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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-30347
CURIS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3505116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
61 Moulton Street
Cambridge, Massachusetts 02138
(Address of principal executive offices, including zip code)
617-503-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value per share
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. [_]
As of March 19, 2001, the aggregate market value of the common stock held
by non-affiliates of the Registrant was approximately $122,926,701 based on the
closing sale price of $4.22 of the Registrant's Common Stock on the Nasdaq
National Market on such date.
As of March 19, 2001, 31,420,225 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 14, 2001, to be filed with the
Commission not later than 120 days after the close of the Registrant's fiscal
year, has been incorporated by reference in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
CURIS, INC.
TABLE OF CONTENTS
Form 10-K
PART I
ITEM 1. BUSINESS............................................................................. 3
ITEM 2. PROPERTIES........................................................................... 25
ITEM 3. LEGAL PROCEEDINGS.................................................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 26
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.................................................... 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS............... 29
ITEM 6. SELECTED FINANCIAL DATA.............................................................. 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................... 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 49
ITEM 11. EXECUTIVE COMPENSATION............................................................... 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................... 50
SIGNATURES....................................................................................... 51
FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Although we believe that the
expectations reflected in the forward-looking statements contained herein are
reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Our future financial condition and results of operations, as well
as any forward-looking statements, are subject to inherent risks and
uncertainties, including but not limited to the risk factors set forth below,
and for the reasons described elsewhere in this Annual Report. All forward-
looking statements and reasons why results may differ included in this Annual
Report are made as of the date hereof, and we assume no obligation to update
these forward-looking statements or reasons why actual results might differ.
As used in this Annual Report, the terms "we," "us," "our," the "Company" and
"Curis" mean Curis, Inc.
Curis(TM), Chondrogel(TM), Neo-Bladder(TM), Vascugel(TM) and BABS(TM) are
trademarks of Curis. This Annual Report also contains trademarks of third
parties. Each trademark of a third party appearing in this report is the
property of its owner.
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PART I
ITEM 1. BUSINESS
Overview
We intend to be a leader in the emerging field of regenerative medicine,
which seeks to improve, restore or preserve the normal function of tissues and
organs by harnessing the body's inherent ability to repair damage caused by
disease, trauma or age. By applying our knowledge of how genes function
(functional genomics) and our knowledge of how cells form into specialized adult
tissues (developmental biology), we believe we will be able to:
. activate cellular development pathways to promote repair and promote normal
tissue and organ function; and
. inhibit abnormal growth pathways to treat certain types of cancer.
We began operations on July 31, 2000 upon the completion of the merger of
Creative BioMolecules, Inc., Ontogeny, Inc. and Reprogenesis, Inc. Each of these
three companies made important contributions to the combined strength of our
business. Those contributions include the following:
Ontogeny: Validated developmental biology and
functional genomic discovery engine
Reprogenesis: Clinical development, regulatory affairs,
quality assurance, manufacturing, biomaterials
and tissue engineering expertise
Creative BioMolecules: Lead product awaiting regulatory review
and significant antibody and developmental
biology intellectual property
Our product development pipeline includes a product which is currently
recommended for approval in Europe and Australia and is under regulatory review
in the United States; a product in late-stage clinical development; multiple
early clinical and advanced preclinical products; and a discovery engine that
combines functional genomics and developmental biology across multiple
therapeutic areas. By harnessing the body's inherent ability to repair damage
caused by disease, trauma or age, we believe the products in our development
pipeline have the potential to change the way degenerative disease, cancer and
other disorders associated with loss of normal function are treated.
Since the merger, we have completed an extensive review of the research and
development pipeline of the combined companies, and have allocated resources
among the various research and development projects based on their strategic fit
and the availability of internal resources. To the extent a project requires
greater resources than are available internally, we may seek to enter into
academic and commercial collaborations to continue to pursue such projects.
Even though we have not identified any research and development projects for
termination, we may not continue to pursue all of the research and development
projects in our pipeline.
Background
Regenerative Medicine Background
The aging of the population is increasing the need for regenerative
medicine therapies. Chronic degenerative diseases result in deteriorating
quality of life and increasing cost of patient care. Currently, there are
insufficient or inadequate therapies available to address the underlying loss of
tissue function inherent in degenerative disorders (e.g. Alzheimer, Parkinson's
Disease, diabetes, etc.). In addition, malignancies, trauma, auto-immune
disorders and other similar conditions create the need for regenerative medicine
therapies.
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One of the challenges facing healthcare providers who treat this aging
population is how to provide access to effective therapeutics that are able to
stimulate repair and regeneration of tissues and organ systems damaged by
disease and age. There is mounting evidence that even elderly adults retain or
can regain the capacity to repair and rebuild tissues and organs. The
restoration of lost function would improve the independence and quality of life
of the individual while having the potential to decrease the financial burden to
society.
Functional Genomics/Developmental Biology
With the initial sequencing of the human genome complete, a major objective
for biotechnology and pharmaceutical companies will be to identify the key
target genes for drug discovery. A significant challenge will be to sort
efficiently through the approximately 30,000 genes in the human genome to
identify these key target genes. Understanding the function of genes in
development processes has become an important basis for creating new drug
development screens and innovative therapies.
Developmental biology, the study of the genetic events and biological
processes that control cell growth and cell differentiation in an organism from
its beginning (embryogenesis) through maturation, is a powerful tool that can be
used to identify therapeutics relevant to tissue repair and regeneration. It is
now understood that the same mechanisms that govern embryonic development are
active and required in adults for normal function, regeneration and repair.
Examples of these mechanisms include the body's normal replenishing of the blood
supply and maintenance of skin and hair growth. The control molecules
discovered in the embryo may someday be applied to the treatment of adult
diseases through cell re-population, regeneration or repair.
We are positioned to integrate genomics sequence data, bioinformatics,
chemoinformatics and knowledge of developmental biology to understand the
function of genes in tissue formation and repair. We believe creating high
throughput screening assays based on developmental biology discoveries will
enable us to accelerate the identification of new therapeutic product
candidates.
The Drug Discovery and Development Process
Historically, pharmaceutical products have been developed primarily by
creating and screening large collections of chemical compounds and natural
products. Using this approach, compounds are identified as pharmaceutical
candidates based on their activity in simple tests that are believed to mimic
aspects of human physiology or biochemistry. Should significant activity be
found, the compound would then be examined in animal models believed to simulate
human disease conditions. The principal limitation of this approach is that
these tests and use of animal models have not always predicted a candidate
drug's safety and efficacy in humans. In addition, the mechanisms by which these
compounds acted and the underlying causes of the disease have in many cases
remained unknown. Consequently, this approach has on occasion resulted in
candidate drugs which are ineffective or which merely ameliorate symptoms of a
disease without addressing its root causes.
While offering a significant improvement over traditional large
pharmaceutical drug discovery methods, a traditional genetics approach to drug
development also has weaknesses when compared with a developmental biology-based
approach. Traditional drug development relies on animal models and laboratory
studies using mature animals. This approach has significant limitations because
the biological processes of interest for treating disease are often inactive in
the healthy adult animal and relevant animal models of disease are difficult to
create and validate. We believe that examining tissues and organs active in
embryonic development will provide a rich source of potentially relevant targets
for drug discovery and help avoid these limitations. For these reasons,
developmental biology may prove to be a more efficient route to discover targets
and bring more product candidates into the clinic.
Recent advances in developmental biology and genomics have the potential to
facilitate drug discovery and development significantly by enabling the
identification of the control molecules and cellular mechanisms by which
organisms develop. This identification is important because these molecules and
mechanisms are believed to be responsible for inducing organ development. In
contrast to
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traditional drug discovery and development techniques, a developmental biology
approach focuses first on the role of molecules in early organ development and
allows the discovery of relevant molecules and processes because cell
regeneration in adults often repeats the developmental processes.
Our Regenerative Medicine Technologies
We have expertise and capabilities in the four major regenerative medicine
technologies which we believe are necessary to further our understanding of
developmental processes and take advantage of the opportunities created by the
sequencing of the human genome. These technologies are:
. Protein Factors: Gene/protein identification, expression and functional
---------------
characterization, and the ability to develop therapies based on or
incorporating genes/proteins through protein biochemistry, protein
production and protein delivery. Examples of protein factors include OP-1
for treatment of bone disorders and Hedgehog protein-based treatments for
neurological disorders.
. Cell Therapies: The ability to culture, qualify, deliver and manage cells
--------------
for the development of therapies incorporating living cells for tissue
regeneration to restore normal physiological function. Examples of cell
therapies include the differentiation of stem cells into mature beta islet
cells for treating diabetes and Vascugel to prevent restenosis and
thrombosis following vascular injury, such as that which occurs following
surgery.
. Tissue Engineering: Matrix development and delivery expertise including
------------------
knowledge of biomaterials, synthetic materials and other scaffolds for
tissue formation and knowledge of cell/factor/matrix interactions in tissue
formation and repair. Examples of tissue engineering include the Chondrogel
and Neo-Bladder products under development in which the shape and structure
of combined cells and biomaterials are utilized to repair or replace organ-
systems.
. Small Molecules: Cell-based assays, developmental biology expertise, high
---------------
throughput screening, combinatorial chemistry libraries and medicinal
chemistry. Examples of small molecules include Cur-61414 for treatment of
basal cell carcinoma and a Hedgehog agonist to stimulate regrowth of hair
follicles.
Protein Factors
The role morphogenic proteins play in the formation, maintenance and repair
of many tissues leads us to believe that these proteins may provide therapies to
treat several types of acute injury or chronic disease. Our research and that of
our collaborators have indicated that morphogenic proteins are critical in the
formation of many tissues including bone, cartilage, kidney and brain. OP-1, a
morphogenic protein, has been developed in a formulation with a collagen matrix
for the purpose of inducing bone formation. In human trials, OP-1 has
demonstrated the ability to repair bone defects in several orthopaedic
indications. Additional clinical trials are currently underway by Stryker
Corporation (Stryker) to evaluate OP-1 in other indications, including the
treatment of fresh fractures, spinal fusion and periodontal disease. We are also
exploring the role of several of the morphogenic proteins in tissues throughout
the body for the purpose of identifying new product opportunities.
Cell Therapies and Tissue Engineering
For decades, scientists have sought to create new tissue in the body by
transplanting viable cells. These cells often have not remained viable for
extended periods or supported new tissue formation. The genesis of our tissue
engineering technology was a series of observations made by researchers at
Harvard University and Massachusetts Institute of Technology. In preclinical
models, these researcher combined a suspension of cells with a fibrous
biodegradable synthetic matrix material and then implanted the cell/matrix
combination into a host. This biodegradable matrix imparts the structure that is
often needed for the cells to organize themselves to form tissue. The host organ
incorporated the transplanted synthetic matrix, and the creation of new tissue
resulted, combined with cell growth and the development of a natural matrix by
the transplanted cells. This approach allowed new solid structures to be
implanted into
5
the body using conventional open surgical procedures for the purpose of creating
new solid tissue structures. The implantable technology using fibrous matrices
has been licensed for genitourinary (i.e., kidney, ureter, bladder, urethra and
reproductive system) and breast indications.
Additionally, we and our collaborators have developed tissue formation
techniques that could be delivered in a minimally invasive fashion. We have
demonstrated in preclinical models that cells can be combined with viscous
hydrogels. If the hydrogels were biodegradable, the cell/hydrogel suspensions
could be delivered into the body in a minimally invasive procedure in both
peripheral and deep body structures to produce new tissue. Once delivered into
the body, the cells would remain viable, propagate and synthesize natural matrix
materials with the net formation of new viable tissue. This hydrogel-based
technology has been licensed to us in all therapeutic fields of use.
Our tissue formation technology has a number of advantages compared to
other approaches. Our technology is straightforward to apply and, for the
injectable approach, can be delivered in a minimally invasive procedure using
standard endoscopic devices. Furthermore, the technology can be applied to many
tissue types. The physiological function and nature of certain stem cells, for
example, suggest that they might be appropriate therapeutic products for
diabetes and neurological disorders.
On October 5, 2000, we announced the receipt of a second $2,000,000 grant
from the National Institute of Standards and Technology (NIST) to support the
development of a new class of biomaterials designed to enable surgical
procedures that augment, repair or regenerate lost structural tissue or
physiological function. The grant period is from January 1, 2001 to December 31,
2003. Previously, we were awarded a $2,000,000 grant from NIST to support the
development of our cardiovascular products, including Vascugel. The grant period
for the first NIST grant is from November 1, 1999 to October 31, 2002.
Small Molecules
A variety of approaches are being utilized by our scientists to study gene
expression patterns and to determine the function of developmentally interesting
proteins. Identifying the roles that a gene and its protein play during
development is an essential element in determining its utility as a basis for a
therapeutic agent or screening target. The program employs the following key
elements:
. expression profiling of genes across different developmental stages of
organs and tissues to identify novel genes which may be important for
repair and regeneration of these tissues in adults;
. computer technology to categorize, characterize and help establish
proprietary positions for gene discoveries;
. a battery of assays to determine where and when genes and their products
become active using our developmental biology technologies to investigate
expression patterns in the embryo;
. traditional and proprietary assays to rapidly determine the expression
patterns of genes during development and in adult organs; and
. small molecule screening through the use of functional assays, including
cell-based assays, that are amenable to screening both biological and
chemical libraries for active compounds.
Our system compares complementary DNA libraries from relevant stages of
embryonic development. We believe that functional screening programs are one
answer to identifying the most promising drug development leads and we believe
that developmental biology-based functional screening programs provide a
powerful tool to identify the most significant genomic sequences that may have
the highest therapeutic potential. Follow-up assay development and
high-throughput screening produces proprietary lead compounds which can be
optimized through standard medicinal chemistry methods. Using this approach, we
have also generated additional potential product candidates:
. a potential treatment for peripheral neuropathies (damaged nervous system
tissues) from research based on the Hedgehog proteins;
6
. a potential protein and small molecule-based treatment for hair loss from
research based on the Hedgehog proteins;
. a potential cell-based treatment derived from pancreatic ductal cells for
Type I diabetes;
. molecules for the potential treatment of Type II diabetes; a small molecule
for the potential treatment of Basal Cell Carcinoma, bladder cancer and
prostate cancer; and
. a small molecule for the potential treatment of colon cancer.
Curis Pipeline
- ------------------------------------------------------------------------------------------------------------------------------------
Product/
Therapeutic IND Phase Regulatory
Approach Indication Research Pre-Clinical Preparation Phase I/II III/Pivotal Review
- ------------------------------------------------------------------------------------------------------------------------------------
Chondrogel Vesicoureteral Reflux --------------------------------------------------------------
Vascugel Coronary Artery Disease -------------------------------------------------
Cur-61414 Basal Cell Carcinoma -------------------------------------
BMP-7 Stroke Recovery ---------------------
Hedgehog Neuropathies/CNS ---------------------
BMP-7 Chronic Renal Failure ---------------------
Hedgehog Hair Re-growth ---------------------
Wnt Colon Cancer ----------
Stem Cells Type I Diabetes ----------
Insulin Sensitizers Type II Diabetes ----------
SMol. Inhibitors Other Cancers ----------
Hedgehog Parkinson's Disease ----------
Programs Partnered with Stryker Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Product/
Therapeutic Pre-Clinical IND Phase Regulatory
Approach Indication Research Preparation Phase I/II III/Pivotal Review
- ------------------------------------------------------------------------------------------------------------------------------------
OP-1 Non-Union Fractures ------------------------------------------------------------------------------
OP-1 Fresh Fractures ---------------------------------------------------------------
OP-1 Spinal Fusion ----------------------------------------------------
OP-1 Periodontal Disease ----------------------------------------------------
7
Chondrogel for Vesicoureteral Reflux
Vesicoureteral Reflux
Under normal conditions, the orifice at the vesicoureteral junction (i.e.,
the junction at which the ureter enters the bladder) allows urine to enter the
bladder and prevents urine from flowing back into the ureter, particularly
during urination. In this way, the kidney is protected from high pressure in the
bladder and from contamination by possibly infected urine. When the junction is
incompetent, urine in the bladder flows back into the ureters and, in many
cases, to the kidneys. Vesicoureteral reflux, a congenital condition, refers to
the retrograde flow (i.e., reflux) of urine from the bladder into the ureter(s)
and, often, to the kidney(s) and affects up to 3% of children.
Reflux and resulting urinary tract infections (UTIs) and possible renal
scarring are significant causes of illness in children. Primary reflux results
from a congenital incompetence of the vesicoureteral junction. Retrograde flow
of infected urine can result in kidney damage and scarring. Approximately 30-50%
of all pediatric patients with UTIs also have reflux.
Current Treatments/Limitations for Reflux
The accepted standard of care for reflux is dependent on the severity of
the condition and is designed to minimize or prevent kidney infections. Most
patients with low-grade reflux may initially be managed medically. Medical
management typically consists of administering antibiotics until the condition
resolves. Additionally, standard care requires frequent urine cultures and
invasive examinations to monitor the condition. The inherent risks associated
with long-term use of antibiotics include the emergence of antibiotic resistant
bacteria and allergic reactions, as well as other risks. The treatment regimens
generally require the child to return regularly to the hospital or clinic for
extensive and invasive studies.
Open surgery is typically performed for severe reflux as well as for those
cases of low-grade reflux where medical management has failed. Due to the
inherent risks and invasiveness of surgery, there is a tendency for both the
physician and parents to seek to avoid open reflux surgery. Typically, open
reflux surgery is a two to three hour procedure, involves a two to five day
hospital stay, has a significant degree of associated discomfort, is expensive
and requires a four to six week recuperation.
10
As a result of the inherent risks and invasiveness of surgery, less
invasive approaches to treat reflux have been sought. In the early 1980s, the
concept of treating reflux using an endoscopically delivered bulking agent was
developed. The placement of a bulking agent at the ureteral junction prevents
backflow of urine from the bladder to the ureter and kidneys, thus preventing
reflux but not interfering with normal bladder function. This concept has been
embraced by medical practitioners worldwide, but its use has not come into
common practice in the United States due to the historic absence of a bulking
agent that is generally accepted as safe, effective and durable. The minimally
invasive injection of Teflon(R) paste as a bulking agent has been used in Europe
to correct reflux; however, concern about particle migration has limited the use
of Teflon(R) for this indication in the United States. Bovine dermal collagen
preparations, derived from the skin of cows, and dextranomer beads in an
hyaluronic acid have also been studied. The implant volume in patents and
preclinical models treated with the latter materials in reflux and other
indications has been reported to decrease over time due to natural breakdown and
absorption, which, in turn, could result in eventual treatment failure.
Deflux(R), a synthetic bulking agent, is marketed by Q-Med AB in Europe for
the treatment of vesicoureteral reflux and incontinence and on October 19, 2000,
based on the data presented to the Gastroenterology and Urological Devices
Advisory Panel appointed by the FDA, the Advisory Panel voted to recommend
approval of the marketing application subject to Q-Med AB furnishing additional
data and analysis, and conducting a post-marketing study. While durability of
Deflux(R) is uncertain, recent data suggest it may be able to compete with
Chondrogel at a substantially lower cost.
Our Approach
We have developed an autologous cellular product which we believe meets the
requirements for a desirable implant. Chondrogel can be implanted endoscopically
(i.e., in a minimally invasive surgical procedure) at the defective
vesicoureteral orifice, and is expected to reduce or eliminate the need for open
surgery in many patients. Chondrogel consists of autologous cartilage cells in a
calcium alginate gel. Cartilage cells are isolated from a tissue biopsy from the
back of the subject's ear, expanded in tissue culture media, and combined with
sodium alginate which is then mixed with a calcium suspension to form a
hydrogel. The gel is thought to serve as a substrate for the cells and
facilitate the creation and maintenance of cartilage architecture in the body.
With time, the cells are thought to secrete a natural matrix that replaces the
space initially occupied by the gel mixture.
Chondrogel appears to be well tolerated, and has not exhibited evidence of
any particulate migration in human or animal studies. By endoscopically
implanting cells in a biodegradable hydrogel matrix, Chondrogel is thought to
correct reflux by augmenting, or bulking, tissue at the vesicoureteral junction
to prevent urine backflow without interfering with normal bladder function.
Based on our experience to date, we believe Chondrogel will allow children with
reflux to be treated safely and effectively with only minimally invasive
outpatient procedures required for the cartilage harvest and injection of
Chondrogel.
Clinical Development of Chondrogel
In 1996, clinical testing of Chondrogel was initiated in a safety study.
The trial was conducted in 10 young adult volunteers and demonstrated that the
biopsy tissue could be obtained safely. In November 1997, enrollment of a
subsequent 29-patient Phase II open-label clinical trial was completed. This
trial was designed to evaluate the safety and preliminary efficacy of Chondrogel
in pediatric patients with vesicoureteral reflux. The primary endpoint of this
trial, which was conducted at two sites, was avoidance of surgery after one or
more treatments. Safety and efficacy measurements were made at three and twelve
months post- treatment. At twelve months after treatment, 18 of 29 (62%)
patients remained free of reflux.
A Phase III clinical trial was initiated in May 1998. In September 1998, it
was determined in preclinical models that product quality could be significantly
improved with relatively minor modifications to the existing formulation.
Enrollment in this Phase III trial was discontinued since it was expected that
this improvement would maximize the clinical outcome. Development studies
identified a
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formulation that would deliver an increased number of viable cells at injection.
This formulation was incorporated in a "ready-to-use" preparation for injection.
Formulation development studies were completed in February 1999, and a
regulatory amendment describing the new formulation was submitted to the FDA.
The FDA agreed to the use of the new formulation to treat patients in a new open
label Phase III safety and efficacy trial. Patient enrollment in the trial began
in July 1999, and was completed in September 2000. Data from this trial is
expected to be available in late 2001. Pending evaluation of data from this
trial, we expect to submit a Biologics License Application (BLA) to the FDA in
2002.
The 61 patients enrolled in the Phase III trial are being treated to
determine the safety and efficacy of the product being submitted for licensure.
Data from the patients in the earlier trials (original formulation) will be used
to demonstrate the safety and effectiveness of a similar product. The current
trial is being conducted at eight clinical sites in the United States. The
primary efficacy outcome for this trial is the resolution of reflux. In addition
to the Phase III trial, the FDA has asked for data to demonstrate the role of
both cartilage cells and an alginate hydrogel for product effectiveness (i.e.,
tissue bulking). Toward this end, a controlled clinical trial was initiated in
urinary stress incontinence (a condition in which involuntary urination occurs
during straining, coughing or sneezing), comparing Chondrogel with crosslinked
alginate hydrogel without cartilage cells. This study is being conducted in up
to ten centers in the United States and will enroll up to 30 adult patients in
the Chondrogel treatment group and up to 30 adult patients in the alginate
hydrogel group. This trial must be completed prior to a filing for FDA approval
for the reflux indication. There can be no assurance that the data from the
trial will be sufficient to gain marketing approval. Separate from these studies
whose completion are required for licensure, we will also conduct a randomized,
controlled (antibiotic treatment) clinical trial evaluating Chondrogel for the
treatment of pediatric patients with less severe reflux than those enrolled in
the current trial.
Many of the biomaterials, cell types, and ingredients used in our products
and product candidates have not previously been used as components in medicinal
products. Historically, neither FDA nor other regulatory authorities have
determined the safety and effectiveness of these materials for pharmaceutical or
other medical use. Therefore, the acceptability or approvability of these
materials has not been demonstrated.
Vascugel for the Inhibition of Restenosis and Thrombosis in Coronary and
Peripheral Vascular Procedures
Cardiovascular Biology
Vascular arterial disease is the most common cause of death in the United
States. Revascularization procedures such as coronary artery bypass graft
surgery and therapies such as angioplasty and stenting are the current standard
of care. However, a large number of these procedures fail after time due to
conditions known as thrombosis and restenosis. Thrombosis is the blockage of the
blood vessel due to the formation of blood clots. Restenosis is the re-narrowing
of the treated blood vessel following vessel wall injury resulting in decreased
blood flow.
Restenosis occurs in large part because smooth muscle cells in the wall of
the vessel proliferate after the vessel is damaged. This proliferation occurs
because the cells on the inside of the vessel (endothelial cells) which normally
control smooth muscle cell proliferation are damaged, and apparently can no
longer provide the physiological function of keeping the underlying smooth
muscle cells in a steady state. It is estimated that in the United States over
1.5 million percutaneous (i.e., balloon angioplasty and stenting) and peripheral
and coronary arterial bypass procedures are performed each year and that a
significant portion of these will fail within months, requiring reintervention
with added risk. Of the approximately 1.5 million procedures per year, 845,000
(1998 data from Medical Data International) are angioplasty and stenting,
570,000 (1996 data from Medical Data International) are coronary artery bypass
procedures, and 100,000 (1996 National Hospital Discharge Survey) are peripheral
artery bypass procedures. Angioplasty and stenting procedures experience
restenosis at a 15 to 50% rate within six months (30 to 50% rate without
stenting, 15 to 33% with stenting). Coronary artery bypass grafts experience
restenosis at a 12 to
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20% rate after one year, while peripheral artery bypass grafts experience
restenosis at a 15 to 20% rate after one year.
Obstructive vascular problems also arise from the need for chronic access
to the vasculature. An example of such access is the arterial/venous (A/V) shunt
fashioned for patients with end-stage renal disease who require kidney dialysis.
Typical failure rates of A/V shunts are 40-50% after 12 months.
Our Approach
We are developing a product, Vascugel, which seeks to enhance the efficacy
of bypass surgery and chronic vascular access by reducing or eliminating
restenosis. Vascugel does not currently address angioplasty or stenting
procedures. Recognizing that the endothelial cells appear to regulate smooth
muscle cell overgrowth, Vascugel utilizes allogeneic endothelial cells in a
degradable matrix placed on the outside of injured vessels at the time of
surgery. Other researchers are attempting to deliver inhibitors of smooth muscle
cell proliferation directly to the lining of the artery to prevent the
overgrowth of smooth muscle cells. This is complicated by the presence of blood
flow at this site. In contrast, our approach seeks to reestablish the normal
cellular control mechanism by implanting endothelial cells in a protected area
next to the artery (i.e., on the outside where there is no blood flow.) When
allogeneic endothelial cells are dispersed within a polymer matrix, they remain
viable and exhibit normal behavior for extended periods. When the cell-matrix
device is "wrapped" around injured arteries or grafts, restenosis was inhibited
in preclinical studies. Moreover, we believe the cells prevent the overgrowth of
smooth muscle cells over a long period of time. However, the immune responses of
patients to these transplanted cells has not been characterized and we recognize
the effectiveness of this product in recipients sensitized to materials or donor
antigens by blood transfusion, pregnancy or organ transplantation is not known
at this time.
We have filed an IND to initiate a Phase I clinical study of Vascugel for
the inhibition of restenosis, and began this study in the first quarter of 2001
in patients undergoing non-emergent coronary artery bypass surgery. We expect to
complete recruitment in this study later this year. We are also exploring the
possibility of filing another IND to initiate a Phase I clinical study of
Vascugel for an additional indication.
Leads from Functional Genomics and Developmental Biology Platform
We are developing several products identified through the use of a
developmental biology-based system for the identification of gene function and
the generation of drug development leads.
Basal Cell Carcinoma
Basal cell carcinoma, a form of skin cancer, is the most common human
cancer. One quarter to one third of Caucasians have a lifetime risk of
developing basal cell carcinoma; the prevalence rises to one half in high risk
areas such as Australia. We have characterized and validated several targets for
small molecule screening using our developmental biology approach. Having
established that Patched1, a membrane receptor molecule, plays a role in the
onset of basal cell carcinoma, we have identified a family of small molecules
which block the Patched1 pathway and have the potential to treat basal cell
carcinoma. A lead compound, Cur-61414, is currently in pre-clinical development
in preparation for an IND to be filed for this indication in 2001.
13
Nervous System Disorders
Desert and Sonic Hedgehog proteins are active in the induction and
maintenance of nervous system tissues. Our strategy is to use these inducing
molecules or small molecule agonists to repair damaged nervous system tissues.
We believe that many degenerative nerve diseases may be addressed by this
strategy. Our lead neurology program is for the treatment of peripheral
neuropathy. We are also evaluating these molecules for other central nervous
system disorders, including Parkinson's disease, Alzheimer's disease and acute
disorders (stroke and trauma).
Peripheral neuropathy is a frequent complication of diabetes resulting in
significant pain and disability due to the loss of nerve function. The National
Institutes of Health estimate that 60 percent of patients with diabetes have
some form of neuropathy. With more than 10 million diabetics in the United
States, treatment for diabetic peripheral neuropathy represents a significant
market opportunity. There is currently no adequate treatment for this condition.
Parkinson's disease afflicts approximately 800,000 people in the United
States. Alzheimer's disease and stroke represent even larger markets, and the
unmet medical need is high for each of these conditions. Although these specific
diseases and other central nervous system-related disorders occur in individuals
for very different reasons, almost all of these disorders are characterized by
the loss of cellular function.
Having demonstrated the importance of Desert Hedgehog in normal peripheral
nerve cell function, our researchers are now examining the therapeutic effect of
Desert and Sonic Hedgehog, or derivative proteins or small molecule agonists, in
preclinical models of peripheral neuropathy, whether resulting from diabetes or
the dose-related side effects of chemotherapy.
Hair Regrowth
Sonic Hedgehog is expressed in the normal development of embryonic hair
follicles. Our researchers have shown that administration of the Sonic Hedgehog
protein can induce or accelerate hair growth in adult mice. Furthermore,
disrupting Sonic Hedgehog activity prevents the appearance of normal hair. We
are using the Sonic Hedgehog signaling pathway as a basis for small molecule
screening assays focused on hair growth. The molecules discovered in these
assays will be tested in preclinical models of hair growth.
Diabetes
Insulin-Dependent, or Type I Diabetes, and Non-Insulin-Dependent, or Type
II Diabetes, are conditions where the pancreas produces insufficient insulin.
There are over one million Type I diabetics and over fourteen million Type II
diabetics in the United States, and the expense of treating these patents to
society is thought to be second only to that of Alzheimer's disease. Our
diabetes program involves the search for the developmental mechanisms, including
factors and cells, which lead to production of the insulin-producing cells of
the pancreas called beta cells. Determination of factors which lead to the
production of beta cells and/or protect beta cells would represent a
breakthrough in the understanding and treatment of Type I diabetics and might
well also be useful for Type II diabetics.
One approach that we are taking to treat diabetes is exploring the use of
inducing molecules to produce pancreatic beta cells in the laboratory, and then
to transplant those cells back into animals.
Clinical leaders believe that the central problem standing in the way of
widespread beta cell transplant is the lack of a reproducible source of pure
cells. Current techniques to isolate beta cells from islets from animals or to
create other sources of islets cannot generate pure reproducible cell
populations. We have important assets that we believe give us an advantage in
identifying the molecules and processes involved in cell production and cell
maturation.
14
Our short term goals in this area are to further characterize the molecules
and contexts required in order to make insulin positive human cells, to develop
the beta cell growth factor leads, and to use proprietary assays relevant to
beta cell development to find small molecules which play a role in beta cell
development and/or function.
Colon Cancer and Other Cancers
Colon cancer is the second leading cause of cancer-related deaths in the
world with over 100,000 diagnosed each year in the United States. Many of these
cases are associated with a mutation in a developmental pathway called Wnt,
analogous to the role played by Patched1 in basal cell carcinoma. Our approach
is to look into the role these and other developmental pathways play in various
tumor types such as colon cancer, bladder cancer and prostate cancer, to name a
few. Our goal is to develop a therapeutic intervention, possibly a small
molecule, that specifically kills the tumor cells that are proliferating under
the influence of these abnormally activated pathways.
Other Tissue Repair and Regeneration Product Opportunities
Bladder Augmentation
We are exploring the development of a tissue engineered autologous bladder
product that would address current treatment limitations for bladder
augmentation. Up to 50,000 patients per year in the United States could benefit
from augmentation or replacement of a malfunctioning bladder due to congenital
deficiencies, resections following cancer, trauma, or other genitourinary
conditions. The current therapy for bladder augmentation is to transplant
autologous segments of bowel to provide the needed structure. The surgeries are
complex and expensive and can lead to significant complications such as
metabolic problems, stone formation, mucous production, bowel obstruction and a
substantial increase in cancer of the reconstructed bladder. The invasiveness,
cost and complications of these surgeries limit their use to only the most
severe bladder deficiencies (approximately 20,000 procedures per year in the
United States). We believe that a less invasive and more effective approach
could potentially increase the number of bladder augmentation surgeries.
We and our collaborators are considering the development of an approach
which would replace the transplanted bowel segments with an implant which
consists of a biodegradable polymer scaffold seeded on its internal surface with
urothelial cells that normally line the inside bladder wall and seeded on its
outside surface with the smooth muscle cells that normally line the outside
bladder wall. Such a tissue engineered bladder could remove the need for bowel
resection and provide the patient with an implant created from the patient's own
bladder cells. This could result in a newly created bladder section with many of
the biological properties of the original bladder tissue. These properties
include biocompatibility with urine, impermeability to urine, avoidance of stone
formation compliance and long-term stability.
OP-1 For Certain Clinical and Pre-Clinical Opportunities
Several therapeutic products based upon OP-1 are currently in development
by our commercial partner, Stryker. The following table sets forth the product
development programs relating to OP-1:
Potential Application Development Status (1)
- --------------------- ----------------------
Orthopaedic Reconstruction and Dental Applications
Non-Union Fractures, Tibia..................... U.S. Pivotal Trial Completed Regulatory Review underway in
the United States, Recommended for Approval in Europe and
Australia
Non-Union Fractures, All Long Bones............ U.S. Treatment Study
Fresh Fractures................................ Phase III Trial underway
Spinal Fusion.................................. Awaiting release of Phase II data
Other Bone Graft Indications (2)............... International Clinical Studies
Periodontal Disease............................ Phase II Trial underway
Cartilage Regeneration......................... Preclinical
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- --------
(1) "Pivotal Clinical Trials" are investigations conducted under an
Investigational Device Exemption (IDE) intended to be used as the primary
supporting documentation for regulatory approval of a new medical device.
(2) Stryker has announced that it has initiated clinical studies for several
orthopaedic reconstruction-applications of OP-1. Preliminary data has been
reported from some of the ongoing studies.
Orthopaedic Reconstruction and Dental Applications
We have collaborated with Stryker, a leading specialty surgical and medical
products company, to develop and commercialize orthopaedic reconstruction and
dental therapy products using the OP-1, a powder mixture of OP-1 and a highly
purified Type I collagen matrix which is formed into a paste. Under the terms of
a collaboration agreement, Stryker has exclusive rights to develop, manufacture
and commercialize OP-1 products in the fields of orthopaedic reconstruction and
dental applications, and we will receive royalties on commercial sales of OP-1
products in these fields. We have retained all rights to OP-1 for all uses other
than orthopaedic reconstruction and dental applications. See "--Collaborative
Alliances and License Agreements--Agreements Relating to OP-1 -- Stryker
Corporation."
Orthopaedic Reconstruction. Through our collaboration with Stryker, we
have generated substantial evidence that OP-1 is a potent stimulator of bone and
cartilage formation. Numerous studies in six different animal species have
demonstrated that OP-1 is capable of inducing bone regeneration at a wide array
of sites within the body in which bone is normally present. Bone formed in
response to OP-1 has been shown to be biochemically and biomechanically
identical to normal bone.
The most widely employed reconstruction procedure for the replacement of
lost or damaged bone is bone grafting. Grafting involves surgical
transplantation of bone or bone chips to the site of the defect to facilitate
new bone formation. Autograft, the currently preferred grafting approach,
involves two surgical steps: a first step to harvest the graft, and a second
step to implant the graft at the site of the defect or injury. In addition to
the pain and cost associated with this two-step procedure, many patients
experience complications resulting from the graft harvesting step. A second
approach involving allograft procedures utilizes bone grafts or demineralized
bone taken from cadavers. We believe that the OP-1 applied locally to the site
of the defect could be used as an alternative to many bone graft procedures, and
may provide reliable healing without the need for graft harvesting with its
associated complications.
Under our agreement with Stryker, Stryker is solely responsible for
clinical development and commercialization of the OP-1 in orthopaedic
reconstruction products. The following four paragraphs are based upon
information presented in Stryker's Annual Report on Form 10-K for the year ended
December 31, 2000.
In 1991, Stryker received FDA approval to begin human clinical trials of
its OP-1 Bone Growth Device known as the OP-1 Implant, which was developed in
collaboration with one of our predecessors, Creative, as part of a long-term
research program funded by Stryker since 1985. This device is composed of OP-1
and a bioresorbable collagen matrix. OP-1 is naturally present in the human body
and directs a cascade of cellular events that results in bone growth. In pre-
clinical studies, OP-1 induced the formation of new bone when implanted into
bony defect sites. In addition, results from early-stage animal trials of OP-1
in cartilage repair have been encouraging. The initial human clinical study,
which began in 1992, compares the efficacy of the OP-1 Implant to autografts in
the repair of non-union fractures of long bones. The patients involved in the
trial all suffered tibial fractures that showed no evidence of healing at least
nine months from the initial injury and at least three months after any prior
surgical intervention. Patients received either the OP-1 Implant or autograft
bone on a random basis. In 1995, the FDA allowed Stryker to enlarge the scope of
the clinical trials for expanded indications of non- union fractures in all long
bones. During 1996, the surgical procedures on the 122 patients in Stryker's
tibial non-union clinical trial were completed and, in 1997, Stryker began the
collection and analysis of the data from the clinical trial. The study
demonstrated that the OP-1 Implant patients had comparable clinical success to
the autograft
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patients without the need for a second invasive procedure to harvest autograft
from the hip. There were three prospectively determined clinical trial outcomes
defined in the study: weight- bearing; level of pain with weight-bearing; and
radiographic assessment of the bridging of the non-union defect. The study
design predicted 80% success at nine months post-surgery. Both the OP-1 Implant
and autograft groups met this prediction for the clinical outcomes of weight-
bearing and pain and both groups had comparable results. The blinded
radiographic assessment by an independent panel of radiologists showed that
neither group achieved the 80% criterion for bridging, although bridging was
higher for the autograft group.
A Pre-Market Approval (PMA) application for the OP-1 Implant was filed
and accepted by the FDA in June 1999. Stryker received a "Not Approvable" letter
from the FDA on January 29, 2001 that cited the failure of the pivotal clinical
trial to meet the study endpoint of non-inferiority of the OP-1 Implant compared
to the autograft control on a combined clinical and radiographic basis. The FDA
has recommended to Stryker that to bring the PMA to an appropvable state, a new
clinical trial for the same indication is required. Stryker believes the data
show that OP-1 Implant has comparable clinical success to autograft and is in
the process of meeting with the FDA to explore additional options. Stryker
cannot predict the outcome of these meetings or the potential approval of the
OP-1 Implant for the nonunion indication in the United States.
Stryker also filed a Marketing Authorization Application (MAA) with the
European Medicines Evaluation Agency (EMEA) for certain OP-1 uses, which was
accepted for filing in July 1999. On December 14, 2000, the Committee for
Proprietary Medicinal Products (CPMP) in Europe voted unanimously to recommend
market authorization for OP-1 for the indication of nonunions of the tibia which
have failed prior autograft treatment or when autograft is not feasible. A New
Drug Application with the Therapeutic Goods Administration (TGA) in Australia
was filed in December of 1999, and in February 2001 the Australian Durg
Evaluation Committee (ADEC) adopted a positive opinion to recommend the granting
of marketing authorization for the OP-1 Implant for treatment of long bone
nonunions secondary to trauma for the purpose of initiating new bone formation.
Stryker believes that it will receive full approval in Europe and Australia
during the first half of 2001 for the use of OP-1 in the above respective
clinical indications. The Company cannot predict the exact timing of the
regulatory process at the FDA or other global regulatory agencies. Further
clinical testing and PMA filings would be necessary to expand the approved uses
of the product beyond nonunions, if received.
The OP-1 Implant is in pivotal and other later stage trials for other bone
reconstruction indications including fresh fractures, spinal fusion and other
bone graft indications. Stryker has initiated a 200 patient Phase III clinical
study in Canada to evaluate the use of the OP-1 Implant for the treatment of
fresh fractures and initiated a U.S. clinical study to evaluate the OP-1 Implant
in a spine indication of which enrollment was completed in the first quarter of
2001. Stryker has also initiated clinical studies in several European
countries. Stryker may initiate additional clinical trials to demonstrate the
utility of OP-1 based products in additional orthopaedic indications. We believe
that Stryker's goal is to market OP-1 products for a number of orthopaedic
reconstruction indications in major markets around the world.
Periodontal Tissue Repair. Periodontal disease is a bacterially induced
inflammatory disorder that results in the progressive destruction of the
periodontal tissues that hold teeth in place. Reliable and effective restoration
of periodontal tissue damaged or lost as a result of periodontal disease is not
possible with current therapies. Based on data from the most recent American
Dental Association Survey of Services Rendered, or ADA Survey, in 1995
approximately four million patients underwent periodontal surgery in the United
States for severe periodontal disease. We believe that many of these patients
would have been candidates for treatment with an OP-1 periodontal product.
Stryker is conducting a clinical trial in the United States to test OP-1
in the treatment of periodontal disease. Patient enrollment was completed in
2000 and analysis of the clinical data will commence after all patients have
reached their follow-up point of one-year post treatment during the second half
of 2001. This trial follows preclinical studies which demonstrated that an OP-1
was capable of regenerating the normal tissue structures surrounding the tooth
root.
17
Research Programs
New Applications of Morphogenic Proteins. The morphogenic proteins to which
we have proprietary rights are involved in the development of several tissues
and mediate the activity of many cell types. We are exploring the biology and
activity of these proteins to identify new therapeutic applications. This
research will require significant development work to determine the therapeutic
potential of these possible future products.
Collaborative Alliances and License Agreements
Our strategy for development and commercialization of many of our products
depends upon the formation of collaborations and strategic alliances. These
alliances are designed to provide us with the requisite capital and development
and marketing capabilities to commercialize the results of our discovery
programs. It is our goal to have each alliance provide one or more of the
following:
. up-front payments in the form of license fees and equity investments;
. royalties and milestone payments;
. technology and patent rights; or
. scientific and development resources.
There can be no assurance that we will be able to establish additional
collaborations and strategic alliances necessary to develop and commercialize
our products, that any future arrangements will be on terms favorable to us or
that the current or future strategic alliances ultimately will be successful.
Agreements Relating to OP-1
Stryker Corporation. We have a collaboration agreement with Stryker to
identify and develop bone-inducing proteins and to develop dental therapeutics.
OP-1 was first isolated and characterized by Creative scientists under this
collaboration. Under this agreement, in exchange for research funding, future
royalties and revenue from commercial manufacturing, Creative developed OP-1 as
a therapy for orthopaedic reconstruction and cartilage regeneration, and
supplied Stryker material for use in clinical trials. Creative restructured its
agreements with Stryker in November 1998 to provide Stryker with the exclusive
rights to manufacture OP-1 products in these fields. At that time, Stryker
acquired Creative's commercial manufacturing operations. As a result, Stryker
has the exclusive right to develop, market, manufacture and sell products based
on OP-1 proteins for use in orthopaedic reconstruction and dental therapies.
We have agreed not to undertake any bone morphogenic protein (BMP)-related
research, development or commercialization of any products in the fields of
orthopaedic reconstruction and dental therapeutics, on our own behalf or for
third parties, for the term of certain patents to the extent that the activities
utilize technology, patents or certain personnel acquired from Creative in the
merger. We have the exclusive and irrevocable right to develop, market and sell
products incorporating morphogenic proteins developed under the research
program, including OP-1, for all uses and applications other than orthopaedic
and dental reconstruction such as neurological diseases, osteoporosis, renal
failure and others. Subject to certain exceptions in connection with the
acquisition or merger of Stryker, Stryker has agreed not to undertake any
research, development or commercialization of any products in our field
(applications other than orthopaedic reconstruction and dental therapies), on
its own behalf or for third parties, for the term of those patents. Each company
has the right to grant licenses to third parties in their respective fields, and
each is obligated to pay royalties to the other on its sales of such products
and to share royalties received from licensees.
We maintain an exclusive license in our field under certain patents and
claims that were assigned to Stryker in November 1998 as part of the sale of
certain of Creative's manufacturing rights and assets to Stryker. In addition,
Stryker was granted an exclusive license under patents in Creative's morphogen
portfolio for use in the fields of orthopaedic reconstruction and dental
therapeutics.
18
Genetics Institute. We have a cross-license agreement with Stryker and
Genetics Institute, Inc., a wholly-owned subsidiary of American Home Products
Corporation. Each party to the agreement has cross-licensed certain of its
worldwide patent rights to each of the other parties, royalty-free, in the bone
morphogenic/osteogenic protein family. The agreement allows the companies to
commercialize their respective lead compounds, which are now in clinical trials
for bone repair and regeneration, free of the risk of patent litigation among
the parties. Under the agreement, which covers both then issued patents and
pending patent applications, we and Stryker have exclusive rights to OP-1, under
both our and Genetics Institute's patents. Genetics Institute and Yamanouchi
Pharmaceutical Company, Ltd., its collaborative partner in the worldwide
development of certain bone growth factors, have exclusive rights to BMP-2,
their lead compound, under both their own and each of our and Stryker's patents.
In addition, each party (Curis, Genetics Institute, and Stryker) have granted
each other royalty-free, non- exclusive cross-licenses to patents and patent
applications covering certain other related morphogenic proteins.
Becton Dickinson
In January 1999, Ontogeny (one of our predecessor companies) and Becton
Dickinson entered into a two-year research collaboration focusing on the
application of cellular therapy and human pancreatic beta islets in the
treatment of diabetes. Under the terms of the agreement, Becton provided one
advanced researcher to work full time at one of our facilities throughout the
period of the research collaboration. All developments created by this
researcher are our property.
The agreement gave Becton the opportunity to negotiate exclusively with us
for three months to obtain exclusive worldwide rights to develop and
commercialize therapeutics comprising beta islet cells for the treatment of
diabetes. On January 12, 2001, we received written notice from Becton that they
are exercising their right to negotiate exclusively with us for the technology.
On March 22, 2001, we received a further notice from Becton releasing us from
the obligation to negotiate exclusively with them with respect to the
technology. We now have the right to pursue independently the development of
such products, either on our own or through collaboration with other research
partners.
Aegera Therapeutics, Inc.
We announced that we have entered into a license and collaboration
agreement, effective January 5, 2001, with Aegera Therapeutics, Inc., a
privately-held biotechnology company headquartered in Montreal, Canada, granting
us an exclusive worldwide license of Aegera's skin-derived, adult stem cell
technologies. The agreement establishes a broad collaboration to investigate the
therapeutic potential of these technologies in neurological, pancreatic and
cardiovascular disorders. Research will be conducted at Curis, Aegera and McGill
University, Aegera's academic collaborator. We believe that our expertise with
stem cells, growth factors and small molecules, combined with Aegera's
technologies, will represent a dynamic development paradigm for innovative
regenerative therapeutics.
Affymetrix
In September 2000, we entered into a relationship with Affymetrix under
which we are able to purchase and use the Affymetrix gene expression probe
arrays. Gene expression probe arrays are automated assay devices that contain
genetic information which allow biologists to identify those genes which are
active in tissues and cells. These devices enable us to automate the process of
identifying the genes and proteins that are active in the biological pathways
regulating tissue growth and development.
EVOTEC Biosystems AG (formerly Oxford Assymetry International PLC)
We have renewed our contract services agreement with EVOTEC under which we
are able to access the EVOTEC chemical library and utilize EVOTEC to perform
high throughput screening of small molecules that regulate our proprietary
developmental biology pathways. EVOTEC provides its services on a contract
basis, and we own the intellectual property relating to small molecules
discovered through these screening activities. The EVOTEC contract activities
have played an important role in the identification of small molecules that
regulate the hedgehog protein biological pathway and other
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pathways that we are exploring. We have also contracted with them to manufacture
the necessary quantities of Cur-61414 to support our pre-clinical and clinical
studies.
Academic Collaborations
We have relationships with a number of academic institutions and
investigators who are focused on areas of interest to us, including morphogenic
proteins, tissue engineering and developmental biology. In these collaborations,
we seek to expand the scientific knowledge concerning internal research programs
as well as the activities and characteristics of various proteins under
development by our scientists. The academic collaborators are not our employees.
Hence, we have limited control over their activities and limited amounts of
their time are dedicated to our projects. From time to time, academic
collaborators have relationships with other commercial entities, some of which
may be our competitors. Although the precise nature of each relationship varies,
the collaborators and their primary affiliated institutions generally sign
agreements that provide for confidentiality of our proprietary technology and
results of studies. We seek to obtain exclusive rights to license developments
that may result from these studies; however, there is no guarantee that such
licenses can be obtained.
Enzon Cross-Licensing Agreement
We own a number of issued U.S. and foreign patents with broad claims on the
composition of Biosynthetic Antibody Binding Sites (BABS) proteins and their
interdomain linkers. BABS is a separate technology developed by Creative, and to
which we have retained rights, but which is not currently being utilized in our
development programs. In December 1993, Creative signed cross- licensing and
exclusive-marketing agreements with Enzon with regard to the two companies'
intellectual property rights and know-how covering BABS proteins. The exclusive
marketing agreement terminated in 1999, and cross-licenses enable us and Enzon
to practice the technology and to grant sublicenses to third parties with the
other party's consent.
Competition
The therapeutic products that we are developing will compete with existing
and new products being developed by others for treatment of the same
indications. Competition in the development of human therapeutics is
particularly intense and includes many large pharmaceutical and
biopharmaceutical companies, as well as specialized biotechnology and medical
device firms. Many of these companies have extensive financial, marketing and
human resources which may result in significant competition. Others have
extensive experience in undertaking clinical trials, in obtaining regulatory
approval to market products and in manufacturing on a large scale, which may
enhance their competitive position. In addition to competing with pharmaceutical
and biotechnology and medical device companies, our products and technologies
will also compete with those developed by academic and research institutions,
government agencies and other public organizations conducting research. Any of
these organizations may discover new therapies, seek patent protection or
establish collaborative arrangements for product research which are competitive
with our products and technologies.
The technology underlying the development of human therapeutic products is
expected to continue to undergo rapid and significant advancement and change. In
the future, our technological and commercial success will be based on our
ability to develop proprietary positions in key scientific areas and efficiently
evaluate potential product opportunities.
In addition to a product's patent position, efficacy and price, the timing
of a product's introduction may be a major factor in determining eventual
commercial success and profitability. Early entry may have important advantages
in gaining product acceptance and market share. Accordingly, the relative speed
with which we or our collaborative partners can complete preclinical and
clinical testing, obtain regulatory approvals, and supply commercial quantities
of the product is expected to have an important impact on our competitive
position, both in the United States and abroad. Other companies may succeed in
developing similar products that are introduced earlier, are more effective, or
are produced and
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marketed more effectively. If any research and development by others renders any
of our products obsolete or noncompetitive, then our potential for success and
profitability may be limited.
We are aware of a number of companies that are engaged in the research and
development of morphogenic proteins for the repair of bone and cartilage.
Genetics Institute, acquired in 1996 by American Home Products Corporation, and
its collaborative partners are pursuing the development of bone morphogenic
proteins and have filed a BLA of a recombinant bone morphogenetic protein for
the repair of orthopaedic and other skeletal defects. Genetics Institute has
entered into relationships with Yamanouchi Pharmaceuticals Co., Ltd. and
Medtronic Sofamor Danek, Inc. covering development and marketing of bone
morphogenic proteins. Other companies may attempt to develop products
incorporating proteins purified from bone, which may include bone morphogenic
proteins, for orthopaedic applications. In addition, we believe that a number of
biopharmaceutical companies are developing other recombinant human proteins,
primarily growth factors, for use in the repair of bone and cartilage defects
and in other indications. A number of other companies are pursuing traditional
therapies, including autografts, allografts and electrical stimulation devices,
as well as cell and gene therapies for the repair of bone and cartilage defects,
that may compete with our products.
We believe that potential dental or periodontal products that Stryker may
develop will compete primarily with traditional therapies and therapies
incorporating other morphogenic proteins or growth factors. Genetics Institute
is also pursuing the development of bone morphogenic proteins for the repair of
dental and periodontal tissue.
Current competition for Chondrogel for vesicoureteral reflux includes
medical management and surgical intervention (the so-called reimplantation
procedure). Additionally, particular bulking agents could gain acceptance for
the treatment of reflux. Bulking agents not yet on the market could become a
factor, and "cross-over" bulking agents (Contigen and Durasphere(TM), for
example, which are currently used to treat incontinence) and bulking agents
currently in use in Europe (Teflon, Deflux and Macroplastique(TM)) could also
compete with Chondrogel. On October 19, 2000, Q-Med AB presented its Deflux
product for vesicoureteral reflux to the Gastroenterology and Urological Devices
Advisory Panel appointed by the FDA. Based on the data presented, the Advisory
Panel voted to recommend conditional approval of the marketing application by
the FDA subject to Q-Med AB furnishing additional data and analysis, and
conducting a post-marketing study. This product is on the market in Europe and,
if approved and efficacious, could pose a significant competitive threat to
Chondrogel.
There are a variety of approaches to the prevention of restenosis following
standard revascularization procedures that are currently being examined. Some of
those approaches, in addition to Vascugel, are cell-based. For example, other
researchers are attempting to directly reconstruct the endothelial cell lining
of the artery in order to control the overgrowth of smooth muscle cells. Many,
if not most, of the approaches currently being examined are being considered in
conjunction with minimally invasive vascular procedures, such as angioplasty and
stenting. However, it is possible and even likely that some of those approaches
will also be examined for use in conjunction with the open surgical procedures
(e.g., coronary artery bypass graft, peripheral artery bypass graft, A/V shunt)
that are the initial clinical indications for Vascugel. Those approaches include
systemic drug delivery (e.g., heparin, ACE inhibitors, antioxidants), radiation
(e.g., catheter delivery system from Novoste), polymeric hydrogels delivered to
the interior surface of the blood vessel (e.g., photo-crosslinked PEG from
Focal), local drug delivery (e.g., heparin-coated stents from Medtronic, taxol-
coated stents from Boston Scientific), biologics/gene therapy (e.g., VEGF-1,
VEGF-2, nitrous oxide), and intravascular endothelial cells (e.g., endothelial
cell paving of the interior of the vessel).
Research in the field of developmental biology and genomics is highly
competitive. Competitors in the field of developmental biology include, among
others, Amgen, Inc., Chiron Corporation, Exelixis, Inc., Genentech, Inc., Geron
Corporation, and Regeneron Corporation, as well as other private companies and
major pharmaceutical companies. Competitors in the genomics area include, among
others, public companies such as Axys Pharmaceuticals, Inc., Genome Therapeutics
Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc.,
Millennium Pharmaceuticals, Inc. and Myriad Genetics, Inc., as well as private
companies and major pharmaceutical companies. We also compete with universities
21
and other research institutions, including those receiving funding from the
federally funded Human Genome Project. A number of entities are attempting to
identify and patent rapidly randomly sequenced genes and gene fragments,
typically without specific knowledge of the function of such genes or gene
fragments. In addition, we believe that certain entities are pursuing a gene
identification and characterization and product development strategy based on
positional cloning. Our competitors may discover, characterize and develop
important inducing molecules or genes in advance of us, which could have a
material adverse effect on any related Curis research program. We also face
competition from these and other entities in gaining access to DNA samples used
in its research and development projects. We expect competition to intensify in
genomics research as technical advances in the field are made and become more
widely known.
We rely on or will rely on our strategic partners for support in our
disease research programs and may turn to our strategic partners for preclinical
evaluation and clinical development of our potential products and manufacturing
and marketing of any products. Some of our strategic partners are conducting
multiple product development efforts within each disease area that is the
subject of our strategic alliance with them. Our strategic alliance agreements
may not restrict the strategic partner from pursuing competing internal
development efforts. Any of our product candidates, therefore, may be subject to
competition with a potential product under development by a strategic partner.
Patents and Proprietary Rights
Our ability to commercialize our products and compete effectively with
other companies will depend, in part, on our ability to maintain proprietary
rights to our products and technology. We currently own or have rights to 133
issued and 184 pending patent applications in the United States and have foreign
counterpart patent filings for most of these patents and patent applications.
These patent applications are directed to compositions of matter, methods of
making and using these compositions, methods of repairing, replacing, augmenting
and creating tissue for multiple applications, methods for drug screening and
discovery, developmental biological processes, and patents relating to our
proprietary technologies. The patent positions of pharmaceutical,
biopharmaceutical, and biotechnology companies, including us, are generally
uncertain and involve complex legal and factual questions. There can be no
assurance that any of these pending patent applications will result in issued
patents, that we will develop additional proprietary technologies or products
that are patentable, that any of our patents or those of our collaborative
partners will provide a basis for commercially viable products or will provide
us with any competitive advantages or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on our ability to
conduct our business.
Our success will depend in part on our ability to obtain marketing
exclusivity for our products for a period of time sufficient to establish a
market position and achieve an adequate return on our investment in product
development. We believe that protection of our products and technology under
United States and international patent laws and other intellectual property laws
is an important factor in securing such market exclusivity.
Although we pursue patent protection for our technology, significant legal
issues remain as to the extent to which patent protection may be afforded in the
field of biotechnology, in both the United States and foreign countries.
Furthermore, the scope of protection has not yet been broadly tested. Therefore,
we also rely upon trade secrets, know-how and continuing technological
advancement to develop and maintain our competitive position. Disclosure of our
know-how is generally protected under confidentiality agreements. We do not
know, however, whether all of our confidentiality agreements will be honored,
that third parties will not develop equivalent technology independently, that
disputes will not arise as to the ownership of technical information or that
wrongful disclosure of our trade secrets will not occur.
Our academic collaborators have certain rights to publish data and
information regarding their discoveries to which we have rights. While we
believe that the limitations on publication of data developed by our
collaborators pursuant to our collaboration agreements will be sufficient to
permit us to apply for patent protection in the areas in which we are interested
in pursuing further research, there is
22
considerable pressure on academic institutions to publish discoveries in the
genetics and genomics fields. Any such publication could affect our ability to
obtain patent protection in the areas in which we may have an interest.
We are party to various license agreements which give us rights to
commercialize various technologies and to use certain technologies in our
research and development processes. The consideration paid in exchange for these
licenses include up-front fees, issuances of shares of common stock, annual
royalties, milestone payments and running royalties on net sales by us and our
sublicensees. The licensors may terminate these agreements if we fail to meet
certain diligence requirements, fail to make payments or otherwise commit a
material breach that is not cured after notice.
Others may have filed, and in the future are likely to file, patent
applications covering molecules, genes or gene products that are similar or
identical to our technologies or products. These third party patent applications
may have priority over patent applications filed by us. Any legal action against
us or our strategic partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to
subjecting us to potential liability for damages, require us or our strategic
partners to obtain a license in order to continue to manufacture or market the
affected products and processes. There can be no assurance that we or our
strategic partners would prevail in any such action or that any license required
under any such patent would be made available upon commercially acceptable
terms, or at all. Litigation, which could result in substantial costs to us, may
be necessary to enforce any patents issued or licensed to us or to determine the
scope and validity of third party proprietary rights. Some of our competitors
have, or are affiliated with companies having, substantially greater resources
than we have, and such competitors may be able to sustain the costs of complex
patent litigation to a greater degree and for longer periods of time than us.
There is uncertainty concerning whether human clinical data will be
required for issuance of patents for human therapeutics. If such data is
required, our ability to obtain patent protection could be delayed or otherwise
adversely affected. Although the USPTO issued new utility guidelines in July
1995 that address the requirements for demonstrating utility for biotechnology
inventions, particularly for inventions relating to human therapeutics, USPTO
examiners may not follow such guidelines and the USPTO's position could change
with respect to what is required to establish utility for gene sequences and
products and methods based on such sequences.
Manufacturing
We have limited experience and capabilities in large-scale commercial
manufacturing of protein, cell therapy, biomaterials and small molecule
products. Creative established manufacturing facilities to produce the OP-1
which were sold to Stryker in 1998. We retain some of the personnel with skills
needed for analytical characterization and development of recombinant proteins.
We have established a manufacturing facility and staff to support clinical
trials of Chondrogel and Vascugel. We have in this group skills in the
production and qualification of cell therapy and biocompatible materials
products. Our commercialization plan for Chondrogel may involve in-house or
contract manufacturing of this product. We do not currently have any commercial
manufacturing operations in-house and do not have a qualified cGMP commercial
manufacturing facility for Chondrogel or other products that we may choose to
develop. We or our collaborative partners will need to establish commercial
manufacturing capacity, either internally or through third parties, for future
products that we or our collaborative partners may develop.
Sales and Marketing
We currently have no sales, marketing and distribution experience or
infrastructure. We plan to develop small specialty sales, marketing and
distribution capabilities for the sale, marketing and distribution of Chondrogel
and other specialty products. There are approximately 250 pediatric urologists
who treat reflux in the United States. These providers treat the majority of
cases of vesicoureteral reflux and can be addressed with a relatively small
sales force. By maintaining all rights and directly marketing the Chondrogel
product, we will retain a much greater portion of product sales than would have
been
23
possible if it had entered into a corporate collaboration with a marketing
partner. However, we may not be able to successfully develop this sales,
marketing and distribution capability. With respect to products which address
larger markets, we plan to rely significantly on sales, marketing and
distribution arrangements with third parties until we develop broader
capabilities.
Regulatory Matters
Regulation by governmental agencies in the United States and other
countries is a significant factor in the clinical evaluation and licensing of
our potential products as well as in the development and research of new
products. All of our products currently under development will require
regulatory approval by the FDA under the Food, Drug, and Cosmetic Act, as drugs
or devices, or under the Public Health Service Act, as biologicals, to be
marketed in the United States and by similar governmental agencies outside the
United States. Regardless of the classification assigned to our products, all
human diagnostic and therapeutic products are subject to rigorous testing to
demonstrate their safety and efficacy. Generally, considerable time and expense
are required to demonstrate safety for use in humans, to design an acceptable
clinical trial to enroll patients and to clinically evaluate the safety and
efficacy of a new product. Moreover, even after extensive preclinical testing,
unanticipated side effects can arise during clinical trials and in the course of
related or unrelated research (within or outside our control) that can halt or
substantially delay the regulatory process at any point. Seeking and obtaining
regulatory approval for a new therapeutic or diagnostic product is likely to
take several years and will require the expenditure of substantial resources. We
cannot assure you that any product which enters preclinical or clinical
development will be approved for sale by the FDA or any other regulatory
authorities.
Products developed through genetic engineering, such as some of ours, are
relatively new, and state and local regulation may increase, as genetically
engineered products become more common. The federal government oversees certain
recombinant DNA research activity through the National Institutes of Health
Guidelines for Research Involving Recombinant DNA Molecules, known as the NIH
Guidelines. We believe that our activities comply with the NIH Guidelines.
Discussions have been underway since 1996 between the NIH and the FDA regarding
alternative models for regulation of recombinant DNA research and the products
resulting from such research, and the appropriateness of any continued NIH role.
It is not possible to predict the effect of such potential regulatory changes on
us or our potential competitors.
Cellular and tissue-based (tissue engineering) medicinal products have been
even more recently developed than genetically engineered products. No
regulations and only minimal guidance (e.g., Proposed Approach to Regulation of
Cellular and Tissue-Based Products) have been published by the FDA specific to
products of this type. The FDA's Center for Biologics Evaluation and Review
(CBER) currently has the primary review responsibility for all cell therapy
products regardless of whether they are, according to established definitions,
considered to be biologicals, medical devices or combination products. The
relative inexperience of regulatory authorities with the review and approval of
tissue engineered products may lead to increased review times or to significant
changes in local, state and national requirements which could have a significant
impact on the progress of these programs.
Our ability to conduct preclinical research is also subject to new and
evolving regulations governing the use of human and embryonic tissues for
isolating new growth factors and genes which may be useful in identifying and
developing new therapeutic product candidates. Our ability to conduct critical
research on which our development activities are based could be restricted or
delayed depending on the outcome of pending rulemaking proceedings governing the
use of these tissues and the collection of related genetic information.
Pharmaceutical and Biological Products
We expect that certain of our potential products will be regulated by the
FDA or other regulatory authorities as pharmaceuticals or biologicals. The
regulatory approval of pharmaceutical and biological products in the United
States intended for therapeutic use in humans involves many steps. Similar
requirements are imposed by other regulatory authorities in major market
countries.
24
Clinical testing usually occurs in three phases to demonstrate safety and
efficacy of the product:
. Phase I clinical trials consist of testing for the safety and tolerance
of the product with a small group of subjects and may also yield
preliminary information about the efficacy and dosage levels of the
product;
. Phase II clinical trials involve testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger
patient group; and
. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group.
Currently, the FDA requires the filing of new information for each distinct
clinical study. After product approval, the FDA may request or require an
additional phase (Phase IV) of clinical studies to provide further information
on safety and/or efficacy.
Many of the biomaterials, cell types, and ingredients used in our products
and product candidates have not previously been used as components in medicinal
products. Historically, neither the FDA nor other regulatory authorities have
determined the safety and effectiveness of these materials for pharmaceutical or
other medical use. Therefore, the acceptability or approvability of these
materials has not been demonstrated.
Devices
We expect that certain of our potential products will be regulated by the
FDA as Class III devices and as regulated devices by other regulatory
authorities. Preclinical evaluations of Class III devices are similar to those
of pharmaceuticals and biologicals, with additional emphasis on implant
persistence, implant sensitization, and carrier characterization and
specifications. Upon completion of preclinical testing, an Investigational
Device Exemption (IDE) application is filed with the Center for Devices and
Radiological Health in the FDA. Similar requirements are imposed by other
regulatory authorities in major market countries.
Following the completion of clinical studies, under the IDE, a company
would then file a pre-market approval application (PMA) with the FDA. The FDA is
required to respond to the PMA submission within 180 days, although the FDA may
not adhere to this schedule and further review may take additional time. After
the FDA completes its review of the application, the product is typically
reviewed by a panel of medical experts, and the applicant is required to answer
questions on the product's safety and effectiveness. Following the
recommendation of the panel, a PMA may be granted by the FDA based on the PMA
submission. Based on the data filed, the FDA regulates the indications or uses
for which the product is approved and the precautions and warnings, if any,
applicable to the product. If so approved, the product may then be marketed for
the indications set forth in the FDA approved labeling.
Employees
We have approximately 136 full time employees, of whom 70 hold Ph.D. or
other advanced degrees. Approximately 105 of these employees are currently
involved in research, development, engineering, production, clinical or
regulatory affairs activities. None of our employees is a party to a collective
bargaining agreement, and we consider our relations with our employees to be
good.
ITEM 2. PROPERTIES
We have three facilities located in Cambridge, Massachusetts. Two of the
facilities are located next to each other at 45 and 61 Moulton Street, and
consist of approximately 34,000 and 18,000 square feet, respectively. 45 Moulton
Street is leased until April 2006, and 61 Moulton Street is leased until April
2007. The third facility is located at 21 Erie Street, with approximately 50,000
square feet. This site is leased through the end of 2007. The Moulton Street
buildings are used primarily by our research and administration groups, and the
Erie Street building is used primarily by our development and manufacturing
groups. We believe that our facilities will be adequate through at least the end
of 2001.
25
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to our business, to which we are a party or of
which our property is the subject. To our knowledge, no material legal
proceeding is being contemplated by any governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------- -------- -----------------------------------------------
Doros Platika, M.D. 48 President and Chief Executive Officer
Andrew C. G. Uprichard, M.D., F.R.C.P 43 Executive Vice President and Chief Operating
Officer
Lynn G. Baird, Ph.D. 53 Vice President of Preclinical and Regulatory
Development
George A. Eldridge 37 Vice President, Chief Financial Officer,
Secretary and Treasurer
Bruce J. Hudson 59 Vice President, Human Resources and
Administration
Daniel R. Passeri 40 Senior Vice President, Corporate Development
and Strategic Planning
Lee L. Rubin, Ph.D 50 Senior Vice President of Research and Chief
Scientific Officer
James S. Sigler 40 Vice President, Manufacturing
Doros Platika, M.D. Dr. Platika has served as President and Chief Executive Officer and as a director of Curis since
February 2000 and served in such positions at Ontogeny since July 1996. From June 1993 to June 1996,
Dr. Platika was employed by Progenitor, Inc., a biotechnology company, most recently as Executive Vice
President responsible for research and development. Dr. Platika completed residencies in medicine and
neurology at Massachusetts General Hospital, where he became Chief Resident. He did post-doctoral
study at the Whitehead Institute, Massachusetts Institute of Technology and at Massachusetts General
Hospital in association with Harvard Medical School. Dr. Platika served on the faculties of Harvard
Medical School and Albert Einstein College of Medicine, where he was the head of gene therapy. Dr.
Platika completed his M.D. at the State University of New York at Stony Brook School of Medicine and
received his B.A. from Reed College.
Andrew C. G. Uprichard Dr. Uprichard has served as Executive Vice President and Chief Operating Officer since November 2000.
From June 2000 to November 2000, Dr. Uprichard was employed by Pfizer, Inc., a pharmaceutical company,
most recently as Vice President of Global Drug Development. Prior to Pfizer's merger with
Warner-Lambert Company, a pharmaceutical company, Dr. Uprichard spent 11 years with Parke-
26
Davis, a division of Warner-Lambert, as senior director of both the cardiovascular clinical group and
the cardiovascular discovery group. Dr. Uprichard is a medical graduate of the University of Edinburgh
in Scotland and a fellow of the Royal College of Physicians of the United Kingdom.
Lynn G. Baird, Ph.D. Dr. Baird has served as Vice President of Preclinical and Regulatory Development of Curis since March
2000. She joined Reprogenesis as Vice President of Regulatory Affairs and Quality in June 1998. From
June 1995 through June 1998, Dr. Baird was employed by CytoTherapeutics, Inc., a biotechnology company
involved in the development of encapsulated cellular therapeutics, most recently as Vice President of
Regulatory, Quality and Clinical Development. Prior to that, Dr. Baird held various positions in
development and regulatory affairs at R. W. Johnson Pharmaceutical Research Institute, a Johnson &
Johnson company, and in regulatory affairs and technical management at Creative. Dr. Baird directed
basic research in immunology at the Wistar Institute and Massachusetts General Hospital prior to
moving to industry. She holds a Ph.D. in microbiology/immunology from the Medical College of Virginia,
a M.S. in chemistry from Virginia Polytechnic Institute and a B.S. in psychology also from Virginia
Polytechnic Institute.
George A. Eldridge Mr. Eldridge has served as Vice President, Chief Financial Officer and Treasurer of Curis since March
2000 and Secretary since December 2000. He joined Ontogeny in April 1996 as Vice President of Finance.
From April 1993 to April 1996, Mr. Eldridge was employed by Boston Life Sciences, Inc. where he was
Vice President, Corporate Development and Finance. Prior to that, he worked with the investment
banking firm, Kidder, Peabody & Co., Incorporated for a total of five years in their New York and
Boston offices. A graduate of Dartmouth College, Mr. Eldridge received his M.B.A. from the University
of Chicago Graduate School of Business.
Bruce J. Hudson Mr. Hudson has served as Vice President, Human Resources and Administration of Curis since July 2000.
From September 1991 to July 2000, Mr. Hudson operated Hudson & Co., a human resources and management
consulting firm. From January 1990 to September 1991, Mr. Hudson served as a Director of Staffing and
Planning for Western Digital Corporation. Mr. Hudson is a graduate of Springfield College with a B.A.
and M.S. degree.
Daniel R. Passeri Mr. Passeri has served as Senior Vice President, Corporate Development and Strategic Planning of Curis
since November 2000. From March 1997 to November 2000, Mr. Passeri was employed by GeneLogic Inc., a
biotechnology company, most recently as Senior Vice President, Corporate Development and Strategic
Planning. From February 1995 to March 1997, Mr. Passeri was employed by Boehringer Mannheim, a
pharmaceutical, biotechnology and diagnostic company, as Director of Technology Management. Mr. Passeri
is a graduate of the National Law Center at George Washington University, with a J.D., of the Imperial
College of Science, Technology and Medicine at the University of London, with a M.S. in biotechnology,
and of Northeastern University, with a B.S.
27
Lee L. Rubin, Ph.D. Dr. Rubin has served as Senior Vice President of Research and Chief Scientific Officer of Curis since
September 2000 and prior to that as Vice President of Research of Curis since March 2000. He joined
Ontogeny in October 1997 as vice president of Research. Prior to joining Ontogeny, Dr. Rubin spent six
years at Eisai London Laboratories at University College London, where he was director and professor of
neurobiology. Prior to that, Dr. Rubin worked for four years with Athena NeuroSciences, Inc. as senior
scientist and head of the blood-brain barrier program. Dr. Rubin completed his Ph.D. at Rockefeller
University and his B.A. at Cornell University.
James S. Sigler Mr. Sigler has served as Vice President of Manufacturing of Curis since March 2000. He joined
Reprogenesis in May 1998, as Vice President of Manufacturing. From April 1994 to April 1998, Mr. Sigler
was Director of Manufacturing for Genzyme Tissue Repair, a biotechnology company specializing in the
development and commercialization of cellular therapies. Prior to coming to BioSurface Technology,
Inc., Genzyme Tissue Repair's predecessor, in 1990, Mr. Sigler was an officer in the US Navy serving as
a nuclear propulsion plant watch officer on board USS Enterprise, CVN 65. Mr. Sigler received his B.S.
from Cornell University, and his M.B.A. from Harvard Business School.
In January 2000, Dr. Platika consented to a retroactive suspension
beginning in June 1999 of his license to practice medicine by the Massachusetts
Board of Registration in Medicine. Dr. Platika became eligible to apply for a
stay of the suspension in December 1999. The Massachusetts Board found that Dr.
Platika had violated various provisions of Massachusetts law by writing
prescriptions which "were not issued in the usual course of his professional
practice and without the appropriate Massachusetts registrations." Dr. Platika
had undergone back surgery with associated back pain, and had been supplementing
prescriptions written by his treating physician. In February 1999, related
charges were filed against Dr. Platika in Waltham District Court in
Massachusetts. In June 1999, Dr. Platika was placed on unsupervised pre-trial
probation. The charges were dismissed in June 2000.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our Common Stock was first traded on the Nasdaq National Market on August
1, 2000. Our trading symbol is "CRIS." The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share of our Common
Stock as reported on the Nasdaq National Market:
Curis
Common Stock
----------------------------
Fiscal Year 2000 High Low
- ---------------------------------------------------- ------------- -------------
Third Quarter (from August 1, 2000)....... $27.25 $13.88
Fourth Quarter.................................. $19.94 $ 6.88
There were 305 holders of record of our Common Stock as of March 19, 2001.
The number of record holders may not be representative of the number of
beneficial owners because many of the shares of our Common Stock are held by
depositories, brokers or other nominees.
We have never declared or paid any cash dividends on our Common Stock. We
currently intend to retain earnings, if any, to support our growth strategy and
do not anticipate paying cash dividends in the foreseeable future. Payment of
future dividends, if any, will be at the sole discretion of the Board of
Directors after taking into account various factors, including our financial
condition, operating results, capital requirements and any plans for expansion.
29
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below have been derived
from our consolidated financial statements. These historical results are not
necessarily indicative of results to be expected for any future period. You
should read the data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in this Report.
Years Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
Research and development contracts and government grants......... $ 997 $ 3,160 $ 10,419 $ 12,693 $ 5,548
License fees and royalties....................................... 26 52 10 - 11,122
Manufacturing contracts.......................................... - - - 394 4,486
--------- --------- --------- -------- --------
Total revenues.................................................... 1,023 3,212 10,429 13,087 21,156
--------- --------- --------- -------- --------
Costs and expenses:
Research and development(A)...................................... 17,424 10,435 24,856 25,122 15,651
General and administrative(A).................................... 9,330 5,524 6,946 5,827 4,374
Stock-based compensation(A)...................................... 16,628 64 322 254 17
Amortization of intangible assets................................ 14,451 808 207 392 510
Loss on disposition of fixed assets.............................. 204 - - - -
In-process research and development.............................. 294,800 - - - -
Cost of manufacturing contracts.................................. - - - 274 3,823
1999 reorganization and 1998 sale of manufacturing operations.... (38) 256 1,362 - -
--------- --------- --------- -------- --------
Total costs and expenses.......................................... 352,799 17,087 33,693 31,869 24,375
--------- --------- --------- -------- --------
Loss from operations.............................................. (351,776) (13,875) (23,264) (18,782) (3,219)
--------- --------- --------- -------- --------
Other income (expense)
Interest income and other income................................. 1,906 1,926 2,196 2,346 1,196
Interest expense................................................. (481) (161) (327) (216) (217)
--------- --------- --------- -------- --------
Total other income (expense)..................................... 1,425 1,765 1,869 2,130 979
--------- --------- --------- -------- --------
Net Loss.......................................................... (350,351) (12,110) (21,395) (16,652) (2,240)
Accretion and repurchase costs on Series 1998/A
Preferred Stock.................................................. - (2,395) (987) - -
--------- --------- --------- -------- --------
Net loss applicable to common stockholders........................ $(350,351) $ (14,505) $ (22,382) $(16,652) $ (2,240)
--------- --------- --------- -------- --------
Basic and diluted net loss per common share....................... $ (19.80) $ (1.36) $ (2.22) $ (1.68) $ (0.25)
--------- --------- --------- -------- --------
Weighted average common shares used for basic and diluted net
loss computation................................................. 17,694 10,682 10,102 9,923 9,019
--------- --------- --------- -------- --------
(A) The following summarizes the departmental allocation of the stock-based compensation charge:
Research and development.......................................... $ 8,358 $ - $ - $ - $ -
General and administrative........................................ 8,270 64 322 254 17
--------- --------- --------- -------- --------
Total stock-based compensation.................................... $ 16,628 $ 64 $ 322 $ 254 $ 17
========= ========= ========= ======== ========
As of December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities.................. $ 75,799 $ 21,371 $ 57,935 $ 30,598 $ 50,075
Working capital................................................... 67,364 17,116 49,613 32,381 48,174
Total assets...................................................... 182,682 28,892 66,164 59,038 73,819
Debt and lease obligations, net of current portion................ 4,155 1,009 713 2,005 1,651
Accumulated deficit............................................... (471,946) (121,595) (109,485) (88,090) (71,438)
Total stockholders' equity........................................ 168,814 23,422 33,105 52,709 67,261
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
On July 31, 2000, Creative BioMolecules, Inc. ("Creative"), Ontogeny, Inc.
("Ontogeny") and Reprogenesis, Inc. ("Reprogenesis") merged with and into Curis,
pursuant to an Agreement and Plan of Merger dated as of February 14, 2000. On
July 31, 2000, Curis, as the surviving company of the merger, assumed the rights
and obligations of Creative, Ontogeny and Reprogenesis. Immediately after the
merger, Curis was owned approximately 43% by the former stockholders of
Creative, 38% by the former stockholders of Ontogeny and 19% by the former
stockholders of Reprogenesis. Consequently, for accounting purposes, Curis is
deemed to be the successor to Creative, and the historical financial statements
of Creative have become the historical financial statements of Curis. The merger
has been accounted for as a purchase of Ontogeny and Reprogenesis in accordance
with Accounting Principles Board (APB) Opinion No. 16, Accounting for Business
Combinations, and accordingly, Ontogeny's and Reprogenesis' operating results
since the merger date are included in the accompanying financial statements.
In accordance with APB No. 16, the purchase price for Ontogeny and
Reprogenesis has been allocated to the assets and liabilities of Ontogeny and
Reprogenesis based on their fair values. The aggregate purchase price based on
the fair market value of Creative common stock was $300,731,000 and $149,000,000
for Ontogeny and Reprogenesis, respectively, including the value of the
outstanding options and warrants exchanged for options and warrants to purchase
the common stock of Curis and the transaction costs related to the merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation tools
and techniques. Significant portions of the purchase price were identified as
intangible assets which included in-process research and development (IPR&D) of
$294,800,000 and assembled workforce of $500,000. The excess of the purchase
price over the fair value of identified tangible and intangible net assets of
$105,477,000 has been allocated to goodwill. Intangible assets are being
amortized over their estimated useful lives of 4 to 5 years. The fair value of
the IPR&D relating to current in-process research and development projects was
recorded as an expense as of the merger date.
The consolidated statement of operations data include only the results of
operations of Creative for all periods prior to the date of the merger. The
consolidated statement of operations data for the year ended December 31, 2000
include the operating results of Creative for the seven months ended July 31,
2000 and the operating results of Curis, comprising the combined operations of
Creative, Ontogeny and Reprogenesis, for the five months ended December 31,
2000. The consolidated balance sheet data for all periods prior to the date of
the merger reflect only the balance sheet of Creative. The consolidated balance
sheet data as of December 31, 2000 reflects the balance sheet of Curis post
merger.
To date, revenues from research and development contracts and license fees
have been generated from agreements between Creative and its collaborative
partners. Over the next several years, Curis anticipates deriving most of its
revenues from royalties from Stryker, from government grants and from additional
collaboration agreements which Curis may enter into during such period. Curis is
not currently receiving research and development payments under collaboration
agreements but intends to seek additional corporate collaborations under which
it may generate future revenues. Curis may not be able to enter into such
collaborations on acceptable terms and thereby may not generate future research
and development contract revenues.
Research agreements with collaborative partners have typically obligated
these collaborative partners to provide for the partial or complete funding of
research and development for specified projects and pay royalties to Curis in
exchange for licenses to market the resulting products. Curis has recognized
revenue under these collaborations based upon work performed, upon the sale or
licensing of product rights, upon shipment of product for use in preclinical and
clinical testing or upon attainment of
31
milestones specified in collaborative agreements. Curis has been a party to
research collaborations with Stryker to develop products for orthopaedic
reconstruction and dental therapeutics and with Biogen to develop products for
the treatment of renal disorders. Each of these research collaborations was
restructured in 1998 and the Biogen collaboration was terminated in December
1999.
In November 1998, certain of the OP-1 manufacturing rights and facilities
were sold to Stryker. Curis does not anticipate significant revenue from Stryker
until OP-1 is approved for commercial sale when Curis will be entitled to
royalties. Stryker has filed for marketing approval for certain uses of OP-1 in
the U.S., Europe and Australia. On January 3, 2001, Stryker announced that the
Committee for Proprietary Medicinal Products (CPMP) adopted a unanimous positive
opinion to recommend the granting of marketing authorization for OP-1 as a drug
in the European Union. On February 16, 2001, Stryker announced that it received
a positive opinion from the Australian Drug Evaluation Committee (ADEC)
recommending the granting of marketing authorization for OP-1 implantTM in
Australia. On January 29, 2001, Stryker Corporation announced that it had
received a not-approvable letter from the FDA regarding its PMA for OP-1 for use
in treating nonunion fractures of the tibia. The FDA has recommended that
Stryker conduct a new study for the same indication to bring the PMA to an
approvable state. The receipt of this letter will delay the receipt of revenue
from Stryker for the commercial sale of OP-1 in the U.S. until the FDA's
concerns can be addressed. OP-1 is currently recommended for approval in Europe
for the treatment of non-union fractures of the tibia and Australia for the
treatment of non-union long bone fractures secondary to trauma for the purposes
of initiating repair by new bone formation.
In January 1999, Ontogeny and Becton Dickinson ("Becton") entered into a
two-year research collaboration focusing on the application of cellular therapy
and human pancreatic beta islets in the treatment of diabetes. Under the terms
of the agreement, Becton provided one advanced researcher to work full time at
one of our facilities throughout the period of the research collaboration. All
developments created by this researcher are our property. The agreement gives
Becton the opportunity to negotiate exclusively with us for three months to
obtain exclusive worldwide rights to develop and commercialize therapeutics
comprising beta islet cells for the treatment of diabetes. On January 12, 2001,
we received written notice from Becton that it was exercising its right to
negotiate exclusively with us for the rights to the technology. On March 22,
2001, we received a further notice from Becton releasing us from the obligation
to negotiate exclusively with them with respect to the rights to the technology.
We now have the right to pursue independently the development of such products,
either on our own or through collaboration with other research partners.
The Company announced that it has entered into a license and collaboration
agreement, effective January 5, 2001, with Aegera Therapeutics, Inc. ("Aegera")
granting the Company an exclusive worldwide license of Aegera's skin-derived,
adult stem cell technologies. The agreement also proposes a three-year research
collaboration agreement in which the Company will fund a total of 18 full time
equivalent researchers dedicated to the agreement. In consideration for the
technology license, the Company will be required to pay a $100,000 up front
license fee, purchase $250,000 of equity securities in privately-held Aegera,
and issue $150,000 of the Company's common stock to Aegera. In addition, under
the terms of the agreement, the Company will be required to make various
milestone and royalty related payments.
Creative was developing a BMP-7 based therapy for chronic renal failure,
Biogen provided research funding to Creative Through December 1999 pursuant to
an option to develop BMP-7 as a therapy for chronic renal failure. As of
December 31, 1999, Biogen did not exercise its option and Creative assumed all
rights to BMP-7 renal therapies. Curis has decided not to further fund this
program but is exploring potential corporate partnerships to move this product
opportunity forward.
Curis has been awarded $4,000,000 of government grants from the National
Institute of Standards and Technology (NIST). These grants are to be received
over the period ending on December 31, 2003, are cancelable at the discretion of
NIST and are subject to annual appropriation by the US government.
32
Curis recognizes grant revenue as the services are provided and costs are
incurred under the terms of the grants.
Operating expenses for the year ended December 31, 2000 include the
operating expenses of Creative for the seven months ended July 31, 2000 and the
operating expenses for Curis, comprising the combined operations of Creative,
Ontogeny and Reprogenesis, for the period from August 1, 2000, to December 31,
2000. Operating expenses for the year ended December 31, 1999 include only the
operating expenses of Creative for such period. Accordingly, comparisons of
operating expenses between the 2000 and the 1999 periods may not prove to be
meaningful. Additionally, in the year ended December 31, 2000, the Company
incurred significant non-cash charges associated with the merger and cash
expenses for merger related fees and expenses.
Since the merger, Curis has reviewed the research and development pipeline
of the combined companies, and has determined that Curis will allocate resources
among the various research and development projects based on their strategic fit
and the availability of internal resources. Curis' current plans anticipate
spending approximately $40 million in each of 2001 and 2002 on operations.
Future operating results will depend largely on the timing and magnitude of
royalty payments from Stryker and the outcome of other products currently under
development. We cannot be sure when those royalties will be received, if at all.
Curis has never been profitable and expects to incur additional operating losses
in the next several years. Curis' results of operations will vary significantly
from year to year and quarter to quarter and depend on, among other factors, the
timing of entering into collaboration agreements and receiving payments from
collaborative partners, the timing of payments under government grants, the
timing of the receipt of royalties and the cost and outcome of clinical trials.
Results of Operations
Years Ended December 31, 2000 and 1999
Total revenues for the year ended December 31, 2000 were $1,023,000 as
compared to $3,212,000 for the year ended December 31, 1999. Research and
development contracts and government grants decreased 68% to $997,000 for the
year ended December 31, 2000 from $3,160,000 for the year ended December 31,
1999. The decrease in research and development contract and government grant
revenues from 1999 to 2000 was primarily the result of the termination of a
research agreement with Biogen, Inc. in 1999 partially offset by revenues of
$319,000 earned under the NIST grant received by Reprogenesis in November 1999.
License fees and royalties decreased 50% to $26,000 for the year ended
December 31, 2000 as compared to $52,000 for the year ended December 31, 1999.
The decrease in license fees and royalties was primarily due to revenues
received in 1999 from licensing patent rights and know-how associated with
certain protein technology.
Research and development expenses increased 67% to $17,424,000 for the year
ended December 31, 2000 from $10,435,000 for the year ended December 31, 1999.
The increase was primarily due to the impact of the merger which occurred on
July 31, 2000. Research and development expenses for the year ended December 31,
2000 include the costs incurred by the combined companies for the period from
August 1, 2000 to December 31, 2000. These include the cost of 111 people
involved in research and development of $5,100,000, external lab services
including clinical trials of $3,200,000, and facility related costs of
$1,300,000. In addition, research and development expenses for the year ended
December 31, 2000 include severance paid to former officers of Creative totaling
$656,000, and severance payments relating to the termination of seven other
employees totaling $251,000.
General and administrative expenses increased 69% to $9,330,000 for the
year ended December 31, 2000 from $5,524,000 for the year ended December 31,
1999. The increase was primarily due to costs incurred by the combined companies
for the period from August 1, 2000 to December 31, 2000 which included personnel
related costs of $1,400,000, legal and professional fees of $875,000, and
insurance expense of $600,000. In addition, general and administrative expenses
for the year ended December 31, 2000 include severance paid to former officers
of Creative of $926,000 and severance payments relating to the termination of
approximately eight other employees totaling $122,000.
Stock-based compensation increased to $16,628,000 for the year ended
December 31, 2000 from $64,000 for the year ended December 31, 1999. The
increase was primarily due to $9,563,000 of
33
amortization expense related to deferred compensation resulting from the merger
which is being amortized over the vesting period of the underlying options
through August 1, 2001. Additionally, a charge of $3,538,000 was recorded
related to the acceleration of certain stock options and the extension of the
exercise period for options held by Creative's executive officers, outside
directors and employees. Also, 57,094 shares of restricted common stock granted
to a former Reprogenesis executive officer became fully vested upon the merger.
Compensation expense of $1,623,000 was recognized based on the fair value of the
shares on the date of the merger. Lastly, on August 18, 2000, Curis issued
3,473,006 options to its employees as well as to nonemployees with an exercise
price below fair market value resulting in deferred compensation, net of
terminations, of $17,330,000. The deferred compensation is being amortized over
the four-year vesting period of the underlying stock options for options granted
to employees and as earned for nonemployees in accordance with EITF 96-18. The
total deferred compensation expense related to these options was $1,904,000 for
the year ended December 31, 2000.
Amortization of intangible assets was $14,451,000 for the year ended
December 31, 2000, as compared to $808,000 for the year ended December 31, 1999.
The increase was partially due to the amortization of goodwill totaling
$9,641,000 and the amortization of assembled workforce totaling $42,000 incurred
as a result of the merger. In addition, Curis incurred an impairment charge of
approximately $4,611,000 to reduce the carrying value of certain capitalized
patents determined not to be beneficial or expected to be utilized in future
operations and which have no alternative future use. Patent impairment charges
for the year ended December 31, 1999 were approximately $538,000. Amortization
of patent costs were $157,000 for the year ended December 31, 2000 as compared
to $270,000 for the year ended December 31, 1999.
Fixed asset disposition charges totaling $204,000 were incurred during the
year ended December 31, 2000 for the net book value of equipment disposed of as
a result of the merger.
A charge of $294,800,000 was incurred on July 31, 2000 resulting from that
portion of the purchase price of Ontogeny and Reprogenesis that was identified
as in-process research and development. The purchase price of Ontogeny and
Reprogenesis was allocated to the assets acquired, including IPR&D, based upon
an independent appraisal which used proven valuation tools and techniques.
For the year ended December 31, 2000, interest and other income was
$1,906,000 as compared to $1,926,000 for the year ended December 31, 1999, a
decrease of $20,000 or 1%. The decrease in interest income resulted primarily
from a slightly lower average available investment balance as compared to the
prior year.
For the year ended December 31, 2000, interest expense was $481,000
compared to $161,000 for the year ended December 31, 1999, an increase of
$320,000 or 199%. The increase in interest expense resulted primarily from the
consolidation into Curis of the outstanding lease obligations from the three
companies prior to the merger.
As a result of the foregoing, Curis incurred a net loss of $350,351,000 for
the year ended December 31, 2000 as compared to a net loss of $12,110,000 for
the year ended December 31, 1999.
Years Ended December 31, 1999 and 1998
Total revenues for the year ended December 31, 1999 were $3,212,000 as
compared to $10,429,000 for the year ended December 31, 1998. Research and
development contract revenues decreased 70% to $3,160,000 in 1999 from
$10,419,000 in 1998. The decrease in research and development contract revenues
from 1998 to 1999 was primarily the result of a decrease in research and
development contract revenues from Stryker as Creative was not providing
research services or supplying OP-1 to Stryker in 1999.
License fees and royalties increased by $42,000 to $52,000 in 1999 from
$10,000 in 1998. The increase in license fees and royalties is partially due to
royalties from Stryker and partially due to an increase in revenue from
licensing patent rights and know-how associated with certain protein technology
which was not central to Creative's business.
34
Total operating expenses decreased 49% to $17,086,000 in 1999 from
$33,693,000 in 1998. Research and development expenses decreased 58% to
$10,435,000 in 1999 from approximately $24,856,000 in 1998. The decrease was
primarily due to the sale of certain of Creative's OP-1 manufacturing rights and
facilities to Stryker in November 1998 and the elimination of manufacturing and
facility-related expenses with respect thereto. Creative had previously reported
the costs associated with such production of OP-1 as research and development
expenses. During 1999, Creative's research and development expenses were related
to renal disease therapy as part of the Biogen collaboration, neurological
disease therapies and other proprietary indications.
General and administrative expenses decreased 20% to $5,524,000 in 1999
from $6,946,000 in 1998. The decrease was primarily due to a reduction in
external legal and other consulting costs and a reduction in personnel-related
costs.
Stock-based compensation decreased 80% to $64,000 in 1999 from $322,000 in
1998. In 1999 and 1998, Creative recorded charges of $64,000 and $205,000,
respectively, related to changes in the exercise terms of stock option
agreements in connection with the sale of its manufacturing operations.
Amortization of intangible assets increased 292% to $808,000 in 1999 from
$206,000 in 1998. The increase was primarily due to an impairment charge of
$538,000 to reduce the carrying value of certain capitalized patents determined
not to be beneficial or expected to be utilized in future operations and which
have no alternative use. The remainder of the increase was due to an increase in
patent amortization of $64,000.
In October 1999, Creative reorganized to focus operations and financial
resources on the development of its morphogenic protein-based clinical
candidates for the treatment of stroke and renal disease. In connection with
this reorganization, Creative reduced its headcount from 70 to 43 employees and
recorded approximately $511,000 in operating expenses for salary termination
costs. In addition, in the fourth quarter of 1999 Creative determined that
health insurance claims were less than originally estimated, related to the 1998
sale of manufacturing operations. This resulted in a reduction in the loss on
sale of manufacturing operations of approximately $255,000 in 1999. The
combination of these two items resulted in a $256,000 charge to operations.
Interest income decreased 12% to $1,924,000 in 1999 from $2,183,000 in 1998
due to lower average balances of cash and marketable securities and lower
interest rates in 1999, as compared to 1998. In May 1998, Creative sold 25,000
shares of Series 1998/A Preferred Stock. Net proceeds after deducting fees and
other expenses of the offering, were approximately $23,618,000. In addition,
Creative received approximately $19,530,000 in the fourth quarter of 1998 from
the sale of Creative's OP-1 manufacturing-related assets to Stryker. In May
1999, Creative repurchased all of the outstanding Series 1998/A Preferred Stock
for approximately $22,470,000 in cash.
Interest expense decreased approximately 51% to $161,000 in 1999 from
$327,000 in 1998. The decrease in interest expense was due to a decrease in
Creative's obligations under capital leases. As part of the sale to Stryker of
certain of Creative's manufacturing-related assets in November 1998, Stryker
assumed $710,000 of Creative's obligations under equipment lease agreements and
$1,727,000 of Creative's obligations under a facility capital lease.
As a result of the foregoing, Creative incurred a net loss of $12,110,000
in 1999 compared to a net loss of $21,395,000 in 1998.
Accretion and repurchase costs on Series 1998/A Preferred Stock was
$2,395,000 for the year ended December 31, 1999, and included the following:
$385,000 calculated at the rate of 5% per annum of the stated value of the
outstanding Series 1998/A Preferred Stock; $144,000 of accretion of issuance
costs related to the sale of Series 1998/A Preferred Stock; and as a result of
the repurchase of the Series 1998/A Preferred Stock on May 7, 1999, a one-time
charge of approximately $1,867,000 recorded in the second quarter of 1999 which
represents accretion of the Series 1998/A Preferred Stock up to its repurchase
amount and accretion of all remaining issuance costs. Accretion on Series 1998/A
Preferred
35
Stock for the year ended December 31, 1998 was $987,000 and includes
$733,000, calculated at the rate of 5% per annum of the stated value of the
outstanding Series 1998/A Preferred Stock from May 27, 1998 and $254,000 of
accretion of issuance costs related to the sale of Series 1998/A Preferred
Stock. As a result of the repurchase of the Series 1998/A Preferred Stock, there
will be no further charges relating to the Series 1998/A Preferred Stock.
In computing the net loss applicable to common stockholders for the years
ended December 31, 1999 and 1998, the accretion and repurchase costs of the
Series 1998/A Preferred Stock mentioned above are included.
Liquidity and Capital Resources
At December 31, 2000, our principal sources of liquidity consisted of cash,
cash equivalents and marketable securities of $75,799,000. We have financed our
operations primarily through placements of equity securities, revenues received
under agreements with collaborative partners and government grants,
manufacturing contracts and the sale of certain of our OP-1 manufacturing rights
and facilities to Stryker. In November 2000, we entered into purchase agreements
relating to the private placement of 5.2 million shares of common stock at $9.00
per share for net proceeds (after deduction of commissions and offering
expenses) of approximately $43,348,000. We issued all of the shares in December
2000 upon the closing of the private placement.
Net cash used in operating activities was $23,592,000 for the year ended
December 31, 2000 compared to $14,768,000 for the year ended December 31, 1999.
The increase was primarily due to the impact of the merger. Our investment in
property, plant and equipment was $1,573,000 during the year ended December 31,
2000 and $610,000 during the year ended December 31, 1999. Curis currently plans
to spend approximately $6,000,000 in 2001 on leasehold improvements and
equipment purchases to upgrade our research and development facilities. In the
year ended December 31, 2000 and the year ended December 31, 1999, we spent
$564,000 and $777,000, respectively, on capitalized patent costs.
As of December 31, 2000, we own 107,142 shares of Exelixis, Inc.
("Exelixis") common stock which are included on our balance sheet under the
category "Marketable securities." During the first quarter of 2001, the Company
sold all 107,142 shares of Exelixis common stock at an average price of $13.83
for total net proceeds of $1,470,000. The fair market value of the shares as of
December 31, 2000 was $1,567,000. In addition, we hold a warrant to purchase
53,571 shares of Exelixis common stock at a price of $1.00 per share exercisable
until January 27, 2005. The sale of the underlying shares of common stock is
prohibited for a period of one year from the date the warrant is exercised. As a
result, the value of this warrant is included in our balance sheet as of
December 31, 2000 under the category "Marketable Securities--Restricted" with a
fair market value of approximately $730,000. Unrealized gains and losses are
recorded in stockholders' equity and realized gains and losses are recorded in
the statement of operations in the period the securities are sold.
Financing activities generated approximately $48,616,000 of cash in the
year ended December 31, 2000 resulting primarily from the sale of 5.2 million
shares of common stock at $9.00 for total net proceeds of $43,348,000 and
proceeds from the exercise of options and warrants totaling approximately
$5,357,000. Financing activities used cash of $20,493,000 in 1999 compared to
$24,403,000 provided in 1998. On May 27, 1998, Creative completed a private
placement with three institutional investors for the sale of 25,000 shares of
Series 1998/A Preferred Stock, with a stated value of $1,000 per share resulting
in net proceeds of approximately $23,618,000 after expenses. Since issuance of
the Series 1998/A Preferred Stock, the holders converted a total of 4,514 shares
of Series 1998/A Preferred Stock into 613,129 shares of common stock through May
7, 1999. On May 7, 1999, Creative repurchased 20,486 shares which represented
all of the outstanding Series 1998/A Preferred Stock following final
conversions, for approximately $22,470,000 in cash. The Series 1998/A Preferred
Stock has been retired and there will be no subsequent conversions into common
stock.
In November 1998, certain OP-1 manufacturing rights and facilities were
sold to Stryker. We expect that under the terms of the sale, we will receive
royalties from Stryker products and, if approved
36
for commercial sale, royalties which would exceed expected manufacturing
revenues anticipated under the prior agreement.
We anticipate that our existing capital resources should enable us to
maintain our current and planned operations into the fourth quarter of 2002.
We expect to incur substantial additional research and development and
other costs, including costs related to preclinical studies and clinical trials.
Our ability to continue funding planned operations is dependent upon our ability
to generate sufficient cash flow from royalties on Stryker products, if approved
for commercial sale, from collaborative arrangements and from additional funds
through equity or debt financings, or from other sources of financing, as may be
required. We are seeking additional collaborative arrangements and also expect
to raise funds through one or more financing transactions, if conditions permit.
Over the longer term, because of our significant long-term capital requirements,
we intend to raise funds through the sale of debt or equity securities when
conditions are favorable, even if we do not have an immediate need for
additional capital at such time. There can be no assurance that additional
financing will be available or that, if available, it would be available on
favorable terms. In addition, the sale of additional debt or equity securities
could result in dilution to our stockholders. If Stryker products are not
approved for commercial sale and we do not receive royalties from Stryker and/or
if substantial additional funding is not available, our business will be
materially and adversely affected.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) released SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes standards for reporting and accounting for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair value. Pursuant to SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, SFAS No.133 is effective for all quarters of fiscal years beginning after
June 15, 2000. The Company does not anticipate the adoption of SFAS No. 133
will have a material impact on the Company's consolidated financial statements.
Staff Accounting Bulletin No. 101 (SAB No. 101), Revenue Recognition, was
issued in December 1999. SAB No. 101 requires companies to recognize certain up-
front nonrefundable fees and milestone payments over the life of the related
alliances when such fees are received in conjunction with alliances that have
multiple elements. The Company adopted this new accounting principle in the
fourth quarter of fiscal 2000. The adoption of SAB No. 101 did not have any
impact on the Company's reported operating results as it relates to the contract
revenues, up-front nonrefundable payments and milestone payments received in
connection with collaborations.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation - An Interpretation of APB
Opinion No. 25. The interpretation clarifies the application of APB Opinion No.
25 in specified areas, as defined. The interpretation is effective July 1, 2000
but covers certain events occurring during the period after December 15, 1998,
but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 31, 1998, but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. The application of this
interpretation resulted in approximately $19,146,000 of deferred compensation
for the value of unvested stock options held by employees and consultants
primarily of Ontogeny. This amount is being amortized over the vesting period
of the underlying options. The adoption of this interpretation did not have a
material impact on the Company's consolidated financial statements, except as
otherwise discussed above.
37
RISK FACTORS
If any of the following risks actually occur, our business, results of
operations and financial condition would likely suffer. Please read " Forward-
Looking Information."
Risks Related to Our Business, Industry, Strategy and Operations
We will face challenges in integrating Creative, Ontogeny and Reprogenesis
and, as a result, may not realize the expected benefits of the merger.
Curis was formed by the merger of Creative, Ontogeny and Reprogenesis on
July 31, 2000. Integrating the operations and personnel of Creative, Ontogeny
and Reprogenesis is a complex process. Employees and management of the three
companies have played a key role in creating each business, and this, in turn
has been an important motivational factor. The successful integration of our
research, development, finance, legal, program management and human resources
into a single organization has altered these prior relationships and may
continue to affect productivity. In addition, it is likely to divert the
attention of our management from ongoing operations and could lead to a loss of
momentum in our operations, employee morale and our ability to retain some of
our key employees. The loss of certain employees could result in a delay or
disruption of one or more of the planned research and development programs of
Curis.
If we do not successfully integrate Creative, Ontogeny and Reprogenesis, or
the benefits of the merger do not meet the expectations of financial or industry
analysts, the market price of our common stock may decline.
We have not commercialized any products to date, and if we do not
commercialize any products we will not be profitable.
To date, we have not commercialized or received regulatory approval to
market the types of products that we or our collaborative partners are and will
be developing. These types of products may require additional research and
development, clinical trials and/or regulatory resources and/or expertise prior
to any commercial sale.
We currently have no products for sale by us or our collaborative partners.
If we or our collaborative partners are not successful in developing and
commercializing any products, we will not become profitable.
We are dependent on collaborative partners for the development and
commercialization of many of our products. Any failure or delay by these
partners in developing or commercializing our products could eliminate
significant portions of our anticipated product pipeline.
Our strategy for development and commercialization of many of our products
depends upon the formation of various collaborations and strategic alliances.
We have entered into strategic alliances with Stryker Corporation and other
companies, and plan to enter into additional alliances. If the products
developed in our alliance with Stryker are not approved for commercial sale and
we do not receive royalties from Stryker, our business will be materially and
adversely affected. In addition, we may not be able to establish new
collaborations and strategic alliances necessary to develop and commercialize
products based upon our research efforts, or to establish such arrangements on
terms favorable to us. We do not control the amount of resources or the
schedule of product development in our collaborations with strategic partners
and may not be able to control the efforts that any future strategic partners
may devote to their respective programs with us. The timing and amount of any
future royalties and manufacturing revenues with respect to product sales and
product development under such collaborative arrangements will therefore depend
on the level of commitment, timing and success of such collaborative partners'
efforts. Accordingly, we cannot predict the success of current or future
strategic alliances.
38
We face substantial competition, which may result in others discovering,
developing or commercializing products before or more successfully than we do.
The products that we will be developing compete with existing and new
products being created by pharmaceutical, biopharmaceutical, biotechnology and
medical device companies, as well as universities and other research
institutions. Many of our competitors are substantially larger than we are and
have substantially greater capital resources, research and development staffs
and facilities than we have. Efforts by other biotechnology or pharmaceutical
companies could render our programs or products uneconomical or result in
therapies superior to any therapy we develop. Furthermore, many of our
competitors are more experienced in product development and commercialization,
obtaining regulatory approvals and product manufacturing. As a result, they may
develop competing products more rapidly and at a lower cost. These competitors
may discover, develop and commercialize products which render non-competitive or
obsolete the products that we or our collaborative partners are seeking to
develop and commercialize.
Other companies are engaged in the research and development of proteins for
various applications. We believe that other biopharmaceutical companies also
are developing proteins, primarily growth factors, for use in the local repair
of orthopaedic and skeletal defects and in other indications. In addition, a
number of other companies are pursuing traditional therapies that may compete
with our products, including bone grafts and electrical stimulation devices for
the repair of orthopaedic and other skeletal defects.
In the field of tissue engineering and the treatment of damaged or diseased
tissue, we compete with several companies that are developing various tissue
replacement products. In addition, a number of biotechnology, pharmaceutical
and medical device companies are developing other types of products as
alternatives to tissue replacement/augmentation for a variety of indications.
For example, vesicoureteral reflux is a pediatric disorder of the urinary
tract involving the backflow of urine from the bladder to the kidneys.
Vesicoureteral reflux is currently treated in the United States either by
surgery or with antibiotics; however, a number of other bulking agents, such as
bovine dermal collagen, a substance derived from the skin of cows, synthetic
materials and other biomaterials (such as dextranomer beads in a hydrogel), are
being evaluated for use in its treatment.
In the area of cardiovascular medicine, several approaches are currently
being developed by major medical device, pharmaceutical and biotechnology
companies to reduce restenosis or the re-narrowing of treated blood vessels,
associated with current cardiovascular therapies. These approaches include,
among others, local and systemic drug therapy, locally delivered radiation, gene
therapy, and improved stents and stenting techniques.
In addition, research in the field of developmental biology and genomics is
highly competitive. Our competitors in the field of developmental biology
include, among others, Amgen, Inc., Chiron Corporation, Exelixis, Inc.,
Genentech, Inc. and Geron Corporation, as well as other private companies and
major pharmaceutical companies. Competitors in the genomics area include, among
others, public companies such as Axys Pharmaceuticals, Inc., Genome Therapeutics
Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc.,
Millennium Pharmaceuticals, Inc. and Myriad Genetics, Inc., as well as private
companies and major pharmaceutical companies. We also compete with universities
and other research institutions, including those receiving funding from the
federally funded Human Genome Project. A number of entities are attempting to
identify and patent rapidly randomly sequenced genes and gene fragments,
typically without specific knowledge of the function of such genes or gene
fragments. In addition, we believe that certain entities are pursuing a gene
identification and characterization and product development strategy based on
positional cloning. Our competitors may discover, characterize and develop
important inducing molecules or genes in advance of us. We also face
competition from these and other entities in gaining access to DNA samples used
in our research and development projects. We expect competition to intensify in
genomics research and developmental biology as technical advances in the field
are made and become more widely known.
39
We rely on our strategic partners for support in our disease research
programs and intend to rely on our strategic partners for preclinical evaluation
and clinical development of our potential products and manufacturing and
marketing of any products. Some of our strategic partners are conducting
multiple product development efforts within each disease area that is the
subject of our strategic alliance with them. Our strategic alliance agreements
may not restrict a strategic partner from pursuing competing internal
development efforts. Any of our product candidates, therefore, may be subject
to competition with a potential product under development by a strategic
partner.
The market may not be receptive to our products due to their use of new
technologies or cost. Such a lack of reception could limit our sales of these
and future products.
The commercial success of our products that are approved for marketing will
depend upon their acceptance by patients, the medical community and third-party
payors. The OP-1, a biological device being developed by our strategic partner
Stryker, is a new form of treatment for orthopaedic reconstruction, and will
require a change from the current standard of care. Chondrogel, currently being
developed for the vesicoureteral reflux indication, is based on the new
technology of tissue engineering. These products may never gain commercial
acceptance among physicians, patients and third-party payors, even if necessary
marketing approval is obtained. We believe that recommendations and
endorsements by physicians will be essential for market acceptance of our
products.
In addition, Chondrogel is an autologous cell-based product, meaning that a
patient's own cells are used to treat a medical condition. Chondrogel may be
more costly than other competitive bulking products because each cell batch must
be handled individually. Therefore, traditional scale-up technologies are not
applicable in our manufacturing process. We may not be able to manufacture
products that will be cost effective or, if we can, our products may not receive
commercial and market acceptance.
Our growth could be limited if we are unable to attract and retain key
personnel and consultants.
Our success is substantially dependent on our ability to attract and retain
qualified scientific and technical personnel for the research and development
activities we conduct or sponsor. If we lose one or more of the members of our
senior management or other key employees or consultants, our business and
operating results could be seriously harmed. Only a limited number of the
members of our senior management or other key employees, including Doros
Platika, M.D., our President and Chief Executive Officer, have entered into
employment agreements that provide for severance payments if they are terminated
without cause. Andrew Uprichard, our Executive Vice President and Chief
Operating Officer, and Daniel Passeri, our Senior Vice President, Corporate
Development and Strategic Planning have reached agreement with respect to the
provision for such severance payments, subject to the approval of the
Compensation Committee of the Board of Directors which is expected early in the
second quarter of 2001.
Our anticipated growth and expansion into areas and activities requiring
additional resources or expertise, such as regulatory affairs, compliance,
manufacturing and marketing, will require the addition of new key personnel.
The pool of personnel with the skills that we require is limited. Competition
to hire from this limited pool is intense, and we may not be able to hire,
train, retain or motivate such additional personnel.
If we fail to obtain an adequate level of reimbursement for our future
products or services by third-party payors, there may be no commercially viable
markets for our products.
The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. These third-party
payors continually attempt to contain or reduce the costs of healthcare by
challenging the prices charged for medical products. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to
40
governmental control. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope or amount.
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the healthcare system.
Further proposals are likely. The potential for adoption of some or all of
these proposals affects or will affect our ability to raise capital, obtain
additional collaborative partners and market our products.
If we or our collaborative partners obtain marketing approval for our
products, we expect to experience pricing pressure due to the trend toward
managed health care, the increasing influence of health maintenance
organizations and additional legislative proposals.
We could be exposed to significant risk from liability claims if we are
unable to obtain insurance at acceptable costs or otherwise protect ourselves
against potential product liability claims.
We may be subjected to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of human health care products. These
claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. Although we
maintain limited product liability insurance coverage for the clinical trials of
our products, it is possible that we will not be able to obtain further product
liability insurance on acceptable terms, if at all, and that our present
insurance levels and insurance subsequently obtained will not provide adequate
coverage against all potential claims.
Risks Relating to Financing
We have incurred substantial losses, we expect to continue to incur losses
and we may never achieve profitability.
We expect to incur substantial operating losses for the foreseeable future.
We currently have no material sources of revenue from product sales or license
fees. It is uncertain when, if ever, we will develop significant revenue
sources or become profitable, even if we are able to commercialize products. In
addition, because certain of our product candidates consist of living cells,
they may be more expensive to manufacture than conventional therapeutic
products.
We expect to increase our spending significantly as we continue to expand
our research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities. As a result, we
will need to generate significant revenues in order to achieve profitability.
We cannot be certain whether or when this will occur because of the significant
uncertainties that affect our business.
We may require additional financing, which may be difficult to obtain and
may dilute your ownership interest in us.
We will require substantial funds to continue our research and development
programs, including clinical trials of our product candidates, and to
manufacture and market any products that are approved for commercial sale. Our
future capital requirements will depend on many factors, including the
following:
. continued progress in our research and development programs, as well as
the magnitude of these programs;
. the resources required to initiate and then successfully complete our
clinical trials for Chondrogel, Vascugel, Cur-61414 and other product
candidates;
. the time and costs involved in obtaining regulatory approvals for
Chondrogel, Vascugel, Cur-61414 and other product candidates;
41
. the cost of manufacturing and commercialization activities;
. the cost of any additional facilities requirements;
. the timing, receipt and amount of milestone and other payments from
collaborative partners such as Stryker;
. the timing, payment and amount of milestone payments, research funding
and royalties due to licensors of patent rights and technology used to
make, use and sell our product candidates;
. the timing, receipt and amount of sales revenues and royalties from our
potential products in the market; and
. the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies.
We estimate that it will cost at least $80 million to fund our operations
until the end of 2002. At December 31, 2000, we had cash, cash equivalents and
marketable securities of approximately $76 million, and with additional revenues
from corporate partnerships and other revenues, we believe we will have
sufficient capital resources to fund our operations into the fourth quarter of
2002. We may seek additional funding through collaborative arrangements and
public or private financings. However, the biotechnology market is highly
volatile and, depending on market conditions and the state of our research,
development and commercialization programs, additional financing may not be
available to us on acceptable terms or at all. If we fail to obtain such
additional financing, our ability to continue all of our research, development,
commercialization, manufacturing and marketing activities may be significantly
diminished.
If we raise additional funds by issuing equity securities, further dilution
to our then existing stockholders will result. In addition, the terms of the
financing may adversely affect the holdings or the rights of our stockholders.
If we are unable to obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development programs. We
also could be required to seek funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products which we would otherwise pursue
independently.
Risks Relating to Clinical and Regulatory Matters
If our clinical trials are not successful, we will not be able to complete
development and market or commercialize our products.
In order to obtain regulatory approval for the commercial sale of our
product candidates, we will be required to complete extensive preclinical
studies as well as clinical trials in humans to demonstrate the safety and
efficacy of our products. We have limited experience in conducting clinical
trials and rely at times on contract research organizations and collaborative
partners for their performance and management.
We cannot assure you that clinical trials of OP-1, Chondrogel, Vascugel or
other product candidates under development will be sufficient to obtain
regulatory approvals for the indications being studied. Furthermore, the timing
and completion of the current and planned clinical trials for Chondrogel and
Vascugel, Stryker's current and planned clinical trials of the OP-1, as well as
clinical trials of other products, depend on, among other factors, the numbers
of patients required for approval and the rate at which those patients are
enrolled. In our clinical trials, more than the anticipated number of patients
could be required and enrollment may not proceed at the predicted rate. Any
increase in the number of patients or decrease in recruitment rates may result
in increased costs, program delays or both. Also, these products may not be
effective in treating any of our targeted disorders or may prove to have
undesirable or unintended side effects, toxicities or other characteristics that
may prevent or limit their commercial use.
42
Progress in the area of orthopaedic reconstruction and dental applications
is within the exclusive control of Stryker. We could experience significant
delays if Stryker's is unable to expeditiously obtain regulatory approval for
the commercialization of OP-1. For example, Stryker filed a Pre-Market Approval
(PMA) application for the OP-1, which was accepted by the FDA in June 1999. On
January 29, 2001, Stryker Corporation announced that it had received a not-
approvable letter from the FDA regarding its PMA for the OP-1. As reported by
Stryker, the deficiencies cited in the letter relate primarily to the lack of
statistical equivalence as compared to the control treatment of autograft in the
clinical trial for tibial nonunions. The FDA has recommended that Stryker
conduct a new study. As show by the Stryker example, the timing of the
regulatory process is unpredictable and it is uncertain whether or when
approvals will be obtained from the FDA or other regulatory agencies for any use
of OP-1.
We could also experience delays in our preclinical trials of any of our
product candidates, unfavorable results in any development program, failure to
obtain regulatory approval for the commercialization of any of our products or
failure to achieve market acceptance of any approved products. Any of these
events would have a negative impact on our ability to market a product.
The development process necessary to obtain regulatory approval is complex,
costly and lengthy and we may not obtain necessary regulatory approvals.
We and our collaborative partners must obtain regulatory approval for
ongoing development activities and before marketing or selling any of our
products. We may not receive regulatory approvals to conduct clinical trials of
our products or to manufacture or market our products. In addition, regulatory
agencies may not grant approvals on a timely basis or may revoke or
significantly modify previously granted approvals. Any delay in obtaining, or
failure to obtain, approvals could adversely affect the marketing of our
products and our ability to generate product revenue.
The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. The time required for FDA and other clearances or
approvals is uncertain and typically takes a number of years, depending on the
complexity and novelty of the product. The process of obtaining FDA and other
required regulatory approvals for many of our products is further complicated
because some of these products use non-traditional or novel materials in non-
traditional or novel ways, and the regulatory officials have little precedent to
follow. We have only limited experience in filing and prosecuting applications
for the conduct of clinical studies and for obtaining marketing approval. Any
delay in obtaining or failure to obtain required clearance or approvals would
reduce our ability to generate revenues from the affected product. We also plan
to rely significantly on contract research organizations and collaborative
partners as we build internal capabilities.
Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities, which
could delay, limit or prevent regulatory approval. Any regulatory approval to
market a product may be subject to limitations on the indicated uses for which
we may market the product. These limitations may restrict the size of the
market for the product and affect reimbursement by third party payors.
We also are subject to numerous foreign regulatory requirements governing
the design and conduct of the clinical trials and the manufacturing and
marketing of our future products outside of the United States. The approval
procedure varies among countries and the time required to obtain foreign
approvals often differs from that required to obtain FDA approvals. Moreover,
approval by the FDA does not ensure approval by regulatory authorities in other
countries, and vice versa.
Our ability to conduct preclinical research is also subject to new and
evolving regulations governing the use of human and embryonic tissues for
isolating new growth factors and genes which may be useful in identifying and
developing new therapeutic product candidates. Our ability to conduct critical
research on which our future development activities are based could be
restricted or delayed depending on the outcome of pending rulemaking proceedings
governing the use of these tissues and the collection of related genetic
information.
43
Even if we obtain marketing approval, our products will be subject to
ongoing regulatory oversight which may affect our ability to successfully
commercialize any products we develop.
Even if we receive regulatory approval of a product, the approval may be
subject to limitations on the indicated uses for which the product is marketed
or contain requirements for costly post-marketing follow-up studies. After we
obtain marketing approval for any product, the manufacturer and the
manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product, or with
the manufacturer or facility, may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
We may not be able to comply with other governmental regulations, which
could subject us to penalties and otherwise result in the limitation of our
operations.
In addition to comprehensive regulation by the FDA, we are subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Research Conservation and
Recovery Act, regulations administered by the Nuclear Regulatory Commission,
national restrictions on technology transfer, import, export and customs
regulations and certain other local, state or federal regulation. From time to
time, other federal agencies and congressional committees have indicated an
interest in implementing further regulation of biotechnology applications. We
are not able to predict whether any such regulations will be adopted or whether,
if adopted, such regulations will apply to our business, or whether we would be
able to comply with any applicable regulations.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. Although we believe that our safety
procedures for handling and dispersing of such materials comply with all
applicable laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials.
Risks Relating to Product Manufacturing, Marketing and Sales
We have limited manufacturing capabilities and may be unable to expand our
manufacturing capabilities as required to meet demand for our products.
We have limited experience or capabilities in large-scale commercial
manufacturing of any of our product candidates. Our current facilities and staff
are inadequate for commercial production and distribution of products. Our
marketing plan for Chondrogel may involve in-house manufacturing of this
product. We may not be able to attract, train and retain the required personnel
or to expand our manufacturing capability to manufacture commercial quantities
of Chondrogel or any of our other products in a timely manner. Our manufacturing
scale-up efforts may not be successful, and we may not be able to establish or
maintain reliable, high-volume manufacturing capabilities at commercially
reasonable costs on a timely basis, or at all. In addition, potential efforts
to contract for manufacture of Chondrogel may not be successful.
Delays in obtaining regulatory approval of our manufacturing facility and
disruptions in our manufacturing process may delay or disrupt our
commercialization efforts.
Before we can begin commercially manufacturing our product candidates, we
must obtain regulatory approval for our manufacturing facility and process.
Manufacturing of our product candidates must comply with the regulations of the
FDA and with foreign regulatory authorities, including current good
manufacturing practices (cGMP). The cGMP regulations provide a framework that
describe the minimum practices, facilities and controls to be used for the
manufacture, processing, packing and holding of a medicinal product to assure
that the product meets the established requirements for safety
44
and effectiveness and govern manufacturing methods, quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we will be obligated to expend time, money and effort
in production, record keeping and quality control to assure that the product
meets applicable specifications and other requirements. If we fail to comply
with these requirements, we would be subject to possible regulatory action and
may be limited in the jurisdictions in which we are permitted to sell our
product candidates.
We have no sales and marketing experience or infrastructure, which could
impair or delay our ability to commercialize our products.
We have no sales, marketing and distribution experience or infrastructure.
We plan to develop small specialty sales, marketing and distribution
capabilities for the sale, marketing and distribution of Chondrogel and other
specialty products. However, we may not be able to successfully develop this
sales, marketing and distribution capability. With respect to all of our other
products which address larger markets, we plan to rely significantly on sales,
marketing and distribution arrangements with third parties for the products that
we are developing until we are able to develop more significant internal sales,
marketing and distribution capabilities. We may have limited or no control over
the sales, marketing and distribution activities of our present or future
collaborative partners. Our future revenues may be materially dependent upon the
success of the efforts of these third parties.
In determining whether to perform sales, marketing and distribution
functions ourselves, we face a number of risks, including:
. not being able to attract and build a significant marketing staff or
sales force;
. the cost of establishing a marketing staff or sales force may not be
justifiable in light of any product revenues; and
. the failure of our direct sales and marketing efforts to be successful.
Risks Relating to Intellectual Property
We may not be able to obtain patent protection for our discoveries and we
may infringe patent rights of third parties.
The patent positions of pharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal, scientific and
factual questions.
Our success depends in significant part on our ability to:
. obtain patents;
. protect trade secrets;
. operate without infringing upon the proprietary rights of others; and
. prevent others from infringing on our proprietary rights.
Patents may not issue from any of the patent applications that we own or
license. If patents do issue, the allowed claims may not be sufficiently broad
to protect our technology. In addition, issued patents that we own or license
may be challenged, invalidated or circumvented. Our patents also may not afford
us protection against competitors with similar technology. Because patent
applications in the United States have been maintained in secrecy until patents
issue, third parties may have filed or maintained patent applications for
technology used by us or covered by our pending patent applications without our
being aware of these applications.
We may not hold proprietary rights to some patents related to our proposed
products. In some cases, these patents may be owned or controlled by third
parties. As a result, we or our collaborative partners may be required to obtain
licenses under third-party patents to develop and commercialize some
45
of our proposed products or services. If licenses are not available to us on
acceptable terms, we or our collaborative partners will not be able to develop
and commercialize these products or services.
If we are not able to keep our trade secrets confidential, our technology
and information may be used by others to compete against us.
We also rely significantly upon unpatented proprietary technology,
information, processes and know-how. We seek to protect this information through
confidentiality agreements with our employees, consultants and other third-party
contractors as well as through other security measures. These confidentiality
agreements may be breached, and we may not have adequate remedies for any such
breach. In addition, our trade secrets may otherwise become known or be
independently developed by competitors.
We may become involved in expensive patent litigation or other intellectual
property proceedings which could result in liability for damages or stop our
development and commercialization efforts.
There have been substantial litigation and other proceedings regarding the
complex patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. We may become a party to patent litigation or other
proceedings regarding intellectual property rights.
Situations in which we may become involved in patent litigation or other
intellectual property proceedings include:
. initiation of litigation or other proceedings against third parties to
enforce our patent rights;
. initiation of litigation or other proceedings against third parties to
seek to invalidate the patents held by these third parties or to obtain
a judgment that our products or services do not infringe the third
parties' patents;
. participation in interference or opposition proceedings to determine the
priority of invention if our competitors file patent applications that
claim technology also claimed by us;
. initiation of litigation by third parties claiming that our processes or
products or the intended use of our products infringe their patent or
other intellectual property rights; and
. initiation of litigation by us or third parties seeking to enforce
contract rights relating to intellectual property which may be important
to our business.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation or proceedings more effectively than we
can because of their substantially greater financial resources. If a patent
litigation or other intellectual property proceeding is resolved unfavorably to
us, we or our collaborative partners may be enjoined from manufacturing or
selling our products and services without a license from the other party and be
held liable for significant damages. Moreover, we may not be able to obtain
required licenses on commercially acceptable terms or any terms at all, and we
could be liable for lost profits if we are found to infringe a valid patent, and
treble damages if we are found to have willfully infringed such patent rights.
Patent cases frequently involve highly complex scientific matters, and each
party has the right to seek a trial by jury. Accordingly, litigation results are
highly unpredictable and we or our collaborative partners may not prevail in any
patent proceeding.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could damage our ability to compete in the
marketplace. Patent litigation and other proceedings may also absorb significant
management time and expense.
46
If we breach any of the agreements under which we license or acquire
intellectual property from others, we could lose intellectual property rights
that are important to our business.
We are a party to intellectual property licenses and agreements that are
important to our business and expect to enter into similar licenses and
agreements in the future. These licenses and agreements impose various
research, development, commercialization, sublicensing, royalty,
indemnification, insurance and other obligations on us. If we fail to comply
with these requirements, we could lose intellectual property rights that are
important to our business.
If licensees or assignees of our intellectual property rights breach any of
the agreements under which we have licensed or assigned our intellectual
property to them, we could be deprived of important intellectual property rights
and future revenue.
We are a party to intellectual property out-licenses, collaborations and
agreements that are important to our business and expect to enter into similar
agreements with third parties in the future. Under these agreements, we license
or transfer intellectual property to third parties and impose various research,
development, commercialization, sublicensing, royalty, indemnification,
insurance, and other obligations on them. If a third party fails to comply with
these requirements, we generally retain the right to terminate the agreement,
and to bring a legal action in court or in arbitration. With respect to the
agreement with Stryker regarding OP-1, the assignment of intellectual property
is irrevocable in the event of a breach of the agreement. Accordingly, it may be
more difficult to enforce our rights in the absence of litigation.
Risks Related to Our Common Stock
We expect that our stock price will fluctuate significantly.
Our common stock is listed on the Nasdaq National Market under the ticker
symbol "CRIS." The stock market, particularly in recent years, has experienced
significant volatility particularly with respect to biopharmaceutical and
biotechnology based stocks. The volatility of biopharmaceutical and
biotechnology based stocks often does not relate to the operating performance of
the companies represented by the stock. Factors that could cause such
volatility in the market price of the common stock include:
. announcements of the introduction of new products by us or our
competitors;
. market conditions in the biotechnology sectors;
. rumors relating to us or our competitors;
. litigation or public concern about the safety of our potential products;
. actual or anticipated variations in our quarterly operating results;
. deviations in our operating results from the estimates of securities
analysts;
. adverse results or delays in clinical trials;
. FDA or international regulatory actions; and
. general market conditions.
If stockholders do not receive dividends, stockholders must rely on stock
appreciation for any return on their investment in us.
We have not declared or paid cash dividends on any of our capital stock.
We currently intend to retain earnings, if any, for future growth and,
therefore, do not anticipate paying cash dividends in the future. As a result,
only appreciation of the price of the common stock will provide a return to
investors.
47
We have anti-takeover defenses that could delay or prevent an acquisition
and could adversely affect our stock price.
Provisions of our certificate of incorporation, our bylaws and Delaware law
may have the effect of deterring unsolicited takeovers or delaying or preventing
changes in control of our management, including transactions in which our
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interest. Our certificate of incorporation permits the board of directors to
issue preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could adversely affect the price of the common stock.
Our certificate of incorporation provides for staggered terms to be served
by the board of directors which makes it difficult for stockholders to change
the composition of the board of directors in any one year. In addition, our
bylaws restrict the ability of stockholders to call a special meeting of the
stockholders. These provisions may have the effect of preventing or delaying
changes in control of our management.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest cash balances in excess of operating requirements in short-term
marketable securities, generally corporate debt and government securities with
an average maturity of less than one year. All marketable securities are
considered available for sale. At December 31, 2000, the fair market value of
these securities amounted to approximately $22,584,000 with net unrealized
losses of approximately $38,000 included as a component of stockholders' equity.
Because of the quality of the investment portfolio and the short-term nature of
the marketable securities, we do not believe that interest rate fluctuations
would impair the principal amount of the securities. Our investments are
investment grade securities and deposits are with investment grade financial
institutions. We believe that the realization of losses due to changes in credit
spreads is unlikely as we expect to hold our debt to maturity.
As of December 31, 2000, in addition to the marketable securities discussed
above, we held 107,142 shares of Exelixis, Inc. common stock with a fair market
value as of that date of approximately $1,567,000. During the first quarter of
2001, we sold all 107,142 shares of Exelixis, Inc. common stock at an average
price of $13.83 for total net proceeds of approximately $1,470,000. In addition,
we hold a warrant to purchase 53,571 shares of Exelixis, Inc. common stock at a
price of $1.00 per share exercisable until January 27, 2005. The value of this
warrant, which as of December 31, 2000 was approximately $730,000, could
fluctuate based on the price of Exelixis, Inc. common stock and market
conditions.
At December 31, 2000, we had approximately $4.6 million outstanding under
fixed rate capital leases which are not subject to fluctuations in interest
rates and approximately $1.1 million outstanding under a term loan agreement
with an adjustable rate equal to prime.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included beginning at F-1. See Index to the
Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors that is required by this Item 10 is set
forth in the proxy statement to be provided to stockholders in connection with
our 2001 Annual Meeting of Stockholders (the "Proxy Statement") under the
headings "Directors and Nominees for Director" and "Section 16(a) Beneficial
Ownership Reporting Compliance," which information is incorporated herein by
reference. The name, age, and position of each executive officer of the Company
is set forth under the heading "Executive Officers of the Company" in Part I of
this Annual Report on Form 10-K, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is set forth in the Proxy Statement
under the headings "Compensation of Executive Officers" and "Director
Compensation," which information is incorporated herein by reference.
Information specified in Item 402(k) and (1) of Regulation S-K and set forth in
the Proxy Statement is not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is set forth in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is set forth in the Proxy Statement
under the heading "Compensation of Executive Officers Employment Agreements,"
which information is incorporated herein by reference.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents Filed as a Part of this Form 10-K:
1. Financial Statements. The Consolidated Financial Statements are
--------------------
included in the 2000 Annual Report, portions of which are filed as
an exhibit to this Annual Report on Form 10-K. The Consolidated
Financial Statements include: Consolidated Balance Sheets,
Consolidated Statements of Operations, Consolidated Statements of
Cash Flows, Consolidated Statements of Changes in Stockholder's
Equity, and Notes to Consolidated Financial Statements.
2. Exhibits. The Exhibits listed in the Exhibit Index immediately
--------
preceding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Current Reports on Form 8-K.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 16, 2000, reporting the issuance of a press release that
announced the signing of purchase agreements relating to a private placement of
5.2 million shares of our Common Stock.
50
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.
Curis, Inc.
By: /s/ Doros Platika, M.D.
-----------------------------------------
Doros Platika, M.D.
President and Chief Executive Officer
Date: March 30, 2001
51
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.
Signature Title Date
- ---------------------------------------- ----------------------------------------- -----------------------------------------
/s/ Doros Platika, M.D. President and Chief Executive Officer March 30, 2001
- ---------------------------------
Doros Platika, M.D. (Principal Executive Director)
/s/ George A. Eldridge Vice President, Chief Financial Officer, March 30, 2001
- ---------------------------------
George A. Eldridge Secretary and Treasurer (Principal
Financial and Accounting Officer)
/s/ Susan B. Bayh Director March 30, 2001
- ---------------------------------
Susan B. Bayh
/s/ Maryn D. Greenacre Director March 30, 2001
- ---------------------------------
Maryn D. Greenacre
/s/ Ruth B. Kunath Director March 30, 2001
- ---------------------------------
Ruth B. Kunath
/s/ James R. McNab, Jr. Director March 30, 2001
- ---------------------------------
James R. McNab, Jr.
/s/ Douglas A. Melton Director March 30, 2001
- ---------------------------------
Douglas A. Melton
/s/ Michael Rosenblatt Director March 30, 2001
- ---------------------------------
Michael Rosenblatt
/s/ James R. Tobin Director March 30, 2001
- ---------------------------------
James R. Tobin
52
EXHIBIT INDEX
-------------
The following exhibits are filed herewith or incorporated herein by reference:
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Curis. (Previously filed with the SEC as Exhibit 3.3
to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on June 19, 2000 and
incorporated herein by reference.)
3.2 Amended and Restated By-laws of Curis. (Previously filed with the SEC as Exhibit 3.2 to the
Registration Statement on Form S-1 of Curis on December 20, 2000 and incorporated herein by
reference.)
4 Form of Curis Common Stock Certificate. (Previously filed with the SEC as Exhibit 4.1 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis on May 5, 2000, and incorporated herein
by reference.)
10.1 Master Lease Agreement, dated October 6, 1997, between Creative and FINOVA Technology
Finance, Inc. (Previously filed with the SEC as Exhibit 10.38 to the Creative Annual Report
on Form 10-K for the period ended December 31, 1997 (File No. 0-19910), and incorporated
herein by reference.)
10.2 Lease, dated as of November 16, 1995, as amended, between Ontogeny and Moulton Realty Corp.
(Previously filed with the SEC as Exhibit 10.42 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis on March 14, 2000, and incorporated herein by reference.)
* 10.3 Lease, dated as of March 15, 2001, between Curis and Moulton Realty Company.
10.4 Lease, dated September 25, 1997, between Reprogenesis, Inc. ("Reprogenesis") and 21 Erie
Realty Trust. (Previously filed with the SEC as Exhibit 10.36 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on June 2, 2000, and incorporated herein by
reference.)
10.5 First Amendment to Lease, dated October 1, 1998, between Reprogenesis and 21 Erie Realty
Trust. (Previously filed with the SEC as Exhibit 10.36 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on June 2, 2000, and incorporated herein by
reference.)
10.6 Second Amendment to Lease, dated June 29, 2000, between Reprogenesis and 21 Erie Street
Trust. (Previously filed with the SEC as Exhibit 10.1 to the Curis Quarterly Report on Form
10-Q for the period ended June 30, 2000 (File No. 0-30347), and incorporated herein by
reference.)
10.7 Third Amendment to Lease, dated July 31, 2000, between Curis and 21 Erie Street Trust.
(Previously filed with the SEC as Exhibit 10.29 to the Curis Quarterly Report on Form 10-Q
for the period ended September 30, 2000 (File No. 0-30347), and incorporated herein by
reference.)
* 10.8 Letter Agreement, dated December 27, 2000, between Curis and Fleet National Bank.
* 10.9 Promissory Note, dated December 27, 2000, made by Curis in favor of Fleet National Bank.
* 10.10 Pledge Agreement, dated December 27, 2000, from Curis to Fleet National Bank.
++ 10.11 Master Restructuring Agreement, dated as of October 15, 1998, between Creative and Stryker
Corporation. (Previously filed as Exhibit 10.10 to the Creative Annual Report on Form 10-K
for the period ended December 31, 1998 (File No. 0-19910), and incorporated herein by
reference.)
++ 10.12 Asset Purchase Agreement, dated as of October 15, 1998, between Creative and Stryker
Corporation. (Previously filed as Exhibit 10.11 to the Creative Annual Report on Form 10-K
for the period ended December 31, 1998 (File No. 0-19910), and incorporated herein by
reference.)
10.13 Irrevocable License Agreement dated November 20, 1998, between Creative and Stryker
Corporation. (Previously filed as Exhibit 10.7 to the Creative Annual Report on Form 10-K for
the period ended December 31, 1999 (File No. 0-19910), and incorporated herein by reference.)
10.14 Stryker Irrevocable License Agreement dated November 20, 1998, between Creative and
53
Stryker Corporation. (Previously filed as Exhibit 10.8 to the Creative Annual Report on Form 10-K for the
period ended December 31, 1999 (File No. 0-19910), and incorporated herein by reference.)
10.15 Assignment from Creative to Stryker dated November 20, 1998. (Previously filed as Exhibit
10.9 to the Creative Annual Report on Form 10-K for the period ended December 31, 1999 (File
No. 0-19910), and incorporated herein by reference.)
++ 10.16 CBM Cross-License Agreement, dated as of November 26, 1993, between Creative and Enzon, Inc.
(Previously filed with the SEC as Exhibit 10.42 to the Creative Quarterly Report on Form 10-Q
for the period ended December 31, 1993 (File No. 0-19910), and incorporated herein by
reference.)
++ 10.17 Enzon Cross-License Agreement, dated as of November 26, 1993, between Creative and Enzon,
Inc. (Previously filed with the SEC as Exhibit 10.43 to the Creative Quarterly Report on Form
10-Q for the period ended December 31, 1993 (File No. 0-19910), and incorporated herein by
reference.)
++ 10.18 Cross-License Agreement, dated as of July 15, 1996, among Curis, Genetics Institute, Inc. and
Stryker Corporation. (Previously filed with the SEC as Exhibit 10.1 to the Quarterly Report
on Form 10-Q for the period ended September 30, 1996 of Genetics Institute, Inc. (File No.
0-14587), filed with the Securities and Exchange Commission on November 6, 1996 and
incorporated herein by reference.)
++ 10.19 License Agreement, dated November 30, 1997, between Curis and the Regents of the University
of Michigan, as amended by a certain Amendment to License Agreement dated August 11, 1999.
(Previously filed with the SEC as Exhibit 10.32 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis on April 3, 2000, and incorporated herein by reference.)
++ 10.20 Amended and Restated License Agreement (Exclusive), dated July 1, 1996, between Curis and the
Massachusetts Institute of Technology, as amended by the First Amendment to Restated License
Agreement dated February 22, 2000. (Previously filed with the SEC as Exhibit 10.33 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis on June 2, 2000, and incorporated
herein by reference.)
++ 10.21 Patent License Agreement (Exclusive), dated October 30, 1996, between Curis and the
Massachusetts Institute of Technology. (Previously filed with the SEC as Exhibit 10.34 to the
Joint Proxy Statement-Prospectus on June 2, 2000, and incorporated herein by reference.)
++ 10.22 Exclusive License Agreement, dated February 20, 2000, between Curis and Children's Medical
Center Corporation. (Previously filed with the SEC as Exhibit 10.35 to the Joint Proxy and
incorporated herein by reference.)
54
10.23 Termination and Release Agreement dated January 27, 1999, between Curis and American Medical Systems, Inc.
(Previously filed with the SEC as Exhibit 10.37 to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on
June 2, 2000, and incorporated herein by reference.)
10.24 Financial Assistance Award (Development of Perivascular Endothelial Cell Implants), dated November 1, 1999,
between Curis and the National Institute of Standards and Technology, Advanced Technology Program. (Previously
filed with the SEC as Exhibit 10.38 to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on March 14,
2000, and incorporated herein by reference.)
* 10.25 Financial Assistance Award (Biomaterial for Minimally Invasive Therapies) dated November 1, 2000, between
Curis and the National Institute of Standards and Technology, Advanced Technology Program.
10.26 Stock Subscription Warrant dated July 2, 1998, between Curis and TBCC Funding Trust II.
(Previously filed with the SEC as Exhibit 10.39 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis on March 14, 2000, and incorporated herein by reference.)
++ 10.27 License Agreement, dated as of February 12, 1996, between Curis and Leland Stanford Junior
University. (Previously filed with the SEC as Exhibit 10.43 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on June 2, 2000, and incorporated herein by
reference.)
++ 10.28 License Agreement, dated as of September 26, 1996 and amended January 15, 1997, among Curis,
The Johns Hopkins University and University of Washington School of Medicine. (Previously
filed with the SEC as Exhibit 10.44 to the Joint Proxy Statement-Prospectus on Form S-4 of
Curis on June 2, 2000, and incorporated herein by reference.)
++ 10.29 License Agreement, dated as of January 1, 1995, and as amended July 19, 1995 and August 30,
1996, between Curis and The Trustees of Columbia University in the City of New York.
(Previously filed with the SEC as Exhibit 10.45 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis on April 3, 2000, and incorporated herein by reference.)
++ 10.30 License Agreement, dated as of February 9, 1995 and as amended (January 1, 1997), between
Curis and the President and Fellows of Harvard University. (Previously filed with the SEC as
Exhibit 10.46 to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on June 2, 2000,
and incorporated herein by reference.)
++ 10.31 Amendment to License Agreement between Curis and Presidents and Fellows of Harvard College
dated September 11, 2000. (Previously filed with the SEC as Exhibit 10.2 to the Curis
Quarterly Report on Form 10-Q for the period ended September 30, 2000 (File No. 0-30347), and
incorporated herein by reference.)
++ 10.32 Exclusive License Agreement, dated as of November 2, 1998, among Curis and the Board of
Trustees of Leland Stanford Junior University and Johns Hopkins University. (Previously filed
with the SEC as Exhibit 10.65 to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on
June 2, 2000, and incorporated herein by reference.)
++ 10.33 License Agreement, dated as of November 20, 1997, between Curis and the Board of Trustees of
Leland Stanford Junior University. (Previously filed with the SEC as Exhibit 10.66 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis on April 3, 2000, and incorporated
herein by reference.)
++ 10.34 License Agreement, dated as of November 30, 1998, between Curis and the Board of Trustees of
Leland Stanford Junior University. (Previously filed with the SEC as Exhibit 10.67 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis on June 2, 2000, and incorporated
herein by reference.)
55
++ 10.35 License Agreement, dated as of June 13, 1996, between Curis and the President and Fellows of
Harvard College. (Previously filed with the SEC as Exhibit 10.68 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on June 2, 2000, and incorporated herein by
reference.)
++ 10.36 License Agreement, dated as of February 1, 1997, between Curis and the President and Fellows
of Harvard College. (Previously filed with the SEC as Exhibit 10.69 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on April 3, 2000, and incorporated herein by
reference.)
*+ 10.37 License and Collaboration Agreement, dated as of January 5, 2001, between Curis and AEGERA.
10.38 Warrant Agreement, dated as of October 1, 1997, between Curis and Lighthouse Capital
Partners, L.P. (Previously filed with the SEC as Exhibit 10.56 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on March 14, 2000, and incorporated herein by
reference.)
10.39 Warrant Agreement, dated as of December 17, 1999, between Curis and Lighthouse Capital III,
L.P. (Previously filed with the SEC as Exhibit 10.61 to the Joint Proxy Statement-Prospectus
on Form S-4 of Curis on March 14, 2000, and incorporated herein by reference.)
10.40 Stock Subscription Warrant, dated as of November 21, 1997, between Curis and MM Ventures.
(Previously filed with the SEC as Exhibit 10.57 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis on March 14, 2000, and incorporated herein by reference.)
10.41 Warrant Agreement, dated as of September 1, 1999, between Curis and Comdisco, Inc.
(Previously filed with the SEC as Exhibit 10.59 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis on March 14, 2000, and incorporated herein by reference.)
10.42 Stock Subscription Warrant, dated as of November 21, 1999, between Curis and
Transamerica Business Credit Corp ("TBCC Funding Trust 1"). (Previously filed
with the SEC as Exhibit 10.57 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis on March 14, 2000, and incorporated herein by reference.)
10.43 Stock Subscription Warrant No. 2, dated as of November 15, 1999 between Curis
and TBCC Funding Trust 1. (Previously filed with the SEC as Exhibit 10.60 to
the Joint Proxy Statement-Prospectus on Form S-4 of Curis on March 14, 2000,
and incorporated herein by reference.)
* 10.44 Employment Agreement dated June 17, 1996 between Ontogeny and Dr Platika.
10.45 Secured Promissory Note dated June 17, 1996, between Ontogeny and Dr. Platika
in the original principal amount of $500,000, as amended by that First
Amendment to Secured Promissory Note dated as of August 31, 1998 and that
Second Amendment to Secured Promissory Note dated as of December 15, 1999.
(Previously filed with the SEC as Exhibit 10.63 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on May 31, 2000, and incorporated
herein by reference.)
10.46 Pledge Agreement dated June 17, 1996, between Ontogeny and Dr. Platika.
(Previously filed with the SEC as Exhibit 10.64 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on March 14, 2000, and incorporated
herein by reference.)
10.47 Mortgage dated December 15, 1999, between Ontogeny and Dr. and Patricia C.
Platika. (Previously filed with the SEC as Exhibit 10.70 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis on May 31, 2000, and incorporated
herein by reference.)
56
10.48 Curis 2000 Stock Incentive Plan. (Previously filed with the SEC as Exhibit
10.71 to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on May 31,
2000, and incorporated herein by reference.)
10.49 Curis 2000 Director Stock Option Plan. (Previously filed with the SEC as
Exhibit 10.72 to the Joint Proxy Statement-Prospectus on Form S-4 of Curis on
May 31, 2000, and incorporated herein by reference.)
*21 Subsidiaries of Curis.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Deloitte & Touche LLP.
__________
++ Confidential treatment has been granted as to certain portions of this
exhibit.
+ Confidential treatment has been requested as to certain portions of this
exhibit.
* filed herewith.
Curis hereby agrees to furnish supplementally any schedules that have been
omitted from this exhibit list to the Securities and Exchange Commission upon
its request.
57
CURIS, INC. AND SUBSIDIARIES
Index
Page
Report of Independent Public Accountants F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
F-1
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Curis, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Curis, Inc.
(f.k.a. Creative BioMolecules, Inc.) and its subsidiaries as of December 31,
2000, and the related consolidated statements of operations and comprehensive
loss, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of Curis, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Curis, Inc. and its
subsidiaries as of December 31, 2000 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 30, 2001 (except with respect to the
matters discussed in Note 19, as to which
the date is March 13, 2001)
F-2
Independent Auditors' Report
To the Board of Directors and Stockholders of
Curis, Inc and Subsidiaries
We have audited the accompanying consolidated balance sheet of Curis, Inc.
(f.k.a. Creative BioMolecules, Inc.) and its subsidiary as of December 31, 1999
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Curis, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Curis, Inc. and its subsidiary at December
31, 1999 and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, on
February 14, 2000, Curis, Inc. entered into a merger agreement with Ontogeny,
Inc. and Reprogenesis, Inc. to form Curis, Inc.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 15, 2000
F-3
CURIS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
ASSETS 2000 1999
Current Assets:
Cash and cash equivalents $ 52,414,312 $ 2,751,069
Marketable securities 22,654,393 18,619,516
Marketable securities--Restricted 729,905 -
Accounts receivable 358,388 60,296
Prepaid expenses and other current assets 920,485 146,764
------------- -------------
Total current assets 77,077,483 21,577,645
------------- -------------
Property and Equipment, net 7,866,591 2,130,158
------------- -------------
Other Assets:
Notes receivable--Officers 230,000 -
Intangible assets (Note 4) 97,145,664 5,075,914
Deposits and other assets 362,252 108,574
------------- -------------
Total other assets 97,737,916 5,184,488
------------- -------------
$ 182,681,990 $ 28,892,291
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt and lease obligations, current portion $ 1,971,609 $ 347,323
Accounts payable 2,187,824 612,811
Accrued liabilities 5,090,841 1,895,634
Accrued compensation 462,800 944,270
Deferred revenue - 661,279
------------- -------------
Total current liabilities 9,713,074 4,461,317
------------- -------------
Debt and Lease Obligations, net of current portion 4,155,150 1,009,388
------------- -------------
Commitments (Note 7)
Stockholders' Equity:
Preferred stock, $0.01 par value-
Authorized--5,000,000 and 10,000,000 shares at December 31, 2000 and 1999, respectively
Issued and outstanding--None - -
Common Stock, $0.01 par value-
Authorized--125,000,000 and 15,000,000 shares at December 31, 2000 and 1999, respectively
Issued and outstanding--31,383,585 and 10,999,534 shares at December 31, 2000 and 1999,
respectively 313,836 109,995
Additional paid-in capital 662,339,492 144,937,416
Notes receivable (1,204,596) -
Deferred compensation (22,893,619) -
Accumulated deficit (471,945,648) (121,595,024)
Accumulated other comprehensive income (loss) 2,204,301 (30,801)
------------- -------------
Total stockholders' equity 168,813,766 23,421,586
------------- -------------
$ 182,681,990 $ 28,892,291
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CURIS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
Year Ended December 31,
2000 1999 1998
Revenues:
Research and development contracts and government grants $ 997,078 $ 3,159,460 $ 10,419,071
License fees and royalties 26,491 52,400 10,000
------------- ------------ ------------
Total revenues 1,023,569 3,211,860 10,429,071
------------- ------------ ------------
Costs and Expenses:
Research and development (a) 17,423,895 10,434,560 24,856,147
General and administrative (a) 9,330,256 5,524,077 6,946,012
Stock-based compensation (a) 16,628,218 64,000 322,000
Amortization of and impairment charge related to intangible assets 14,450,894 808,017 206,360
Loss on disposition of fixed assets 203,904 - -
In-process research and development 294,800,000 - -
1999 reorganization costs and 1998 loss on sale of manufacturing (38,391) 255,701 1,362,249
operations ------------- ------------ ------------
Total costs and expenses 352,798,776 17,086,355 33,692,768
------------- ------------ ------------
Loss from operations (351,775,207) (13,874,495) (23,263,697)
------------- ------------ ------------
Other Income (Expenses):
Interest income 1,900,693 1,924,313 2,183,472
Other income 5,200 1,777 12,391
Interest expense (481,310) (161,385) (327,304)
------------- ------------ ------------
Total other income 1,424,583 1,764,705 1,868,559
------------- ------------ ------------
Net loss (350,350,624) (12,109,790) (21,395,138)
Accretion and Repurchase Costs on Series 1998/A Preferred Stock - (2,395,559) (986,587)
------------- ------------ ------------
Net loss applicable to common stockholders $(350,350,624) $(14,505,349) $(22,381,725)
============= ============ ============
Basic and Diluted Net Loss per Common Share $ (19.80) $ (1.36) $ (2.22)
============= ============ ============
Weighted Average Common Shares for Basic and Diluted Net Loss 17,693,966 10,681,547 10,101,632
Computation ============= ============ ============
Net Loss $(350,350,624) $(12,109,790) $(21,395,138)
Unrealized gain (loss) on marketable securities 2,235,102 (136,262) 105,461
------------- ------------ ------------
Comprehensive loss $(348,115,522) $(12,246,052) $(21,289,677)
============= ============ ============
(a) The following summarizes the departmental allocation of the
stock-based compensation charge:
Research and development $ 8,358,400 $ - $ -
General and administrative 8,269,818 64,000 322,000
------------- ------------ ------------
Total stock-based compensation $ 16,628,218 $ 64,000 $ 322,000
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CURIS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Additional
Common Stock Paid-in Notes
Shares Amount Capital Receivable
Balance, December 31, 1997 10,017,775 $100,178 $140,699,260 $ -
Conversions of Series 1998/A Preferred Stock into
common stock 219,711 2,197 1,549,969 -
Stock-based compensation 14,400 144 321,856 -
Other issuances of common stock 85,355 853 797,231 -
Unrealized gain on marketable securities - - - -
Accretion on Series 1998/A Preferred Stock - - (986,587) -
Net loss - - - -
---------- -------- ------------ ------------
Balance, December 31, 1998 10,337,241 103,372 142,381,729 -
Conversions of Series 1998/A Preferred Stock into
common stock 393,418 3,934 2,974,065 -
Warrant exercises into common stock 119,198 1,192 946,430 -
Other issuances of common stock 149,677 1,497 966,751 -
Stock-based compensation - - 64,000 -
Unrealized loss on marketable securities - - - -
Accretion and repurchase costs on Series 1998/A
Preferred Stock - - (2,395,559) -
Net loss - - - -
---------- -------- ------------ ------------
Balance, December 31, 1999 10,999,534 109,995 144,937,416 -
Issuance of 5.2 million shares of common stock, net
of issuance costs of approximately $3.5 million 5,200,000 52,000 43,296,458 -
Issuance of common stock related to the acquisitions
of Ontogeny and Reprogenesis 14,452,913 144,529 447,249,424 -
Issuance of restricted common stock for services - - 1,623,000 -
Warrant exercises into common stock 113,119 1,131 306,430 -
Other issuances of common stock 478,313 4,784 5,044,174 -
Exercise of common stock options through issuance of
notes receivable 139,706 1,397 1,129,983 (1,131,380)
Interest on notes receivable - - - (73,216)
Stock-based compensation from modification of option
agreements - - 3,538,440 -
Deferred compensation related to common stock options - - 17,329,822 -
Amortization of deferred compensation - - - -
Deferred compensation related to forfeited options - - (2,115,655) -
Unrealized gain on marketable securities - - - -
Net loss - - - -
---------- -------- ------------ ------------
Balance, December 31, 2000 31,383,585 $313,836 $662,339,492 $ (1,204,596)
========== ======== ============ ============
Accumulated Other
Deferred Accumulated Comprehensive
Compensation Deficit Income (Loss) Total
Balance, December 31, 1997 $ - $ (88,090,096) $ - $ 52,709,342
Conversions of Series 1998/A Preferred Stock into
common stock - - - 1,552,166
Stock-based compensation - - - 322,000
Other issuances of common stock - - - 798,084
Unrealized gain on marketable securities - - 105,461 105,461
Accretion on Series 1998/A Preferred Stock - - - (986,587)
Net loss - (21,395,138) - (21,395,138)
------------- ------------- ------------ -------------
Balance, December 31, 1998 - (109,485,234) 105,461 33,105,328
Conversions of Series 1998/A Preferred Stock into
common stock - - - 2,977,999
Warrant exercises into common stock - - - 947,622
Other issuances of common stock - - - 968,248
Stock-based compensation - - - 64,000
Unrealized loss on marketable securities - - (136,262) (136,262)
Accretion and repurchase costs on Series 1998/A
Preferred Stock - - - (2,395,559)
Net loss - (12,109,790) - (12,109,790)
------------- ------------- ------------ -------------
Balance, December 31, 1999 - (121,595,024) (30,801) 23,421,586
Issuance of 5.2 million shares of common stock, net
of issuance costs of approximately $3.5 million - - - 43,348,458
Issuance of common stock related to the acquisitions
of Ontogeny and Reprogenesis (19,146,230) - - 428,247,723
Issuance of restricted common stock for services - - - 1,623,000
Warrant exercises into common stock - - - 307,561
Other issuances of common stock - - - 5,048,958
Exercise of common stock options through issuance of
notes receivable - - - -
Interest on notes receivable - - - (73,216)
Stock-based compensation from modification of option
agreements - - - 3,538,440
Deferred compensation related to common stock options (17,329,822) - - -
Amortization of deferred compensation 11,466,778 - - 11,466,778
Deferred compensation related to forfeited options 2,115,655 - - -
Unrealized gain on marketable securities - - 2,235,102 2,235,102
Net loss - (350,350,624) - (350,350,624)
------------- ------------- ------------ -------------
Balance, December 31, 2000 $ (22,893,619) $(471,945,648) $ 2,204,301 $ 168,813,766
============= ============= ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CURIS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
2000 1999 1998
Cash Flows from Operating Activities:
Net loss $(350,350,624) $(12,109,790) $(21,395,138)
Adjustments to reconcile net loss to net cash used in operating activities-
Loss on sale of manufacturing operations - - 1,362,249
Depreciation and amortization 11,148,110 989,490 2,485,753
Stock-based compensation expense 16,628,218 64,000 371,999
Reorganization expense adjustment 39,141 - -
Noncash interest expense on notes payable 12,811 - -
Noncash interest income on officers' notes receivable (73,216) - -
Impairment costs of patents 4,611,261 - -
Loss on disposition of fixed assets 203,904 - -
Write-off of in-process research and development 294,800,000 - -
Deferred patent and application costs - 537,781 -
Increase (decrease) in operating assets and liabilities, net of assets acquired-
Accounts receivable (97,507) 608,936 3,903,286
Prepaid expenses and other current assets 52,660 154,137 (104,428)
Notes receivable from related parties 30,000 - -
Other assets 108,919 - -
Accounts payable and accrued liabilities (44,002) (2,012,555) (696,973)
Deferred contract revenue (661,279) (3,000,000) 3,661,279
------------- ------------ ------------
Total adjustments 326,759,020 (2,658,211) 10,983,165
------------- ------------ ------------
Net cash used in operating activities (23,591,604) (14,768,001) (10,411,973)
------------- ------------ ------------
Cash Flows from Investing Activities:
Purchase of marketable securities (15,036,205) (9,359,549) (30,021,298)
Sale of marketable securities 12,506,525 30,903,094 18,368,193
Expenditures for property and equipment (1,573,494) (610,013) (2,849,288)
Proceeds from sale of assets 687,500 - -
Expenditures for patents (563,882) (776,586) (1,120,609)
Note receivable from officer - - (10,000)
Repayment of note receivable from officer - 116,668 116,667
Decrease in deposits and other - - 12,549
Proceeds from sale of manufacturing related assets - - 17,092,322
Marketable securities received in acquisition of Ontogeny and Reprogenesis 17,829,518 - -
Cash received from acquisition of Ontogeny and Reprogenesis, net 10,788,955 - -
------------- ------------ ------------
Net cash provided by investing activities 24,638,917 20,273,614 1,588,536
------------- ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of 5.2 million shares of common stock, net of issuance costs 43,348,458 - -
Proceeds from warrant exercises 307,561 947,622 -
Proceeds from other issuances of common stock 5,048,958 968,248 798,084
Proceeds from redeemable Series 1998/A Preferred Stock - - 23,618,366
Repurchase of Series 1998/A Preferred Stock - (22,470,347) -
Increase in obligations under capital leases 1,094,458 311,031 193,524
Repayments of obligations under capital leases (1,183,505) (249,142) (207,402)
------------- ------------ ------------
Net cash provided by (used in) financing activities 48,615,930 (20,492,588) 24,402,572
------------- ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 49,663,243 (14,986,975) 15,579,135
Cash and Cash Equivalents, beginning of period 2,751,069 17,738,044 2,158,909
------------- ------------ ------------
Cash and Cash Equivalents, end of period $ 52,414,312 $ 2,751,069 $ 17,738,044
============= ============ ============
Supplemental Disclosure of Noncash Investing and Financing Activities:
Property and equipment purchased under capital lease obligations $ 1,094,458 $ 313,512 $ 1,089,164
============= ============ ============
Capital leases assumed by buyer in connection with sale of manufacturing operations $ - $ - $ 2,437,802
============= ============ ============
Conversion of Series 1998/A Preferred Stock $ - $ 2,977,999 $ 1,552,166
============= ============ ============
Issuance of notes receivable for exercise of stock options $ 1,131,380 $ - $ -
============= ============ ============
Acquisition of Ontogeny and Reprogenesis:
Fair value of assets acquired $ 38,952,383 $ - $ -
Assumed liabilities (9,143,881) - -
Cost in excess of net assets acquired 125,123,232 - -
In-process research and development cost acquired 294,800,000 - -
Acquisition costs incurred (2,337,781) - -
------------- ------------ ------------
Fair value of common stock issued $ 447,393,953 $ - $ -
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) OPERATIONS
On February 14, 2000, Creative BioMolecules, Inc. (Creative) announced that
it would merge with Ontogeny, Inc. (Ontogeny) and Reprogenesis, Inc.
(Reprogenesis) to form a public company named Curis, Inc. (Curis or the
Company). Curis, the successor to Creative, recorded the merger as a
purchase of Reprogenesis and Ontogeny.
The Company focuses its efforts in the area of regenerative medicine and
uses its functional genomics and developmental biology expertise to (i)
activate cellular development pathways to promote repair and promote normal
tissue and organ function and (ii) inhibit abnormal growth pathways to
treat certain types of cancer. The Company has identified product leads
from its experience in working with protein factors, cell therapies,
biomaterials, tissue engineering and small molecules. The Company is
subject to risks common to companies in the biotechnology industry
including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology and compliance with FDA government
regulations and approval requirements.
(2) MERGER
Curis, Inc. was incorporated on February 14, 2000, and was formed on July
31, 2000. Creative (a Delaware corporation), Ontogeny (a Delaware
corporation), and Reprogenesis (a Texas corporation), merged (the Merger)
with and into the Company, pursuant to an Agreement and Plan of Merger
dated as of February 14, 2000 (the Merger Agreement). On July 31, 2000, the
Company, as the surviving company of the Merger, assumed the rights and
obligations of Creative, Ontogeny and Reprogenesis. Immediately after the
Merger, the Company was owned approximately 43% by the former stockholders
of Creative, 38% by the former stockholders of Ontogeny and 19% by the
former stockholders of Reprogenesis. Consequently, for accounting purposes,
the Company is deemed to be the successor to Creative, and the historical
financial statements of Creative have become the historical financial
statements of the Company. The Merger has been accounted for as a purchase
of Ontogeny and Reprogenesis in accordance with Accounting Principles Board
Opinion (APB) No. 16, Accounting for Business Combinations, and
accordingly, Ontogeny's and Reprogenesis' operating results since the
Merger date are included in the accompanying financial statements.
Pursuant to the Merger Agreement, the following conversion ratios were
applied to the outstanding securities of Creative, Ontogeny and
Reprogenesis:
. Creative's common stockholders and the holders of options or warrants to
acquire the common stock of Creative received, or are entitled to
receive, upon the exercise of options or warrants, an aggregate number
of shares of the Company's common stock equal to 0.3000 multiplied by
the number of shares of Creative common stock outstanding or subject to
options or warrants;
. Ontogeny's capital stockholders and the holders of options or warrants
to acquire the capital stock of Ontogeny received, or are entitled to
receive, upon the exercise of options or warrants, an aggregate number
of shares of the Company's common stock equal to 0.2564 multiplied by
the number of shares of Ontogeny capital stock outstanding or subject to
options or warrants; and
. Reprogenesis' capital stockholders and the holders of options or
warrants to acquire the capital stock of Reprogenesis received, or are
entitled to receive, upon the exercise of
F-8
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
options or warrants, an aggregate number of shares of the Company's
common stock equal to 0.1956 multiplied by the number of shares of
Reprogenesis capital stock outstanding or subject to options or
warrants.
In connection with the Merger, the Company approved a 0.30-for-1 stock
split of the Company's common stock. All share and per share amounts of
common stock for all periods have been retroactively adjusted to reflect
the stock split. In addition, the Company's certificate of incorporation
was amended and restated among other things, to change its authorized
capital stock to 125,000,000 shares of $0.01 par value common stock and
5,000,000 shares of $0.01 par value preferred stock.
In accordance with APB Opinion No. 16, the purchase price for Ontogeny and
Reprogenesis has been allocated to the assets and liabilities of Ontogeny
and Reprogenesis based on their fair values. The aggregate purchase price
based on the fair market value of Creative common stock was $300,731,000
and $149,000,000 for Ontogeny and Reprogenesis, respectively, including the
value of the outstanding options and warrants exchanged for options and
warrants to purchase the Company's common stock and the transaction costs
related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation
tools and techniques. Significant portions of the purchase price were
identified as intangible assets which included in-process research and
development (IPR&D) of $294,800,000 and assembled workforce of $500,000.
The excess of the purchase price over the fair value of identified tangible
and intangible net assets of $105,477,000 has been allocated to goodwill.
Intangible assets are being amortized over their estimated useful lives of
four to five years. The fair value of the IPR&D relating to current in-
process research and development projects was recorded as an expense as of
the Merger date.
The acquired IPR&D consists of development work to date on 11 primary
projects and six primary projects for Ontogeny and Reprogenesis,
respectively. The technology resulting from these development efforts offer
no alternative uses in the event that they prove not to be feasible. If a
technology fails to achieve FDA approval or was considered for an alternate
use, it would be subjected to the risk associated with another series of
clinical trials. The new use would also face regulatory risk associated
with the FDA approval process.
The aggregate purchase price of $449,731,000, including acquisition costs,
was allocated as follows:
Current assets $ 32,082,000
Property, plant and equipment 6,328,000
Assembled workforce 500,000
In-process research and development 294,800,000
Deferred compensation 19,146,000
Other assets 542,000
Goodwill 105,477,000
Assumed liabilities (9,144,000)
------------
$449,731,000
============
F-9
Unaudited pro forma operating results for the Company, assuming the Merger
occurred at the beginning of the periods presented are as follows:
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year Ended December 31,
2000 1999
------------ ------------
Revenues $ 4,486,633 $ 9,966,730
Net loss $(98,674,701) $(74,393,085)
Net loss per share $ (3.78) $ (3.40)
For purposes of these pro forma operating results, the IPR&D was assumed to
have been written off prior to the pro forma periods, so that the operating
results presented only include recurring costs.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts and disclosure of certain assets and liabilities at the
balance sheet date. Such estimates include the collectability of
receivables, the carrying value of property and equipment and
intangible assets and the value of certain liabilities. Actual results
may differ from such estimates.
(b) Reclassifications
Certain amounts in the prior years have been reclassified to conform
to the current year's presentation.
(c) Consolidation
The accompanying consolidated financial statements include the Company
and its wholly owned subsidiaries. Intercompany balances are
eliminated in consolidation.
(d) Revenue Recognition
Staff Accounting Bulletin No. 101 (SAB No. 101), Revenue Recognition,
was issued in December 1999. SAB No. 101 requires companies to
recognize certain up-front nonrefundable fees and milestone payments
over the life of the related alliances when such fees are received in
conjunction with alliances that have multiple elements. The Company
adopted this new accounting principle in the fourth quarter of fiscal
2000, which did not have any impact on the Company's reported
operating results as it relates to the contract revenues, up-front
nonrefundable payments and milestone payments received in connection
with collaborations.
Research and development contract revenues consist of nonrefundable
research and development funding under collaborative agreements with
various strategic partners. Research and development contract revenue
is recognized at the time the research and development activities are
performed under the terms of the related agreements, when the
strategic partner is obligated to pay and when no future obligations
exist. As of December 31, 2000, the Company was not providing research
and development services under corporate collaboration agreements.
Government grant revenues consist of grant awards from the Department
of Health and Human Services (DHHS) and the National Institute of
Standards and Technology (NIST) (see Note 8). Revenue is recognized
under government grants as the services are provided and payment is
assured under the terms of the grant.
F-10
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fees for the sale or licensing of product rights are recorded as
deferred revenue upon receipt and recognized as income on a systematic
basis (based upon the timing and level of work performed or on a
straight-line basis if not otherwise determinable) over the period
that the related products or services are delivered or obligations as
defined in the agreement are performed.
Revenue from milestone or other contingent payments is recognized as
earned in accordance with the terms of the related agreement.
Royalties are recognized as earned under the Company's royalty
agreements when amounts are determinable and payment is reasonably
assured. The Company's manufacturing contracts provided for technical
collaboration and manufacturing for third parties. Revenue was earned
and recognized based upon work performed. The Company sold its
manufacturing facilities to Stryker Corporation in November 1998 (see
Note 11).
During the years ended December 31, 2000, 1999 and 1998, total
revenues from major customers as a percent of total revenues of the
Company were as follows:
Year Ended December 31,
2000 1999 1998
---- ---- ----
Biogen, Inc -% 95% 28%
Stryker Corporation 69% 3% 55%
NIST 24% -% -%
(e) Research and Development
Research and development costs are charged to operations as incurred.
Certain research and development projects are partially funded by
research and development contracts and government grants, and the
expenses related to these activities are included in research and
development costs.
F-11
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Cash Equivalents and Marketable Securities
Cash equivalents consist of short-term, highly liquid investments
purchased with remaining maturities of three months or less. All other
liquid investments are classified as marketable securities. Marketable
securities have been designated as available-for-sale and are stated
at market value with any unrealized holding gains or losses included
as a component of stockholders' equity and any realized gains and
losses recorded in the statement of operations in the period the
securities are sold. The amortized cost, unrealized gains (losses) and
fair value of marketable securities available-for-sale as of December
31, 2000, with maturity dates ranging between one and 12 months are as
follows:
Amortized Cost Unrealized Gain Fair Value
(Loss)
U.S. government obligations $ 2,574,742 $ 3,530 $ 2,578,272
Commercial paper 9,763,209 165 9,763,374
Corporate bonds and notes 10,284,682 (41,901) 10,242,781
Corporate equity securities 53,571 2,243,300 2,296,871
----------- ---------- -----------
22,676,204 2,205,094 24,881,298
Less--Cash and cash equivalents (1,497,793) (793) (1,497,000)
----------- ---------- -----------
Available-for-sale marketable $21,178,411 $2,204,301 $23,384,298
securities =========== ========== ===========
At December 31, 1999, the Company's marketable securities portfolio
included approximately $18,620,000 in corporate bonds and notes as of
December 31, 1999, all with maturities ranging from three to 12
months. At December 31, 1999, gross unrealized losses were $30,801.
At December 31, 2000, the Company held 107,142 shares of Exelixis,
Inc. (Exelixis) common stock which are included in the Company's
balance sheet as of December 31, 2000, under the category "Marketable
securities" with a fair market value of approximately $1,567,000.
During the first quarter of 2001, the Company sold all shares of
Exelixis common stock for total net proceeds of approximately
$1,470,000 (see Note 19 - Subsequent Events). The Company also holds a
warrant to purchase 53,571 shares of Exelixis common stock at $1.00
per share exercisable until January 27, 2005. The sale of the
underlying common shares is prohibited for a period of one year from
the date the warrant is exercised. As a result, the value of this
warrant is included in the Company's balance sheet as of December 31,
2000 under the category "Marketable securities - Restricted" at its
fair market value of approximately $730,000.
(g) Fair Value of Financial Instruments
The estimated fair values of financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies.
The estimated fair value of cash and cash equivalents, accounts and
notes receivable and accounts payable approximates fair value due to
the short-term nature of these instruments. The fair value of
marketable securities is based on current market values.
F-12
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The carrying amounts of the Company's debt and lease obligations also
approximates fair value (see Note 6).
(h) Plant and Equipment
Purchased equipment is recorded at cost. Leased equipment is recorded
at the lesser of cost or the present value of the minimum lease
payments. Depreciation and amortization are provided on the straight-
line method over the estimated useful lives of the related assets or
the remaining terms of the leases, as follows:
Estimated
Asset Classification Useful Life
Laboratory equipment and computers 3-5 years
Leasehold improvements Life of the lease
Office furniture and equipment 5 years
Equipment under lease obligations Life of the lease
(i) Other Intangible Assets
The Company has filed applications for United States and foreign
patents covering aspects of its technology. Certain costs related to
successful patent applications and certain costs related to pending
applications from which the Company is currently deriving economic
benefit, are capitalized and amortized over the estimated useful life
of the patent, generally 16 to 20 years, using the straight-line
method. Accumulated amortization was approximately $445,000 and
$912,000 at December 31, 2000 and 1999, respectively. During the year
ended December 31, 2000, the Company recognized an impairment charge
of approximately $4,611,000 to reduce the carrying value of certain
patents (see Note 3(j)). The Company evaluates all patent costs and,
to the extent there is uncertainty as to the realizability of such
costs, they are expensed as incurred.
(j) Long-lived Assets
The Company applies the provisions of Statements of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS
No. 121 requires that long-lived assets be reviewed for impairment by
comparing the fair values of the assets with their carrying amounts.
Any write- downs are to be treated as permanent reductions in the
carrying amounts of the assets. The Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances
indicate that carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted net cash flows expected to be generated by the asset.
Accordingly, the Company evaluates the possible impairment of goodwill
and other assets at each reporting period based on the projected cash
flows of the related asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less the cost to sell.
During the third quarter of the year ended December 31, 2000, the
Company performed a review of its capitalized patent costs as part of
evaluating its post-merger strategy. This review resulted in an
impairment charge of approximately $4,611,000 to reduce the
F-13
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
carrying value of those patents determined not to be beneficial or not
expected to be utilized in future operations and which have no
alternative future use. This amount has been included under
amortization of intangibles in the accompanying consolidated statement
of operations for the year ended December 31, 2000.
(k) Basic and Diluted Loss Per Common Share
The Company applies SFAS No. 128, Earnings per Share, which
establishes standards for computing and presenting earnings per share.
Basic and diluted net loss per share were determined by dividing net
loss, after giving effect to accretion and repurchase costs on Series
1998/A Preferred Stock in 1999 and 1998, by the weighted average
common shares outstanding during the period. Diluted loss per share is
the same as basic loss per share for all periods presented, as the
effect of the potential common stock equivalents is antidilutive.
Antidilutive securities, which consist of stock options and warrants
that are not included in diluted net loss per common share, were
6,899,088, 1,834,513 and 2,521,200 as of December 31, 2000, 1999 and
1998, respectively.
(l) Stock-Based Compensation
Stock options issued to employees under the Company's stock option and
purchase plans are accounted for under APB No. 25, Accounting for
Stock Issued to Employees (see Note 14). All stock-based awards to
non- employees are accounted for at their fair value in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, and
Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees.
(m) New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) released
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes standards for reporting and
accounting for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair
value. Pursuant to SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133, SFAS No.133 is effective for all quarters of
fiscal years beginning after June 15, 2000. The Company does not
anticipate the adoption of SFAS No. 133 will have a material impact on
the Company's consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation - An
Interpretation of APB Opinion No. 25. The interpretation clarifies
the application of APB Opinion No. 25 in specified areas, as
F-14
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
defined. The interpretation is effective July 1, 2000 but covers
certain events occurring during the period after December 15, 1998,
but before the effective date. To the extent that events covered by
this interpretation occur during the period after December 31, 1998,
but before the effective date, the effects of applying this
interpretation would be recognized on a prospective basis from the
effective date. The application of this interpretation resulted in
approximately $19,146,000 of deferred compensation for the value of
unvested stock options held by employees and consultants primarily of
Ontogeny. This amount is being amortized over the vesting period of
the underlying options. The adoption of this interpretation did not
have a material impact on the Company's consolidated financial
statements, except as otherwise discussed above.
(4) INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
2000 1999
------------ ----------
Goodwill $105,477,000 $ -
Patents 1,297,000 5,988,000
Assembled workforce 500,000 -
107,274,000 5,988,000
Less--Accumulated amortization (10,128,000) (912,000)
------------ ----------
$ 97,146,000 $5,076,000
============ ==========
Goodwill totaling $105,477,000 and assembled workforce of $500,000 are
being amortized over their estimated useful lives of four to five years.
Accumulated amortization as of December 31, 2000, was approximately
$9,641,000 and $42,000 for goodwill and assembled workforce, respectively.
Patent accumulated amortization (see Note 3(i)) was approximately $445,000
and $912,000 at December 31, 2000 and 1999, respectively.
F-15
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
2000 1999
----------- -----------
Laboratory equipment and furniture $ 3,510,930 $ 4,093,121
Equipment under notes payable
and capital leases 5,537,625 1,846,137
Leasehold improvements under notes payable
and capital leases 3,431,496 -
Leasehold improvements 1,015,265 764,021
Office furniture and equipment 397,630 1,921,983
----------- -----------
13,892,946 8,625,262
Less--Accumulated depreciation and
amortization (6,026,355) (6,495,104)
----------- -----------
Total $ 7,866,591 $ 2,130,158
=========== ===========
(6) LONG-TERM DEBT and CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following at
December 31, 2000 and 1999:
December 31,
2000 1999
------------- -----------
Notes payable to financing agencies
for capital purchases $ 1,946,000 $ -
Notes payable to Genetics Institute for
technology purchases 394,000 -
Obligations under capital leases, net of
$73,000 discount at December 31, 2000 3,787,000 1,357,000
----------- ----------
6,127,000 1,357,000
Less--Current portion (1,972,000) (348,000)
----------- ----------
Total long-term debt and capital lease
obligations $ 4,155,000 $1,009,000
=========== ==========
During 1996, Ontogeny entered into an agreement with Genetics Institute
("GI") to screen certain protein library plates provided by GI. During 1998
and 1997, Ontogeny purchased plates with an aggregate cost of $99,000 and
$139,500, respectively, of which $194,000 was financed by GI with notes
payable bearing interest at the prime lending rate (9.5% at December 31,
2000). During 1997, Ontogeny also exercised its right to obtain an option
to exclusively license a protein for a fee of $250,000, of which $200,000
was financed by GI with a note payable bearing interest at the prime
lending rate (9.5% at December 31, 2000). As of December 31, 2000, $295,000
of these notes payable matured but had yet to be paid. Under a verbal
agreement between the parties, the Company is not in default on these
notes. The remaining $99,000 of the notes payable matures in 2001. Each of
these notes are payable at any time at the election of the Company with
either cash or common stock of the Company discounted by 25% from the fair
F-16
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
market value. Accrued interest, which totaled approximately $126,000 at
December 31, 2000, is due upon payment of the related note.
In June 1998, Reprogenesis entered into an equipment loan agreement with a
maximum borrowing capacity of $2,000,000. The principal and interest on any
borrowings are to be repaid over 48 equal monthly installments. As of
December 31, 2000, approximately $852,000 is outstanding under this
agreement.
In December 2000, the Company entered into a term loan agreement with a
lender to finance equipment purchases and leasehold improvements in its
facilities. The agreement made available to the Company an aggregate
principal amount of $5,000,000, of which $1,094,000 was outstanding as of
December 31, 2000. Interest is variable and is computed based on a risk-
adjusted LIBOR rate (9.15% as of December 31, 2000). Interest is payable
on any outstanding principal on a monthly basis beginning December 2000.
Principal amounts outstanding related to equipment purchases are payable
in 12 equal quarterly installments beginning on March 31, 2002. Amounts
outstanding for leasehold improvements are payable in 11 equal quarterly
installments beginning on March 31, 2002, with a final balloon payment due
on December 31, 2004. Substantially all of the assets of the Company,
excluding intellectual property and assets already pledged under existing
financing arrangements, serve as collateral for the loan. Additionally, the
Company must comply with certain financial covenants related to minimum
liquidity ratio, minimum tangible capital base, and a minimum unencumbered
cash balance. As of December 31, 2000, the Company was in compliance with
all covenants under this agreement.
The Company leases equipment under various capital lease arrangements.
Monthly payments range from $363 to $21,170 and maturities range from
September 2001 to July 2004. The initial terms of the leases range from 36
months to 60 months and bear interest at rates ranging from 11.0% to 16.3%.
Maturities of long-term debt and future capital lease obligations are as
follows:
2001 $ 2,562,000
2002 2,434,000
2003 1,390,000
2004 939,000
-----------
Total minimum payments 7,325,000
Less--Amount representing interest (1,198,000)
-----------
Principal obligation 6,127,000
Less--Current portion (1,972,000)
-----------
$ 4,155,000
===========
(7) Commitments
(a) Operating Leases
The Company has noncancellable operating lease agreements for office
and laboratory space and certain office and laboratory equipment. The
Company's remaining operating lease commitments for all leased
facilities and equipment with an initial or remaining term of at least
one year, net of anticipated sublease revenues, are as follows:
F-17
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2001 $ 1,873,000
2002 1,916,000
2003 1,980,000
2004 1,964,000
Thereafter 4,572,000
-----------
Total minimum payments $12,305,000
===========
Rent expense for all operating leases was approximately $1,372,000,
$841,000 and $1,037,000 for the years ended December 31, 2000, 1999
and 1998, respectively, net of facility sublease income of
approximately $268,000 in 2000.
In March 2000, the Company entered into a sublease for its Boston,
Massachusetts, facility previously occupied by Creative, commencing on
July 1, 2000. The sublease terminates on July 31, 2002, also the
termination date of the Company's original lease on this facility. In
April 2000, the Company amended one of its Hopkinton, Massachusetts,
facility leases previously occupied by Creative whereby the lease
terminated on July 31, 2000.
In November 2000, the Company entered into a sublease for the
remaining facility lease in Hopkinton, Massachusetts, previously
occupied by Creative. The sublease commenced on November 15, 2000 and
terminates on June 30, 2001, also the termination date of the
Company's original lease on this facility.
(b) Royalty Agreements
The Company has entered into various license agreements that require
the Company to pay royalties based upon a set percentage of certain
product sales and license fee revenue subjects, in some cases, up to
certain minimum amounts. The Company incurred no royalty expense for
the year ended December 31, 2000, and $23,000 for each of the years
ended December 31, 1999 and 1998.
Effective September 19, 1996, Reprogenesis entered into an exclusive
license agreement (the UMASS License Agreement) and a sponsored
research agreement (the UMASS Research Agreement) with the University
of Massachusetts (UMASS). The UMASS License Agreement granted
Reprogenesis the rights to certain existing and future UMASS patents
(the Patents) that relate to the use of cartilage paint technology.
This license was assigned to Curis. Payments were made by Reprogenesis
related to the UMASS Research Agreement of approximately $250,000 in
each of the years ended December 31, 1999 and 1998, respectively.
During the year ended December 31, 2000, Reprogenesis made payments
totaling $125,000. Effective September 30, 2000, the UMASS Research
Agreement term expired and Curis elected not to renew its term.
UMASS is entitled to a royalty of 3% of net sales of products or
services licensed under the UMASS License Agreement (as defined).
Minimum license fees of $25,000 and $50,000 for primary field and
secondary field products, as defined, respectively, are payable
beginning in 1999 and 2001, respectively, to UMASS. Milestone payments
totaling a maximum of $1,280,000 may be made to UMASS based on
reaching certain events, as defined in the UMASS License Agreement.
The UMASS License Agreement is cancelable by the Company upon 90 days
written notice and remains in force until the earlier of the
expiration of all issued patents or September 2006.
F-18
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reprogenesis had entered into a collaborative agreement with another
party. Under this agreement, the Company is required to make milestone
payments of $3,500,000 contingent upon regulatory approval/
notification and commercialization of the reflux and incontinence
products, as defined.
The Company announced that it had entered into a license and
collaboration agreement, effective January 5, 2001, with Aegera
Therapeutics, Inc. ("Aegera") granting the Company an exclusive
worldwide license of Aegera's skin-derived, adult stem cell
technologies. The agreement also proposes a three-year research
collaboration agreement in which the Company will fund a total of 18
full-time equivalent researchers dedicated to the agreement. In
consideration for the technology license, the Company will be required
to pay a $100,000 up-front license fee, purchase $250,000 of equity
securities in privately-held Aegera, and issue $150,000 of Curis
common stock to Aegera. In addition, under the terms of the agreement,
the Company will be required to make various milestone and royalty
related payments.
(8) GOVERNMENT GRANTS
Effective September 20, 1998, Reprogenesis received a grant award for its
vesicoureteral reflux product under the Orphan Drug Program of the
Department of Health and Human Services. This grant award provides for
cost reimbursement funding over a three-year period of approximately
$323,000 for certain patient costs associated with a vesicoureteral reflux
Phase III clinical trial to the extent we comply with all of the
requirements governing the grant.
Effective November 1, 1999, Reprogenesis received a grant award for its
cardiovascular project from the advanced technology program of the National
Institute of Standards and Technology (NIST) to support the development of
the Company's cardiovascular products, Vascugel and Vascuject. The Company
has assumed this award in conjunction with the Merger. Under the terms of
the grant award, the Company will receive $2,000,000 in cost reimbursement
funding to be paid at a rate of approximately $666,000 annually over a
three-year period.
On October 5, 2000, the Company announced the receipt of a second
$2,000,000 grant from NIST to support the development of a new class of
biomaterials designed to enable surgical procedures that augment, repair or
regenerate lost structural tissue or physiological function. The grant
period is from January 1, 2001 to December 31, 2003. Funding under the NIST
grants is contingent on the Company meeting minimum cost-sharing and other
requirements, as defined in the financial assistance award and annual
government appropriations for the awards.
The Company recognized approximately $319,000 under these awards for the
year ended December 31, 2000.
(9) COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Creative had an original agreement with Stryker to identify and develop OP-
1, a bone-inducing protein, as orthopaedic reconstruction and dental
therapy products. In exchange for research funding, future royalties and
revenue from commercial manufacturing, Creative developed OP-1 as a therapy
for orthopedic reconstruction and cartilage regeneration and supplied
Stryker material for use in clinical trials. Creative restructured its
agreements with Stryker in November 1998, to provide Stryker with the
exclusive rights to manufacture OP-1 products in these fields. At that
time, Stryker acquired Creative's commercial manufacturing operations. As a
result, Stryker has the exclusive right to develop, market, manufacture and
sell products based on OP-1
F-19
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
proteins for use in orthopedic reconstruction and dental therapies and is
required to pay the Company royalties on such commercial sales.
Under the agreement with Stryker, as amended, Stryker has exclusive rights
to develop, market and sell products incorporating bone and cartilage-
inducing proteins developed under the research program, including OP-1, for
use in the field of orthopaedic reconstruction and dental therapeutics. The
Company has agreed not to undertake any bone morphogenic protein (BMP)-
related research, development or commercialization of any products in the
fields of orthopaedic reconstruction and dental therapeutics, on our own
behalf or for third parties, for the term of certain patents to the extent
that the activities utilize technology, patents or certain personnel
acquired from Creative in the merger. The Company has the exclusive and
irrevocable right to develop, market and sell products incorporating
morphogenic proteins developed under the research program, including OP-1,
for all uses and applications other than orthopaedic and dental
reconstruction, such as neurological diseases, osteoporosis, renal failure
and others. Subject to certain exceptions in connection with the
acquisition or merger of Stryker, Stryker has agreed not to undertake any
research, development or commercialization of any products in our field
(applications other than orthopaedic reconstruction and dental therapies),
on its own behalf or for third parties, for the term of those patents. Each
company has the right to grant licenses to third parties in their
respective fields, and each is obligated to pay royalties to the other on
its sales of such products and to share royalties received from licensees.
The Company maintains an exclusive license under certain patents and claims
that were assigned to Stryker in November 1998, as part of the sale of
certain of Creative's manufacturing rights and assets to Stryker. In
addition, Stryker was granted an exclusive license under patents in
Creative's morphogen portfolio for use in the fields of orthopaedic
reconstruction and dental therapeutics.
In January 1999, Ontogeny and Becton Dickinson ("Becton") entered into a
two-year research collaboration focusing on the application of cellular
therapy and human pancreatic beta islets in the treatment of diabetes.
Under the terms of the agreement, Becton provided one advanced researcher
to work full time at one of the Company's facilities throughout the period
of the research collaboration. All developments created by this researcher
is the property of Curis.
In December 1996, Creative entered into a Research Collaboration and
License Agreement with Biogen to collaborate on the development of novel
therapeutics based on OP-1 for the treatment of renal disorders. The
initial focus of the collaboration was on advancing the development of
Creative's morphogenic protein, OP-1, for the treatment of acute and
chronic renal failure. Under the agreement, Creative granted to Biogen
exclusive worldwide rights to manufacture, market and sell OP-1 and OP-1
products developed through the collaboration for the treatment of renal
disease. The agreement provided for $10,500,000 in research funding over a
three-year period ending December 31, 1999, of which $7,500,000 had been
recognized through December 31, 1998. In December 1998, Biogen and Creative
signed an Amendment Agreement and Biogen paid $3,000,000 in research
support for the year ending December 31, 1999. The $3,000,000 has been
recognized through December 31, 1999. Under the Biogen Amendment, Creative
assumed primary responsibility for the development of OP-1 for the
treatment of renal disorders, and Biogen retained an option through 1999 to
resume responsibility for development of OP-1 as a therapy for chronic
renal failure. Biogen did not exercise its option by December 31, 1999, and
Curis has assumed all rights to OP-1 renal therapies.
F-20
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) NOTES RECEIVABLE--OFFICERS
On February 8, 2000, Creative loaned to two executive officers an aggregate
of approximately $1,131,000, which was equal to the aggregate exercise
price of incentive stock options exercised by them on the same date. The
officers immediately used these funds to pay Creative the exercise price of
such incentive stock options. These full recourse loans each bear interest
at an annual rate of 7.0%. All principal and interest is due and payable
on the earlier of May 8, 2002 or 30 days following the sale of the stock
purchased with these funds.
In 1996, Ontogeny loaned an officer $500,000, of which $300,000 is being
forgiven over a five-year period commencing in 1996, contingent on the
officer's continued employment with the Company. The remaining $200,000
matures in 2003. Upon forgiveness, the Company has committed to pay for any
resulting income taxes to the officer. The Company is recording
compensation expense to amortize the total of these loans over a period of
five to seven years and to accrue the related taxes. The outstanding
balance at December 31, 2000 is $230,000 and accrued taxes related to this
commitment of approximately $163,000 are included in accrued expenses.
(11) SALE OF MANUFACTURING OPERATIONS AND REORGANIZATION CHARGES
In November 1998, Creative sold certain of its OP-1 manufacturing rights
and facilities to Stryker. In addition to cash consideration in exchange
for the manufacturing facility, the transaction is expected to provide the
Company with increased royalties on Stryker products, if approved for
commercial sale, in lieu of the manufacturing revenue anticipated under the
prior agreement. Proceeds and expenses associated with this transaction
include the following:
Total proceeds (including capital leases
assumed by the buyer of $2,438,000) $19,530,000
Less-
Net book value of manufacturing related assets 18,929,000
Employee termination costs 1,438,000
Legal, accounting and consulting costs 525,000
-----------
Loss on sale of manufacturing operations $(1,362,000)
===========
As a result of this transaction, Creative recorded a charge to operations
of $1,362,000 in the quarter ended December 31, 1998. The charge included
$885,000 primarily related to employee termination benefits and $548,000
related to estimated health insurance claims on the terminated employees,
which $903,000 remained to be paid as of December 31, 1998. During the
quarter ended December 31, 1999, Creative determined that health insurance
claims were less than originally estimated. This resulted in a reduction in
the loss on sale of manufacturing operations and the related accrual of
approximately $255,000.
In addition, Creative recorded a charge of $64,000 and $205,000 related to
a change in the exercise terms of stock option agreements in connection
with the sale of manufacturing operations for the years ended December 31,
1999 and 1998, respectively.
Effective October 19, 1999, Creative was reorganized and the Board approved
a plan in order to focus its operations and financial resources on the
development of its morphogenic protein-based clinical candidates for the
treatment of stroke and renal disease. The reorganization charge included
$511,000 related primarily to termination benefits in the reduction of
employees from 70 to 43. Salaries and termination benefits, either in the
form of one-time or periodic payments, were
F-21
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
made when the employee ceased employment. These employees were in
management, research and development and administrative support. As of
December 31, 1999, there was approximately $95,503 of accrued costs,
principally representing future cash outlays for employee-termination
costs. As of December 31, 2000, all reorganization accruals were paid or
reversed. A detailed rollforward of these accruals are as follows:
1999 1998 Sale of
Reorganization Manufacturing
Charges Operations
-------------- -------------
Expensed $1,362,000
Paid (459,000)
----------
Accrued at December 31, 1998 903,000
Expensed $ 511,000 -
Paid (415,000) (648,000)
Reversed - (255,000)
--------- ----------
Accrued at December 31, 1999 96,000 $ -
==========
Paid (58,000)
Reversed (38,000)
---------
Accrued at December 31, 2000 $ -
=========
The following table summarizes the effect to the income statement for
reorganization charges and sale of manufacturing operations for the year
ended December 31, 1999:
Salaries and termination benefits accrued
during 1999 $ 511,000
Salaries and termination benefits accrued
during 1998 and settled for amounts less
than anticipated (255,000)
---------
Total $ 256,000
=========
(12) SERIES 1998/A redeemable PREFERRED STOCK
On May 27, 1998 (the Issue Date), Creative completed a private placement
with three institutional investors (the Investors) for the sale of 25,000
shares of Series 1998/A Preferred Stock, $0.01 par value per share (the
Series 1998/A Preferred Stock), with a stated value of $1,000 per share
resulting in gross proceeds of $25,000,000. Issuance costs totaled
approximately $1,382,000 (offset against the Series 1998/A Preferred Stock
proceeds in the accompanying consolidated balance sheet at December 31,
1998), resulting in net proceeds of approximately $23,618,000. Accretion on
Series 1998/A Preferred Stock for the year ended December 31, 1998, was
$987,000 and includes $733,000, calculated at the rate of 5% per annum of
the stated value of the outstanding Series 1998/A Preferred Stock from May
27, 1998, and $254,000 of accretion of issuance costs related to the sale
of Series 1998/A Preferred Stock.
Through May 7, 1999, the holders converted a total of 4,514 shares of
Series 1998/A Preferred Stock into 613,129 shares of Common Stock. On May
7, 1999, Creative repurchased 20,486 shares, which represented all of the
then outstanding Series 1998/A Preferred Stock following final conversions,
for approximately $22,470,000 in cash. Accretion and Repurchase Costs on
Series 1998/A Preferred Stock was $21,396,000 for the year ended
December 31, 1999, and
F-22
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
included the following: $385,000 calculated at the rate of 5% per annum of
the stated value of the outstanding Series 1998/A Preferred Stock; $144,000
of accretion of issuance costs related to the sales of Series 1998/A
Preferred Stock; and, as a result of the repurchase of the Series 1998/A
Preferred Stock on May 7, 1999, a one-time charge of approximately
$1,867,000 recorded in the second quarter of 1999 which represents
accretion of the Series 1998/A Preferred Stock up to its repurchase amount
and accretion of all remaining issuance costs. As a result of this
transaction, the Series 1998/A Preferred Stock has been retired and there
will be no subsequent conversions into Common Stock.
(13) WARRANTS
In connection with a private placement offering in 1994 and 1995, Creative
sold 339,000 warrants, each to purchase one share of Common Stock. Each
warrant is exercisable for a period of five years from the date of issuance
at an exercise price of $7.95. During the years ended December 31, 2000 and
1999, 74,194 and 119,198 Creative warrants were exercised, respectively.
Proceeds to Creative were approximately $308,000 and $948,000,
respectively. At December 31, 2000, all unexercised warrants had expired.
In connection with the Merger, the Company assumed 71,089 warrants from
Ontogeny and Reprogenesis. The exercise price of these warrants ranges from
$3.40 to $19.51 per share. During the fourth quarter of the year ended
December 31, 2000, 55,685 warrants were exercised on a net issuance basis
resulting in the issuance of 38,925 shares. At December 31, 2000,
warrants to purchase 15,404 shares of common stock with prices ranging from
$9.76 to $19.51 per share are outstanding.
(14) STOCK PLANS
(a) Option Plans
In May 1987, Creative established the 1987 Stock Plan (1987 Plan) and
terminated the 1983 Incentive Stock Option Plan (1983 Plan) such that
no further grants of options could be made thereunder. On June 30,
1999, the 1987 Plan expired. At December 31, 2000, there were no
shares available for grant under the 1987 Plan.
In April 1998, the Board of Directors adopted and in June 1998, the
stockholders of Creative approved the 1998 Stock Plan (1998 Plan)
which permitted the granting of incentive and non-qualified stock
options. On July 31, 2000, the date of the Merger, the 1998 Plan was
cancelled. At December 31, 2000, no shares were available for grant
under the 1998 Plan.
In March 2000, the Board of Directors adopted and, in June 2000, the
stockholders approved the 2000 Stock Incentive Plan (the 2000 Plan),
which permits granting of incentive and non-qualified stock options as
well as the issuance of restricted shares. The number of shares of
common stock subject to issuance under the 2000 Plan is 10,000,000. At
December 31, 2000, 2,935,969 shares are available for grant under the
2000 Plan.
The 2000 Plan permits the granting of incentive and nonqualified stock
options to consultants, employees or officers of the Company and its
subsidiaries at prices determined by the Board of Directors. Awards of
stock may be made to consultants, employees or officers of the Company
and its subsidiaries, and direct purchases of stock
F-23
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
may be made by such individuals also at prices determined by the Board
of Directors. Options become exercisable as determined by the Board of
Directors and expire up to 10 years from the date of grant.
The 1992 Non-Employee Director Non-Qualified Stock Option Plan
(Director Plan) provided for the granting of options to non-employee
directors. The Director Plan was amended and approved by the
stockholders of Creative in June 1999, increasing the number of shares
of common stock authorized for issuance under the Plan from 90,000 to
150,000 shares (after retroactive adjustment to give effect to the
0.30-for-1 stock split). On July 31, 2000, the date of the Merger, the
Director Plan was cancelled. At December 31, 2000, no shares are
available for grant under the Director Plan.
In March 2000, the 2000 Director Stock Option Plan (2000 Director
Plan) was adopted by the Board of Directors and approved by the
stockholders in June 2000. The 2000 Director Plan provides for the
granting of options to non-employee directors. The number of shares of
common stock subject to issuance under the 2000 Director Plan is
500,000. As of December 31, 2000, 475,000 shares are available for
grant under the 2000 Director Plan.
Activity under all the stock option plans is summarized as follows:
Weighted Average
Number of Exercise Price
Shares per Share
--------- ----------------
Outstanding, December 31, 1997 (778,169 exercisable
at a weighted average price of $13.47 per share) 1,504,904 $17.10
Granted 417,503 15.67
Exercised (63,577) 6.80
Canceled (129,388) 25.93
--------- ------
Outstanding, December 31, 1998 (1,051,768 exercisable
at a weighted average price of $15.10 per share) 1,729,442 16.47
Granted 348,435 10.23
Exercised (130,141) 6.00
Canceled (237,504) 22.60
--------- ------
Outstanding, December 31, 1999 (1,060,589 exercisable
at a weighted average price of $15.47 per share) 1,710,232 15.13
Granted 4,447,620 13.77
Exchange of Ontogeny and Reprogenesis options for
Curis options 1,772,054 4.57
Exercised (601,287) 7.75
Canceled (444,935) 7.27
--------- ------
Outstanding, December 31, 2000 (2,384,703 exercisable
at weighted average price of $10.16 per share) 6,883,684 $12.00
========= ======
F-24
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below summarizes options outstanding and exercisable at
December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Average
Options Life Exercise Price Exercise Exercise Price
--------- ----------- -------------- -------- --------------
$ 0.39 - $ 0.59 228,044 5.78 $ 0.58 195,743 $ 0.58
1.17 - 1.56 96,796 5.19 1.54 90,443 1.54
1.95 - 1.95 91,481 6.62 1.95 57,751 1.95
3.90 - 5.26 1,020,892 7.43 4.26 750,590 4.39
6.77 - 10.00 640,198 6.29 8.96 558,836 9.25
10.21 - 15.19 4,281,041 9.58 13.76 260,420 12.72
15.42 - 20.00 198,775 6.91 17.92 152,854 17.98
23.76 - 33.55 326,457 5.95 29.36 318,066 29.42
--------- ---- ------ --------- ------
Total 6,883,684 8.48 $12.00 2,384,703 $ 0.16
========= ==== ====== ========= ======
(b) Employee Stock Purchase Plan
In March 2000, the Board of Directors adopted and, in June 2000, the
stockholders approved the 2000 Employee Stock Purchase Plan (ESPP
Plan). The Company has reserved 1,000,000 of its shares for issuance
under the ESPP Plan. Eligible employees may purchase shares at 85% of
the lower closing market price at the beginning or ending date of the
ESPP Plan period, as defined. As of December 31, 2000, 16,732 shares
have been issued under the ESPP Plan.
The prior Employee Stock Purchase Plan permitted Creative employees to
purchase common stock of Creative up to an aggregate of 225,000
shares. During the year ended December 31, 1999, 19,536 shares were
issued under this plan at the fair market value prices of $9.47 and
$9.83 per share; during the year ended December 31, 1998, 31,745
shares were issued under this plan at prices of $13.00 and $9.67 per
share.
(c) Stock-Based Compensation
The Company accounts for its stock-based awards using the intrinsic
value method in accordance with APB No. 25 and its related
interpretations. Accordingly, no compensation expense has been
recognized in the consolidated financial statements at the date of
grant for employee stock option arrangements for which the exercise
price is equal to the fair market value of the underlying shares at
that date. The Company recorded a charge of $399,000, $64,000 and
$205,000 related to a change in the exercise terms of stock option
agreements in connection with the Merger and the sale of manufacturing
operations for the years ended December 31, 2000, 1999 and 1998,
respectively.
On February 8, 2000, the Board of Directors approved the immediate
acceleration of vesting of unvested stock options held by Creative's
executive officers and outside directors and the extension of the
exercise period for one year. Vesting for approximately 397,200
options was accelerated and the exercise period for approximately
708,300 vested options was extended, resulting in a non-cash
compensation charge of $3,139,000, which was recorded in the year
ended December 31, 2000.
F-25
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with stock options granted to employees and non-
employees during the year ended December 31, 2000, the Company
recorded deferred compensation, net of terminations, of approximately
$17,330,000, which represents the aggregate difference between the
option exercise price and the fair market value of the common stock on
the grant date. The deferred compensation will be recognized as an
expense on a straight-line basis over the vesting period, generally
four years, of the underlying stock options for options granted to
employees and as earned for non-employees in accordance with EITF 96-
18. The options granted to non-employees were valued based upon the
fair value of the options granted. The Company recorded compensation
expense of approximately $1,864,000 and $39,000 related to employee
and non-employee options, respectively, for the year ended December
31, 2000. The Company did not grant stock options to non-employees in
1999 or 1998.
On February 14, 2000, Reprogenesis issued 300,000 shares of restricted
stock for services. These shares of restricted stock were fully vested
upon the effective date of the Merger, at which time the Company
recorded approximately $1,623,000 of compensation expense representing
the fair market value of the shares on that date.
As a result of the Merger, the Company recorded approximately
$19,146,000 of deferred compensation as a component of stockholders'
equity related to the value of unvested stock options held by
employees and consultants primarily of Ontogeny which were exchanged
for options to acquire Curis' common stock. The Company is amortizing
this amount over the one-year vesting period of the stock options
ending on August 1, 2001. As of December 31, 2000, compensation
expense related to these options totaled $9,564,000. The Company also
reversed approximately $2,116,000 of unamortized compensation for
options forfeited by terminated employees.
Under SFAS No. 123, the fair value of stock-based awards to employees
is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following
assumptions:
Year Ended December 31,
2000 1999 1998
------- ------ ------
Risk-free interest rate 6.0% 6.4% 4.7%
Expected dividend yield - - -
Expected lives 7.4 6 months following total vesting
Expected volatility 113% 94% 94%
Weighted average grant date fair value $15.84 $2.26 $3.49
The Company's calculations are based on a multiple option valuation
approach and forfeitures for broad-based grants are estimated at 2%
per year and adjusted to actual as they occur. Forfeitures for grants
to executives are recognized as they occur. If the computed fair
values of the 2000, 1999, and 1998 awards had been amortized to
expense over the vesting period of the awards consistent with SFAS No.
123, pro forma net loss and net loss per common share would have been
approximately as follows:
F-26
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year Ended December 31,
2000 1999 1998
------------- ------------ ------------
Net loss-
As reported $(350,350,624) $(14,505,349) $(22,381,725)
Pro forma (355,434,299) (14,804,644) (25,466,000)
Net loss per common share
(basic and diluted)-
As reported $ (19.80) $ (1.36) $ (2.22)
Pro forma (20.09) (1.39) (2.52)
(15) INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes, as the Company has incurred losses since inception. As of
December 31, 2000, the Company had available federal and state net
operating loss carryforwards of approximately $166,373,000 for income tax
purposes. In addition, the Company had approximately $3,525,000 of unused
investment and research and development tax credits. These net operating
loss and tax credit carryforwards will expire at various dates between 2001
and 2020.
The components of deferred income taxes at December 31, 2000 and 1999,
consist primarily of the following:
2000 1999
------------ ------------
Deferred tax assets-
Net operating loss carryforwards $ 57,868,000 $ 32,916,000
Investment credit and research and development tax
credit carryforwards 3,525,000 1,837,000
Research and development expenditures 17,157,000 11,929,000
Other 6,013,000 124,000
------------ ------------
Total 84,563,000 46,806,000
Valuation allowance (84,563,000) (46,806,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
The Company has not yet achieved profitable operations. In addition, the
future availability of the Company's tax benefits may be significantly
limited under Section 382 of the Internal Revenue Code. Section 382 limits
the use of net operating loss carryforwards, credit carryforwards and
certain other tax attributes as a result of changes in a company's
ownership. The Merger has caused a change in control under Section 382 of
the Internal Revenue Code and, accordingly, the Company's ability to
utilize the net operating loss carryforwards will be limited. The amount of
the limitation has not yet been determined. Accordingly, management
believes that the tax benefits as of December 31, 2000 and 1999, do not
satisfy the realization criteria set forth in SFAS No. 109 and has recorded
a valuation allowance for the entire net asset.
In addition, as a result of the Merger, the historical net operating loss
carryforwards of Ontogeny and Reprogenesis are available to Curis but are
limited due to the provisions of Section 382 of the Internal Revenue Code.
The amount and availability of the net operating loss carryforwards of
Ontogeny and Reprogenesis have not been determined.
F-27
CURIS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially all
of the Company's employees. Matching Company contributions are at the
discretion of the Board of Directors. The Board of Directors authorized
matching contributions up to 3% of participants' salaries amounting to
approximately $141,000, $160,000 and $286,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
(17) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2000 1999
---------- ----------
Research collaboration costs $2,024,571 $1,469,473
Professional fees 858,151 127,090
Severance and related costs - 95,503
Other 2,208,119 203,568
---------- ----------
Total $5,090,841 $1,895,634
========== ==========
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following are selected quarterly financial data for the years ended
December 31, 2000 and 1999:
Quarter Ended
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March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
Revenues $ 670,387 $ 7,471 $ 65,955 $ 279,756
Loss from operations (6,096,809) (2,757,646) (323,270,194) (19,650,558)
Net loss (5,841,548) (2,514,016) (322,870,195) (19,124,865)
Basic and diluted net
loss per share $ (0.16) $ (0.07) $ (15.19) $ (0.71)
Quarter Ended
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March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
Revenues $ 824,645 $ 757,542 $ 823,573 $ 806,100
Loss from operations (3,433,910) (3,386,356) (3,314,208) (3,740,021)
Net loss (2,710,838) (2,926,280) (2,994,559) (3,478,113)
Basic and diluted net
loss per share $ (0.09) $ (0.14) $ (0.08) $ (0.32)
(19) SUBSEQUENT EVENT
Through February 20, 2001, the Company sold all 107,142 shares of Exelixis
common stock at an average price of $13.83 for total net proceeds of
approximately $1,470,000. The value of the shares as of December 31, 2000,
was approximately $1,567,000. The Company exercised the warrant to purchase
53,571 shares of Exelixis common stock at $1.00 per share on March 13,
2001.
F-28