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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended JUNE 30, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-12900
ALLIANCE PHARMACEUTICAL CORP.
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(Exact name of registrant as specified in its charter)
New York 14-1644018
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3040 Science Park Road, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 619-558-4300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01.
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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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. [ ]
[Cover page 1 of 2 pages]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on
the NASDAQ National Market System on August 30, 1996, was $414,450,288.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 30, 1996 was 30,047,306.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to
the 1996 Annual Meeting of Shareholders, which the Registrant intends to file
with the Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this report.
[Cover page 2 of 2 pages]
PART I
ITEM 1. BUSINESS
Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on developing
scientific discoveries into potential drug products and licensing these
products to multinational pharmaceutical companies in exchange for fixed
payments and royalties. To date, the Company has entered into agreements with
researchers for the rights to two innovative products, developed these
products through initial clinical (human) trials, and entered into
collaborative relationships with multinational pharmaceutical companies for
the final stages of development and worldwide marketing. These products are
OXYGENT-TM-, an intravascular oxygen carrier designed to reduce the need for
donor blood transfusions during surgery, which is currently in Phase IIb
clinical trials and is licensed to affiliates of Johnson & Johnson; and
LIQUIVENT-Registered Trademark-, an intrapulmonary agent for use in treatment
of acute respiratory failure, which is currently in a pivotal Phase II/III
clinical trial and is licensed to Hoechst Marion Roussel, Inc., an affiliate
of Hoechst AG. Alliance intends to enter into a collaborative agreement for
IMAGENT-Registered Trademark- US, an ultrasound contrast agent for which the
Company recently completed a Phase I clinical trial.
The Company's strategy is to identify potential new pharmaceutical
products through scientific collaborations with researchers and clinicians in
universities and medical centers where many of the basic causes of disease
and potential targets for new therapies are discovered. Using its experience
in defining pharmaceutical formulations, designing manufacturing processes,
conducting preclinical pharmacology and toxicology studies, and conducting
early-phase human testing, Alliance endeavors to advance such discoveries
into clinical development. The Company seeks collaborative relationships for
the final stages of drug development, including completing late-phase human
testing, obtaining worldwide regulatory approvals, building large-scale
manufacturing capacities, and marketing.
The Company was incorporated in New York in 1983. Its principal
executive offices are located at 3040 Science Park Road, San Diego,
California 92121, and its telephone number is (619) 558-4300.
PRODUCTS IN CLINICAL DEVELOPMENT
Alliance's products currently in clinical development - OXYGENT,
LIQUIVENT, and IMAGENT US - are based upon perfluorochemical ("PFC") and
emulsion technologies. PFCs are biochemically inert compounds and may be
employed in a variety of therapeutic and diagnostic applications. The Company's
primary drug substance is perflubron, a brominated PFC that has a high
solubility for respiratory gases and can be used to transport these gases safely
throughout the body.
OXYGENT. OXYGENT, an emulsion containing perflubron, is an intravascular
oxygen carrier to be used as a temporary "blood substitute" to provide oxygen
to tissues during elective surgeries where substantial blood loss is
anticipated. It is estimated that in excess of three million patients
annually in the United States may receive one or more units of blood during
elective surgeries, including, for example, cardiovascular, orthopedic, and
general surgical procedures. An oxygen carrier could be used instead of
blood for a portion of these patients. The OXYGENT dose for surgical
applications is expected to provide the equivalent oxygen delivery of at
least two units of red blood cells.
OXYGENT has several potential advantages over the use of allogeneic
(donor) blood: there is no risk of infectious disease transmission; it is
compatible with all blood types; it has a shelf-life in excess of one year;
and it can be sterilized. According to the 1994 estimates of The National
Institutes of Health, the risks per unit of blood transfused in the United
States are 1:2,500 for bacterial infections, 1:3,000 for hepatitis, 1:100,000
for fatal hemolytic reactions, primarily due to clerical error, and 1:225,000
for HIV infection (AIDS). To minimize the use of allogeneic blood and to
avoid these risks, certain techniques can be employed that allow use of the
patient's own (autologous) blood during surgery. These techniques include (i)
predonation, in which patients donate several units of their blood in the six
weeks preceding surgery, (ii) perioperative hemodilution, in which several
units of the patient's blood are removed just prior to surgery and are
replaced with a plasma expander, and (iii) salvage, wherein a device (cell
saver) is used to collect blood lost during the surgical procedure. OXYGENT
can be used with any of these autologous blood collection techniques to
enhance safety, by reducing the need for allogeneic blood. When a blood
transfusion is indicated during surgery, one or more doses of OXYGENT would
be used in place of allogeneic blood to maintain an adequate level of oxygen
delivery despite a lower red blood cell concentration. This use of OXYGENT
delays or reduces the need for the transfusion of donor blood, thereby
avoiding its associated risks.
1
In August 1994, the Company entered into a license agreement (the "Ortho
License Agreement"), with Ortho Biotech, Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation, both affiliates of Johnson & Johnson (collectively referred to
as "Ortho"), which provides Ortho with worldwide marketing rights to the
Company's injectable PFC emulsions capable of transporting oxygen for
therapeutic use, including OXYGENT. The product is being developed jointly
by Alliance and Ortho, with Ortho being responsible for substantially all of
the costs of development and marketing.
In October 1995, the Company and Ortho commenced a Phase IIb randomized,
controlled, efficacy trial involving surgical patients at multiple sites in
the United States. A similar Phase IIb clinical study was commenced in
Europe in January 1996. In February 1996, the Company and Ortho commenced a
Phase II study in the United States in cardiopulmonary bypass patients.
LIQUIVENT. LIQUIVENT, sterile perflubron, is an intrapulmonary agent for
treatment of acute respiratory failure, a disorder that can result from many
causes, including serious infections, traumatic shock, severe burns, or
inhalation of toxic substances. Acute respiratory failure is generally
characterized by an excessive inflammatory response, which leads to blockage
of the small airways and collapse of alveoli, resulting in inadequate gas
exchange and impairment of normal lung function. Each year, more than
200,000 patients in the United States are placed on mechanical gas
ventilators for at least four days for treatment of lung dysfunction due to
acute injuries. The most urgent need for these patients is to improve their
blood oxygenation. However, the prolonged use of high ventilatory pressures
or high continuous concentrations of inspired oxygen can further damage the
patient's lungs. Some of these patients may benefit from treatment with
LIQUIVENT.
LIQUIVENT is intended to be used in a technique called partial liquid
ventilation ("PLV"). In this procedure, the drug is administered through an
endotracheal tube into the lungs of a patient being supported by a mechanical
ventilator. The initial goal of LIQUIVENT/PLV therapy is to open collapsed
alveoli to improve gas exchange. Once this has been accomplished, ventilator
pressure and oxygen concentration may be lowered to minimize
ventilator-induced lung trauma. In clinical studies, LIQUIVENT has also been
observed to promote the migration of mucus and alveolar debris to the central
airways, where suctioning is easier. The ability to remove such debris may
significantly reduce the excessive inflammatory response associated with
acute respiratory failure and enhance the effectiveness of other therapeutic
interventions, all serving potentially to reduce patient recovery time.
Published results from initial clinical trials have indicated that LIQUIVENT
improved lung oxygenation, without clinically significant side effects. In
addition, preclinical studies indicate LIQUIVENT may mitigate inflammation,
ventilator-induced trauma, and oxygen toxicity.
In January 1996, the Company began a multi-center pivotal Phase II/III
clinical trial with LIQUIVENT in pediatric patients with acute respiratory
failure. Separate multi-center Phase II clinical trials in adults and
premature infants are underway. The U.S. Food and Drug Administration
("FDA") has granted Subpart E status (expedited review) for the product.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which
provides HMRI with worldwide marketing and manufacturing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. The product is being developed
jointly by Alliance and HMRI, with HMRI responsible for substantially all of
the costs of development and marketing.
IMAGENT US. IMAGENT US is an ultrasound contrast agent being developed to
aid in the assessment of cardiac function and myocardial perfusion, as well
as the detection of solid organ lesions and blood flow abnormalities. More
than 30 million scans of the heart, vasculature, and abdominal organs are
performed annually in the United States, some of which may potentially
benefit from a cost-effective contrast agent. To be successful in the
marketplace, ultrasound contrast agents should provide enhanced diagnostic
images during several minutes of scanning, be easy to use, be stable during
transportation, and have a long shelf-life. IMAGENT US is being developed to
meet these requirements.
2
IMAGENT US is a powder comprising hollow microspheres containing a
PFC-based gaseous mixture and water-soluble components that are known to be
acceptable for parenteral use. Prior to use, IMAGENT US is reconstituted
with a sterile saline solution to form microbubbles that are then injected
into the patient. The gas bubbles are highly echogenic and, when delivered
intravenously, reflect signals that enhance ultrasound images. In
preclinical studies, IMAGENT US has been found to enhance the ultrasound
signal from perfused tissues and blood vessels using traditional gray-scale
and color Doppler technologies, as well as the emerging harmonic ultrasound
imaging technique. Additionally, gray-scale contrast enhancement of cardiac,
abdominal, and vascular structures was observed with no serious or unexpected
adverse events, no clinically significant changes, and no trends indicative
of clinical concern, in the recently completed Phase I clinical trial.
A Phase II program is planned in adult patients undergoing diagnostic
procedures for the evaluation of myocardial perfusion abnormalities
(subsequent to myocardial infarction or coronary artery disease),
space-occupying lesions of the liver (or other organs), and vascular flow
abnormalities. In these studies, each subject will serve as his/her own
control through the blinded evaluation of non-contrast and contrast
ultrasound images. In addition, the diagnostic utility of the contrast
ultrasound evaluation with IMAGENT US will be compared to that of other
technologies used to diagnose anatomic, functional, and flow abnormalities
(e.g., nuclear perfusion scintigraphy, angiography, computed tomography, and
magnetic resonance imaging). The Phase II program is planned to begin before
the end of 1996.
OTHER PRODUCTS
Alliance is supporting internal research efforts to expand the
applicability of its core technologies. The Company has patented fluorinated
surfactants that are potentially useful in the preparation of therapeutic or
diagnostic emulsions and other formulations.
Alliance is investigating the use of PFC-containing reverse emulsions,
microemulsions, gels, foams, and other compositions as drug delivery agents.
These compositions are either aqueous or oil-based, and may be administered
via oral, intravenous, intrapulmonary, or topical routes to distribute
antibiotics, chemotherapy agents, gene therapies, or other medicaments
systemically or to selected areas of the body. Alliance is also conducting
preclinical studies of a PFC-based formulation that could be beneficial for
warm temperature preservation of kidneys or other organs which may extend the
time the organ is viable for transplantation.
The Company has initiated a pilot clinical study in Europe to assess
OXYFLOW, an apparatus designed to be a combined cardiovascular and
oxygenation monitor that acquires data by minimally invasive means. This
device is intended to provide on-line information pertaining to oxygenation
and other physiological parameters, which could assist physicians in their
decisions regarding transfusions and other interventions.
The Company has certain agreements with research institutions to develop
discoveries that the Company believes may be the basis of new products.
Antigenized antibodies that could potentially stimulate or down-regulate
antibody production are being developed in conjunction with Mt. Sinai Medical
Center in New York City. A prototype vaccine for infectious disease and a
prototype tolerogen for an autoimmune disease are also under development. In
addition, Alliance is working with researchers at Temple University to
develop an apoptotic factor for regulating the death of certain cancer cells.
Alliance has developed and is marketing SAT PAD-REGISTERED TRADEMARK-, a
re-usable magnetic resonance ("MR") imaging accessory that improves the
quality of images obtained by certain MR imaging techniques. SAT PAD is
distributed by dealers specializing in radiology products. Sales of SAT PAD
were approximately $230,000 for fiscal 1996. Alliance expects that the sales
volume of SAT PAD will be limited and does not anticipate significant revenue
from the product.
The Company intends to consider other technologies that may be available
for licensing and research agreements with other institutions or inventors.
Alliance intends, where appropriate, to seek outside sources of funding. If
new license and research agreements are added and the Company is not able to
obtain outside sources of funding, the Company's losses from research and
development activities are expected to increase significantly.
3
The Company's products require substantial development efforts. The
Company may encounter unforeseen technical and other problems which may force
abandonment or substantial change in the development of a specific product or
process, or technological change or product development by others, any of
which may have a material adverse effect on the Company. The Company expends
substantial amounts of money on research and development and expects to do so
for the foreseeable future. In fiscal 1996, 1995, and 1994 the Company
incurred research and development expenses of $33,730,000, $35,257,000, and
$32,070,000, respectively.
COLLABORATIVE RELATIONSHIPS
HOECHST MARION ROUSSEL, INC. In February 1996, the Company entered into the
HMRI License Agreement, which provides HMRI with worldwide marketing and
manufacturing rights to the intratracheal administration of liquids,
including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. The product is being developed jointly by Alliance and HMRI,
with HMRI responsible for substantially all of the costs of development and
marketing. In conjunction with the HMRI License Agreement, HMRI purchased
750,000 shares of the Company's Series B Preferred Stock and 200,000 shares
of its Series C Preferred Stock for an aggregate of $22 million. In addition,
HMRI paid Alliance an initial license fee of $5 million and agreed to pay
further license fees, milestones payments, and royalties on product sales.
HMRI also received a five-year warrant to acquire 300,000 shares of Common
Stock at $20 per share. On June 6, 1996, after the average closing price of
the Company's Common Stock for a period of twenty consecutive trading days
was at least $20 per share, each share of Series B Preferred Stock converted
into one (1) share of Common Stock. At the time of conversion, accrued
dividends on the Series B Preferred Stock in the amount of $187,500 were paid
in Common Stock, issued at $20 per share. The Series C Preferred Stock
converts automatically on June 30, 1997, into a number of shares of Common
Stock obtained by dividing the average closing price of the Common Stock over
the twenty trading days preceding January 14, 1997 into $5 million. Prior to
June 29, 1997, HMRI may, if the HMRI License Agreement is terminated, redeem
the Series C Preferred Stock for $15 million, payable in cash or Common Stock
at Alliance's election within five years of the redemption date. The Series
C Preferred Stock does not have dividend or voting rights.
ORTHO BIOTECH, INC. In August 1994, the Company entered into the Ortho
License Agreement for injectable PFC emulsions capable of transporting oxygen
for therapeutic use, including OXYGENT. The product is being developed
jointly by Alliance and Ortho, with Ortho responsible for substantially all
of the costs of developing and marketing the product. Under the Ortho
License Agreement, Ortho paid to Alliance an initial fee of $4 million and
will make other payments upon the achievement of certain milestones. Ortho
will pay Alliance a royalty based upon sales of products after
commercialization. In conjunction with the Ortho License Agreement, Johnson
& Johnson Development Corp. ("J&JDC") purchased 1.5 million shares of Series
A Preferred Stock for $15 million. On June 6, 1996, after the average
closing price of the Company's Common Stock for a period of twenty
consecutive trading days was at least $20 per share, each share of Series A
Preferred Stock converted into one-half (1/2) share of Common Stock. At the
time of conversion, accrued dividends on the Series A Preferred Stock in the
amount of $1,312,500 were paid in Common Stock, issued at $20 per share. On
June 6, 1996, Ortho also exercised a three-year warrant to purchase 300,000
shares of Common Stock at $15 per share, which warrant it acquired in
connection with the Ortho License Agreement.
The Company intends to enter into a collaborative relationship for
IMAGENT US, an ultrasound contrast agent for which the Company recently
completed a Phase I clinical trial.
In November 1994, the Company entered into a license agreement with
Glaxo Group Limited ("Glaxo") for the use of certain of the Company's
fluorinated surfactants in metered dose inhalers that deliver Glaxo's
respiratory drug formulations. Based upon interactions with Glaxo, the
Company believes the surfactants selected by Glaxo for development may have
an unacceptable half-life for chronic use in asthma patients, Glaxo's
intended application. Therefore, the Company expects that Glaxo will not
make the next license payment under the agreement. If such payment is not
made, the license agreement would terminate. Alliance received aggregate fees
of $650,000 during the past two years under the agreement. The Company does
not consider the license agreement to be material to its present operations.
There can be no assurances that the Company will be able to enter into
future collaborative relationships on acceptable terms. The termination of
any collaborative relationship or failure to enter into such relationships
may limit the ability of the Company to develop its technology and may have a
material adverse effect on the Company's business.
4
MARKETING
Under the terms of the Ortho License Agreement, Ortho has exclusive
worldwide marketing rights to OXYGENT and any other injectable PFC emulsion
products capable of transporting oxygen for therapeutic use. Under the terms
of the HMRI License Agreement, HMRI has exclusive worldwide marketing rights
to the intratracheal administration of liquids, including LIQUIVENT, which
perform bronchoalveolar lavage or liquid ventilation. The Company has not
yet selected its marketing partner for IMAGENT US. The Company's only
commercialized product, SAT PAD, is currently distributed through certain
distributors of MR imaging equipment and supplies.
MANUFACTURING
The Company manufactures all of its products for preclinical testing and
clinical trials. OXYGENT is produced in Alliance's San Diego facility, which
includes both a pilot plant and a production-scale manufacturing facility.
The Company believes that this production facility will provide sufficient
capacity for future clinical trials and market launch of OXYGENT, if and when
approved by the FDA. However, a larger commercial-scale facility will be
required in the future. Under the terms of the Ortho License Agreement, Ortho
has the right to elect to manufacture OXYGENT itself or have the Company
continue to do so, which election must be made at or prior to the filing of a
new drug application ("NDA"). If Alliance manufactures OXYGENT for Ortho,
the transfer price, which will not be less than Alliance's fully burdened
cost, will be determined by Ortho's net sales price for the product. The
Company has not selected a commercial-scale site or obtained any regulatory
approvals. Construction of such a facility will depend upon Ortho's decision
regarding manufacturing, product development, capital resources, and
regulatory approvals, among other things.
LIQUIVENT is manufactured for clinical trials at the Company's
Otisville, New York facility. LIQUIVENT is the same drug substance as IMAGENT
GI, for which Alliance obtained FDA approval in August 1993 as an oral
contrast agent for MR imaging. As a result, certain chemistry, manufacturing,
and control requirements have been accepted by the FDA, which may benefit the
Company in the regulatory review process. The HMRI License Agreement
requires the Company to manufacture LIQUIVENT at its Otisville facility for a
period of time after market launch at a negotiated price. HMRI will be
responsible for establishing production capacity beyond the maximum capacity
of the Otisville facility.
IMAGENT US is manufactured for clinical studies at the San Diego
facility, using a proprietary process to form dry, PFC vapor-containing
spheres which are reconstituted with sterile saline to form microbubbles just
prior to use. The facility is expected to provide sufficient capacity for
clinical trials and market launch.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company has obtained perflubron, the principal raw material utilized
in OXYGENT and LIQUIVENT, from several large chemical suppliers, and believes
that it has sufficient inventory of the drug substance for clinical trials.
HMRI and Ortho have initiated discussions with a potential supplier to secure
a long-term supply of perflubron. The Company believes it has a sufficient
supply of raw materials for IMAGENT US for clinical trials. The Company's
business could be materially and adversely affected if it or its
collaborative partners are unable to obtain necessary raw materials on a
timely basis and at a cost-effective price.
PATENTS
The Company seeks proprietary protection for its products, processes,
technologies, and ongoing improvements. The Company is pursuing patent
protection in the United States and in foreign countries that it regards as
important for future endeavors. Numerous patent applications have been filed
in the European Patent Office, Australia, Canada, Ireland, Israel, Japan,
Norway, and South Africa, and patents have been granted in some of these
countries.
The Company has seven issued U.S. patents related to or covering PFC
emulsions. Such emulsions are the basis of the Company's OXYGENT products.
The issued patents and other pending patent applications cover specific
details of emulsified PFCs, and include product-by-process claims, method
claims describing their manufacture and use, and some composition claims.
These broadly cover high concentration PFC emulsions, typically 40-125%
weight per volume (although some are limited to 75-125% weight per volume),
and manufacturing methods.
5
In September 1994, Alliance received a U.S. patent for its preferred
method of using blood substitutes to facilitate oxygen delivery. A related
U.S. patent was issued in September 1995. Corresponding patents are pending
in Europe, Japan, and other countries. The issued claims cover methods for
facilitating autologous blood use in conjunction with administering
oxygen-enriched gas and oxygen carriers that contain fluorochemicals, as well
as those derived from human, animal, plant, or recombinant hemoglobin, in
order to reduce or eliminate the need for allogeneic blood transfusions
during surgery.
The Company has filed U.S. and foreign patent applications on its method
of using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing
conventional gas ventilators. In August 1995, a U.S. patent licensed to the
Company issued. The patent covers a method of administering liquids,
including LIQUIVENT, to patients. Another U.S. patent, covering other
methods of administration of liquids, including LIQUIVENT, to patients, was
issued in February 1996. The Company has issued patents and has pending
patent applications which seek to cover the use of PFCs to deliver drugs to
the lungs and to wash debris from, and open, collapsed lungs. In November
1995, the Company received a U.S. patent covering the use of fluorochemicals
to treat localized and systemic inflammation. The Company also has patent
applications pending that cover apparati for liquid ventilation using PFCs.
The Company has filed eight U.S. patent applications related to IMAGENT
US concerning the composition, manufacture, and use of novel stabilized
microbubble compositions, which include applications based on its discovery
that PFC gases, in combination with appropriate surfactants, can stabilize
microbubbles for use in ultrasonic imaging. International applications
directed to the same subject matter have also been filed. In July 1996, the
Company received a U.S. patent covering the use of various contrast agents,
including IMAGENT US, in harmonic imaging.
The Company has patents that have issued in the United States and
abroad, and additional pending patents, covering its novel fluorinated
surfactants. These compounds may be useful in oxygen-carrying or
drug-transport compositions, and in liposomal formulations that have
therapeutic and diagnostic applications. Additional fluorinated compounds
disclosed in pending applications may be employed in cosmetics, protective
creams, and lubricating agents. Compositions that can be structured as
emulsions, microemulsions, and gels may be useful as contrast enhancement
agents for radiography and scintigraphy. The Company also has pending
applications relating to microstructures (tubules, helixes, fibers) that may
have uses in the fields of medicine, biomolecular engineering,
microelectronics, and electro-optics.
Aside from the issued patents and allowed applications referred to
above, however, no assurance can be given that any of these applications will
result in issued U.S. or foreign patents. Although patents are issued with a
presumption of validity and require a challenge with a high degree of proof
to establish invalidity, no assurance can be given that any issued patents
would survive such a challenge and would be valid and enforceable.
The Company also attempts to protect its proprietary products,
processes, and other information by relying on trade secret laws and
non-disclosure and confidentiality agreements with its employees,
consultants, and certain other persons who have access to such products,
processes, and information. The agreements affirm that all inventions
conceived by employees are the exclusive property of the Company, with the
exception of inventions unrelated to the Company's business and developed
entirely on the employee's own time. Nevertheless, there can be no assurance
that these agreements will afford significant protection against or adequate
compensation for misappropriation or unauthorized disclosure of the Company's
trade secrets.
COMPETITION
Biotechnology and pharmaceutical companies are highly competitive.
There are many pharmaceutical companies, biotechnology companies, public and
private universities, and research organizations actively engaged in research
and development of products that may be similar to Alliance's products. Many
of the Company's existing or potential competitors have substantially greater
financial, technical, and human resources than the Company and may be better
equipped to develop, manufacture, and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing
the intended purposes of the Company's products, which might render the
Company's technology and products uncompetitive or obsolete. There can be no
assurance that the Company will be able to compete successfully.
6
Well-publicized side effects associated with the transfusion of human donor
blood have spurred efforts to develop a blood substitute. Two primary
approaches have shown promise as temporary oxygen carriers: PFC emulsions and
hemoglobin solutions. Hemoglobin development efforts include chemically
modified, stroma-free hemoglobin from human or bovine red blood cells, and the
use of genetic engineering to produce recombinant hemoglobin. There are several
companies working on hemoglobin solutions as a blood substitute, two of which
are in Phase II clinical trials. One of these companies is developing a
recombinant hemoglobin-based blood substitute in conjunction with a major U.S.
pharmaceutical company. Another major U.S. pharmaceutical company has indicated
that it will begin Phase III clinical trials in the near future. The Company
believes that the relatively low cost and ease of production of OXYGENT provide
advantages over hemoglobin based products. Alliance is aware of two other
companies developing PFC-based temporary oxygen carriers, one of which has
entered Phase I clinical trials.
Although liquid ventilation therapy has been in the research phase for the
last two decades, the Company is unaware of any potential competitor that has
reached the clinical trial stage. However, other companies may be evaluating
compounds with the possibility of entering this field. If major manufacturers
of PFCs entered the field, the Company could face competition from companies
with substantially greater resources. The Company believes that its patent
position and stage of research and development give it an advantage over these
potential competitors. Other companies are attempting to develop alternative
types of therapies for treatment of acute respiratory failure.
Competition in the development of ultrasound imaging contrast agents is
intense and is expected to increase. There is currently only one commercially
available ultrasound imaging contrast agent for certain cardiology applications.
Other companies are in advanced clinical trials with ultrasound contrast agents.
One of these companies recently reported the completion of Phase III clinical
trials of cardiac function and peripheral vascular Doppler enhancement and has
indicated that it is planning to submit an application for drug approval later
this year. Another company has also indicated completion of a Phase III study
of echocardiography. The Company expects that competition in the ultrasound
contrast imaging agent field will be based primarily on the products safety
profile, efficacy, stability, ease of administration, breadth of approved
indications, and physician, healthcare payor, and patient acceptance. Although
the Company believes that if and when IMAGENT US is approved for commercial sale
it will be well positioned to compete successfully, there can be no assurance
that the product will be able to do so.
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
The sale or use of the Company's present products and any other products or
processes that may be developed or sold by the Company may expose the Company to
potential liability from claims by end-users of such products or by
manufacturers or others selling such products, either directly or as a component
of other products. While the Company has product liability insurance, there can
be no assurance that the Company will continue to maintain such insurance or
that it will provide adequate coverage. If the Company is held responsible for
damages in a product liability suit, the Company's financial condition could be
materially and adversely affected.
GOVERNMENT REGULATION
The Company's products require governmental approval before production and
marketing can commence. The regulatory approval process is administered by the
FDA in the United States and by similar agencies in foreign countries. The
process of obtaining regulatory clearances or approvals is costly and time
consuming. The Company cannot predict how long the necessary clearances or
approvals will take or whether it will be successful in obtaining them.
Generally, all potential pharmaceutical products must successfully complete
two major stages of development (preclinical and clinical testing) prior to
receiving marketing approval by the governing regulatory agency. In preclinical
testing, potential compounds are tested both in vitro and in animals to gain
safety information prior to administration in humans. Knowledge is obtained
regarding the effects of the compound on bodily functions as well as its
absorption, distribution, metabolism, and elimination.
7
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with
the initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance. Phase II typically involves studies in a somewhat larger patient
population to identify possible adverse effects and safety risks, to begin
gathering preliminary efficacy data, and to investigate potential dose sizes
and schedules. Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient
population. Each trial is conducted in accordance with certain standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and the efficacy criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the investigational new drug
application. Further, each clinical study must be evaluated by an independent
review board at the institution at which the study will be conducted. The
review board will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution.
Following completion of these studies, a NDA must be submitted to and
approved by the FDA in order to market the product in the United States.
Similar applications are required in foreign countries. There can be no
assurance that, upon completion of the foregoing trials, the results will be
considered adequate for government approval. If and when approval is obtained
to market a product, the FDA's (or applicable foreign agency's) regulations
will govern manufacturing and marketing activities.
The FDA has established a designation to speed the availability of new
therapies for life-threatening or severely debilitating diseases. This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some
new drugs, such as LIQUIVENT, which has been so designated.
Perflubron is an eight-carbon halogenated fluorocarbon liquid. Certain
halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons) have
been implicated in stratospheric ozone depletion. The FDA issued a Finding of
No Significant Impact under the National Environmental Protection Act in
connection with the approval for marketing of IMAGENT GI, a perflubron-based
drug previously developed by the Company However, all materials contained in
the Company's products remain subject to regulation by governmental agencies.
In addition to FDA regulation, the Company is subject to regulation by
various governmental agencies including, without limitation, the Drug
Enforcement Administration, the U.S. Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food
and Drug Branch. Such regulation, by governmental authorities in the United
States and other countries, may impede or limit the Company's ability to
develop and market its products.
EMPLOYEES
As of August 30, 1996, the Company had 194 full-time employees, of whom
163 were engaged in research and development, production and associated
support, 5 in business development, sales and marketing, and 26 in general
administration. There can be no assurance that the Company will be able to
continue attracting and retaining sufficient qualified personnel in order to
meet its needs. None of the Company's employees is represented by a labor
union. The Company believes that its employee relations are satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company:
DUANE J. ROTH. Mr. Roth, who is 46, has been President and Chief Executive
Officer since 1985 and Chairman since October 1989. Prior to joining
Alliance, Mr. Roth served as President of Analytab Products, Inc., an
American Home Products company involved in manufacturing and marketing
medical diagnostics, pharmaceuticals and devices. For the previous ten
years, he was employed in various sales, marketing, and general management
capacities by Ortho Diagnostic Systems, Inc., a Johnson & Johnson company,
which is a manufacturer of diagnostic and pharmaceutical products. Mr.
Roth's brother, Theodore D. Roth, is an Executive Vice President of the
Company.
HAROLD W. DELONG. Mr. DeLong, who is 48, has been Executive Vice President,
Business Development for the Company since February 1989. Mr. DeLong has
been employed for more than 20 years in the medical diagnostics and
pharmaceutical industry in various sales, marketing, and management
positions. Prior to joining Alliance, Mr. DeLong was Vice President, Sales
and Marketing for Murex Corporation, a company participating in the
infectious disease
8
diagnostics market. He previously served as Director, Sales and Marketing
for Becton Dickinson's Immunocytometry Systems division. Mr. DeLong was also
previously employed by Ortho Diagnostic Systems, Inc., for over ten years,
where his last position was Director of the Hemostasis and Chemistry Products
business units.
THEODORE D. ROTH. Mr. Roth, who is 45, has been Executive Vice President and
Chief Financial Officer of the Company since November 1987 and Secretary
since 1990. For more than ten years prior to joining the Company, he was
General Counsel of SAI Corporation, a company in the business of operating
manufacturing concerns, and General Manager of Holland Industries, Inc., a
manufacturing company. Mr. Roth received his J.D. from Washburn University
and an LL.M. in Corporate and Commercial Law from the University of Missouri
in Kansas City. He is the brother of Duane J. Roth, the Chairman of the
Company.
B. JACK DEFRANCO. Mr. DeFranco, who is 51, has been Vice President, Market
Planning for Alliance since January 1991. He has more than 20 years
experience in sales and marketing in the medical products industry. He was
President of Orthoconcept Inc., a private firm marketing orthopedic and
urological devices from 1986 through 1990. Prior to 1986, he was Director of
Marketing and New Business Development for Smith and Nephew Inc., which
markets orthopedic and general wound-care products and he served in various
sales and marketing positions with Ortho Diagnostic Systems, Inc. Mr.
DeFranco received an M.B.A. from Fairleigh Dickinson University.
N. SIMON FAITHFULL, M.D., Ph.D. Dr. Faithfull, who is 56, has been Vice
President, Medical Research for the Company since September 1990. Dr.
Faithfull joined Alliance after serving as Director of Medical Research for
Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior
Lecturer in Anesthesia at the University of Manchester (UK), and has held
various academic appointments and clinical anesthesia positions at Erasmus
University (Netherlands), Tulane University and the University of Alabama
(Birmingham) for more than 15 years. He has served as Secretary of the
International Society on Oxygen Transport to Tissue. He received his Ph.D.
from Erasmus University, Rotterdam and his M.D. from London University.
STEPHEN F. FLAIM, Ph.D. Dr. Flaim, who is 48, was appointed Vice President,
Biological Sciences in May 1996, having joined the Company in 1990 as
Division Director of Pharmacology and Toxicology. Prior to joining Alliance,
he was the Associate Director of Pharmacology at The Bristol-Meyers Squibb
Institute for Medical Research. Dr. Flaim was also employed for five years
at McNeil Pharmaceutical, an affiliate of Johnson & Johnson, where he
directed an antianginal drug discovery program. Dr. Flaim was also on the
faculty of Pennsylvania State University College of Medicine for seven years.
He received his Ph.D. from the University of California at Davis, California.
HENRY A. GRAHAM, Ph.D. Dr. Graham, who is 53, has been Vice President,
Operations since January 1990. In his more than 20 years in industrial
research, he has directed groups involved in the development of biological
and immunodiagnostic products. Prior to joining Alliance, he worked for
Johnson & Johnson for 17 years on a broad range of projects including
injectable human biologicals, immunohematology reagents, immunoassay reagents
and instrument systems. Dr. Graham was Director of Product Development for
Ortho Diagnostic Systems, Inc. for at least five years prior to 1990. During
his tenure at Johnson & Johnson, he was the recipient of several awards,
including the Corporate Medal for Outstanding Research. Dr. Graham received
a Ph.D. in immunology from Rutgers University.
RONALD M. HOPKINS, Ph.D. Dr. Hopkins, who is 54, has been Vice President,
Research and Development since May 1990. Prior to joining Alliance, Dr.
Hopkins spent 20 years with Mallinckrodt Medical, Inc. As Vice President at
Mallinckrodt his responsibilities primarily involved identification and
development of various diagnostic x-ray, magnetic resonance, ultrasound and
radiopharmaceutical imaging agents as well as angiographic catheters. In
addition to product and business development experience, Dr. Hopkins has an
extensive background in cardiovascular pharmacology and toxicology research,
as well as sterile pharmaceutical formulation and production. Dr. Hopkins
received a Ph.D. in pharmacology from the University of Maryland.
DAVID H. KLEIN, Ph.D. Dr. Klein, who is 63, has been employed by the Company
since 1989 and is Distinguished Research Fellow, Pharmaceutical Sciences.
For over 40 years he has carried out and directed chemical research in
various academic, research and pharmaceutical institutions. Prior to joining
Alliance, Dr. Klein worked for over four years at Sun, Inc. on medical uses
of perfluorocarbon emulsions. He has served as a consultant for the National
Science Foundation, the Michigan Department of Natural Resources, and the
United States Senate. He received his Ph.D. in analytical chemistry from
Case Western Reserve University.
9
GORDON L. SCHOOLEY, Ph.D. Dr. Schooley, who is 49, has been Vice President,
Clinical Research and Regulatory Affairs since January 1989. Dr. Schooley
has been employed for over 20 years in research and development in the
pharmaceutical industry. Prior to joining Alliance in 1989, Dr. Schooley was
Vice President of Clinical Research and Regulatory Affairs for Newport
Pharmaceuticals, a company developing antiviral drugs. For the previous
eight years, he was Director of Clinical Research and Biostatistics for
Allergan Pharmaceuticals, a division of SmithKline Beecham, developing
ophthalmologic and dermatologic drugs and devices. He was also employed by
McGaw Laboratories as Manager of Biostatistics for parenteral products and by
The Upjohn Company as a senior biostatistician for analgesic and CNS drugs.
Dr. Schooley received a Ph.D. from the University of Michigan School of
Public Health.
ITEM 2. PROPERTIES
FACILITIES
The Company has principal facilities in two locations: San Diego,
California and Otisville, New York. In San Diego, California, where the
Company maintains its principal executive offices, performs research and
development on its PFC-based products and has its emulsion products
manufacturing facility, the Company has approximately 70,000 square feet of
laboratory, manufacturing and office space in two leased facilities. The
Otisville site, where the Company has established the LIQUIVENT and SAT PAD
production facility, also includes laboratories and administrative offices.
The Company is considering additional facilities in San Diego to meet its
projected needs for the next two to three years and is currently reviewing
its long term needs.
The Company purchased the Otisville site from the New York City Public
Development Corporation ("PDC") in June 1983. In connection with the
acquisition, the Company entered into a land use agreement (the "Land Use
Agreement") with New York City and the PDC. The Company estimates that the
cost of complying with the Land Use Agreement for fiscal 1996 was
approximately $100,000. The provisions of the Land Use Agreement are
"covenants running with the land," which may bind the Company and subsequent
owners of the Otisville site for a substantial period of time.
While the Company believes that it can produce materials for clinical
trials and initial market launch for its emulsion products at its existing
San Diego facility and for LIQUIVENT at its Otisville, New York facility, it
may need to expand its commercial manufacturing capabilities for its products
in the future. This expansion may occur in stages, each of which would
require regulatory approval, and product demand could at times exceed supply
capacity. The Company has not selected a site or obtained any regulatory
approvals for construction of a commercial production facility for its
products. The projected location and completion date of any production
facility will depend upon regulatory and development activities and other
factors. The Company cannot predict the amount that it will expend for the
construction of such production facility, and there can be no assurance as to
when or whether the FDA will determine that such facility conforms with Good
Manufacturing Practices. The Ortho License Agreement grants an option to
Ortho to elect to manufacture the emulsion products referred to therein, or
to require the Company to manufacture such products at a negotiated price.
The HMRI License Agreement requires the Company to manufacture LIQUIVENT at
its Otisville facility for a period of time after market launch and to sell
the product to HMRI at a negotiated price. HMRI will be responsible for
establishing production capacity beyond the maximum capacity of the Otisville
facility.
ITEM 3. LEGAL PROCEEDINGS
During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed in the U.S.
District Court for the Southern District of California by certain
shareholders. The actions were consolidated into one class action lawsuit
titled "In re Alliance Pharmaceutical Securities Litigation." The complaint
claimed, among other things, that the defendants failed to disclose certain
problems with two of the Company's products under development, which conduct
is alleged to have portrayed falsely the Company's financial condition. On
May 25, 1995, summary judgment was granted in favor of the Company and its
officers and directors. Attorneys for the plaintiffs appealed the decision;
however, at their request, the lawsuit was dismissed with prejudice on May
30, 1996.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the last quarter of Alliance's fiscal year ended June 30, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the NASDAQ National Market System under the symbol ALLP.
The following table sets forth, for the periods indicated, the high and low
sale prices of the common stock as reported on NASDAQ, without retail mark-up,
markdown or commission.
High Low
---- ---
Fiscal 1996
Quarter ended September 30, 1995 $12.625 $7.875
Quarter ended December 31, 1995 $14.25 $10.50
Quarter ended March 31, 1996 $19.75 $12.625
Quarter ended June 30, 1996 $22.875 $15.25
High Low
---- ---
Fiscal 1995
Quarter ended September 30, 1994 $12.00 $8.00
Quarter ended December 31, 1994 $8.75 $5.625
Quarter ended March 31, 1995 $7.625 $4.25
Quarter ended June 30, 1995 $8.625 $4.75
On August 30, 1996, the closing price of the Company's common stock was
$14.00.
The Company has not paid dividends on its common stock and the Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
On August 30, 1996, the approximate number of record holders of the
Company's common stock was 1,730. The Company believes that, in addition, there
are in excess of 20,000 beneficial owners of its common stock whose shares are
held in street name and, consequently, the Company is unable to determine the
actual number of beneficial holders thereof.
11
ITEM 6. SELECTED FINANCIAL DATA
The following information has been summarized from the financial statements
included elsewhere herein and should be read in conjunction with such financial
statements and the related notes thereto (in thousands except per share
amounts):
Years ended June 30,
1996 1995 1994 1993 1992
Statement of Operations Data:
Total revenues $ 17,323 $ 11,816 $ 409 $ 2,370 $ 1,805
Net loss $(23,172) $(29,717) $(36,946) $(26,380) $(21,766)
Net loss per common share $ (.91) $ (1.35) $ (1.83) $ (1.39) $ (1.25)
June 30,
1996 1995 1994 1993 1992
Balance Sheet Data:
Working capital $ 73,244 $22,346 $19,446 $39,745 $65,578
Total assets $108,343 $56,030 $53,132 $72,537 $97,976
Long-term debt and other $ 1,166 $ 843 $ 348 $ 447 $ 756
Stockholders' equity $101,467 $50,077 $49,825 $69,144 $94,553
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(References to years are to the Company's fiscal years ended June 30.)
Alliance has devoted substantial resources to research and development
related to its pharmaceutical products. The Company has been unprofitable since
inception and expects to continue to spend substantial amounts on research and
development, preclinical testing and clinical trials, regulatory activities, and
commercial manufacturing start-up. The Company has entered into collaborative
research and development agreements with pharmaceutical companies for OXYGENT
and LIQUIVENT, and is actively searching for a similar arrangement for IMAGENT
US. The arrangements with its existing partners require them to reimburse the
Company for substantially all of its development expenses incurred for the
respective products and to make milestone payments to the Company upon the
achievement of certain product development events, followed by royalties on
sales at commercialization. If the Company enters into a similar arrangement
for IMAGENT US, and some of the development events under its existing agreements
are achieved and the relevant payments made, the Company could become profitable
on a periodic basis over the next two years, prior to the commercialization of
products. However, the timing and amounts of such license fees and milestone
payments, if any, cannot be predicted with certainty and may not occur if
product development events are not achieved. There can be no assurance that the
Company will be able to achieve profitability at all or on a sustained basis.
LIQUIDITY AND CAPITAL RESOURCES
Through June 1996, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. To date, the Company's revenue from the sale of products has
not been significant.
In April 1996, the Company completed a public offering of 2.9 million
shares of newly issued common stock, resulting in net proceeds to the Company of
approximately $44million.
12
In February 1996, the Company entered into a license agreement with HMRI,
which provides HMRI with worldwide marketing and manufacturing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. The product is being developed
jointly by Alliance and HMRI with HMRI responsible for substantially all of the
costs of development and marketing. In conjunction with the HMRI License
Agreement, HMRI purchased shares of Series B Preferred Stock and Series C
Preferred Stock for $22million. In addition, HMRI paid Alliance an initial
license fee of $5million and agreed to pay further license fees, milestone
payments, and royalties on product sales. HMRI also received a five-year
warrant to acquire 300,000 shares of Common Stock at $20 per share. In June
1996, the Series B Preferred Stock was converted into Common Stock of the
Company.
In August 1995, the Company entered into a loan and security agreement
under which the Company received $2.2 million. Amounts borrowed under the
agreement are secured by fixed assets, and are being repaid over three years.
If certain financial covenants are not satisfied, the debt may become due and
payable. The Company has financed substantially all of its office and research
facilities and related leasehold improvements under operating lease
arrangements.
In April 1995, the Company completed offerings of 3.2 million shares of
newly issued Common Stock, resulting in net proceeds to the Company of
approximately $14.3 million.
In August 1994, the Company entered into the Ortho License Agreement for
injectable PFC emulsions capable of transporting oxygen for therapeutic use,
including OXYGENT. Under the Ortho License Agreement, Ortho paid to Alliance an
initial fee of $4million and agreed to make other payments upon the achievement
of certain milestones. Ortho is responsible for substantially all the remaining
costs of developing and marketing the products and will pay Alliance a royalty
based upon sales of products after commercialization. From August 1994 through
June 30, 1996, the Company had received aggregate research revenue payments
under the Ortho License Agreement of $13.1 million from Ortho, and as of June
30, 1996, had recorded a receivable of $1.8 million, which was subsequently
received. In conjunction with the Ortho License Agreement, J&JDC purchased
Series A Preferred Stock for $15 million and obtained a three-year warrant to
purchase 300,000 shares of Common Stock at $15 per share. In June 1996, the
Series A Preferred Stock was converted into Common Stock of the Company, and
J&JDC exercised its warrant for 300,000 shares.
The Company had net working capital of $73.2 million at June 30, 1996
compared to $22.3 million at June 30, 1995. The Company's cash, cash
equivalents, and short-term investments increased to $71.4 million at June 30,
1996 from $23.5 million at June 30, 1995. The Company received net proceeds of
approximately $44million from the public offering of 2.9 million shares of
common stock in April 1996. The Company also received $4.5 million in June 1996
from the exercise of the warrant held by J&JDC. The Company received $22
million from the issuance of preferred stock to HMRI, and $2.2 million under the
August 1995 loan and security agreement. These increases were partially offset
by net cash used in operations of $21.9 million, and property, plant and
equipment additions of $4 million. The Company's operations to date have
consumed substantial amounts of cash, and are expected to continue to do so for
the foreseeable future.
In December 1993, in order to obtain a commitment for a long-term supply of
raw material for both clinical trials and anticipated future production
requirements, the Company entered into an agreement with a supplier under which
the Company was obligated to make payments to the supplier through May 1997
based, in part, upon the achievement of certain milestones. Based upon the
supplier's intent to negotiate directly with the Company's existing and future
collaborative partners, that agreement was modified in July 1995 to terminate
certain commitments by both parties. Some or all of the Company's payment
obligations that remain may be reimbursed to the Company by existing
collaborative partners.
The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential. Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
health care system, status of its proprietary rights, technical feasibility,
expected and known product attributes, and estimated costs to bring the product
to market. Based on these and other factors, the Company may from time to time
reallocate its resources among its product development activities. Additions to
products under development or changes in products being pursued can
substantially and rapidly change the Company's funding requirements.
13
The Company expects to incur substantial additional expenditures associated
with product development. The Company will seek additional collaborative
research and development relationships with suitable corporate partners for its
non-licensed products. There can be no assurance that such relationships, if
any, will successfully reduce the Company's funding requirements. Additional
equity or debt financing may be required, and there can be no assurance that
funds from these sources will be available on reasonable terms, if at all. If
adequate funds are not available, the Company may be required to delay, scale
back, or eliminate one or more of its product development programs, or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates, or products that the Company would not otherwise relinquish.
Alliance anticipates that its current capital resources, including the net
proceeds from the recent offering, expected revenues from the Ortho License
Agreement, HMRI License Agreement, and investments, will be adequate to satisfy
its capital requirements for at least the next 24 months. The Company's future
capital requirements will depend on many factors, including continued scientific
progress in its research and development programs, progress with preclinical
testing and clinical trials, the time and cost involved in obtaining regulatory
approvals, patent costs, competing technological and market developments,
changes in existing collaborative relationships, the ability of the Company to
establish additional collaborative relationships, and the cost of manufacturing
scale-up.
While the Company believes that it can produce materials for clinical
trials and the initial market launch for its emulsion products at its existing
San Diego facility and for LIQUIVENT at its Otisville facility, it may need to
expand its commercial manufacturing capabilities for its products in the future.
This expansion may occur in stages, each of which would require regulatory
approval, and product demand could at times exceed supply capacity. The Company
has not selected a site or obtained any regulatory approvals for construction of
a commercial production facility for its products, nor can there be any
assurance that it will be able to do so. The projected location and completion
date of any production facility will depend upon regulatory and development
activities and other factors. The Company cannot predict the amount that it
will expend for the construction of such a production facility, and there can be
no assurance as to when or whether the FDA will determine that such facility
complies with Good Manufacturing Practices. Construction of a facility will
depend on regulatory approvals, product development, and capital resources,
among other things. The Ortho License Agreement provides an option to Ortho to
elect to manufacture the emulsion products referred to therein, or to require
the Company to manufacture such products at a negotiated price. The HMRI
License Agreement requires the Company to manufacture LIQUIVENT at its Otisville
facility for a period of time after market launch and to sell the product to
HMRI at a negotiated price. HMRI will be responsible for establishing
production capacity beyond the maximum capacity of the Otisville facility.
Except for historical information, the statements made herein and elsewhere
are forward looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 1997, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include the
inability to enter into collaborative relationships to further develop and
commercialize the Company's products, changes in any such relationships, or the
inability of any collaborative partner to adequately commercialize any of the
Company's products; the uncertainties associated with the lengthy regulatory
approval process; obtaining and enforcing patents important to the Company's
business; and possible competition from other products. Furthermore, even if
the Company's products appear promising at an early stage of development, they
may not reach the market for a number of important reasons. Such reasons
include, but are not limited to, the possibilities that the potential products
will be found ineffective during clinical trials, failure to receive necessary
regulatory approvals, difficulties in manufacturing on a large scale, failure to
obtain market acceptance, and the inability to commercialize because of
proprietary rights of third parties. The research, development, and market
introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost effective prices or at all; the effect of possible technology
and/or other business acquisitions or transactions; and the increasing emphasis
on controlling health care costs and potential legislation or regulation of
health care pricing.
14
During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed in the U.S.
District Court for the Southern District of California by certain shareholders.
The actions were consolidated into one class action lawsuit titled "In re
Alliance Pharmaceutical Securities Litigation." The complaint claimed, among
other things, that the defendants failed to disclose certain problems with two
of the Company's products under development, which conduct is alleged to have
portrayed falsely the Company's financial condition. On May 25, 1995, summary
judgment was granted in favor of the Company and its officers and directors.
Attorneys for the plaintiffs appealed the decision; however, at their request,
the lawsuit was dismissed with prejudice on May 30,1996.
RESULTS OF OPERATIONS
1996 AS COMPARED WITH 1995
The Company's license and research revenue was $17.1 million for 1996,
compared to $11.6 million for 1995. License revenue included $5 million from
the HMRI License Agreement for 1996, compared to $4 million from the Ortho
License Agreement for 1995. Research revenue increased from $7.1 million to
$11.9 million in 1996 primarily as a result of amounts received from the HMRI
Agreement. The Company expects research revenue to continue at higher levels in
1997 compared to 1996.
Research and development expenses decreased by 4% to $33.7 million 1996,
compared to $35.3 million 1995. The decrease in expenses was primarily the
result of a $4 million reduction in purchases of raw materials, and a $929,000
net reduction in acquired research and development expense. These reductions
were partially offset by a $2.5 million increase in payments to universities and
outside consultants. The expenses for 1995 included a one-time $1.7 million
charge to research and development expense which arose when the Company licensed
product rights to Ortho. The expenses for 1996 included a $757,000 charge
arising from the acquisition of certain PFC patents, patent rights, and related
documents in exchange for 50,000 shares of the Company's common stock and a
five-year warrant to purchase up to an additional 100,000 shares of the
Company's common stock at $10 per share.
General and administrative expenses increased by 4% to $7.2 million for
1996, compared to $6.9 million for 1995. The increase in general and
administrative expenses was primarily due to increased salaries and wages.
Investment income and other was $1.4 million for 1996, compared to $1.2
million for 1995. The increase was primarily a result of higher average cash
balances as a result of the February 1996 HMRI transaction and the April 1996
stock offering.
1995 AS COMPARED WITH 1994
The Company's license and research revenue increased to $11.6 million in
1995 compared to $163,000 in 1994. The increase was primarily due to $4 million
of license revenue and $7.1 million of research revenue derived from the Ortho
License Agreement.
The Company incurred total operating expenses of $42.1 million for 1995.
Operating expenses included $5.0 million for purchases of raw materials for
certain products being developed, $1.8 million for OXYGENT costs incurred prior
to execution of the Ortho License Agreement, $545,000 for products no longer
promoted or developed by Alliance, and a $1.7 million non-cash charge related to
the license of previously capitalized product rights. In January 1994, the
Company regained from Boehringer Ingelheim International GmbH ("BII") all
marketing and manufacturing rights to IMAGENT-Registered Trademark-,
diagnostic imaging agents, and OXYGENT products outside of North America. In
conjunction with the acquisition of the marketing and manufacturing rights
from BII, the Company recorded product rights of $1.8 million, based on the
value of warrants issued to acquire the rights. The unamortized portion
($1.7 million) of these product rights was charged to research and
development expense when the Company licensed these product rights to Ortho.
Research and development expenses increased by 10% to $35.3 million for
1995 compared to $32.1 million for 1994. The growth in expenses was primarily
a result of increased raw material costs and the product rights charge discussed
above and increased salary costs. These expenses were partially offset by a
reduction in payments to universities and outside consultants.
15
General and administrative expenses increased by 1% to $6.9 million for
1995 compared to $6.8 million for 1994. During the fourth quarter of 1995, the
Company was successful in recovering $1.6 million from its insurance carrier to
offset professional fees incurred in connection with the defense of its lawsuit.
Investment and other income was $1.2 million for 1995 compared to
$1.6 million for 1994. The decline in investment revenue was primarily a result
of lower average cash balances.
Alliance expects to continue to incur substantial and increasing expenses
associated with its research and development programs. Operating losses may
fluctuate from quarter to quarter as a result of the differences in the timing
of revenues earned and expenses incurred and such fluctuations may be
substantial. The Company's historical results are not necessarily indicative of
future results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Table of Contents to Consolidated Financial Statements on page F-1
below for a list of the Financial Statements being filed herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is contained
in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant." Information concerning the directors of the
Company is incorporated by reference to the section entitled "Election of
Directors" that the Company intends to include in its definitive proxy statement
for Alliance's November 1996 Annual Meeting of Shareholders (the "Proxy
Statement"). Copies of the Proxy Statement will be duly filed with the
commission pursuant to Rule 14a-6(c) promulgated under the Securities Exchange
Act of 1934, as amended, not later than 120 days after the end of the fiscal
year covered by its Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation" and "Election of Directors"
to appear in the Company's Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Ownership of Voting Securities by Certain Beneficial
Owners and Management" to appear in the Company's Proxy Statement is
incorporated herein by reference.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Election of Directors" and "Executive Compensation"
to appear in the Company's Proxy Statement are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report.
1. See Table of Contents to Consolidated Financial Statements on
Page F-1 for a list of Financial Statements being filed herein.
2. See Page F-2 for the Report of Ernst & Young LLP, Independent
Auditors, being filed herein.
3. See Exhibits below for a list of all Exhibits being filed or
incorporated by reference herein.
(b) None
(c) Exhibits.
(3) (a) Restated Certificate of Incorporation of the Company, as amended
through August 31, 1994. (Incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994
(the "1994 10-K").)
(b) Certificate of Amendment to the Certificate of Incorporation of
the Company filed on March 25, 1996 (Incorporated by reference to Exhibit 3 to
Amendment No. 1 of the S-3 Registration Statement of the Company filed on March
28, 1996 (the "1996 S-3")).
(c) By-Laws of the Company, as amended. (Incorporated by reference
to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989 (the "1989 10-K").)
(10) (a) Lease Agreement, as amended, between the Company and Hartford
Accident and Indemnity Company relating to the Company's San Diego, California
facilities. (Incorporated by reference to Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993.)
(b) Loan Modification Agreement between the Company and Theodore
Roth, dated May 24, 1994 - Management contract or compensatory plan or
arrangement required to be filed. (Incorporated by reference to Exhibit 10(d)
to the 1994 10-K.)
(c) Formula Award of Stock Options for Non-employee members of the
Board of Directors as approved by shareholders of the Company - Management
contract or compensatory plan or arrangement required to be filed. (Incorporated
by reference to Exhibit 10(e) to the 1994 10-K.)
(d) License Agreement dated August 16, 1994 among the Company, Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute.
(Incorporated by reference to Exhibit 10(f) to the 1994 10-K.)
(e) Stock and Warrant Purchase Agreement dated August 16, 1994
between the Company and Johnson & Johnson Development Corporation. (Incorporated
by reference to Exhibit 10(g) to the 1994 10-K.)
(f) License Agreement dated February 28, 1996 between the Company and
Hoechst Marion Roussel, Inc. (Incorporated by reference to Exhibit 10 (a) to the
1996 S-3).
(g) Stock and Warrant Purchase Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc. (Incorporated by reference
to Exhibit 10 (b) to the 1996 S-3).
(h) Supply and Technology Transfer Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc. (Incorporated by reference
to Exhibit 10 (c) to the 1996 S-3).
(23.1) Consent of Ernst & Young LLP, Independent Auditors
17
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.
ALLIANCE PHARMACEUTICAL CORP.
(Registrant)
Date: September 10, 1996 By: \s\ Duane J. Roth
-----------------------------------
Duane J. Roth
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
\s\ Duane J. Roth President, Chief Executive September 10, 1996
- --------------------------- Officer and a Director
Duane J. Roth
\s\ Theodore D. Roth Executive Vice President September 10, 1996
- --------------------------- and Chief Financial Officer
Theodore D. Roth
\s\ Tim T. Hart Controller, Chief Accounting September 10, 1996
- --------------------------- Officer
Tim T. Hart
\s\ Pedro Cuatrecasas, M.D. Director September 10, 1996
- ---------------------------
Pedro Cuatrecasas, M.D.
\s\ Carroll O. Johnson Director September 10, 1996
- ---------------------------
Carroll O. Johnson
\s\ Stephen M. McGrath Director September 10, 1996
- ---------------------------
Stephen M. McGrath
\s\ Helen M. Ranney, M.D. Director September 10, 1996
- ---------------------------
Helen M. Ranney, M.D.
\s\ Donald E. O'Neill Director September 10, 1996
- ---------------------------
Donald E. O'Neill
\s\ Jean Riess, Ph.D. Director September 10, 1996
- ---------------------------
Jean Riess, Ph.D.
\s\ Thomas F. Zuck, M.D. Director September 10, 1996
- ---------------------------
Thomas F. Zuck, M.D.
18
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at June 30, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-13
No consolidated financial statement schedules are filed herewith because they
are not required or are not applicable, or because the required information is
included in the consolidated financial statements or notes thereto.
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.
We have audited the accompanying consolidated balance sheets of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 18, 1996
F-2
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
JUNE 30,
1996 1995
--------------- ----------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 9,480,000 $ 12,519,000
Short-term investments 61,921,000 10,964,000
Research revenue receivable 5,750,000 2,060,000
Inventories and other current assets 1,803,000 1,913,000
--------------- ----------------
Total current assets 78,954,000 27,456,000
Property, plant and equipment - net 12,390,000 9,946,000
Purchased technology - net 15,966,000 17,371,000
Other assets - net 1,033,000 1,257,000
--------------- ----------------
$ 108,343,000 $ 56,030,000
--------------- ----------------
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,189,000 $ 2,509,000
Accrued expenses 2,801,000 2,601,000
Current portion of long-term debt 720,000
--------------- ----------------
Total current liabilities 5,710,000 5,110,000
Long-term debt 945,000
Other 221,000 843,000
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock - $.01 par value;
5,000,000 shares authorized;
200,000 and 1,500,000 shares
issued and outstanding at
June 30, 1996 and 1995, respectively 2,000 15,000
Common stock - $.01 par value;
50,000,000 shares authorized;
30,001,918 and 24,759,150 shares
issued and outstanding at
June 30, 1996 and 1995, respectively 300,000 248,000
Additional paid-in capital 313,397,000 238,874,000
Accumulated deficit (212,232,000) (189,060,000)
--------------- ----------------
Total stockholders' equity 101,467,000 50,077,000
--------------- ----------------
$ 108,343,000 $ 56,030,000
--------------- ----------------
--------------- ----------------
See Accompanying Notes to Consoliated Financial Statements.
F-3
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------
Years ended June 30,
1996 1995 1994
------------ ------------ -----------
Revenues:
License and research revenue $ 17,087,000 $ 11,640,000 $ 163,000
Product revenue - net 236,000 176,000 246,000
------------ ------------ -----------
17,323,000 11,816,000 409,000
Operating expenses:
Research and development 33,730,000 35,257,000 32,070,000
General and administrative 7,214,000 6,891,000 6,847,000
------------ ------------ -----------
40,944,000 42,148,000 38,917,000
------------ ------------ -----------
Loss from operations (23,621,000) (30,332,000) (38,508,000)
Investment income and other - net 1,355,000 1,209,000 1,562,000
------------ ------------ -----------
Net loss (22,266,000) (29,123,000) (36,946,000)
Dividends on preferred stock (906,000) (594,000)
------------ ------------ -----------
Net loss applicable to common shares $(23,172,000) $(29,717,000) $(36,946,000)
------------ ------------ -----------
------------ ------------ -----------
Net loss per common share $ (0.91) $ (1.35) $ (1.83)
------------ ------------ -----------
------------ ------------ -----------
Weighted average number of shares outstanding 25,504,000 21,959,000 20,226,000
------------ ------------ -----------
------------ ------------ -----------
See Accompanying Notes to Consoliated Financial Statements.
F-4
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE CAPITAL
PREFERRED STOCK COMMON STOCK ADDITIONAL ARISING FROM
--------------------- ---------------------- PAID-IN ACQUISITION OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSIDIARY DEFICIT
--------- -------- ---------- --------- ------------ -------------- -------------
BALANCES AT JUNE 30, 1993 19,000,000 $190,000 $190,551,000 $800,000 $(122,397,000)
Sale of common stock 2,180,000 22,000 15,228,000
Exercise of stock options
and warrants 75,000 1,000 199,000
Installment payment related
to acquisition
of BioPulmonics, Inc. 105,000 1,000 921,000 (800,000)
Issuance of warrants in
connection with
acquisition of product
rights 1,840,000
Issuance of stock in
satisfaction of employer
matching contribution
to 401(k) savings plan 12,000 95,000
Amortization of deferred
compensation 120,000
Net loss (36,946,000)
--------- -------- ---------- --------- ------------ -------------- -------------
BALANCES AT JUNE 30, 1994 21,372,000 214,000 208,954,000 - (159,343,000)
Sale of convertible
preferred stock 1,500,000 15,000 14,618,000
Sale of common stock 3,175,000 32,000 14,262,000
Exercise of stock
options and warrants 56,000 1,000 36,000
Installment payment
related to acquisition
of BioPulmonics, Inc. 131,000 1,000 999,000
Issuance of stock in
satisfaction of employer
matching contribution
to 401(k) savings plan 25,000 150,000
Net unrealized loss on
available-for-sale
securities (145,000)
Dividends on preferred
stock (594,000)
Net loss (29,123,000)
--------- -------- ---------- --------- ------------ -------------- -------------
BALANCES AT JUNE 30, 1995 1,500,000 15,000 24,759,000 248,000 238,874,000 - (189,060,000)
Sale of convertible
preferred stock 950,000 9,500 21,530,000
Sale of common stock 2,865,000 29,000 43,925,000
Exercise of stock
options and warrants 745,000 7,000 6,548,000
Conversion of convertible
preferred stock to
common shares (2,250,000) (22,500) 1,500,000 15,000 8,000
Conversion of convertible
preferred stock dividend
to common shares 75,000 1,000 1,499,000
Payment related to
acquisition of
technology rights 50,000 757,000
Issuance of stock in
satisfaction of employer
matching contribution
to 401(k) savings plan 8,000 114,000
Net unrealized gain on
available-for-sale
securities 142,000
Dividends on preferred
stock (906,000)
Net loss (22,266,000)
--------- -------- ---------- --------- ------------ -------------- -------------
BALANCES AT JUNE 30, 1996 200,000 2,000 30,002,000 $300,000 $313,397,000 $ - $(212,232,000)
--------- -------- ---------- --------- ------------ -------------- -------------
--------- -------- ---------- --------- ------------ -------------- -------------
See Accompanying Notes to Consoliated Financial Statements.
F-5
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
Years ended June 30,
1996 1995 1994
-------------- -------------- --------------
Operating activities:
Net loss $ (22,266,000) $ (29,123,000) $ (36,946,000)
-------------- -------------- --------------
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 3,086,000 2,859,000 3,073,000
Acquired research and development 757,000 1,686,000
Non-cash compensation - net 277,000 150,000 215,000
Changes in operating assets and liabilities:
Research revenue receivable (3,690,000) (2,060,000)
Inventories and other 219,000 (668,000) 1,331,000
Accounts payable and accrued
expenses and other (263,000) 1,459,000 285,000
-------------- -------------- --------------
Net adjustments 386,000 3,426,000 4,904,000
-------------- -------------- --------------
Net cash used in operating activities (21,880,000) (25,697,000) (32,042,000)
-------------- -------------- --------------
Financing activities:
Issuance of common and preferred stock
and warrants 72,001,000 29,557,000 15,450,000
Proceeds from long-term debt 2,208,000
Principal payments of long-term debt (543,000) (3,000)
-------------- -------------- --------------
Net cash provided by financing activities 73,666,000 29,557,000 15,447,000
-------------- -------------- --------------
Investing activities:
Short-term investments (50,815,000) 8,045,000 15,072,000
Property, plant and equipment (4,010,000) (1,288,000) (1,891,000)
Net cash provided by (used in) -------------- -------------- --------------
investing activities (54,825,000) 6,757,000 13,181,000
-------------- -------------- --------------
Increase (decrease) in cash and
cash equivalents (3,039,000) 10,617,000 (3,414,000)
Cash and cash equivalents at beginning
of year 12,519,000 1,902,000 5,316,000
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 9,480,000 $ 12,519,000 $ 1,902,000
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosure of non-cash
investing and financing activities:
Common stock and warrants issued for
acquisition of patent and other rights $ 757,000
Common stock issued for BioPulmonics, Inc.
installment payment $ 1,000,000 $ 922,000
Issuance of warrants in connection with
acquisition of product rights $ 1,840,000
Preferred stock dividends $ 906,000 $ 594,000
See Accompanying Notes to Consoliated Financial Statements.
F-6
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Alliance Pharmaceutical Corp. ("Alliance") and its subsidiaries
(collectively, the "Company") are engaged in identifying, designing, and
developing novel medical and pharmaceutical products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alliance, its
wholly owned subsidiaries, Rosanin Corporation and BioPulmonics, Inc., and its
majority-owned subsidiaries, Astral, Inc., Talco Pharmaceutical, Inc., and
Applications et Transferts de Technologies Avancees. All significant
intercompany accounts and transactions have been eliminated. Certain amounts in
1995 and 1994 have been reclassified to conform to the current year's
presentation. BioPulmonics, Inc. was merged into Alliance in March 1996, and
Rosanin Corporation was dissolved in April 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, and short-term investments consist of highly liquid
debt instruments. The Company considers instruments purchased with an original
maturity of three months or less to be cash equivalents. Management has
classified the Company's cash equivalents and short-term investments as
available-for-sale securities in the accompanying financial statements.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity.
INVENTORIES
Inventories, which consist primarily of raw materials, are stated at the
lower of cost (first-in, first-out basis) or market.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification and maturities to maintain safety and liquidity.
These guidelines are reviewed periodically and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
material losses on its investments.
PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS
Buildings, furniture, and equipment are stated at cost and depreciation is
computed using the straight-line method over the estimated useful lives of 3 to
25 years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease term.
Technology and patent rights are amortized using the straight-line method over 5
to 20 years.
F-7
PURCHASED TECHNOLOGY
The purchased technology was primarily acquired as a result of the merger
of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal
1989. The technology acquired is the Company's core perfluorochemical ("PFC")
technology and was valued based on an analysis of the present value of future
earnings anticipated from this technology at that time. The Company identified
alternative future uses for the PFC technology, including the OXYGENT-TM-
(temporary blood substitute) and LIQUIVENT-Registered Trademark- (intrapulmonary
oxygen carrier) products. Purchased technology also includes $2.0 million for
technology capitalized as a result of the acquisition of BioPulmonics in
December 1991. Since the acquisition, an alternative future use of the
acquired technology has been pursued by the Company. An intrapulmonary drug
delivery system using the PFC-based liquid as a carrier (or dispersing agent)
is being developed by Alliance from the liquid ventilation technology.
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. Accumulated amortization
for this PFC technology was $8,516,000 and $7,355,000 at June 30, 1996 and 1995,
respectively. The technology acquired from BioPulmonics is being amortized over
five to seven years and accumulated amortization was $843,000 and $500,000 at
June 30, 1996 and 1995, respectively.
The carrying value of purchased technology is reviewed periodically based
on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues. If such cash flows are less
than the carrying value of the purchased technology, the difference will be
charged to expense.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
LONG-TERM DEBT
The Company entered into a loan and security agreement in August 1995 under
which the Company received $2.2 million. Amounts borrowed under the agreement
are secured by fixed assets, and are being repaid over three years. If certain
financial covenants are not satisfied, the note may become due and payable.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of shares
outstanding during the respective years and does not include common stock
equivalents since their effect on the net loss per share would be anti-dilutive.
NEW ACCOUNTING STANDARDS
In November 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation," effective for fiscal years beginning
after December 15, 1995. SFAS 123 establishes and encourages the use of the
fair value based method of accounting for stock-based compensation arrangements
under which compensation cost is determined using the fair value of stock-based
compensation determined as of the grant date, and is recognized over the periods
in which the related services are rendered. The statement also permits
companies to elect to continue using the current implicit value accounting
method specified in APBO No. 25 to account for stock-based compensation. If the
Company were to retain its current implicit value based method, it will be
required to disclose the pro forma effect of using the fair value based method
to account for its stock-based compensation. The Company intends to continue
accounting for stock options under the APBO No. 25 based method.
F-8
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT, AND EQUIPMENT - NET
Property, plant, and equipment consist of the following:
June 30,
1996 1995
---------- ----------
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 1,574,000 1,574,000
Furniture, fixtures, and equipment 11,981,000 10,419,000
Leasehold improvements 6,126,000 3,678,000
---------- ----------
20,206,000 16,196,000
Less accumulated depreciation
and amortization (7,816,000) (6,250,000)
---------- ----------
$12,390,000 $ 9,946,000
---------- ----------
---------- ----------
INVENTORIES AND OTHER CURRENT ASSETS
Inventories and other current assets consist of the following:
June 30,
1996 1995
---------- ----------
Inventories $1,418,000 $1,323,000
Loan receivable 53,000 127,000
Interest receivable 115,000 231,000
Other 217,000 232,000
---------- ---------
$1,803,000 $1,913,000
---------- ---------
---------- ---------
Inventories include amounts related to certain raw materials reimbursable
under a license agreement.
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30,
1996 1995
---------- ----------
Payroll and related expenses $2,173,000 $1,736,000
Rent and related operating expenses 354,000 206,000
Other 274,000 659,000
---------- ----------
$2,801,000 $2,601,000
---------- ----------
---------- ----------
F-9
3. INVESTMENTS
The Company classifies its investment securities as available-for-sale and
records holding gains or losses as a separate component of stockholders' equity.
The following is a summary of available-for-sale securities:
June 30, 1996 June 30, 1995
------------------------------------------------------- ------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------------------------------------------------- ------------------------------------------------------
U.S. Government
Securities $60,924,000 $ - $(3,000) $60,921,000 $ 5,049,000 $1,000 $(108,000) $ 4,942,000
Corporate
Securities 5,364,000 - - 5,364,000 8,029,000 6,000 (44,000) 7,991,000
----------- ------ ------- ----------- ----------- ------ --------- -----------
$66,288,000 $ - $(3,000) $66,285,000 $13,078,000 $7,000 $(152,000) $12,933,000
----------- ------ ------- ----------- ----------- ------ --------- -----------
----------- ------ ------- ----------- ----------- ------ --------- -----------
The gross realized losses on sales of available-for-sale securities totaled
$13,000 and $104,000, in 1996 and 1995, respectively. The net unrealized losses
of $3,000 and $145,000, in 1996 and 1995, respectively (which reflect a net
unrealized gain of $142,000 in fiscal 1996), are recorded as components of
additional paid-in capital. The unrealized losses had no cash effect and
therefore are not reflected in the consolidated statement of cash flows.
The amortized cost and estimated fair value of available-for-sale debt
securities at June 30, 1996 and 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations.
June 30, 1996 June 30, 1995
-------------------------- ---------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------------------------- -------------------------
Due in one year or less $65,788,000 $65,785,000 $ 7,565,000 $ 7,539,000
Due in one year through
three years 500,000 500,000 5,513,000 5,394,000
----------- ----------- ----------- -----------
$66,288,000 $66,285,000 $13,078,000 $12,933,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
As of June 30, 1996 and 1995, $4,364,000 and $1,969,000, respectively, of the
available-for-sale securities were classified as cash equivalents.
4. STOCKHOLDERS' EQUITY
In April 1996, the Company completed a public offering of 2.9 million
shares of newly issued stock. Net proceeds to the Company from the offering
were approximately $44 million.
STOCK OPTION PLANS
The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991 Stock
Option Plan which provides for both incentive and non-qualified stock options
(the "1991 Plan"). These plans provide for the granting of options to purchase
shares of the Company's common stock (up to an aggregate of 500,000, 2,500,000,
and 3,200,000 shares under the 1983 Plan, 1983 Program, and 1991 Plan,
respectively) to directors, officers, employees, and consultants. The
optionees, date of grant, option price (which cannot be less than 100% and 80%
of the fair market value of the common stock on the date of grant for incentive
stock options and non-qualified stock options, respectively), vesting schedule,
and term of options, which cannot exceed ten years (five years under the 1983
Plan), are determined by the Stock Option Committee of the Board of Directors.
The 1983 Plan has expired and no additional options may be granted under such
plan.
F-10
The following table summarizes stock option activity through June 30, 1996:
WEIGHTED
SHARES AVERAGE PRICE
---------------------------------
Balance at June 30, 1993 1,809,903 $10.43
Granted 564,550 $ 9.42
Exercised (74,666) $ 2.81
Terminated/Expired (51,215) $11.57
---------
Balance at June 30, 1994 2,248,572 $10.42
Granted 967,050 $ 5.50
Exercised (56,103) $ 3.98
Terminated/Expired (115,531) $11.14
---------
Balance at June 30, 1995 3,043,988 $ 9.02
Granted 288,600 $13.62
Exercised (469,078) $ 7.73
Terminated/Expired (122,937) $13.47
---------
Balance at June 30, 1996 2,740,573 $ 9.53
---------
Available for future grant
under the 1983 Program 26,485
---------
Available for future grant
under the 1991 Plan 1,063,295
---------
At June 30, 1996, 1,721,780 options were vested and exercisable.
WARRANTS
In July 1995, the Company issued a warrant to purchase 100,000 shares of
the Company's common stock through June 2000 at $10 per share. The warrant and
50,000 shares of common stock were issued in exchange for certain PFC patents,
patent rights, and related documents which resulted in a $757,000 charge in
fiscal 1996. In March 1996, the Company issued a warrant to purchase 300,000
shares of common stock through February 2001 at an exercise price of $20 per
share. The warrant was issued in conjunction with the license agreement and
sale of convertible preferred stock discussed in Note 5. At June 30, 1996, the
Company had warrants outstanding to purchase 582,289 shares of common stock at
prices ranging from $6.95 to $20 per share. The warrants expire on various
dates from August 1998 through February 2001.
PREFERRED STOCK
In fiscal 1996, in conjunction with a license agreement, Hoechst Marion
Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's Series B
Convertible Preferred Stock and 200,000 shares of its Series C Convertible
Preferred Stock for an aggregate $22 million. In June 1996, all outstanding
shares of Series A and Series B Preferred Stock were converted into 1.5 million
shares of Alliance common stock (see Note 5). The Series C Convertible
Preferred Stock does not have dividend or voting rights.
The Series A Convertible Preferred Stock carried a cumulative annual
dividend of $0.50 per share. The Series B Convertible Preferred Stock carried a
cumulative annual dividend of $1.00 per share. The dividends were payable in
cash or common stock. In June 1996, these dividends were paid by issuing 75,000
shares of Alliance common stock.
5. LICENSE AGREEMENTS
In August 1994, the Company executed a license agreement with Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute, a division
of Ortho Pharmaceutical Corporation (collectively referred to as "Ortho"), which
provides Ortho with worldwide marketing and, at its election, manufacturing
rights to the Company's injectable perfluorochemical emulsions capable of
transporting oxygen for therapeutic use, including OXYGENT. Ortho agreed to pay
to Alliance a royalty based upon sales of products after commercialization. In
addition, Ortho paid to Alliance an initial
F-11
license fee of $4 million and agreed to make other payments upon the
achievement of certain milestones. Ortho will also be responsible for
substantially all of the costs of developing and marketing the products. From
August 1994 through June 30, 1996, the Company earned research revenue of
$14.9 million from Ortho ($7.8 million and $7.1 million in 1996 and 1995,
respectively), of which $1.8 million and $2.0 million were included in
accounts receivable at June 30, 1996 and 1995, respectively. In conjunction
with the license agreement, Johnson & Johnson Development Corp. purchased 1.5
million shares of Alliance Series A Convertible Preferred Stock for $15
million and obtained a three-year warrant to purchase 300,000 shares of
Alliance common stock at $15 per share. In June 1996, the preferred stock
and warrant were converted into common stock (see Note 4).
In February 1996, the Company entered into a license agreement (the "HMRI
License Agreement") with HMRI, which provides HMRI with worldwide marketing and
manufacturing rights to the intratracheal administration of liquids, including
LIQUIVENT, which perform bronchoalveolar lavage or liquid ventilation. The
product is being developed jointly by Alliance and HMRI with HMRI responsible
for substantially all of the costs of development and marketing. HMRI agreed to
pay Alliance royalties based on sales of the product after commercialization.
In conjunction with the HMRI License Agreement, HMRI purchased 750,000 shares of
the Company's Series B Preferred Stock and 200,000 shares of its Series C
Preferred Stock for an aggregate of $22 million. The Series B Preferred Stock
was converted in June 1996 to 750,000 shares of the Company's common stock (see
Note 4). There were no shares of Series B Preferred Stock and 200,000 of Series
C Preferred Stock outstanding at June 30, 1996. HMRI also received a five-year
warrant to acquire 300,000 shares of the Company's common stock at $20 per
share. The Series C Preferred Stock converts automatically on June 30, 1997 into
a number of shares of the Company's common stock obtained by dividing the
average closing price of the Company's common stock over the twenty trading days
preceding January 14, 1997 into $5 million. Prior to June 29, 1997, HMRI may,
if the HMRI License Agreement is terminated, cause the Company to redeem the
Series C Preferred Stock for $15 million, payable in cash or the Company's
common stock at Alliance's election, any time on or before the expiration of
five years following the redemption date. In addition, HMRI paid Alliance an
initial license fee of $5 million and agreed to make other payments upon the
achievement of certain milestones.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of June 30,
1996 are shown below. A valuation allowance of $80,967,000, of which
$10,367,000 is related to 1996, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
Deferred tax assets consist of the following:
June 30,
1996 1995
----------- ----------
Net operating loss carryforwards $64,706,000 $ 56,752,000
Research and development credits 8,176,000 8,133,000
Capitalized research expense 6,040,000 5,470,000
Other - net 2,045,000 246,000
----------- ------------
Total deferred tax assets 80,967,000 70,601,000
Valuation allowance for deferred tax assets (80,967,000) (70,601,000)
----------- ------------
Net deferred tax assets $ -- $ --
----------- ------------
Approximately $3,026,000 of the valuation allowance for deferred tax assets
relates to stock option deductions which, when recognized, will be allocated to
contributed capital.
At June 30, 1996, the Company had federal and various state net operating
loss carryforwards of approximately $175,900,000 and $52,345,000, respectively.
The difference between the federal and state tax loss carryforwards is primarily
attributable to the capitalization of research and development expenses for
California tax purposes and the fifty percent limitation on California loss
carryforwards. The federal and various state tax loss carryforwards will begin
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expiring in fiscal 1998 and 1997, respectively, unless previously utilized. The
Company also has federal and state research and development tax credit
carryforwards of $6,996,000 and $1,816,000, respectively, which will begin
expiring in fiscal 1998 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of the Company's net operating loss and credit carryforwards may be limited
because of cumulative changes in ownership of more than 50% which have occurred.
However, the Company does not believe such limitation will have a material
impact upon the utilization of these carryforwards.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain office and research facilities in San Diego and
certain equipment under operating leases. Provisions of the facilities lease
provide for abatement of rent during certain periods and escalating rent
payments during the lease terms based on changes in the Consumer Price Index.
Rent expense is recognized on a straight-line basis over the term of the leases.
Minimum annual commitments related to operating lease payments at June 30,
1996 are as follows:
Years ending June 30,
--------------------
1997 $1,868,000
1998 1,912,000
1999 1,966,000
2000 950,000
2001 750,000
Thereafter 773,000
---------
Total $8,219,000
Rent expense for fiscal 1996, 1995, and 1994 was $2,134,000, $2,043,000,
and $2,286,000, respectively.
In December 1993, in order to obtain a commitment for a long-term supply of
raw material for both clinical trials and anticipated future commercial
production requirements, the Company entered into an agreement with a supplier
under which the Company was obligated to make payments to the vendor through May
1997 based, in part, upon the achievement of certain milestones. The Company's
total minimum future commitment is approximately $1.7 million, some or all of
which may be reimbursed to the Company by existing and future collaborative
partners.
During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed by certain
shareholders. The actions were consolidated into one class action lawsuit. In
May 1995, the U.S. District Court for the Southern District of California
granted summary judgment in favor of the Company, dismissing the lawsuit in its
entirety. On May 30, 1996, the appeal was dismissed at the request of the
plaintiff's lawyers, making final the summary judgment granted in favor of the
Company. By virtue of the judgment, no payments to the class members or their
lawyers have been or will be made by the Company or its insurer.
F-13
EXHIBIT INDEX
-------------
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of exhibits, see Item 14 hereof.
The following exhibits are being filed herewith:
Location of
Exhibit in
Sequential
Numbering
Number Document System
- ------ ------------------------------------------------------- -----------
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(23.1) Consent of Ernst & Young LLP, Independent Auditors