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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-K
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999.
AUTOIMMUNE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-348-9062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
128 Spring Street, Lexington, MA 02421
(Address of principal executive (Zip Code)
offices)
(781) 860-0710
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which
registered.
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On March 13, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $62,089,908.41. As of March 13, 2000,
there were outstanding 16,759,622 shares of the registrant's Common Stock,
$0.01 par value.
Documents Incorporated by Reference
Portions of the Company's definitive Proxy Statement for its annual meeting
of shareholders which the Company intends to file within 120 days after the
end of the Company's fiscal year ended December 31, 1999 are incorporated by
reference into Part III hereof as provided therein.
PART I
Item 1. Business.
Overview
AutoImmune Inc. (the "Company" or "AutoImmune") is a biopharmaceutical
company developing a new class of therapeutics for the treatment of autoimmune
and other cell-mediated inflammatory diseases and conditions. The Company
believes, based on preclinical and clinical data, that its proprietary
approach to therapy can induce tissue-specific immunosuppression without
toxicity or significant side effects. Additional clinical and commercial
advantages of this approach include the possibility of administering products
orally (the preferred method of treating chronic diseases) and the potential
for application to a variety of inflammatory diseases and conditions.
All of the Company's products are based upon the principles of mucosal
tolerance. When proteins are administered by a mucosal route (e.g., oral,
nasal, or by aerosol to the lungs) the body's natural immune system mechanisms
suppress the response that would otherwise arise against a foreign substance.
This immune suppression can be directed toward a specific tissue through
appropriate selection and dosing of the protein in a mucosally delivered
product.
AutoImmune believes it is the leading company developing therapeutics based
upon the concepts of mucosal tolerance. The status of each of AutoImmune's
principal products is as follows:
Colloral(R)--AutoImmune has completed nine human clinical trials of Colloral
involving over 1,900 patients to investigate its use in treating rheumatoid
arthritis. The results of the Phase III trial were announced in September
1999. The drug was demonstrated to be very safe, but did not meet the primary
endpoints specified in the protocol. Consistent with the data seen in previous
trials, substantial improvements from baseline were noted in the Colloral
treated group for each of the primary clinical efficacy measures.
Unfortunately, the size of the placebo response was much greater than
previously observed. AutoImmune subsequently ceased efforts to obtain approval
of Colloral as a pharmaceutical product. The Company recently completed a
market analysis of the opportunity for Colloral as a nutraceutical product.
AutoImmune is currently seeking a marketing/distribution partner for Colloral
to help realize this potential.
AI 401--Under a non-exclusive license for research purposes only, Eli Lilly
and Company ("Lilly") is supporting Phase II clinical trials to demonstrate
human proof of principle for AI 401 in patients newly diagnosed with Type 1
diabetes. The results of these studies are expected to be made public during
calendar year 2000. In addition, Lilly is providing AI 401 for the Diabetes
Prevention Trial (DPT-1) being conducted by the National Institute for Health
("NIH"). The oral arm of this trial, which is expected to enroll 490 patients,
is designed to determine whether AI 401 can delay or prevent the clinical
onset of Type 1 diabetes. Patient enrollment in the oral arm of DPT-1 is
approximately 50% complete.
AI 502--In January 1997, the Company initiated a clinical trial of
tolerizing peptides for the prevention of organ transplant rejection. The open
label study was designed to assess the safety and immunological effects of
oral peptides in laboratory measures of chronic transplant rejections.
Preliminary analysis of the data revealed no safety issues related to
administration of the peptides. Background variability in the laboratory
measures made interpretation of efficacy results impossible. The final report
on this trial should be available within the next four months. The Company has
suspended development efforts on this product.
AI 301--The development of AI 301 for the treatment of uveitis, an
inflammatory disease of the eye, has been suspended as a result of
difficulties encountered in producing the recombinant human protein.
Products for Multiple Sclerosis--The Company has entered into an exclusive
agreement with Teva Pharmaceutical Industries, Ltd. ("Teva"). This agreement
covers the development by Teva of an oral formulation of Copaxone(R)
(glatiramer acetate), Teva's currently available injectable drug for multiple
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sclerosis. The new formulation would use the Company's proprietary technology
for oral tolerance and entered efficacy trials for marketing approval during
March 2000. The results of these trials are expected to be available early in
calendar year 2002.
Products for Myasthenia Gravis--The Company's agreement with Teva also
covered an orally delivered formulation of a product to treat myasthenia
gravis which was in preclinical research. Teva recently ceased all development
efforts on this product.
Products for Alzheimer's disease--In March, 2000, the Company entered into
an agreement under which a subsidiary of Elan Plc purchased all of
AutoImmune's rights to certain patent applications involving the treatment of
Alzheimer's Disease. Under the terms of the deal, AutoImmune will receive up
to $7 million in cash in a combination of upfront fees and contingent payments
over the next three years. At the time the future payments are made, the
subsidiary of Elan Plc will receive warrants to purchase up to 750,000 shares
of AutoImmune common stock at the market price for AutoImmune shares when the
warrants are issued.
Autoimmune diseases represent a major worldwide health care problem in terms
of the number of people affected. The Company believes that each of these
products under development offers the potential for a therapeutic
breakthrough.
The Company was incorporated in Delaware in September 1988 as AutoImmune
Technologies, Inc. The Company changed its name to AutoImmune Inc. in July
1991. The corporate mailing address of AutoImmune is 128 Spring Street,
Lexington, Massachusetts 02421, and its telephone number is (781) 860-0710.
Strategy
The Company's objective is to become a leading provider of therapeutic
products to treat immune system disorders. The key elements of the Company's
strategy include the following:
Leveraging the Company's Technology Platform. The Company believes its
technology is applicable to a variety of autoimmune and other cell-mediated
diseases and conditions. In addition to the development efforts on products
described above, the Company continues to support research on other potential
applications of its technology, with an initial focus on atherosclerosis. The
Company has, and plans to continue to seek, licensing arrangements, joint
ventures or other collaborative agreements to assist in financing the
development and commercialization of its products. This strategy resulted in
the Company's collaboration with Lilly for clinical testing of its products to
treat autoimmune-mediated diabetes and the Company's agreement with Teva
relating to the development of an oral formulation of Copaxone. It also
resulted in the Company's agreement with Oragen Inc., under which AutoImmune
received an equity position in OraGen for providing consulting services
related to the development of products using mucosal tolerance for the
treatment of certain sequelae of infectious diseases. More recently, it
resulted in the Company's agreement with a subsidiary of Elan Plc relating to
their purchase of all of AutoImmune's rights to certain patent applications
involving the treatment of Alzheimer's Disease.
The Company continues to develop the technology underlying mucosal tolerance
therapy through research conducted primarily at The Brigham and Women's
Hospital, a teaching hospital affiliated with Harvard Medical School. This
research is designed to further the Company's understanding of the mechanisms
of mucosal tolerance with the goal of increasing the effectiveness of the
Company's products and exploring new therapeutic applications for this
technology.
Protecting the Company's Competitive Position. From its inception, the
Company has sought to establish a strong proprietary position. As of December
31, 1999, the Company had pending 22 original and continuation-in-part United
States patent applications and numerous foreign counterparts. The Company has
received or has exclusive rights to 61 U.S. and foreign patents, including
seven U.S. patents covering the use of oral Type I, II, or III collagen (or
fragments of collagen) to treat rheumatoid arthritis in humans; five U.S.
patents covering the
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treatment of cell-mediated autoimmune disease by nasal or by inhalation
administration of autoantigens, and in particular covering treatment of
multiple sclerosis or rheumatoid arthritis using nasal or by inhalation
administration of compositions containing myelin basic protein or collagen,
respectively, or active fragments thereof; three U.S. patents covering
suppression of allograft rejection by oral administration of a major
histocompatibility complex Class II antigen or an active fragment thereof;
four U.S. patents covering the treatment, or prevention of the onset of, Type
1 diabetes by oral or nasal administration of a composition containing insulin
or a fragment of insulin; four U.S. patents covering treatment of multiple
sclerosis by oral administration of bovine myelin; one U.S. patent covering
the treatment of uveoretinitis using oral S-antigen; one U.S. patent covering
the combination of oral tolerance and methotrexate in the treatment of
multiple sclerosis; two U.S. patents directed respectively to peptide
fragments of myelin basic protein and the use of such fragments in suppressing
proliferation of T cells activated in multiple sclerosis patents; and one U.S.
patent covering a method for preparing Type II collagen. The European and
Japanese Patent Offices have each granted a patent to the Company covering the
use of compositions containing autoantigens to treat a group of human
autoimmune diseases, but oppositions (proceedings challenging their validity)
have been filed against these patents by a third party. The Japanese Patent
Office has issued a decision adverse to the patent, but the Company has filed
a response, and that decision is under review at present. A number of the
pending U.S. patent applications which the Company owns or to which it has
exclusive rights have been allowed and are expected to issue in the near
future.
In addition, the Company expects that Orphan Drug status may provide
increased proprietary protection for certain of its products in the United
States. The Company has received Orphan Drug status for Colloral for the
treatment of juvenile rheumatoid arthritis. The Company also anticipates that
the FDA will classify its pharmaceutical products as "biologics." If the
Company's products are so classified, there is currently no provision for
rapid approval of generic competitors after the expiration of any proprietary
protection the Company receives.
Minimizing Costly Infrastructure and Capital Investment. From its inception,
the Company has sought to conserve its financial resources. The Company has
historically made extensive use of external resources, such as clinical
research organizations and consultants. Moving forward, the Company
anticipates it will operate as a "virtual" company to the maximum extent
possible by operating without office space and full time employees as it
awaits the results of currently ongoing clinical trials and business
development activities.
Autoimmune Diseases
The human immune system is the major biological defense mechanism
responsible for recognizing and fighting disease. The immune system
distinguishes foreign substances (antigens) from the body's tissue and rids
the body of a wide variety of disease-causing antigens such as bacteria and
viruses. T cells, which circulate in the blood, are a major component of this
system. There are several types of T cells, which play a critical role in
recognizing antigens, carrying out the immune response, and regulating the
resulting chain of events. These include "helper" T cells, which release
factors to amplify the immune response, "killer" T cells, which attack and
destroy other cells displaying the targeted antigen, and "regulatory" T cells,
which release factors to down-regulate or suppress the immune response and
keep it in control.
Autoimmune diseases are generally believed to be a result of an
inappropriate response of the immune system. In many autoimmune diseases, the
helper and killer T cells go awry and attack the body's healthy tissues. T
cells which act in this manner are called autoreactive T cells. These T cells
appear to target the antigenic substances present in specific tissues
(autoantigens). The antigenic substances differ depending upon the disease and
may change over the course of a disease. In some diseases, the antigenic
substances have not been characterized, while in others a number of substances
have been found, but the particular role of each has not been identified.
Autoimmune diseases, which may be crippling or fatal, can strike virtually
any tissue or organ. The particular disease that occurs depends upon which
healthy tissue is attacked. For example, if the tissue attacked
4
is the brain, multiple sclerosis results; if synovial tissue in joints is the
target, rheumatoid arthritis results. Type 1 diabetes occurs when certain
pancreatic cells are the target, and uveitis occurs when cells of the uvea,
the middle, vascular layer in the eye, are attacked.
There is currently no method known for curing autoimmune diseases. They are
chronic and require lifelong treatment. Treatments tend to fall into two major
categories. The first category involves compounds for palliative treatment,
such as anti-inflammatory agents and pain killers for rheumatoid arthritis or
insulin for diabetics. In some forms of the diseases, there is no acceptable
method of treating even the symptoms. The second category involves the
administration of non-specific immunosuppressants, which indiscriminately shut
down multiple parts of the immune system. These immunosuppressants usually
have serious toxicity and side effect problems with long-term use.
While there are numerous cell-mediated autoimmune diseases, the Company at
present is developing products for two: rheumatoid arthritis and Type 1
diabetes. Rheumatoid arthritis is a chronic disease in which the body's immune
system attacks synovial tissue in joints, resulting in a progressive, painful
inflammation of the joints, along with crippling deformation of the hands,
feet, hips, knees and shoulders. In advanced phases of the disease, symptoms
include severe pain, body disfiguration and loss of mobility. The autoimmune
form of diabetes (Type I, also known as juvenile or insulin-dependent
diabetes) is the result of the body's immune system destroying the insulin-
producing islet cells in the pancreas. Although the administration of insulin
controls the metabolic abnormalities of the disease, it does not always
prevent major debilitating effects, which can include neural degeneration,
chronic pain, arteriosclerosis, loss of limbs due to peripheral vascular
disease, blindness and kidney failure. In its most severe form, diabetes can
result in death.
In addition, through the Company's agreement with Teva, mucosal tolerance
therapy is being developed for multiple sclerosis. Multiple sclerosis is a
neurologic disease which in its most severe from is relentlessly progressive
and can result in complete disability within ten years.
The Company has directed its efforts in these areas because each of these
diseases and conditions is mediated by the T cells in the immune system, and
thus is well suited to AutoImmune's mucosal tolerance approach. No completely
satisfactory treatment currently exists for any of these conditions.
The Company's Technology
AutoImmune's products are based upon the principles of mucosal tolerance.
Mucosal tolerance utilizes the natural immune system mechanisms associated
with the gut (the small intestine), nasal passages, lungs and other mucosally
lined tissues. These mechanisms allow the body to accept ("tolerate") proteins
(antigens) absorbed through the mucosal tissue without stimulating an immune
response that would otherwise arise against a foreign substance. In a series
of extensive research studies directed by Dr. Howard Weiner, who is one of the
Company's principal scientific advisors, it was shown that, when properly
activated, these mechanisms can be used to treat autoimmune disorders by
selectively suppressing the immune system. This discovery forms the basis of
the Company's products and patent claims. See "Patents and Proprietary
Rights."
The Company's method uses therapeutic substances--antigenic proteins or
derivatives thereof found in organs attacked by each disease--which, for
example, if delivered orally are disassembled in the gut by the normal
digestive processes. Specific fragments of these substances (peptides) attach
to antigen-presenting cells on the surface of the gut. The cells involved are
those associated with Peyer's Patches, which are groupings of immune system
cells surrounding the gut that have been reported to induce immune tolerance.
This triggers the immune system to initiate a chain of events that results in
the creation of regulatory T cells that migrate through the blood and lymph
system to suppress or down-regulate the immune response at the targeted organ,
thereby mitigating the disease. This suppression can be directed toward the
tissue under attack in an autoimmune disease by appropriate selection and
dosing of the protein in a mucosally-delivered product.
AutoImmune has completed a wide range of human, animal and in vitro tests
relating to the mucosal administration of its products in a variety of disease
indications. The Company believes these experiments have
5
demonstrated that selective immune system tolerance can be induced by mucosal
administration of antigens, suppressing undesirable immune system attacks
against healthy tissue without suppressing the entire immune system.
AutoImmune's research has indicated that identification of the precise
autoantigen for a disease may not be necessary to develop an effective
treatment based on oral tolerance. Research has shown that mucosal tolerance
induced by one organ-specific protein is capable of suppressing autoreactive T
cells that are attacking a different protein in the same organ. The Company
refers to this phenomenon as "bystander suppression," and has filed patents to
protect its rights to this discovery. In particular, bystander suppression
allows a mucosal tolerance treatment to be effective even if the autoantigen
is not precisely identified or changes during the course of a disease (an
effect known as "determinant spreading").
In contrast to existing treatments, which are limited to treating only the
symptoms of autoimmune disease or which run the risks and side effects of
shutting down the entire immune system, the Company's products are intended to
interrupt the disease process and be specific to each disease. Moreover,
because of the apparent freedom from significant side effects enjoyed by
AutoImmune's products, the Company believes they may be prescribed earlier in
the disease process than is now customary, and thus may allow patients to
avoid most or all of the debilitating effects of autoimmune diseases. The
Company believes its approach of developing products to induce the activation
of regulatory T cells in order to suppress disease distinguishes it from most
others currently conducting autoimmune disease research.
The Company's approach offers a number of important clinical and commercial
advantages:
Adverse Reactions Unlikely. The Company believes that since the therapeutic
substances it is developing are protein-based products taken in small
quantities and stimulate natural functions, they are unlikely to cause adverse
reactions. AutoImmune's human studies to date have shown a lack of both
toxicity and significant side effects, which the Company believes may expedite
the regulatory process.
Tissue-Specific Immunosuppression. The Company's mucosal tolerance technique
utilizes the immune system itself to generate natural immunosuppression in the
specific tissue(s) attacked by a disease. It does not down-regulate the entire
immune system.
Oral Delivery. Several of AutoImmune's products are administered orally, the
preferred method of treating chronic diseases. Other forms of immunotherapy
which are being marketed or are known by the Company to be in development by
competitors are likely to require chronic intravenous, sub-cutaneous or intra-
muscular administration.
Broad Application. The Company believes that, in addition to the diseases
and conditions on which it has been working to date, its mucosal tolerance
approach potentially could be applied to the treatment of a variety of other
inflammatory diseases and other clinical conditions, including psoriasis and
atherosclerosis.
6
Principal Products in Development
AutoImmune has products in development for the treatment of rheumatoid
arthritis and Type 1 diabetes. The chart set forth below describes the stage
of development of each of the Company's principal products.
PRINCIPAL PRODUCTS IN DEVELOPMENT
Product Disease/Condition Development Status
------- ------------------- ------------------------------------------------
Colloral(R) Rheumatoid Phase III trial completed in the third quarter
Arthritis of 1999; results did not meet primary endpoint
specified in protocol. Currently seeking a
marketing/distribution partner to help realize
the value of this product in the nutraceutical
market.
AI 401 Type 1 diabetes Phase II trials in progress
Rheumatoid Arthritis. Colloral, AutoImmune's proprietary oral formulation of
Type II collagen, recently completed a Phase III human clinical trial. This
772 patient study was designed as the final pivotal trial for regulatory
approval as a pharmaceutical product. More than 1,200 patients had been
involved in the five Phase II Colloral trials completed prior to the start of
the Phase III. Integrated data analysis from the five Phase II trials showed
that Colloral is significantly more efficacious than placebo, the optimum dose
is 60 micrograms, and the safety profile is unsurpassed. The results of the
Phase III trial, announced in September 1999, showed that despite substantial
improvements from baseline noted in the Colloral treated group for each of the
"core four" measures, the drug did not meet the primary endpoint specified in
the protocol because of a very large placebo response. AutoImmune subsequently
ceased efforts to obtain approval of Colloral as a pharmaceutical product. The
Company recently completed a market analysis of the opportunity for Colloral
as a nutraceutical product. AutoImmune is currently seeking a
marketing/distribution partner for Colloral to help realize this potential.
It is estimated that 1% of the worldwide population suffers from rheumatoid
arthritis. In the United States, there are 2.1 million patients with
rheumatoid arthritis, including more than 70,000 patients with JRA. There is
no known cure, but several approaches are used in an attempt to alleviate two
major symptoms of the disorder, pain and inflammation. A number of pain
relievers are widely used, but most have undesirable side effects. Similarly,
a wide variety of anti-inflammatory agents, ranging from aspirin to NSAIDs,
are used with varying degrees of success. The NSAIDs used to alleviate pain
and inflammation have undesirable gastrointestinal side effects that limit
their use. None of the available NSAIDs work with consistent efficacy on all
types of patients. Several companies are working on a new class of NSAIDs
described as COX-2 inhibitors. These products, which began to enter the market
in 1999, may alleviate some of the gastrointestinal side effects currently
seen with traditional NSAIDS. Broad immunosuppressants are also used to treat
rheumatoid arthritis but toxicity limits their use. A new product in this
category is leflunomide, which can be characterized as methotrexate-like, but
with an additional indication for slowing disease progression. Additionally,
there are two biologic products, Enbrel and Remicade, recently approved by the
FDA. Both products, which are injectables, are TNF (tumor necrosis factor)
inhibitors.
Type 1 Diabetes. In December 1994 the Company entered into a collaborative
agreement with Lilly under which Lilly provided support for clinical testing
of the Company's autoimmune-mediated (Type 1) diabetes product. This agreement
was terminated in the first quarter of 1999 as a result of Lilly's failure to
make a required milestone payment. Lilly is obligated to complete the trials
now underway and to provide the Company with full access to the data
therefrom, including the right to use such data for any purpose. Under a non-
exclusive license for research purposes only, Lilly sponsored investigators
have completed enrollment in three different Phase II clinical trials to
demonstrate human proof of principle for AI 401. The U.S. study is a one-year,
double-blind, placebo-controlled trial with 200+ patients, designed to measure
immunological changes, preservation of
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pancreatic function and time to insulin dependence. The second Phase II trial
involves approximately 150 patients and is being conducted in France. The
third trial is in Italy with approximately 80 patients. The results of these
trials are expected to be made public during calendar year 2000. In addition,
Lilly is providing AI 401 for the Diabetes Prevention Trial (DPT-1) being
conducted by the NIH. This trial, which began in September 1996 and is
expected to enroll 490 patients, is designed to determine whether AI 401 can
delay or prevent the clinical onset of Type 1 diabetes. Enrollment in DPT-1 is
approximately 50% complete.
Approximately 1,000,000 people in the United States suffer from Type 1
diabetes. It is estimated that worldwide there are 180,000 new patients
diagnosed with this disease each year. There is no known way of curing Type 1
diabetes; at best it can be controlled. In addition, because insulin is a
large protein that is not appreciably absorbed through the gut, it must be
administered intravenously or intra-muscularly, rather than orally. The
limitations of the treatment delivery system and the inconsistency of the
therapeutic results have led to major efforts to discover effective new
methods of treatment. The Company believes that the preferred therapeutic
approach would be an oral treatment such as the Company's which could prevent
the onset of the disease (and the related destruction of the insulin-producing
cells) in susceptible populations. Methods to pre-screen persons who are
genetically susceptible to Type 1 diabetes are being developed by others.
AutoImmune expects that individuals who have been diagnosed in the early
stages of Type 1 diabetes, as well as those who may be identified through such
pre-screening, will constitute the primary market for AutoImmune's diabetes
product.
Multiple Sclerosis. In the second quarter of 1997, the Company ceased
independent efforts to develop a product for the treatment of multiple
sclerosis and began evaluating opportunities to collaborate with third parties
in the development of such a product. In this regard, the Company entered into
an exclusive agreement with Teva. The agreement covers the development by Teva
of an oral formulation of Copaxone(R) (glatiramer acetate), Teva's currently
available injectable drug for multiple sclerosis. This oral formulation would
use the Company's proprietary technology for oral tolerance and entered
efficacy trials during March 2000. AutoImmune will receive up to $15 million
in milestone payments upon product approvals, and escalating royalties on
cumulative sales for all products covered by the agreement.
Approximately 350,000 persons in the United States suffer from multiple
sclerosis. Approximately one-third of individuals with multiple sclerosis
stabilize and never reach a severe stage; others have multiple acute attacks
as frequently as two to three times a year. In its most severe form, the
disease is relentlessly progressive and can result in complete disability
within ten years. Since the early 1980s, non-specific immunosuppressants, such
as cyclophosphamide and azothioprine, have been used with occasional success
to slow the progression of this disease in some patients. None of these
treatments is capable of stopping multiple sclerosis attacks or halting the
progression of the disease without exposing patients to potentially serious
side effects. Since 1993, three products have been approved by the FDA for the
treatment of relapsing/remitting multiple sclerosis. All three are indicated
for reduction of the frequency of multiple sclerosis exacerbations (one is
also approved for slowing the progression of disability associated with
sclerosis). Each of these drugs is administered by injection and each has side
effects, including injection site reactions and flu-like symptoms or shortness
of breath.
Additional Products and Research Programs
The Company's additional research and development efforts are focused on two
primary objectives.
The first objective is the development of ways to enhance the therapeutic
effect of the Company's existing products. One such approach under study by
the Company is the creation of "fusion proteins" with interleukins which
predispose the immune system toward the production of regulatory T cells. This
method has been shown in animal studies to increase the effectiveness of
mucosal tolerance therapy.
The second objective is to expand its applications of mucosal tolerance
therapy. The Company believes its mucosal tolerance approach may lead to
treatments for cell-mediated inflammatory diseases including atherosclerosis
and psoriasis.
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Manufacturing
All of the Company's pharmaceutical products for clinical and commercial use
would have to be produced under controlled conditions and under current FDA
Good Manufacturing Practices ("GMP"). To ensure compliance with GMP
requirements, the Company will be required to obtain sufficient technical
staff to oversee all production operations, including quality control, quality
assurance, technical support and manufacturing management. To the extent the
Company relies upon contract manufacturing arrangements, the Company will
depend upon third parties to produce and deliver products in accordance with
GMP.
Currently, the Company is not producing any products for clinical or
commerical use. If and when a partner is found to market Colloral as a
nutraceutical product, the Company may rely upon a contract manufacturer. The
Company placed all of the equipment used to produce Colloral for the clinic in
storage.
Marketing and Sales
In order to market any of its products directly, the Company must develop a
marketing and sales organization. However, the Company may elect to enter into
agreements with established companies with respect to the marketing of one or
more of its products. Such agreements may be exclusive or non-exclusive and
may provide for marketing rights worldwide or in specific markets.
Collaborative Research Agreements
During the early stages of its development, the Company chose to operate
through a variety of agreements with medical research institutions.
AutoImmune's agreements with The Brigham and Women's Hospital and other
leading medical research institutions, together with the advantages of the
mucosal tolerance mechanism, have allowed the Company to conduct pilot human
studies and demonstrate the potential utility of its technique in a number of
diseases at a comparatively early stage of the Company's development.
The Brigham and Women's Hospital. The Brigham and Women's Hospital, Inc.
("BWH"), a teaching hospital affiliated with Harvard Medical School, has been
performing sponsored research for the Company since 1988. The current
agreement extends until June 30, 2001 and is automatically renewed for
successive two-year periods unless one year's prior written notice is given.
The current research budget at BWH provides for expenditures by AutoImmune of
approximately $314,000 during the twelve months ending June 30, 2000. Under
certain circumstances, the Company may reduce its level of expenditures. The
Company will own or have exclusive rights to all inventions, improvements and
discoveries made at BWH and resulting from the research program, subject to
certain rights retained by the U.S. government in any patentable invention
conceived or first reduced to practice using federal funds. The Company will
pay to BWH (i) a royalty on all products sold by the Company that are subject
to a patent covering an invention developed under the research program or as
to which rights were acquired by the Company from BWH, and (ii) a percentage
of any upfront payments and/or royalties received by AutoImmune with respect
to sales of such products by others. BWH may also receive a percentage of any
milestone payments which the Company is entitled to receive from licensees or
other transferees of such a patent after the first commercial sale of a
product covered by a patent. If the Company defaults in the payment of any
amount due to BWH, BWH will have an option to purchase all technology
developed under the research program at a purchase price equal to the sum of
all amounts previously paid by the Company to BWH.
BWH is a shareholder of the Company. Both of the scientists who made the
discoveries which led to the founding of AutoImmune are affiliated with BWH.
National Eye Institute. The National Eye Institute ("NEI") was party to a
CRADA with AutoImmune and BWH pursuant to which clinical trials of
AutoImmune's uveitis product were conducted. The agreement expired June 30,
1996. The NEI is a co-owner with AutoImmune of a patent application directed
to the use of oral tolerance to treat uveitis. The NEI has granted BWH an
exclusive commercialization license for any and all products or processes
developed pursuant to the CRADA (including the uveitis patent application) in
exchange
9
for one-half of any royalties with respect to uveitis products collected by
BWH pursuant to its agreement with the Company. BWH has in turn granted the
Company an exclusive commercialization license with respect to all such
technology. The Company and NEI recently agreed to suspend development efforts
on the Company's second generation product for uveitis, AI 301.
Patents and Proprietary Rights
The establishment of a strong proprietary position is an important element
of AutoImmune's strategy. As of December 31, 1999, the Company had pending 22
original and continuation-in-part United States patent applications and
numerous foreign counterparts. The Company has received or has exclusive
rights to 61 U.S. and foreign patents, including seven U.S. patents covering
the use of oral Type I, II, or III collagen (or fragments of collagen) to
treat rheumatoid arthritis in humans; five U.S. patents covering the treatment
of cell-mediated autoimmune disease by nasal or by inhalation administration
of autoantigens, and in particular covering treatment of multiple sclerosis or
rheumatoid arthritis using nasal or by inhalation administration of
compositions containing myelin basic protein or collagen, respectively, or
active fragments thereof; three U.S. patents covering suppression of allograft
rejection by oral administration of a major histocompatibility complex Class
II antigen or an active fragment thereof; four U.S. patents covering the
treatment, or prevention of the onset of, Type 1 diabetes by oral or nasal
administration of a composition containing insulin or a fragment of insulin;
four U.S. patents covering treatment of multiple sclerosis by oral
administration of bovine myelin; one U.S. patent covering the treatment of
uveoretinitis using oral S-antigen; one U.S. patent covering the combination
of oral tolerance and methotrexate in the treatment of multiple sclerosis; two
U.S. patents directed respectively to peptide fragments of myelin basic
protein and the use of such fragments in suppressing proliferation of T cells
activated in multiple sclerosis patents; and one U.S. patent covering a method
for preparing Type II collagen. The European and Japanese Patent Offices have
each granted a patent to the Company covering the use of compositions
containing autoantigens to treat a group of human autoimmune diseases, but
oppositions (proceedings challenging their validity) have been filed against
these patents by a third party. The Japanese Patent Office has issued a
decision adverse to the patent, but the Company has filed a response, and that
decision is under review at present. A number of the pending U.S. patent
applications which the Company owns or to which it has exclusive rights have
been allowed and are expected to issue in the near future.
The Company owns a patent application originally filed by BWH for the
treatment of autoimmune diseases by oral administration of autoantigens, which
includes a number of specific claims directed to the treatment of multiple
sclerosis. The disclosure contained in this initial patent application has
been significantly expanded in a chain of successor applications. There can be
no assurance, however, that patents will be granted on these applications or
that the Company will succeed in developing additional products that are
patentable.
The Company has applied for patents, or acquired rights to patent
applications, covering oral or more broadly mucosal tolerance methods of
treating or preventing other specific autoimmune diseases and related
conditions, including uveitis, Type 1 diabetes, transplant rejection,
Alzheimer's disease and vascular disease. It has filed applications that claim
tolerization treatment of autoimmune diseases by inhalation of autoantigens in
aerosol form, use of synergizing compounds to enhance the treatment of
autoimmune disorders, specific peptides thought to be involved in multiple
sclerosis, and bystander suppression, by which tolerance can be induced
without identifying the specific antigen causing an autoimmune disease.
There can be no assurance that patent applications owned by, or licensed to,
the Company will issue as patents or that, if issued, the Company's patents
will be valid or that they will provide the Company with meaningful protection
against competitors or with a competitive advantage. There can be no assurance
that the Company will not need to acquire licenses under patents belonging to
others for technology potentially useful or necessary to the Company and there
can be no assurance that such licenses will be available to the Company, if at
all, on terms acceptable to the Company. Moreover, there can be no assurance
that any patent issued to or licensed by the Company will not be infringed or
circumvented by others. In particular, if the Company is unable to obtain
issuance of a patent with broad claims with respect to oral tolerance
treatment of autoimmune diseases
10
or if the Company is unable to prevail in oppositions against foreign patents
of the Company with similar claim scope a competitor may be able to design
around the Company's patent rights by employing a treatment that is not
covered by the Company's subsisting patents.
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection
for the Company's trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure. In addition, the Company's
business may be adversely affected by competitors who independently develop
competing technologies, especially if the Company obtains no, or only narrow,
patent protection.
Lastly, there can be no assurance that third-parties will not bring suit
against the Company for patent infringement or for declaratory judgment to
have the Company's patents declared invalid.
Competition
The pharmaceutical and nutraceutical industries are highly competitive, and
research on the causes of and possible treatments for autoimmune diseases is
developing rapidly. The Company competes with a number of pharmaceutical and
biotechnology companies which have financial, technical and marketing
resources significantly greater than those of the Company. Some companies with
established positions in the pharmaceutical and nutraceutical industries may
be better equipped than the Company to develop and market products based on
the application of new technologies to the treatment of autoimmune diseases. A
significant amount of research in the field is also being conducted at
universities and other not-for-profit research organizations. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they
have developed. These institutions may also market competitive commercial
products on their own or through joint ventures and may compete with the
Company in recruiting highly qualified scientific personnel.
The Company is pursuing areas of product development in which there is a
potential for extensive technological innovation in relatively short periods
of time. The Company's competitors may succeed in developing products that are
more effective than those of the Company. Rapid technological change or
developments by others may result in the Company's potential products becoming
obsolete or non-competitive.
For additional information concerning products developed and under
development by the Company's competitors to treat rheumatoid arthritis, see
"Principal Products in Development--Rheumatoid Arthritis."
Government Regulation
The manufacturing and marketing of the Company's products and certain areas
of its research are subject to regulation for safety and efficacy by numerous
government authorities in the United States and other countries. Domestically,
the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and
other federal and state statutes and regulations govern the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of the Company's products. There can be no assurance
that the Company will ever obtain the government approval necessary to make
commercial sales of any of its products.
Further, the FDA may grant Orphan Drug status, under the Orphan Drug Act, to
therapeutic agents which are intended to treat a "rare disease or condition,"
which is generally described as a disease or condition that affects fewer than
200,000 individuals in the United States, but also includes multiple sclerosis
and certain other diseases. Orphan Drug status confers upon the sponsor tax
credits for the amounts expended on clinical trials, as well as marketing
exclusivity for the proposed therapeutic indication for a period of seven
years following approval of a New Drug Application ("NDA") or Biologics
License Application ("BLA"). This status does not convey any advantage during
regulatory review, but it is possible that products may qualify both for
Orphan
11
Drug status and also for fast-track regulatory review. Colloral for juvenile
rheumatoid arthritis has been designated as an Orphan Drug. To receive the
benefits of Orphan Drug designation, however, the Company must be first to
receive FDA approval of the product for the particular indication.
AutoImmune believes that its pharmaceutical products under development will
be classified by the FDA as "biologic products," while others may be
classified as "drug products." As part of its regulatory strategy, the Company
intends to direct some of its products into the Biologics Divisions of the
FDA. While both biologics and drugs can qualify for Orphan Drug status,
biologics, once approved, have no current provision for subsequent competitors
to market generic versions. Each biologic, even if it has the same composition
and is for the same indication, must undergo the entire development process in
order for a competitive firm to obtain FDA approval.
New drug or biological products require several steps in order to receive
regulatory approval, including (i) preclinical laboratory and animal tests;
(ii) submission by the Company or an individual physician to the FDA of an
application for an IND, or submission to a research institution of an
Institutional Review Board approval for intrastate trials, one of which must
become effective before human clinical trials may start; (iii) the performance
of well-controlled clinical trials; and (iv) the submission of an NDA or BLA
containing the results of clinical trials and methods of manufacture of the
product prior to commercial sale or shipment of the product. During the
approval process, the FDA must confirm that good laboratory and clinical
practices were maintained during product testing as well as good manufacturing
practices were employed in product manufacture.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess potential product safety and efficacy. The results of
the preclinical tests are submitted to the FDA as part of an IND, and, unless
the FDA objects, the IND becomes effective, and clinical trials may begin, 30
days after the FDA receives the filing.
The initial clinical evaluation, Phase I trials, generally involve
administration of a product to a small number of persons. The product is
tested for safety, dosage tolerance, metabolism, and pharmacokinetic
properties. Phase II trials generally involve administration of a product to a
limited number of patients with a particular disease to determine dose level,
efficacy and safety. Phase III trials generally examine the clinical efficacy
and safety in an expanded patient population at multiple clinical sites. The
FDA reviews the clinical plans and the results of trials and can discontinue
the trials at any time if there are significant safety issues or if there is
convincing evidence that a drug is not effective for the purpose for which it
is being investigated. Each of AutoImmune's clinical trials will be conducted
with the approval of an Institutional Review Board at the institution where
the trial will be conducted. The Institutional Review Board considers, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution. Pivotal Phase III trials are designed to
demonstrate definitive efficacy. More than one trial is usually required for
FDA approval to market a drug. The results of the preclinical and clinical
trials are submitted after completion of the pivotal Phase III trials in the
form of a BLA or NDA for approval to commence commercial sales. The approval
process is affected by several factors, including the severity of the disease,
the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials. The FDA may also require post-marketing
surveillance to monitor potential adverse effects of the product. The
regulatory process can be modified by Congress or the FDA in specific
situations.
The length of the regulatory review process cannot be predicted with
certainty for new individual products. The Drug Price Competition and Patent
Term Restoration Act, however, defines the original period of enforceability
for a product or use patent to be 17 years from issuance or 20 years from
filing. Under certain circumstances, to compensate the patent holder for the
time required for FDA regulatory review, this period may be extended for up to
5 years. This Act also establishes a period following FDA approval of a
product during which the FDA may not accept or approve short-form applications
for generic versions of the drug from other sponsors.
The Company also will be subject to government regulations enforced under
the Occupational Safety and Health Act, the Environmental Protection Act, the
United States Atomic Energy Act, the Clean Air Act, the
12
Clean Water Act, the National Environmental Policy Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, and other national,
state or local restrictions.
In addition, the Company's ability to successfully commercialize human
therapeutic products may depend in part on the extent to which reimbursement
for the cost of such products and related treatment will be available from
government health administration authorities, private health coverage insurers
and other organizations. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be
no assurance that adequate third-party coverage will be available for the
Company to maintain price levels sufficient for realization of an appropriate
return on its investment in product development.
Employees
As of March 12, 2000, AutoImmune has no employees. Two former employees, the
President and Director of Finance, are currently working for the Company as
consultants.
Factors To Be Considered
The parts of this Annual Report on Form 10-K titled "Item 1--Business" and
"Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking statements which involve risks
and uncertainties. Set forth below is a discussion of certain factors that
could cause the Company's actual results to differ materially from the results
projected in such forward-looking statements.
Developmental Stage of the Company's Products. The Company has not completed
the development of any products. The Company's pharmaceutical products require
significant additional clinical testing and/or investment prior to
commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. Positive
results for a product in a clinical trial do not necessarily assure that
future clinical trials will yield positive results or that the government will
approve the commercialization of the product. Clinical trials may be
terminated at any time for many reasons, including toxicity or a lack of
efficacy based upon mid-trial examinations of clinical trial data or adverse
event reporting. There can be no assurance that the Company will successfully
develop any product or that the Company's products will prove to be safe and
efficacious in clinical trials, meet applicable regulatory standards, receive
required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs or be successfully marketed. The Company also
may encounter problems in clinical trials that will cause the Company to delay
or suspend product development.
History of Operating Losses; Lack of Product Revenues. From its inception in
1988 through December 31, 1999, the Company accumulated net losses of
$111,466,000. The Company expects to incur losses as the Company continues its
research and pursues the nutraceutical market, technology outlicensing and
other opportunities. The Company's ability to achieve profitable operations
depends on the Company successfully completing the development of its
products, obtaining any required regulatory approvals and manufacturing and
marketing its products. There can be no assurance that the Company will
achieve profitable operations at any time.
The Company's revenues to date have been earned in connection with
collaborative agreements and the granting of short term rights. The Company
has granted to Teva exclusive worldwide patent rights to the multiple
sclerosis and myasthenia gravis applications of its technology. These rights
were granted in return for payments if certain milestones are achieved and
royalties based on sales, if any. In addition, the Company has sold to a
subsidiary of Elan Plc all of AutoImmune's patent rights to the Alzheimer's
application of its technology. Signing of this agreement triggered a
$4,000,000 payment to the Company in March 2000 with contingent payments of up
to $3 million due over the next three years. There can be no assurance that
the Company will derive any revenues from the Teva agreement or any additional
revenues from the sale of AutoImmune's patent rights to the Alzheimer's
application of its technology. At present, there are no other agreements that
entitle the Company to receive revenues.
13
Additional Financing Requirements and Access to Capital. Since inception,
the Company has raised net proceeds of $116,000,000 from the sale of equity
securities in private placements and public stock offerings. The Company may
require substantial funds to perform further research and development. Based
upon its budget for calendar year 2000, the Company believes that current cash
and marketable securities and the interest earned from the investment thereof
will be sufficient to meet the Company's operating expenses and capital
requirements for at least five years. Thereafter, or if the Company's
operations change substantially, the Company may need to raise substantial
additional capital to fund its operations, including clinical trials and
commercialization efforts.
The Company may intend to seek such additional funding through public or
private equity or debt financings, collaborative arrangements with
pharmaceutical companies or other sources. There can be no assurance that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, the Company will have to reduce certain
areas of research, product development, manufacturing or marketing activity or
otherwise modify its business strategy. Such a reduction would have material
adverse effects on the Company.
Dependence on Collaborative Agreements. One of the Company's historic
objectives has been to enter into licensing agreements or joint ventures with
established pharmaceutical companies for products to be sold in foreign
markets or for products to treat diseases which involve large physician
audiences and/or which are expected to have longer regulatory approval cycles.
The Company has an agreement with Teva with respect to multiple sclerosis and
myasthenia gravis products, and with Lilly for research on diabetes products.
There can be no assurance that the Company will be able to negotiate other
acceptable arrangements in the future, to the extent the Company desires to do
so, or that such arrangements will be successful.
The majority of the Company's basic research to date has been done through
agreements with The Brigham and Women's Hospital and other medical research
institutions. Between 1993 and 1999, the Company conducted some of its
research and most of its development activities internally. Currently the
Company has no employees engaged in research and product development.
Therefore, the Company expects to continue to be dependent upon research
performed under contract with The Brigham and Women's Hospital. If the Company
is unable to maintain this relationship, the Company would be adversely
affected and the Company's ability to commercialize future products may be
delayed.
Manufacturing and Marketing. The Company has not yet introduced any products
and has limited manufacturing experience. To be successful, the Company's
products must be manufactured in commercial quantities in compliance with
regulatory requirements and at acceptable costs. To the extent the Company
relies upon contract manufacturers, there can be no assurance that such
parties will perform their obligations in a timely fashion. The failure by
third parties to perform their obligations in a timely fashion could delay
clinical trials or commercialization of a product and could adversely affect
the Company's ability to supply the market. There can be no assurance that the
Company will be able to enter into agreements to manufacture its products, if
the Company desires to do so, on favorable terms, if at all.
Developing its own full-scale manufacturing facilities will require
substantial additional funds. All pharmaceutical manufacturing facilities must
comply with applicable regulations of the FDA. No assurance can be given that
the Company's products will not require raw materials for which the sources
and amount of supply are limited. An inability to obtain adequate supplies of
such raw materials could significantly delay the development, regulatory
approval and marketing of the Company's products.
The Company has no sales organization or marketing force. In order to market
any of its products directly, the Company must develop a marketing and sales
force with sufficient technical expertise to generate demand for its products.
There can be no assurance that the Company will be able to establish effective
sales and distribution capabilities or be successful in gaining market
acceptance for its products.
14
Patents and Proprietary Rights. The Company's success will depend, in part,
on its ability to obtain patents and Orphan Drug protection, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties or having third parties circumvent the Company's rights. The
Company has received or has exclusive rights to 61 U.S. and foreign patents.
The Company has filed and is actively pursuing numerous applications for
additional U.S. and foreign patents, and is an assignee or licensee of the
rights to other patent applications. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions. For example, no consistent policy has emerged regarding the
breadth of biotechnology patent claims that are granted by the United States
Patent Office or enforced by the federal courts. Thus, there can be no
assurance that any patents issued to the Company will provide the Company with
any competitive advantages or will not be challenged by any third parties,
that the patents of others will not impede the ability of the Company to do
business or that third parties will not be able to circumvent the Company's
patents, that any of the Company's patent applications will result in the
issuance of patents or that the Company will develop additional proprietary
products that are patentable. Certain of the Company's foreign patents are
currently subject to or under opposition, a proceeding which, if resolved
adversely to the Company, can result in revocation of a patent or curtailment
of its claim scope. See "Strategy--Protecting the Company's Competitive
Position." There can be no assurance that the Company will prevail in such
oppositions. Furthermore, there can be no assurance that others will not
develop independently similar products, duplicate any of the Company's
products, or, if patents are issued to the Company, design around the patented
products developed by the Company. Although the Company has obtained Orphan
Drug status in the United States for some of its products, it also must be the
first to market an effective treatment for a particular disease in order to
obtain the protections afforded to Orphan Drugs.
The Company may be required to obtain licenses from third parties to avoid
infringing patents or other proprietary rights. No assurance can be given that
any licenses required under any such patents or proprietary rights would be
available, if at all, on terms acceptable to the Company. If the Company does
not obtain such licenses, it could encounter delays in product introductions,
or could find that the development, manufacture or sale of products requiring
such licenses could be prohibited. In addition, the Company could incur
substantial costs in defending itself in suits brought against the Company on
patents it might infringe or in filing suits against others to have such
patents declared invalid.
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection
for the Company's trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure. Furthermore, the Company's
business may be adversely affected by competitors who independently develop
competing technologies, especially if the Company obtains no, or only narrow,
patent protection.
Technological Change and Competition. The biotechnology and pharmaceutical
industries are subject to rapid and significant technological change. The
Company's competitors are numerous and include, among others, major
pharmaceutical companies, biotechnology firms, universities and other research
institutions in the United States and abroad. There can be no assurance that
the Company's competitors will not develop technologies and products that are
more effective than any being developed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Many of
these competitors have substantially greater financial and technical resources
and production and marketing capabilities than the Company. In addition, many
of the Company's competitors have significantly greater experience than the
Company in conducting preclinical testing and clinical trials of
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, the Company's competitors may
obtain FDA approval for products more rapidly than the Company. If the Company
commences significant commercial sales of its products, it will also compete
with other companies with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited experience.
15
Government Regulation. The Company's production and marketing of its
pharmaceutical products and ongoing research and development activities are
subject to regulation by numerous government authorities in the United States
and other countries. Prior to marketing, any pharmaceutical product developed
by the Company must undergo rigorous preclinical testing and clinical trials,
as well as an extensive regulatory approval process mandated by the FDA and
foreign regulatory agencies. These processes can take many years and require
the expenditure of substantial resources. The Company has limited experience
in conducting and managing the preclinical and clinical trials necessary to
obtain government approvals. Delays in obtaining regulatory approvals would
adversely affect the marketing of the Company's products and its ability to
receive product revenues or royalties. There can be no assurance that the
Company will be able to obtain the clearances and approvals necessary for the
clinical testing or manufacturing and marketing of its products. Existing or
additional government regulation could prevent or delay regulatory approval of
the Company's products or affect the pricing or marketing of such products.
Item 2. Properties.
The lease for the principal offices of the Company in Lexington,
Massachusetts expired in November 1999 and was not renewed. The Company is
currently operating in a virtual mode utilizing the personal office spaces of
the President and the Director of Finance, however, it maintains the Lexington
address for corporate mailing purposes.
Item 3. Legal Proceedings.
The Company is not a party to any litigation or legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of fiscal 1999.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol AIMM. The following table shows the quarterly high and low closing
price on Nasdaq for a share of the Company's common stock for the fiscal years
ended December 31, 1998 and 1999.
Price range
of common
stock
-----------
High Low
----- -----
Fiscal year ending December 31, 1998
First quarter $3.44 $2.25
Second quarter $3.06 $2.31
Third quarter $2.62 $1.62
Fourth quarter $2.56 $1.56
Fiscal year ending December 31, 1999
First quarter $2.50 $1.94
Second quarter $2.44 $1.94
Third quarter $4.00 $0.56
Fourth quarter $1.19 $0.41
As of March 7, 2000, there were 229 record holders and approximately 9,690
total shareholders of the Company's Common Stock.
AutoImmune has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings, if any, and
therefore does not anticipate paying any cash dividends on its capital stock
in the foreseeable future.
17
Item 6. Selected Financial Data.
The selected financial data set forth below are derived from financial
statements that have been audited by PricewaterhouseCoopers LLP, independent
accountants. The balance sheet at December 31, 1998 and 1999 and the related
statements of operations and of cash flows for the three years ended December
31, 1999 and notes thereto appear elsewhere in this Form 10-K. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and related notes included elsewhere in this Form 10-K.
For the year ended December 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------- -------------
Statement of Operations
Data:
Revenue:
Option fees............ $ 1,500,000 $ -- $ -- $ -- $ --
Research and
development revenue
under collaborative
agreements............ -- -- -- -- --
------------ ------------ ------------ ------------- -------------
Total revenue........ 1,500,000 -- -- -- --
------------ ------------ ------------ ------------- -------------
Costs and expenses:
Research and
development:
Related party......... 2,294,000 2,158,000 1,880,000 1,314,000 1,170,000
All other............. 12,554,000 22,029,000 15,426,000 11,496,000 7,649,000
General and
administrative........ 2,213,000 2,414,000 2,214,000 1,712,000 2,416,000
------------ ------------ ------------ ------------- -------------
Total costs and
expenses............ 17,061,000 26,601,000 19,520,000 14,522,000 11,235,000
------------ ------------ ------------ ------------- -------------
Loss from operations.... (15,561,000) (26,601,000) (19,520,000) (14,522,000) (11,235,000)
Interest income, net.... 1,968,000 3,117,000 1,995,000 1,337,000 570,000
------------ ------------ ------------ ------------- -------------
Net loss................ $(13,593,000) $(23,484,000) $(17,525,000) $ (13,185,000) $ (10,665,000)
============ ============ ============ ============= =============
Net loss per share--
basic and diluted(1)... $ (1.01) $ (1.44) $ (1.07) $ (0.80) $ (0.64)
============ ============ ============ ============= =============
Weighted average common
shares outstanding--
basic and diluted(1)... 13,522,091 16,303,051 16,385,629 16,491,701 16,602,911
============ ============ ============ ============= =============
December 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------- -------------
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 70,453,000 $ 49,310,000 $ 30,025,000 $ 17,528,000 $ 6,973,000
Working capital......... 68,791,000 45,453,000 28,983,000 16,325,000 6,411,000
Total assets............ 72,981,000 52,462,000 31,498,000 18,326,000 7,082,000
Capital lease
obligations less
current maturities..... 569,000 627,000 193,000 -- --
Deficit accumulated
during development
stage.................. (46,611,000) (70,095,000) (87,620,000) (100,805,000) (111,470,000)
Total stockholders'
equity................. 70,418,000 47,341,000 29,880,000 16,917,000 6,411,000
- --------
(1) Basic net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the year in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share. For each of the periods presented,
basic and diluted net loss per share are the same due to the antidilutive
effect of potential common shares.
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Overview
Since its inception through December 31, 1999, the Company has incurred
ongoing losses from operations and has cumulative losses as of December 31,
1999 totaling $111,466,000. To date, the Company has not recorded any revenue
from the sale of products. Revenue recorded through December 31, 1999 was
earned in connection with contract research and the granting of certain short-
term rights.
The Company expects to remain in the development stage for the foreseeable
future and accordingly expects to continue to incur substantial losses.
Years Ended December 31, 1998 and 1999
No revenues were earned in the years ended December 31, 1998 and 1999.
Research and development expenses were $12,810,000 in 1998, as compared with
$8,819,000 for the year ended December 31, 1999. The decrease is due to the
cessation of Colloral clinical trials at the end of the third quarter of 1999
offset by severance costs associated with eliminating research and development
personnel.
General and administrative expenses were $1,712,000 in 1998, as compared
with $2,416,000 for the year ended December 31, 1999. The increase is due to
severance costs associated with terminating administrative employees.
Net interest income was $1,337,000 in 1998, as compared with $570,000 for
the year ended December 31, 1999. The decrease is due to a lower balance of
cash available for investment.
The net loss was $13,185,000 in 1998, as compared with $10,665,000 for the
year ended December 31, 1999. The net loss per share decreased from $0.80 for
the year ended December 31, 1998 to $0.64 for the year ended December 31,
1999. The change reflects the cessation of clinical trials and the reduction
in corporate activity, offset by severance costs.
In September 1999, the Company announced disappointing results from the
Phase III trial of Colloral, its product for rheumatoid arthritis. Very soon
thereafter, the Company began a corporate downsizing which was completed by
year end and resulted in the elimination of all full time employees. In 1999,
the Company recorded $1,495,000 of restructuring costs consisting of severance
charges of $1,454,000 and a net loss on equipment disposal of $41,000. Two
former employees, the President and Director of Finance, signed consulting
agreements with the Company to provide corporate business development and
reporting services on an as needed basis in the future.
Years Ended December 31, 1997 and 1998
No revenues were earned in the years ended December 31, 1997 and 1998.
Research and development expenses were $17,306,000 in 1997, as compared with
$12,810,000 for the year ended December 31, 1998. The decrease is due to lower
levels of research and clinical trial activity in 1998 and restructuring costs
recorded in 1997.
General and administrative expenses were $2,214,000 in 1997, as compared
with $1,712,000 for the year ended December 31, 1998. The decrease is due
primarily to decreased personnel costs and corporate activity and
restructuring costs recorded in 1997.
19
Net interest income was $1,995,000 in 1997, as compared with $1,337,000 for
the year ended December 31, 1998. The decrease is due to a lower balance of
cash available for investment.
The net loss was $17,525,000 in 1997, as compared with $13,185,000 for the
year ended December 31, 1998. The net loss per share decreased from $1.07 for
the year ended December 31, 1997 to $0.80 for the year ended December 31,
1998. The change reflects a decrease in personnel costs and research and
development activity levels and restructuring costs recorded in 1997.
In April 1997, the Company announced disappointing results from the Phase
III trial of Myloral, its product for multiple sclerosis. Very soon
thereafter, the Company also announced a corporate downsizing by eliminating
23 positions directly related to the Myloral program and an increased focus of
resources on the development of Colloral for rheumatoid arthritis. The Company
recorded a charge during the second quarter of 1997 of approximately $618,000
relating primarily to employee severance costs and costs associated with
terminating Myloral manufacturing and clinical trial functions. This estimated
charge was adjusted to $615,000 during the third quarter of 1997 to reflect
actual costs incurred.
In May 1997, the Company announced preliminary results from two Phase II
trials of Colloral for rheumatoid arthritis. Both trials demonstrated positive
trends for Colloral, although statistical significance was not demonstrated
versus placebo. A restructuring plan was announced in June 1997, to further
focus the Company's efforts to the clinical program for Colloral. This
resulted in a further workforce reduction of 30 positions. The Company
recorded a charge during the second quarter of 1997 of approximately
$2,689,000 relating to employee severance, costs associated with vacating
leased space and equipment disposal and write-offs. This estimated charge was
adjusted to $1,636,000 during the third quarter of 1997 to reflect the
sublease of 22,000 square feet of space and actual costs incurred.
Liquidity and Capital Resources
The Company's needs for funds have historically fluctuated from period to
period as it has increased or decreased the scope of its research and
development activities. Its current needs have been significantly reduced as a
result of the termination of research, development and administrative
employees and other operating expenses in 1999. Since inception, the Company
has funded these needs almost entirely through sales of its equity securities.
The Company's working capital and capital requirements will depend on
numerous factors, including the strategic direction in which the Company and
its shareholders choose, the level of resources that the Company devotes to
the development of its patented products, the extent to which it proceeds by
means of collaborative relationships with pharmaceutical companies and its
competitive environment. Based upon its budget for the calendar year 2000, the
Company believes that current cash and marketable securities and the interest
earned from the investment thereof will be sufficient to meet the Company's
operating expenses and capital requirements for at least five years. At the
appropriate time, the Company may seek additional funding through public or
private equity or debt financings, collaborative arrangements with
pharmaceutical companies or from other sources. If additional funds are
necessary but not available, the Company will have to reduce certain areas of
research, product development, manufacturing or marketing activity, or
otherwise modify its business strategy. Such a reduction would have a material
adverse effect on the Company.
In order to preserve principal and maintain liquidity, the Company's funds
are invested in U.S. Treasury obligations and other short-term instruments. As
of December 31, 1999, the Company's cash and cash equivalents and marketable
securities totaled $6,973,000. Current liabilities at December 31, 1999 were
$671,000.
Impact of Year 2000 Issues
Over the last two years, the Company has prepared for the possible
disruptions that might have resulted from the date change to the Year 2000. No
year 2000 problems were experienced and at this point the Company
20
believes no material exposure to Year 2000 issues exist. Total expenditures
related to the conversions to new software for the Year 2000 issues totaled
less than $1,000.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company invests all of its cash in U.S. Treasury obligations and money
market instruments. These investments are denominated in U.S. dollars. Due to
the conservative nature of these instruments, the Company does not believe that
it has a material exposure to interest rate or market risk.
Item 8. Financial Statements and Supplementary Data.
Information with respect to the Company's financial statements and financial
statement schedules filed with this report is set forth in Item 14 of Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
21
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by this Item and not provided below is
incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange Commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1999.
Executive officer information is as follows:
Robert C. Bishop, Ph.D., age 57, became a director of the Company in May
1992, when he was also elected President and Chief Executive Officer. In May
1999, Dr. Bishop was elected Chairman of the Board. For more than five years
prior to joining the Company, Dr. Bishop held senior management positions at
Allergan, Inc., an eye and skin care company, including President of Allergan
Medical Optics from 1986 to 1988, Senior Vice President, Corporate Development
of Allergan, Inc. from 1988 to 1989, President of Allergan Pharmaceuticals,
Inc. from 1989 to 1991 and Group President, Therapeutics for Allergan's
worldwide pharmaceutical, surgical and neurotoxin businesses from February
1991 to May 1992. From 1976 through 1986, Dr. Bishop served as an executive of
American Hospital Supply Corporation. Dr. Bishop received his B.A. degree and
a Ph.D. in biochemistry from the University of Southern California and his
M.B.A. from the University of Miami. Dr. Bishop is a director of Quintiles
Transnational Corp., a contract research, sales and marketing company serving
the health care industry. Dr. Bishop is also a director of Millipore
Corporation, a purification technologies/systems company serving the
microelectronics, biopharmaceutical and analytical laboratories markets.
Effective December 31, 1999, Dr. Bishop ceased as an employee of AutoImmune
and is working in the same capacity on a consultant basis.
Heather A. Ellerkamp, CPA, age 35, joined the Company in February 1994.
Since June 1997, Ms. Ellerkamp has been Director of Finance and Treasurer of
the Company, and from February 1994 to June 1997, she held various financial
positions with the Company, including controller. From 1992 to 1994, she was
employed by Kendall Square Research Corporation, most recently as Corporate
Accounting Manager and Assistant Controller. Ms. Ellerkamp received her B.A.
degree in Management Science from the University of California, San Diego and
her M.B.A. from the University of Michigan. Effective November 19, 1999, Ms.
Ellerkamp ceased as an employee of AutoImmune and is working in the same
capacity on a consultant basis.
Item 11. Executive Compensation.
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange Commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1999.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange Commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1999.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
Page
----
Report of Independent Accountants F-2
Balance Sheet at December 31, 1998 and 1999 F-3
Statement of Operations for the three years ended December 31, 1999 and
for the period from inception (September 9, 1988) through December 31,
1999 F-4
Statement of Changes in Stockholders' Equity for the period from
inception (September 9, 1988) through December 31, 1999 F-5
Statement of Cash Flows for the three years ended December 31, 1999 and
for the period from inception (September 9, 1988) through December 31,
1999 F-6
Notes to the Financial Statements F-7
(a)(2) Financial Statement Schedule
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements.
(a)(3) Exhibits
Exhibit
Number Exhibit Description
------- -------------------
3.1 --Restated Certificate of Incorporation(1)
3.2 --By-Laws(2)
4.1 --Specimen Common Stock Certificate(2)
10.1 --Amended and Restated 1988 Stock Option Plan effective December 14,
1992(1)
10.2 --Agreement, dated March 18, 1992, between AutoImmune Inc. and
Schering Corporation(2)+
10.3 --Lease Agreement, dated November 1992, between AutoImmune Inc. and
Ledgemont Realty Trust(2)
10.4 --Amended and Restated Research and Development Agreement, dated July
1, 1992, between AutoImmune Inc. and The Brigham and Women's
Hospital, Inc.(2)
10.5 --Research Agreement, dated October 21, 1992, and Royalty Agreement,
dated 1992, between AutoImmune Inc. and Joslin Diabetes Center(2)
10.6 --Research Agreement, dated July 1, 1992, Royalty Agreement, dated
June 6, 1990, and Research Agreement, dated July 1990, between
AutoImmune Inc. and the Beth Israel Hospital(2)
10.7 --Cooperative Research and Development Agreement, effective July 1,
1990, among the National Eye Institute of the National Institutes of
Health, The Brigham and Women's Hospital and AutoImmune Inc.(2)
10.8 --Retainer Agreement, dated June 1, 1992, between AutoImmune Inc. and
Cato Research Ltd.(2)
10.9 --Employment Agreement, dated April 2, 1992, between AutoImmune Inc.
and Robert C. Bishop(2)
10.10 --Amended Consulting Agreement, dated July 1992, and Amended and
Restated Consulting Agreement, dated November 1988, between
AutoImmune Inc. and Howard L. Weiner, M.D.(2)
10.11 --Amended Consulting Agreement, dated July 1992, and Amended and
Restated Consulting Agreement, dated November 1988, between
AutoImmune Inc. and David A. Hafler, M.D.(2)
23
Exhibit
Number Exhibit Description
------- -------------------
10.13 --Consulting Agreement, dated February 1, 1989, between AutoImmune
Inc. and James P. Tam, Ph.D.(2)
10.14 --Scientific Advisory Board Agreement, dated August 5, 1992, and
Consulting Service Agreement, dated August 5, 1992, between
AutoImmune Inc. and Jack L. Strominger, M.D.(2)
10.15 --Scientific Advisory Board Agreement, dated August 11, 1992, between
AutoImmune Inc. and Herman N. Eisen, M.D.(2)
10.16 --Scientific Consultant Agreement, dated July 16, 1992, between
AutoImmune Inc. and Henry Oettinger, Ph.D.(2)
10.17 --Nonemployee Director Stock Option Plan(3)
10.18 --Employee Stock Purchase Plan(4)
10.19 --License and Collaboration Agreement dated December 1, 1994 between
AutoImmune Inc. and Eli Lilly and Company(5)+
10.20 --First Amendment to Lease dated October 31, 1993 between AutoImmune
Inc. and Ledgemont Realty Trust(6)
10.21 --Second Amendment to Lease dated February 1, 1996 between AutoImmune
Inc. and Ledgemont Realty Trust(6)
10.22 --Third Amendment to Lease, dated October 23, 1996 between AutoImmune
Inc. and Ledgemont Realty Trust(7)
10.23 --Sublease agreement, dated November 1, 1997 between AutoImmune Inc.
and Antigenics, LLC(7)
10.24 --Consent to Sublease Agreement, dated November 1, 1997 between
AutoImmune Inc., Antigenics, LLC, and Ledgemont Realty Trust(7)
10.25 --1998 Stock Option Plan(8)
10.26 --Development and License Agreement dated as of December 4, 1998
between AutoImmune Inc. and Teva Pharmaceutical Industries Ltd.(9)++
10.27 --Sublease Termination Agreement, dated June 15, 1998 between
AutoImmune Inc. and Antigenics, LLC (9)
10.28 --Fourth Amendment to Lease, dated July 17, 1998 between AutoImmune
Inc. and Ledgemont Realty Trust(9)
10.29 --Consulting Agreement, dated January 3, 2000, between AutoImmune Inc.
and Robert C. Bishop, Ph.D.
10.30 --Consulting Agreement, dated November 20, 1999, between AutoImmune
Inc. and Heather A. Ellerkamp
10.31 --Consulting Agreement, dated September 20, 1999, between AutoImmune
Inc. and Fletcher Spaght, Inc.
23 --Consent of PricewaterhouseCoopers LLP
- --------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 0-20948).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-55430).
24
(3) Incorporated by reference to Appendix A to the Company's definitive Proxy
Statement dated April 6, 1994 for the Annual Meeting of Shareholders held
on May 18, 1994 filed pursuant to Section 14 of the Exchange Act.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on August 17, 1994
(Registration No. 33-82972).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, as amended.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on December 3, 1998
(Registration No. 333-68309).
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
+ The Company has been granted confidential treatment of the redacted
portions of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, and has separately filed a complete copy
of this exhibit with the Securities and Exchange Commission.
++ The Company has requested confidential treatment of the redacted portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended, and has separately filed a complete copy of this exhibit
with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
1999.
25
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, on the 30th day
of March, 2000
AUTOIMMUNE INC.
/s/ Robert C. Bishop
By: _________________________________
Robert C. Bishop,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert C. Bishop Chairman, President and March 30, 2000
______________________________________ Chief Executive Officer
Robert C. Bishop
(Principal Executive Officer)
/s/ Heather A. Ellerkamp Director of Finance and March 30, 2000
______________________________________ Treasurer
Heather A. Ellerkamp
(Principal Financial and Accounting
Officer)
/s/ Hugh A. D'Andrade Director March 30, 2000
______________________________________
Hugh A. D'Andrade
/s/ Allan R. Ferguson Director March 30, 2000
______________________________________
Allan R. Ferguson
/s/ R. John Fletcher Director March 30, 2000
______________________________________
R. John Fletcher
/s/ Henri A. Termeer Director March 30, 2000
______________________________________
Henri A. Termeer
26
AutoImmune Inc.
(a development stage company)
Index to Financial Statements
Page
----
Financial Statements:
Report of Independent Accountants F-2
Balance Sheet at December 31, 1998 and 1999 F-3
Statement of Operations for the three years ended December 31, 1999 and
for the period from inception (September 9, 1988) through December 31,
1999 F-4
Statement of Changes in Stockholders' Equity for the period from
inception (September 9, 1988) through December 31, 1999 F-5
Statement of Cash Flows for the three years ended December 31, 1999 and
for the period from inception (September 9, 1988) through December 31,
1999 F-6
Notes to the Financial Statements F-7
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders
of AutoImmune Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of AutoImmune
Inc. (a development stage company) at December 31, 1998 and 1999, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999 and for the period from inception
(September 9, 1988) through December 31, 1999, in conformity with generally
accepted accounting principles in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2000
F-2
AutoImmune Inc.
(a development stage company)
Balance Sheet
December 31,
1998 1999
Assets
Current assets:
Cash and cash equivalents $ 4,801,000 $ 6,973,000
Marketable securities 12,727,000 --
Interest receivable 77,000 --
Prepaid expenses and other current assets 129,000 109,000
------------- -------------
Total current assets 17,734,000 7,082,000
Fixed assets, net 538,000 --
Other assets 54,000 --
------------- -------------
$ 18,326,000 $ 7,082,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 677,000 $ 64,000
Accrued expenses 539,000 607,000
Current portion of obligations under capital
leases 193,000 --
------------- -------------
Total current liabilities 1,409,000 671,000
------------- -------------
Commitments and contingencies (Notes 6 and 14)
------------- -------------
Stockholders' equity:
Common stock, $.01 par value: 25,000,000 shares
authorized; 16,548,995 and 16,657,872 shares
issued and outstanding at December 31, 1998
and 1999, respectively 166,000 167,000
Additional paid-in capital 117,551,000 117,714,000
Deficit accumulated during the development
stage (100,805,000) (111,470,000)
Net unrealized gain on marketable securities 5,000 --
------------- -------------
16,917,000 6,411,000
------------- -------------
$ 18,326,000 $ 7,082,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
AutoImmune Inc.
(a development stage company)
Statement of Operations
Period from
inception
(September 9, 1988)
For the year ended December 31, through
1997 1998 1999 December 31, 1999
Revenue:
Option fees $ -- $ -- $ -- $ 2,200,000
Research and
development revenue
under collaborative
agreements -- -- -- 955,000
------------ ------------ ------------ -------------
Total revenue -- -- -- 3,155,000
------------ ------------ ------------ -------------
Costs and expenses:
Research and
development:
Related party 1,880,000 1,314,000 1,170,000 19,332,000
All other 15,426,000 11,496,000 7,649,000 90,755,000
General and
administrative 2,214,000 1,712,000 2,416,000 15,655,000
------------ ------------ ------------ -------------
Total costs and
expenses 19,520,000 14,522,000 11,235,000 125,742,000
------------ ------------ ------------ -------------
Interest income 2,063,000 1,344,000 572,000 11,424,000
Interest expense (68,000) (7,000) (2,000) (303,000)
------------ ------------ ------------ -------------
1,995,000 1,337,000 570,000 11,121,000
------------ ------------ ------------ -------------
Net loss $(17,525,000) $(13,185,000) $(10,665,000) $(111,466,000)
============ ============ ============ =============
Net loss per share--
basic and diluted $ (1.07) $ (0.80) $ (0.64)
============ ============ ============
Weighted average
shares outstanding--
basic and diluted 16,385,629 16,491,701 16,602,911
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
AutoImmune Inc.
(a development stage company)
Statement of Changes In Stockholders' Equity
For the period from inception (September 9, 1988)
through December 31, 1999
Deficit
accumulated Accumulated
Common Stock Additional during the other Total
Number Par paid-in Comprehensive development comprehensive stockholders'
of shares value capital Loss stage income equity
Issuance of common
stock during 1988 168,750 $ 2,000 $ -- $ (1,000) $ -- $ 1,000
Conversion of junior
convertible
preferred stock to
common stock during
1991 506,250 5,000 (3,000) 2,000
Issuance of common
stock during 1992 91,116 1,000 100,000 101,000
Conversion of
mandatorily
redeemable
convertible
preferred stock to
common stock during
1993 6,353,568 63,000 12,496,000 12,559,000
Issuance of common
stock, net of
issuance costs
during 1993 3,022,000 30,000 35,669,000 35,699,000
Issuance of common
stock during 1994 67,500 1,000 2,000 3,000
Issuance of common
stock, net of
issuance costs
during 1995 6,072,883 61,000 68,530,000 68,591,000
Issuance of common
stock during 1996 75,978 1,000 441,000 442,000
Comprehensive loss:
Net loss for the
period from
inception
(September 9, 1988)
through
December 31, 1996 $ (70,091,000) (70,091,000) (70,091,000)
Other comprehensive
income (loss):
Net unrealized gain
on marketable securities
during 1994, 1995
and 1996 (Note 2) 34,000 34,000 34,000
-------------
Comprehensive loss (70,057,000)
------------- ------------- ------------- ============= ------------- ------------ ------------
Balance at December
31, 1996 16,358,045 164,000 117,238,000 (70,095,000) 34,000 47,341,000
Comprehensive loss:
Net loss (17,525,000) (17,525,000) (17,525,000)
Other comprehensive
income (loss):
Net unrealized loss
on marketable
securities (Note
2) (28,000) (28,000) (28,000)
-------------
Comprehensive loss (17,553,000)
=============
Issuance of common
stock 34,851 -- 92,000 92,000
------------- ------------- ------------- ------------- ------------ ------------
Balance at December
31, 1997 16,392,896 164,000 117,330,000 (87,620,000) 6,000 29,880,000
Comprehensive loss:
Net loss (13,185,000) (13,185,000) (13,185,000)
Other comprehensive
income (loss):
Net unrealized loss
on marketable
securities (Note
2) (1,000) (1,000) (1,000)
-------------
Comprehensive loss (13,186,000)
=============
Issuance of common
stock 156,099 2,000 221,000 223,000
------------- ------------- ------------- ------------- ------------ ------------
Balance at December
31, 1998 16,548,995 166,000 117,551,000 (100,805,000) 5,000 16,917,000
Comprehensive loss:
Net loss (10,665,000) (10,665,000) (10,665,000)
Other comprehensive
income (loss):
Net unrealized loss
on marketable
securities (Note
2) (5,000) (5,000) (5,000)
-------------
Comprehensive loss $ (10,670,000)
=============
Issuance of common
stock 108,877 1,000 163,000 164,000
------------- ------------- ------------- ------------- ------------ ------------
Balance at December
31, 1999 16,657,872 $ 167,000 $ 117,714,000 $(100,470,000) $ -- $ 6,411,000
============= ============= ============= ============= ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
AutoImmune Inc.
(a development stage company)
Statement of Cash Flows
Period from
inception
Increase (Decrease) in (September 9,
Cash and Cash Equivalents For the year ended December 31, 1988) through
Cash flows from operating December 31,
activities: 1997 1998 1999 1999
Net loss $ (17,525,000) $ (13,185,000) $ (10,665,000) $(111,466,000)
Adjustments to
reconcile net loss to
net cash used by
operating activities:
Interest expense
related to demand
notes converted into
mandatorily redeemable
convertible preferred
stock................. -- -- -- 48,000
Patent costs paid with
junior convertible
preferred and common
stock................. -- -- -- 3,000
Depreciation and
amortization.......... 960,000 567,000 311,000 4,464,000
Loss on sale/disposal
of fixed assets....... 604,000 2,000 36,000 642,000
Decrease in patent
costs................. -- -- -- 563,000
(Increase) decrease in
interest receivable... (99,000) 163,000 77,000 --
(Increase) decrease in
prepaid expenses and
other current assets.. 353,000 14,000 20,000 (109,000)
Increase (decrease) in
accounts payable...... (2,521,000) 201,000 (613,000) 64,000
Increase (decrease) in
accrued expenses...... (118,000) (125,000) 68,000 607,000
------------- ------------- ------------- -------------
Net cash used by
operating
activities........... (18,346,000) (12,363,000) (10,766,000) (105,184,000)
------------- ------------- ------------- -------------
Cash flows from
investing activities:
Purchase of available-
for-sale marketable
securities............ (30,592,000) (23,878,000) (4,316,000) (261,720,000)
Proceeds from
sale/maturity of
available-for-sale
marketable
securities............ 57,250,000 27,342,000 17,038,000 250,709,000
Proceeds from maturity
of held-to-maturity
marketable
securities............ -- -- -- 11,011,000
Proceeds from sale of
equipment............. 64,000 1,000 241,000 306,000
Purchases of fixed
assets................ (203,000) (48,000) (51,000) (5,288,000)
Increase in patent
costs................. -- -- -- (563,000)
Increase in other
assets................ -- (24,000) 54,000 (125,000)
------------- ------------- ------------- -------------
Net cash provided
(used) by investing
activities........... 26,519,000 3,393,000 12,966,000 (5,670,000)
------------- ------------- ------------- -------------
Cash flows from
financing activities:
Proceeds from sale-
leaseback of fixed
assets................ -- -- -- 2,872,000
Payments on obligations
under capital leases.. (864,000) (285,000) (193,000) (2,872,000)
Net proceeds from
issuance of
mandatorily redeemable
convertible preferred
stock................. -- -- -- 10,011,000
Proceeds from bridge
notes................. -- -- -- 300,000
Proceeds from issuance
of common stock....... 92,000 223,000 165,000 105,316,000
Proceeds from issuance
of convertible notes
payable............... -- -- -- 2,200,000
------------- ------------- ------------- -------------
Net cash provided
(used) by financing
activities........... (772,000) (62,000) (28,000) 117,827,000
------------- ------------- ------------- -------------
Net increase
(decrease) in cash
and cash
equivalents.......... 7,401,000 (9,032,000) 2,172,000 6,973,000
Cash and cash
equivalents at
beginning of period.. 6,432,000 13,833,000 4,801,000 --
------------- ------------- ------------- -------------
Cash and cash
equivalents at end of
period............... $ 13,833,000 $ 4,801,000 $ 6,973,000 $ 6,973,000
============= ============= ============= =============
See Note 2 for supplemental disclosure of non-cash financing activities.
The accompanying notes are an integral part of these financial statements.
F-6
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
1.Formation and Operations of the Company
AutoImmune Inc. (the "Company") was incorporated in Delaware on September
9, 1988. The Company is dedicated to the development of innovative
therapeutics to treat people who suffer from immune systems disorders. The
Company's therapeutic approach is based upon "mucosal tolerance," a method
designed to control disease by using the body's natural immunosuppressive
mechanisms. The Company is considered a development stage company as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7,
Accounting and Reporting by Development Stage Enterprises.
The Company has not yet completed the development of any products. The
Company's products will require significant additional clinical testing and
investment prior to commercialization. To date the Company has been
dependent on collaborative agreements for the majority of its basic
research and has primarily used contract manufacturers to produce its
products for clinical trials.
2.Summary of Significant Accounting Policies
Cash Equivalents and Marketable Securities
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The
Company invests primarily in U.S. Government debt securities. These
investments are subject to minimal credit and market risks. The Company
specifically identifies securities for purposes of determining gains and
losses on the sale of cash equivalents and marketable securities. At
December 31, 1998, the Company has classified all of its marketable
securities as available-for-sale as defined in SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Accordingly, unrealized
gains and losses on available-for-sale securities are recorded as a
separate component of stockholders' equity. At December 31, 1999, there
were no marketable securities.
Fair Value of Financial Instruments
At December 31, 1999, the Company's financial instruments consist of cash
equivalents, accounts payable and accrued expenses. The carrying amount of
these instruments approximate their fair values.
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line
method over the estimated useful life of the assets. Assets under capital
leases and leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases by use of the
straight-line method.
Contingent Stock Purchase Warrants
The value of contingent stock purchase warrants issued by the Company in
connection with clinical research agreements is determined on the date that
the Company estimates that it is probable that such contingencies will be
met. The fair value of the warrants on the measurement date is recorded as
compensation expense. The Company periodically assesses whether it is
probable and estimable that the compensation related to contingent warrants
will be earned.
Revenue Recognition
Revenue from research and development arrangements is recognized pursuant
to the related agreements as work is performed or defined milestones are
attained. Payments received under these arrangements prior to the
completion of the related work or attainment of milestones are recorded as
deferred revenue. Option fees representing payments to be made to the
Company for a right to evaluate and negotiate the terms of a
F-7
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
potential licensing arrangement are recognized as the options are granted
as such fees are non-refundable and the Company has no further obligations.
Stock Compensation
The Company's employee stock option plans are accounted for in accordance
with Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees. The Company applies the disclosure requirements
of SFAS No. 123, Accounting for Stock-Based Compensation.
Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income in 1998.
SFAS No. 130 requires that a full set of general purpose financial
statements be expanded to include the reporting of "comprehensive income."
Comprehensive income is comprised of two components, net income and other
comprehensive income. The adoption of SFAS No. 130 resulted in revised and
additional disclosures but had no effect on the financial position or
results of operations.
Net Loss Per Share--Basic and Diluted
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share. The
standard replaces the presentation of primary earnings per share prescribed
by APB No. 15, Earnings Per Share, with a presentation of basic earnings
per share and also requires dual presentation of basic and diluted earnings
per share on the face of the statement of operations for all entities with
complex capital structures. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share is computed similarly to fully diluted earnings
per share pursuant to APB No. 15. The Company adopted SFAS No. 128 in the
fourth quarter of fiscal 1997. The basic and diluted net loss per share
under SFAS No. 128 is not different from the previous computation and
presentation. Potential common shares from stock options and warrants are
excluded from the computation of diluted net loss per share as their effect
is antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 these
estimates.
Statement of Cash Flows
Disclosure of Non-Cash Investing and Financing Activities
In 1988, 168,750 shares of common stock and 168,750 shares of junior
convertible preferred stock were issued to the Brigham and Women's Hospital
in exchange for patent rights and technology contributed or licensed in
connection with the formation of the Company.
Notes payable to stockholders totaling $2,200,000 and related interest of
$48,000 were converted into Series A mandatorily redeemable convertible
preferred stock in 1991.
Bridge notes of $300,000 were converted into Series C mandatorily
redeemable convertible preferred stock in 1991.
F-8
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
In 1991, 168,750 shares of junior convertible preferred stock were
converted into 506,250 shares of common stock.
In 1993, 2,117,856 shares of mandatorily redeemable convertible preferred
stock were converted into 6,353,568 shares of common stock in connection
with the Company's initial public offering of common stock.
Supplemental Disclosure of Cash Flow Information
The Company has paid interest of $68,000, $7,000 and $2,000 in 1997, 1998
and 1999, respectively, and $255,000 since inception. The Company has paid
income taxes of $11,000 in 1996 and since inception.
3.Cash Equivalents and Marketable Securities
The following is a summary of cash equivalents held by the Company. Cash
equivalents are carried at fair market value, which approximated amortized
cost at December 31, 1998 and 1999.
December 31,
1998 1999
Money market $ 924,000 $ 659,000
U.S. Government debt securities 2,441,000 6,270,000
---------- ----------
$3,365,000 $6,929,000
========== ==========
The following is a summary of available-for-sale marketable securities held
by the Company at December 31, 1998 which are carried at fair market value:
Unrealized Unrealized Amortized
Maturity term Fair Value gains losses cost
December 31, 1998:
U.S. Government debt
securities............ within 1 year $12,727,000 $ 6,000 $ (1,000) $12,722,000
=========== =========== =========== ===========
There were no marketable securities at December 31, 1999. All of the
Company's marketable securities are classified as current at December 31,
1998 as these funds are highly liquid and are available to meet working
capital needs and to fund current operations. Gross realized gains and
losses on sales of marketable securities for the years ended December 31,
1998 and 1999 were not significant.
Marketable securities which were purchased and sold in periods prior to
adoption of SFAS No. 115 on January 1, 1994 other than held-to-maturity
marketable securities, are included in the category available-for-sale
marketable securities in the "period from inception" column of the
statement of cash flows.
4.Fixed Assets
Fixed assets consist of the following:
Estimated
useful
life December 31,
(years) 1998 1999
Laboratory equipment 2-5 $1,394,000 $ 160,000
Office equipment -- 434,000 --
Leasehold improvements -- 461,000 --
---------- ----------
2,289,000 160,000
Less--accumulated depreciation and
amortization 1,751,000 160,000
---------- ----------
$538.000 $ --
========== ==========
F-9
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
Depreciation and amortization expense relating to fixed assets was
$960,000, $567,000 and $311,000 for the years ended December 31, 1997, 1998
and 1999, respectively. Assets held under capital leases consisted of
$1,243,000 of laboratory equipment at December 31, 1998. There were no
assets held under capital leases at December 31, 1999. Accumulated
amortization of these assets totaled $1,072,000 at December 31, 1998. For
the years ended December 31, 1997, 1998 and 1999, amortization expense
charged to operations on assets held under capital lease obligations was
$552,000, $307,000 and $137,000, respectively. In 1997, fixed assets
totaling $2,931,000 were disposed of or sold, of which $1,642,000 were held
under capital leases. Accumulated depreciation and amortization relating to
these assets was $923,000 and $1,341,000, respectively. In 1999, fixed
assets with a cost totaling $2,180,000 and accumulated depreciation of
$1,903,000 were sold or disposed. Proceeds totaling $64,000, $1,000 and
$241,000 were received upon the sale of certain equipment in 1997, 1998 and
1999, respectively.
5.Accrued Expenses
Accrued expenses consist of the following:
December 31,
1998 1999
Accrued employee costs $322,000 $ 37,000
Accrued professional 217,000 92,000
Accrued severance -- 478,000
-------- --------
$539,000 $607,000
======== ========
6.Related Party Transactions
In connection with the formation of the Company and the issuance of 168,750
shares of common stock and 168,750 shares of junior convertible preferred
stock to The Brigham and Women's Hospital ("BWH"), the Company entered into
related technology transfer and research and development agreements with
BWH. The technology transfer agreement provides the Company with all rights
and interests in certain BWH patented technology in exchange for the
issuance of the aforementioned stock and the payment of royalties under
certain conditions. The research and development agreement provides that
certain research activities are performed by BWH on behalf of the Company.
The current research and development agreement terminates in June 2001. The
agreement provides for automatic two-year renewal periods, subject to the
Company's and BWH's mutual agreement annually, with respect to the budget
for research to be performed and related minimum payments made to BWH for
each following year. The Company has agreed to pay BWH minimum payments
totaling $314,000 for the one-year period ending June 30, 2000. There is no
guaranteed minimum payment for the one-year period ending June 30, 2001.
This agreement also provides for payments to BWH for royalties on sales of
related patented products by the Company, as well as for payments to BWH
for a portion, as defined in the agreement, of any proceeds received by the
Company in connection with the licensing of patented technology to, and
royalty or milestone payments received from, third parties. Royalty
payments to BWH begin upon the commercialization of the related products
and will continue for the life of the underlying patent. For a period not
to exceed three years after the first commercial sale of any product of the
Company, the Company is required to make payments to BWH in each quarter
only to the extent that the Company has a positive cash flow in such
quarter with the balance deferred to the succeeding quarter.
F-10
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
Deferred payments will be subject to interest. If the Company defaults in
the payment of any amount due to BWH, BWH will have an option to purchase
all technology developed under the research program at a purchase price
equal to the sum of all amounts previously paid by the Company to BWH. In
addition, certain expenses were paid by the Company for research conducted
at BWH.
During the year ended December 31, 1999, the Company paid $150,000 for
consulting services to an entity whose founder is a director of the
Company.
7.Income Taxes
The components of deferred income tax benefit are as follows:
Year ended December 31,
1997 1998 1999
Income tax benefit:
Federal $ 7,809,000 $ 4,557,000 $ 3,755,000
State 1,821,000 1,262,000 1,010,000
----------- ----------- -----------
9,630,000 5,819,000 4,765,000
Deferred tax asset valuation
allowance (9,630,000) (5,819,000) (4,765,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
No significant federal or state taxes were payable in any years as a result
of losses incurred and utilization of net operating losses and credits.
A reconciliation between the amounts of reported income tax (expense)
benefit and the amount determined by applying the U.S. federal statutory
rate of 35% for 1997, 1998 and 1999 to pre-tax loss is as follows:
Year ended December 31,
1997 1998 1999
Loss at statutory rate $ 6,134,000 $ 4,615,000 $ 3,733,000
Nondeductible research and
development expenses (1,190,000) (265,000) (162,000)
Federal and state research and
development, orphan drug, and
investment tax credits 3,576,000 843,000 542,000
State tax benefit, net of federal
tax liability 1,009,000 735,000 579,000
Stock option compensation 126,000 22,000 37,000
Utilization of net operating losses -- -- --
Other (25,000) (131,000) 36,000
----------- ----------- -----------
9,630,000 5,819,000 4,765,000
Benefit of loss not recognized,
increase in valuation allowance (9,630,000) (5,819,000) (4,765,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
F-11
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
Deferred tax assets are comprised of the following:
December 31,
1998 1999
Research costs capitalized for tax purposes $ 21,087,000 $ 24,593,000
Research and development, orphan drug and
investment tax credits 10,749,000 11,291,000
Loss carryforwards 15,792,000 16,589,000
Net unrealized gain on investments available-
for-sale (2,000) --
Other temporary differences 82,000 --
------------ ------------
Gross deferred tax assets 47,708,000 52,473,000
Deferred tax asset valuation allowance (47,708,000) (52,473,000)
------------ ------------
$ -- $ --
============ ============
The Company has provided a full valuation allowance for net deferred tax
assets since the realization of these future benefits is not sufficiently
assured as of the end of each related year. As the Company achieves
profitability, these deferred tax assets will be available to offset future
income tax liabilities and expenses. Of the $52,473,000 valuation allowance
at December 31, 1999, $748,000 relating to deductions for stock option
compensation will be credited to additional paid-in capital upon
realization.
At December 31, 1999, the Company had the following net operating loss,
research and development, orphan drug and investment tax credit
carryforwards available to reduce future tax liabilities, which expire as
follows:
Research and development,
Net operating orphan drug and investment
Year of expiration loss carryforward tax credit carryforwards
2003 $ 19,000
2004 91,000
2005 121,000
2006 162,000
2007 234,000
2008 420,000
2009 $ 43,000 960,000
2010 728,000
2011 3,895,000
2012 38,859,000 3,670,000
2018 553,000 888,000
2019 2,018,000 583,000
----------- -----------
$41,473,000 $11,771,000
=========== ===========
Ownership changes, as defined in the Internal Revenue Code, resulting from
the Company's initial public offering of stock in January 1993 and
subsequent follow-on offerings in 1995, had no impact on the amount of net
operating loss and tax credit carryforwards that can be utilized annually
to offset future taxable income or tax liabilities. Subsequent significant
ownership changes could, however, limit the utilization of these
carryforwards in future years.
F-12
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
8.Preferred Stock
Upon the closing of the Company's initial public offering on January 27,
1993 each share of Series A, B and C convertible preferred stock
automatically converted into three shares of common stock (Note 9). No
dividends had been paid to the preferred stockholders.
At December 31, 1998, the Company had authorized 5,000,000 shares of $.01
par value preferred stock. Preferred stock may be issued at the discretion
of the Board of Directors of the Company (without stockholder approval)
with such designations, rights and preferences as the Board of Directors
may determine from time to time. The preferred stock may have dividend,
liquidation, redemption, conversion, voting or other rights which may be
more expansive than the rights accorded to the common stock.
On May 17, 1995, the Company's Board of Directors adopted a shareholder
rights plan. The Board declared a distribution of one right for each share
of common stock outstanding on June 1, 1994. Stock issued after that date
will be issued with an attached right. Each right will entitle the holder,
upon the occurrence of certain events, to purchase 1/100th of a share of
preferred stock at an exercise price of $73. The Board may, at any time,
redeem the rights until their expiration on June 1, 2005, and may amend the
rights under certain circumstances until they become exercisable.
9.Stockholders' Equity and Common Stock
In December 1992, the Company effected a three-for-one stock split of the
Company's common stock in the form of a stock dividend. All common shares
and per share amounts have been adjusted to give retroactive effect to the
common stock split for all years presented.
In January 1993, the Company completed its initial public offering of
3,000,000 shares of common stock. Proceeds to the Company, net of issuance
costs, amounted to $35,690,000.
In January 1995, the Company completed a private placement of 2,039,547
shares of common stock. Proceeds to the Company, net of issuance costs,
amounted to $9,136,000.
In August and September 1995, the Company completed its second public
offering of 3,925,000 shares of common stock. Proceeds to the Company, net
of issuance costs, amounted to $58,878,000.
As of December 31, 1999, the Company has reserved 3,082,541 shares of
common stock for use in the Company's stock option plans and employee stock
purchase plan (Note 10).
10.Stock Option and Employee Stock Purchase Plans
1988 Stock Option Plan
The Company's 1988 Stock Option Plan (the "1988 Stock Option Plan"), as
amended effective May 15, 1996, provided for the granting of incentive
stock options and non-qualified stock options to employees and other
individuals performing services on behalf of the Company. The Compensation
Committee (the "Committee"), appointed by the Board of Directors, is
responsible for the administration of the 1988 Stock Option Plan. The
Committee determined the term of each option, option price, number of
shares for which each option was granted, whether restrictions were imposed
on the shares subject to options and the rate at which each option becomes
exercisable. The maximum number of shares of common stock of the Company
reserved for issuance in accordance with the terms of the 1988 Stock Option
Plan was 3,700,000.
F-13
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
On June 19, 1997, the Company repriced 338,850 options with exercise prices
ranging from $4.88 to $16.38 per share to 254,138 options at a price of
$2.00 per share. Employees had the option not to reprice certain options
previously granted. The repriced options were subject to the same vesting
schedule as the previous options except that any vesting would be forfeited
unless the optionee remained in the Company's employ through June 19, 1998.
The 1988 Stock Option Plan expired on September 19, 1998.
1998 Stock Option Plan
The Company's 1998 Stock Option Plan (the "1998 Stock Option Plan"),
adopted by the shareholders on May 28, 1998, provides for the granting of
incentive stock options and non-qualified stock options to employees,
directors and other individuals performing services on behalf of the
Company. The Committee is responsible for the administration of the 1998
Stock Option Plan. The Committee determines the term of each option, option
price, number of shares for which each option is granted, whether
restrictions will be imposed on the shares subject to options and the rate
at which each option is exercisable. The exercise price for stock options
granted may not be less than 100% of the fair market value per share of the
underlying common stock on the date granted (110% for options granted to
holders of more than 10% of the voting stock of the Company). The term of
options granted under the 1998 Stock Option Plan cannot exceed ten years
(five years for options granted to holders of more than 10% of the voting
stock of the Company). The maximum number of shares of common stock of the
Company reserved for issuance in accordance with the terms of the 1998
Stock Option Plan is 1,300,000.
Director Stock Option Plan
During 1993, the Company's Board of Directors approved a stock option plan
for non-employee directors (the "Director Option Plan"). This plan was
approved by the Company's shareholders in 1994 and an amendment to the plan
was approved by the shareholders on May 15, 1996. Under the original
Director Option Plan, each director who was eligible to participate in the
plan on May 19, 1993 received, at fair market value on the date of grant,
options to purchase 4,000 shares of common stock. Under the amended
Director Option Plan, upon the first election of a non-employee to the
Board of Directors, the director shall receive an option to purchase 25,000
shares of common stock and will receive options to purchase an additional
6,500 shares of common stock every year thereafter if the individual
remains a member of the Board of Directors. In addition, an option to
purchase 1,000 shares of common stock was granted to each director who was
a member of a standing committee of the Board of Directors on May 19, 1993.
An option for 1,000 shares will be granted automatically to each member of
a standing committee following his first election to each such committee,
and options to purchase 1,000 additional shares will automatically be
granted every four years thereafter for each standing committee of which
the individual remains a member. Options to purchase 162,000 shares of
common stock have been granted under this plan. A maximum of 300,000 shares
of common stock of the Company is reserved for issuance in accordance with
the terms of this amended plan.
F-14
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
A summary of option activity under the Stock Option Plans and the Director
Option Plan for the years ended December 31, 1997, 1998 and 1999 is as
follows:
Weighted average
Shares exercise price
Outstanding at December 31, 1996 2,356,511 $4.87
Granted (weighted average fair value $2.97) 1,218,608 5.19
Exercised (31,198) 2.72
Cancelled (1,479,356) 9.47
----------
Outstanding at December 31, 1997 2,064,565 1.85
Granted (weighted average fair value $1.51) 187,800 2.77
Exercised (129,688) 1.39
Cancelled (184,643) 3.27
----------
Outstanding at December 31, 1998 1,938,034 1.83
Granted (weighted average fair value $0.99) 278,500 1.73
Exercised (108,877) 1.51
Cancelled (464,276) 2.16
----------
Outstanding at December 31, 1999 1,643,381 1.74
==========
Options exercisable at year end 1,403,881 $1.68
==========
As of December 31, 1997 and 1998, 1,203,539 and 1,326,530 options were
exercisable, respectively, under the 1988 and 1998 Stock Option Plans and
Director Option Plan.
The following table summarizes information about stock options outstanding
at December 31,1999:
Options outstanding
Weighted Options exercisable
average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price Exercisable exercise price
$ 0.03 268,500 1.3 years $0.03 268,500 $.03
$ 0.53 80,000 9.9 years 0.53 -- --
$1.33-
$ 2.00 985,195 4.2 years 1.54 960,195 1.53
$2.03-
$ 3.00 219,750 8.6 years 2.56 93,375 2.54
$5.25-
$10.25 89,936 5.1 years 8.08 81,811 7.86
--------- ---------
1,643,381 1,403,881
========= =========
Employee Stock Purchase Plan
On July 20, 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan (the "Purchase Plan"). This plan enables eligible employees
to purchase the Company's common stock at 85% of the fair market value of
the stock on the date an offering commences or on the date an offering
terminates, whichever is lower. The Purchase Plan is available to
substantially all employees, subject to certain limitations. An eligible
employee may elect to have up to 12% of his or her base pay withheld and
applied toward the purchase of shares in such an offering (not to exceed
$25,000 in any year). At December 31, 1999, 158,160 shares of common stock
were reserved for purchases under the Purchase Plan. During 1998, 26,411
shares were purchased under the Purchase Plan at an average price of $1.59
per share. During 1999, no shares were purchased under the Purchase Plan.
F-15
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic based
method prescribed in APB No. 25. The Company has adopted the disclosure-
only provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for the Company's stock option plans and employee stock purchase
plan. Had compensation cost been determined based on the fair value at the
grant dates for awards in 1997, 1998 and 1999 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below:
Years ended December 31,
1997 1998 1999
Net loss:
As reported $(17,525,000) $(13,185,000) $(10,665,000)
Pro forma (18,059,000) (13,989,000) (10,710,000)
Net loss per share--basic and
diluted:
As reported $ (1.07) $ (0.80) $ (0.64)
Pro forma (1.10) (0.85) (0.65)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999: no dividend yield for
all years; expected volatility of 65%, 62% and 70%, respectively; risk free
interest rates ranging from 4.6% to 7.4% and a weighted average expected
option term ranging from 3 to 6.5 years for options granted during all
years. Because additional option grants are expected to be made each year,
the pro forma impact on the three years ended December 31, 1999 is not
representative of the pro forma effects which may be expected in future
years.
11.Accumulated Other Comprehensive Income
In the first quarter of 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires disclosure of comprehensive
income and its components in interim and annual reports. Comprehensive
income includes all changes in stockholders' equity during a period except
those resulting from investments by stockholders and distributions to
stockholders. Accordingly, the components of comprehensive income include
net income and unrealized gains and losses on available-for-sale
securities.
Net unrealized loss on marketable securities is comprised of the following:
For the period
January 1, 1994
through December 31,
1996 1997 1998 1999
Unrealized holding gain
(loss) arising during
the period $ 56,000 $ (6,000) $ 5,000 $ --
Reclassification
adjustment for (gain)
loss included in net
income (22,000) (22,000) (6,000) (5,000)
-------- -------- -------- ---------
Net unrealized gain
(loss) on marketable
securities $ 34,000 $(28,000) $ (1,000) $ (5,000)
======== ======== ======== =========
F-16
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
12.Employee Savings Plan
In 1993, the Company initiated an employee savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is
available to substantially all employees. The Company has made no
contributions to the 401(k) Plan since inception.
13.Restructuring Costs
In the second quarter of 1997, the Company recorded $3,307,000 of
restructuring costs as a result of a corporate downsizing. This charge
consisted of severance costs of $1,009,000 for 53 employees; lease costs of
$1,510,000; equipment disposal and write-offs of $531,000; and the
termination of certain contractual requirements of $257,000. During the
third quarter of 1997, this estimated charge was adjusted to $2,251,000 to
reflect the sublease of 22,000 square feet of space and actual costs
incurred. The adjusted charge consists of severance costs of $1,138,000 for
53 employees; lease costs of $261,000; equipment disposal and write-offs of
$599,000; and the termination of certain contractual requirements of
$253,000. As of December 31, 1998, all of these restructuring costs had
been paid.
In the third quarter of 1999, the Company recorded $661,000 of
restructuring costs after announcing disappointing results from the Phase
III clinical trial of Colloral, its product for rheumatoid arthritis. These
charges consisted of severance charges of $620,000 for 18 employees and 4
temporary employees and a net loss on equipment disposal of $41,000. In the
fourth quarter of 1999, the Company recorded an additional $834,000 of
restructuring costs consisting of severance charges for the remaining 4
employees.
14.Commitments and Contingencies
Clinical Research Agreement
The Company entered into an agreement with CATO Research ("CATO"),
effective June 1993, to have a clinical investigational study performed on
the Company's multiple sclerosis product. The agreement allowed for
termination by either the Company or CATO, upon prior written notice. In
1997, the Company terminated the agreement, therefore CATO was entitled to
a termination fee totaling $257,000. Additionally, CATO was granted a
warrant to purchase 30,000 shares of common stock of the Company at $10.50
per share which expires in June 2003. In 1998, the warrant to purchase
10,000 shares became exercisable upon the achievement of a specific
milestone. The value ascribed to these shares was not significant. Given
the uncertainty surrounding the achievement of the final milestone, the
estimated fair value of the remaining contingent stock purchase warrants to
purchase 20,000 shares of common stock of the Company cannot be reasonably
determined at December 31, 1999.
License Agreements
In December 1994, the Company entered into a license agreement with Eli
Lilly and Company ("Lilly"). Under the agreement, Lilly provided support
for clinical testing of the Company's autoimmune mediated (Type 1) diabetes
product in exchange for certain worldwide license rights for the
manufacture, distribution and sale of the related products. This agreement
was terminated in the first quarter of 1999 as a result of Lilly's failure
to make a required milestone payment. Lilly is obligated to complete the
trials now underway and to provide the Company with full access to the data
therefrom, including the right to use the data for any purpose. The Company
has regained all rights to the product. Lilly is completing the trials
under a non-exclusive license for research purposes only.
F-17
AutoImmune Inc.
(a development stage company)
Notes to the Financial Statements
Leases
The Company leased its facilities under an operating lease which expired on
December 2, 1999. The operating lease for facilities provided for monthly
rental payments and estimated monthly operating charges which covered
building maintenance costs and real estate taxes. On November 1, 1997, the
Company exercised its option to sublease 22,000 square feet of the 33,000
square feet total through the end of the lease term. In 1997 and 1998, the
Company received rent payments from the subtenant totaling $52,000 and
$211,000, respectively. Effective October 1, 1998, the sublease agreement
was terminated and concurrently, the Company's operating lease was amended
to include only the approximately 11,000 square feet occupied by the
Company.
Total rent expense was $507,000, $149,000 and $167,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
During 1997, the Company disposed of equipment under various leases entered
into prior to 1997 and combined the remaining assets from those various
leases into one lease agreement. The term for the combined lease under the
agreement was the twenty-four month period ended July 1999 and bore
interest at a rate determined on the lease date. At December 31, 1999,
there are no future minimum lease commitments.
15.Subsequent Event
In March 2000, the Company entered an agreement under which a subsidiary of
Elan Plc has purchased all of AutoImmune's rights to certain patent
applications involving the treatment of Alzheimer's Disease. Under the
terms of the deal, AutoImmune received a $4 million cash payment with
contingent payments of up to $3 million due over the next three years. At
the time the future payments are made, the subsidiary of Elan Plc will
receive warrants to purchase up to 750,000 shares of AutoImmune stock at
the market price for AutoImmune shares when the warrants are issued.
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