manufacturing and marketing of the patented products. If any
of these actions are successful, in addition to any potential liability for
damages, we could be required to obtain a license in order to continue to
manufacture or market the affected products. There can be no assurance that we
would prevail in any such action or that any license required under any such
third party patent would be made available on acceptable terms or at all. We
believe that there may be significant litigation in the biotechnology and
vaccine industries regarding patent and other intellectual property rights. If
we become involved in that litigation, we could consume substantial resources.
LICENSES: We have entered into several significant license agreements
relating to technology that is being developed by AVANT and/or its
collaborators, including licenses from the following: Massachusetts Institute of
Technology covering proprietary technologies for vaccine delivery related to
PCPP microparticles; Penn State Research Foundation covering the production of
polyphosphazene polymer; Harvard College relating to proprietary technology
involving genetically altered Vibrio cholera and Salmonella strains; Cincinnati
Children's Hospital involving proprietary rights and technologies relating to an
attenuated rotavirus strain for a rotavirus vaccine; Harvard College and the
Dana Farber Cancer Institute relating to a genetically-altered HSV2 virus for
use in a genital herpes virus vaccine; and Harvard College and the NIH for the
proprietary technology related to Therapore-TM-, a novel immunotherapy delivery
system to be developed for delivery of products for the treatment of persistent
viral infections and some forms of cancer. In general, these institutions
(except the NIH) have granted us an exclusive worldwide license (with right to
sublicense) to make, use and sell products embodying the licensed technology,
subject to the reservation by the licensor of a non-exclusive right to use the
technologies for non-commercial purposes. Generally, the term of each license is
through the expiration of the last of the patents issued with respect to the
technologies covered by the license. We have generally agreed to use reasonable
efforts to develop and commercialize licensed products and to achieve specified
milestones and pay license fees, milestone payments and royalties based on the
net sales of the licensed products or to pay a percentage of sublicense income.
If we breach our obligations, the licensor has the right to terminate the
license, and, in some cases, convert the license to a non-exclusive license.
PROPRIETARY RIGHTS: We also rely on unpatented technology, trade secrets
and confidential information, and no assurance can be given that others will not
independently develop substantially equivalent information and techniques or
otherwise gain access to our know-how and information, or that we can
meaningfully protect our rights in such unpatented technology, trade secrets and
information. We require each of our employees, consultants and advisors to
execute a confidentiality agreement at the commencement of an employment or
consulting relationship with AVANT. The agreements generally provide that all
inventions conceived by the individual in the course of employment or in
providing services to AVANT and all confidential information developed by, or
made known to, the individual during the term of the relationship shall be the
exclusive property of AVANT and shall be kept confidential and not disclosed to
third parties except in limited specified circumstances. There can be no
assurance, however, that these agreements will provide meaningful protection for
our information in the event of unauthorized use or disclosure of such
confidential information.
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L. GOVERNMENT REGULATION
Our activities and products are significantly regulated by a number of
governmental entities, including the FDA in the United States and by comparable
authorities in other countries and by the USDA with respect to products
developed by Megan. These entities regulate, among other things, the
manufacture, testing, safety, effectiveness, labeling, documentation,
advertising and sale of our products. We must obtain regulatory approval for a
product in all of these areas before we can commercialize the product. Product
development within this regulatory framework takes a number of years and
involves the expenditure of substantial resources. Many products that initially
appear promising ultimately do not reach the market because they are found to be
unsafe or ineffective when tested. Our inability to commercialize a product
would impair our ability to earn future revenues.
In the United States, vaccines and immunotherapeutics for human use are
subject to FDA approval as "biologics" under the Public Health Service Act and
"drugs" under the Federal Food, Drug and Cosmetic Act. The steps required before
a new product can be commercialized include: pre-clinical studies in animals,
clinical trials in humans to determine safety and efficacy and FDA approval of
the product for commercial sale.
Data obtained at any stage of testing is susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval.
Moreover, during the regulatory process, new or changed drug approval policies
may cause unanticipated delays or rejection of our product. We may not obtain
necessary regulatory approvals within a reasonable period of time, if at all, or
avoid delays or other problems in testing our products. Moreover, even if we
received regulatory approval for a product, the approval may require limitations
on use, which could restrict the size of the potential market for the product.
The FDA provides that human clinical trials may begin thirty (30) days after
receipt and review of an Investigational New Drug ("IND") application, unless
the FDA requests additional information or changes to the study protocol within
that period. An IND must be sponsored and filed by AVANT for each of our
proposed products. Authorization to conduct a clinical trial in no way assures
that the FDA will ultimately approve the product. Clinical trials are usually
conducted in three sequential phases. In a Phase I trial, the product is given
to a small number of healthy volunteers to test for safety (adverse effects).
Phase II trials are conducted on a limited group of the target patient
population; safety, optimal dosage and efficacy are studied. A Phase III trial
is performed in a large patient population over a wide geographic area to prove
that significant efficacy exists. The FDA has ongoing oversight over all these
trials and can order a temporary or permanent discontinuation if warranted. Such
an action could materially harm AVANT. Clinical tests are critical to the
success of our products but are subject to unforeseen and uncontrollable delay,
including delay in enrollment of patients. Any delay in clinical trials could
delay our commercialization of a product.
A product's safety and effectiveness in one test is not necessarily
indicative of its safety and effectiveness in another test. Moreover, we may not
discover all potential problems with a product even after completing testing on
it. Some of our products and technologies have undergone only pre-clinical
testing. As a result, we do not know whether they are safe or effective for
humans. Also, regulatory authorities may decide, contrary to our findings, that
a product is unsafe or not as effective in actual use as its test results
indicated. This could prevent the product's widespread use, require its
withdrawal from the market or expose us to liability.
The results of the clinical trials and all supporting data are submitted to
the FDA for approval. A Biologics License Application (BLA) is submitted for a
biologic product; a New Drug Application (NDA) for a drug product. The interval
between IND filing and BLA/NDA filing is usually at least several years due to
the length of the clinical trials, and the BLA/NDA review process can take over
a year. During this time the FDA may request further testing or additional
trials or may turn down the
27
application. Even with approval, the FDA frequently requires post-marketing
safety studies (known as Phase IV trials) to be performed.
The FDA requires that the manufacturing facility that produces a licensed
product meet specified standards, undergo an inspection and obtain an
establishment license prior to commercial marketing. Subsequent discovery of
previously unknown problems with a product or its manufacturing process may
result in restrictions on the product or the manufacturer, including withdrawal
of the product from the market. Failure to comply with the applicable regulatory
requirements can result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution.
In the United States, vaccines for animal health and food safety use are
subject to USDA approval. The steps required before a new product can be
commercialized include: pre-clinical studies in animals; clinical trials in
animals to determine safety and efficacy; and USDA approval of the product for
commercial sale. The registration of these vaccines may be subject to numerous
delays or possibly outright rejection of the product by the agency. Delays may
occur at any stage of testing, clinical results may be subject to unfavorable
interpretation by the agency and regulatory approval, if received, may require
limitations on use which could restrict the size of the potential market for the
product. The USDA requires that the manufacturing facility that produces a
licensed product meet specified standards, undergo an inspection and obtain an
establishment license prior to commercial marketing. Under USDA regulations,
this license is held by the manufacturer of the product, not the developer of
the product, such as Megan. Failure to comply with applicable USDA regulatory
requirements can result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution.
The Advisory Committee on Immunization Practices (ACIP) of the CDC has a
role in setting the public market in the United States for the vaccine products
we intend to develop. The ACIP makes recommendations on the appropriate use of
vaccines and related products and the CDC develops epidemiologic data relevant
to vaccine requirements and usage.
Because we may market our products abroad, we will be subject to varying
foreign regulatory requirements. Although international efforts are being made
to harmonize these requirements, applications must currently be made in each
country. The data necessary and the review time varies significantly from one
country to another. Approval by the FDA does not ensure approval by the
regulatory bodies of other countries.
Our collaborators are also subject to all of the above-described regulations
in connection with the commercialization of products utilizing our technology.
M. PRODUCT LIABILITY
The risk of product liability claims, product recalls and associated adverse
publicity is inherent in the testing, manufacturing, marketing and sale of
medical products. If and when we manufacture vaccines that are recommended for
routine administration to children, we will be required to participate in the
National Vaccine Injury Compensation Program. This program compensates children
having adverse reactions to certain routine childhood immunizations with funds
collected through an excise tax from the manufacturers of these vaccines.
We have clinical trial liability insurance coverage in the amount of
$5 million. However, there can be no assurance that such insurance coverage is
or will continue to be adequate or available. We may choose or find it necessary
under our collaborative agreements to increase our insurance coverage in the
future. We may not be able to secure greater or broader product liability
insurance coverage on acceptable terms or at reasonable costs when needed. Any
liability for mandatory damages could exceed the amount of our coverage. A
successful product liability claim against us could require us to pay a
substantial monetary award. Moreover, a product recall could generate
substantial negative
28
publicity about our products and business and inhibit or prevent
commercialization of other product candidates.
N. EMPLOYEES; SCIENTIFIC CONSULTANTS
As of March 1, 2001, we employed 66 full time persons, 13 of whom have
doctoral degrees. Of these employees, 50 were engaged in or directly support
research and development activities.
We have also retained a number of scientific consultants and advisors in
various fields and have entered into consulting agreements with each of them.
These consultants include the following members of the Scientific Advisory
Board: Dr. Mark Davis, Stanford University; Dr. Tak Mak, Ontario Cancer
Institute; Dr. Peter Ward, University of Michigan School of Medicine; Dr. Hans
Wigzell, Karolinska Institute; Dr. Peter Henson, National Jewish Center for
Immunology and Respiratory Medicine; Dr. Peter Libby, Brigham and Women's
Hospital; and Dr. Robert Langer, Massachusetts Institute of Technology.
ITEM 2. PROPERTIES
We lease approximately 54,000 square feet of laboratory and office space in
Needham, Massachusetts, of which we sublease approximately 13,000 square feet of
excess laboratory and office space to a tenant. The lease has an initial
six-year term which expires in April 2002. Under the lease agreement, we are
obligated to pay a base annual rent of $1,335,600 until the end of the initial
term. The sublease relating to the 13,000 square feet of excess space has an
initial four-year term which expires in April 2000 with an option to extend the
lease to April 2002. Under the sublease agreement, which was extended by the
subtenant to April 2002, we will receive base annual sub-rental income of
$308,300 until the end of the initial term. Aggregate net base rental payments
for the years ended December 31, 2000 and 1999 for this facility were $1,019,700
and $580,600, respectively.
We also lease approximately 17,800 square feet of laboratory and office
space in Cambridge, Massachusetts. The lease has a five-year term, which
commenced on December 1, 1996. Under the lease agreement, we are obligated to
pay a base annual rent of $293,700 until the end of the lease term. Effective
February 1, 1999, we sublet the entire Cambridge, Massachusetts facility through
the end of the lease term. Under the sublease agreement, we will receive base
annual sub-rental income of $431,700 of which approximately $41,400 will be
payable to the landlord as additional rent.
Our wholly owned subsidiary, Megan Health Inc., leases approximately 11,000
square feet of laboratory and office space in St. Louis, Missouri. The lease has
a five-year term that expires August 31, 2002. Under the lease agreement, we are
obligated to pay a base annual rent of $244,000 until the end of the lease term.
In November 2000, our building was sold to a new landlord who subsequently
notified Megan that its lease was being terminated without cause as provided in
the lease. As required by the lease, Megan was given 270 days written notice
that its lease would now terminate as of August 31, 2001. Megan is currently in
discussions with the new landlord about possibly occupying less space in the
building and extending the lease beyond August 2001 on a month-to-month basis.
Megan is also investigating alternative lease arrangements in the St. Louis
area.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market (the "Nasdaq")
under the symbol "AVAN" on August 24, 1998. Prior to that date, we were traded
on the Nasdaq under the symbol "TCEL". The following table sets forth for the
periods indicated the high and low closing sales prices for our common stock as
reported by Nasdaq.
FISCAL PERIOD HIGH LOW
- ------------- -------- --------
YEAR ENDED DECEMBER 31, 1999
1Q (Jan. 1 - March 31, 1999)................................ $ 2.41 $1.06
2Q (April 1 - June 30, 1999)................................ 2.13 1.13
3Q (July 1 - Sept. 30, 1999)................................ 3.13 1.69
4Q (Oct. 1 - Dec. 31, 1999)................................. 2.47 1.50
YEAR ENDED DECEMBER 31, 2000
1Q (Jan. 1 - March 31, 2000)................................ $16.75 $2.06
2Q (April 1 - June 30, 2000)................................ 11.06 4.66
3Q (July 1 - Sept. 30, 2000)................................ 12.00 6.50
4Q (Oct. 1 - Dec. 31, 2000)................................. 11.00 6.00
As of March 1, 2001, there were approximately 655 shareholders of our common
stock. The price of the common stock was $5.00 as of the close of the market on
March 1, 2001. We have not paid any dividends on our common stock since our
inception and do not intend to pay any dividends in the foreseeable future.
Declaration of dividends will depend, among other things, upon our operating and
future earnings, our capital requirements and general business conditions.
In December 2000, we issued 1,841,236 shares of our common stock at $9.54
per share in connection with our acquisition of Megan Health Inc. and 285,877
shares of our common stock at $10.50 per share in a separate private placement
with Pfizer Inc.
On July 17, 2000, we closed a private placement of approximately
4.7 million shares of common stock at $7.85 per share for a total amount of
$36.5 million. PaineWebber, Inc. was the placing agent for the offering, which
included several European and U.S. institutional investors. The transaction was
not registered under the Securities Act of 1933, as amended, in reliance on an
exemption from registration provided by Rule 506 of the Securities Act of 1933,
as amended, which was available because, among other things, there were fewer
than thirty five purchasers of common stock and more than six months had elapsed
from the date of any previous offerings. Proceeds from the private placement
will be used to support clinical development of our lead complement inhibitor,
TP10, in infants and adults undergoing cardiac surgery on cardiopulmonary
bypass, the manufacture of commercial grade TP10 for the planned pivotal
Phase III in pediatric cardiac surgery and other company activities.
On September 22, 1999, we closed a private placement of approximately
5.5 million shares of common stock at $1.92 per share for a total amount of
$10.5 million. Nomura was the placing agent for the offering, which included
several European and U.S. institutional investors. The transaction was not
registered under the Securities Act of 1933, as amended, in reliance on an
exemption from registration provided by Rule 506 of the Securities Act of 1933,
as amended, which was available because, among other things, there were fewer
than thirty five purchasers of common stock and more than six months had elapsed
from the date of any previous offerings. Proceeds from the private placement
will be used
30
to support clinical development of our lead complement inhibitor, TP10, in
infants undergoing cardiac surgery on cardiopulmonary bypass and other company
activities.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the years ended
December 31, 2000, 1999, 1998, 1997 and 1996 have been derived from the audited
consolidated financial statements of AVANT. The results of operations for 2000,
1999 and 1998 include the operating results of Virus Research Institute, Inc.
("VRI") from August 21, 1998, the date on which AVANT acquired VRI, through the
present. The results of operations for 2000 also include the operating results
of Megan Health, Inc. ("Megan") from December 1, 2000, the date on which AVANT
acquired Megan, through the present (see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). All amounts are in
thousands except per share data.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- -------- --------
OPERATING REVENUE:
Product Sales, Product Development and
Licensing Agreements.................. $ 763 $ 1,484 $ 2,150 $ 1,192 $ 1,115
--------- --------- --------- -------- --------
OPERATING EXPENSE:
Research and Development................ 10,774 7,872 5,703 5,257 6,036
Charge for Purchased In-Process
Research & Development................ 9,012 -- 44,630 -- --
Legal Settlement........................ (500) -- (166) 6,109 --
Other Operating Expense................. 5,430 5,556 4,377 3,494 6,549
--------- --------- --------- -------- --------
Total Operating Expense................. 24,716 13,428 54,544 14,860 12,585
--------- --------- --------- -------- --------
Non-Operating Income, Net............... 1,978 635 594 560 680
--------- --------- --------- -------- --------
Net Loss................................ $ (21,975) $ (11,309) $ (51,800) $(13,108) $(10,790)
========= ========= ========= ======== ========
Basic and Diluted Net Loss Per Common
Share................................. $ (0.42) $ (0.26) $ (1.56) $ (0.52) $ (0.50)
========= ========= ========= ======== ========
Weighted Average Common Shares
Outstanding........................... 52,438 44,076 33,177 25,140 21,693
========= ========= ========= ======== ========
CONSOLIDATED BALANCE SHEET DATA
DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- -------- --------
Working Capital......................... $ 46,409 $ 12,289 $ 12,298 $ 4,629 $ 11,673
Total Assets............................ 63,563 19,883 22,650 9,827 17,224
Other Long Term Obligations............. 4,233 269 563 750 --
Accumulated Deficit..................... (155,320) (133,345) (122,036) (70,237) (57,129)
Total Stockholders' Equity.............. 53,932 17,413 18,770 6,316 15,619
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We own financial instruments that are sensitive to market risk as part of
our investment portfolio. Our investment portfolio is used to preserve our
capital until it is used to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We invest our cash primarily in money market mutual funds
and U.S. Government and other investment grade debt securities. These
investments are evaluated quarterly to determine the fair value of the
portfolio. Our investment portfolio includes only marketable securities with
active secondary or resale markets to help insure liquidity. We have implemented
policies regarding the amount and credit ratings of investments. Due to the
conservative nature of these policies, we do not believe we have material
exposure due to market risk. The impact to our financial position and results of
operations from likely changes in interest rates is not material.
We do not utilize derivative financial instruments. See Notes 1 and 2 to the
Consolidated Financials Statements for a description of our use of other
financial instruments. The carrying amounts reflected in the consolidated
balance sheet of cash and cash equivalents, accounts receivables and accounts
payable approximates fair value at December 31, 2000 due to the short-term
maturities of these instruments.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: STATEMENTS CONTAINED IN THE FOLLOWING, ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THAT ARE NOT
HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO A VARIETY
OF RISKS AND UNCERTAINTIES. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY AVANT. THESE FACTORS INCLUDE, BUT ARE NOT
LIMITED TO: (I) OUR ABILITY TO SUCCESSFULLY COMPLETE PRODUCT RESEARCH AND
DEVELOPMENT, INCLUDING PRE-CLINICAL AND CLINICAL STUDIES, AND COMMERCIALIZATION;
(II) OUR ABILITY TO OBTAIN SUBSTANTIAL ADDITIONAL FUNDING; (III) OUR ABILITY TO
OBTAIN REQUIRED GOVERNMENTAL APPROVALS; (IV) OUR ABILITY TO ATTRACT
MANUFACTURING, SALES, DISTRIBUTION AND MARKETING PARTNERS AND OTHER STRATEGIC
ALLIANCES; AND (V) OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS BEFORE
OUR COMPETITORS.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AVANT's principle activity since our inception has been research and product
development conducted on our own behalf, as well as through joint development
programs with several pharmaceutical companies. We were incorporated in the
State of Delaware in December 1983.
A significant portion of AVANT's revenue has consisted of payments by others
to fund sponsored research, milestone payments under joint development
agreements, license fees, payments for material produced for pre-clinical and
clinical studies, and sales of test kits and antibodies. Certain portions of the
collaborative payments are received in advance, recorded as deferred revenue and
recognized when earned in later periods.
Inflation and changing prices have not had a significant effect on
continuing operations and are not expected to have any in the near future.
OVERVIEW
We are engaged in the discovery, development and commercialization of
products that harness the human immune response to prevent and treat disease.
Our products derive from a broad set of complementary technologies with the
ability to inhibit the complement system, regulate T and B cell activity, and
enable the creation and delivery of preventative and therapeutic vaccines. We
are using these technologies to develop vaccines and immunotherapeutics that
prevent or treat disease caused by
32
infectious organisms, and drugs and treatment vaccines that modify undesirable
activity by the body's own proteins or cells.
ACQUISITIONS
MEGAN HEALTH, INC.: On December 1, 2000, AVANT acquired all of the
outstanding capital stock of Megan Health, Inc. ("Megan"), a company engaged in
the discovery and development of human and animal vaccines using patented gene
modification technologies (see Note 14 of Notes to Consolidated Financial
Statements). We issued approximately 1,841,200 shares of AVANT's common stock in
exchange for all of the outstanding capital stock of Megan, on the basis of
0.763542977 shares of AVANT common stock for each share of Megan preferred stock
and 0.08115304 shares of AVANT common stock for each share of Megan common
stock. We also assumed all of the outstanding options to purchase common stock
of Megan under Megan's stock option plan. The purchase price of $17,332,000
consisted of (i) the issuance of 1,841,200 shares of AVANT common stock valued
at $15,803,400, (ii) cash distributed to certain Megan shareholders in lieu of
AVANT common stock totaling $236,700, (iii) the issuance of fully vested options
to purchase AVANT common stock valued at $239,400 and (iv) severance and
transaction costs totaling $1,052,500. As of the date of the acquisition of
Megan, AVANT had identified all significant actions to be taken to terminate
certain Megan employees. Severance costs totaled approximately $164,200, were
recognized upon consummation of the merger and are included in the $1,052,500
referenced above.
The acquisition of Megan has been accounted for as a purchase. Consequently,
the purchase price was allocated to the acquired assets and assumed liabilities
based upon their fair value at the date of acquisition. The excess of the
purchase price over the tangible assets acquired was assigned to acquired
intangible assets, the components of which include core technology, developed
technology, strategic partner agreement and assembled work force. These acquired
intangible assets are being amortized on a straight-line basis over their
estimated lives which range from 5 to 17 years. An allocation of $9,012,300 was
made to in-process research and development ("IPR&D"), which represented
purchased in-process technology which had not yet reached technological
feasibility and had no alternative future use. The amount was charged as an
expense in our financial statements during the fourth quarter of 2000.
As of the date of the acquisition, Megan was engaged in three significant
research and development projects. See our discussion of these projects in the
section entitled "Animal Health and Food Safety Vaccine Programs" on page 10.
The value of IPR&D was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the net cash flows from such projects and discounting the net cash flows back to
their present values. The probability of success and discount rates used for
each project take into account the uncertainty surrounding the successful
development and commercialization of the purchased in-process technology. The
resulting net cash flows for these projects were based on our best estimates of
revenue, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes for each project, and the net cash flows
reflect assumptions that would be used by market participants.
Substantial additional research and development will be required prior to
reaching technological feasibility on any of these products. In addition, each
product needs to successfully complete a series of clinical trials and to
receive USDA or other regulatory approval prior to commercialization. We are
also dependent upon the activities of our collaborators in developing and
marketing our products. There can be no assurance that these projects will ever
reach feasibility or develop into products that can be marketed profitably, nor
can there be assurance AVANT and our collaborators will be able to develop and
commercialize these products before our competitors. If these products are not
successfully developed and do not become commercially viable, our financial
condition and results of operations could be materially adversely affected.
33
VIRUS RESEARCH INSTITUTE, INC.: On August 21, 1998 AVANT acquired VRI, a
company engaged in the discovery and development of systems for the delivery of
vaccines and immunotherapeutics, and novel vaccines for adults and children. We
issued 14,036,400 shares of AVANT's common stock and warrants to purchase
1,811,200 shares of AVANT's common stock in exchange for all of the outstanding
common stock of VRI, on the basis of 1.55 shares of our common stock and .20 of
an AVANT warrant for each share of VRI common stock. The acquisition has been
accounted for as a purchase. Consequently, the purchase price was allocated to
the acquired assets and assumed liabilities based upon their fair value at the
date of acquisition. The excess of the purchase price over the tangible assets
acquired was assigned to collaborative relationships, work force and goodwill
and is being amortized on a straight-line basis over 12 to 60 months. An
allocation of $44,630,000 was made to IPR&D, which represented purchased
in-process technology which had not yet reached technological feasibility and
had no alternative future use. The amount was charged as an expense in our
financial statements during the third quarter of 1998.
As of the date of the acquisition, VRI was engaged in six significant
research and development projects. As of December 31, 2000, technological
feasibility had not yet been reached on any of the major projects acquired, and
no significant departures from the assumptions included in the valuation
analysis had occurred. Substantial additional research and development will be
required prior to reaching technological feasibility on any of these projects.
In addition, each project will need to successfully complete a series of
clinical trials and will need to receive FDA approval prior to
commercialization. There can be no assurance that these projects will ever reach
feasibility or develop into products that can be marketed profitably, nor can
there be assurance that AVANT and our collaborators will be able to develop and
commercialize these products before our competitors. If these products are not
successfully developed and do not become commercially viable, our financial
condition and results of operations could be harmed.
The acquisitions of Megan and VRI represent the only purchases of historical
IPR&D by AVANT to date. As of December 31, 2000, we have no immediate plans to
acquire additional IPR&D, although we expect to raise additional capital, as
required, through licensing of technology programs with existing or new
collaborative partners, possible business combinations, or the issuance of
common stock via private placement or public offering.
NEW DEVELOPMENTS
COMPLEMENT INHIBITORS: In 1997, we entered into an agreement with Novartis
relating to the development of TP10 for use in xenotransplantation (animal
organs into humans) and allotransplantation (human organs into humans). We
granted Novartis a two-year option to license TP10 with exclusive worldwide
marketing rights (except Japan) in the fields of xenotransplantation and
allotransplantation. In July 1999, Novartis exercised its option to license TP10
for use in the field of transplantation. In December 1999, the Novartis
agreement was amended to include marketing rights for Japan. The decision to
license TP10 resulted in a $6 million equity investment and license payment by
Novartis which was received by AVANT in January 2000. Under the agreement, we
may receive additional milestone payments of up to $14 million upon attainment
of certain development and regulatory goals. We will also be entitled to
royalties on product sales under the agreement.
We have elected to independently develop and commercialize TP10 for
pediatric cardiac surgery. In September 1999, we initiated an open-label,
Phase I/II trial of TP10 in infants undergoing cardiac surgery for congenital
heart defects. The trial evaluated the ability of TP10 to mitigate the injury to
the heart and other organs that occurs when patients are placed on
cardiopulmonary bypass circuits. TP10 was well tolerated in the study population
and results of this Phase I/II trial were presented at the Society of
Cardiovascular Anesthesiologists Annual Meeting in May 2000 and at the American
Heart Annual Association's Meeting in November 2000. In March 2000, we received
orphan drug designation for TP10 in infants undergoing cardiac surgery.
34
AVANT expects to complete two Phase IIb studies of its lead complement
inhibitor, TP10, in pediatric cardiac surgery utilizing cardiopulmonary bypass
in a total of 40-70 patients before moving to a pivotal Phase III trial. The
first study, which was initiated at the end of 2000, is enrolling babies born
with hypoplastic left heart syndrome who often have high morbidity and mortality
after heart surgery. The second study, which is being conducted in a lower risk
infant population, is planned to begin shortly and will allow us to further
define our clinical endpoints. We are looking to the results of these trials to
support a mortality endpoint for the high risk infant population in the larger
pivotal Phase III study and to allow for a possible broadening of the product
label for TP10 to cover all babies under one year requiring cardiac surgery to
repair congenital heart defects.
In addition, in November 2000, AVANT initiated a placebo-controlled
Phase II trial in approximately 600 adult patients undergoing cardiac surgery
utilizing cardiopulmonary bypass. This 30-center study is a dose-ranging study
that will allow us to further define our clinical endpoints in the adult patient
population before moving ahead to a number of pivotal clinical trials. This
adult study is intended to investigate the efficacy and safety in a population
known to be at high risk of medically important adverse outcomes that have a
real effect on the long-term health of a substantial population. AVANT may
partner the adult program when additional clinical data becomes available.
CHOLESTEROL TREATMENT VACCINE: We are developing a therapeutic vaccine
against endogenous cholesteryl ester transfer protein (CETP), which may be
useful in reducing risks associated with atherosclerosis. CETP is a key
intermediary in the balance of HDL and LDL. We are developing a vaccine (CETi-1)
to stimulate an immune response against CETP, which we believe may improve the
ratio of HDL to LDL cholesterol and reduce the progression of atherosclerosis.
We have conducted preliminary studies of rabbits, which have demonstrated the
ability of CETi-1 vaccine to elevate HDL and reduce the development of blood
vessel lesions. In September 1999, we initiated a double-blind placebo
controlled, Phase I clinical trial of our CETi-1 vaccine in adult volunteers.
The object of the study is to demonstrate the safety of single administrations
of the vaccine at four different dosage strengths. Patient enrollment in this
Phase I trial was completed in February 2000 and we announced trial results in
January 2001.
The vaccine was very well tolerated in the 48 adult volunteers who
participated in the study. The only serious adverse reaction reported during the
study (allergic reaction to shower gel) was not related to study medication.
There were no differences in the safety profiles of placebo groups and active
vaccine groups. In addition there was limited evidence of an immune response in
one subject treated with the highest dose. In addition, AVANT recently announced
preliminary results from a double-blinded placebo controlled extension of the
earlier completed Phase I trial of our CETP vaccine (CETi-1) in healthy adult
volunteers. CETi-1 is being developed for the management of patients with low
levels of HDL (high-density lipoprotein) cholesterol. Results from the extension
study showed measurable antibody titers in all dose groups treated with study
medication, suggesting a dose-response relationship. These data will be
extremely helpful in designing a Phase II study, which we plan to begin in the
summer of 2001. As clinical data becomes available, we plan to seek a corporate
partner to complete development and to commercialize the vaccine.
CHOLERA VACCINE: We are developing a single dose, oral cholera vaccine
using a live, genetically attenuated cholera strain. Based on this technology,
developed in academia, we have developed the vaccine through early Phase II
trials. We then negotiated a collaboration agreement under which a Phase IIb
trial will be performed and funded by the Walter Reed Army Institute of Research
(WRAIR) and the National Institute of Health (NIH). This trial, started in
October 2000, will test the safety, immunogenecity and protective capacity of
the vaccine against a challenge with live virulent cholera. If results from this
study are positive, we will move rapidly to complete the manufacture of cGMP
grade clinical material in 2001 and to initiate a pivotal challenge trial in the
first half of 2002. Development of a safe, effective cholera vaccine is the
first step in establishing AVANT's travelers' vaccine franchise. AVANT has also
conducted initial clinical studies of our single dose, oral typhoid vaccine and
has a
35
shigella vaccine in pre-clinical development. With the acquisition of Megan
Health Inc., AVANT has gained access to technologies for developing vaccines
against CAMPYLOBACTER and E. COLI, two additional causes of serious diarrheal
diseases worldwide.
ROTAVIRUS VACCINE: Rotavirus is a major cause of diarrhea and vomiting in
infants and children. No vaccine against rotavirus is currently on the market.
In 1997, we licensed our oral rotavirus vaccine to SmithKline. In 1999, after
our Phase II study demonstrated 89% protection in a study involving 215 infants,
SmithKline paid us an additional license fee and assumed full responsibility for
funding and performing all remaining clinical development. SmithKline has
initiated Phase I/II bridging studies in Europe using its newly manufactured
rotavirus vaccine, called Rotarix-TM-, and is now planning to start Phase III
safety and efficacy studies in the second half of 2001, after review with health
authorities. Assuming product development and commercialization continues
satisfactorily, we expect that SmithKline will pay us additional milestones and
a royalty based on sales.
ADJUMER-REGISTERED TRADEMARK-: AVANT is a party to two license agreements
with Aventis pursuant to which Aventis has been granted the exclusive and
co-exclusive right (exclusive, except for the right of AVANT or one other person
licensed by AVANT) to make, use and sell certain of our vaccines. We received a
milestone payment of $600,000 from our collaborator Aventis in the fourth
quarter of 1998. The milestone payment relates to a Phase I clinical trial using
our Adjumer-Registered Trademark--formulated Respiratory Syncytial Virus (RSV)
vaccine initiated by Aventis in 1998.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 1999
AVANT reported a net loss of $21,975,000, or $0.42 per share, for the year
ended December 31, 2000, compared to a net loss of $11,309,100, or $0.26 per
share, for the year ended December 31, 1999. The net loss for the year ended
December 31, 2000 includes a charge of $9,012,300 for purchased in-process
research and development related to the acquisition of Megan in December 2000.
Excluding the charge for purchased in-process research and development, the net
loss for 2000 increased $1,653,600, or 14.6%, to $12,962,700, or $0.25 per
share, compared to a net loss of $11,309,100, or $0.26 per share, for 1999. The
weighted average common shares outstanding used to calculate the net loss per
common share was 52,438,100 in 2000 and 44,076,400 in 1999.
OPERATING REVENUE
Total operating revenue decreased $720,300, or 48.6%, to $763,200 in 2000
from $1,483,500 in 1999.
Product development and licensing revenue decreased $753,700, or 50.8%, to
$729,800 in 2000 from $1,483,500 in 1999. In 2000, we recognized $729,800 in the
amortization of nonrefundable license fees from Novartis and Pfizer in product
development and licensing revenue. In 1999, product development and licensing
revenue consisted primarily of $750,000 in the amortization of a nonrefundable
option fee associated with our agreement with Novartis, a milestone payment of
$500,000 from SmithKline and $193,500 received in connection with our SBIR
grants.
Product sales for 2000 totaled $33,400 and were derived from sales of our
Megan-Registered Trademark-Vac 1 product, a vaccine for use in chickens for
protection against multiple strains of SALMONELLA bacteria, which we acquired in
connection with our acquisition of Megan. There were no product sales recorded
in 1999.
OPERATING EXPENSE
Total operating expense for 2000 was $24,716,300 compared to $13,427,800 for
1999. Operating expense for 2000 included a charge of $9,012,300 for purchased
in-process research and development in connection with the acquisition of Megan
in December 2000. Excluding the purchased in-process
36
research and development charge, operating expense increased $2,276,200, or
17.0%, to $15,104,000 for 2000 compared to $13,427,800 for 1999. The increase in
total operating expense for 2000 compared to 1999 is primarily due to increased
clinical trials costs and clinical materials costs incurred in connection with
AVANT's TP10 and CETi-1 clinical programs. These cost increases were offset in
part by the receipt in 2000 of legal settlement payments totaling $500,000 and a
reduction in the charge for amortization of acquired intangible assets.
Research and development expense increased $2,902,400, or 36.9%, to
$10,774,200 in 2000 from $7,871,800 in 1999. The increase in 2000 compared to
1999 is primarily due to costs associated with conducting clinical trials of
CETi-1 and TP10, and an increase in expense associated with the manufacture of
clinical materials.
Selling, general and administrative expense increased $528,100, or 12.3%, to
$4,808,300 in 2000 compared to $4,280,200 in 1999. Included in selling, general
and administrative expense in 2000 and 1999 are charges of $69,600 and $105,900
for the write-off of certain capitalized patent costs associated with our
complement and SMIR programs, respectively. Excluding the write-off of patent
costs in 2000 and 1999, selling, general and administrative expense increased
$564,400, or 13.5%, to $4,738,700 for 2000 compared to $4,174,300 for 1999. The
increase in expense in 2000 compared to 1999 is primarily attributed to higher
consultant, investor relations and personnel costs.
NON-OPERATING INCOME, NET
Interest income increased $1,342,900, or 211%, to $1,978,100 for 2000
compared to $635,200 for 1999. The increase in interest income is primarily due
to higher average cash balances in 2000.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 1998
AVANT reported a net loss of $11,309,100, or $0.26 per share, for the year
ended December 31, 1999, compared to a net loss of $51,799,700, or $1.56 per
share, for the year ended December 31, 1998. The net loss for the year ended
December 31, 1998 includes a charge of $44,630,000 for purchased in-process
research and development related to the acquisition of VRI in August 1998.
Excluding the charge for purchased in-process research and development in 1998,
the net loss for 1999 increased 57.7% to $11,309,100, or $0.26 per share,
compared to a net loss of $7,169,700, or $0.22 per share, for 1998. The weighted
average common shares outstanding used to calculate the net loss per common
share was 44,076,400 in 1999 and 33,177,200 in 1998.
OPERATING REVENUE
Total operating revenue decreased $666,900, or 31.0%, to $1,483,500 in 1999
from $2,150,400 in 1998.
Product development and licensing revenue decreased $611,000, or 29.2%, to
$1,483,500 in 1999 from $2,094,500 in 1998. Product development and licensing
revenue in 1999 consisted primarily of a $750,000 nonrefundable option fee
associated with our agreement with Novartis, a milestone payment of $500,000
from SmithKline and $193,500 received in connection with our SBIR grants. In
1998, we recognized $1,000,000 of a nonrefundable option fee from Novartis in
product development and licensing revenue, milestone payments totaling $600,000
from Aventis and $494,500 received in connection with our SBIR grants.
There were no product sales recorded in 1999. Product sales for 1998 totaled
$55,900 and were derived from sales of our TRAx-Registered Trademark- test kits.
In August 1999, we sold the TRAx-Registered Trademark- line of diagnostic
products and the TRAx-Registered Trademark- technology.
37
OPERATING EXPENSE
Total operating expense for 1999 was $13,427,800 compared to $54,544,300 for
1998. Operating expense for 1998 included a charge of $44,630,000 for purchased
in-process research and development in connection with the acquisition of VRI in
August 1998. Excluding the purchased in-process research and development charge
in 1998, operating expense increased $3,513,500, or 35.4%, to $13,427,800 for
1999 compared to $9,914,300 for 1998. The increase in total operating expense
for 1999 compared to 1998 is primarily due to: (i) a full year of operations of
VRI in 1999 versus four months in 1998, combined with an increase of goodwill
amortization expense of $729,400; (ii) an increase in clinical trials cost; and
(iii) an increase in expense associated with the manufacture of clinical
materials for AVANT-funded clinical studies.
Research and development expense increased $2,168,700, or 38.0%, to
$7,871,800 in 1999 from $5,703,100 in 1998. The increase in 1999 compared to
1998 is primarily due to a full year of operations of VRI in 1999 versus four
months in 1998, costs associated with conducting the Phase I clinical trial of
CETP and the Phase I/II clinical trial of TP10, both ongoing in 1999, and an
increase in expenses associated with the manufacture of clinical materials.
General and administrative expense increased $472,100, or 12.4%, to
$4,280,200 in 1999 compared to $3,808,100 in 1998. Included in general and
administrative expense in 1999 and 1998 are charges of $105,900 and $294,500 for
the write-off of certain capitalized patent costs associated with our SMIR
program and our TRAx-Registered Trademark- technology, respectively. Excluding
the write-off of patent costs in 1999 and 1998, general and administrative
expense increased $660,700, or 18.8%, to $4,174,300 for 1999 compared to
$3,513,600 for 1998. The increase in 1999 compared to 1998 is primarily due to a
full year of operations of VRI in 1999 versus four months in 1998.
NON-OPERATING INCOME, NET
Non-operating income, net increased $41,000, or 6.9%, to $635,200 for 1999
compared to $594,200 in 1998. Interest income increased $63,300, or 11.1%, to
$635,200 for 1999 compared to $571,900 for 1998. The increase in interest income
is primarily due to higher average cash balances in 1999.
LIQUIDITY AND CAPITAL RESOURCES
AVANT's cash, cash equivalents and marketable securities at December 31,
2000 was $50,177,000 compared to $13,619,000 at December 31, 1999. Cash used in
operations was $4,431,900 in 2000 compared $8,539,100 in 1999 and $8,852,000 in
1998.
Concurrent with our acquisition of Megan, we entered into a licensing
agreement with Pfizer whereby Pfizer made an initial license payment of
$2.5 million together with a $3 million equity investment in AVANT. In
July 1999, Novartis exercised its option to license TP10 for use in the field of
transplantation. The decision to license TP10 resulted in a $6 million payment
by Novartis which was received by AVANT in January 2000.
On July 17, 2000, we completed a private placement of 4,650,900 newly issued
shares of common stock at $7.85 per share which generated net proceeds totaling
approximately $34,481,000 after deducting all associates expenses. In
September 1999, we completed a private placement of 5,459,400 shares of common
stock to institutional investors at a price of $1.92 per share. Net proceeds
from the common stock issuance totaled approximately $9,838,900. In March 1998,
we completed a private placement of 2,043,500 shares of common stock to
institutional investors at a price of $1.90 per share. Net proceeds from the
common stock issuance totaled approximately $3,699,800.
In November 1997, AVANT reached a settlement in a lawsuit with our former
landlord and the landlord's mortgagee. As part of the settlement, we agreed to
pay $858,800 in cash on November 17, 1997 and issue a total of 1,500,000 shares
of our common stock. In addition, we signed a note for
38
$750,000, due on November 16, 1998, secured by $750,000 cash and a note for
$750,000 due November 15, 1999, secured by 132,500 shares of our common stock.
The total settlement, valued at $6,108,800, is comprised of the cash and notes
totaling $2,358,800 and our common stock valued at $3,750,000 as of October 31,
1997. The common stock is subject to restrictions on transfer in accordance with
the settlement agreement and limits the number of shares that may be sold over a
given period of time. In May 1998, in accordance with the settlement agreement,
we elected to secure the note for $750,000 due November 15, 1999 by $750,000
cash in exchange for the return of 66,250 shares or one half of the common stock
originally used to secure the note. The cash collateral is recorded as
short-term restricted cash at December 31, 1998. In November 1999, the note was
paid in full.
During 1994, we entered into an agreement providing us with the right to
lease up to $2,000,000 of equipment for up to a five-year term. The lease
arrangement contains certain restrictive covenants, determined at the end of
each fiscal quarter. In accordance with the lease agreement, in September 1995
we pledged as collateral cash equal to the amount outstanding on the lease,
which is to remain in a certificate of deposit until the end of the lease, or as
otherwise agreed by the lessor and AVANT. In March 2000, the lessor released us
from the requirement to maintain cash collateral.
AVANT believes that cash inflows from existing grants and collaborations,
interest income on invested funds and our current cash and cash equivalents will
be sufficient to meet estimated working capital requirements and fund operations
beyond December 31, 2001 and into the first half of 2002. The working capital
requirements of AVANT are dependent on several factors including, but not
limited to, the costs associated with research and development programs,
pre-clinical and clinical studies, manufacture of clinical and commercial grade
materials and the scope of collaborative arrangements. During 2001, we expect to
take steps to raise additional capital including, but not limited to, licensing
of technology programs with existing or new collaborative partners, possible
business combinations, or the issuance of common stock via private placement or
public offering. There can be no assurance that such efforts will be successful.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
--------
Report of Independent Accountants........................... 41
Consolidated Balance Sheet at December 31, 2000 and
December 31, 1999......................................... 42
Consolidated Statement of Operations for the Years Ended
December 31, 2000, December 31, 1999 and December 31,
1998...................................................... 43
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2000, December 31, 1999 and
December 31, 1998......................................... 44
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, December 31, 1999 and December 31,
1998...................................................... 45
Notes to Consolidated Financial Statements.................. 46
40
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
AVANT Immunotherapeutics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of AVANT
Immunotherapeutics, Inc. and its subsidiaries (the "Company") at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 2001
41
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 50,177,000 $ 13,619,000
Accounts Receivable....................................... 153,500 --
Inventories............................................... 59,200 --
Current Portion Lease Receivable.......................... 395,700 431,700
Prepaid and Other Current Assets.......................... 1,021,200 439,000
------------- -------------
Total Current Assets.................................... 51,806,600 14,489,700
Property and Equipment, Net................................. 1,037,900 1,256,800
Restricted Cash............................................. -- 217,000
Long-Term Lease Receivable.................................. -- 395,700
Intangible and Other Assets................................. 10,718,500 3,523,500
------------- -------------
Total Assets............................................ $ 63,563,000 $ 19,882,700
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.......................................... $ 902,300 $ 575,300
Accrued Expenses.......................................... 2,681,600 1,331,500
Current Portion Deferred Revenue.......................... 1,539,600 --
Current Portion Lease Payable............................. 274,500 293,700
------------- -------------
Total Current Liabilities............................... 5,398,000 2,200,500
------------- -------------
Long-Term Deferred Revenue.................................. 4,233,000 --
Long-Term Lease Payable..................................... -- 269,200
Commitments and Contingent Liabilities (Notes 3 and 13)
Stockholders' Equity:
Common Stock, $.001 Par Value 75,000,000 Shares
Authorized; 57,144,200 Issued and Outstanding at
December 31, 2000; 48,127,400 Issued and Outstanding at
December 31, 1999....................................... 57,100 48,100
Additional Paid-In Capital................................ 209,195,300 150,710,300
Accumulated Deficit....................................... (155,320,400) (133,345,400)
------------- -------------
Total Stockholders' Equity.............................. 53,932,000 17,413,000
------------- -------------
Total Liabilities and Stockholders' Equity.............. $ 63,563,000 $ 19,882,700
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
42
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------- ------------- -------------
OPERATING REVENUE:
Product Development and Licensing Agreements........ $ 729,800 $ 1,483,500 $ 2,094,500
Product Sales....................................... 33,400 -- 55,900
------------ ------------ ------------
Total Operating Revenue......................... 763,200 1,483,500 2,150,400
------------ ------------ ------------
OPERATING EXPENSE:
Research and Development............................ 10,774,200 7,871,800 5,703,100
Selling, General and Administrative................. 4,808,300 4,280,200 3,808,100
Cost of Product Sale................................ 3,500 -- 22,300
Charge for Purchased In-Process
Research & Development............................ 9,012,300 -- 44,630,000
Legal Settlement.................................... (500,000) -- (165,600)
Amortization of Acquired Intangible Assets.......... 618,000 1,275,800 546,400
------------ ------------ ------------
Total Operating Expense......................... 24,716,300 13,427,800 54,544,300
------------ ------------ ------------
Operating Loss...................................... (23,953,100) (11,944,300) (52,393,900)
Non-Operating Income, Net........................... 1,978,100 635,200 594,200
------------ ------------ ------------
Net Loss............................................ $(21,975,000) $(11,309,100) $(51,799,700)
============ ============ ============
Basic and Diluted Net Loss Per Common Share......... $ (0.42) $ (0.26) $ (1.56)
============ ============ ============
Weighted Average Common
Shares Outstanding................................ 52,438,100 44,076,400 33,177,200
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
43
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL TREASURY TOTAL
STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL COST DEFICIT EQUITY
---------- --------- ------------ -------- ------------- -------------
BALANCE AT DECEMBER 31, 1997......... 26,487,400 $26,500 $ 76,561,400 $(35,800) $ (70,236,600) $ 6,315,500
Shares Issued upon Exercise of Stock
Options............................ 11,400 -- 15,300 -- -- 15,300
Employee Stock Purchase Plan
Issuance........................... -- -- (10,700) 22,000 -- 11,300
Returned Shares from Settlement of
Litigation at $2.50 per Share...... (66,300) -- (165,600) -- -- (165,600)
Net Proceeds from Stock Issuance..... 2,043,500 2,000 3,697,800 -- -- 3,699,800
Shares Issued for Acquisition of
Virus Research Institute, Inc...... 14,036,400 14,000 60,679,000 -- -- 60,693,000
Net Loss for the Year Ended
December 31, 1998.................. -- -- -- -- (51,799,700) (51,799,700)
---------- ------- ------------ -------- ------------- ------------
BALANCE AT DECEMBER 31, 1998......... 42,512,400 $42,500 $140,777,200 $(13,800) $(122,036,300) $ 18,769,600
Shares Issued upon Exercise of Stock
Options............................ 152,100 100 102,000 -- -- 102,100
Employee Stock Purchase Plan
Issuance........................... 3,500 -- (2,200) 13,800 -- 11,600
Net Proceeds from Stock Issuance..... 5,459,400 5,500 9,833,300 -- -- 9,838,800
Net Loss for the Year Ended
December 31, 1999.................. -- -- -- -- (11,309,100) (11,309,100)
---------- ------- ------------ -------- ------------- ------------
BALANCE AT DECEMBER 31, 1999......... 48,127,400 $48,100 $150,710,300 $ -- $(133,345,400) $ 17,413,000
Shares Issued upon Exercise of Stock
Options............................ 738,800 700 2,114,800 -- -- 2,115,500
Shares Issued upon Exercise of
Warrants........................... 55,000 100 313,600 -- -- 313,700
Employee Stock Purchase Plan
Issuance........................... 5,500 -- 11,000 -- -- 11,000
Net Proceeds from Stock Issuance..... 6,376,300 6,400 39,509,500 -- -- 39,515,900
Shares Issued for Acquisition of
Megan Health, Inc.................. 1,841,200 1,800 16,536,100 -- -- 16,537,900
Net Loss for the Year Ended
December 31, 2000.................. -- -- -- -- (21,975,000) (21,975,000)
---------- ------- ------------ -------- ------------- ------------
BALANCE AT DECEMBER 31, 2000......... 57,144,200 $57,100 $209,195,300 $ -- $(155,320,400) $ 53,932,000
========== ======= ============ ======== ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
44
AVANT IMMUNOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2000 1999 1998
- ------------------------------------------------ ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.......................................... $(21,975,000) $(11,309,100) $(51,799,700)
Adjustments to Reconcile Net Loss to Cash
Used by Operating Activities:
Depreciation and Amortization................... 1,310,800 1,988,600 989,800
Write-off of Capitalized Patent Costs........... 69,600 105,900 337,000
Non-Cash Portion of Litigation Settlement....... -- -- (165,600)
Gain on Sale of Equipment....................... -- -- (22,300)
Charge for Purchased In-Process Research and
Development................................... 9,012,300 -- 44,630,000
Changes in Assets and Liabilities, Net of
Acquisition:
Current Portion Restricted Cash................. -- 750,000 --
Accounts Receivable............................. (8,100) -- --
Inventories..................................... 2,400 -- --
Prepaid and Other Current Assets................ (541,900) 190,700 (1,529,900)
Accounts Payable and Accrued Expenses........... 1,787,900 358,400 (1,291,300)
Deferred Revenue................................ 5,772,600 (750,000) --
Lease Receivable................................ 431,700 395,600 --
Lease Payable................................... (294,200) (269,200) --
------------ ------------ ------------
Net Cash Used in Operating Activities............... (4,431,900) (8,539,100) (8,852,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment............. (177,200) (688,500) (294,800)
Proceeds from the Sale of Equipment............... -- -- 25,200
Redemption of Marketable Securities............... -- 4,903,100 4,463,000
Increase in Patents and Licenses.................. (282,000) (344,200) (426,000)
Decrease in Long-Term Restricted Cash, Net........ 217,000 148,000 160,000
Cash Paid for Acquisition of Megan
Health, Inc..................................... (724,000) -- --
Cash Received from Acquisition of Virus Research
Institute, Inc.................................. -- -- 4,391,500
Payment of Notes Payable.......................... -- (750,000) (750,000)
Other............................................. -- -- 57,600
------------ ------------ ------------
Net Cash Provided by (Used in) Investing
Activities........................................ (966,200) 3,268,400 7,626,500
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from Stock Issuance.................. 39,515,900 9,850,400 3,711,100
Proceeds from Exercise of Stock Options and
Warrants........................................ 2,440,200 102,100 15,300
------------ ------------ ------------
Net Cash Provided by Financing Activities........... 41,956,100 9,952,500 3,726,400
------------ ------------ ------------
Increase in Cash and Cash Equivalents............... 36,558,000 4,681,800 2,500,900
Cash and Cash Equivalents at Beginning of Period.... 13,619,000 8,937,200 6,436,300
------------ ------------ ------------
Cash and Cash Equivalents at End of Period.......... $ 50,177,000 $ 13,619,000 $ 8,937,200
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
45
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
AVANT Immunotherapeutics, Inc. ("AVANT") is a biopharmaceutical company
engaged in the discovery, development and commercialization of products that
harness the human immune response to prevent and treat disease. We develop and
commercialize products on a proprietary basis and in collaboration with
established pharmaceutical partners, including Novartis Pharma AG, Aventis
Pasteur, GlaxoSmithKline plc and Pfizer Inc.
In July 2000, we completed a private placement of approximately 4,650,900
shares of common stock to institutional investors at a price of $7.85 per share
which generated net proceeds totaling approximately $34,481,000. In
September 1999, we completed a private placement of 5,459,400 shares of common
stock to institutional investors at a price of $1.92 per share. Net proceeds
from the common stock issuance totaled approximately $9,838,800.
On December 1, 2000, AVANT acquired all of the outstanding capital stock of
Megan Health, Inc. ("Megan"), a company engaged in the discovery and development
of human and animal vaccines using patented gene modification technologies (see
Note 14). On August 21, 1998, AVANT acquired all of the outstanding capital
stock of Virus Research Institute, Inc. ("VRI"), a company engaged in the
discovery and development of (i) systems for the delivery of vaccines and
immunotherapeutics and (ii) novel vaccines (see Note 15).
AVANT's cash and cash equivalents at December 31, 2000 was $50,177,000. Our
working capital at December 31, 2000 was $46,408,600. We incurred a loss of
$21,975,000 for the year ended December 31, 2000. AVANT believes that cash
inflows from existing grants and collaborations, interest income on invested
funds and our current cash and cash equivalents will be sufficient to meet
estimated working capital requirements and fund operations beyond December 31,
2001. The working capital requirements of AVANT are dependent on several factors
including, but not limited to, the costs associated with research and
development programs, pre-clinical and clinical studies and the scope of
collaborative arrangements. During 2001, we expect to take steps to raise
additional capital, including, but not limited to, licensing of technology
programs with existing or new collaborative partners, possible business
combinations, or the issuance of common stock via private placement or public
offering. There can be no assurances that such efforts will be successful.
In December 2000, Pfizer Inc. made an equity investment of $3,000,000 for
285,900 shares of our common stock and paid a license fee of $2,500,000 as a
result of our acquisition of Megan Health, Inc. (see Note 9).
In July 1999, Novartis exercised its option to license TP10 for use in the
field of transplantation. The decision to license TP10 resulted in a $6 million
payment by Novartis which was received by AVANT in January 2000. The payment
included an equity investment of $2,307,700 for 1,439,500 shares of our common
stock at $1.60 per share and a license fee of $3,692,300.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AVANT
Immunotherapeutics, Inc. and our wholly owned subsidiaries Megan Health, Inc.
and Polmerix, Inc. All intercompany transactions have been eliminated.
46
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less. Cash and cash equivalents are
stated at cost, which approximates fair value.
We invest our non-operating cash in debt instruments of financial
institutions, government entities and corporations, and mutual funds. We have
established guidelines relative to credit ratings, diversification and
maturities that maintain safety and liquidity.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS
AVANT enters into various types of financial instruments in the normal
course of business. Fair values for cash, cash equivalents, short-term
investments, accounts and notes receivable, accounts and notes payable and
accrued expenses approximate carrying value at December 31, 2000 and 1999, due
to the nature and the relatively short maturity of these instruments.
(E) REVENUE RECOGNITION
AVANT has entered into various license and development agreements with
pharmaceutical and biotechnology companies. Nonrefundable revenue derived from
such agreements is recognized over the specified development period as research
and development or discovery activities are performed. Milestone payments are
recognized as revenue upon receipt, if we have no continuing involvement in
accordance with the related agreement. Option fees are recognized over the
related option period. Payments received in advance of activities being
performed is recorded as deferred revenue. Revenues from product sales are
recorded when the product is shipped providing no significant post-delivery
obligations remain and collection of the related receivable is
reasonably assured.
The adoption of Staff Accounting Bulletin 101 "Revenue Recognition in
Financial Statements" has no impact on our financial statements.
(F) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(G) INVENTORIES
Inventories are stated at the lower of cost or market. Inventories consist
of finished products at December 31, 2000. Cost is determined using the
first-in, first-out (FIFO) method.
(H) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the related assets using the straight-line method. Laboratory
equipment and office furniture and equipment are depreciated over a five year
period and computer equipment is depreciated over a three year period. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
noncancelable term of the related lease.
47
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) LICENSES, PATENTS AND TRADEMARKS
Included in other assets are some costs associated with purchased licenses
and some costs associated with patents and trademarks which are capitalized and
amortized over the shorter of the estimated useful lives or ten years using the
straight-line method. We periodically evaluate the recoverability of these
assets in accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of".
(J) LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
which changed the method of calculating earnings per share. SFAS 128, which we
adopted in the fourth quarter of 1997, requires the presentation of "basic"
earnings per share and "diluted" earnings per share. As a result of our net
loss, both basic and diluted earnings per share are computed by dividing the net
loss available to common shareholders by the weighted average number of shares
of common stock outstanding.
(K) COMPREHENSIVE INCOME
AVANT adopted Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income," effective January 1, 1998. The statement requires a full
set of general purpose financial statements to be expanded to include the
reporting of "comprehensive income." Comprehensive income is comprised of two
components, net income and other comprehensive income. For the years ended
December 31, 1999 and 2000, the Company had no other comprehensive income.
(L) STOCK COMPENSATION
AVANT's employee stock compensation plans are accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." We adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". All stock based awards to non-employees are accounted for at
their fair value as prescribed by SFAS 123 and ETIF 96-18, "Accounting for
Equity Instruments that are issued to other than Employees for Acquiring, or in
conjunction with Selling, Goods and Services" (see Note 7).
(M) USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and disclosures. Actual results could
differ from those estimates.
(N) SEGMENTS
AVANT is engaged principally in one industry segment that represents all
revenues. AVANT follows the requirements of Statement of Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
48
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SHORT-TERM INVESTMENTS AND RESTRICTED CASH
AVANT invests in high quality, short-term investments which are considered
highly liquid and are available to support current operations. We also invest in
high quality, debt securities which are classified as held-to-maturity. At
December 31, 2000 and 1999, our investments that met the definition of cash
equivalents were recorded at cost, which approximated fair value.
Pursuant to the terms of an operating lease, AVANT pledged as collateral
$217,000 at December 31, 1999 (see Note 3). In March 2000, the lessor released
us from the requirement to maintain cash collateral.
3. PROPERTY, EQUIPMENT AND LEASES
Property and equipment includes the following:
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
Laboratory Equipment............................... $ 2,800,500 $ 2,595,400
Office Furniture and Equipment..................... 1,355,600 1,176,800
Leasehold Improvements............................. 962,200 938,100
----------- -----------
Property and Equipment, Total...................... 5,118,300 4,710,300
Less Accumulated Depreciation...................... (4,080,400) (3,453,500)
----------- -----------
$ 1,037,900 $ 1,256,800
=========== ===========
Depreciation expense related to equipment and leasehold improvements was
approximately $524,200, $543,100 and $267,600 for the years ended December 31,
2000, 1999 and 1998, respectively.
In May 1996, we entered into a six-year lease for laboratory and office
space in Needham, Massachusetts. The lease replaced two-year lease and sublease
agreements entered into in March 1995 for the same location and increased the
amount of office and laboratory space available.
In 1994, we entered into a lease agreement providing AVANT with the right to
lease up to $2,000,000 of equipment for up to a five-year term. The lease
agreement contains specified restrictive covenants determined at the end of each
fiscal quarter which, for the quarter ended September 30, 1995, included a
minimum cash, cash equivalents and short-term investments balance of
$10,000,000. At September 30, 1995 our cash and cash equivalents balance was
below $10,000,000. As a result, in accordance with the lease agreement, we
pledged cash as collateral to the lessor equal to the amount outstanding on the
lease, which is to remain in a certificate of deposit until the end of the lease
or as otherwise agreed by the lessor and AVANT. We have recorded $217,000 as
long-term restricted cash at December 31, 1999. In March 2000, the lessor
released us from the requirement to maintain cash collateral.
49
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, EQUIPMENT AND LEASES (CONTINUED)
Obligations for base rent, net of sublease income, under these and other
noncancelable operating leases as of December 31, 2000 are approximately
as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $1,210,800
2002........................................................ 377,400
2003........................................................ 24,500
2004........................................................ 23,800
2005 and thereafter......................................... 19,800
----------
Total minimum lease payments................................ $1,656,300
==========
Our total rent for all operating leases (including rent expense net of
sublease income) was approximately $1,159,300, $804,900 and $909,500 for the
years ended December 31, 2000, 1999 and 1998, respectively.
4. OTHER ASSETS
Other assets include the following:
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
Capitalized Patent Costs........................... $ 2,322,900 $ 2,101,300
Accumulated Amortization........................... (883,900) (715,300)
----------- -----------
Capitalized Patent Costs, Net...................... 1,439,000 1,386,000
Acquired Intangible Assets:
Goodwill......................................... 2,275,700 2,275,700
Collaborative Relationships...................... 1,090,000 1,090,000
Assembled Workforce.............................. 625,400 470,000
Core Technology.................................. 1,786,900 --
Developed Technology............................. 3,263,100 --
Strategic Partner Agreement...................... 2,563,900 --
Accumulated Amortization........................... (2,440,300) (1,822,200)
----------- -----------
Acquired Intangible Assets, Net.................... 9,164,700 2,013,500
Other Non Current Assets........................... 114,800 124,000
----------- -----------
$10,718,500 $ 3,523,500
=========== ===========
In December 2000 and 1999, we evaluated and subsequently wrote off
approximately $69,600 and $105,900 of capitalized patent costs relating to
certain abandoned patent applications in our complement program and our SMIR
program, respectively. These write-offs were included in operating expense as
general and administrative expense for the years ended December 31, 2000
and 1999.
Amortization expense for the years ended December 31, 2000, 1999 and 1998
relating to the capitalized costs of purchased licenses, patents and trademarks
was approximately $168,600, $169,700
50
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OTHER ASSETS (CONTINUED)
and $175,800, respectively. Amortization expense for goodwill and acquired
intangible assets for the years ended December 31, 2000, 1999 and 1998 was
approximately $618,000, $1,275,800 and $546,400, respectively.
5. ACCRUED EXPENSES
Accrued expenses include the following:
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
Accrued License Fees................................ $ 201,800 $ 8,300
Accrued Payroll and Employee Benefits............... 294,600 333,200
Accrued Clinical Trials............................. 1,286,000 409,200
Accrued Legal....................................... 165,000 138,100
Other Accrued Expenses.............................. 734,200 442,700
---------- ----------
$2,681,600 $1,331,500
========== ==========
6. INCOME TAXES
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------- ----------- ------------
Income tax benefit (provision):
Federal............................. $ 4,954,600 $ 3,628,500 $ 17,640,500
State............................... (572,000) 189,000 3,141,500
----------- ----------- ------------
4,382,600 3,817,500 20,782,000
Deferred tax assets valuation
allowance........................... (4,382,600) (3,817,500) (20,782,000)
----------- ----------- ------------
$ -- $ -- $ --
=========== =========== ============
Deferred tax assets are comprised of the following:
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
Net Operating Loss Carryforwards................. $ 45,841,000 $ 39,851,000
Tax Credit Carryforwards......................... 5,276,000 4,742,000
Other............................................ 2,937,000 645,000
------------ ------------
Gross Deferred Tax Assets........................ 54,054,000 45,238,000
Deferred Tax Assets Valuation Allowance.......... (54,054,000) (45,238,000)
------------ ------------
$ -- $ --
============ ============
51
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Reconciliation between the amount of reported income tax expenses and the
amount computed using the U.S. Statutory rate of 34% follows:
2000 1999 1998
----------- ----------- ------------
Loss at Statutory Rates............... $(7,471,500) $(3,866,800) $(17,612,200)
Research and Development Credits...... (500,500) (200,000) (218,700)
State tax provision (benefit), net of
federal tax liabilities............. 572,000 (747,200) (514,000)
Other................................. (393,600) 438,300 190,400
Expiration of State NOLS.............. 339,000 558,200 170,800
In Process R&D........................ 3,072,000 -- 15,174,200
Benefit of losses and credits not
recognized, increase in valuation
allowance........................... 4,382,600 3,817,500 2,809,500
----------- ----------- ------------
$ -- $ -- $ --
=========== =========== ============
AVANT has provided a full valuation allowance for deferred tax assets as
management has concluded that it is more likely than not that we will not
recognize any benefits from our net deferred tax asset. The timing and amount of
future earnings will depend on numerous factors, including our future
profitability. We will assess the need for a valuation allowance as of each
balance sheet date based on all available evidence.
At December 31, 2000, we had U.S. net operating loss carryforwards of
$123,000,000, U.S. capital loss carryforwards of $1,852,000, and U.S. tax
credits of $4,236,800 which expire at various dates through 2020. Under the Tax
Reform Act of 1986, substantial changes in our ownership could result in an
annual limitation on the amount of net operating loss carryforwards, research
and development tax credits, and capital loss carryforwards which could
be utilized. Approximately $3,638,000 of the net operating loss carryforwards
relate to the exercise of non-qualified stock options and disqualifying
dispositions of incentive stock options, the tax benefit from which, if
realized, will be credited to additional paid-in capital.
7. STOCKHOLDERS' EQUITY
(A) PUBLIC AND PRIVATE STOCK OFFERINGS
On July 17, 2000, we completed a private placement of 4,650,900 newly issued
shares of common stock which generated net proceeds totaling approximately
$34,481,000 after deducting all associated expenses.
On September 22, 1999, we completed a private placement of 5,459,400 newly
issued shares of common stock. Net proceeds were approximately $9,838,800 after
deducting all associated expenses.
(B) PREFERRED STOCK
At December 31, 2000 and 1999, AVANT had authorized preferred stock
comprised of 1,163,102 shares of convertible Class B and 3,000,000 shares of
convertible Class C of which
52
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
350,000 shares has been designated as Class C-1 Junior Participating Cumulative,
the terms of which are to be determined by our Board of Directors. There was no
preferred stock outstanding at December 31, 2000 and 1999.
(C) WARRANTS
AVANT has issued warrants to purchase common stock in connection with the
acquisition of VRI on August 21, 1998. The warrants are exercisable at
$6.00 per share and expire August 22, 2003. In connection with the acquisition
of VRI, we also assumed the obligations of VRI with respect to each outstanding
warrant to purchase VRI common stock (a "VRI Warrant"). Each VRI Warrant assumed
by AVANT, which will continue to have, and be subject to, the terms and
conditions of the applicable warrant agreements and warrant certificates, has
been adjusted consistent with the ratio at which our common stock was issued in
exchange for VRI common stock in the acquisition.
Warrants outstanding at December 31, 2000 are as follows:
NUMBER EXERCISE PRICE
SECURITY OF SHARES PER SHARE EXPIRATION DATE
- -------- ---------- -------------- -----------------
Common stock...................... 35,657 $ .62 February 9, 2004
Common stock...................... 72,682 1.26 December 14, 2005
Common stock...................... 17,050 6.19 April 12, 2001
Common stock...................... 1,774,484 6.00 August 22, 2003
(D) STOCK COMPENSATION AND EMPLOYEE STOCK PURCHASE PLANS
STOCK COMPENSATION
On May 6, 1999, AVANT's 1999 Stock Option and Incentive Plan (the "1999
Plan") was adopted. The 1999 Plan replaced the Amended and Restated 1991 Stock
Compensation Plan, which was an amendment and restatement of our 1985 Incentive
Option Plan. The 1999 Plan permits the granting of incentive stock options
(intended to qualify as such under Section 422A of the Internal Revenue Code of
1986, as amended), non-qualified stock options, stock appreciation rights,
performance share units, restricted stock and other awards of restricted stock
in lieu of cash bonuses to employees, consultants and outside directors.
The 1999 Plan allows for a maximum of 2,000,000 shares of common stock to be
issued prior to May 6, 2009. The Board of Directors determines the term of each
option, option price, number of shares for which each option is granted and the
rate at which each option vests. The term of each option cannot exceed ten years
(five years for options granted to holders of more than 10% of the voting stock
of AVANT) and the exercise price of stock options cannot be less than the fair
market value of the common stock at the date of grant (110% of fair market value
for options granted to holders of more than 10% of the voting stock of AVANT).
In connection with the acquisition of Megan, we assumed the obligations of
Megan under Megan's Stock Option Plan (the "Megan Plan") and each outstanding
option to purchase Megan common stock (a "Megan Stock Option") granted under the
Megan Plan. Each Megan Stock Option assumed by AVANT is deemed to constitute an
option to acquire, on the same terms and conditions as were applicable under the
Megan Plan, shares of AVANT's common stock which has been adjusted
53
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
consistent with the ratio at which our common stock was issued in exchange for
Megan's common stock in the acquisition. As of the date the acquisition was
completed we assumed options to acquire 31,910 shares of our common stock at a
weighted average exercise price of $4.39. The Megan Stock Options are fully
vested as of December 1, 2000 and the term of each option cannot exceed ten
years from the date of grant.
In connection with the acquisition of VRI, we assumed the obligations of VRI
under VRI's 1992 Equity Incentive Plan (the "VRI Plan") and each outstanding
option to purchase VRI common stock (a "VRI Stock Option") granted under the VRI
Plan. Each VRI Stock Option assumed by AVANT is deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under the VRI
Plan, shares of AVANT's common stock which has been adjusted consistent with the
ratio at which our common stock was issued in exchange for VRI's common stock in
the acquisition. As of the date the acquisition was completed we assumed options
to acquire 1,532,055 shares of our common stock at a weighted average exercise
price of $2.34. The VRI Stock Options vest over four years and the term of each
option cannot exceed ten years from the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
The 1994 Employee Stock Purchase Plan (the "1994 Plan") was adopted on
June 30, 1994. All full time employees of AVANT are eligible to participate in
the 1994 Plan. A total of 150,000 shares of common stock are reserved for
issuance under this plan. Under the 1994 Plan, each participating employee may
contribute up to 15% of his or her compensation to purchase up to 500 shares of
common stock per year in any public offering and may withdraw from the offering
at any time before stock is purchased. Participation terminates automatically
upon termination of employment. The purchase price per share of common stock in
an offering is 85% of the lower of its fair market value at the beginning of the
offering period or the applicable exercise date.
54
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity for the years ended December 31, 2000,
1999 and 1998 is as follows:
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PER PRICE PER PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- --------- --------- --------- --------- ---------
Outstanding at January 1,....... 3,138,559 $2.34 3,354,708 $2.65 1,773,242 $3.20
Granted......................... 1,060,350 4.66 557,500 1.60 638,250 1.99
Assumed in acquisition.......... 31,910 4.39 -- -- 1,532,055 2.34
Exercised....................... (738,642) 2.86 (152,056) 0.67 (11,355) 1.34
Canceled........................ (282,888) 2.80 (621,593) 3.76 (577,484) 2.82
--------- ----- --------- ----- --------- -----
Outstanding at December 31,..... 3,209,289 $2.96 3,138,559 $2.34 3,354,708 $2.65
========= ===== ========= ===== ========= =====
At December 31,
Options exercisable............. 1,667,566 2,091,562 2,542,950
Available for grant............. 934,674 2,833,818 1,095,206
Weighted average fair value of
options granted
during year................... $2.49 $0.83 $1.10
The following tables summarize information about the stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING
----------------------------------------------------
NUMBER
OUTSTANDING AT WEIGHTED AVERAGE WEIGHTED AVERAGE
DECEMBER 31, REMAINING EXERCISE PRICE
RANGE OF EXERCISE PRICES 2000 CONTRACTUAL LIFE PER SHARE
- ------------------------ -------------- ---------------- ----------------
$0.30 - 1.31..................... 693,131 5.33 $0.8913
1.41 - 1.97..................... 689,722 7.11 1.7701
1.97 - 2.50..................... 779,569 7.87 2.3784
2.52 - 6.13..................... 673,074 6.03 3.9159
6.20 - 24.64.................... 373,793 9.11 8.5117
--------- ---- -------
$0.30 - 24.64.................... 3,209,289 6.92 $2.9633
========= ==== =======
55
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS EXERCISABLE
---------------------------------
NUMBER
EXERCISABLE AT WEIGHTED AVERAGE
DECEMBER 31, EXERCISE PRICE
RANGE OF EXERCISE PRICES 2000 PER SHARE
- ------------------------ -------------- ----------------
$0.30 - 1.31..................................... 505,069 $0.7346
1.41 - 1.97..................................... 410,348 1.7279
1.97 - 2.50..................................... 234,132 2.4820
2.52 - 6.13..................................... 472,574 3.8523
6.20 - 24.64.................................... 45,443 7.6117
--------- -------
$0.30 - 24.64.................................... 1,667,566 $2.2953
========= =======
FAIR VALUE DISCLOSURES
Had compensation costs for AVANT's stock compensation plans been determined
based on the fair value at the grant dates, consistent with SFAS 123, our net
loss, and net loss per share for the years ending December 31, 2000, 1999 and
1998 would be as follows:
2000 1999 1998
----------- ----------- -----------
Net Loss:
As reported......................... $21,975,000 $11,309,100 $51,799,700
Pro forma........................... 22,925,300 11,416,700 52,150,800
Basic and Diluted Net Loss Per Share:
As reported......................... $ 0.42 $ 0.26 $ 1.56
Pro forma........................... 0.44 0.26 1.57
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
2000 1999 1998
----------- ----------- -----------
Expected dividend yield............. 0% 0% 0%
Expected stock price volatility..... 109% 63% 63%
Risk-free interest rate............. 5.0% - 6.5% 5.0% - 6.1% 4.5% - 5.6%
Expected option term................ 2.5 Years 2.5 Years 2.5 Years
Because the determination of the fair value of all options granted includes
an expected volatility factor in addition to the factors detailed in the table
above, and because additional option grants are expected to be made each year,
the above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
(E) SHAREHOLDER RIGHTS PLAN
On November 10, 1994, AVANT's Board of Directors declared a dividend of one
preferred share purchase right for each share of common stock outstanding. Each
right entitles the holder to purchase
56
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
from AVANT one-one thousandth of a share of Series C-1 Junior Participating
Cumulative Preferred Stock (a "Unit"), par value $0.01 at a price of $16.00 per
one-one thousandth of a share, subject to specified adjustments. The Units are
exercisable only if a person or a group acquires 15% or more of the outstanding
common stock of AVANT or commences a tender offer which would result in the
ownership of 15% or more of our outstanding common stock. Once a Unit becomes
exercisable, the plan allows our shareholders to purchase common stock at a
substantial discount. Unless earlier redeemed, the Units expire on November 10,
2004. AVANT is entitled to redeem the Units at $0.01 per Unit subject to
adjustment for any stock split, stock dividend or similar transaction.
As of December 31, 2000 and 1999, we have authorized the issuance of
350,000 shares of Series C-1 Junior Participating Cumulative Preferred Stock for
use in connection with the shareholder rights plan.
(F) ACQUISITION OF MEGAN HEALTH, INC.
AVANT issued 1,841,200 shares of its common stock and fully vested options
to purchase 31,900 shares of its common stock on December 1, 2000, in exchange
for all of the outstanding capital stock and options of Megan, respectively (see
Note 14).
(G) ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC.
AVANT issued 14,036,400 shares of our common stock and warrants to purchase
approximately 1,811,200 shares of our common stock on August 21, 1998, in
exchange for all of the outstanding common stock of VRI (see Note 15).
8. RESEARCH AND LICENSING AGREEMENTS
AVANT has entered into licensing agreements with several universities and
research organizations. Under the terms of these agreements, we have received
licenses or options to license technology, specified patents or patent
applications. We have made required payments of nonrefundable license fees and
royalties, which amounted to approximately $307,500, $221,500 and $100,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.
57
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PRODUCT DEVELOPMENT AND LICENSING AGREEMENTS
Our revenue from product development and licensing agreements was received
from contracts with different organizations. Total revenue received by us in
connection with these contracts for the years ended December 31, 2000, 1999 and
1998 were approximately $692,400, $1,483,500 and $2,094,500, respectively. A
summary of these contracts follows:
(A) NOVARTIS PHARMA AG
In 1997, we entered into an option agreement with Novartis Pharma AG
("Novartis"), a worldwide pharmaceutical company headquartered in Basel,
Switzerland, relating to the development of TP10 for use in xenotransplantation
(animal organs into humans) and allotransplantation (human to human). Under the
agreement, we received annual option fees and supplies of TP10 for clinical
trials in return for granting Novartis a two-year option to license TP10 with
exclusive worldwide (except Japan) marketing rights. In July 1999, Novartis
exercised its option to license TP10 for use in the field of transplantation.
The decision to license TP10 resulted in a $6 million equity investment and
license fee payment by Novartis which was received by AVANT in January 2000.
Under the agreement, we may receive additional milestone payments based upon
attainment of specified development and regulatory goals, which has an
approximate aggregate value of up to $14 million. We may also receive funding
for research as well as royalty payments on eventual product sales.
(B) GLAXOSMITHKLINE PLC
During 1997, AVANT entered into an agreement with GlaxoSmithKline plc
("SmithKline") to collaborate on the development and commercialization of our
oral rotavirus vaccine. Under the terms of the agreement, SmithKline received an
exclusive worldwide license to commercialize AVANT's rotavirus vaccine. We were
responsible for continuing the Phase II clinical efficacy study of the rotavirus
vaccine, which was completed in August 1998. Subject to the development by
SmithKline of a viable manufacturing process, SmithKline is required to assume
responsibility for all subsequent clinical trials and all other development
activities. SmithKline made an initial license payment in 1997 upon execution of
the agreement and has agreed to make further payments upon the achievement of
specified milestones. In addition, we will be entitled to royalties based on net
sales of the rotavirus vaccine. In June 1999, we received a milestone payment of
$500,000 from SmithKline for the successful completion of the Phase II clinical
efficacy study and the establishment of a commercially viable process for
manufacture of the vaccine.
(C) AVENTIS PASTEUR
In 1994, AVANT entered into a license agreement with Aventis Pasteur
("Aventis") which granted Aventis the exclusive right to make, use and sell
Adjumer-Registered Trademark--formulated vaccines for prevention of influenza,
Lyme disease and diseases caused by meningococcus and the co-exclusive right
(exclusive, except for the right of AVANT or one other person licensed by AVANT)
to make, use and sell Adjumer-Registered Trademark--formulated vaccines directed
against five other pathogens, including pneumococcus and RSV. We have retained
rights to make, use, sell and license Adjumer-Registered Trademark--formulated
vaccines against the subject infections in most of the Far East, including China
and Japan, subject to geographical extension rights available to Aventis. In
December 1998, we received a milestone payment of $600,000 from Aventis upon
commencement of the first Phase I clinical trial of the
Adjumer-Registered Trademark--formulated vaccine for RSV.
58
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PRODUCT DEVELOPMENT AND LICENSING AGREEMENTS (CONTINUED)
(D) PFIZER INC.
In connection with our acquisition of Megan, we entered into a licensing
agreement with Pfizer Inc., Animal Health Division ("Pfizer"), whereby Pfizer
has licensed Megan's technology for the development of animal health and food
safety vaccines. Upon execution of the agreement, Pfizer made an initial license
payment of $2,500,000 together with a $3,000,000 equity investment. For
accounting treatment, we have allocated a portion of the equity investment to
the license fee as the fair market value of the equity investment was determined
to be $2,727,300. Under the agreement, we may receive additional milestone
payments based upon attainment of specified milestones. We will also receive
research and development funding for up to two years as well as royalty payments
on eventual product sales.
10. NON-OPERATING INCOME
Non-operating income includes the following:
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
---------- -------- --------
Interest and Dividend Income................ $1,978,100 $635,200 $571,900
Gain on Sale of Equipment................... -- -- 22,300
---------- -------- --------
$1,978,100 $635,200 $594,200
========== ======== ========
11. DEFERRED SAVINGS PLAN
Under section 401(k) of the Internal Revenue Code of 1986, as amended, the
Board of Directors adopted, effective May 1990, a tax-qualified deferred
compensation plan for employees of AVANT. Participants may make tax deferred
contributions up to 15%, or $10,000, of their total salary in 2000. AVANT may,
at its discretion, make contributions to the plan each year matching up to 1% of
the participant's total annual salary. AVANT contributions amounted to $29,200,
$30,100 and $20,100 for the years ended December 31, 2000, 1999 and 1998,
respectively.
12. FOREIGN SALES
Product sales were generated geographically as follows:
NET PRODUCT SALES FOR THE
TWELVE MONTHS ENDED EUROPE USA ASIA OTHER TOTAL
- ------------------------- -------- -------- -------- -------- --------
December 31, 2000............... $ -- $33,400 $ -- $ -- $33,400
December 31, 1999............... -- -- -- -- --
December 31, 1998............... 5,000 31,000 -- 20,000 56,000
13. LITIGATION
In December 1994, AVANT filed a lawsuit in the Superior Court of
Massachusetts against the landlord of our former Cambridge, Massachusetts
headquarters to recover the damages incurred by AVANT resulting from the
evacuation of the building due to air quality problems, which caused skin
59
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LITIGATION (CONTINUED)
and respiratory irritation to a significant number of employees. The landlord
defendant filed counterclaims, alleging we breached our lease obligations. In a
separate lawsuit, the landlord's mortgagee filed claims against AVANT for
payment of the same rent alleged to be owed. In August 1997, the Superior Court
of Massachusetts entered findings of fact and conclusions of law on the limited
trial of AVANT's lawsuit against the landlord. In its findings, the Court
concluded that we had not proved our claims and were not justified in
terminating our lease. In November 1997, AVANT reached a settlement of the
litigation with our former landlord and the landlord's mortgagee. We agreed to
pay $858,800 in cash on November 17, 1997 and issue a total of 1,500,000 shares
of our common stock. In addition, we signed a note for $750,000 payable on
November 16, 1998, secured by $750,000 cash collateral and a note for $750,000
due November 15, 1999, secured by 132,500 shares of common stock. The total
settlement, valued at $6,108,800, is comprised of the cash and notes totaling
$2,358,800 and common stock valued at $3,750,000 as of October 31, 1997. The
common stock issued is subject to restrictions on transfer per the settlement
and limits the number of shares that may be sold over a given period of time.
In May 1998, we used cash as collateral for a $750,000 note due
November 15, 1999 issued in connection with the settlement agreement with our
former landlord and the landlord's mortgagee. In accordance with the settlement
agreement, 66,250 shares of our common stock issued to secure the note were
returned to AVANT. The common stock was valued at $165,600 as of October 31,
1997 and its return is included as a reduction of operating expense in 1998. In
November 1999, the note was paid in full.
14. ACQUISITION OF MEGAN HEALTH, INC.
On December 1, 2000, AVANT acquired all of the outstanding capital stock of
Megan, a company engaged in the discovery and development of human and animal
vaccines using patented gene modification technologies. We issued approximately
1,841,200 shares of AVANT's common stock in exchange for all of the outstanding
capital stock of Megan, on the basis of 0.763542977 shares of AVANT common stock
for each share of Megan preferred stock and 0.08115304 shares of AVANT common
stock for each share of Megan common stock. The purchase price of $17,332,000
consisted of (i) the issuance of approximately 1,841,200 shares of AVANT common
stock valued at $15,803,400, (ii) cash distributed to certain Megan shareholders
in lieu of AVANT common stock totaling $236,700, (iii) the issuance of fully
vested options to purchase AVANT common stock valued at $239,400 for all of the
outstanding options to purchase Megan common stock assumed by us, and
(iv) severance and transaction costs totaling $1,052,500. As of the date of the
acquisition of Megan, AVANT had identified all significant actions to be taken
to terminate certain Megan employees. The severance costs associated with this
plan totaled approximately $164,200, were recognized upon consummation of the
merger and are included in the $1,052,500 referenced above.
The acquisition has been accounted for as a purchase. Consequently, the
operating results of Megan from December 2, 2000 to December 31, 2000 have been
included in our consolidated results of
60
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ACQUISITION OF MEGAN HEALTH, INC. (CONTINUED)
operations. The purchase price was allocated to the acquired assets and assumed
liabilities, based upon their fair value at the date of acquisition, as follows:
Net tangible assets acquired................................ $ 550,400
Intangible assets acquired:
Assembled Workforce....................................... 155,400
Core Technology........................................... 1,786,900
Developed Technology...................................... 3,263,100
Strategic Partner Agreement............................... 2,563,900
In-process Technology..................................... 9,012,300
-----------
Total....................................................... $17,332,000
===========
The values assigned to the intangible assets acquired, including the IPR&D,
were determined based on fair market value using a risk adjusted discounted cash
flow approach. Megan was a development stage biotechnology enterprise and its
resources were substantially devoted to research and development at the date of
acquisition. Management is responsible for determining the fair value of the
acquired IPR&D.
Each of Megan's three significant research and development projects
in-process were valued through detailed analysis of product development data
concerning the stage of development, time and resources needed to complete the
project, expected income-generating ability and associated risks. The value of
IPR&D was determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the net cash flows from
such projects and discounting the net cash flows back to their present values.
The probability of success and discount rates used for each project take into
account the uncertainty surrounding the successful development and
commercialization of the purchased in-process technology. The resulting net cash
flows for these projects were based on our best estimates of revenue, cost of
sales, research and development costs, selling, general and administrative
costs, and income taxes for each project, and the net cash flows reflect
assumptions that would be used by market participants.
The significant assumptions underlying the valuations included potential
revenues, costs of completion, the timing of product approvals and the selection
of appropriate probability of success and discount rates. None of Megan's
projects have reached technological feasibility nor do they have any alternative
future use. Consequently, in accordance with generally accepted accounting
principles, the amount allocated to IPR&D was charged as an expense in the AVANT
consolidated financial statements for the year ended December 31, 2000. The
remaining acquired intangible assets arising from the acquisition are being
amortized on a straight line basis over their estimated lives which range from 5
to 17 years.
A discussion of the in-process research and development projects identified
at the time of acquisition and assumptions used in the valuation analysis
follows. The projected costs to complete the projects represent costs to be
incurred by AVANT and do not include any costs to be expended by our
collaborators. (i) MEGAN-REGISTERED TRADEMARK-EGG VACCINE.
Megan-Registered Trademark-Egg is derived from the same master seed as
Megan-Registered Trademark-Vac 1, the poultry health and food safety vaccine
presently marketed by Megan. Megan-Registered Trademark-Vac 1 is a double
gene-deleted modified vaccine for use in chickens for protection against
multiple species and/or strains
61
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ACQUISITION OF MEGAN HEALTH, INC. (CONTINUED)
of Salmonella bacteria. Megan-Registered Trademark-Egg is being developed with
titer, dosage recommendations, and product configuration specifically targeted
for the egg layer market. This development program is required to gain the label
clearance needed to make advertising claims about the effectiveness of
Megan-Registered Trademark-Vac in eliminating Salmonella on eggs in mature
laying chickens. Field safety studies of the vaccine in egg laying chickens,
scale-up of manufacturing for the vaccine by our contract manufacturer, MBL, and
registration efforts by both us and MBL must be completed prior to filing an
application for USDA licensure of Megan-Registered Trademark-Egg. USDA licensure
is expected in 2002. The estimated cost to complete the project and
commercialize Megan-Registered Trademark-Egg exceeds $300,000. A 90% probability
of success adjustment has been applied to the project to reflect its late stage
of development and low technological risk. A discount rate of 18% was utilized
in determining the IPR&D value of $3,340,700 which was assigned to the
Megan-Registered Trademark-Egg project. (ii) ANTIPATH-TM- VACCINE. AntiPath-TM-
is a SALMONELLA TYPHIMURIUM strain containing both chromosomal and plasmid genes
derived from pathogenic E. COLI. AntiPath-TM- will be labeled for prevention of
airsacculitis, perihepatitis, and pericarditis (and possibly cellulitis) caused
by E. COLI infection in poultry. In addition, certain strains of E. COLI are
important causes of diarrheal disease in humans and humans are often infected
through their food supply, including chickens. We have selected three E. COLI
serotypes (078, 01 and 02) as targets for poultry vaccine development.
Development work for safety and efficacy studies and licensing will be completed
in 2001 and 2002. Additional work is required by AVANT prior to
commercialization. USDA licensure is expected in 2003. The estimated cost to
complete the project and commercialize AntiPath-TM- exceeds $1,025,000. An 85%
probability of success adjustment has been applied to the project to reflect its
stage of development and technological risk. A discount rate of 18% was utilized
in determining the IPR&D value of $5,360,800 which was assigned to the
AntiPath-TM- project. (iii) MEGAN-REGISTERED TRADEMARK-VAC "KENTUCKY" VACCINE.
Megan-Registered Trademark-Vac "Kentucky" is in the research stage and is
focused on the broiler processing plant, where over 30% of the SALMONELLA SPP.
found on broiler carcasses are the SALMONELLA KENTUCKY strain. While
Megan-Registered Trademark-Vac 1 does reduce some type C salmonellae, efficacy
against SALMONELLA KENTUCKY is inadequate in some cases.
Megan-Registered Trademark-Vac "Kentucky" is an important extension of the
Megan-Registered Trademark-Vac line and is required to make significant inroads
into the broiler market in those geographic areas where SALMONELLA KENTUCKY is a
problem. With current vaccine strains under development, USDA licensure is
expected in 2004. The estimated cost to complete the project and commercialize
Megan-Registered Trademark-Vac "Kentucky" exceeds $400,000. A 75% probability of
success adjustment has been applied to the project to reflect its stage of
development and technological risk. A discount rate of 18% was utilized in
determining the IPR&D value of $310,800 which was assigned to the
Megan-Registered Trademark-Vac "Kentucky" project at the time of acquisition.
As of December 31, 2000, the technological feasibility of the projects had
not yet been reached and no significant departures from the assumptions included
in the valuation analysis had occurred. Substantial additional research and
development will be required prior to reaching technological feasibility. In
addition, each product needs to successfully complete a series of clinical
trials and to receive USDA or other regulatory approval prior to
commercialization. We are also dependent upon the activities of our
collaborators in developing and marketing our products. There can be no
assurance that these projects will ever reach feasibility or develop into
products that can be marketed profitably, nor can there be assurance AVANT and
our collaborators will be able to develop and commercialize these products
before our competitors. If these products are not successfully developed and do
not become commercially viable, our financial condition and results of
operations could be materially affected.
62
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ACQUISITION OF MEGAN HEALTH, INC. (CONTINUED)
The following unaudited pro forma financial summary is presented as if the
operations of AVANT and Megan were combined as of January 1, 2000 and 1999,
respectively. The unaudited pro forma combined results are not necessarily
indicative of the actual results that would have occurred had the acquisition
been consummated at that date, or of the future operations of the combined
entities. Nonrecurring charges, such as the acquired in-process research and
development charge of $9,012,300, are not reflected in the following pro forma
financial summary.
YEAR ENDED DECEMBER 31, 2000 1999
- ----------------------- ------------- -------------
Operating revenue............................... $ 1,839,700 $ 3,462,500
Net loss........................................ (15,662,400) (13,688,100)
Basic and diluted net loss per share............ (0.29) (0.25)
15. ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC.
On August 21, 1998, AVANT acquired all of the outstanding capital stock of
VRI, a company engaged in the discovery and development of (i) systems for the
delivery of vaccines and immunotherapeutics and (ii) novel vaccines. We issued
approximately 14,036,400 shares of AVANT's common stock and warrants to purchase
approximately 1,811,200 shares of AVANT's common stock in exchange for all of
the outstanding common stock of VRI, on the basis of 1.55 shares of AVANT's
common stock and .20 of an AVANT warrant for each share of VRI common stock. The
purchase price of $63,004,700 consisted of (i) the issuance of 14,036,400 shares
of AVANT common stock valued at $51,686,800 and 1,811,200 AVANT warrants valued
at $4,980,700 for all outstanding VRI capital stock, (ii) the issuance of AVANT
warrants valued at $387,600 in exchange for all of the outstanding VRI warrants,
(iii) the issuance of options to purchase AVANT common stock valued at
$3,637,900 for all of the outstanding options to purchase VRI common stock
assumed by us, and (iv) severance and transaction costs totaling $2,311,700. As
of the date of the acquisition of VRI, we had already begun to formulate a plan
to assess which activities of VRI to continue and to identify all significant
actions to be taken to terminate a number of VRI employees and to relocate the
remaining employees from the VRI facility in Cambridge, MA (which was to be
closed) to our facility in Needham, MA. The costs associated with this plan,
including severance costs of approximately $243,000, were recognized upon
consummation of the merger and are included in the $2,311,700 referenced above.
The plan was finalized and implemented during 1998 and the first quarter of
1999. Actual costs were not materially different from those accrued at the
acquisition date and were paid in 1998 and early 1999.
The acquisition has been accounted for as a purchase. Consequently, the
operating results of VRI from August 22, 1998 to December 31, 2000 have been
included in our consolidated results of
63
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC. (CONTINUED)
operations. The purchase price was allocated to the acquired assets and assumed
liabilities, based upon their fair value at the date of acquisition, as follows:
Net tangible assets acquired................................ $14,539,000
Intangible assets acquired:
Workforce................................................. 470,000
Collaborative Relationships............................... 1,090,000
Goodwill.................................................. 2,275,700
In-process Technology..................................... 44,630,000
-----------
Total....................................................... $63,004,700
===========
The values assigned to the intangible assets acquired, including the IPR&D,
were determined based on fair market value using a risk adjusted discounted cash
flow approach. VRI was a development stage biotechnology enterprise and its
resources were substantially devoted to research and development at the date of
acquisition. Management is responsible for determining the fair value of the
acquired IPR&D.
Each of VRI's six research and development projects in-process was valued
through detailed analysis of product development data concerning the stage of
development, time and resources needed to complete the project, expected
income-generating ability and associated risks. The significant assumptions
underlying the valuations included potential revenues, costs of completion, the
timing of product releases and the selection of an appropriate discount rate.
None of VRI's projects have reached technological feasibility nor do they have
any alternative future use. Consequently, in accordance with generally accepted
accounting principles, the amount allocated to IPR&D was charged as an expense
in the AVANT consolidated financial statements for the year ended December 31,
1998. The remaining intangible assets arising from the acquisition are being
amortized on a straight line basis over 12 months and 60 months.
A discussion of the in-process research and development projects identified
at the time of acquisition follows. The projected costs to complete the projects
represent costs to be incurred by AVANT and do not include any costs to be
expended by our collaborators. (i) ADJUMER-REGISTERED TRADEMARK- VACCINE
DELIVERY SYSTEM. Adjumer-Registered Trademark- is being developed as an adjuvant
to enhance the immune response to injected vaccines. AVANT and our collaborator,
Aventis, are conducting research on the development of
Adjumer-Registered Trademark--formulated vaccines utilizing a variety of
Aventis' antigens, including influenza, lyme disease, pneumococcus,
meningococcus, RSV and hepatitis B. As of the acquisition date, with projected
release dates ranging from 2001 to 2004, the estimated cost to complete the
project for all antigens exceeded $9,500,000. In addition, substantial
additional work is required by Aventis prior to commercialization. Discount
rates ranging from 42.5% to 47.5% were used in determining the IPR&D value of
$15,450,000 which was assigned to the Adjumer-Registered Trademark- vaccine
delivery system. (ii) MICROMER-REGISTERED TRADEMARK- VACCINE DELIVERY SYSTEM.
Micromer-Registered Trademark- is a proprietary vaccine delivery system designed
to facilitate the mucosal (intranasal or oral) delivery of antigens and
stimulate both the systemic and mucosal branches of the immune system. AVANT is
conducting research on a number of Micromer-Registered Trademark--formulated
vaccines, including influenza and RSV. As of the acquisition date, the estimated
cost to complete the development of Micromer-Registered Trademark--formulated
vaccines for influenza and RSV exceeded $3,300,000 with projected release dates
of 2002 and 2004, respectively. A discount rate of 45% was utilized in
determining the IPR&D
64
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC. (CONTINUED)
value of $3,260,000 which was assigned to Micromer-Registered Trademark-.
(iii) VIBRIO VEC-TM- VACCINE DELIVERY SYSTEM. Vibrio Vec-TM- is a proprietary
vaccine and immunotherapeutic system that uses a bacterial vector for the oral
delivery of antigens. AVANT is conducting research on a number of antigens
proposed to be delivered by Vibrio Vec-TM-, including, in conjunction with our
collaborators, Pasteur Merieux-Oravax and CSL, Ltd., a vaccine targeting H.
pylori. At the acquisition date, the projected product release date was 2003 and
the approximate research and development cost required to complete the Vibrio
Vec-TM- project totaled approximately $900,000. A discount rate of 45% was used
in determining the IPR&D value of $2,450,000 which was assigned to Vibrio
Vec-TM- at the time of acquisition. (iv) ROTAVIRUS VACCINE. A collaboration with
SmithKline was established by AVANT to develop and commercialize our novel,
proprietary vaccine against rotavirus infection, a major cause of diarrhea and
vomiting in infants. At the acquisition date, a project release date was
projected of 2002, with $1,200,000 in additional research and development
expenditures anticipated. In addition, substantial work is required to be
completed by SmithKline prior to commercialization of the rotavirus vaccine. An
IPR&D value of $3,120,000 was assigned to the rotavirus vaccine utilizing a
discount rate of 45%. (v) HERPES VACCINE. The herpes vaccine is a proprietary
vaccine for the prevention of genital herpes (HSV2). At the time of acquisition,
the vaccine was in a pre-clinical development stage with a projected product
release date of 2007 and an estimated cost to complete of $1,600,000. A discount
rate of 45% was utilized in determining the IPR&D value of $2,240,000 which was
assigned to the herpes vaccine. (vi) THERAPORE-TM-. AVANT was granted an
exclusive worldwide license from Harvard for Therapore-TM-, a novel technology
for the development of immunotherapeutics. We are conducting pre-clinical
research to evaluate this system for the treatment of persistent viral
infections, such as Hepatitis B, Hepatitis C and HIV, and some forms of cancer
including melanoma. The first release date for a Therapore-TM- product is
estimated to be in 2004 and the projected research and development cost to
complete all indications of Therapore-TM- approximated $41,200,000 at the
acquisition date. A discount rate of 50% was utilized in determining the IPR&D
value of $18,110,000 which was assigned to Therapore-TM-.
As of December 31, 2000, the technological feasibility of the projects had
not yet been reached and no significant departures from the assumptions included
in the valuation analysis had occurred. Substantial additional research and
development will be required prior to reaching technological feasibility. In
addition, each product needs to successfully complete a series of clinical
trials and to receive FDA approval prior to commercialization. We are also
dependent upon the activities of our collaborators in developing and marketing
our products. There can be no assurance that these projects will ever reach
feasibility or develop into products that can be marketed profitably, nor can
there be assurance AVANT and our collaborators will be able to develop and
commercialize these products before our competitors. If these products are not
successfully developed and do not become commercially viable, our financial
condition and results of operations could be materially affected.
The following unaudited pro forma financial summary is presented as if the
operations of AVANT and VRI were combined as of January 1, 1998. The unaudited
pro forma combined results are not necessarily indicative of the actual results
that would have occurred had the acquisition been consummated at that date, or
of the future operations of the combined entities. Nonrecurring charges,
65
AVANT IMMUNOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. ACQUISITION OF VIRUS RESEARCH INSTITUTE, INC. (CONTINUED)
such as the acquired in-process research and development charge of $44,630,000,
are not reflected in the following pro forma financial summary.
YEAR ENDED DECEMBER 31, 1998
- ----------------------- -------------
Operating revenue........................................... $ 2,206,500
Net loss.................................................... (13,389,800)
Basic and diluted net loss per share........................ (0.32)
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 Q1 2000 Q2 2000 Q3 2000 Q4 2000
- ---- ------------ ------------ ------------ -------------
Total operating revenue................ $ 153,800 $ 153,900 $ 153,900 $ 301,600
Net loss............................... (2,123,400) (2,723,900) (3,633,600) (13,494,100)
Basic and diluted net loss per
common share......................... (0.04) (0.05) (0.08) (0.25)
1999 Q1 1999 Q2 1999 Q3 1999 Q4 1999
- ---- ------------ ------------ ------------ ------------
Total operating revenue................. $ 337,900 $ 847,900 $ 297,700 $ --
Net loss................................ (2,741,800) (2,356,200) (2,552,000) (3,659,100)
Basic and diluted net loss per
common share.......................... (0.06) (0.06) (0.06) (0.08)
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the Sections "Proposal 2 -- Election of Directors" in
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 10, 2001, is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the Section "Compensation of Directors and Executive
Officers" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 10, 2001, is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the Section "Principal and Management Stockholders" of
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 10, 2001, is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the Sections "Proposal 2 -- Election of Directors" of
the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 10, 2001, is hereby incorporated by reference.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Form 10-K:
(1) Financial Statements:
See "Index to Consolidated Financial Statements" at Item 8.
(2) Financial Statement Schedules:
Schedules are omitted since the required information is not applicable or
is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
(3) Exhibits:
NO. DESCRIPTION PAGE NO.
--------------------- ------------------------------------ ------------------------------------
2.1 Agreement and Plan of Merger, dated Incorporated by reference to
as of May 12, 1998, by and among the Exhibit 2.1 of the Company's
Company, TC Merger Corp., Virus Registration Statement on Form S-4
Research Institute, Inc. (Reg. No. 333-59215), filed
July 16, 1998
2.2 Agreement and Plan of Merger, dated Incorporated by reference to
as of November 20, 2000, by and Exhibit 2.1 of the Company's Current
among AVANT, AVANT Acquisition Report on Form 8-K filed
Corp., and Megan Health, Inc. December 12, 2000
2.3 First Amendment to Agreement and Incorporated by reference to
Plan of Merger, dated as of Exhibit 2.2 of the Company's Current
November 20, 2000, by and among Report on Form 8-K filed
AVANT, AVANT Acquisition Corp., and December 12, 2000
Megan Health, Inc.
3.1 Third Restated Certificate of Incorporated by reference to
Incorporation of the Company Exhibit 3.1 of the Company's
Registration Statement on Form S-4
(Reg. No. 333-59215), filed
July 16,1998
3.2 Certificate of Amendment of Third Incorporated by reference to
Restated Certificate of Exhibit 3.1 of the Company's
Incorporation of the Company Registration Statement on Form S-4
(Reg. No. 333-59215), filed
July 16, 1998
3.3 Certificate of Designation for Incorporated by reference to
series C-1 Junior Participating Exhibit 3.1 of the Company's
Cumulative Preferred Stock Registration Statement on Form S-4
(Reg. No. 333-59215), filed
July 16, 1998
3.4 Second Certificate of Amendment of Incorporated by reference to
Third Restated Certificate of Exhibit 3.2 of the Company's
Incorporation of the Company Registration Statement on Form S-4
(Reg. No. 333-59215), filed
July 16, 1998
68
NO. DESCRIPTION PAGE NO.
--------------------- ------------------------------------ ------------------------------------
3.5 Amended and Restated By-Laws of the Incorporated by reference to
Company as of November 10, 1994 Exhibit 3.3 of the Company's
Registration Statement on Form S-4
(Reg. No. 333-59215), filed
July 16, 1998
4.1 Shareholder Rights Agreement dated Incorporated by reference to
November 10, 1994 between the Exhibit 4.1 of the Company's Annual
Company and State Street Bank and Report on Form 10-K filed March 28,
Trust Company as Rights Agent 2000
4.2 Form of Stock Purchase Agreement Incorporated by reference to
dated March 20, 1998 relating to the Exhibit 4.1 of the Company's
Company's private placement of Registration Statement on Form S-3
Common Stock (Reg. No. 333-56755), filed
July 16, 1998
10.1 1994 Employee Stock Purchase Plan Incorporated by reference to the
Company's Registration Statement on
Form S-8 filed June 8, 1994
10.2 Megan Health, Inc. Stock Option Plan Incorporated by reference to the
Company's Registration Statement on
Form S-8 (Reg. No. 333-52796), filed
December 27, 2000
10.3 AVANT Incorporated by reference to
Immunotherapeutics, Inc. 1999 Exhibit A to the Company's Proxy
Stock Option and Incentive Plan Statement on Schedule 14A filed on
April 1, 1999
10.4 Virus Research Incorporated by reference to
Institute, Inc. 1992 Equity Exhibit 10.4 of the Company's Annual
Incentive Plan as amended and Report on Form 10-K filed March 28,
restated 2000
10.5 Performance Plan of the Company Incorporated by reference to
Exhibit 10.5 of the Company's Annual
Report on Form 10-K filed March 28,
2000
10.6 Form of Agreement relating to Change Incorporated by reference to
of Control Exhibit 10.6 of the Company's Annual
Report on Form 10-K filed March 28,
2000
10.7 Amended and Restated Employment Incorporated by reference to the
Agreement between the Company and Company's Annual Report on
Una S. Ryan, Ph.D. dated August 20, Form 10-K for the fiscal year ended
1998. December 31, 1998
10.8 Commercial Lease Agreement of Incorporated by reference to the
May 1, 1997 between the Company and Company's report on Form 10-Q for
Fourth Avenue Ventures Limited the quarterly period ended
September 30, 1996
69
NO. DESCRIPTION PAGE NO.
--------------------- ------------------------------------ ------------------------------------
10.9 Option Agreement by and between the Incorporated by reference to the
Company and Novartis Pharma AG dated Company's report on Form 10-Q/A for
as of October 31, 1997, portions of the quarterly period ended
which are subject to a request for September 30, 1997
confidential treatment
10.10 Settlement Agreement between the Incorporated by reference to the
Company and Forest City 38 Sidney Company's Annual Report on
Street, Inc.; Forest City Form 10-K for the fiscal year ended
Management, Inc.; and Forest City December 31, 1997
Enterprises, Inc.
10.11 Agreement between Lonza Filed herewith
Biologics plc and the Company dated
as of April 19, 2000, portions of
which are subject to a request for
confidential treatment
10.12 Stock Purchase Agreement dated Filed herewith
December 1, 2000 by and between the
Company and Pfizer Inc.
10.13 License and Royalty Agreement by and Filed herewith
between Pfizer Inc., the Company and
Megan Health, Inc. dated as of
December 1, 2000, portions of which
are subject to a request for
confidential treatment
10.14 Amendment to License and Royalty Filed herewith
Agreement by and between
Pfizer Inc., the Company and Megan
Health, Inc. dated as of
December 1, 2000, portions of which
are subject to a request for
confidential treatment
10.15 Collaborative Research and Filed herewith
Development Agreement by and between
Pfizer Inc. and Megan Health, Inc.
dated as of December 1, 2000,
portions of which are subject to a
request for confidential treatment
21.0 List of Subsidiaries Filed herewith
23.0 Consent of Independent Accountants Filed herewith
(B) Reports on Form 8-K.
We filed a Current Report on Form 8-K on December 12, 2000, which we amended
on January 30, 2001.
70
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.
DATE
AVANT IMMUNOTHERAPEUTICS, INC. ------------------
By: /s/ UNA S. RYAN
---------------------------------
Una S. Ryan March 20, 2001
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. BARRIE WARD
-------------------------------------- Chairman March 20, 2001
J. Barrie Ward
/s/ UNA S. RYAN
-------------------------------------- President, Chief Executive March 20, 2001
Una S. Ryan Officer, and Director
/s/ AVERY W. CATLIN Senior Vice President, Chief
-------------------------------------- Financial Officer and March 20, 2001
Avery W. Catlin Treasurer
/s/ FREDERICK W. KYLE
-------------------------------------- Director March 20, 2001
Frederick W. Kyle
/s/ JOHN W. LITTLECHILD
-------------------------------------- Director March 20, 2001
John W. Littlechild
/s/ THOMAS R. OSTERMUELLER
-------------------------------------- Director March 20, 2001
Thomas R. Ostermueller
/s/ HARRY H. PENNER, JR.
-------------------------------------- Director March 20, 2001
Harry H. Penner, Jr.
/s/ PETER A. SEARS
-------------------------------------- Director March 20, 2001
Peter A. Sears
/s/ KAREN S. LIPTON
-------------------------------------- Director March 20, 2001
Karen S. Lipton
71