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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-27756
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ALEXION PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3648318
(State or Other Jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or Organization)
25 SCIENCE PARK, NEW HAVEN, CONNECTICUT 06511
(Address of Principal Executive Offices) (Zip Code)
203-776-1790
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.0001
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation (NASDAQ) National
Market System on October 18, 1999, was approximately $148,000,000.
The number of shares of Common Stock outstanding as of October 18, 1999 was
11,331,310.
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DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)
Portions of the registrant's proxy statement to be filed with the Securities
and Exchange Commission in connection with solicitations of proxies for the
registrant's upcoming 1999 Annual Meeting of Stockholders (the "Proxy
Statement") are incorporated by reference in Part III, Item 11 of this
Form 10-K.
PART I
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD
LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS
ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS AND CERTAIN ASSUMPTIONS MADE
BY THE COMPANY'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS,"
"PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE SET FORTH HEREIN UNDER "IMPORTANT FACTORS REGARDING
FORWARD-LOOKING STATEMENTS," ATTACHED HERETO AS EXHIBIT 99, AS WELL AS THOSE
NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. UNLESS REQUIRED BY LAW,
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER
REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION.
ITEM 1. BUSINESS.
OVERVIEW
We are engaged in the development of products for the treatment of
cardiovascular, autoimmune and neurologic diseases caused by undesired effects
of the human immune system. Our product development programs are based on
proprietary technologies which are designed to block selected components of the
human immune system in order to reduce undesired inflammation while allowing
other beneficial aspects of the immune system to remain functional. Our two lead
product candidates are:
- 5G1.1-SC, in Phase II trials for the treatment of acute inflammation
caused by cardiopulmonary bypass surgery, which is being developed in
collaboration with Procter & Gamble; and
- 5G1.1, in Phase II trials for the chronic treatment of rheumatoid
arthritis and membranous nephritis, which we are developing ourselves.
In addition, we are developing our Apogen and UniGraft technologies in
preclinical studies. We are targeting our first Apogen product candidate, known
as MP4, for the treatment of patients with multiple sclerosis. We are also
developing our two UniGraft xenotransplantation product candidates, UniGraft-PD
and UniGraft-SCI, for the treatment of Parkinson's disease and spinal cord
injury.
THE IMMUNE SYSTEM
The human immune system defends the body from attack or invasion by
infectious agents or pathogens. This is accomplished through a complex system of
proteins and cells, primarily complement proteins, antibodies and white blood
cells, each with a specialized function. Under normal circumstances, complement
proteins, together with antibodies and white blood cells, act to protect the
body by removing:
- harmful microorganisms;
2
- cells containing foreign proteins known as antigens; and
- disease-causing combinations of antigens and antibodies known as immune
complexes.
When activated by stimuli, the immune system triggers a series of enzymatic
and biochemical reactions called the complement cascade that results in an
inflammatory response. This inflammatory response is one of the immune system's
weapons against foreign pathogens or otherwise diseased tissue. However, under
certain circumstances, the complement cascade may be activated inappropriately
to direct an inflammatory response at healthy tissue, which may result in acute
and chronic inflammatory conditions.
Common heart diseases and procedures in which the complement cascade is
activated include:
- cardiopulmonary bypass surgery;
- myocardial infarction;
- unstable angina;
- angioplasty; and
- stroke and other peripheral vascular diseases.
Common autoimmune diseases in which the complement cascade is activated
include:
- rheumatoid arthritis;
- kidney diseases;
- lupus;
- inflammatory bowel diseases;
- inflammatory skin disorders; and
- multiple sclerosis.
T-cells, a type of white blood cell, play a critical role in the normal
immune response by recognizing cells containing antigens and initiating the
immune response. This response results in T-cells:
- attacking the antigen-containing tissue; and
- directing the production of antibodies by white blood cells to eliminate
the antigen-bearing foreign organism.
In autoimmune diseases, T-cells may mistakenly attack healthy host tissue
and may cause an inflammatory response resulting in tissue destruction. In the
case of multiple sclerosis, this may cause paralysis due to destruction of nerve
fibers in the brain.
PRODUCT DEVELOPMENT PROGRAMS
We have focused our product development programs on anti-inflammatory
therapeutics for diseases for which we believe current treatments are either
non-existent or inadequate. Currently available drugs for certain autoimmune,
cardiovascular and neurologic diseases, in which the immune system attacks the
patient's own tissue, broadly suppress the entire immune system, and may also
cause potentially severe side effects. Our lead product candidates, known as C5
Complement Inhibitors, are designed to selectively block the production of
inflammation-causing proteins in the complement cascade. We believe that
selective suppression of this immune response will provide a significant
therapeutic advantage relative to existing therapies.
3
Additionally, we are developing selective T-cell inhibitors known as Apogens
and UniGraft xenotransplants for neurologic disorders.
C5 COMPLEMENT INHIBITORS
Complement proteins are a series of inactive proteins circulating in the
blood. When activated by stimuli, including those associated with both acute and
chronic inflammatory disorders, these inactive complement proteins are split by
enzymes known as convertases into activated byproducts through the complement
cascade.
Some of these byproducts, notably C3b, are helpful in fighting infections
and inhibiting autoimmune disorders. However, the byproducts generated by the
cleavage of C5, known as C5a and C5b-9, generally cause harmful inflammation.
The inflammatory byproducts of C5 cause:
- activation of white blood cells;
- attraction of white blood cells;
- production of injurious cytokines including tumor necrosis factor-alpha;
- activation of blood vessel-lining cells called endothelial cells, allowing
leakage of white blood cells into tissue; and
- activation of blood-clotting cells called platelets.
The following diagram describes the complement cascade:
[LOGO]
Because of the generally beneficial effects of the components of the
complement cascade prior to C5 and the greater inflammatory disease-promoting
effects of the cleavage products of C5, we have identified C5 as a potentially
effective anti-inflammatory drug target. Our first two C5 Inhibitors
specifically and tightly bind to C5 blocking its cleavage into harmful
byproducts and are designed to inhibit subsequent damage from the inflammatory
response.
In laboratory and animal models of human disease, we have shown that the
administration of C5 Inhibitor, as compared to placebo, is effective in:
- preventing inflammation during cardiopulmonary bypass;
- reducing heart tissue damage during myocardial infarction;
4
- reducing brain damage in cerebral ischemia;
- enhancing survival in a model of lupus; and
- preserving kidney function in nephritis.
In addition, in initial human clinical trials, we have shown that C5
Inhibitors can reduce:
- inflammation during cardiopulmonary bypass surgery;
- heart tissue damage during cardiopulmonary bypass surgery;
- new cognitive deficits after cardiopulmonary bypass surgery;
- an objective measure of disease activity in rheumatoid arthritis patients;
and
- the incidence of proteinuria in lupus patients.
Our product candidates are as follows:
PRODUCT CANDIDATE TECHNOLOGY INDICATION STATUS
- ----------------- ------------------------ ------------------------ -----------------
5G1.1-SC C5 Complement Inhibitor Cardiopulmonary bypass Phase IIb ongoing
(single chain antibody) Myocardial infarction Preparing IND
(1) Thrombolysis to commence
(2) PTCA Phase II
5G1.1 C5 Complement Inhibitor Rheumatoid arthritis Phase II ongoing
(antibody) Membranous nephritis Phase II ongoing
Lupus Completed Phase I
MP4 Apogen Multiple sclerosis Preclinical
UniGraft-SCI Cell replacement Spinal cord injury Preclinical
UniGraft-PD Cell replacement Parkinson's disease Preclinical
C5 INHIBITOR IMMUNOTHERAPEUTIC PRODUCT CANDIDATES
We are developing one of our two lead C5 Inhibitor product candidates,
5G1.1-SC, for the treatment of inflammation related to acute cardiovascular
diseases and procedures. Our initial indications for 5G1.1-SC are
cardiopulmonary bypass surgery and myocardial infarction. We are developing our
other C5 Inhibitor product candidate, 5G1.1, for the treatment of inflammation
related to chronic autoimmune disorders. Our initial indications for 5G1.1 are
rheumatoid arthritis and membranous nephritis. We have selected these four
initial indications because we believe each represents a clinical condition
which is:
- closely tied to the production of activated complement byproducts;
- characterized by clear development pathways;
- inadequately treated by current therapies;
- associated with substantial health care costs; and
- a significant market opportunity.
To date, 5G1.1-SC and 5G1.1 have been observed to be safe and well tolerated
in completed and ongoing controlled clinical trials in over 250 individuals
treated with either C5 Inhibitor or placebo.
5
5G1.1-SC
5G1.1-SC is a humanized, single chain antibody that has been shown to block
complement activity for up to 20 hours at doses tested and is designed for the
treatment of acute inflammatory conditions. In January 1999, we entered into a
collaboration with Procter & Gamble to develop and commercialize 5G1.1-SC. Under
this collaboration, we will initially pursue the development of 5G1.1-SC for the
treatment of inflammation caused by various acute cardiovascular indications and
procedures such as cardiopulmonary bypass surgery, myocardial infarction and
angioplasty. Procter & Gamble has agreed to fund all clinical development and
manufacturing costs relating to 5G1.1-SC for these indications.
CARDIOPULMONARY BYPASS SURGERY
In cardiopulmonary bypass surgery, blood is diverted from a patient's heart
and lungs to a cardiopulmonary, heart-lung, bypass machine in the operating
room. The machine adds oxygen to the blood and circulates the oxygenated blood
to the organs in the patient's body. Significant side effects of cardiopulmonary
bypass surgery include tissue damage and excessive bleeding during and after the
procedure. We believe these side effects may result from activation of the
complement cascade when the patient's blood comes into contact with the plastic
lining of the machine, when insufficient blood flows through the heart as a
result of the procedure and after blood flow through the heart is reintroduced
following completion of the procedure. Activated complement byproducts may be
increased by over 1,000% in patients undergoing cardiopulmonary bypass surgery.
The inflammation is also characterized by activation of leukocytes, a type of
white blood cell, and platelets, cells responsible for clotting. We believe that
this leukocyte activation is associated with impaired lung, heart, brain and
kidney function. We further believe that platelet activation and subsequent
platelet dysfunction during the procedure impair a patient's ability to stop the
bleeding that occurs after extensive surgery.
5G1.1-SC is designed to rapidly penetrate the patient's tissues and to
inhibit complement activation in patients immediately before, during and after
cardiopulmonary bypass in order to reduce the cardiovascular and brain tissue
damage and bleeding complications. We believe inhibition of the inflammatory
response might reduce:
- incidence of death;
- incidence of heart tissue damage;
- incidence of stroke;
- post-operative complications;
- the time spent by patients in the intensive care unit;
- the scope of required treatments associated with cardiopulmonary bypass;
and
- the need for blood transfusions.
The American Heart Association estimates that in 1996, approximately 500,000
cardiopulmonary bypass operations were performed in the United States.
Currently, products utilized in patients undergoing cardiopulmonary bypass are
designed to enhance the coagulation of blood so as to reduce the need for blood
transfusions. However, we believe these products have little beneficial effect
on the heart and brain inflammatory complications associated with the surgery.
Our preclinical studies indicated that C5 Inhibitors can prevent activation
of platelets and leukocytes and the subsequent inflammatory response that occurs
during circulation of human blood in a closed-loop cardiopulmonary bypass
machine. These preclinical studies additionally indicated that administration of
a C5 Inhibitor reduces cardiac damage associated with reduced heart blood flow.
6
CLINICAL TRIALS
In March 1996, we filed an investigational new drug application, or IND,
with the FDA for 5G1.1-SC, targeting the treatment of patients undergoing
cardiopulmonary bypass surgery. To date, we have initiated and completed four
human clinical trials of 5G1.1-SC administered intravenously. Although we
designed these early clinical studies primarily to assess dosing and safety, we
also collected biological and clinical results. These trials are described
below.
- In June 1996, we commenced a Phase I clinical trial in 33 healthy
volunteers receiving a single bolus administration of 0.5 to 2.0 mg/kg of
5G1.1-SC or placebo. In this trial, 5G1.1-SC:
- was safe and well tolerated in this study population as compared to
placebo; and
- showed dose-dependent reduction in complement activity in study
subjects.
- In October 1998, we commenced a Phase I clinical trial in 49 healthy
volunteers receiving a single bolus dose, double bolus dose, and single
bolus dose followed by continuous infusion administration of up to 6.8
mg/kg of 5G1.1-SC or placebo. In this trial, 5G1.1-SC:
- was safe and well tolerated in this study population as compared to
placebo; and
- showed dose-dependent reduction in complement activity in study
subjects.
- In October 1996, we commenced a Phase I/II clinical trial in 17 patients
undergoing cardiopulmonary bypass surgery receiving a single bolus
administration of 0.5 to 2.0 mg/kg of 5G1.1-SC or placebo. In this trial,
5G1.1-SC:
- was safe and well tolerated in this study population as compared to
placebo; and
- showed a dose-dependent reduction in the more than ten-fold increase in
activated complement byproducts experienced by placebo-treated
patients.
- In August 1997, we commenced a Phase IIa clinical trial in 18 patients
undergoing cardiopulmonary bypass surgery receiving a single bolus
administration of 1.0 or 2.0 mg/kg of 5G1.1-SC or placebo. In this trial,
5G1.1-SC:
- was safe and well tolerated in this study population as compared to
placebo; and
- showed dose-dependent reductions in activated complement byproducts.
In April 1998, we announced the combined results of our Phase I/II and
Phase IIa trials in cardiopulmonary bypass surgery patients. The results for
patients treated with either a 2.0 mg/kg bolus of 5G1.1-SC or placebo are shown
in the table below.
7
CLINICAL RESULTS OF A SINGLE 2.0 MG/KG DOSE OF 5G1.1-SC
IN PATIENTS UNDERGOING CARDIOPULMONARY BYPASS
BIOLOGICAL AND CLINICAL MEASUREMENTS 5G1.1-SC VS. PLACEBO
- ------------------------------------ --------------------
C5 complement activation 100% less*
C3 complement activation No difference
Leukocyte activation 60% to 70% less*+
Heart tissue damage 40% less*
New cognitive deficits 80% less*
Blood loss 400 ml less*
-----------------------------------------
* P less than or equal to .05 vs. placebo
+ Includes both patients treated with 1.0 mg/kg 5G1.1-SC and
patients treated with 2.0 mg/kg 5G1.1-SC
In January 1999, we announced that we had commenced dosing patients
undergoing coronary artery bypass graft surgery with or without accompanying
valve surgery during cardiopulmonary bypass in a Phase IIb clinical trial with
5G1.1-SC. This multi-center, double-blinded, randomized, placebo-controlled
study is expected to enroll approximately 1,000 patients and is designed to
gather clinical data to augment and extend previous findings regarding the
safety profile and pharmacokinetics of 5G1.1-SC and its efficacy in reducing the
life-threatening inflammatory complications, such as mortality, myocardial
infarction, heart failure and stroke, that can be triggered by cardiopulmonary
bypass procedures.
ACUTE MYOCARDIAL INFARCTION
Myocardial infarction is an acute cardiovascular disorder in which the
coronary arteries, the blood vessels that supply nutrients to the heart muscle,
are blocked to such an extent that the flow of blood is insufficient to supply
enough oxygen and nutrients to keep the heart muscle alive. With insufficient
supply of blood, oxygen, and nutrients, the heart muscle may subsequently
infarct or die. Upon the reduction in flow in the coronary artery, a complex
cascade of inflammatory events involving complement proteins, platelets and
leukocytes and their secreted factors, and endothelial cells commences within
the blood vessel. In patients suffering a myocardial infarction, activated
complement byproducts are significantly elevated. This severe inflammatory
response targeting the area of insufficient blood flow to cardiac muscle is
associated with subsequent death of heart muscle. Restoration of blood flow is
also associated with an additional inflammatory reaction with concomitant
production of activated complement byproducts. In addition to the high incidence
of sudden cardiac death at the onset, severe complications associated with the
initial survival of an acute myocardial infarction include congestive heart
failure, stroke, and death. The American Heart Association estimates that
approximately 1.0 million people in the United States will have a heart attack
in 1999.
We are developing 5G1.1-SC to inhibit inflammation associated with
complement activation in order to reduce the extent of death of heart muscle in
patients suffering an acute myocardial infarction. In contrast, most drugs
currently being developed or on the market to treat myocardial infarction are
designed to improve blood flow through the heart, rather than treating the
damaging effects of inflammation caused by myocardial infarction. We and our
scientific collaborators have performed preclinical studies in rodents which
have demonstrated that administration of a C5 Inhibitor during periods of
insufficient supply of blood to the heart muscle and prior to restoration of
normal flow to the heart muscle significantly reduced the extent of subsequent
death of heart muscle compared to control animal studies.
8
Additionally, administration of a C5 Inhibitor significantly reduced the extent
of cardiac damage associated with reduced heart blood flow without subsequent
restoration of blood flow. The results of these preclinical studies are shown in
the table below.
PRECLINICAL RESULTS WITH C5 INHIBITOR ADMINISTRATION
IN ANIMAL MODELS OF MYOCARDIAL INFARCTION
BIOLOGICAL AND CLINICAL MEASUREMENTS C5 INHIBITOR VS. PLACEBO
- ------------------------------------ ------------------------
Complement activity 100% less*
Leukocyte activation > 90% less*
Heart tissue damage 50% less*
-----------------------------------------
* P less than or equal to .05 vs. placebo
CLINICAL TRIALS
In October 1998, we commenced dosing subjects in a Phase I clinical trial in
healthy individuals that was designed to evaluate dosing regimens for subsequent
cardiopulmonary bypass and myocardial infarction clinical trials. We have used
the results of this trial to select dosing regimens for subsequent clinical
trials in acute myocardial infarction patients. The results of this trial
indicated that 5G1.1-SC was well tolerated at doses more than three times as
high as had been previously administered. Together with our collaborator
Procter & Gamble, we expect to file in 1999 an IND for use of 5G1.1-SC in two
Phase II trials with approximately 1,000 patients each for the treatment of
acute myocardial infarction.
5G1.1
5G1.1 is a humanized, monoclonal antibody that blocks complement activity
for one to two weeks at doses tested and is designed for the chronic treatment
of autoimmune diseases such as rheumatoid arthritis and nephritis. 5G1.1 is not
included in the collaboration with Procter & Gamble, and we have retained full
rights to 5G1.1.
RHEUMATOID ARTHRITIS
Rheumatoid arthritis is an autoimmune disease directed at various organ and
tissue linings, including the lining of the joints, causing inflammation and
joint destruction. Clinical signs and symptoms of the disease include weight
loss, joint pain, morning stiffness and fatigue. Further, the joint destruction
can progress to redness, swelling and pain with frequent and severe joint
deformity. Diagnostic procedures, which may include obtaining a sample of joint
fluid, routinely demonstrate substantial elevations in the levels of activated
complement byproducts in the joint fluid of affected rheumatoid arthritis
patients. Rheumatoid arthritis is generally believed to be caused by different
types of white blood cells, including T-cells, which both directly attack the
patient's joints and also activate B-cells to produce antibodies which activate
complement proteins in the joint leading to inflammation with subsequent tissue
and joint destruction. It is estimated that more than 2.0 million people are
currently affected by rheumatoid arthritis in the United States.
We are developing 5G1.1 for the treatment of patients with chronic
inflammatory diseases, including rheumatoid arthritis. We have performed
preclinical studies in rodent models of rheumatoid arthritis which have shown
that C5 Inhibitor administration, as compared to placebo-treated subjects:
- reduced the swelling in joints;
- prevented the onset of erosion of joints;
9
- reduced the inflammatory white blood cell infiltration into the joints;
- prevented the spread of disease to additional joints;
- blocked the onset of clinical signs of rheumatoid arthritis; and
- ameliorated established disease.
Currently, there are a large number of anti-inflammatory drugs under
development or on the market for the treatment of patients with rheumatoid
arthritis. These drugs include non-steroidal anti-inflammatory drugs, and their
more recent analog the COX-2 inhibitors, which generally treat the symptoms of
the disease, but do not alter disease progression. There are also several
currently available drugs that are disease-modifying agents, but these are
associated with undesirable side effects. More recently, tumor necrosis factor,
or TNF, inhibitors have been approved or are under development to reduce the
inflammatory response. TNF is one of the many injurious substances that may be
generated downstream of the complement cascade. In contrast to these single
agent inhibitors like TNF inhibitors, by acting at C5 of the complement cascade,
we expect 5G1.1 both to block complement activation and reduce the production of
many of these downstream harmful substances. Because of this dual action, we
believe that 5G1.1 may provide a more potent anti-inflammatory effect.
CLINICAL TRIALS
In December 1997, we filed an IND with the FDA for 5G1.1 in the treatment of
rheumatoid arthritis patients.
- In July 1998, we commenced a Phase I/II multi-center, clinical trial in 42
rheumatoid arthritis patients receiving a single bolus administration of
0.1 to 8.0 mg/kg of 5G1.1. In this trial, 5G1.1:
-- was safe and well tolerated in this study population as compared to
placebo;
-- showed dose-dependent reduction in complement activity in study
subjects; and
-- at 8.0 mg/kg, showed a reduction in C-reactive protein blood levels in
study subjects.
C-reactive protein is considered by many physicians to be the most objective
component of the American College of Rheumatology's definition of efficacy
criteria for rheumatoid arthritis drug trials. Although this initial clinical
trial was designed to primarily assess dosing and safety, biological and
clinical results were collected. These results in the patients treated with a
8.0 mg/kg bolus of 5G1.1, announced in April 1999, are shown in the table below.
CLINICAL RESULTS OF A SINGLE 8.0 MG/KG DOSE OF 5G1.1
IN PATIENTS WITH RHEUMATOID ARTHRITIS
AFTER 5G1.1 TREATMENT VS.
BIOLOGICAL AND CLINICAL MEASUREMENTS BEFORE 5G1.1 TREATMENT
- ------------------------------------ -------------------------
Complement activity 100% reduction*
C-reactive protein blood level 30% decrease*
-----------------------------------------
* P less than or equal to .05 vs. before treatment
In August 1999, we initiated a Phase II multi-center, double-blinded,
randomized, placebo-controlled clinical safety and efficacy trial with multiple
doses of 5G1.1 at one to four week dosing intervals that is intended to enroll
200 rheumatoid arthritis patients.
10
MEMBRANOUS NEPHRITIS
The kidneys are responsible for filtering blood to remove toxic metabolites
and maintaining the minerals and proteins in the blood that are required for
normal metabolism. Each kidney consists of millions of individual filtering
units, or glomeruli. When glomeruli are damaged, the kidney can no longer
adequately maintain its normal filtering function. This may result in the
build-up of toxins in the blood and the loss of valuable minerals and proteins
in the urine. Clinically severe nephritis, or kidney inflammation, is found in
many patients suffering from lupus and other autoimmune diseases. This condition
occurs when more than 90% of the kidney is destroyed by disease. Kidney failure
is frequently associated with:
- hypertension;
- strokes;
- infections;
- anemia;
- heart, lung and joint inflammation;
- coma; and
- death.
Many forms of damage to the glomeruli are mediated by the immune system,
particularly by antibodies and activated complement proteins. Membranous
nephritis is a form of kidney inflammation that is believed to be caused by a
chronic autoimmune disorder that targets the kidney. We estimate that there are
approximately 100,000 to 300,000 people currently afflicted with membranous
nephritis in the United States.
Membranous nephritis is characterized by kidney inflammation and dysfunction
that may eventually progress to kidney failure. Diagnostic criteria for
membranous nephritis include kidney biopsies that may demonstrate the presence
of antibodies and activated complement byproducts in the kidneys of affected
patients. The subsequent kidney inflammation leads to the abnormal loss of
substantial amounts of protein in the patient's urine; this condition is known
as proteinuria and is recognized as an objective measurement of kidney disease.
Loss of protein in the urine disturbs the normal control of water in the blood
vessels and also is believed to directly further injure the kidney. Moreover,
clinical studies by others have shown that the degree of proteinuria is
associated with the incidence of subsequent kidney failure. Additional clinical
signs associated with proteinuria may include:
- abnormally low levels of protein in the blood;
- a propensity for abnormal clotting;
- abnormal lipid elevations; and
- substantial swelling in the abdomen and under the skin.
Current therapies for membranous nephritis include potentially toxic drugs
more frequently used in other indications such as cancer. These drugs generally
act to suppress broadly the proliferation of many types of cells, including
white blood cells. We believe that the use of such therapies is generally
limited due to their unfavorable side effects. Even with current therapies, in
such a severe disease population more than 30% of the patients are expected to
progress to renal failure, which may require dialysis or transplantation. In
contrast, 5G1.1 directly targets the inhibition of deleterious complement
activation. We believe 5G1.1 may exert more selective and effective
anti-inflammatory activity without the adverse effects associated with current
therapies.
We have performed preclinical studies in rodent models of nephritis and
observed that C5 Inhibitor administration, as compared to placebo-treated
subjects, substantially reduced:
- scarring of the kidney;
- breakdown of kidney tissue into the urine;
- clogging of the kidney filtering units; and
- proteinuria.
11
CLINICAL TRIALS
We are developing 5G1.1 for a family of kidney and kidney-related chronic
autoimmune disorders, which include membranous nephritis, lupus nephritis, and
lupus. Our strategy is to develop 5G1.1 in kidney disease by initially obtaining
safety data in the more readily available lupus patient population and then to
commence efficacy trials in patients with a kidney disorder known as membranous
nephritis. We are initially starting efficacy trials with 5G1.1 for the
treatment of membranous nephritis patients because of the more uniform clinical
presentations of membranous nephritis patients as compared to lupus patients. We
then intend to expand our efforts to conduct advanced clinical trials in other
kidney diseases and lupus.
The results of our initial clinical trial in lupus patients are described
below.
- In July 1998, we commenced a Phase I single-center, clinical study in 24
lupus patients receiving a single bolus administration of 0.1 to 8.0 mg/kg
of 5G1.1 or placebo. In this trial, 5G1.1:
-- was safe and well tolerated in this study population as compared to
placebo;
-- showed dose-dependent reduction in complement activity in study
subjects; and
-- at 8.0 mg/kg, resulted in significantly lower incidence of proteinuria
in study subjects as compared to placebo.
Although we designed this initial clinical trial to assess primarily dosing
and safety, we also collected biological and clinical results. These results in
the patients treated with a 8.0 mg/kg bolus of 5G1.1, announced in June 1999,
are shown in the table below.
CLINICAL RESULTS OF A SINGLE 8.0 MG/KG DOSE
OF 5G1.1 IN PATIENTS WITH LUPUS
BIOLOGICAL AND CLINICAL MEASUREMENTS 5G1.1 VS. PLACEBO
- ------------------------------------ -----------------
Complement activity 100% less*
Incidence of proteinuria 100% less*
-----------------------------------
* P less than or equal to .05 vs. placebo
In August 1999, we commenced a Phase II multi-center, double-blinded,
randomized, placebo-controlled clinical safety and efficacy trial with multiple
doses of 5G1.1 at two to four week dosing intervals that is intended to enroll
150 membranous nephritis patients.
LUPUS
Lupus is an autoimmune disorder that damages the brain, lungs, heart, joints
and especially the kidneys. In lupus, antibodies deposit within particular
organs causing complement activation, inflammation and tissue destruction. For
decades, clinical studies by others have demonstrated the presence of complement
activation in lupus patients undergoing flares. Studies have further shown an
abundant deposition of activated complement proteins with localized inflammation
in tissue biopsies from kidney or other tissues in lupus patients. The Lupus
Foundation estimates that approximately 1.4 million people in the United States
have lupus. Further, an estimated 70% of individuals afflicted with lupus have
nephritis. Although lupus may affect people of either sex, women are 10 to 15
times more likely to suffer from the disease than men.
Patients with active lupus may have a broad range of symptoms related to the
antibody and activated complement deposition and inflammation. Inflammation of
the brain may cause seizures and other neurologic abnormalities. Inflammation of
the heart may cause heart failure or sudden death. Lung inflammation causes
shortness of breath. Lupus may also cause the swollen joints and arthritis. One
of the most common complications associated with lupus, however, is kidney
disease, which often leads to kidney failure requiring dialysis or
transplantation.
12
Current therapies generally act to suppress broadly the proliferation of
many types of cells, including white blood cells. In contrast, 5G1.1 directly
targets the inhibition of deleterious complement activation. We believe 5G1.1
may exert more selective and effective anti-inflammatory activity without the
adverse effects associated with current therapies.
We are developing 5G1.1 for the prevention and treatment of inflammation in
lupus patients. We have performed preclinical studies in a rodent model of
lupus. In this chronic rodent model that spontaneously develops a disease
similar to lupus, substantially more animals treated with a C5 Inhibitor
survived as compared to untreated control animals.
CLINICAL TRIALS
We filed an IND with the FDA in late December 1997 for 5G1.1 in the
treatment of patients suffering from lupus and began a Phase I clinical trial in
lupus patients in July 1998. As discussed above, in the Clinical Trials section
of Membranous Nephritis, we announced results of a 24 patient,
placebo-controlled clinical study in June 1999. This trial showed that a single
dose of 5G1.1 was safe and well tolerated, reduced complement activity in a
dose-dependent manner, and a single 8.0 mg/kg dose significantly lowered
incidence of proteinuria.
APOGEN T-CELL IMMUNOTHERAPEUTIC PRODUCT CANDIDATES
MP4
MP4 is a recombinant protein consisting of two brain-derived proteins. These
two proteins are believed to be major targets of disease-causing T-cells in
patients with multiple sclerosis. MP4 is designed to bind specifically to, and
induce cell suicide in, the small population of T-cells in multiple sclerosis
patients which are responsible for attacking the patient's brain cells, while
leaving the vast majority of uninvolved T-cells unaffected. In addition, MP4 is
designed to induce other white blood cells to suppress other inflammatory cells.
MULTIPLE SCLEROSIS
Multiple sclerosis is an autoimmune disease of the central nervous system
which hinders the ability of the brain and spinal cord to control movement,
speech and vision. Multiple sclerosis can be severely debilitating; long-term
disability is a common outcome. In severe cases, reduced motor strength may
confine the patient to a wheelchair. Multiple sclerosis is widely believed to be
caused by the attack of a patient's antigen-specific T-cells on the protective
myelin sheath surrounding nerve cells in the central nervous system. According
to the National Multiple Sclerosis Society, there are approximately 250,000
reported cases of multiple sclerosis in the United States.
Preclinical animal studies which we performed in an experimental rodent
model of multiple sclerosis have demonstrated that administration of our
proprietary Apogen multiple sclerosis drug candidate, MP4, at the time of
disease induction, effectively prevents the development of severe neurologic
disease. These studies also demonstrated that administration of MP4 after the
onset of disease ameliorates established disease by both eliminating
disease-causing T-cells and by inducing other T-cells to further suppress
inflammation.
In February 1998, we filed an IND with the FDA for MP4 for the treatment of
patients suffering from multiple sclerosis. After completion of additional
preclinical studies and amendment of the clinical protocol in line with the
preferred route of administration, we may initiate a Phase I/II clinical trial
in multiple sclerosis patients.
13
THE UNIGRAFT XENOTRANSPLANTATION PROGRAM
Most transplant procedures today are whole organ transplants. We believe
that there is a far greater number of patients with medical disorders, such as
Parkinson's disease and spinal cord injury, that are caused by the functional
loss of highly specialized cells. The number of these patients is likely to grow
due to both the aging of the population, with subsequent increase in the
incidence of degenerative diseases, as well as the increasing incidence of
trauma. Therefore, cell transplantation could be an important benefit to a large
number of previously untreated, or severely under-treated patients suffering
from severe medical disorders. However, since there are no human donors of such
specialized cells, there is currently no available supply of such cells for
replacement therapy. Further, the immune system prevents the transplantation of
cells from other species, known as xenografts, as they are recognized by the
immune system as foreign and they are rejected. We are developing a portfolio of
UniGraft immunoregulatory technologies designed to permit the therapeutic
transplantation of such cells without rejection.
Although approximately 20,000 people received whole organ transplants in the
United States in 1998, there are many times that number of patients who have
disorders that may be amenable to cell or tissue transplantation. It is
estimated that this broader population includes approximately 200,000 patients
suffering from spinal cord injury and 1.0 million individuals with Parkinson's
disease. In particular, we believe that use of a safe and effective cell
transplantation therapy for patients with spinal cord injury or Parkinson's
disease would represent major therapeutic advances.
In February 1999, we terminated our collaboration agreement with US Surgical
under which we were jointly developing a xenotransplantation program. As part of
the termination, we obtained the exclusive rights to that program. We also
acquired manufacturing assets that had been developed by US Surgical in
connection with the program. We financed the purchase of the manufacturing
assets through a $3.9 million term note payable to US Surgical. Interest is 6.0%
per year and is payable quarterly. The principal balance under the note is due
in May 2005. Security for this term note is the manufacturing assets that we
purchased.
NEUROLOGIC CELL TRANSPLANTATION
We have developed methods of blocking the immune system which are designed
to permit the replacement of damaged human brain and other neurologic cells with
potentially highly therapeutic genetically modified porcine cells.
Rejection of non-human tissue by patients is generally believed to occur in
two stages:
- hyperacute phase, which is very rapid, extending from minutes to hours;
and
- acute phase, which is somewhat less rapid, extending from days to months.
Hyperacute rejection is generally believed to be mediated by
naturally-occurring antibodies in the patient, most of which target a sugar
antigen uniquely present on the surface of non-human tissue but not on the
patient's own tissue. After binding to the foreign tissue, these antibodies
stimulate the activation of the recipient's inactive complement proteins on the
surface of the donor tissue with subsequent destruction of the donor tissue.
Subsequently, acute rejection of xenografts is generally believed to be mediated
by white blood cells.
We are designing UniGraft cell products to resist
complement/antibody-mediated hyperacute rejection. We have commenced preclinical
studies employing the UniGraft technologies during transplantation of
genetically modified and proprietary porcine cells that are resistant to
destruction by human complement proteins. We are currently focusing our
immunoregulatory and molecular engineering technologies primarily on the
development of UniGraft cells to treat Parkinson's disease and injuries to the
spinal cord.
14
SPINAL CORD INJURY
In spinal cord injury patients, conduction of nerve signals between the
brain and those nerve cells below the injury site in the spinal cord is blocked.
These patients experience impaired or loss of normal bodily functions, including
the sense of touch and the ability to move. Since the level of injury differs
between patients, the degree and type of impairment also differs. Motor vehicle
crashes are the leading cause of spinal cord injury in the U.S. Additionally,
patients may develop spinal cord injury following traumatic injuries or, less
commonly, following an autoimmune disorder known as transverse myelitis.
According to the National Spinal Cord Injury Association, approximately 200,000
individuals in the United States suffer from debilitating spinal cord injury.
Steroids are the most common therapy for patients with spinal cord injury.
If administered to a patient within a very short time following the injury,
steroids are believed to limit initial swelling in the area of the injury.
However, steroid administration is not believed to allow nerve cells to
regenerate nor is it believed to reverse existing clinical disability.
Our UniGraft spinal cord injury cell therapy candidate, UniGraft-SCI,
consists of genetically modified pig cells. In preclinical rodent models of
spinal cord injury, these cells have been shown to:
- engraft at sites of spinal cord injury;
- ensheath damaged nerve cells with a protective myelin sheath; and
- restore conduction following partial cutting of the spinal cord.
We are currently performing additional preclinical studies in this program
and optimizing manufacturing methods.
PARKINSON'S DISEASE
Parkinson's disease is a progressive neurological disorder that is characterized
by a decrease in spontaneous movements and an increase in tremor. Nerve cells in
the brain which produce dopamine degenerate in these patients. Dopamine is an
important messenger in the brain without which normal neurological activities
are impaired. According to the National Parkinson Foundation, Parkinson's
disease is currently believed to affect over 1.0 million Americans.
The current drugs for Parkinson's disease act to non-specifically increase
dopamine throughout the body but can cause harmful side effects. We believe that
these therapies are unable to adequately restore levels of dopamine specifically
in damaged areas of the brain.
Our UniGraft Parkinson's disease cell therapy candidate, UniGraft-PD,
consists of genetically modified pig cells that, after transplant into rodents
with Parkinson's disease-like lesions:
- engraft into the brain;
- extend and make connections with the damaged areas of the brain;
- locally produce enzymes to restore dopamine levels; and
- restore brain function.
We are currently performing additional preclinical studies in this program
and optimizing manufacturing methods.
STRATEGIC ALLIANCE WITH PROCTER & GAMBLE
In January 1999, we entered into an exclusive collaboration with Procter &
Gamble to develop and commercialize 5G1.1-SC. Under this collaboration, we will
initially pursue the development of 5G1.1-SC for the treatment of inflammation
caused by cardiopulmonary bypass surgery, myocardial infarction and
15
angioplasty. Procter & Gamble has agreed to fund all clinical development and
manufacturing costs relating to 5G1.1-SC for these indications. In addition,
under this agreement, Procter & Gamble has agreed to pay us up to $95 million in
payments, which include a non-refundable upfront license fee, as well as
milestone and research and development support payments. In addition, we will
receive royalties on worldwide sales of 5G1.1-SC for all indications. We also
have a preferred position relative to third-party manufacturers to manufacture
5G1.1-SC worldwide. We share co-promotion rights with Procter & Gamble to sell,
market and distribute 5G1.1-SC in the United States, and have granted Procter &
Gamble the exclusive rights to sell, market and distribute 5G1.1-SC outside of
the United States. Through July 31, 1999, we received $17.8 million from Procter
& Gamble, including a non-refundable upfront license fee of $10.0 million and
$7.8 million in research and development support payments. Our collaboration
with Procter & Gamble does not involve any of our other product candidates.
GRANTS FROM ADVANCED TECHNOLOGY PROGRAM AND NATIONAL INSTITUTE OF STANDARDS AND
TECHNOLOGY
In August 1995, we were awarded cost-shared funding from the U.S. Commerce
Department's National Institute of Standards and Technology under its Advanced
Technology Program. Through the program, we may receive up to approximately
$2.0 million over three years to support our UniGraft cell, tissue, and organ
transplantation programs. Through July 31, 1999, we have received approximately
$1.9 million under this award. In September 1998, the three-year period was
amended to extend to September 1999.
In November 1997, both ourselves and US Surgical were awarded a three-year
$2.0 million cooperative agreement from NIST under its Advanced Technology
Program for funding a joint xenotransplantation project. In February 1999, this
funding was amended to a single company award to us with our reacquisition of
the rights to all aspects of our xenotransplantation program from US Surgical
which had been acquired by Tyco International Ltd. Through July 31, 1999, we had
received approximately $322,000 under this award.
In October 1998, we were granted our third award under this program, a
three-year grant supporting product development within our neurologic disorder
transplantation program. Through the program, we may receive up to approximately
$2.0 million over three years to support our UniGraft program to develop a
spinal cord injury product within our neurologic disorder xenotransplantation
program.
In October 1999, we were granted our fourth award under this program, a
three-year grant supporting product development within our UniGraft program.
Through the program, we may receive up to approximately $2.0 million over three
years to support our production of UniGraft products.
MANUFACTURING
We obtain drug product to meet our requirements for preclinical studies
using both internal and third-party contract manufacturing capabilities. At our
headquarters in New Haven, Connecticut, we have pilot manufacturing facilities
suitable for the fermentation and purification of certain of our recombinant
compounds for clinical studies. Our pilot plant has the capacity to manufacture
under cGMP regulations. We have also secured the production of clinical supplies
of certain other recombinant products through third-party manufacturers. In each
case, we have contracted product finishing, vial filling, and packaging through
third parties.
To date, we have not invested in the development of commercial manufacturing
capabilities. Although we have established a pilot manufacturing facility for
the production of material for clinical trials for certain of our potential
products, we do not have sufficient capacity to manufacture more than one drug
candidate at a time or to manufacture our drug candidates for later stage
clinical development or commercialization. In the longer term, we may contract
the manufacture of our products for commercial sale or may develop large-scale
manufacturing capabilities for the commercialization of some of our products.
The key factors which will be given consideration when making the determination
of which
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products will be manufactured internally and which through contractual
arrangements will include the availability and expense of contracting this
activity, control issues and the expertise and level of resources required for
us to manufacture products. If we are unable to develop or contract for
additional manufacturing capabilities on acceptable terms, our ability to
conduct human clinical testing will be materially adversely affected, resulting
in delays in the submission of products for regulatory approval and in the
initiation of new development programs, which could have a material adverse
effect on our competitive position and our prospects for achieving
profitability. In addition, as our product development efforts progress, we will
need to hire additional personnel skilled in product testing and regulatory
compliance.
SALES AND MARKETING
We currently have no sales, marketing, or distribution capabilities. We will
need to establish or contract these capabilities to commercialize successfully
any of our drug candidates. We may promote our products in collaboration with
marketing partners or rely on relationships with one or more companies with
established distribution systems and direct sales forces. Under our
collaboration agreement, Procter & Gamble is obligated to sell, market and
distribute worldwide 5G1.1-SC for all approved indications. We share with
Procter & Gamble co-promotion rights for 5G1.1-SC in the United States. For
other future drug products, as well as for 5G1.1-SC in the United States, we may
elect to establish our own specialized sales force and marketing organization to
market our products.
PATENTS AND PROPRIETARY RIGHTS
We believe that patents and other proprietary rights are important to our
business. Our policy is to file patent applications to protect technology,
inventions and improvements to our technologies that are considered important to
the development of our business. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position.
We have filed several U.S. patent applications and international
counterparts of certain of these applications. In addition, we have exclusively
licensed several additional U.S. patents and patent applications. Of our owned
and exclusively licensed patents and patent applications as of July 31, 1999, 13
relate to technologies or products in the C5 Inhibitor program, seven relate to
the Apogen program, and 21 relate to the UniGraft program.
Our success will depend in part on our ability to obtain United States and
foreign patent protection for our products, to preserve our trade secrets and
proprietary rights, and to operate without infringing on the proprietary rights
of third parties or having third parties circumvent our rights. Because of the
length of time and expense associated with bringing new products through
development and regulatory approval to the marketplace, the health care industry
has traditionally placed considerable importance on obtaining patent and trade
secret protection for significant new technologies, products and processes.
We are aware of broad patents owned by third parties relating to the
manufacture, use, and sale of recombinant humanized antibodies, recombinant
humanized single-chain antibodies and genetically engineered animals. We have
received notice from certain of these parties regarding the existence of certain
of these patents which the owners claim may be relevant to the development and
commercialization of certain of our proposed products. With respect to certain
of these patents which we believe are relevant for the expeditious development
and commercialization of certain of our products as currently contemplated, we
have acquired licenses. With regard to certain other patents, we have either
determined in our judgment that our products do not infringe the patents or have
identified and are testing various approaches which we believe should not
infringe the patents and which should permit commercialization of our products.
17
It is our policy to require our employees, consultants, members of our
scientific advisory board, and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of employment or consulting
relationships or collaborations with us. These agreements provide that all
confidential information developed or made known during the course of
relationship with us is to be kept confidential and not to be disclosed to third
parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions resulting from work performed for us,
utilizing our property or relating to our business and conceived or completed by
the individual during employment shall be our exclusive property to the extent
permitted by applicable law.
GOVERNMENT REGULATION
The preclinical studies and clinical testing, manufacture, labeling,
storage, record keeping, advertising, promotion, export, and marketing, among
other things, of our proposed products are subject to extensive regulation by
governmental authorities in the United States and other countries. In the United
States, pharmaceutical products are regulated by the FDA under the Federal Food,
Drug, and Cosmetic Act and other laws, including, in the case of biologics, the
Public Health Service Act. At the present time, we believe that our products
will be regulated by the FDA as biologics.
The steps required before a novel biologic may be approved for marketing in
the United States generally include:
(1) preclinical laboratory tests and IN VIVO preclinical studies;
(2) the submission to the FDA of an IND for human clinical testing, which
must become effective before human clinical trials may commence;
(3) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product;
(4) the submission to the FDA of a biologics license application or BLA; and
(5) FDA review and approval of such application.
The testing and approval process requires substantial time, effort and
financial resources. We cannot be certain that any approval will be granted on a
timely basis, if at all. Prior to and following approval, if granted, the
establishment or establishments where the product is manufactured are subject to
inspection by the FDA and must comply with cGMP requirements enforced by the FDA
through its facilities inspection program. Manufacturers of biological materials
also may be subject to state regulation.
Preclinical studies include animal studies to evaluate the mechanism of
action of the product, as well as animal studies to assess the potential safety
and efficacy of the product. Compounds must be produced according to applicable
cGMP requirements and preclinical safety tests must be conducted in compliance
with FDA regulations regarding good laboratory practices. The results of the
preclinical tests, together with manufacturing information and analytical data,
are submitted to the FDA as part of an IND, which must become effective before
human clinical trials may be commenced. The IND will automatically become
effective 30 days after receipt by the FDA, unless the FDA before that time
requests an extension to review or raises concerns about the conduct of the
trials as outlined in the application. In such latter case, the sponsor of the
application and the FDA must resolve any outstanding concerns before clinical
trials can proceed. We cannot assure you that submission of an IND will result
in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational product to
healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with
protocols that detail many items, including:
- the objectives of the study;
18
- the parameters to be used to monitor safety; and
- the efficacy criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND. Further, each
clinical study must be reviewed and approved by an independent institutional
review board, prior to the recruitment of subjects.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is tested for safety and, as appropriate, for absorption,
metabolism, distribution, excretion, pharmacodynamics and pharmacokinetics.
Phase II usually involves studies in a limited patient population to:
- evaluate preliminarily the efficacy of the drug for specific, targeted
indications;
- determine dosage tolerance and optimal dosage; and
- identify possible adverse effects and safety risks.
Phase III trials are undertaken to further evaluate clinical efficacy and to
test further for safety within an expanded patient population at geographically
dispersed clinical study sites. Phase I, Phase II or Phase III testing may not
be completed successfully within any specific time period, if at all, with
respect to any products being tested by a sponsor. Furthermore, the FDA may
suspend clinical trials at any time on various grounds, including a finding that
the subjects or patients are being exposed to an unacceptable health risk.
The results of the preclinical studies and clinical trials, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA as part of a BLA requesting approval for the marketing of
the product. The FDA may deny approval of the application if applicable
regulatory criteria are not satisfied, or if additional testing or information
is required. Post-marketing testing and surveillance to monitor the safety or
efficacy of a product may be required. FDA approval of any application may
include many delays or never be granted. Moreover, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. Finally, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if safety or
manufacturing problems occur following initial marketing. Among the conditions
for approval is the requirement that the prospective manufacturer's quality
control and manufacturing procedures conform to cGMP requirements. These
requirements must be followed at all times in the manufacture of the approved
product. In complying with these requirements, manufacturers must continue to
expend time, monies and effort in the area of production and quality control to
ensure full compliance.
Both before and after the FDA approves a product, the manufacturer and the
holder or holders of the BLA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the preclinical and clinical testing process, the review process, or
at any time afterward, including after approval, may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or the license
holder. In addition, later discovery of previously unknown problems may result
in restrictions on a product, its manufacturer, or the license holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of our products
under development.
For clinical investigation and marketing outside the United States, we are
also subject to foreign regulatory requirements governing human clinical trials
and marketing approval for drugs. The foreign regulatory approval process
includes all of the risks associated with FDA approval set forth above as well
as country-specific regulations.
19
No xenotransplantation-based therapeutic product has been approved for sale
by the FDA. The FDA has not yet established definitive regulatory guidelines for
xenotransplantation, but has proposed interim guidelines in an attempt to reduce
the risk of contamination of transplanted organ and cellular products with
infectious agents. Definitive guidelines in the United States may never be
issued, if at all. Current companies involved in this field, including
ourselves, may not be able to comply with any federal final definitive
guidelines that may be issued.
COMPETITION
Currently, many companies, including major pharmaceutical and chemical
companies as well as specialized biotechnology companies, are engaged in
activities similar to our activities. Universities, governmental agencies and
other public and private research organizations also conduct research and may
market commercial products on their own or through joint ventures. Many of these
entities may have:
- substantially greater financial and other resources;
- larger research and development staffs;
- in the case of universities, lower labor costs; and/or
- more extensive marketing and manufacturing organizations.
Many of these companies have significant experience in preclinical testing,
human clinical trials, product manufacturing, marketing and distribution and
other regulatory approval procedures. They may also have a greater number of
significant patents and greater legal resources to seek remedies for cases of
alleged infringement of their patents by us to block, delay, or co-opt our own
drug development process.
We compete with large pharmaceutical companies that produce and market
synthetic compounds and with specialized biotechnology firms in the United
States, Europe and elsewhere, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Many biotechnology companies have focused their developmental efforts in the
human therapeutics area, and many major pharmaceutical companies have developed
or acquired internal biotechnology capabilities or have made commercial
arrangements with other biotechnology companies. A number of biotechnology and
pharmaceutical companies are developing new products for the treatment of the
same diseases being targeted by us; in some instances these products have
already entered clinical trials. Other companies are engaged in research and
development based on complement proteins, T-cell therapeutics, gene therapy and
xenotransplantation.
Each of Avant Immunotherapeutics, Inc., Leukosite Inc., Abbott Laboratories,
Gliatech Inc. and Biocryst Pharmaceuticals Inc. has publicly announced
intentions to develop complement inhibitors to treat diseases related to trauma,
inflammation or certain brain or nervous system disorders. Avant has initiated
clinical trials for a proposed complement inhibitor to treat acute respiratory
distress syndrome, myocardial infarction, and lung transplantation. We are aware
that Pfizer, Inc., SmithKline Beecham Plc, and Merck & Co., Inc. are also
attempting to develop complement inhibitor therapies. We believe that our
potential C5 Inhibitors differ substantially from those of our competitors due
to our compounds' demonstrated ability to specifically intervene in the
complement cascade at what we believe to be the optimal point so that the
disease-causing actions of complement proteins generally are inhibited while the
normal disease-preventing functions of complement proteins generally remain
intact as do other aspects of immune function.
We further believe that, under conditions of inflammation, a complement
inhibitor compound which only indirectly addresses the harmful activity of
complement may be bypassed by pathologic mechanisms present in the inflamed
tissue. Each of Bayer AG, Immunex Corp., Pharmacia & Upjohn Inc. and Rhone-
Poulenc SA sells a product which is used clinically to reduce surgical bleeding
during cardiopulmonary bypass surgery, but has little beneficial effect on other
significant inflammatory morbidities associated with
20
cardiopulmonary bypass surgery. We believe that each of these drugs does not
significantly prevent complement activation and subsequent inflammation that
lead to organ damage and blood loss during cardiopulmonary bypass surgery, but
instead each drug attempts to reduce blood loss by shifting the normal blood
thinning/blood clotting balance in the blood towards enhanced blood clotting.
Nextran Inc., a subsidiary of Baxter International Inc., and Imutran Ltd., a
wholly-owned subsidiary of Novartis Pharma AG, are seeking to develop pig cell
xenograft technology. Novartis Pharma AG is also collaborating with
Biotransplant Inc. to commercially develop xenograft organs. We are aware that
Diacrin Inc. and Genzyme Tissue Repair, Inc. are working in this field.
EMPLOYEES
As of October 1, 1999, we had 90 full-time employees, of which 81 were
engaged in research, development, manufacturing, and clinical development, and
nine in administration and finance. Doctorates are held by 28 of our employees.
Each of our employees has signed a confidentiality agreement.
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ITEM 2. PROPERTIES.
FACILITIES
Our headquarters, research and development facility, and pilot manufacturing
facility are located in New Haven, Connecticut, within close proximity to Yale
University. At this facility, we lease and occupy a total of approximately
60,000 square feet of space, which includes approximately 30,000 square feet of
research laboratories and 10,000 square feet of space dedicated to the pilot
manufacturing facility. We lease our facilities under three operating leases
which expired in December 1997, June 1998, and March 1999. We are currently
continuing the leases on a month-to-month basis while lease extensions are under
discussion. Current monthly rental on the facilities is approximately $36,000.
Our pilot manufacturing plant is currently being utilized for producing
compounds for our current clinical trials. We believe the laboratory space will
be adequate for our current research and development activities. In addition
through a wholly-owned subsidiary, we own a transgenic manufacturing facility
located in the Northeast.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on The Nasdaq National Market under the symbol
"ALXN." The following table sets forth the range of high and low sales prices
for our common stock on The Nasdaq National Market for the periods indicated
since August 1, 1997.
FISCAL 1998 HIGH LOW
- ----------- -------- --------
First Quarter
(August 1, 1997 to October 31, 1997)...................... $16.00 $ 9.25
Second Quarter
(November 1, 1997 to January 31, 1998).................... $14.88 $ 9.88
Third Quarter
(February 1, 1998 to April 30, 1998)...................... $15.00 $12.13
Fourth Quarter
(May 1, 1998 to July 31, 1998)............................ $13.75 $ 8.00
FISCAL 1999 HIGH LOW
First Quarter
(August 1, 1998 to October 31, 1998)...................... $10.25 $ 5.50
Second Quarter
(November 1, 1998 to January 31, 1999).................... $17.75 $ 8.38
Third Quarter
(February 1, 1999 to April 30, 1999)...................... $14.25 $ 8.38
Fourth Quarter
(May 1, 1999 to July 31, 1999)............................ $12.75 $ 8.75
As of October 1, 1999, we had 158 stockholders of record of our common stock
and an estimated 2,500 beneficial owners. The closing sale price of our common
stock on October 1, 1999 was $15.19 per share.
DIVIDEND POLICY
We have never paid cash dividends. We do not expect to declare or pay any
dividends on our common stock in the foreseeable future. We intend to retain all
earnings, if any, to invest in our operations. The payment of future dividends
is within the discretion of our board of directors and will depend upon our
future earnings, if any, our capital requirements, financial condition and other
relevant factors.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JULY 31,
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Contract research revenues...................... $18,754 $ 5,037 $ 3,811 $ 2,640 $ 136
------- ------- ------- ------- -------
Operating expenses:
Research and development...................... 23,710 12,323 9,079 6,629 5,637
General and administrative.................... 2,953 2,666 2,827 1,843 1,592
------- ------- ------- ------- -------
Total operating expenses........................ 26,663 14,989 11,906 8,472 7,229
------- ------- ------- ------- -------
Operating loss.................................. (7,909) (9,952) (8,095) (5,832) (7,093)
Other income (expense), net..................... 1,514 2,087 843 397 (29)
------- ------- ------- ------- -------
Net loss........................................ (6,395) (7,865) (7,252) (5,435) (7,122)
Preferred stock dividends....................... -- (900) -- -- --
------- ------- ------- ------- -------
Net loss applicable to common shareholders...... $(6,395) $(8,765) $(7,252) $(5,435) $(7,122)
======= ======= ======= ======= =======
Net loss per common share, basic and diluted.... $ (0.57) $ (0.87) $ (0.97) $ (1.02) $ (2.02)
======= ======= ======= ======= =======
Shares used in computing net loss per common
share......................................... 11,265 10,056 7,451 5,351 3,528
======= ======= ======= ======= =======
AS OF JULY 31,
----------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1999 1998 1997 1996 1995
------- ------- ------- ------- ------
Cash, cash equivalents, and marketable
securities.................................... $28,328 $37,494 $22,749 $18,598 $5,701
Total current assets............................ 35,662 37,840 22,981 19,064 5,874
Total assets.................................... 44,374 42,085 24,260 20,454 7,927
Notes payable, less current portion............. 4,383 832 -- 128 456
Total stockholders' equity...................... 33,301 39,190 21,846 18,285 5,119
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. SUCH STATEMENTS ARE SUBJECT TO CERTAIN FACTORS WHICH MAY CAUSE
OUR PLANS AND RESULTS TO DIFFER SIGNIFICANTLY FROM PLANS AND RESULTS DISCUSSED
IN FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "IMPORTANT
FACTORS REGARDING FORWARD-LOOKING STATEMENTS" ATTACHED HERETO AS EXHIBIT 99.
OVERVIEW
Since our inception in January 1992, we have devoted substantially all of
our resources to drug discovery, research and product development. In 1998, we
began to focus more of our resources to clinical testing and trials. We are
conducting clinical trials of our two lead product candidates, 5G1.1-SC for the
treatment of inflammation caused by cardiopulmonary bypass surgery and 5G1.1 for
the chronic treatment of rheumatoid arthritis and membranous nephritis. To date,
we have not received any revenues from the sale of products. We have incurred
operating losses since our inception. As of July 31, 1999, we had an accumulated
deficit of $47.0 million. We expect to incur substantial and increasing
operating losses for the next several years due to expenses associated with:
- product research and development;
- preclinical studies and clinical testing;
- regulatory activities;
- manufacturing development and scale-up; and
- developing a sales and marketing force.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JULY 31, 1999, 1998 AND 1997
We earned contract research revenues of $18.8 million for the fiscal year
ended July 31, 1999, $5.0 million for the fiscal year ended July 31, 1998, and
$3.8 million for the fiscal year ended July 31, 1997. The increase in the fiscal
year ended July 31, 1999 as compared to the fiscal year ended July 31, 1998 was
primarily due to a non-refundable license fee of $10.0 million which we received
from Procter & Gamble in February 1999 in exchange for rights to sell, market
and distribute 5G1.1-SC. Additionally, during fiscal year ended July 31, 1999,
we received $7.8 million in contract revenues from Procter & Gamble under our
collaborative research and development agreement. The increase in the fiscal
year ended July 31, 1998 as compared to the fiscal year ended July 31, 1997 was
primarily due to revenues of $3.5 million which we received from United States
Surgical Corporation in exchange for licensing rights and other
xenotransplantation manufacturing assets. The revenues in the fiscal year ended
July 31, 1997 consisted principally of contract revenues of $1.8 million from
US Surgical and $1.1 million from Genetic Therapy, Inc., a subsidiary of
Novartis.
During the fiscal year ended July 31, 1999, we incurred expenses of
$23.7 million, on research and development activities. In the fiscal year ended
July 31, 1998, we incurred expenses of $12.3 million, and in the fiscal year
ended July 31, 1997 we incurred expenses of $9.1 million in research and
development activities.
Our increase in research and development expenses in the fiscal year ended
July 31, 1999 as compared to the fiscal year ended July 31, 1998 was primarily
attributable to an expansion of the clinical trials of our lead C5 Inhibitor
product candidates and process manufacturing development for our C5 Inhibitor
product
25
candidates. In the fiscal year ended July 31, 1998, research and development
expenses increased $3.2 million as compared to the fiscal year ended
July 31, 1997 due principally to expanded preclinical development of our
research programs and process development for our C5 Inhibitor and Apogen
product candidates.
Our general and administrative expenses were $3.0 million for the fiscal
year ended July 31, 1999, $2.7 million for the fiscal year ended July 31, 1998,
and $2.8 million for the fiscal year ended July 31, 1997. The increase in
general and administrative expenses in the fiscal year ended July 31, 1999 was
primarily related to higher recruiting expenses, legal expenses related to
business development and patent costs in the fiscal year ended July 31, 1999 as
compared to the fiscal year ended July 31, 1998. The decrease in general and
administrative expenses in the fiscal year ended July 31, 1998 was primarily
related to lower legal and patent costs in the fiscal year ended July 31, 1998
as compared to the fiscal year ended July 31, 1997.
Other income (expense), net, representing primarily net investment income,
was $1.5 million for the fiscal year ended July 31, 1999, $2.1 million for the
fiscal year ended July 31, 1998, and $843,000 for the fiscal year ended
July 31, 1997. The decrease in the fiscal year ended July 31, 1999 was due to
lower cash balances available for investment as compared to the fiscal year
ended July 31, 1998. The increase in the fiscal year ended July 31, 1998 was due
to higher cash balances available for investment as compared to the fiscal year
ended July 31, 1997.
As a result of the above factors, we had incurred net losses of
$6.4 million for the fiscal year ended July 31, 1999, $7.9 million for the
fiscal year ended July 31, 1998, and $7.3 million for the fiscal year ended
July 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in January 1992, we have financed our operations and
capital expenditures principally through private placements of our common and
preferred stock, an initial public offering of our common stock, equipment and
leasehold improvements financing, other debt financing and payments under
corporate collaborations.
In the fiscal year ended July 31, 1998, we financed the purchase of
laboratory and process development equipment and leasehold improvements through
a $1.2 million secured term loan from a commercial bank. Principal payments of
$92,000 are payable quarterly through August 2001. As of July 31, 1999, the
outstanding balance on this term loan was $831,000. Principal is due with
interest at a variable rate which is reset quarterly. As of July 31, 1999, the
annualized interest rate was 7.1%. The term loan agreement requires us to
maintain a restricted cash balance equal to 115.0% of the outstanding loan
balance plus accrued interest in an interest earning money market account as
security for the note.
In February 1999, we acquired the manufacturing assets, principally land,
buildings and laboratory equipment, for the xenotransplantation program
developed by US Surgical. We financed the purchase of the manufacturing assets
through a $3.9 million term note payable to US Surgical. Interest is 6.0% per
annum and is payable quarterly. The principal balance under the note is due in
May 2005. Security for this term note is the manufacturing assets that we
purchased.
As of July 31, 1999, our cash, cash equivalents, and marketable securities
totaled $28.3 million. At July 31, 1999, our cash and cash equivalents consisted
of $24.2 million of cash we hold in short-term highly liquid investments with
original maturities of less than three months. As of July 31, 1999, we have
invested $10.8 million in property and equipment to support our research and
development efforts. We anticipate our research and development expense will
increase significantly for the foreseeable future to support our clinical and
manufacturing development of our product candidates.
We lease our administrative office and research and development facilities
under three operating leases which expired in December 1997, June 1998 and
March 1999. We are currently continuing the leases
26
on a month-to-month basis while participating in ongoing discussions for new
leases of our current facilities.
Procter & Gamble has agreed to fund all clinical testing of our C5
Inhibitor, 5G1.1-SC, initially for use in cardiopulmonary bypass surgery,
myocardial infarction and angioplasty. The Procter & Gamble collaboration does
not involve any of our other product candidates.
We anticipate that our existing available capital resources and interest
earned on available cash and marketable securities should be sufficient to fund
our operating expenses and capital requirements as currently planned for at
least the next 18 months. While we currently have no material commitments for
capital expenditures, our future capital requirements will depend on many
factors, including:
- progress of our research and development programs;
- progress and results of clinical trials;
- time and costs involved in obtaining regulatory approvals;
- costs involved in obtaining and enforcing patents and any necessary
licenses;
- our ability to establish development and commercialization relationships;
and
- costs of manufacturing scale-up.
We expect to incur substantial additional costs, for:
- research;
- preclinical studies and clinical testing;
- manufacturing process development;
- additional capital expenditures related to personnel, and facilities
expansion; and
- manufacturing requirements.
In addition to funds we may receive from our collaboration with Procter &
Gamble, we will need to raise or generate substantial additional funding in
order to complete the development and commercialization of our product
candidates. In addition, if and when we achieve contractual milestones related
to product development and product license applications and approvals,
additional payments would be required if we elect to continue and maintain our
licenses with our licensors, aggregating up to a maximum of $2.0 million. Our
additional financing may include public or private debt or equity offerings,
bank loans and/or collaborative research and development arrangements with
corporate partners.
For tax reporting purposes, as of July 31, 1999, we had approximately
$44.1 million of federal net operating loss carryforwards which expire through
2019 and $2.2 million of tax credit carryforwards which expire commencing in
fiscal 2008. Provisions of the Tax Reform Act of 1986 may limit our ability to
utilize net operating loss and tax credit carryforwards in any given year if
certain events occur, including a provision relating to cumulative changes in
ownership interests in excess of 50% over a three-year period. We cannot assure
you that our ability to utilize the net operating loss and tax credit
carryforwards in future years will not be limited as a result of a change in
ownership.
YEAR 2000
The Year 2000 issue, or Y2K, refers to potential problems with computer
systems or any equipment with computer chips or software that use dates where
the date has been stored as just two digits. On January 1, 2000, any clock or
date recording mechanism incorporating date sensitive software which uses only
two digits to represent the year may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including,
27
among other things, a temporary inability to process transactions, perform
laboratory analyses, or engage in similar business activities.
We are a biotechnology company and our proposed product candidates are not
software or computer based. Therefore, our proposed products are not directly
impacted by the Y2K problem. Our exposure to potential risks from this problem
involves computer and information technology systems, and other systems which
include embedded technology using date sensitive programs such as for:
- heating, ventilation, air conditioning, or HVAC;
- scientific instrumentation; and
- laboratory facilities.
Our internal information systems consist of off-the-shelf accounting and
e-mail systems, off-the-shelf application programs such as spreadsheet, word
processing, graphics, database management, and presentation software, and
certain instrumentation/data acquisition software. Non-informational technology
systems consist of HVAC and telecommunications.
We have taken actions to minimize the impact of the Y2K problem on our
systems and operations, excluding a systemic failure outside our control, such
as a prolonged loss of electrical or telephone service. We have inventoried and
reviewed our systems, scientific instrumentation, and laboratory facilities,
including querying third parties that have a material relationship with us, to
ascertain Y2K compliance. Our review included examining information from our
equipment and software vendors, literature supplied with software, and test
evaluations of our systems. Based upon our work and knowledge to date, which
included updating various software programs, we believe that the risk is minimal
that our internal systems, scientific instrumentation, and laboratory facilities
will be materially impacted by Y2K non-compliance disruptions. Most of our
existing systems, scientific instrumentation, and laboratory facilities are Y2K
compliant or are expected to be Y2K compliant by December 31, 1999.
Vendors for our off-the-shelf applications, including our accounting and
e-mail systems, have informed us that their products are Y2K compliant. To date,
our review has not disclosed otherwise. We have no reason to believe that these
applications are not Y2K compliant. If these applications are not Y2K compliant,
we expect, but cannot be certain, that the vendors will make appropriate
upgrades available to all of their customers at no cost or at minimal cost. We
believe that if it were necessary to replace our off-the-shelf software
applications, such software could be replaced at reasonable costs. For example,
the approximate replacement cost of our e-mail system would be $10,000.
We have identified a Y2K problem in our HVAC system. We have engaged an
outside contractor to correct the Y2K problem. We believe that the cost of
correcting this problem will be approximately $20,000 and expect the problem to
be corrected in December 1999 during a regularly scheduled maintenance cycle. As
a result of our personnel expansion, we upgraded our telecommunication system,
whether or not it had a Y2K problem. The cost of this upgrade, which is Y2K
compliant, was approximately $35,000 and also provided for future enhancements.
With regard to third-party risks, we continue to assess Y2K risks. Third
parties include research suppliers and partners, manufacturers, research
organizations and clinical study administrators. Our vendors and suppliers have
indicated that they will make every effort to be Y2K compliant before
December 31, 1999, but that no guarantees can be given. We have, for example,
been informed by our outside payroll processor that their payroll system is Y2K
compliant. We expect third parties to honor their contractual obligations.
The majority of our material third-party contracts relate to sites for
clinical trials of our product candidates, research and development, and our
collaboration with Procter & Gamble. We believe that there is no readily
available replacement for our collaboration agreement with Procter & Gamble. We
further believe that it would be difficult, time consuming, and costly to find
alternative clinical sites and
28
research arrangements. We will continue to work with third parties to identify
and resolve any problems with Y2K compliance.
In a worst case scenario, we could experience delays in receiving research
and development and manufacturing supplies as well as managing and accessing
data on patients enrolled in clinical studies. These delays could slow clinical
development and research and development programs, or impact our ability to
effectively manage and monitor these programs. These delays could also have an
adverse impact on our stock price. Based on the information and assessments to
date, no contingency plans have been developed.
Any Y2K compliance problems which arise could materially and adversely
affect our business, results of operations, or cash flow. We will continue to
identify all Y2K problems that could materially adversely affect our business
operations. However, it is not possible to determine with complete certainty
that all Y2K problems affecting us or third parties which have a material
relationship with us, have been identified. It is not possible to insure
economically against all conceivable risks.
To date, we have incurred less than $5,000 in costs associated with our Y2K
program. This excludes the costs of older computer and scientific
instrumentation that have been replaced in the ordinary course as such systems
are upgraded or expanded. We believe that the costs associated with repairs or
upgrades and verification of our internal systems to become Y2K compliant will
not be more than $50,000. We believe that all such repairs or upgrades and
verification will be complete in December 1999 with the repair and upgrade to
our HVAC system discussed above. We expect to fund all these expenses from
working capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest income on the Company's marketable securities is carried in "Other
income (expense)." The Company accounts for its marketable securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the
cash equivalents and marketable securities are treated as available-for-sale
under SFAS 115.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of expectations
due to changes in interest rates or the Company may suffer losses in principal
if forced to sell securities which have seen a decline in market value due to
changes in interest rates. The Company's marketable securities are held for
purposes other than trading. The marketable securities as of July 31, 1999, had
maturities of less than two years. The weighted-average interest rate on
marketable securities at July 31, 1999 was 5.7%. The fair value of marketable
securities held at July 31, 1999 was $4.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the Company
required in this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
29
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES.
Set forth below is certain information regarding our executive officers,
directors and key employees:
NAME AGE POSITION WITH ALEXION
- ---- -------- ---------------------
John H. Fried, Ph.D.(1) .................. 70 Chairman of the Board of Directors
Leonard Bell, M.D.(1) .................... 41 President, Chief Executive Officer,
Secretary, Treasurer, Director
David W. Keiser........................... 48 Executive Vice President, Chief Operating
Officer
Louis A. Matis, M.D. ..................... 49 Senior Vice President, Chief Scientific
Officer
Stephen P. Squinto, Ph.D. ................ 43 Senior Vice President, Chief Technology
Officer
Barry P. Luke............................. 41 Vice President of Finance and
Administration, Assistant Secretary
Nancy Motola, Ph.D. ...................... 47 Vice President of Regulatory Affairs and
Quality Assurance
James A. Wilkins, Ph.D. .................. 47 Vice President of Process Sciences and
Manufacturing
William Fodor, Ph.D.(2) .................. 41 Senior Director of Xenotransplantation
Christopher F. Mojcik, M.D., Ph.D.(2) .... 39 Senior Director of Clinical Development
Scott A. Rollins, Ph.D.(2) ............... 36 Senior Director of Project Management and
Drug Development
Jerry T. Jackson.......................... 58 Director
Max Link, Ph.D.(1)(3) .................... 59 Director
Joseph A. Madri, Ph.D., M.D. ............. 53 Director
Leonard Marks, Jr., Ph.D.(3) ............. 78 Director
Eileen M. More............................ 53 Director
R. Douglas Norby.......................... 64 Director
Alvin S. Parven(3)........................ 59 Director
- ------------------------
(1) Member of our nominating committee.
(2) Key employee.
(3) Member of our audit committee and our compensation committee.
Each director will hold office until the next annual meeting of stockholders
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Each officer serves at the discretion of the
board of directors. Each of our executive officers is a party to an employment
agreement with us.
JOHN H. FRIED, PH.D. has been the Chairman of our board of directors of
Alexion since April 1992. Since 1992, Dr. Fried has been President of Fried &
Co., Inc., a health technology venture firm. Dr. Fried was a director of Syntex
Corp., a life sciences and health care company, from 1982 to 1994 and he served
as Vice Chairman of Syntex from 1985 to January 1993 and President of the Syntex
Research Division from 1976 to 1992. Dr. Fried has originated more than 200 U.S.
Patents and has authored more than 80 scientific publications. Dr. Fried
received his B.S. in Chemistry and Ph.D. in Organic Chemistry from Cornell
University.
LEONARD BELL, M.D. is the principal founder of Alexion, and has been a
director of Alexion since February 1992 and the Company's President and Chief
Executive Officer, Secretary and Treasurer since January 1992. From 1991 to
1992, Dr. Bell was an Assistant Professor of Medicine and Pathology and
30
co-Director of the Program in Vascular Biology at the Yale University School of
Medicine. From 1990 to 1992, Dr. Bell was an attending physician at the Yale-New
Haven Hospital and an Assistant Professor in the Department of Internal Medicine
at the Yale University School of Medicine. Dr. Bell was the recipient of the
Physician Scientist Award from the National Institutes of Health and
Grant-in-Aid from the American Heart Association as well as various honors and
awards from academic and professional organizations. His work has resulted in
more than 20 scientific publications and three patent applications. Dr. Bell is
a director of the Connecticut Technology Council and Connecticut United for
Research Excellence, Inc. He also served as a director of the Biotechnology
Research and Development Corporation from 1993 to 1997. Dr. Bell received his
A.B. from Brown University and M.D. from Yale University School of Medicine.
Dr. Bell is currently an Adjunct Assistant Professor of Medicine and Pathology
at Yale University School of Medicine.
DAVID W. KEISER has been Executive Vice President and Chief Operating
Officer of Alexion since July 1992. From 1990 to 1992, Mr. Keiser was Senior
Director of Asia Pacific Operations for G.D. Searle & Company Limited, a
manufacturer of pharmaceutical products. From 1986 to 1990, Mr. Keiser was
successively Licensing Manager, Director of Product Licensing and Senior
Director of Product Licensing for Searle. From 1984 to 1985, Mr. Keiser was New
Business Opportunities Manager for Mundipharma AG, a manufacturer of
pharmaceutical products, in Basel, Switzerland where he headed pharmaceutical
licensing and business development activities in Europe and the Far East. From
1978 to 1983, he was Area Manager for F. Hoffmann La Roche Ltd., a manufacturer
of pharmaceutical products, in Basel, Switzerland. Mr. Keiser received his B.A.
from Gettysburg College.
LOUIS A. MATIS, M.D. has been the Senior Vice President and Chief Scientific
Officer since March 1998 and Vice President of Research, Immunobiology, of
Alexion from August 1994 to March 1998. From January 1993 to July 1994,
Dr. Matis served as the Director of our Program in Immunobiology. Prior to
joining Alexion, from 1977 to 1992, Dr. Matis held various appointments at the
NIH and the FDA. From 1990 to 1992, Dr. Matis was a Senior Investigator in the
Laboratory of Immunoregulation at the National Cancer Institute and from 1987 to
1990 he was a Senior Staff Fellow in the Molecular Immunology Laboratory at the
Center for Biologics Evaluation and Research associated with the FDA. Dr. Matis
is the author of more than 100 scientific papers in the fields of T-cell
biology. Dr. Matis has received numerous awards including the NIH Award of
Merit. Dr. Matis received his B.A. from Amherst College and M.D. from the
University of Pennsylvania Medical School.
STEPHEN P. SQUINTO, PH.D. is a founder of Alexion and has held the positions
of Senior Vice President and Chief Technical Officer since March 1998, Vice
President of Research, Molecular Sciences, from August 1994 to March 1998,
Senior Director of Molecular Sciences from July 1993 to July 1994 and Director
of Molecular Development from April 1992 to July 1993. From 1989 to 1992,
Dr. Squinto held various positions at Regeneron Pharmaceuticals, Inc., most
recently serving as Senior Scientist and Assistant Head of the Discovery Group.
From 1986 to 1989, Dr. Squinto was an Assistant Professor of Biochemistry and
Molecular Biology at Louisiana State University Medical Center. Dr. Squinto's
work has led to over 70 scientific papers in the fields of gene regulation,
growth factor biology and gene transfer. Dr. Squinto's work is primarily in the
fields of regulation of eukaryotic gene expression, mammalian gene expression
systems and growth receptor and signal transduction biology. Dr. Squinto also
serves as a Director of the BRDC since 1997. Dr. Squinto received his B.A. in
Chemistry and Ph.D. in Biochemistry and Biophysics from Loyola University of
Chicago.
BARRY P. LUKE has been Vice President of Finance and Administration since
September 1998 and Senior Director of Finance and Administration of Alexion from
August 1995 to September 1998 and prior thereto was Director of Finance and
Accounting of the Company from May 1993. From 1989 to 1993, Mr. Luke was Chief
Financial Officer, Secretary and Vice President--Finance and Administration at
Comtex Scientific Corporation, a publicly held distributor of electronic news
and business information. From 1985 to 1989, he was Controller and Treasurer of
Softstrip, Inc., a manufacturer of computer peripherals and
31
software. From 1980 to 1985, Mr. Luke was employed by the General Electric
Company where he held positions at GE's Corporate Audit Staff after completing
GE's Financial Management Program. Mr. Luke received a B.A. in Economics from
Yale University and an M.B.A. in management and marketing from the University of
Connecticut.
NANCY MOTOLA, PH.D. has been the Vice President of Regulatory Affairs and
Quality Assurance since 1998. From 1991 to 1998, Dr. Motola served as Assistant,
Associate, and then Deputy Director, Regulatory Affairs for the Bayer
Corporation Pharmaceutical Division where she was responsible for regulatory
aspects of product development programs for cardiovascular, neuroscience,
metabolic and oncology drugs and included drugs targeting arthritis, cardiac
disorders, stroke and cognitive dysfunction. Dr. Motola has been responsible for
the filing of numerous INDs, other regulatory submissions and has filed New Drug
Applications for marketing approval resulting in three currently marketed drugs.
Dr. Motola held regulatory affairs positions of increasing responsibility at
Abbott Laboratories from 1989 to 1991 and at E.R. Squibb and Sons, Inc. from
1983 to 1989. She has also served as past Chairperson of the Regulatory Affairs
Section of the American Association of Pharmaceutical Scientists. Dr. Motola
received her B.A. from Central Connecticut State University and M.S. and Ph.D.
degrees in medicinal chemistry from the University of Rhode Island.
JAMES A. WILKINS, PH.D. has been Vice President of Process Sciences and
Manufacturing of Alexion since September 1998 and has held the positions of
Senior Director of Process Sciences from August 1996 to September 1998, Senior
Director of Process Development from August 1995 to August 1996, and Director of
Process Development from September 1993 to August 1995. From 1989 to 1993,
Dr. Wilkins was Group Leader of the Protein Chemistry Department at Otsuka
America Pharmaceutical, Inc. From 1987 to 1989, Dr. Wilkins was a Scientist in
Recovery Process Development at Genentech, Inc. and from 1982 to 1987, he was an
Associate Research Scientist in the Thomas C. Jenkins Department of Biophysics
at Johns Hopkins University. He is the author of more than 25 presentations and
scientific articles in the fields of protein refolding and protein biochemistry.
Dr. Wilkins received a B.A. in Biology from University of Texas and a Ph.D. in
Biochemistry from University of Tennessee.
WILLIAM FODOR, PH.D. has been Senior Director of Xenotransplantation since
1997. After joining Alexion in 1992, Dr. Fodor was a Staff Scientist from 1992
to 1994, Principal Scientist from 1994 to 1996, and Director of
Xenotransplantation from 1996 to 1997. Dr. Fodor has been responsible for
managing the preclinical development and manufacturing of our
xenotransplantation product candidates. Prior to 1992, Dr. Fodor was a
postdoctoral research fellow in the Section of Immunobiology at Yale University
School of Medicine and at Biogen, Inc., a biopharmaceutical firm. Dr. Fodor's
work has led to over 30 scientific papers and patents in the fields of
immunobiology and molecular biology. Dr. Fodor received his B.S. in Genetics and
Ph.D. in Molecular Genetics from the Ohio State University.
CHRISTOPHER F. MOJCIK, M.D., PH.D. has been Senior Director of Clinical
Development since joining Alexion in July 1998. From 1996 until July 1998, he
was an Associate Director in the Metabolics/ Rheumatics Department at Bayer
Corporation's Pharmaceuticals Division. Dr. Mojcik was responsible for Phase II
and III development of certain arthritis programs and certain Phase IV programs
in cardiopulmonary bypass. From 1993 to 1996, he was a Senior Staff Fellow in
the Cellular Immunology Section of the Laboratory of Immunology in the NIAID at
the NIH. From 1991 to 1993, he completed his Fellowship in Rheumatology in the
National Institute of Arthritis and Musculoskeletal and Skin Diseases at the
NIH. He received his B.A. from Washington University in St. Louis, Missouri, and
his M.D. and Ph.D. from the University of Connecticut.
SCOTT A. ROLLINS, PH.D. is a co-founder of Alexion and has been Senior
Director of Project Management and Drug Development since August 1999, Senior
Director of Complement Biology from 1997 to 1999, Director of Complement Biology
from 1996 to 1997, Principal Scientist from 1994 to 1996, and Staff Scientist
from 1992 to 1994. Since 1994, Dr. Rollins has been responsible for the
preclinical development of our anti-inflammatory compound 5G1.1-SC. Since 1999,
Dr. Rollins has been additionally responsible
32
for the project management functions of 5G1.1-SC, currently under joint
development with Procter & Gamble Pharmaceuticals. Prior to 1992, Dr. Rollins
was a postdoctoral research fellow in the Department of Immunobiology at Yale
University School of Medicine. Dr. Rollins' work has led to over 50 scientific
papers and patents in the fields of complement biology. He received his B.S. in
Cytotechnology and Ph.D. in Microbiology and Immunology from the University of
Oklahoma Health Sciences Center.
JERRY T. JACKSON has been a director of Alexion since September 1999. He was
employed by Merck & Co. Inc., a major pharmaceutical company, from 1965 until
his retirement in 1995. During this time, he had extensive experience in sales,
marketing and corporate management, including joint ventures. From 1993 until
1995, Mr. Jackson served as Executive Vice President of Merck with broad
responsibilities for numerous operating groups--including Merck's International
Human Health, Worldwide Human Vaccines, the AgVet Division, Astra/Merck U.S.
Operations, as well as worldwide marketing. During 1993, he was also President
of the Worldwide Human Health Division in 1993. He served as Senior Vice
President of Merck from 1991 to 1992 responsible for Merck's Specialty Chemicals
and previously, he was President of Merck's Sharp & Dohme International.
Mr. Jackson serves as a director of Cor Therapeutics, Inc., Molecular
Biosystems, Inc., SunPharm Corporation, and Crescendo Pharmaceuticals
Corporation. Mr. Jackson received his B.A. from University of New Mexico.
MAX LINK, PH.D. has been a director of Alexion since April 1992. From
May 1993 to June 1994, Dr. Link was Chief Executive Officer of Corange
(Bermuda), the parent company of Boehringer Mannheim Therapeutics, Boehringer
Mannheim Diagnostics and DePuy Orthopedics. From 1992 to 1993, Dr. Link was
Chairman of the Board of Sandoz Pharma, Ltd., a manufacturer of pharmaceutical
products. From 1987 to 1992, Dr. Link was the Chief Executive Officer of Sandoz
Pharma and a member of the Executive Board of Sandoz, Ltd., Basel. Prior to
1987, Dr. Link served in various capacities with the United States operations of
Sandoz, including as President and Chief Executive Officer. Dr. Link is also a
director of Protein Design Labs, Inc., Cell Therapeutics, Inc., and
Procept, Inc., each a publicly held pharmaceutical company, as well as Human
Genome Sciences Inc., a genomics company.
JOSEPH A. MADRI, PH.D., M.D. is a founder of Alexion and has been a director
of Alexion since February 1992. Since 1980, Dr. Madri has been on the faculty of
the Yale University School of Medicine and is currently a Professor of
Pathology. Dr. Madri serves on the editorial boards of numerous scientific
journals and he is the author of over 175 scientific publications. Dr. Madri
works in the areas of regulation of angiogenesis, vascular cell-matrix
interactions, cell-cell interactions, lymphocyte-endothelial cell interactions
and endothelial and smooth muscle cell biology and has been awarded a Merit
award from the National Institutes of Health. Dr. Madri received his B.S. and
M.S. in Biology from St. John's University and M.D. and Ph.D. in Biological
Chemistry from Indiana University.
LEONARD MARKS, JR., PH.D. has been a director of Alexion since April 1992.
Since 1985 Dr. Marks has served as an independent corporate director and
management consultant. Dr. Marks serves on the board of directors of Netvision
Technologies Inc. Dr. Marks served as a director of Airlease Management
Services, an aircraft leasing company (a subsidiary of Bank America Leasing &
Capital Corporation), from 1995 to March 1998, and Northern Trust Bank of
Arizona, a commercial and trust bank subsidiary of Northern Trust of Chicago,
from 1995 to March 1998. Prior to 1985, Dr. Marks held various positions in
academia and in the corporate sector including Executive Vice President,
Castle & Cooke, Inc. from 1972 to 1985. Dr. Marks received his B.A. in Economics
from Drew University and an M.B.A. and Doctorate in Business Administration from
Harvard University.
EILEEN M. MORE has been a director of Alexion since December 1993. Ms. More
has been associated since 1978 with Oak Investment Partners and has been a
General Partner of Oak since 1980. Oak is a venture capital firm and a
stockholder of Alexion. Ms. More is currently a director of several private high
technology and biotechnology firms including OraPharma, Inc., Halox
Technologies, Psychiatric Solutions and Teloquent Communication Corporation.
Ms. More studied mathematics at the University of Bridgeport and is a Chartered
Financial Analyst.
33
R. DOUGLAS NORBY has been a director of Alexion since September 1999. Since
1996, Mr. Norby has been the Executive Vice President and Chief Financial
Officer of LSI Logic Corporation, a semiconductor company, and he also serves on
the Board of LSI. From September 1993 until November 1996, he served as Senior
Vice President and Chief Financial Officer of Mentor Graphics Corporation, a
software company. Mr. Norby served as President of Pharmetrix Corporation, a
drug delivery company, from July 1992 to September 1993, and from 1985 to 1992,
he was President and Chief Operating Officer of Lucasfilm, Ltd., an
entertainment company. From 1979 to 1985, Mr. Norby was Senior Vice President
and Chief Financial Officer of Syntex Corporation, a pharmaceutical company.
Mr. Norby received a B.A. in Economics from Harvard University and an M.B.A.
from Harvard Business School.
ALVIN S. PARVEN has been a director of Alexion since May 1999. Since 1997,
Mr. Parven has been President of ASP Associates, a management and strategic
consulting firm. From 1994 to 1997, Mr. Parven was Vice President at Aetna
Business Consulting, reporting to the Office of the Chairman of Aetna. From 1987
to 1994, Mr. Parven was Vice President, Operations at Aetna Health Plans. Prior
to 1987, he served in various capacities at Aetna including Vice President,
Pension Services from 1983 to 1987. Mr. Parven received his B.A. from
Northeastern University.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers and Directors"
contained in the Proxy Statement.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of October 1, 1999, except as
otherwise noted in the footnotes: (1) each person known by us to own
beneficially more than 5.0% percent of our outstanding common stock; (2) each
director and each named executive officer; and (3) all directors and executive
officers of Alexion as a group.
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY SHARES
NAME OF BENEFICIAL OWNER(1) OWNED(2) BENEFICIALLY OWNED
- --------------------------- ---------------- ------------------
BB Biotech AG
Vordergrasse 3
8200 Schaffhausen
CH/Switzerland(3)......................................... 1,824,113 16.1%
Zesiger Capital
320 Park Avenue, 30th floor
New York, NY 10022(4)..................................... 845,000 7.5%
The Kaufmann Fund, Inc.
140 E. 45th Street, 43rd floor
New York, NY 10017(5)..................................... 837,300 7.4%
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154(6)..................................... 828,600 7.3%
T. Rowe Price Associates
100 East Pratt Street
Baltimore, MD 21205(7).................................... 828,600 7.3%
OrbiMed Advisers, Inc.
41 Madison Avenue, 40th floor
New York, NY 10010(8)..................................... 750,500 6.6%
Leonard Bell, M.D.(9)....................................... 583,850 5.0%
Stephen P. Squinto, Ph.D.(10)............................... 180,450 1.6%
David W. Keiser(11)......................................... 167,300 1.5%
Louis A. Matis, M.D.(12).................................... 147,900 1.3%
Eileen M. More(13).......................................... 114,780 1.0 %
John H. Fried, Ph.D.(14).................................... 91,003 *
James A. Wilkins, Ph.D.(15)................................. 60,000 *
Joseph A. Madri, Ph.D., M.D.(16)............................ 57,467 *
Max Link, Ph.D.(17)......................................... 25,490 *
Leonard Marks, Jr., Ph.D.(18)............................... 15,967 *
Jerry T. Jackson(19)........................................ -- *
R. Douglas Norby(20)........................................ -- *
Alvin S. Parven(21)......................................... -- *
Directors and Executive Officers as a group
(15 persons)(22).......................................... 1,501,257 12.2%
- ------------------------
* Less than one percent
(1) Unless otherwise indicated, the address of all persons is 25 Science Park,
New Haven, Connecticut 06511.
(2) To our knowledge, except as set forth below, the persons named in the table
have sole voting and investment power with respect to all shares of our
common stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the
footnotes in this table.
35
(3) This figure is based upon information set forth in Amendment No. 3 to
Schedule 13D filed on May 27, 1998, filed jointly by BB Biotech AG and
Biotech Target, S.A. Biotech Target, S.A., a Panamanian corporation, is a
wholly-owned subsidiary of BB Biotech AG. BB Biotech AG is a holding company
incorporated in Switzerland.
(4) This figure is based upon information set forth in Schedule 13G filed on
January 21, 1999.
(5) This figure is based upon information set forth in Schedule 13G filed on
August 20, 1999.
(6) This figure is based upon information independently obtained by us as of
October 14, 1999. The last publicly available disclosure filed with the SEC
by the stockholder was a Form 13F dated as of August 14, 1998.
(7) This figure is based upon information set forth in Schedule 13G filed on
February 5, 1999.
(8) This figure is based upon information set forth in Schedule 13G filed on
March 25, 1999.
(9) Includes 423,750 shares of our common stock that may be acquired upon the
exercise of options within 60 days of October 1, 1999 and 300 shares, in
aggregate, held in the names of Dr. Bell's three minor children. Excludes
161,250 shares obtainable through the exercise of options granted to
Dr. Bell which are not exercisable within 60 days of October 1, 1999 and
90,000 shares held in trust for Dr. Bell's children of which Dr. Bell
disclaims beneficial ownership. Dr. Bell disclaims beneficial ownership of
the shares held in the name of his minor children.
(10) Includes 123,750 shares of our common stock which may be acquired upon the
exercise of options within 60 days of October 1, 1999 and 6,200 shares, in
aggregate, held in the names of Dr. Squinto's two minor children of which
6,000 shares are in two trusts managed by his wife. Excludes 58,750 shares
obtainable through the exercise of options granted to Dr. Squinto which, are
not exercisable within 60 days of October 1, 1999. Dr. Squinto disclaims
beneficial ownership of the shares held in the name of his minor children
and the foregoing trusts.
(11) Includes 125,000 shares of our common stock which may be acquired upon the
exercise of options within 60 days of October 1, 1999 and 300 shares, in
aggregate, held in the names of Mr. Keiser's three minor children. Excludes
72,500 shares obtainable through the exercise of options granted to
Mr. Keiser, which, are not exercisable within 60 days of October 1, 1999.
Mr. Keiser disclaims beneficial ownership of the shares held in the name of
his minor children.
(12) Includes 133,750 shares of our common stock which may be acquired upon the
exercise of options granted to Dr. Matis within 60 days of October 1, 1999
and 150 shares, in aggregate, held in the names of Dr. Matis' three minor
children. Excludes 58,750 shares obtainable through the exercise of options,
granted to Dr. Matis, which, are not exercisable within 60 days of
October 1, 1999. Dr. Matis disclaims beneficial ownership of the shares held
in the name of his minor children.
(13) Includes 27,467 shares of our common stock which may be acquired upon the
exercise of options within 60 days of October 1, 1999 granted to Eileen
More. Also includes 76,406 shares owned by Oak Investment V Partners and
10,907 shares owned by Oak Investment V Affiliates, two affiliated limited
partnerships. Ms. More is a General Partner of these entities. Excludes
3,333 shares obtainable through the exercise of options granted to Ms. More
which are not exercisable within 60 days of October 1, 1999.
(14) Includes 14,967 shares of our common stock that may be acquired on the
exercise of options that are exercisable within 60 days of October 1, 1999.
Excludes 3,333 shares obtainable through the exercise of options granted to
Dr. Fried, which are not exercisable within 60 days of October 1, 1999.
(15) Excludes 45,000 shares obtainable through the exercise of options granted
to Dr. Wilkins, which are not exercisable within 60 days of October 1, 1999.
(16) Includes 12,467 shares of our common stock that may be acquired upon the
exercise of options within 60 days of October 1, 1999. Excludes 3,333 shares
obtainable through the exercise of options granted to Dr. Madri, which are
not exercisable within 60 days of October 1, 1999.
(17) Includes 167 shares of our common stock which, may be acquired upon the
exercise of options within 60 days of October 1, 1999. Excludes 3,333 shares
obtainable through the exercise of options, granted to Dr. Link, which are
not exercisable within 60 days of October 1, 1999.
(18) Includes 14,967 shares of our common stock which, may be acquired upon the
exercise of options within 60 days of October 1, 1999. Excludes 3,333 shares
obtainable through the exercise of options granted to Dr. Marks, which are
not exercisable within 60 days of October 1, 1999.
(19) Excludes 7,500 shares obtainable through the exercise of options granted to
Mr. Jackson, which are not exercisable within 60 days of October 1, 1999.
(20) Excludes 7,500 shares obtainable through the exercise of options granted to
Mr. Norby, which are not exercisable within 60 days of October 1, 1999.
(21) Excludes 7,500 shares obtainable through the exercise of options granted to
Mr. Parven, which are not exercisable within 60 days of October 1, 1999.
(22) Consists of shares beneficially owned by Drs. Bell, Fried, Link, Madri,
Marks, Matis, Motola, Squinto, and Wilkins, Messrs. Jackson, Keiser, Luke,
Norby and Parven, and Ms. More. Includes 993,335 shares of our common stock
which, may be acquired upon the exercise of options within 60 days of
October 1, 1999.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In March 1998, through its wholly-owned subsidiary Biotech Target, S.A.,
BB Biotech AG, a single institutional investor, purchased 670,000 shares of our
common stock in a private placement at $13.175 per share, aggregating
$8.8 million. At October 1, 1999, BB Biotech beneficially owned 1,824,113 shares
of common stock, or approximately 16.1% of our outstanding shares of common
stock.
In September 1997, BB Biotech, through Biotech Target, purchased 400,000
shares of Series B Preferred Stock at $25.00 per share, convertible
automatically in six months, or at the election of the holder at any time after
the date of issuance, into 935,782 shares of common stock at $10.69 per share.
The net proceeds from this private placement were approximately $9.5 million.
The conversion price represented a 3.0% premium to the closing bid of $10.38 on
the day of pricing. The Series B Preferred Stock paid a dividend of $2.25 per
share of Series B Preferred Stock on March 4, 1998. In March 1998, the Series B
Preferred Stock was converted to 935,782 shares of our common stock, and we
elected to pay the dividend on the preferred stock in shares of common stock,
aggregating 70,831 shares.
In June and October 1992, we entered into patent licensing agreements with
Oklahoma Medical Research Foundation and Yale University. The agreements provide
that we will pay to these institutions royalties based on sales of products
incorporating technology licensed thereunder and also license initiation fees,
including annual minimum royalties that increase in amount based on the status
of product development and the passage of time. Under policies of OMRF and Yale,
the individual inventors of patents are entitled to receive a percentage of the
royalties and other license fees received by the licensing institution. Some of
our founders and scientific advisors are inventors under patent and patent
applications, including Dr. Bell, one of our directors and our President and
Chief Executive Officer, Dr. Madri, one of our directors, Dr. Squinto, Senior
Vice President and Chief Technology Officer, and Dr. Rollins, Senior Director of
Project Management and Drug Development with respect to patent applications
licensed from Yale and, therefore, entitled to receive a portion of royalties
and other fees payable by us.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) FINANCIAL STATEMENTS:
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
(2) FINANCIAL STATEMENT SCHEDULES:
Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or notes thereto.
(3) EXHIBITS:
3.1 Certificate of Incorporation, as amended.*(1)
3.2 Bylaws.*(1)
4.1 Specimen Common Stock Certificate.*(1)
10.1 Employment Agreement, dated April 1, 1997, between the
Company and Dr. Leonard Bell.*(2)
10.2 Employment Agreement, dated October 22, 1997, between the
Company and David W. Keiser.*(3)
10.3 Employment Agreement, dated October 22, 1997, between the
Company and Dr. Stephen P. Squinto.*(3)
10.4 Employment Agreement, dated October 22, 1997, between the
Company and Dr. Louis A. Matis.*(3)
10.5 Employment Agreement, dated July 1993, between the Company
and Dr. James A. Wilkins, as amended.*(1)
10.6 Administrative Facility Lease, dated August 23, 1995,
between the Company and Science Park Development
Corporation.*(1)
10.7 Research and Development Facility Lease, dated August 23,
1995, between the Company and Science Park Development
Corporation.*(1)
10.8 Option Agreement, dated April 1, 1992 between the Company
and Dr. Leonard Bell.*(1)
10.9 Company's 1992 Stock Option Plan, as amended.*(4)
10.10 Company's 1992 Stock Option Plan for Outside Directors, as
amended.*(5)
10.11 Form of Investor Rights Agreement, dated December 23, 1994,
between the Company and the purchasers of the Company's
Series A Preferred Stock, as amended.*(1)
10.12 Exclusive License Agreement dated as of June 19, 1992 among
the Company, Yale University and Oklahoma Medical Research
Foundation.*(1)+
10.13 License Agreement dated as of September 30, 1992 between the
Company and Yale University, as amended July 2, 1993.*(1)+
10.14 License Agreement dated as of August 1, 1993 between the
Company and Biotechnology Research and Development
Corporation ("BRDC"), as amended as of July 1, 1995.*(1)+
10.15 License Agreement dated January 25, 1994 between the Company
and The Austin Research Institute.*(1)+
38
10.16 Exclusive Patent License Agreement dated April 21, 1994
between the Company and the National Institutes of
Health.*(1)+
10.17 License Agreement dated July 22, 1994 between the Company
and The Austin Research Institute.*(1)+
10.18 License Agreement dated as of January 10, 1995 between the
Company and Yale University.*(1)+
10.19 Advanced Technology Program ("ATP"), Cooperative Agreement
70NANB5H, National Institute of Standards and Technology,
entitled "Universal Donor Organs for Transplantation," dated
September 15, 1995.*(1)+
10.20 U.S. Department of Health and Human Services, National
Heart, Lung and Book Institute, Small Business Research
Program, Phase II Grant Application, entitled "Role of
Complement Activation in Cardiopulmonary Bypass," dated
December 14, 1994; and Notice of Grant Award dated September
21, 1995.*(3)+
10.21 Agreement to be Bound by Master Agreement dated as of August
1, 1993 between the Company and BRDC.*(1)
10.22 Research and Development Facility Lease, dated April 1,
1996, between the Company and Science Park Development
Corporation.*(6)
10.23 License Agreement dated March 27, 1996 between the Company
and Medical Research Council.*(6)+
10.24 License Agreement dated May 8, 1996 between the Company and
Enzon, Inc.*(6)+
10.25 Stock Purchase Agreement dated September 8, 1997 by and
between the Company and Biotech Target S.A. *(7)+
10.26 Stock Purchase Agreement dated March 4, 1998 by and between
the Company and Biotech Target S.A. *(7)+
10.27 Asset Purchase Agreement dated as of February 9, 1999
between the Company and United States Surgical
Corporation.++
10.28 Collaboration Agreement dated January 25, 1999 between the
Company and The Procter & Gamble Company, as amended.++
10.29 Letter agreement dated September 14, 1999 between the
Company and Leonard Bell.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
99.1 Risk Factors.
- ------------------------
* Previously filed
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-00202).
(2) Incorporated by reference to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (Reg. No. 333-19905) filed on April 4, 1997.
(3) Incorporated by reference to the Company's Annual report on Form 10-K for
the fiscal year ended July 31, 1997.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-8 (Reg. No. 333-71879) filed on February 5, 1999.
39
(5) Incorporated by reference to the Company's Registration Statement on
Form S-8 (Reg. No. 333-71985) filed on February 8, 1999.
(6) Incorporated by reference to the Company's Annual report on Form 10-K for
the fiscal year ended July 31, 1996.
(7) Incorporated by reference to the Company's Annual report on Form 10-K for
the fiscal year ended July 31, 1998.
+ Confidential treatment was granted for portions of such document.
++ A request for confidential treatment was filed for portions of such document.
Confidential portions have been omitted and filed separately with the
Commission as required by Rule 24b-2.
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated May 25, 1999 relating to the election of
Alvin S. Parven to the Company's Board of Directors.
Current Report on Form 8-K dated September 24, 1999 relating to the election
of Jerry T. Jackson and R. Douglas Norby to the Company's Board of Directors.
(C) EXHIBITS:
See (a) (3) above.
(D) FINANCIAL STATEMENT SCHEDULES:
See (a) (2) above.
40
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.
ALEXION PHARMACEUTICALS, INC.
By: /s/ LEONARD BELL
-----------------------------------------
Leonard Bell, M.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER,
SECRETARY AND TREASURER
By: /s/ DAVID W. KEISER
-----------------------------------------
David W. Keiser
EXECUTIVE VICE PRESIDENT AND CHIEF
OPERATING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
President, Chief Executive
/s/ LEONARD BELL Officer, Secretary, Treasurer
------------------------------------------- and Director (principal October 18, 1999
Leonard Bell, M.D executive officer)
/s/ DAVID W. KEISER Executive Vice President and
------------------------------------------- Chief Operating Officer October 18, 1999
David W. Keiser (principal financial officer)
/s/ BARRY P. LUKE Vice President of Finance and
------------------------------------------- Administration (principal October 18, 1999
Barry P. Luke accounting officer)
/s/ JOHN H. FRIED
------------------------------------------- Chairman of the Board of October 18, 1999
John H. Fried, Ph.D. Directors
------------------------------------------- Director
Jerry T. Jackson
/s/ MAX LINK
------------------------------------------- Director October 18, 1999
Max Link, Ph.D.
41
/s/ JOSEPH A. MADRI
------------------------------------------- Director October 18, 1999
Joseph A. Madri, Ph.D., M.D.
/s/ LEONARD MARKS
------------------------------------------- Director October 18, 1999
Leonard Marks, Jr., Ph.D.
/s/ EILEEN M. MORE
------------------------------------------- Director October 18, 1999
Eileen M. More
/s/ R. DOUGLAS NORBY
------------------------------------------- Director October 18, 1999
R. Douglas Norby
/s/ ALVIN S. PARVEN
------------------------------------------- Director October 18, 1999
Alvin S. Parven
42
ALEXION PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of July 31, 1999 and 1998.... F-3
Consolidated Statements of Operations for the Years Ended
July 31, 1999, 1998 and 1997.............................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended July 31, 1999, 1998, and 1997................. F-5
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1999, 1998 and 1997.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Alexion Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Alexion
Pharmaceuticals, Inc. (a Delaware corporation) and subsidiary as of July 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended July 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Alexion Pharmaceuticals, Inc. and subsidiary as of July 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended July 31, 1999, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Hartford, Connecticut
August 27, 1999
F-2
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
JULY 31,
-------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 24,238 $ 31,509
Marketable securities..................................... 4,090 5,985
Reimbursable contract costs:
Billed.................................................. 4,577 --
Unbilled................................................ 2,285 137
Prepaid expenses.......................................... 472 209
-------- --------
Total current assets.................................. 35,662 37,840
PROPERTY, PLANT, AND EQUIPMENT, net......................... 7,413 2,357
SECURITY DEPOSITS AND OTHER ASSETS.......................... 1,299 1,888
-------- --------
Total assets.......................................... $ 44,374 $ 42,085
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................... $ 368 $ 368
Accounts payable.......................................... 3,544 810
Accrued expenses.......................................... 2,328 818
Deferred revenue.......................................... 450 67
-------- --------
Total current liabilities............................. 6,690 2,063
-------- --------
NOTES PAYABLE, less current portion included above.......... 4,383 832
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 1, 7, 9 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000 shares
authorized; none issued at July 31, 1999 and 1998....... -- --
Common stock $.0001 par value; 25,000 shares authorized;
11,304 and 11,237 shares issued at July 31, 1999 and
1998, respectively...................................... 1 1
Additional paid-in capital................................ 80,287 79,781
Accumulated deficit....................................... (46,987) (40,592)
Treasury stock, at cost, 12 shares........................ -- --
-------- --------
Total stockholders' equity............................ 33,301 39,190
-------- --------
Total liabilities and stockholders' equity............ $ 44,374 $ 42,085
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
FOR THE YEARS
ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
CONTRACT RESEARCH REVENUES.................................. $18,754 $ 5,037 $ 3,811
------- ------- -------
OPERATING EXPENSES:
Research and development.................................. 23,710 12,323 9,079
General and administrative................................ 2,953 2,666 2,827
------- ------- -------
Total operating expenses................................ 26,663 14,989 11,906
------- ------- -------
OPERATING LOSS.............................................. (7,909) (9,952) (8,095)
OTHER INCOME, net........................................... 1,514 2,087 843
------- ------- -------
Net loss................................................ (6,395) (7,865) (7,252)
PREFERRED STOCK DIVIDENDS................................... -- (900) --
------- ------- -------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. $(6,395) $(8,765) $(7,252)
======= ======= =======
NET LOSS PER COMMON SHARE--
BASIC AND DILUTED (NOTE 2)................................ $ (0.57) $ (0.87) $ (0.97)
======= ======= =======
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE................................. 11,265 10,056 7,451
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands)
CONVERTIBLE TREASURY STOCK,
PREFERRED STOCK COMMON STOCK ADDITIONAL AT COST
------------------- ------------------- PAID-IN ACCUMULATED -------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
-------- -------- -------- -------- ---------- ------------ -------- --------
BALANCE, July 31, 1996............. -- $ -- 7,335 $ 1 $42,859 $(24,575) 12 $ --
Issuance of common stock, net of
issuance costs of $814......... -- -- 1,450 -- 10,424 -- -- --
Issuance of common stock from
exercise of warrants........... -- -- 38 -- 286 -- -- --
Issuance of common stock from
exercise of stock options...... -- -- 35 -- 83 -- -- --
Net change in unrealized gains on
marketable securities.......... -- -- -- -- 20 -- -- --
Net loss......................... -- -- -- -- -- (7,252) -- --
-------- ------- ------ ---- ------- -------- --- ----
BALANCE, July 31, 1997............. -- -- 8,858 1 53,672 (31,827) 12 --
Issuance of Series B convertible
preferred stock, net of
issuance
costs of $493.................. 400,000 -- -- -- 9,507 -- -- --
Issuance of common stock in
payment of preferred stock
dividend....................... -- -- 71 -- 900 (900) -- --
Conversion of Series B
convertible preferred stock
into
common stock................... (400,000) -- 936 -- -- -- -- --
Issuance of common stock, net of
issuance costs of $49.......... -- -- 837 -- 11,779 -- -- --
Issuance of common stock from
exercise of warrants........... -- -- 513 -- 3,858 -- -- --
Issuance of common stock from
exercise of stock options...... -- -- 22 -- 67 -- -- --
Net change in unrealized gains on
marketable securities.......... -- -- -- -- (2) -- -- --
Net loss......................... -- -- -- -- -- (7,865) -- --
-------- ------- ------ ---- ------- -------- --- ----
BALANCE, July 31, 1998............. -- -- 11,237 1 79,781 (40,592) 12 --
Issuance of common stock from
exercise of stock options...... -- -- 67 -- 383 -- -- --
Compensation expense, related to
grant of stock options......... -- -- -- -- 132 -- -- --
Net change in unrealized gains on
marketable securities.......... -- -- -- -- (9) -- -- --
Net loss......................... -- -- -- -- -- (6,395) -- --
-------- ------- ------ ---- ------- -------- --- ----
BALANCE, July 31, 1999............. -- $ -- 11,304 $ 1 $80,287 $(46,987) 12 $ --
======== ======= ====== ==== ======= ======== === ====
TOTAL
STOCKHOLDERS'
EQUITY
-------------
BALANCE, July 31, 1996............. $18,285
Issuance of common stock, net of
issuance costs of $814......... 10,424
Issuance of common stock from
exercise of warrants........... 286
Issuance of common stock from
exercise of stock options...... 83
Net change in unrealized gains on
marketable securities.......... 20
Net loss......................... (7,252)
-------
BALANCE, July 31, 1997............. 21,846
Issuance of Series B convertible
preferred stock, net of
issuance
costs of $493.................. 9,507
Issuance of common stock in
payment of preferred stock
dividend....................... --
Conversion of Series B
convertible preferred stock
into
common stock................... --
Issuance of common stock, net of
issuance costs of $49.......... 11,779
Issuance of common stock from
exercise of warrants........... 3,858
Issuance of common stock from
exercise of stock options...... 67
Net change in unrealized gains on
marketable securities.......... (2)
Net loss......................... (7,865)
-------
BALANCE, July 31, 1998............. 39,190
Issuance of common stock from
exercise of stock options...... 383
Compensation expense, related to
grant of stock options......... 132
Net change in unrealized gains on
marketable securities.......... (9)
Net loss......................... (6,395)
-------
BALANCE, July 31, 1999............. $33,301
=======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (6,395) $ (7,865) $ (7,252)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 889 598 698
Compensation expense related to grant of stock
options............................................. 132 -- --
Change in assets and liabilities--
Reimbursable contract costs......................... (6,725) (137) --
Prepaid expenses.................................... (263) 23 235
Accounts payable.................................... 2,734 82 447
Accrued expenses.................................... 1,510 (384) 801
Deferred revenue.................................... 383 (279) (653)
-------- -------- --------
Net cash used in operating activities........... (7,735) (7,962) (5,724)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from marketable securities, net.................. 1,895 20 3,119
Purchases of property, plant, and equipment............... (1,912) (2,057) (749)
-------- -------- --------
Net cash (used in) provided by investing
activities.................................... (17) (2,037) 2,370
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred and common
stock................................................... 383 25,211 10,793
Repayments of capital lease obligations................... -- (8) (29)
Borrowings under notes payable............................ -- 1,200 --
Repayments of notes payable............................... (369) (130) (321)
Security deposits and other............................... 467 (1,508) 163
-------- -------- --------
Net cash provided by financing activities....... 481 24,765 10,606
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (7,271) 14,766 7,252
CASH AND CASH EQUIVALENTS, beginning of period.............. 31,509 16,743 9,491
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 24,238 $ 31,509 $ 16,743
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense............................ $ 188 $ 42 $ 47
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Fixed assets acquired pursuant to seller financing........ $ 3,920 $ -- $ --
======== ======== ========
Preferred stock dividends................................. $ -- $ 900 $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Alexion Pharmaceuticals, Inc. ("Alexion" or the "Company") was organized in
1992 and is a company engaged in the development of proprietary products for the
treatment of cardiovascular, autoimmune and neurologic diseases and disorders.
The Company is currently conducting Phase II clinical trials for its two lead C5
Inhibitor product candidates, 5G1.1-SC and 5G1.1. The Company is also developing
Apogen immunotherapeutic products affecting disease-causing T-cells. In
addition, the Company is developing therapies to permit transplantation of cells
from other species into humans known as xenotransplantation.
The Company has incurred consolidated losses since inception and has made no
product sales to date.
The Company will continue to need additional financing to obtain regulatory
approvals for its product candidates, fund operating losses, and, if deemed
appropriate, establish manufacturing, sales, marketing and distribution
capabilities. In addition, the Company operates in an environment of rapid
changes in technology, FDA guidelines and regulations, healthcare regulations
and competition from pharmaceutical and biotechnology companies and is dependent
upon the services of its employees and other third parties.
The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its products.
The Company will seek to raise necessary funds through public or private equity
or debt financings, bank loans, collaborative or other arrangements with
corporate sources, or through other sources of financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION--
The accompanying consolidated financial statements include Alexion
Pharmaceuticals, Inc. and its wholly-owned subsidiary Columbus Farming
Corporation ("Columbus"). Columbus was formed on February 9, 1999 to acquire
certain manufacturing assets from United States Surgical Corporation ("US
Surgical") (See Notes 3 and 6). All significant inter-company balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS--
Cash and cash equivalents are stated at cost, which approximates market, and
include short-term highly liquid investments with original maturities of less
than three months.
MARKETABLE SECURITIES--
The Company invests in marketable securities of highly rated financial
institutions and investment-grade debt instruments and limits the amount of
credit exposure with any one entity.
The Company has classified its marketable securities as "available for sale"
and, accordingly, carries such securities at aggregate fair value. Unrealized
gains or losses are included in stockholders' equity as a component of
additional paid-in capital. At July 31, 1999, the Company's marketable
securities had a
F-7
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
maximum maturity of less than two years with an average of approximately six
months. The following is a summary of marketable securities at July 31, 1999 and
1998 (dollars in thousands):
AMORTIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- -------------- --------
Federal agency obligations................... $2,088 $(9) $2,079
Corporate bonds.............................. 2,006 5 2,011
------ --- ------
Total marketable securities at July 31,
1999..................................... $4,094 $(4) $4,090
====== === ======
U.S. government obligations.................. $ 500 $-- $ 500
Federal agency obligations................... 2,000 -- 2,000
Corporate bonds.............................. 3,480 5 3,485
------ --- ------
Total marketable securities at July 31,
1998 $5,980 $ 5 $5,985
====== === ======
PROPERTY, PLANT, AND EQUIPMENT--
Property, plant, and equipment is recorded at cost and is depreciated over
the estimated useful lives of the assets involved. Depreciation commences at the
time the assets are placed in service and is computed using the straight-line
method over the estimated useful lives of the assets (see Note 3). Maintenance
and repairs are charged to expense when incurred.
ASSET ESTIMATED USEFUL LIFE
- ----- ---------------------
Building and building improvements........................ 15 years
Laboratory equipment...................................... 5 years
Office equipment.......................................... 3 years
Furniture................................................. 3 years
LONG-LIVED ASSETS--
The Company accounts for its investments in long-lived assets in accordance
with Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
(SFAS 121). SFAS 121 requires a company to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company has reviewed its
long-lived assets and determined that no impairments exist.
REVENUE RECOGNITION--
Contract research revenues recorded by the Company consist of research and
development support payments, license fees, and milestone payments under
collaborations with third parties and amounts received under various government
grants.
Research and development support revenues are recognized as the related work
and expenses are incurred under the terms of the contracts for development
activities. Revenues derived from the achievement of milestones are recognized
when the milestone is achieved. Non-refundable license fees received in
F-8
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
exchange for specific rights to the Company's technologies, research, potential
products and markets are recognized as revenues as earned in accordance with the
terms of the contracts.
Unbilled reimbursable contract costs as shown on the accompanying
consolidated balance sheets represent reimbursable costs incurred in connection
with research contracts which have not yet been billed. The Company bills these
costs and recognizes the costs and related revenues in accordance with the terms
of the contracts.
Deferred revenue results from cash received in advance of revenue
recognition under research and development contracts (see Note 8).
RESEARCH AND DEVELOPMENT EXPENSES--
Research and development costs are expensed in the period incurred.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME--
In July 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income (loss) and its components in a full set of
general purpose financial statements. The objective of the statement is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners ("comprehensive income (loss)").
The impact of adoption of this statement did not have a significant effect
on the Company's financial position and results of operations, as there was no
significant difference in comprehensive income (loss) and net loss represented a
gain (loss) on marketable securities of $(9,000), $(2,000), and $20,000 for the
years ended July 31, 1999, 1998 and 1997, respectively.
NET LOSS PER COMMON SHARE--
The Company computes and presents net loss per common share in accordance
with SFAS No. 128, "Earnings Per Share." There is no difference in basic and
diluted net loss per common share as the effect of stock options and warrants is
anti-dilutive for all periods presented. These outstanding stock options and
warrants entitled holders to purchase 2,568,587, 1,947,986, and 2,410,953 shares
of common stock at July 31, 1999, 1998 and 1997, respectively.
F-9
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT, AND EQUIPMENT:
A summary of equipment is as follows (dollars in thousand):
JULY 31,
-------------------
1999 1998
------- -------
Land...................................................... $ 364 $ --
Building and building improvements........................ 3,080 --
Laboratory equipment...................................... 6,013 4,523
Office equipment.......................................... 648 352
Furniture................................................. 695 104
Equipment under capital leases............................ -- 378
------- -------
10,800 5,357
Less--Accumulated depreciation and amortization........... (3,387) (3,000)
------- -------
$ 7,413 $ 2,357
======= =======
During 1999, the Company acquired land, building, and additional laboratory
equipment at a total cost of approximately $3.9 million financed with a note
payable to US Surgical (see Note 6).
4. SECURITY DEPOSITS AND OTHER:
A summary of security deposits and other assets is as follows (dollars in
thousands):
JULY 31,
-------------------
1999 1998
-------- --------
Restricted cash held as collateral for note payable (see
Note 6)................................................... $ 955 $1,500
Other....................................................... 344 388
------ ------
$1,299 $1,888
====== ======
5. ACCRUED EXPENSES:
A summary of accrued expenses is as follows (dollars in thousands):
JULY 31,
-------------------
1999 1998
-------- --------
Research and development expenses........................... $1,333 $ 159
Payroll and employee benefits............................... 617 477
Professional fees........................................... 91 77
Other....................................................... 287 105
------ ------
$2,328 $ 818
====== ======
F-10
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE:
A summary of notes payable is as follows (dollars in thousands):
1999 1998
-------- --------
Term loan payable to a bank requiring quarterly principal
payments of $92 payable through August 2001 bearing
interest at a variable rate which is repriced quarterly.
The rate as of July 31, 1999 was 7.1%. The term loan
agreement requires the Company to maintain a restricted
cash balance equal to 115% of the outstanding loan balance
plus accrued interest in an interest bearing account as
collateral for the note................................... $ 831 $1,200
Term note payable to US Surgical bearing interest at 6% per
annum, payable quarterly. The principal balance under the
note matures in May 2005. The note payable is secured by
certain manufacturing assets of Columbus.................. 3,920 --
------ ------
4,751 1,200
Less--Current portion....................................... 368 368
------ ------
Total long--term...................................... $4,383 $ 832
====== ======
Future repayments of the notes payable are scheduled as follows (dollars in
thousands):
YEAR ENDING JULY 31,
- --------------------
2000.................................................... $ 368
2001.................................................... 463
2005.................................................... 3,920
------
$4,751
======
7. LICENSE AND RESEARCH & DEVELOPMENT AGREEMENTS:
The Company has entered into a number of license and research & development
agreements since its inception. These agreements have been made with various
research institutions, universities, and government agencies in order to advance
and obtain technologies management believes important to the Company's overall
business strategy.
License agreements generally provide for an initial fee followed by annual
minimum royalty payments. Additionally, certain agreements call for future
payments upon the attainment of agreed to milestones, such as, but not limited
to, Investigational New Drug (IND) application or Product License Approval
(PLA). These agreements require minimum royalty payments based upon sales
developed from the applicable technologies, if any. The Company's policy is to
amortize capitalized licensed technology over a seven year period or over the
license term, whichever is shorter, using the straight-line method.
Research & development agreements generally provide for the Company to fund
future project research for one to four years. Based upon these agreements, the
Company may obtain exclusive and non-exclusive rights and options to the
applicable technologies developed as a result of the applicable research. The
Company's policy is to expense research and development payments as incurred.
F-11
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LICENSE AND RESEARCH & DEVELOPMENT AGREEMENTS: (CONTINUED)
The minimum payments (assuming non-termination of the above agreements) as
of July 31, 1999, for each of the next five years are as follows (dollars in
thousands):
RESEARCH
LICENSE DEVELOPMENT
YEAR ENDING JULY 31, AGREEMENTS AGREEMENTS
- -------------------- ---------- -----------
2000.............................................. $296 $50
2001.............................................. 296 50
2002.............................................. 389 50
2003.............................................. 389 50
2004.............................................. 274 --
Should the Company achieve certain milestones related to product development
and product license applications and approvals, additional payments would be
required if the Company elects to continue and maintain its licenses. The
agreements also require the Company to fund certain costs associated with the
filing of patent applications.
8. CONTRACT RESEARCH REVENUES:
During the three years ended July 31, 1999, the Company recorded contract
research revenues from the Commerce Department's National Institute of Standards
and Technology (NIST) and National Institutes of Health (NIH).
In July 1995, the Company entered into a collaborative research and
development agreement in connection with its xenotransplantation program with US
Surgical. In September 1997, the Company modified its research and development
agreement with US Surgical. As part of the modification agreement, US Surgical
purchased 166,945 shares of common stock for $3.0 million. In February 1999, as
part of the termination of this agreement, the Company purchased certain
manufacturing assets and effected the return of all technology rights of its
xenotransplantation program from US Surgical. The Company financed the asset
purchase with a $3.9 million note payable (see Note 6).
In December 1996, the Company entered into a license and collaborative
research agreement with Genetic Therapy Inc. ("GTI/Novartis"), a subsidiary of
Novartis, Inc., relating to the Company's gene transfer technology. In
October 1998, in view of Alexion's increased focus on the advanced clinical
development of its anti-inflammatory drug candidates and GTI/Novartis' announced
restructuring and reorganization, the Company and GTI/Novartis agreed to
discontinue the collaborative gene therapy program.
In August 1995, the Company was awarded a three-year agreement, for
approximately $2 million, from NIST to fund a xenotransplantation project. In
November 1997, the Company and US Surgical were awarded a three-year,
$2 million cooperative agreement from NIST to fund a joint xenotransplantation
project. This agreement was modified into a single entity agreement in
February 1999. In October 1998, the Company was awarded another three-year
$2 million agreement from NIST to fund a xenotransplantation project.
In January 1999, the Company and Procter & Gamble Pharmaceuticals Inc.
("P&G") entered into an exclusive collaboration to develop and commercialize
5G1.1-SC, one of the Company's lead product candidates. Under this
collaboration, the Company will initially pursue the development of 5G1.1-SC for
F-12
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONTRACT RESEARCH REVENUES: (CONTINUED)
the treatment of inflammation caused by cardiopulmonary bypass surgery, heart
attack, and angioplasty. P&G has agreed to fund all clinical development and
manufacturing costs relating to 5G1.1-SC for these indications. Additionally,
P&G has agreed to pay the Company up to $95 million in payments, which include a
non-refundable upfront license fee, milestone payments, and research and
development support payments. The Company will also receive royalties on
worldwide sales of 5G1.1-SC, if any, for all indications. The Company also has a
preferred position relative to third-party manufacturers to manufacture 5G1.1-SC
worldwide. The Company shares co-promotion rights with P&G to sell, market and
distribute 5G1.1-SC in the United States, and has granted P&G the exclusive
rights to sell, market and distribute 5G1.1-SC outside of the United States.
Through July 31, 1999, the Company recorded revenues of $17.8 million from P&G,
including receiving a non-refundable upfront license fee of $10 million and
$7.8 million for research and development support expenses.
A summary of revenues generated from contract research collaboration and
grant awards is as follows for the years ended July 31, (dollars in thousands):
COLLABORATION/GRANT AWARDS 1999 1998 1997
- -------------------------- -------- -------- --------
P&G................................................ $17,753 $ -- $ --
NIST and NIH....................................... 834 857 924
US Surgical........................................ -- 3,780 1,804
GTI/Novartis....................................... 167 400 1,083
------- ------ ------
$18,754 $5,037 $3,811
======= ====== ======
9. COMMITMENTS:
The Company has entered into three-year and five-year employment agreements
with its executives. These agreements provide that these individuals will
receive aggregate annual base salaries of approximately $827,000 as of July 31,
1999. These individuals may also receive discretionary bonus awards, as
determined by the Board of Directors.
As of July 31, 1999, the Company leases its administrative and research &
development facilities under three operating leases which expired in
December 1997, June 1998, and March 1999. The Company is currently continuing
the leases on a month-to-month basis while discussions for new lease
arrangements continue. The Company believes it will reach an agreement regarding
such facilities on commercially adequate terms.
Lease expense for the Company's facilities was $420,000, $415,000 and
$216,000 for the years ended July 31, 1999, 1998, and 1997, respectively.
Future minimum annual rental payments as of July 31, 1999, under other
noncancellable operating leases (primarily for equipment) are approximately
$36,000, $34,000, $30,000, $30,000, and $30,000 for the five years ended
July 31, 2004, respectively.
F-13
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK AND PREFERRED STOCK:
FISCAL 1997 PRIVATE PLACEMENT--
In July 1997, the Company completed a private placement offering for
1,450,000 shares of common stock, resulting in net proceeds of approximately
$10.4 million.
FISCAL 1998 PRIVATE PLACEMENTS--
In September 1997, the Company completed the private placement of 400,000
shares of Series B convertible preferred stock for aggregate consideration of
$10 million to a single institutional investor, Biotech Target, S.A., a
wholly-owned subsidiary of BB Biotech AG. The net proceeds to the Company were
approximately $9.5 million. The investor was entitled to a dividend of $2.25 per
share of Series B convertible preferred stock if this stock was held through
March 4, 1998. In March 1998 the investor converted the preferred stock into
935,782 shares of common stock and dividends of $900,000 were paid by the
delivery of an additional 70,831 shares of the Company's common stock. Also, in
March 1998, Biotech Target S.A. purchased an additional 670,000 shares of common
stock for aggregate consideration of approximately $8.8 million.
In September 1997, the Company sold 166,945 shares of its common stock to US
Surgical for aggregate consideration of $3.0 million. The sale of common stock
was made in connection with the modification of the joint development agreement
between the Company and US Surgical.
11. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS--
Under the Company's 1992 Stock Option Plan, as amended, incentive and
nonqualified stock options may be granted for up to a maximum of 3.1 million
shares of common stock to directors, officers, key employees and consultants of
the Company. Under the Company's 1992 Stock Option Plan for Outside Directors,
as amended, the Company has registered an additional 200,000 shares of common
stock for issuance upon exercise of options granted under the plan. Options
generally become exercisable in equal proportions over three to four years and
remain exercisable for up to ten years after the grant date, subject to certain
conditions.
Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation (SFAS 123) requires the measurement of the fair value
of stock options or warrants to be included in the statement of income or
disclosed in the notes to financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS 123. The Company has computed the pro forma disclosure
required under SFAS 123 for options granted using the Black-Scholes option
pricing model prescribed by SFAS 123. The weighted average assumptions used are
as follows:
1999 1998 1997
-------- -------- --------
Risk free interest rate........................... 5.00% 5.25% 6.25%
Expected dividend yield........................... 0% 0% 0%
Expected lives.................................... 5 years 5 years 5 years
Expected volatility............................... 65% 61% 53%
F-14
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS: (CONTINUED)
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net loss and pro forma net
loss per common share would have been increased to the pro forma amounts
indicated below (dollars in thousands, except per share amounts):
1999 1998 1997
-------- -------- --------
Net loss:
As reported..................................... $(6,395) $(8,765) $(7,252)
Pro forma....................................... (8,419) (9,958) (7,815)
Net loss per common share:
As reported..................................... $ (0.57) $ (0.87) $ (0.97)
Pro forma....................................... (0.74) (0.99) (1.05)
A summary of the status of the Company's stock option plans at July 31,
1999, 1998 and 1997 and changes during the years then ended is presented in the
table and narrative below:
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding at August 1.................. 1,727,986 $7.40 1,484,284 $ 6.63 1,207,334 $ 5.46
Granted................................ 780,750 9.64 279,750 $11.31 337,250 $10.37
Exercised.............................. (66,587) 5.75 (21,864) $ 3.16 (34,937) $ 2.38
Cancelled.............................. (93,562) 9.73 (14,184) $11.29 (25,363) $ 6.19
--------- ----- --------- ------ --------- ------
Outstanding at July 31................... 2,348,587 $8.10 1,727,986 $ 7.40 1,484,284 $ 6.63
========= ===== ========= ====== ========= ======
Options exercisable at July 31........... 1,238,398 $6.46 883,063 $ 5.73 574,690 $ 4.98
Weighted-average fair value of options
granted during the year................ $6.52 $ 6.42 $ 5.40
During fiscal 1999, options to purchase 513,500 shares of common stock were
granted at an exercise price equal to the fair value of the stock at the date of
grant. The weighted average exercise price of these options was $9.98 per share.
The weighted average fair value of these options at the date of grant was $5.89
per option. In addition, options to purchase 267,250 shares of common stock were
granted subject to shareholders' approving an increase in total shares available
to be granted under the plan. These options were granted at an exercise price of
$9.00 per share which was equal to the fair value of the common stock at the
date of grant. The exercise price of these options was less than the fair value
of the stock at the date of shareholder approval. Accordingly, the Company is
recording compensation expense based upon this difference over the vesting
period associated with these options. Compensation expense associated with these
options was $132,000 for the year ended July 31, 1999. Aggregate compensation
expense of approximately $600,000 associated with these option grants is
expected to be recognized over the next three years. The weighted average fair
value of these options at the date of shareholder approval was $7.73 per option.
F-15
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS: (CONTINUED)
The following table presents weighted average price and life information
about significant option groups outstanding at July 31, 1999:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- --------------------- ----------- ----------- -------- ----------- --------
$2.37-$2.50 555,448 5.4 $ 2.38 536,698 $ 2.38
$2.51-$8.24 166,000 3.5 7.47 152,250 7.54
$8.25-$10.50 1,359,839 8.4 9.69 512,552 9.95
$10.51-$13.25 267,300 8.7 12.25 36,898 12.87
--------- --- ------ --------- ------
2,348,587 7.4 $ 8.10 1,238,398 $ 6.46
========= === ====== ========= ======
WARRANTS--
In connection with the Company's initial public offering, the Company sold
to its underwriter, for nominal consideration, warrants to purchase 220,000
shares of common stock. These warrants are exercisable at a price of $9.90 per
share for a period of forty-two (42) months commencing on August 27, 1997. None
of these warrants have been exercised as of July 31, 1999.
12. RIGHTS TO PURCHASE PREFERRED STOCK:
In February 1997, the Board of Directors of the Company declared a dividend
of one preferred stock purchase right for each outstanding share of common
stock. Under certain conditions, each right may be exercised to purchase one
one-hundredth of a share of a new series of preferred stock at an exercise price
of $75.00, subject to adjustment. The rights may be exercised only after a
public announcement that a party acquired 20% or more of the Company's common
stock or after commencement or public announcement to make a tender offer for
20% or more of the Company's common stock. The rights, which do not have voting
rights, expire on March 6, 2002, and may be redeemed by the Company at a price
of $0.01 per right at any time prior to their expiration or the acquisition of
20% or more of the Company's stock. The preferred stock purchasable upon
exercise of the rights will have a minimum preferential dividend of $10.00 per
year, but will be entitled to receive, in the aggregate, a dividend of 100 times
the dividend declared on a share of common stock. In the event of a liquidation,
the holders of the shares of preferred stock will be entitled to receive a
minimum liquidation payment of $100 per share, but will be entitled to receive
an aggregate liquidation payment equal to 100 times the payment to be made per
share of common stock.
In the event that the Company is acquired in a merger, other business
combination transaction, or 50% or more of its assets, cashflow, or earning
power are sold, proper provision shall be made so that each holder of a right
shall have the right to receive, upon exercise thereof at the then current
exercise price, that number of shares of common stock of the surviving company
which at the time of such transaction would have a market value of two times the
exercise price of the right.
F-16
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 401(K) PLAN:
The Company has a 401(k) plan. Under the plan, employees may contribute up
to 15 percent of their compensation with a maximum of $10,000 per employee in
calendar year 1999. Effective January 1998, Company matching contributions of
$0.50 for each dollar deferred (up to the first 6% deferred) have been
authorized by the Board of Directors. The Company had matching contributions of
approximately $85,000, $48,000 and $31,000 for the years ended July 31, 1999,
1998 and 1997, respectively.
14. INCOME TAXES:
At July 31, 1999, the Company has available for federal tax reporting
purposes, net operating loss carryforwards of approximately $44.1 million which
expire through 2019. The Company also has research and development credit
carryovers of approximately $2.2 million which begin to expire commencing in
fiscal 2008. The Tax Reform Act of 1986 contains certain provisions that may
limit the Company's ability to utilize net operating loss and tax credit
carryforwards in any given year if certain events occur, including cumulative
changes in ownership interests in excess of 50% over a three-year period.
Accordingly there can be no assurance that the Company's ability to utilize its
existing net operating loss and tax credit carryforwards in future periods will
not be limited as a result of the effect of changes in ownership in excess of
50% over a three-year period.
The Company follows SFAS No. 109, "Accounting for Income Taxes." This
statement requires that deferred income tax assets and liabilities reflect the
impact of "temporary differences" between the amount of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws and
regulations.
The components of deferred income taxes as of July 31, 1999 are as follows
(dollars in thousands):
Deferred tax assets:
Net operating loss carryforwards.......................... $16,801
Tax credit carryforwards.................................. 2,218
Other..................................................... 144
-------
Total deferred tax assets................................... 19,163
Less: Valuation allowance for deferred tax assets........... 19,163
-------
Net deferred tax assets..................................... $ --
=======
The Company has not yet achieved profitable operations. Accordingly,
management believes the tax benefits as of July 31, 1999 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire deferred tax asset.
F-17