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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1996.
AUTOIMMUNE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-348-9062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
128 SPRING STREET, LEXINGTON, MA 02173
(Address of principal executive offices) (Zip Code)
(617) 860-0710
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered.
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /______/
On February 21, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $244,539,887. As of February 21,
1997, there were outstanding 16,366,920 shares of the registrant's Common Stock,
$0.01 par value.
Documents Incorporated by Reference
-----------------------------------
Portions of the Company's definitive Proxy Statement for its annual meeting of
shareholders which the Company intends to file within 120 days after the end of
the Company's fiscal year ended December 31, 1996 are incorporated by reference
into Part II hereof as provided therein.
PART I
ITEM 1. BUSINESS
OVERVIEW
AutoImmune Inc. (the "Company" or "AutoImmune") is a biopharmaceutical
company developing a new class of orally administered pharmaceutical products
for the treatment of autoimmune and other cell-mediated inflammatory diseases
and conditions. The Company is conducting clinical trials for the following
products: Myloral(R), for the treatment of multiple sclerosis ("MS"),
Colloral(R), for the treatment of rheumatoid arthritis, and AI 502, for the
treatment of chronic transplant rejection. A fourth product, AI 401, for the
treatment of Type I diabetes, is in Phase II clinical trials funded by the
Company's collaborator, Eli Lilly and Company ("Lilly") and the National
Institutes of Health ("NIH"). The Company believes, based on preclinical and
clinical data, that its proprietary approach to therapy can induce tissue-
specific immunosuppression without toxicity or significant side effects.
Additional clinical and commercial advantages of this approach include the
ability to administer products orally (the preferred method of treating chronic
diseases) and the potential for application to a variety of inflammatory
diseases and conditions.
All of the Company's products are based upon the principles of oral
tolerance. Oral tolerance utilizes natural immune system mechanisms associated
with the gut (the small intestine). These mechanisms allow the body to accept
orally ingested proteins by suppressing the immune response that would otherwise
arise against a foreign substance. This suppression can be directed toward a
tissue under attack by the body's own immune system, which occurs in an
autoimmune disease, through appropriate selection and dosing of the protein in
an orally delivered product.
AutoImmune believes it is the leading company developing pharmaceutical
products based upon the principles of oral tolerance. The status of each of
AutoImmune's principal products is as follows:
Myloral----AutoImmune is conducting a two-year Phase III pivotal multi-
center trial in over 500 patients to investigate the use of Myloral in treating
MS. Enrollment in the trial concluded in March 1995 and the last patient visit
is expected to occur in late March 1997. The primary endpoint is the reduction
in frequency of attacks in relapsing/remitting MS. This Phase III trial follows
the conclusion of a 30-patient double-blind Phase I/II trial that showed
positive results. The Company is also conducting a 32-patient human immunology
study to identify biochemical markers that may help guide treatment with
Myloral. In July 1996, researchers at The Brigham and Women's Hospital reported
studies which demonstrated that white blood cells from multiple sclerosis
patients receiving Myloral produce immune-regulating hormones that may suppress
their disease. These studies, which involved 34 MS patients, are the first to
demonstrate the cellular mechanism of oral tolerance in humans.
Colloral----To date, AutoImmune has completed four human clinical
trials of Colloral in over 350 patients to investigate its use in treating
rheumatoid arthritis. In 1996, the Company initiated three additional Phase II
trials, involving more than 800 patients, which were designed to further refine
dosage using material produced by the Company's manufacturing process and to
gather additional data for use in designing Phase III trials. Preliminary
results of these trials are expected to be announced in the second quarter of
1997. In July 1995, the Company announced the results of its Phase II dose
ranging clinical trial involving 274 patients with severe, active rheumatoid
arthritis. The data showed that patients receiving a 20 microgram dose of
Colloral demonstrated statistically significant improvement compared to patients
receiving placebo as measured by the Paulus criteria, a commonly used method to
discriminate between drug and placebo response in rheumatoid arthritis trials.
Colloral was safe and well tolerated by patients at all dose levels.
AI 401---- In December 1994, the Company entered into a collaborative
agreement with Lilly under which Lilly will be responsible for all development,
commercialization and manufacturing of the Company's autoimmune-mediated (Type
I) diabetes products. AutoImmune will receive payments based on milestones
achieved, as well as royalties based on sales. During 1996, Lilly initiated the
first of several Phase II clinical trials to demonstrate human proof of
principle for AI 401. The first study is a one-year, double-blind, placebo-
controlled trial of 300 patients. In addition, Lilly is providing the oral
product for the Diabetes Prevention Trial (DPT-1) being conducted by the NIH.
This trial, which is expected to enroll 490 patients, is designed to determine
whether AI 401 can delay or prevent the clinical onset of Type I diabetes.
AI 502--- In January 1997, the Company initiated a clinical trial of
tolerizing peptides for the prevention of organ transplant rejection. The open
label study, which is being conducted in 15 patients at The Brigham and Women's
Hospital, is designed to assess the safety and immunological effects of oral
peptides in laboratory measures of transplant rejection. The results of this
trial are expected during 1998.
AI 301----The Company is developing AI 301, a recombinant human
protein, for the treatment of uveitis, an inflammatory disease of the eye. Using
its first generation product based on animal protein, AI 300, the Company
conducted a Phase I/II clinical trial in 45 patients in conjunction with the
National Eye Institute of the NIH. Preliminary results of the trial, which
concluded in the first quarter of 1996, were encouraging but did not reach
statistical significance for the clinical
-2-
endpoint. The results of the trial are expected to be published in the American
Journal of Ophthalmology during the second quarter of 1997. The Company expects
that future clinical trials for uveitis will use AI 301, due to the expected
lower cost of manufacturing its recombinant product compared to its product
based on animal protein.
Autoimmune diseases represent a major worldwide health care problem in
terms of the number of people affected. The Company believes that each of these
products under development offers the potential for a therapeutic breakthrough.
The Company was incorporated in Delaware in September 1988 as
AutoImmune Technologies, Inc. The Company changed its name to AutoImmune Inc. in
July 1991. The executive offices of AutoImmune are located at 128 Spring Street,
Lexington, Massachusetts 02173, and its telephone number is (617) 860-0710.
STRATEGY
The Company's objective is to become a leading provider of therapeutic
products to treat immune system disorders. The key elements of the Company's
strategy include the following:
Focusing on Myloral and Colloral. The Company is concentrating a
significant portion of its resources on its two most advanced products, Myloral
and Colloral. More than seven million people worldwide suffer from multiple
sclerosis or rheumatoid arthritis, the diseases addressed by Myloral and
Colloral, and current therapies for these diseases have significant limitations.
The Company has retained all rights to Myloral and Colloral. AutoImmune
currently plans to evaluate all of its options for these products, including
independently developing and marketing one or both of these products or seeking
to enter into licensing arrangements, exclusive marketing agreements in specific
foreign markets or joint ventures with established pharmaceutical companies with
respect to one or both of these products.
Leveraging the Company's Technology Platform. The Company believes its
technology is applicable to a variety of autoimmune and other cell-mediated
diseases and conditions. In addition to Myloral and Colloral, the Company has
several other products in various stages of development, including products to
treat Type I diabetes, chronic transplant rejection and uveitis. The Company
has, and plans to continue to, seek licensing arrangements, joint ventures or
other collaborative agreements to assist in financing the development of one or
more of these products. One result of this strategy is the Company's
collaboration with Lilly for the development and commercialization of its
products to treat autoimmune-mediated diabetes.
The Company continues to develop the technology underlying oral
tolerance therapy through research conducted primarily at The Brigham and
Women's Hospital, a teaching hospital affiliated with Harvard Medical School.
This research is designed to further the Company's understanding of the
mechanisms of oral tolerance with the goals of increasing the effectiveness of
the Company's products and exploring new therapeutic applications for this
technology.
Protecting the Company's Competitive Position. From its inception, the
Company has sought to establish a strong proprietary position. As of December
31, 1996, the Company had pending 22 original and continuation-in-part United
States patent applications and numerous foreign counterparts. The Company has
received or has exclusive rights to 18 U.S. and foreign patents. The United
States Patent and Trademark Office has issued to the Company one patent covering
the use of Colloral to treat rheumatoid arthritis in humans; two patents
covering treatment of multiple sclerosis or rheumatoid arthritis using nasal or
by-inhalation administration of compositions containing myelin basic protein or
collagen (respectively) or active fragments thereof; and one patent covering
suppression of allograft rejection by oral administration of a major
histocompatibility complex Class II antigen or an active fragment thereof. The
European Patent Office has granted a patent which the Company owns covering the
use of compositions containing autoantigens to treat a group of human autoimmune
diseases, but an opposition (a proceeding challenging its validity) has recently
been filed against this patent by a third party. A number of the pending U.S.
applications which the Company owns or to which it has exclusive rights have
been allowed and are expected to issue shortly. In addition, the Company expects
that Orphan Drug status may provide increased proprietary protection for certain
of its products in the United States. The Company has received Orphan Drug
status for Myloral for the treatment of MS and for Colloral for the treatment of
juvenile rheumatoid arthritis. In addition, the Company anticipates that the
United States Food and Drug Administration (the "FDA") will classify its
products as "biologics." If the Company's products are so classified, there is
no provision for rapid approval of generic competitors after the expiration of
any proprietary protection the Company receives.
Minimizing Costly Infrastructure and Capital Investment. From its
inception, the Company has sought to conserve its financial resources. The
Company's early research was conducted at The Brigham and Women's Hospital, and
the Company did not begin to hire employees in significant numbers until 1993.
The Company has made extensive use of external resources, such as clinical
research organizations and consultants. The Company believes it will be able to
minimize costly infrastructure by continuing the use of external resources where
appropriate.
-3-
AUTOIMMUNE DISEASES
The human immune system is the major biological defense mechanism
responsible for recognizing and fighting disease. The immune system
distinguishes foreign substances (antigens) from the body's tissue and rids the
body of a wide variety of disease-causing antigens such as bacteria and viruses.
T cells, which circulate in the blood, are a major component of this system.
There are several types of T cells, which play a critical role in recognizing
antigens, carrying out the immune response, and regulating the resulting chain
of events. These include "helper" T cells, which release factors to amplify the
immune response; "killer" T cells, which attack and destroy other cells
displaying the targeted antigen; and "regulatory" T cells, which release factors
to down-regulate or suppress the immune response and keep it in control.
Autoimmune diseases are generally believed to be a result of an
inappropriate response of the immune system. In many autoimmune diseases, the
helper and killer T cells go awry and attack the body's healthy tissues. T cells
which act in this manner are called autoreactive T cells. These T cells appear
to target the antigenic substances present in specific tissues (autoantigens).
The antigenic substances differ depending upon the disease and may change over
the course of a disease. In some diseases, the antigenic substances have not
been characterized, while in others a number of substances have been found, but
the particular role of each has not been identified.
Autoimmune diseases, which may be crippling or fatal, can strike
virtually any tissue or organ. The particular disease that occurs depends upon
which healthy tissue is attacked. For example, if the tissue attacked is the
brain, multiple sclerosis results; if synovial tissue in joints is the target,
rheumatoid arthritis results. Type I diabetes occurs when certain pancreatic
cells are the target, and uveitis occurs when cells of the uvea, the middle,
vascular layer in the eye, are attacked .
There is currently no method known for curing autoimmune diseases. They
are chronic and require lifelong treatment. Treatments tend to fall into two
major categories. The first category involves compounds for palliative
treatment, such as anti-inflammatory agents and pain killers for rheumatoid
arthritis or insulin for diabetics. In some forms of the diseases, there is no
acceptable method of treating even the symptoms. The second category involves
the administration of non-specific immunosuppressants, which indiscriminately
shut down multiple parts of the immune system. These immunosuppressants usually
have serious toxicity and side effect problems with long-term use.
While there are numerous cell-mediated autoimmune diseases, the Company
at present is developing products for four: multiple sclerosis, rheumatoid
arthritis, Type I diabetes, and uveitis (or uveoretinitis). Multiple sclerosis
is a chronic inflammatory disease of the central nervous system that results
from damage to myelin, a substance that encircles and insulates nerve fibers.
Symptoms include impaired mobility, visual impairment, slurred speech, sexual
dysfunction and poor bladder control. Rheumatoid arthritis is a chronic disease
in which the body's immune system attacks synovial tissue in joints, resulting
in a progressive, painful inflammation of the joints, along with crippling
deformation of the hands, feet, hips, knees and shoulders. In advanced phases of
the disease, symptoms include severe pain, body disfiguration and loss of
mobility. The autoimmune form of diabetes (Type I, also known as juvenile or
insulin-dependent diabetes) is the result of the body's immune system destroying
the insulin-producing islet cells in the pancreas. Although the administration
of insulin controls the metabolic abnormalities of the disease, it does not
always prevent major debilitating effects, which can include neural
degeneration, chronic pain, arteriosclerosis, loss of limbs due to peripheral
vascular disease, blindness and kidney failure. In its most severe form,
diabetes can result in death. The autoimmune form of uveitis is a chronic,
degenerative eye disease, resulting in inflammation, discoloration and
ultimately blindness.
In addition, AutoImmune is developing a product for the treatment of
transplant rejection which, while not an autoimmune disease, involves similar
mechanisms of action. Due to the similarity, the Company believes that its oral
tolerance approach may provide an effective therapy for this clinical condition.
The Company has directed its efforts in these areas because each of
these diseases and conditions is mediated by the T cells in the immune system,
and thus is well suited to AutoImmune's oral tolerance approach. No completely
satisfactory treatment currently exists for any of these conditions.
THE COMPANY'S TECHNOLOGY
AutoImmune's products are based upon the principles of oral tolerance.
Oral tolerance utilizes the natural immune system mechanisms associated with the
gut (the small intestine). These mechanisms allow the body to accept
("tolerate") orally ingested proteins (antigens) absorbed through the intestine
without stimulating an immune response that would otherwise arise against a
foreign substance. In a series of extensive research studies directed by Dr.
Howard Weiner, who is one of the Company's principal scientific advisors, it was
shown that, when properly activated, these mechanisms can be used to treat
autoimmune disorders by selectively suppressing the immune system. This
discovery forms the basis of the Company's products and patent claims. See
"Patents and Proprietary Rights."
The Company's method uses therapeutic substances - antigenic proteins
or derivatives thereof found in the organs attacked by each disease - which are
delivered orally and disassembled in the gut by the normal digestive processes.
Specific
-4-
fragments of these substances (peptides) attach to antigen-presenting cells on
the surface of the gut. The cells involved are those associated with Peyer's
Patches, which are groupings of immune system cells surrounding the gut that
have been reported to induce immune tolerance. This triggers the immune system
to initiate a chain of events that results in the creation of regulatory T cells
that migrate through the blood and lymph system to suppress or down-regulate the
immune response at the targeted organ, thereby mitigating the disease. This
suppression can be directed toward the tissue under attack in an autoimmune
disease by appropriate selection and dosing of the protein in an orally-
delivered product.
AutoImmune has completed a wide range of human, animal and in vitro
tests relating to the oral administration of its products in a variety of
disease indications. The Company believes these experiments have demonstrated
that selective immune system tolerance can be induced by oral administration of
antigens, suppressing undesirable immune system attacks against healthy tissue
without suppressing the entire immune system.
AutoImmune's research has indicated that identification of the precise
autoantigen for a disease may not be necessary to develop an effective treatment
based on oral tolerance. Research has shown that oral tolerance induced by one
organ-specific protein is capable of suppressing autoreactive T cells that are
attacking a different protein in the same organ. The Company refers to this
phenomenon as "bystander suppression," and has filed patents to protect its
rights to this discovery. In particular, bystander suppression allows an oral
tolerance treatment to be effective even if the autoantigen is not precisely
identified or changes during the course of a disease (an effect known as
"determinant spreading").
In contrast to existing treatments, which are limited to treating only
the symptoms of autoimmune disease or which run the risks and side effects of
shutting down the entire immune system, the Company's products are intended to
interrupt the disease process and be specific to each disease. Moreover, because
of the apparent freedom from significant side effects enjoyed by AutoImmune's
products, the Company believes they may be prescribed earlier in the disease
process than is now customary, and thus may allow patients to avoid most or all
of the debilitating effects of autoimmune diseases. The Company believes its
approach of developing products to induce the activation of regulatory T cells
in order to suppress disease distinguishes it from most others currently
conducting autoimmune disease research.
The Company's approach offers a number of important clinical and
commercial advantages:
Adverse Reactions Unlikely. The Company believes that since the
therapeutic substances it is developing are protein-based products taken in
small quantities, are digested like normal foodstuffs and stimulate natural
functions, they are unlikely to cause adverse reactions. AutoImmune's human
studies to date have shown a lack of both toxicity and significant side effects,
which the Company believes may expedite the regulatory process.
Tissue-Specific Immunosuppression. The Company's oral tolerance
technique utilizes the immune system itself to generate natural
immunosuppression in the specific tissue(s) attacked by a disease. It does not
down-regulate the entire immune system.
Oral Delivery. AutoImmune's products are administered orally, the
preferred method of treating chronic diseases. Other forms of immunotherapy
which are being marketed or are known by the Company to be in development by
competitors are likely to require chronic intravenous, sub-cutaneous or intra-
muscular administration.
Broad Application. The Company believes that, in addition to the
diseases and conditions on which it has been working to date, its oral tolerance
approach potentially could be applied to the treatment of a variety of other
inflammatory diseases and other clinical conditions, including psoriasis and
Alzheimer's disease.
-5-
PRINCIPAL PRODUCTS IN DEVELOPMENT
AutoImmune has products in various stages of development for treating
multiple sclerosis, rheumatoid arthritis, Type I diabetes, chronic transplant
rejection and uveitis. The chart set forth below describes the stage of
development of each of the Company's principal products.
PRINCIPAL PRODUCTS IN DEVELOPMENT
PRODUCT DISEASE/CONDITION DEVELOPMENT STATUS
- ------- ----------------- ------------------
Myloral(R) Multiple Sclerosis Phase III pivotal trial in progress; results expected in the
second quarter of 1997
Colloral(R) Rheumatoid Arthritis Phase II trials in progress; results expected in the second
quarter of 1997
AI 401 Type I Diabetes Phase II trials in progress
AI 301 Uveitis Phase I/II trial completed (using AI 300)
AI 502 Transplant Rejection Phase I/II trial in progress
Multiple Sclerosis. Myloral, AutoImmune's proprietary oral formulation
of bovine myelin for the treatment of multiple sclerosis, is currently in a
double-blind placebo-controlled Phase III clinical trial. This pivotal trial,
designed with the FDA, enrolled 515 patients for a two-year observation period,
making it one of the largest therapeutic studies ever conducted on MS.
Recruitment was completed in March 1995, less than 12 months after initiation.
As of December 31, 1996, over 400 of these patients had completed their two
years in this trial. The last patient visit is expected to occur late in March
1997. The trial is intended to demonstrate that Myloral reduces the frequency of
attacks in relapsing/remitting MS. Clinical observations will be supplemented by
data from MRI scans. The patients are stratified into subpopulations based on
gender, as well as genetic factors associated with immune response, to permit
subgroup analysis and thus determine appropriate labeling. In addition, a
pharmacoeconomic study is being conducted simultaneously to analyze the
potential savings in healthcare costs from the use of Myloral. In this study,
data on the cost of health care-associated events, such as hospitalizations,
health professional services, disease-related equipment and sick days, for the
patients enrolled in the Phase III trial will be collected throughout the study
to compare the differences, if any, between the Myloral and placebo groups. The
Company is also conducting a 32-patient human immunology study to identify
biochemical markers that may help guide treatment with Myloral.
The clinical proof of principle study for Myloral was a Phase I/II
trial on 30 patients at The Brigham and Women's Hospital. This trial
demonstrated positive clinical and immunological effects, especially for certain
patient subgroups. Results of this trial were published in the journal, Science,
on February 26, 1993. Overall response rates and safety profiles of patients
from this study who have continued on Myloral, some up to six years, remain
favorable.
In the July 1996 issue of the Journal of Clinical Investigation,
researchers at The Brigham and Women's Hospital reported on additional
laboratory studies conducted using Myloral. The studies involved 34 patients,
half of whom had received Myloral and half of whom had received no immune
regulating drug treatment. The studies demonstrated that white blood cells from
MS patients receiving Myloral produce immune-regulating hormones that may
suppress the disease. These studies are the first to demonstrate the mechanism
of oral tolerance in humans.
AutoImmune has received Orphan Drug designation for Myloral.
Approximately 350,000 persons in the United States suffer from MS, of
which approximately 45% have relapsing/remitting MS. The patients in the Phase
III pivotal trial of Myloral suffer from relapsing/remitting MS. Approximately
one-third of individuals with MS stabilize and never reach a severe stage;
others have multiple acute attacks as frequently as two to three times a year.
In its most severe form, the disease is relentlessly progressive and can result
in complete disability within ten years. Since the early 1980s, non-specific
immunosuppressants, such as cyclophosphamide and azothioprine, have been used
with occasional success to slow the progression of this disease in some
patients. None of
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these treatments is capable of stopping MS attacks or halting the progression of
the disease without exposing patients to potentially serious side effects. Since
1993, three products have been approved by the FDA for the treatment of
relapsing/remitting MS. All three are indicated for reduction of the frequency
of MS exacerbations (one is also approved for slowing the progression of
disability associated with MS). Each of these drugs is administered by injection
and each has side effects, including injection site reactions and flu-like
symptoms or shortness of breath.
Rheumatoid Arthritis. Colloral, AutoImmune's proprietary oral
formulation of Type II collagen, is undergoing a series of Phase II human
clinical trials. These studies are designed to build the clinical database
required for regulatory approval. More than 350 patients have been involved in
the four Colloral trials completed to date, and more than 800 patients are
involved in the three Phase II Colloral trials that are in progress.
During 1996, the Company initiated three Phase II trials to gather
important additional data for use in designing Phase III studies, including the
optimum dose, the effect of switching patients from a disease modifying anti-
rheumatic drug ("DMARD") to Colloral and the relative efficacy of Colloral when
compared with a commonly prescribed DMARD. These trials, which are being
conducted at 48 sites in the United States, consist of (i) a 360-patient,
placebo-controlled dose refinement trial using three different doses, 5, 20 and
60 micrograms; (ii) a 180-patient, placebo-controlled trial testing Colloral in
patients who have been withdrawn from methotrexate, a frequently used DMARD; and
(iii) a 270-patient, active control trial testing Colloral against a first line
DMARD in patients who have never been on DMARD therapy, but who have responded
poorly to nonsteroidal anti-inflammatory drugs ("NSAIDs"). Patients in each of
these studies are being treated for six months. Trial results are expected to be
announced in the second quarter of 1997.
In June 1995, the Company completed a six-month, six-center, double-
blind Phase II clinical trial involving 274 patients with severe, active
rheumatoid arthritis. The results of the study showed that patients receiving a
20 microgram dose of Colloral demonstrated statistically significant improvement
compared to patients receiving placebo as measured by the therapeutic response
standard known as the Paulus criteria. Results of the study also demonstrated
that patient improvement increased as the dosage of Colloral decreased. Colloral
was safe and well tolerated by patients at all dose levels. The Paulus criteria,
a commonly used method to discriminate between drug and placebo response in
rheumatoid arthritis, require that patients achieve at least four of the
following six levels of response: 20% or greater improvement in tender joint
score, swollen joint score, morning stiffness, or sedimentation rate, and 40% or
greater improvement in patient and physician global scores. The analysis showed
39% of patients given the 20 microgram dose of Colloral met this standard,
compared with 19% of patients receiving placebo. No patient met all criteria for
complete remission of disease. The results of this study were presented in
October 1995 at the National Scientific Meeting of the American College of
Rheumatology.
Drugs for rheumatoid arthritis are given chronically and, as a result,
long-term safety data are required for approval of all new drugs. AutoImmune has
begun to generate long-term safety data on Colloral through an open label
continuation trial with patients who have participated in the development
program. As of December 31, 1996, of the 237 patients who entered the
continuation trial, 121 patients were remaining in the trial.
Prior to the Phase II trial completed in June 1995, three clinical
studies were conducted to provide preliminary efficacy data for Colloral. One of
these studies, conducted by Beth Israel Hospital researchers and published in
the September 1993 issue of Science, was a double-blind, placebo-controlled
three-month trial involving 60 patients. This trial followed a three-month, 10-
patient, open label trial, also conducted at Beth Israel Hospital. In addition,
Harvard researchers conducted a 10-patient pilot trial in patients with juvenile
rheumatoid arthritis ("JRA"). The results of the JRA trial were published in the
April 1996 issue of Arthritis and Rheumatism. AutoImmune has received Orphan
Drug designation for Colloral for the treatment of JRA.
It is estimated that 1% of the worldwide population suffers from
rheumatoid arthritis. In the United States, 2.1 million patients currently seek
treatment for rheumatoid arthritis, including more than 70,000 patients with
JRA. There is no known cure, but several approaches are used in an attempt to
alleviate two major symptoms of the disorder, pain and inflammation. A number of
pain relievers are widely used, but most have undesirable side effects.
Similarly, a wide variety of anti-inflammatory agents, ranging from aspirin to
NSAIDs , are used with varying degrees of success. The NSAIDs used to alleviate
pain and inflammation have undesirable gastrointestinal side effects that limit
their use. None of the available NSAIDs work with consistent efficacy on all
types of patients. Broad immunosuppressants are also used to treat rheumatoid
arthritis but toxicity limits their use.
Type I Diabetes. The Company has entered into a collaborative agreement
with Lilly with respect to the Company's diabetes product. In May 1996, Lilly
initiated the first of several Phase II clinical trials to demonstrate human
proof of principle for AI 401. The first study is a one-year, double-blind,
placebo-controlled trial in 300 patients. This Phase II clinical trial is
designed to measure immunological changes, preservation of pancreatic function
and time to insulin dependence. In January 1997, Lilly initiated a second Phase
II trial in France, and is expected to begin a third trial in Italy. In
addition, Lilly is providing the oral product for the Diabetes Prevention Trial
(DPT-1) being conducted by the NIH. This trial, which began in September 1996
and is expected to enroll 490 patients, is designed to determine whether AI 401
can delay or prevent the clinical onset of Type I diabetes.
-7-
Under the agreement with Lilly, the Company granted to Lilly exclusive
worldwide development, manufacturing and marketing rights to its current and any
future oral tolerance products for autoimmune-mediated diabetes in return for
payments aggregating $20 million if certain milestones are achieved and for
royalties based on sales. AutoImmune has royalty-bearing, non-exclusive rights
outside the area of autoimmune-mediated diabetes to all developments by Lilly in
the field of oral tolerance. Lilly is responsible at its expense for conducting
all clinical trials and making all regulatory submissions and product
registrations. Lilly may terminate the agreement at any time, in which event
the Company retains all rights to the product(s).
Approximately 1,000,000 people in the United States suffer from Type I
diabetes. It is estimated that there are 50,000 new patients diagnosed with
this disease each year. There is no known way of curing Type I diabetes; at
best it can be controlled. In addition, because insulin is a large protein that
is not appreciably absorbed through the gut, it must be administered
intravenously or intra-muscularly, rather than orally. The limitations of the
treatment delivery system and the inconsistency of the therapeutic results have
led to major efforts to discover effective new methods of treatment. The
Company believes that the preferred therapeutic approach would be an oral
treatment such as the Company's which could prevent the onset of the disease
(and the related destruction of the insulin-producing cells) in susceptible
populations. Methods to pre-screen persons who are genetically susceptible to
Type I diabetes are being developed by others. AutoImmune expects that
individuals who have been diagnosed in the early stages of Type I diabetes, as
well as those who may be identified through such pre-screening, will constitute
the primary market for AutoImmune's diabetes product.
Transplant Rejection. In January 1997, the Company initiated a clinical
trial of tolerizing peptides for the prevention of organ transplant rejection.
The open label study, which is being conducted in 15 patients at The Brigham and
Women's Hospital, is designed to assess the safety and immunological effects of
oral peptides in laboratory measures of transplant rejection. The results of
this trial are expected during 1998. Prior to the initiation of AutoImmune's
human clinical program in chronic transplant rejection, the Company conducted
several preclinical studies at The Brigham and Women's Hospital which achieved
positive results in the suppression of the rejection reaction using peptides.
Although not an autoimmune disease, the rejection of a transplanted
organ by its new host is of interest to the Company because this phenomenon
involves a similar cell-mediated mechanism of action. For certain diseases such
as end-stage kidney, heart and liver failure, transplantation of donated organs
is the only means of keeping the patient alive. Two factors, however, have
served to limit the effectiveness of this approach. One factor is lack of donor
organs, while the other is the rejection of the transplanted organ as a foreign
body by the patient's immune system. The availability of the drug cyclosporin,
which suppresses the host's entire immune system, has significantly changed the
nature of organ transplantation in recent years. While this drug has allowed
transplantation to become a much more widespread clinical procedure, cyclosporin
is a powerful, non-specific immunosuppressant that has severe side effects,
especially in the kidneys, and exposes the patient to attacks from other
diseases and opportunistic infections. The Company believes that its approach
offers selective immunosuppression with a lack of toxicity or significant side
effects. Approximately 35,000 organ transplants are performed annually
worldwide.
Uveitis. The Company is developing AI 301, a recombinant human protein,
for the treatment of uveitis, an inflammatory disease of the eye. Using its
first generation, non-recombinant product, AI 300, the Company completed a 45-
patient placebo-controlled Phase I/II clinical trial in January 1996. This trial
was conducted under the sponsorship of the Company pursuant to a Collaborative
Research and Development Agreement ("CRADA") with the National Eye Institute of
the NIH. The results of the Phase I/II trial demonstrate that treatment with
purified bovine S-antigen is safe and may facilitate the withdrawal of systemic
immunosuppressants. Statistical significance, however, was not reached for the
clinical endpoints. The results of the trial are expected to be published in the
American Journal of Ophthalmology during the second quarter of 1997. The Company
expects to move forward in its program for the treatment of uveitis using AI
301, a recombinant form of S-antigen. The Company believes that a recombinant
product for this disease is likely to be manufactured at a significantly lower
cost than a product based on animal protein.
Although uveitis can be caused by other factors such as external
irritants, the autoimmune form of the disease is particularly severe. Doctors
have used non-specific immunosuppressants, such as corticosteroids and
cyclosporin, on uveitis patients. Results, however, have not been consistent and
serious side effects may occur.
ADDITIONAL PRODUCTS AND RESEARCH PROGRAMS
The Company's additional research and development efforts are focused
on three primary objectives: (i) developing ways to enhance the therapeutic
effect of the Company's existing products by combining its products with other
compounds or drugs; (ii) developing second generation products using recombinant
human proteins and/or peptides; and (iii) expanding the applications of oral
tolerance therapy.
There are two basic approaches under study by the Company to enhance the
therapeutic effect of existing products. The first is through the
contemporaneous administration of agents such as beta-interferon, interleukin-4,
or interleukin-10, which have been demonstrated to predispose the immune system
toward the production of regulatory T cells. The second
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approach is through the contemporaneous administration of agents such as
methotrexate which can impact the disease process through its effect on
autoreactive T cells. Both methods have been shown in animal studies to increase
the effectiveness of oral tolerance therapy.
The Company is also developing products utilizing recombinant human
proteins and/or peptides, which may offer significant improvements from both
clinical and commercial perspectives. The Company has begun preclinical studies
on AI 101, a second generation product for the treatment of MS, which is based
on recombinant protein. In addition, the Company is developing AI 201, a
recombinant human form of Colloral, which may provide a second generation
product for treating rheumatoid arthritis. The Company entered into a joint
research project with Pharming B.V., of Leiden, The Netherlands, to evaluate
human collagen, produced in the milk of transgenic animals, in animal models of
rheumatoid arthritis. After completion of the currently ongoing Phase II
Colloral trials, the companies will evaluate the opportunities for a more
extensive collaboration.
Recombinant human proteins and their derivatives are likely to be more
effective in humans than animal proteins because of genetic homology.
Genetically engineered products may increase the efficacy and enhance the
proprietary position of the Company's products. The Company also believes that,
in some cases, recombinant proteins, peptides and synthetic analogues may be
manufactured at lower cost and may allow lower dosages than animal proteins.
In addition to the products it currently is developing, AutoImmune has
several research programs involving possible future products. The Company
believes its oral tolerance approach may lead to treatments for cell-mediated
inflammatory diseases in addition to those it is currently studying. For
example, the Company is conducting research on products to treat other diseases,
including psoriasis and Alzheimer's disease.
MANUFACTURING
All of the Company's products for clinical and commercial use must be
produced under controlled conditions and under current FDA Good Manufacturing
Practices ("GMP"). To ensure compliance with GMP requirements, the Company will
be required to maintain sufficient technical staff to oversee all production
operations, including quality control, quality assurance, technical support and
manufacturing management. To the extent the Company relies upon contract
manufacturing arrangements, the Company will depend upon third parties to
produce and deliver products in accordance with GMP.
The Company has a long-term contract manufacturing arrangement with
Scientific Protein Laboratories ("SPL"), a subsidiary of American Home Products,
under which the Company is able to obtain, through SPL's facilities, clinical
and early commercial quantities of bulk Myloral produced using AutoImmune's
manufacturing process. The Company also has a long-term contract manufacturing
arrangement with Global Pharm of Toronto, Canada, for the encapsulation and
packaging of Myloral. In addition, the Company entered into an agreement with
Nova-Tech, Inc., a supplier of raw materials relating to the manufacturing of
Myloral. The Company is producing Colloral in bulk form for use in its clinical
trials from a pilot facility it constructed in 1996. The Company is currently
meeting its filling, labeling and packaging requirements for Colloral through
arrangements with third parties. The Company will continue to evaluate whether
to manufacture bulk product and finished dosage forms for all of its products
through contract suppliers, by leasing space in an existing facility or by
establishing its own facility on a product-by-product basis.
MARKETING AND SALES
In order to market any of its products directly, the Company must
develop a marketing and sales organization. The Company has begun the planning
required to establish a marketing department in late 1997. However, the Company
may elect to enter into agreements with established pharmaceutical companies
with respect to the marketing of one or more of its products. Such agreements
may be exclusive or non-exclusive and may provide for marketing rights worldwide
or in specific markets.
COLLABORATIVE RESEARCH AGREEMENTS
During the early stages of its development, the Company chose to
operate through a variety of agreements with medical research institutions.
AutoImmune's agreements with The Brigham and Women's Hospital and other leading
medical research institutions, together with the advantages of the oral
tolerance mechanism, have allowed the Company to conduct pilot human studies and
demonstrate the potential utility of its technique in a number of diseases at a
comparatively early stage of the Company's development. Although the Company is
expanding its research and development effort, it plans to continue working with
research institutions.
The Brigham and Women's Hospital. The Brigham and Women's Hospital,
Inc. ("BWH"), a teaching hospital affiliated with Harvard Medical School, has
been performing sponsored research for the Company since 1988. The current
agreement extends until June 30, 1997 and is automatically renewed for
successive two-year periods unless one year's prior written notice is given. The
current research budget at BWH provides for expenditures by AutoImmune of
approximately $1,227,000 during the twelve months ending June 30, 1997. Under
certain circumstances, the Company may reduce its level
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of expenditures. The Company will own or have exclusive rights to all
inventions, improvements and discoveries made at BWH and resulting from the
research program, subject to certain rights retained by the U.S. government in
any patentable invention conceived or first reduced to practice using federal
funds. The Company will pay to BWH a royalty on all products sold by the Company
and subject to a patent covering an invention developed under the research
program or as to which rights were acquired by the Company from BWH, and a
percentage of any royalties received by AutoImmune with respect to sales of such
products by others. BWH also will receive a percentage of any milestone payments
which the Company is entitled to receive from licensees or other transferees of
such a patent after the first commercial sale of a product covered by a patent.
If the Company defaults in the payment of any amount due to BWH, BWH will have
an option to purchase all technology developed under the research program at a
purchase price equal to the sum of all amounts previously paid by the Company to
BWH.
BWH is a shareholder of the Company. Both of the scientists who made
the discoveries which led to the founding of AutoImmune are affiliated with BWH.
National Eye Institute. The National Eye Institute ("NEI") is party to
a CRADA with AutoImmune and BWH pursuant to which clinical trials of
AutoImmune's uveitis product were conducted. The agreement expired June 30,
1996. The NEI is a co-owner with AutoImmune of a patent application directed to
the use of oral tolerance to treat uveitis. The NEI has granted BWH an exclusive
commercialization license for any and all products or processes developed
pursuant to the CRADA (including the uveitis patent application) in exchange for
one-half of any royalties with respect to uveitis products collected by BWH
pursuant to its agreement with the Company. BWH has in turn granted the Company
an exclusive commercialization license with respect to all such technology. The
Company and NEI are currently discussing a potential collaboration to develop
the Company's second generation product for uveitis, AI 301.
PATENTS AND PROPRIETARY RIGHTS
The establishment of a strong proprietary position is an important
element of AutoImmune's strategy. As of December 31, 1996, the Company had
pending 22 original and continuation-in-part United States patent applications
and numerous foreign counterparts. The Company has received or has exclusive
rights to 18 U.S. and foreign patents. The United States Patent and Trademark
Office has issued to the Company: one patent covering the use of Colloral to
treat rheumatoid arthritis in humans; two patents covering treatment of multiple
sclerosis or rheumatoid arthritis using nasal or by-inhalation administration of
compositions containing myelin basic protein or collagen (respectively) or
active fragments thereof; and one patent covering suppression of allograft
rejection by oral administration of a major histocompatibility complex Class II
antigen or an active fragment thereof. The European Patent Office has granted a
patent which the Company owns covering the use of compositions containing
autoantigens to treat a group of human autoimmune diseases, but an opposition (a
proceeding challenging its validity) has recently been filed against this patent
by a third party. A number of the pending U.S. patent applications which the
Company owns or to which it has exclusive rights have been allowed and are
expected to issue.
The Company owns a patent application originally filed by BWH for the
treatment of autoimmune diseases by oral administration of autoantigens,
including a number of specific patent claims directed to treatment of multiple
sclerosis. The disclosure contained in this initial patent application has been
significantly expanded in a chain of successor applications. There can be no
assurance, however, that these patents will be granted or that the Company will
succeed in developing additional products that are patentable.
The Company has applied for patents, or acquired rights to patent
applications, covering oral tolerance methods of treating or preventing other
specific autoimmune diseases and related conditions, including uveitis, Type I
diabetes, transplant rejection and various skin disorders, including psoriasis.
It has filed applications that claim tolerization treatment of autoimmune
diseases by inhalation of autoantigens in aerosol form, use of synergizing
compounds to enhance the treatment of autoimmune disorders, specific peptides
thought to be involved in multiple sclerosis, and bystander suppression, by
which oral tolerance can be induced without identifying the specific antigen
causing an autoimmune disease.
There can be no assurance that patent applications owned by, or
licensed to, the Company will issue or that, if issued, the Company's patents
will be valid or that they will provide the Company with meaningful protection
against competitors or with a competitive advantage. There can be no assurance
that the Company will not need to acquire licenses under patents belonging to
others for technology potentially useful or necessary to the Company and there
can be no assurance that such licenses will be available to the Company, if at
all, on terms acceptable to the Company. Moreover, there can be no assurance
that any patent issued to or licensed by the Company will not be infringed upon
or circumvented by others. In particular, if the Company is unable to obtain
issuance of a patent with broad claims with respect to oral tolerance treatment
of autoimmune diseases or if the Company is unable to prevail in an opposition
by a third party against a foreign patent of the Company with a similar claims
scope, a competitor may be able to design around the Company's patent rights by
employing a treatment using an antigen that is not covered by the Company's
subsisting patents.
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Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. In addition, the Company's business
may be adversely affected by competitors who independently develop competing
technologies, especially if the Company obtains no, or only narrow, patent
protection.
Lastly, there can be no assurance that third-parties will not bring
suit against the Company for patent infringement or for declaratory judgment to
have the Company's patents declared invalid.
COMPETITION
The pharmaceutical industry is highly competitive, and research on the
causes of and possible treatments for autoimmune diseases is developing rapidly.
The Company competes with a number of pharmaceutical and biotechnology companies
which have financial, technical and marketing resources significantly greater
than those of the Company. Some companies with established positions in the
pharmaceutical industry may be better equipped than the Company to develop and
market products based on the application of new technologies to the treatment of
autoimmune diseases. A significant amount of research in the field is also being
conducted at universities and other not-for-profit research organizations. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. These institutions may also market competitive commercial products on
their own or through joint ventures and will compete with the Company in
recruiting highly qualified scientific personnel.
The Company is pursuing areas of product development in which there is
a potential for extensive technological innovation in relatively short periods
of time. The Company's competitors may succeed in developing products that are
more effective than those of the Company. Rapid technological change or
developments by others may result in the Company's potential products becoming
obsolete or non-competitive.
For additional information concerning products developed and under
development by the Company's competitors to treat multiple sclerosis and
rheumatoid arthritis, see "Principal Products in Development-Multiple Sclerosis"
and "-Rheumatoid Arthritis."
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products and certain
areas of its research are subject to regulation for safety and efficacy by
numerous government authorities in the United States and other countries.
Domestically, the Federal Food, Drug and Cosmetic Act, the Public Health Service
Act, and other federal and state statutes and regulations govern the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of the Company's products. There can be no assurance
that the Company will ever obtain the government approval necessary to make
commercial sales of any of its products.
Further, the FDA may grant Orphan Drug status, under the Orphan Drug
Act, to therapeutic agents which are intended to treat a "rare disease or
condition," which is generally described as a disease or condition that affects
fewer than 200,000 individuals in the United States, but also includes multiple
sclerosis and certain other diseases. Orphan Drug status confers upon the
sponsor tax credits for the amounts expended on clinical trials, as well as
marketing exclusivity for the proposed therapeutic indication for a period of
seven years following approval of a New Drug Application ("NDA") or Product
License Application ("PLA"). This status does not convey any advantage during
regulatory review, but it is possible that products may qualify both for Orphan
Drug status and also for fast-track regulatory review. Myloral for multiple
sclerosis and Colloral for juvenile rheumatoid arthritis have been designated as
Orphan Drugs. The Company also expects to apply for Orphan Drug status on AI
301, its product for uveitis. To receive the benefits of Orphan Drug
designation, however, the Company must be first to receive FDA approval of the
product for the particular indication.
AutoImmune believes that many of its products under development will be
classified by the FDA as "biologic products," while others may be classified as
"drug products." As part of its regulatory strategy, the Company intends to
direct some of its products into the Biologics Divisions of the FDA. While both
biologics and drugs can qualify for Orphan Drug status, biologics, once
approved, have no provision for subsequent competitors to market generic
versions. Each biologic, even if it has the same composition and is for the
same indication, must undergo the entire development process in order to be
approved by a competitor firm.
New drug or biological products require several steps in order to
receive regulatory approval, including (i) preclinical laboratory and animal
tests; (ii) submission by the Company or an individual physician to the FDA of
an application for an IND, or submission to a research institution of an
Institutional Review Board approval for intrastate trials, one of which must
become effective before human clinical trials may start; (iii) the performance
of well-controlled clinical
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trials; and (iv) the submission of an NDA or PLA containing the results of
clinical trials and methods of manufacture of the product prior to commercial
sale or shipment of the product. During the approval process, the FDA must
confirm that good laboratory and clinical practices were maintained during
product testing. In addition to obtaining FDA approval for each NDA or PLA, an
Establishment License Application must be filed and approved by the FDA for the
manufacturing facilities for a biologic product.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess potential product safety and efficacy. The results
of the preclinical tests are submitted to the FDA as part of an IND, and, unless
the FDA objects, the IND becomes effective, and clinical trials may begin, 30
days after the FDA receives the filing.
The initial clinical evaluation, Phase I trials, generally involve
administration of a product to a small number of persons. The product is tested
for safety, dosage tolerance, metabolism, and pharmacokinetic properties. Phase
II trials generally involve administration of a product to a limited number of
patients with a particular disease to determine dosage, efficacy and safety.
Phase III trials generally examine the clinical efficacy and safety in an
expanded patient population at multiple clinical sites. The FDA reviews the
clinical plans and the results of trials and can discontinue the trials at any
time if there are significant safety issues or if there is convincing evidence
that a drug is not effective for the purpose for which it is being investigated.
Each of AutoImmune's clinical trials will be conducted with the approval of an
Institutional Review Board at the institution where the trial will be conducted.
The Institutional Review Board considers, among other things, ethical factors,
the safety of human subjects and the possible liability of the institution.
Pivotal Phase III trials are designed to demonstrate definitive efficacy. More
than one trial is usually required for FDA approval to market a drug. The
results of the preclinical and clinical trials are submitted after completion of
the pivotal Phase III trials in the form of a PLA or NDA for approval to
commence commercial sales. The approval process is affected by several factors,
including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may also require post-marketing surveillance to monitor potential adverse
effects of the product. The regulatory process can be modified by Congress or
the FDA in specific situations.
The length of the regulatory review process cannot be predicted with
certainty for new individual products. The Drug Price Competition and Patent
Term Restoration Act, however, defines the original period of enforceability for
a product or use patent to be 17 years from issuance or 20 years from filing.
Under certain circumstances, to compensate the patent holder for the time
required for FDA regulatory review, this period may be extended for up to 5
years. This Act also establishes a period following FDA approval of a product
during which the FDA may not accept or approve short-form applications for
generic versions of the drug from other sponsors.
The Company also will be subject to government regulations enforced
under the Occupational Safety and Health Act, the Environmental Protection Act,
the United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the
National Environmental Policy Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, and other national, state or local
restrictions.
In addition, the Company's ability to successfully commercialize human
therapeutic products may depend in part on the extent to which reimbursement for
the cost of such products and related treatment will be available from
government health administration authorities, private health coverage insurers
and other organizations. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third-party coverage will be available for the Company to maintain
price levels sufficient for realization of an appropriate return on its
investment in product development.
EMPLOYEES
As of February 21, 1997, AutoImmune employed 72 individuals full-time,
20 of whom hold Ph.D. or M.D. degrees. Of its total work force, 63 employees are
engaged in research and development activities and nine are devoted to support
and administrative activities. AutoImmune believes it maintains good relations
with its employees.
FACTORS TO BE CONSIDERED
The parts of this Annual Report on Form 10-K titled "Item 1 - Business"
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking statements which involve risks
and uncertainties. Set forth below is a discussion of certain factors that could
cause the Company's actual results to differ materially from the results
projected in such forward-looking statements.
Developmental Stage of the Company's Products. The Company has not yet
completed the development of any products. The Company's products will require
significant additional clinical testing and investment prior to
commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. The
Company has a number of products in clinical development, including Myloral,
Colloral, AI 401 and AI 502. Positive results for a product
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in a clinical trial do not necessarily assure that positive results will be
obtained in future clinical trials or that government approval to commercialize
the product will be obtained. Clinical trials may be terminated at any time for
many reasons, including toxicity or a lack of efficacy based upon interim
examinations of clinical trial data or adverse event reporting. There can be no
assurance that any of the Company's products will be successfully developed,
prove to be safe and efficacious in clinical trials, meet applicable regulatory
standards, receive required regulatory approvals, be capable of being produced
in commercial quantities at reasonable costs or be successfully marketed or that
the Company will not encounter problems in clinical trials that will cause the
Company to delay or suspend product development. None of the Company's products
is expected to be commercially available in 1997.
History of Operating Losses; Lack of Product Revenues. The Company has
accumulated net losses, from its inception in 1988 through December 31, 1996, of
approximately $70,091,000. The Company expects to continue to incur loses for a
number of years as the Company's research, development and clinical trial
programs and related expenses expand. The Company's ability to achieve a
profitable level of operations is dependent on successfully completing the
development of its products, obtaining required regulatory approvals, and
manufacturing and marketing its products. There can be no assurance that the
Company will achieve a profitable level of operations.
The Company's revenues to date have been earned in connection with
collaborative agreements and the granting of short term rights. The Company has
granted exclusive worldwide patent rights to its autoimmune-mediated diabetes
products to Lilly in return for payments if certain milestones are achieved, as
well as royalties based on sales, if any. There can be no assurance that the
Company will derive any revenues from the Lilly agreement, which may be
terminated by Lilly at any time. At present there are no other outstanding
agreements pursuant to which the Company is entitled to receive revenues.
Additional Financing Requirements and Access to Capital. Since
inception, the Company has raised net proceeds of approximately $117,000,000
from the sale of equity securities in private placements and public stock
offerings. The Company will require substantial funds for further research and
development, existing and planned clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. Based upon its current plans, the Company believes that current
cash and marketable securities and the interest earned from the investment
thereof will be sufficient to meet the Company's operating expenses and capital
requirements through the filing of the Company's PLA for its lead product.
Thereafter, the Company will need to raise substantial additional capital to
fund its operations, including clinical trials.
The Company intends to seek such additional funding through public or
private equity or debt financings, collaborative arrangements with
pharmaceutical companies or from other sources. There can be no assurance,
however, that additional financing will be available on acceptable terms, if at
all. If adequate funds are not available, the Company will have to reduce
certain areas of research, product development, manufacturing or marketing
activity or otherwise modify its business strategy, and its business will be
materially adversely affected.
Dependence on Collaborative Agreements. One of the Company's historic
objectives has been to enter into licensing agreements or joint ventures with
established pharmaceutical companies for products to be sold in foreign markets
or for products to treat diseases which involve large physician audiences and/or
which are expected to have longer regulatory approval cycles. The Company has
such an agreement with Lilly with respect to autoimmune-mediated diabetes
products. There can be no assurance that the Company will be able to negotiate
other acceptable arrangements in the future, to the extent the Company desires
to do so, or that such arrangements will be successful.
The majority of the Company's basic research to date has been done
through agreements with The Brigham and Women's Hospital and other medical
research institutions. Since 1993, the Company has conducted some research and
most of its development activities internally, and currently the Company has 63
full-time employees engaged in research and product development. Nevertheless,
the Company expects to continue to be at least partially dependent upon research
performed under contract with The Brigham and Women's Hospital. If the Company
is unable to maintain this relationship, the Company would be adversely affected
and the Company's ability to commercialize future products would be delayed.
Manufacturing and Marketing. The Company has not yet introduced any
products and has limited manufacturing experience. To be successful, the
Company's products must be manufactured in commercial quantities in compliance
with regulatory requirements and at acceptable costs. The Company currently has
limited facilities for manufacturing its products under development and has
until recently obtained all of its products for clinical trials from contract
manufacturing companies. In order to manufacture its products in commercial
quantities, the Company will need to develop its own manufacturing facilities or
contract with third parties to manufacture its products. To the extent the
Company relies upon contract manufacturers, there can be no assurance that such
parties will perform their obligations in a timely fashion. Any failures by
third parties could cause a delay in clinical trials, commercialization of
product, or the ability to supply the market. The Company has entered into
agreements with Scientific Protein Laboratories, a subsidiary of American Home
Products, Global Pharm of Toronto, Canada, and Nova-Tech, Inc., with respect to
Myloral. There can be no assurance that
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the Company will be able to enter into agreements for its other products, to the
extent the Company desires to do so, on favorable terms, if at all.
To the extent that the Company chooses to establish its own
manufacturing capability, there can be no assurance that the Company will be
successful in doing so. The Company is producing Colloral in bulk form for use
in its clinical trials from a pilot facility it constructed in 1996. Developing
its own full-scale manufacturing facilities will require substantial additional
funds. All manufacturing facilities must comply with applicable regulations of
the FDA. No assurance can be given that the Company's products will not require
raw materials for which the sources and amount of supply are limited. An
inability to obtain adequate supplies of such raw materials could significantly
delay the development, regulatory approval and marketing of the Company's
products.
The Company has no sales organization or marketing force. In order to
market any of its products directly, the Company must develop a marketing and
sales force with sufficient technical expertise to generate demand for its
products. There can be no assurance that the Company will be able to establish
effective sales and distribution capabilities or be successful in gaining market
acceptance for its products.
Patents and Proprietary Rights. The Company's success will depend, in
part, on its ability to obtain patents and Orphan Drug protection, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties or having third parties circumvent the Company's rights. The
Company has received or has exclusive rights to 18 U.S. and foreign patents. The
Company has filed and is actively pursuing numerous applications for additional
U.S. and foreign patents, and is an assignee or licensee of the rights to other
patent applications. The patent positions of biotechnology and pharmaceutical
companies can be highly uncertain and involve complex legal and factual
questions. For example, no consistent policy has emerged regarding the breadth
of biotechnology patent claims that are granted by the United States Patent
Office or enforced by the federal courts. Thus, there can be no assurance that
any patents issued to the Company will provide the Company with any competitive
advantages or will not be challenged by any third parties, that the patents of
others will not impede the ability of the Company to do business or that third
parties will not be able to circumvent the Company's patents, that any of the
Company's patent applications will result in the issuance of patents or that the
Company will develop additional proprietary products that are patentable.
Furthermore, there can be no assurance that others will not develop
independently similar products, duplicate any of the Company's products, or, if
patents are issued to the Company, design around the patented products developed
by the Company. Although the Company has obtained Orphan Drug status in the
United States for some of its products, it also must be the first to market an
effective treatment for a particular disease in order to obtain the protections
afforded to Orphan Drugs.
The Company may be required to obtain licenses from third parties to
avoid infringing patents or other proprietary rights. No assurance can be given
that any licenses required under any such patents or proprietary rights would be
made available, if at all, on terms acceptable to the Company. If the Company
does not obtain such licenses, it could encounter delays in product
introductions, or could find that the development, manufacture or sale of
products requiring such licenses could be prohibited. In addition, the Company
could incur substantial costs in defending itself in suits brought against the
Company on patents it might infringe or in filing suits against others to have
such patents declared invalid.
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Furthermore, the Company's business
may be adversely affected by competitors who independently develop competing
technologies, especially if the Company obtains no, or only narrow, patent
protection.
Technological Change and Competition. The biotechnology and
pharmaceutical industries are subject to rapid and significant technological
change. Competitors of the Company in the United States and abroad are numerous
and include, among others, major pharmaceutical companies, biotechnology firms,
universities and other research institutions. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than any being developed by the Company or that would
render the Company's technology and products obsolete or noncompetitive. Many of
these competitors have substantially greater financial and technical resources
and production and marketing capabilities than the Company. In addition, many of
the Company's competitors have significantly greater experience than the Company
in conducting preclinical testing and clinical trials of pharmaceutical products
and obtaining FDA and other regulatory approvals of products for use in health
care. Accordingly, the Company's competitors may succeed in obtaining FDA
approval for products more rapidly than the Company. If the Company commences
significant commercial sales of its products, it will also be competing with
other companies with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited experience.
Government Regulation. The Company's production and marketing of its
products and ongoing research and development activities are subject to
regulation by numerous government authorities in the United States and other
countries. Prior to marketing, any therapeutic product developed by the Company
must undergo rigorous preclinical testing and clinical
-14-
trials, as well as an extensive regulatory approval process mandated by the FDA
and foreign regulatory agencies. These processes can take many years and require
the expenditure of substantial resources. The Company has limited experience in
conducting and managing the preclinical and clinical trials necessary to obtain
government approvals. Delays in obtaining regulatory approvals would adversely
affect the marketing of the Company's products and its ability to receive
product revenues or royalties. There can be no assurance that the Company will
be able to obtain the clearances and approvals necessary for the clinical
testing or for the manufacturing and marketing of its products. Existing or
additional government regulation could prevent or delay regulatory approval of
the Company's products or affect the pricing or marketing of such products. One
such regulation involves the potential transmission of bovine spongiform
encephalopathy ("BSE"), a bovine disease. Although there is no conclusive
evidence that BSE can be transmitted to humans, concern over the possibility of
such transmissions could adversely affect in certain jurisdictions regulatory
approval of Myloral, which is produced from bovine sources.
ITEM 2. PROPERTIES
AutoImmune's administrative offices and research facilities occupy
approximately 33,000 square feet of leased space in Lexington, Massachusetts.
In addition, AutoImmune has signed a lease for 9,000 square feet of space
adjoining its current facilities, which the Company expects to occupy in late
1997. The leases run through November 1999. The Company believes that its
facilities are adequate for its present and anticipated purposes, except that
additional facilities will be needed if the Company expands its manufacturing
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of fiscal 1996.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol AIMM. The following table shows the quarterly high and low
closing price on Nasdaq for a share of the Company's common stock for the fiscal
years ended December 31, 1995 and 1996.
Price range of
common stock
--------------
High Low
---- ---
Fiscal year ending December 31, 1995
First quarter $ 6.75 $ 4.75
Second quarter $13.38 $ 6.38
Third quarter $17.00 $ 9.75
Fourth quarter $16.00 $ 8.50
Fiscal year ending December 31, 1996
First quarter $13.88 $ 8.13
Second quarter $11.75 $ 7.88
Third quarter $10.00 $ 7.88
Fourth quarter $17.00 $11.13
As of February 21, 1997, there were 304 record holders of the Company's
Common Stock.
AutoImmune has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings, if any, and
therefore does not anticipate paying any cash dividends on its capital stock in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from financial
statements that have been audited by Price Waterhouse LLP, independent
accountants. The balance sheet at December 31, 1995 and 1996 and the related
statements of operations and of cash flows for the three years ended December
31, 1996 and notes thereto appear elsewhere in this Form 10-K. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and related notes included elsewhere in this Form 10-K.
-16-
Year ended December 31,
====================================================================================
1992 1993 1994 1995 1996
---------------- ---------------- ---------------- ---------------- ----------------
STATEMENT OF OPERATIONS DATA:
Revenue:
Option fees $ 700,000 $ -- $ -- $ 1,500,000 $ --
Research and development
revenue under collaborative
agreements 418,000 537,000 -- -- --
------------- ------------- ------------- ------------- -------------
Total revenue 1,118,000 537,000 -- 1,500,000 --
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Research and development:
Related party 1,664,000 2,390,000 2,257,000 2,294,000 2,158,000
Other 2,506,000 5,860,000 11,381,000 12,554,000 22,029,000
General and administrative 999,000 1,555,000 1,662,000 2,213,000 2,414,000
------------- ------------- ------------- ------------- -------------
Total costs and
expenses 5,169,000 9,805,000 15,300,000 17,061,000 26,601,000
------------- ------------- ------------- ------------- -------------
Loss from operations (4,051,000) (9,268,000) (15,300,000) (15,561,000) (26,601,000)
Interest income, net 194,000 1,174,000 623,000 1,968,000 3,117,000
------------- ------------- ------------- ------------- -------------
Net loss $ (3,857,000) $ (8,094,000) $ (14,677,000) $ (13,593,000) $ (23,484,000)
============= ============= ============= ============= =============
Net loss per share (1) $ (2.89) $ (0.85) $ (1.44) $ (1.01) $ (1.44)
============= ============= ============= ============= =============
Weighted average common
shares outstanding (1) 1,334,194 9,474,968 10,205,567 13,522,091 16,303,051
============= ============= ============= ============= =============
December 31,
====================================================================================
1992 1993 1994 1995 1996
---------------- ---------------- ---------------- ---------------- ----------------
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities $ 2,677,000 $ 29,963,000 $ 15,568,000 $ 70,453,000 $ 49,310,000
Working capital 1,226,000 29,608,000 13,825,000 68,791,000 45,453,000
Total assets 3,998,000 32,142,000 18,218,000 72,981,000 52,462,000
Capital lease obligations
less current maturities -- 735,000 1,031,000 569,000 627,000
Mandatorily redeemable
convertible preferred stock 12,559,000 -- -- -- --
Deficit accumulated during
development stage (10,247,000) (18,341,000) (33,018,000) (46,611,000) (70,095,000)
Total stockholders' equity
(deficit) (10,140,000) 30,025,000 15,102,000 70,418,000 47,341,000
- ---------------------------
(1) Net loss per share is calculated by dividing net loss by the weighted
average number of Common Stock and Common Stock equivalents outstanding
during the year. This calculation excludes antidilutive Common Stock
equivalents and stock options and warrants. In accordance with Staff
Accounting Bulletin No. 83, Common Stock and Common Stock options sold
at prices below the per share offering price in the twelve months
preceding the Company's initial public offering are included in the
calculation as if outstanding for all periods presented prior to the
initial public offering.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Since its inception through December 31, 1996, the Company has incurred
ongoing losses from operations and has cumulative losses as of December 31, 1996
totaling $70,091,000. To date, the Company has not recorded any revenue from
the sale of products. Revenue recorded through December 31, 1996 was earned in
connection with contract research and the granting of certain short-term rights.
The Company expects that research and development and sales and
marketing expenses will increase in connection with new product development and
the creation of the Company's sales and marketing organization. Accordingly, the
Company expects to continue to incur substantial losses for the foreseeable
future.
Years Ended December 31, 1995 and 1996
Revenue for the year ended December 31, 1995 of $1,500,000 represents
fees paid by a Japanese pharmaceutical company for a short-term exclusive right
among Japanese companies to review the results of the Phase II dosing study of
Colloral. No revenue was earned in the year ended December 31, 1996.
Research and development expenses were $14,848,000 in 1995, as compared
with $24,187,000 for the year ended December 31, 1996. The increase is due to
the advancement of clinical trial activity and the scale-up of manufacturing
capacity.
General and administrative expenses were $2,213,000 in 1995, as
compared with $2,414,000 for the year ended December 31, 1996. The increase is
due primary to personnel costs and the timing of corporate activity.
Net interest income was $1,968,000 in 1995, as compared with $3,117,000
for the year ended December 31, 1996. The increase is due to a higher balance of
cash available for investment.
The net loss was $13,593,000 in 1995, as compared with $23,484,000 for
the year ended December 31, 1996. The increase reflects the continued growth in
the Company's development activities. The net loss per share increased from
$1.01 for the year ended December 31, 1995 to $1.44 for the year ended December
31, 1996 due to an increase in the net loss partially offset by an increase in
weighted average shares outstanding.
Years Ended December 31, 1994 and 1995
No revenue was earned in 1994. Revenue for 1995 of $1,500,000
represents fees paid by a Japanese pharmaceutical company for a short-term
exclusive right among Japanese companies to review the results of the Phase II
dose ranging study of Colloral.
Research and development expenses were $13,638,000 in 1994, as compared
with $14,848,000 in 1995. The increase is attributable to the continued
expansion of research and development efforts, including contract research,
clinical trial expenses and related clinical trial material, manufacturing and
personnel costs.
General and administrative expenses were $1,662,000 in 1994, as
compared with $2,213,000 in 1995. The increase is due primarily to personnel
costs related to additional employee headcount and increased corporate activity.
Net interest income was $623,000 in 1994, as compared with $1,968,000
in 1995. The increase is due to higher interest rates and a higher balance of
cash available for investment.
The net loss was $14,677,000 in 1994, as compared with $13,593,000 in
1995. The decrease reflects the continued increase in activity levels offset by
revenues from fees and an increase in net interest income. The net loss per
share decreased from $1.44 in 1994 to $1.01 in 1995 due to a decrease in the net
loss and an increase in weighted average number of shares outstanding.
-18-
LIQUIDITY AND CAPITAL RESOURCES
The Company's needs for funds have increased from period to period as
it has increased the scope of its research and development activities. Since
inception, the Company has funded these needs almost entirely through sales of
its equity securities.
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the Company's research and
development activities, the level of resources that the Company devotes to the
development, clinical, regulatory and marketing aspects of its products, the
extent to which it proceeds by means of collaborative relationships with
pharmaceutical companies and its competitive environment. Based upon its current
plans, the Company believes that current cash and marketable securities and the
interest earned from the investment thereof will be sufficient to meet the
Company's operating expenses and capital requirements through the filing of the
Company's Product License Application for its lead product. The Company intends
to seek additional funding through public or private equity or debt financings,
collaborative arrangements with pharmaceutical companies or from other sources.
If adequate funds are not available, the Company will have to reduce certain
areas of research, product development, manufacturing or marketing activity, or
otherwise modify its business strategy, and its business will be materially
adversely affected.
In order to preserve principal and maintain liquidity, the Company's
funds are invested in U.S. Treasury obligations and other short-term
instruments. As of December 31, 1996, the Company's cash and cash equivalents
and marketable securities totaled $49,310,000. Current liabilities at December
31, 1996 were $4,494,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements and financial statement schedules at
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-19-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Director information is incorporated by reference to the Company's proxy
statement which the Company intends to file with the Securities and Exchange
Commission and mail to shareholders within 120 days of the Company's fiscal year
ended December 31, 1996.
Executive officer information is as follows:
Robert C. Bishop, Ph.D., age 54, became a director of the Company in
May 1992, when he was also elected President and Chief Executive Officer. For
more than five years prior to joining the Company, Dr. Bishop held senior
management positions at Allergan, Inc., an eye and skin care company, including
President of Allergan Medical Optics from 1986 to 1988, Senior Vice President,
Corporate Development of Allergan, Inc. from 1988 to 1989, President of Allergan
Pharmaceuticals, Inc. from 1989 to 1991 and Group President, Therapeutics for
Allergan's worldwide pharmaceutical, surgical and neurotoxin businesses from
February 1991 to May 1992. From 1976 through 1986, Dr. Bishop served as an
executive of American Hospital Supply Corporation. Dr. Bishop received his B.A.
degree and a Ph.D. in biochemistry from the University of Southern California
and his M.B.A. from the University of Miami. Dr. Bishop is a director of
Quintiles Transnational Corp., a contract research, sales and marketing company
serving the health care industry.
Fredric G. Bader, Ph.D., age 49, joined the Company in September 1992
as Vice President of Operations. Prior to joining AutoImmune, Dr. Bader held
senior positions at Genetics Institute, Inc., a biotechnology company, including
Vice President of Process Development and Manufacturing during part of 1987,
Senior Vice President of Process Development and Manufacturing, from 1987 to
1989, and Senior Vice President of Manufacturing and Pharmaceutical Development,
from 1990 to 1992. Dr. Bader was employed by Bristol-Myers from 1983 to 1987,
and by Upjohn Company from 1977 to 1983. Dr. Bader received his B.S. degree from
the University of Michigan and a Ph.D. in chemical engineering from the
University of Minnesota.
Malcolm J.F. Fletcher, M.D., age 49, joined the Company in November
1992 as Vice President of Clinical and Regulatory Affairs. From 1991 to 1992, he
was employed by Cato Research, Ltd., one of the primary consultants to
AutoImmune. At Cato, Dr. Fletcher was a Vice President with primary
responsibility for establishing a new subsidiary in Canada. From 1980 to 1990,
Dr. Fletcher was employed by Burroughs Wellcome, Inc., the last eight years as
Medical Director for its Canadian operations. Dr. Fletcher trained in medicine
at the Medical College of St. Bartholomew's Hospital, University of London,
becoming a Licentiate of the Royal College of Physicians and a Member of the
Royal College of Surgeons in 1972. In 1975 he received a D.A. from the Royal
College of Surgeons.
Michael W. Rogers, age 37, joined the Company in July 1995 as Vice
President, Chief Financial Officer and Treasurer. From 1994 to 1995, he was Vice
President, Investment Banking at Lehman Brothers Inc. From 1990 to 1994, he was
employed by PaineWebber Incorporated, most recently as Vice President,
Investment Banking Division. From 1986 to 1988, Mr. Rogers was employed by
Fidelity Bank N.A. Mr. Rogers received a B.A. from Union College and his M.B.A.
from the University of Virginia.
Jo Ann Wallace, age 42, joined the Company in October 1994 as Vice
President of Corporate Development. From 1993 to 1994, she was Vice President,
Sales and Marketing at Greenwich Pharmaceuticals, Inc. From 1981 to 1993, Ms.
Wallace was employed by G.D. Searle & Co., most recently as Senior Director in
U.S. Marketing. Ms. Wallace was employed by Baxter Travenol from 1975 to 1981.
Ms. Wallace received her B.S. degree in microbiology from the University of
Texas.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange Commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-20-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Listed on page F-1 of the Financial Statements.
(a) (2) Financial Statement Schedule.
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements
(a) (3) Exhibits
Exhibits filed as part of this Form 10-K are listed in the exhibit
index appearing on page 23 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of 1996.
-21-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
February, 1997.
AUTOIMMUNE INC.
By /s/Robert C. Bishop
--------------------------------------
Robert C. Bishop,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert C. Bishop President, Chief Executive Officer February 26, 1997
- ------------------------ and Director
Robert C. Bishop
(Principal Executive
Officer)
/s/ Michael W. Rogers Vice President, Chief Financial February 26, 1997
- ----------------------- Officer and Treasurer
Michael W. Rogers
(Principal Financial
and Accounting Officer)
/s/ Barry Weinberg Chairman of the Board of Directors February 26, 1997
- -----------------------
Barry Weinberg
/s/ Allan R. Ferguson Director February 26, 1997
- -----------------------
Allan R. Ferguson
/s/ R. John Fletcher Director February 26, 1997
- -----------------------
R. John Fletcher
/s/ Henri A. Termeer Director February 26, 1997
- -----------------------
Henri A. Termeer
/s/ Hugh A. D'Andrade Director February 26, 1997
- -----------------------
Hugh A. D'Andrade
-22-
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS:
Report of Independent Accountants F-2
Balance Sheet at December 31, 1995 and 1996 F-3
Statement of Operations for the three years ended December 31, 1996
and for the period from inception (September 9, 1988) through
December 31, 1996 F-4
Statement of Changes in Stockholders' Equity for the period
from inception (September 9, 1988) through December 31, 1996 F-5
Statement of Cash Flows for the three years ended December 31, 1996
and for the period from inception (September 9, 1988) through
December 31, 1996 F-6
Notes to the Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of AutoImmune Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of AutoImmune
Inc. (a development stage company) at December 31, 1995 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 and for the period from inception (September 9,
1988) through December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 21, 1997
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
1995 1996
ASSETS
Current assets:
Cash and cash equivalents $29,087,000 $ 6,432,000
Marketable securities 41,366,000 42,878,000
Interest receivable 160,000 141,000
Prepaid expenses and other current assets 172,000 496,000
----------- -----------
Total current assets 70,785,000 49,947,000
Fixed assets, net 2,166,000 2,485,000
Other assets 30,000 30,000
----------- -----------
$72,981,000 $52,462,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 944,000 $ 2,997,000
Accrued expenses 588,000 782,000
Current portion of obligations
under capital leases 462,000 715,000
----------- -----------
Total current liabilities 1,994,000 4,494,000
----------- -----------
Obligations under capital leases 569,000 627,000
----------- -----------
Commitments and contingencies (Notes 6 and 11)
----------- -----------
Stockholders' equity:
Common stock, $.01 par value: 25,000,000 shares
authorized; 16,282,067 and 16,358,045 shares
issued and outstanding at December 31, 1995 and
1996, respectively 163,000 164,000
Additional paid-in capital 116,797,000 117,238,000
Deficit accumulated during the development stage (46,611,000) (70,095,000)
Net unrealized gain on marketable securities 69,000 34,000
----------- -----------
70,418,000 47,341,000
----------- -----------
$72,981,000 $52,462,000
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-3
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM
INCEPTION
(SEPTEMBER 9, 1988)
THROUGH
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996
Revenue:
Option fees $ - $ 1,500,000 $ - $ 2,200,000
Research and development revenue
under collaborative agreements - - - 955,000
------------ ------------ ------------ ------------
Total revenue - 1,500,000 - 3,155,000
------------ ------------ ------------ ------------
Costs and expenses:
Research and development:
Related party 2,257,000 2,294,000 2,158,000 14,968,000
Other 11,381,000 12,554,000 22,029,000 56,184,000
General and administrative 1,662,000 2,213,000 2,414,000 9,313,000
------------ ------------ ------------ ------------
Total costs and expenses 15,300,000 17,061,000 26,601,000 80,465,000
------------ ------------ ------------ ------------
Interest income 666,000 2,021,000 3,191,000 7,445,000
Interest expense (43,000) (53,000) (74,000) (226,000)
------------ ------------ ------------ ------------
623,000 1,968,000 3,117,000 7,219,000
------------ ------------ ------------ ------------
Net loss $(14,677,000) $(13,593,000) $(23,484,000) $(70,091,000)
============ ============ ============ ============
Net loss per share $ (1.44) $ (1,01) $ (1.44)
============ ============ ============
Weighted average shares outstanding 10,205,567 13,522,091 16,303,051
============ ============ ============
The accompanying notes are an integral
part of these financial statements.
F-4
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 9,
1988) THROUGH DECEMBER 31, 1996
DEFICIT
ACCUMULATED NET UNREALIZED
COMMON STOCK ADDITIONAL DURING THE GAIN (LOSS) ON TOTAL
NUMBER PAID-IN DEVELOPMENT MARKETABLE STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL STAGE SECURITIES EQUITY
Issuance of Common stock
during 1988 168,750 $ 2,000 $ - $ (1,000) $ - $ 1,000
Conversion of junior
convertible preferred
stock to common
stock during 1991 506,250 5,000 (3,000) 2,000
Issuance of common stock
during 1992 91,116 1,000 100,000 101,000
Conversion of mandatorily
redeemable convertible
preferred stock to
common stock during 1993 6,353,568 63,000 12,496,000 12,559,000
Issuance of common stock,
net of issuance costs
during 1993 3,022,000 30,000 35,669,000 35,699,000
Net loss for the period
from inception
(September 9, 1988)
through December 31,
1993 (18,337,000) (18,337,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31,
1993 10,141,684 101,000 48,265,000 (18,341,000) - 30,025,000
Issuance of common stock 67,500 1,000 2,000 3,000
Net unrealized loss on
marketable securities (249,000) (249,000)
Net loss (14,677,000) (14,677,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31,
1994 10,209,184 102,000 48,267,000 (33,018,000) (249,000) 15,102,000
Issuance of common stock,
net of issuance costs 6,072,883 61,000 68,530,000 68,591,000
Net unrealized gain on
marketable securities 318,000 318,000
Net loss (13,593,000) (13,593,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31,
1995 16,282,067 163,000 116,797,000 (46,611,000) 69,000 70,418,000
Issuance of common stock 75,978 1,000 441,000 442,000
Net unrealized loss on
marketable securities (35,000) (35,000)
Net loss (23,484,000) (23,484,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31,
1996 16,358,045 $164,000 $117,238,000 $(70,095,000) $ 34,000 $ 47,341,000
============ ============ ============ ============ ============ ============
The accompanying notes are in integral
part of these financial statements.
F-5
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
PERIOD FROM
INCEPTION
(SEPTEMBER 9, 1988)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
1994 1995 1996 DECEMBER 31, 1996
Cash flows from operating activities:
Net loss $(14,677,000) $(13,593,000) $(23,484,000) $(70,091,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Interest expense related to demand notes
converted into mandatorily redeemable
convertible preferred stock - - - 48,000
Patent costs paid with junior convertible
preferred and common stock - - - 3,000
Depreciation and amortization 579,000 702,000 961,000 2,626,000
Decrease in patent costs - - - 563,000
(Increase) decrease in interest receivable 123,000 9,000 19,000 (141,000)
(Increase) decrease in prepaid expenses
and other current assets 22,000 1,000 (324,000) (496,000)
Increase (decrease) in accounts payable 299,000 (163,000) 2,053,000 2,997,000
Increase in accrued expenses 242,000 54,000 194,000 782,000
Decrease in amounts due to related parties (40,000) - - -
---------- ----------- ------------ ------------
Net cash used by operating activities (13,452,000) (12,990,000) (20,581,000) (63,709,000)
---------- ----------- ------------ ------------
Cash flows from investing activities:
Purchase of available-for-sale marketable
securities (2,283,000) (37,292,000) (44,563,000) (202,934,000)
Proceeds from sale/maturity of available-for-sale
marketable securities 12,728,000 2,488,000 43,016,000 149,079,000
Proceeds from maturity of held-to-maturity
marketable securities 5,055,000 5,956,000 - 11,011,000
Purchases of fixed assets (1,195,000) (590,000) (1,280,000) (4,986,000)
Increase in patent costs - - - (563,000)
Increase in other assets - - - (155,000)
---------- ----------- ------------ ------------
Net cash provided (used) by investing
activities 14,305,000 (29,438,000) (2,827,000) (48,548,000)
---------- ----------- ------------ ------------
Cash flows from financing activities:
Proceeds from sale-leaseback of fixed assets 821,000 - 1,039,000 2,872,000
Payments on obligations under capital leases (323,000) (444,000) (728,000) (1,530,000)
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock - - - 10,011,000
Proceeds from bridge notes - - - 300,000
Proceeds from issuance of common stock 3,000 68,591,000 442,000 104,836,000
Proceeds from issuance of convertible
notes payable - - - 2,200,000
---------- ----------- ------------ ------------
Net cash provided by financing activities 501,000 68,147,000 753,000 118,689,000
---------- ----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,354,000 25,719,000 (22,655,000) 6,432,000
Cash and cash equivalents at
beginning of period 2,014,000 3,368,000 29,087,000 -
---------- ----------- ------------ ------------
Cash and cash equivalents at end of period $3,368,000 $29,087,000 $ 6,432,000 $ 6,432,000
========== =========== ============ ============
See Note 2 for supplemental disclosure of non-cash financing activities.
The accompanying notes are an integral
part of these financial statements.
F-6
AUTOMIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
1. FORMATION AND OPERATIONS OF THE COMPANY
AutoImmune Inc. (the "Company") was incorporated in Delaware on September
9, 1988. The Company is dedicated to the development of innovative
pharmaceutical products to treat people who suffer from immune systems
disorders. The Company's therapeutic approach is based upon "oral
tolerance", a method designed to control disease by using the body's
natural immunosuppressive mechanisms. The Company is considered a
development stage company as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage
Enterprises.
The Company has not yet completed the development of any products. The
Company's products will require significant additional clinical testing and
investment prior to commercialization. To date the Company has been
dependent on collaborative agreements for the majority of its basic
research and has primarily used contract manufacturers to produce its
products for clinical trials.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The
Company invests primarily in U.S. Government debt securities. These
investments are subject to minimal credit and market risks. The Company
specifically identifies securities for purposes of determining gains and
losses on the sale of cash equivalents and marketable securities. At
December 31, 1995 and 1996, the Company has classified all of its
marketable securities as available-for-sale as defined in SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities,
accordingly unrealized gains and losses on available-for-sale securities
are recorded as a separate component of stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 the Company's financial instruments consist of cash
equivalents, marketable securities and interest receivable, accounts
payable and accrued expenses. The carrying amount of these instruments
approximate their fair values.
FIXED ASSETS
Fixed assets are stated at cost and depreciated using the straight-line
method over the estimated useful life of the assets. Assets under capital
leases and leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases by use of the
straight-line method. Maintenance and repair expenditures are charged to
expense as incurred.
CONTINGENT STOCK PURCHASE WARRANTS
The value of contingent stock purchase warrants issued by the Company is
determined on the date that the Company estimates that it is probable that
such contingencies will be met. The difference between the quoted market
price of the Company's common stock and the exercise price of the warrants
on the measurement date is recorded as compensation expense. The Company
periodically assesses whether it is probable and estimable that the
contingent warrants will be earned.
REVENUE RECOGNITION
Revenue from research and development arrangements is recognized pursuant
to the related agreements as work is performed or defined milestones are
attained. Payments received under these arrangements prior to the
completion of the related work or attainment of milestones are recorded as
deferred revenue. Option fees representing payments to be made to the
Company for a right to evaluate and negotiate the terms of a potential
licensing arrangement are recognized as the options are granted as such
fees are non-refundable and the Company has no further obligations.
F-7
AUTOMIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
STOCK COMPENSATION
The Company's employee stock option plans are accounted for in accordance
with Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees. The Company has adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation.
NET LOSS PER SHARE
Net loss per share is determined by dividing net loss by the weighted
average number of common shares outstanding during the year. Common stock
equivalent shares from stock options and warrants are excluded from the
computation as their effect is antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles generally requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
STATEMENT OF CASH FLOWS
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1988, 168,750 shares of common stock and 168,750 shares of junior
convertible preferred stock were issued to the Brigham and Women's Hospital
in exchange for patent rights and technology contributed or licensed in
connection with the formation of the Company.
Notes payable to stockholders totaling $2,200,000 and related interest of
$48,000 were converted into Series A mandatorily redeemable convertible
preferred stock in 1991.
Bridge notes of $300,000 were converted into Series C mandatorily
redeemable convertible preferred stock in 1991.
In 1991, 168,750 shares of junior convertible preferred stock were
converted into 506,250 shares of common stock.
In 1993, 2,117,856 shares of mandatorily redeemable convertible preferred
stock were converted into 6,353,568 shares of common stock in connection
with the Company's initial public offering of common stock.
The Company recorded net unrealized gains of $69,000 and $34,000 related to
marketable securities classified as available-for-sale at December 31, 1995
and 1996, respectively.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company has paid interest of $43,000, $53,000 and $74,000 in 1994, 1995
and 1996, respectively, and $178,000 since inception. The Company has paid
income taxes of $11,000 in 1996 and since inception.
3. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash equivalents held by the Company. Cash
equivalents are carried at fair market value, which approximated amortized
cost at December 31, 1995 and 1996.
DECEMBER 31,
1995 1996
Money market $12,736,000 $2,299,000
U.S. Government debt securities 16,292,000 3,993,000
----------- ----------
$29,028,000 $6,292,000
=========== ==========
F-8
AUTOMIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
The following is a summary of available-for-sale marketable securities held
by the Company at December 31, 1995 and 1996 which are carried at fair
market value:
UNREALIZED UNREALIZED AMORTIZED
MATURITY TERM FAIR VALUE GAINS LOSSES COST
December 31, 1995:
U.S. Government
debt securities within 1 year $32,252,000 $23,000 $ - $32,229,000
U.S. Government debt
securities between 1-5 years 9,114,000 46,000 - 9,068,000
----------- ------- ---------- -----------
$41,366,000 $69,000 $ - $41,297,000
=========== ======= ========== ===========
December 31, 1996:
U.S. Government
debt securities within 1 year $32,842,000 $16,000 $(6,000) $32,832,000
U.S. Government debt
securities between 1-5 years 10,036,000 24,000 - 10,012,000
----------- ------- ---------- -----------
$42,878,000 $40,000 $(6,000) $42,844,000
=========== ======= ========== ===========
All of the Company's marketable securities are classified as current at
December 31, 1995 and 1996 as these funds are highly liquid and are
available to meet working capital needs and to fund current operations.
Gross realized gains and losses on sales of marketable securities for the
years ended December 31, 1995 and 1996 were not significant.
Marketable securities which were purchased and sold in periods prior to
adoption of SFAS No. 115 on January 1, 1994 other than held-to-maturity
marketable securities, are included in the category available-for-sale
marketable securities in the "period from inception" column of the
statement of cash flows.
4. FIXED ASSETS
Fixed assets consist of the following:
ESTIMATED
USEFUL LIFE DECEMBER 31,
(YEARS) 1995 1996
Laboratory equipment 4-5 $2,638,000 $3,181,000
Office equipment 4-5 417,000 667,000
Leasehold improvements 5-7 592,000 1,058,000
---------- ----------
3,647,000 4,906,000
Less - accumulated depreciation and amortization 1,481,000 2,421,000
---------- ----------
$2,166,000 $2,485,000
========== ==========
Depreciation and amortization expense relating to fixed assets was
$579,000, $702,000 and $961,000 for the years ended December 31, 1994, 1995
and 1996, respectively. Assets held under capital leases consisted of
$1,833,000 and $2,872,000 of lab equipment at December 31, 1995 and 1996,
respectively. Accumulated amortization of these assets totaled $858,000
and $1,488,000 at December 31, 1995 and 1996, respectively. For the years
ended December 31, 1994, 1995 and 1996, amortization expense charged to
operations on assets held under capital lease obligations was $343,000,
$479,000 and $630,000, respectively.
F-9
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
1995 1996
Accrued employee costs $372,000 $552,000
Accrued professional fees 216,000 230,000
-------- --------
$588,000 $782,000
======== ========
6. RELATED PARTY TRANSACTIONS
TECHNOLOGY TRANSFER AGREEMENT AND RESEARCH AND DEVELOPMENT AGREEMENT WITH
THE BRIGHAM AND WOMEN'S HOSPITAL
In connection with the formation of the Company and the issuance of 168,750
shares of common stock and 168,750 shares of junior convertible preferred
stock to The Brigham and Women's Hospital ("BWH"), the Company entered into
related technology transfer and research and development agreements with
BWH. The technology transfer agreement provides the Company with all
rights and interests in certain BWH patented technology in exchange for the
issuance of the aforementioned stock and the payment of royalties under
certain conditions. The research and development agreement provides that
certain research activities are performed by BWH on behalf of the Company.
The current research and development agreement terminates in June 1998.
The agreement provides for automatic two-year renewal periods, subject to
the Company's and BWH's mutual agreement annually, with respect to the
budget for research to be performed and related minimum payments made to
BWH for each following year. The Company has agreed to pay BWH minimum
payments totaling $1,227,000 for the one-year period ending June 30, 1997.
There is no guaranteed minimum payment for the one-year period ending June
30, 1998. This agreement also provides for payments to BWH for royalties
on sales of related patented products by the Company, as well as for
payments to BWH for a portion, as defined in the agreement, of any proceeds
received by the Company in connection with the licensing of patented
technology to, and royalty or milestone payments received from, third
parties. Royalty payments to BWH begin upon the commercialization of the
related products and will continue for the life of the underlying patent.
For a period not to exceed three years after the first commercial sale of
any product of the Company, the Company is required to make payments to BWH
in each quarter only to the extent that the Company has a positive cash
flow in such quarter with the balance deferred to the succeeding quarter.
Deferred payments will be subject to interest. If the Company defaults in
the payment of any amount due to BWH, BWH will have an option to purchase
all technology developed under the research program at a purchase price
equal to the sum of all amounts previously paid by the Company to BWH.
7. INCOME TAXES
The components of deferred income tax benefit are as follows:
YEAR ENDED DECEMBER 31,
1994 1995 1996
Income tax benefit:
Federal $ 5,261,000 $ 4,477,000 $ 9,328,000
State 1,682,000 1,366,000 1,964,000
----------- ----------- ------------
6,943,000 5,843,000 11,292,000
Deferred tax asset valuation allowance (6,943,000) (5,843,000) (11,292,000)
----------- ----------- ------------
$ - $ - $ -
=========== =========== ============
F-10
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
No significant federal or state taxes were payable in any years as a result
of losses incurred and utilization of net operating losses and credits.
A reconciliation between the amounts of reported income tax (expense)
benefit and the amount determined by applying the U.S. federal statutory
rate of 35% for 1994, 1995 and 1996 to pre-tax loss is as follows:
YEAR ENDED DECEMBER 31,
1994 1995 1996
Loss at statutory rate $5,137,000 $4,758,000 $ 8,219,000
Nondeductible research and
development expenses (273,000) (158,000) (1,015,000)
Federal and state research and development,
orphan drug, and investment tax credits 1,068,000 746,000 3,184,000
State tax benefit, net of federal tax liability 806,000 595,000 991,000
Stock option compensation 191,000 142,000 136,000
Utilization of net operating losses - (364,000) (203,000)
Other 14,000 124,000 (20,000)
---------- ---------- -----------
6,943,000 5,843,000 11,292,000
Benefit of loss not recognized,
increase in valuation allowance (6,943,000) (5,843,000) (11,292,000)
---------- ---------- -----------
$ - $ - $ -
========== ========== ===========
Deferred tax assets are comprised of the following:
DECEMBER 31,
1995 1996
Research costs capitalized for tax purposes $17,774,000 $26,208,000
Research and development, orphan drug and investment tax credits 2,890,000 5,739,000
Loss carryforwards 178,000 -
Net unrealized gain on investments available-for-sale (27,000) (13,000)
Other temporary differences 152,000 325,000
----------- -----------
Gross deferred tax assets 20,967,000 32,259,000
Deferred tax asset valuation allowance (20,967,000) (32,259,000)
----------- -----------
$ - $ -
=========== ===========
The Company has provided a full valuation allowance for net deferred tax
assets since the realization of these future benefits is not sufficiently
assured as of the end of each related year. As the Company achieves
profitability, these deferred tax assets will be available to offset future
income tax liabilities and expense. Of the $32,259,000 valuation allowance
at December 31, 1996, $203,000 relating to deductions for stock option
compensation will be credited to additional paid-in capital upon
realization.
F-11
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
During 1996, the Company utilized $580,000 of federal and state net
operating loss carryforwards and $173,000 of federal orphan drug credits
and state research and development and investment tax credits. At December
31, 1996, the Company had the following research and development, orphan
drug and investment tax credit carryforwards available to reduce future tax
liabilities, which expire as follows:
RESEARCH AND DEVELOPMENT,
ORPHAN DRUG AND INVESTMENT
YEAR OF EXPIRATION TAX CREDIT CARRYFORWARDS
2003 $ 19,000
2004 91,000
2005 121,000
2006 162,000
2007 234,000
2008 420,000
2009 1,013,000
2010 728,000
2011 3,269,000
----------
$6,057,000
==========
Ownership changes, as defined in the Internal Revenue Code, resulting from
the Company's initial public offering of stock in January 1993 and
subsequent follow-on offerings in 1995, had no impact on the amount of net
operating loss and tax credit carryforwards that can be utilized annually
to offset future taxable income or tax liabilities. Subsequent significant
ownership changes could, however, limit the utilization of these
carryforwards in future years.
8. PREFERRED STOCK
Upon the closing of the Company's initial public offering on January 27,
1993 each share of Series A, B and C convertible preferred stock
automatically converted into three shares of common stock (Note 9). No
dividends had been paid to the preferred stockholders.
At December 31, 1996, the Company had authorized 5,000,000 shares of $.01
par value preferred stock. Preferred stock may be issued at the discretion
of the Board of Directors of the Company (without stockholder approval)
with such designations, rights and preferences as the Board of Directors
may determine from time to time. The preferred stock may have dividend,
liquidation, redemption, conversion, voting or other rights which may be
more expansive than the rights accorded to the common stock.
On May 17, 1995, the Company's Board of Directors adopted a shareholder
rights plan. The Board declared a distribution of one right for each share
of common stock outstanding on June 1, 1994. Stock issued after that date
will be issued with an attached right. Each right will entitle the holder,
upon the occurrence of certain events, to purchase 1/100th of a share of
preferred stock at an exercise price of $73. The Board may, at any time,
redeem the rights until their expiration on June 1, 2005, and may amend the
rights under certain circumstances until they become exercisable.
9. STOCKHOLDERS' EQUITY AND COMMON STOCK
In December 1992, the Company effected a three-for-one stock split of the
Company's common stock in the form of a stock dividend. All common shares
and per share amounts have been adjusted to give retroactive effect to the
common stock split for all years presented.
In January 1993, the Company completed its initial public offering of
3,000,000 shares of common stock. Proceeds to the Company, net of issuance
costs, amounted to $35,690,000.
F-12
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
In January 1995, the Company completed a private placement of 2,039,547
shares of common stock. Proceeds to the Company, net of issuance costs,
amounted to $9,136,000.
In August and September 1995, the Company completed its second public
offering of 3,925,000 shares of common stock. Proceeds to the Company, net
of issuance costs, amounted to $58,878,000.
As of December 31, 1996, the Company has reserved 3,360,070 shares of
common stock for use in the Company's stock option plans and stock purchase
plan (Note 10).
10. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
STOCK OPTION PLAN
The Company's 1988 Stock Option Plan (the "Stock Option Plan"), as amended
effective May 17, 1995, provides for the granting of incentive stock
options and non-qualified stock options to employees and other individuals
performing services on behalf of the Company. The Compensation Committee
(the "Committee"), appointed by the Board of Directors, is responsible for
the administration of the Stock Option Plan. The Committee determines the
term of each option, option price, number of shares for which each option
is granted, whether restrictions will be imposed on the shares subject to
options and the rate at which each option is exercisable. The exercise
price for incentive stock options granted may not be less than 100% of the
fair market value per share of the underlying common stock on the date
granted (110% for options granted to holders of more than 10% of the voting
stock of the Company). The exercise price per share for non-qualified
options may not be less than 50% of the fair market value per share of the
underlying common stock on the date of grant. The term of options granted
under the Stock Option Plan cannot exceed ten years (five years for options
granted to holders of more than 10% of the voting stock of the Company).
During 1995, the Board of Directors increased the maximum number of shares
of common stock of the Company reserved for issuance in accordance with the
terms of the Stock Option Plan from 2,500,000 to 3,100,000.
DIRECTOR STOCK OPTION PLAN
During 1993, the Company's Board of Directors approved a stock option plan
for non-employee directors (the "Director Option Plan"). This plan was
approved by the Company's shareholders in 1994 and an amendment to the plan
was approved by the shareholders on May 15, 1996. Under the original
Director Option Plan, each director who was eligible to participate in the
plan on May 19, 1993 received, at fair market value on the date of grant,
options to purchase 4,000 shares of common stock. Under the amended
Director Option Plan, upon the first election of a non-employee to the
Board of Directors, the director shall receive an option to purchase 25,000
shares of common stock and will receive options to purchase an additional
6,500 shares of common stock every year thereafter if the individual
remains a member of the Board of Directors. In addition, an option to
purchase 1,000 shares of common stock was granted to each director who was
a member of a standing committee of the Board of Directors on May 19, 1993.
An option for 1,000 shares will be granted automatically to each member of
a standing committee following his first election to each such committee,
and options to purchase 1,000 additional shares will automatically be
granted every four years thereafter for each standing committee of which
the individual remains a member. Options to purchase 58,500 shares of
common stock have been granted under this plan. A maximum of 300,000 shares
of common stock of the Company is reserved for issuance in accordance with
the terms of this amended plan.
F-13
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
A summary of option activity under the Stock Option Plan and the Director
Option Plan for the years ended December 31, 1994, 1995 and 1996 is as
follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
Outstanding at December 31, 1993 1,722,750 $ 3.14
Granted 448,936 5.57
Exercised (67,500) .03
Cancelled (13,500) 7.01
----------
Outstanding at December 31, 1994 2,090,686 3.73
Granted 311,900 8.99
Exercised (77,438) 3.85
Cancelled (157,512) 7.09
----------
Outstanding at December 31, 1995 2,167,636 4.24
Granted 264,800 10.41
Exercised (45,100) 4.52
Cancelled (30,825) 8.75
----------
Outstanding at December 31, 1996 2,356,511 $ 4.87
==========
Options exercisable at period end 1,214,336 $ 1.83
==========
Weighted average fair value of options granted
during the period $ 5.90
==========
The following table summarizes information about employee and director
stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 CONTRACTUAL LIFE EXERCISE PRICE 1996 EXERCISE PRICE
$ .03 315,000 4.2 years $ .03 315,000 $ .03
$ 1.33 742,750 5.4 years 1.33 742,750 1.33
$ 4.88 - $ 7.25 400,336 7.6 years 5.23 63,461 5.69
$ 7.50 - $11.25 860,525 7.6 years 9.18 91,500 9.24
$11.50 - $15.75 37,900 9.4 years 13.01 1,625 13.18
--------- ---------
2,356,511 1,214,336
========= =========
EMPLOYEE STOCK PURCHASE PLAN
On July 20, 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan (the "Purchase Plan"). This plan enables eligible employees
to purchase the Company's common stock at 85% of the fair market value of
the stock on the date an offering commences or on the date an offering
terminates, whichever is lower. The Purchase Plan is available to
substantially all employees, subject to certain limitations. An eligible
employee may elect to have up to 12% of his or her base pay withheld and
applied toward the purchase of shares in such an offering (not to exceed
$25,000 in
F-14
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
any year). At December 31, 1996, 188,224 shares of common stock
were reserved for purchases under the Purchase Plan. During 1995 and 1996,
30,898 and 30,878 shares were purchased under the Purchase Plan at an
average price of $5.69 and $7.68 per share, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the method
prescribed in APB No. 25. The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for the Company's stock option plans and employee stock purchase
plan. Had compensation cost been determined based on the fair value at
the grant dates for awards in 1995 and 1996 consistent with the provisions
of SFAS No. 123, the Company's net loss and net loss per share would have
been increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
1995 1996
Net loss:
As reported $(13,593,000) $(23,484,000)
Pro forma (13,920,000) (24,540,000)
Net loss per share:
As reported $ (1.01) $ (1.44)
Pro forma (1.03) (1.51)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995 and 1996, respectively: no dividend
yield for both years; expected volatility of 61% and 65%, respectively;
risk free interest rates ranging from 5.1% to 7.4% and a weighted average
expected option term ranging from 3 to 6.5 years for options granted during
both years.
Because additional option grants are expected to be made each year, the pro
forma impact on the two years ended December 31, 1996 is not representative
of the pro forma effects which may be expected in future years.
11. COMMITMENTS AND CONTINGENCIES
CLINICAL RESEARCH AGREEMENT
The Company entered into an agreement with CATO Research ("CATO"),
effective June 1993, under which the Company has agreed to pay
approximately $1,800,000 to have a clinical investigational study performed
on the Company's multiple sclerosis product. The total cost of the study
is subject to adjustment if the project specifications change. The
agreement may be terminated by either the Company or CATO, upon prior
written notice. If the Company terminates the agreement, CATO will be
entitled to a termination fee. Additionally, CATO was granted warrants to
purchase 30,000 shares of common stock of the Company at $10.50 per share.
Certain of these warrants become exercisable only upon the achievement of
specified milestones. Given the uncertainty surrounding the achievement of
these milestones, estimated fair value of the contingent stock purchase
warrants cannot be reasonably determined at December 31, 1996.
OPTION FEES AND LICENSE AGREEMENTS
The Company received a payment of $1,500,000 in July 1995 in return for
granting to a Japanese pharmaceutical company the exclusive short-term
right among Japanese companies to review the results of the Phase II dose
ranging study of Colloral(R) and to make an offer for an exclusive license
to the product covering Japan. No business arrangements resulted from this
option and the Company has no further obligations under this agreement.
In December 1994, the Company entered into a license agreement with Eli
Lilly and Company ("Lilly"). Under the agreement, Lilly agreed to provide
funding for the Company's research in autoimmune-mediated diabetes in
exchange for certain worldwide license rights for the manufacture,
distribution and sale of the related products. The agreement provides that
Lilly will fund and conduct Phase II and III clinical trials. In addition,
Lilly will make payments to the Company upon achievement of certain
milestones as defined in the agreement and for royalties earned by the
Company based on sales by Lilly of related products. Lilly has the right
to terminate the agreement at any time, in which event the Company retains
all rights to the product. As of December 31, 1996, no payments had been
earned by the Company.
F-15
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENT
PURCHASE AGREEMENTS
In August 1994, the Company entered into a purchase agreement with a
contract manufacturer for the manufacture of the Company's multiple
sclerosis product. The Company has minimum purchase obligations of
$360,000 for the year ending September 30, 1997. During 1996, the Company
entered into an agreement with a supplier for the sourcing and purchase of
raw materials related to the Company's multiple sclerosis product.
Commitments under the arrangement range from $600,000 to $1,125,000 for the
year ending June 30, 1997.
LEASES
The Company leases its facilities under an operating lease which includes
renewal and escalation clauses. The operating lease for facilities
provides for monthly rental payments and estimated monthly operating
charges which cover building maintenance costs and real estate taxes.
Additionally, the Company has the option to sublease office or laboratory
space under the agreement.
Total rent expense was $333,000 and $421,000 for the years ended December
31, 1995 and 1996, respectively. Future minimum lease commitments due
under non-cancelable operating leases and capital lease obligations at the
end of each year are as follows:
CAPITAL OPERATING
LEASES LEASES
1997 $ 806,000 $ 465,000
1998 480,000 614,000
1999 187,000 563,000
---------- ----------
Total obligations 1,473,000 $1,642,000
==========
Less - amount representing interest 131,000
----------
$1,342,000
==========
During January 1996, the Company received a $1,500,000 lease line from an
unaffiliated third party. Subsequent to December 31, 1996 the remaining
unused lease line balance of $431,000 expired. The term for each lease
under the agreement is thirty-six months and bears interest at a rate
determinable on the lease date. The Company is required to meet certain
financial covenants during the lease term. If the Company violates any of
the covenants the Lessor may require additional cash collateral, not to
exceed the amount of the remaining balance.
12. EMPLOYEE SAVINGS PLAN
In 1993, the Company initiated an employee savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is
available to substantially all employees. The Company has made no
contributions to the 401(k) Plan since inception.
F-16
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 - Restated Certificate of Incorporation*
3.2 - By-Laws**
4.1 - Specimen Common Stock Certificate**
10.1 - Amended and Restated 1988 Stock Option Plan effective December 14, 1992*+
10.2 - Agreement, dated March 18, 1992, between AutoImmune Inc. and Schering Corporation**++
10.3 - Lease Agreement, dated November 1992, between AutoImmune Inc. and Ledgemont Realty Trust**
10.4 - Amended and Restated Research and Development Inc. and The Brigham and Women's Hospital, Inc.**
10.5 - Research Agreement, dated October 21, 1992, and Royalty Agreement, dated 1992, between AutoImmune Inc. and Joslin
Diabetes Center**
10.6 - Research Agreement, dated July 1, 1992, Royalty Agreement, dated June 6, 1990, and Research Agreement dated July
1990, between AutoImmune Inc. and the Beth Isreal Hospital**
10.7 - Cooperative Research and Development Agreement, effective July 1, 1990, among the National Eye Institute
of the National Institutes of Health, The Brigham and Women's Hospital and AutoImmune Inc.**
10.8 - Retainer Agreement, dated June 1, 1992, between AutoImmune Inc. and Cato Research Ltd.**
10.9 - Employment Agreement, dated April 2, 1992, between AutoImmune Inc. and Robert C. Bishop**+
10.10 - Amended Consulting Agreement, dated July 1992, and Amended and Restated Consulting Agreement, dated November
1988, between AutoImmune Inc. and Howard L. Weiner, M.D.**
10.11 - Amended Consulting Agreement, dated July 1992, and Amended and Restated Consulting Agreement, dated
November 1988, between AutoImmune Inc. and David A. Hafler, M.D.**
10.13 - Consulting Agreement, dated February 1, 1989, between AutoImmune Inc. and James P. Tam, Ph.D.**
10.14 - Scientific Advisory Board Agreement, dated August 5, 1992, and Consulting Service Agreement, dated
August 5, 1992, between AutoImmune Inc. and Jack L. Strominger, M.D.**
10.15 - Scientific Advisory Board Agreement, dated August 11, 1992, between AutoImmune Inc. and Herman N. Eisen, M.D.**
10.16 - Scientific Consultant Agreement, dated July 16, 1992, between AutoImmune Inc. and Henry Oettinger, Ph.D.**
10.17 - Nonemployee Director Stock Option Plan***+
10.18 - Employee Stock Purchase Plan****+
10.19 - License and Collaboration Agreement dated December 1, 1994 between AutoImmune Inc. and Eli Lilly and Company*****++
10.20 - First Amendment to Lease dated October 31, 1993 between AutoImmune Inc. and Ledgemont Realty Trust******
10.21 - Second Amendment to Lease dated February 1, 1996 between AutoImmune Inc. and Ledgemont Realty Trust******
23 - Consent of Price Waterhouse LLP
- ----------------------
* Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 0-20948).
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-55430).
*** Incorporated by reference to Appendix A to the Company's definitive Proxy
Statement dated April 6, 1994 for the Annual Meeting of Shareholders held
on May 18, 1994 filed pursuant to Section 14 of the Exchange Act.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on August 17, 1994
(Registration No. 33-82972).
***** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, as amended.
****** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
+ Required to be filed pursuant to Item 14(c) of Form 10-K.
++ The Company has been granted confidential treatment of the redacted
portions of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, and has separately filed a complete
copy of this exhibit with the Securities and Exchange Commission.
-23-