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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, 1997.
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)
(781) 860-0710
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered.
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /______/
On February 20, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $35,733,756. As of February 20, 1998,
there were outstanding 16,413,334 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, 1997 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 currently conducting clinical trials for the
following products: Colloral(R), for the treatment of rheumatoid arthritis, and
AI 502, for the treatment of chronic transplant rejection. A third 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:
Colloral----To date, AutoImmune has completed eight human clinical trials
of Colloral in over 1200 patients to investigate its use in treating rheumatoid
arthritis. In 1997, the Company completed its Phase II program which was
intended 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. The Company met with the United States Food and Drug Administration
("FDA") in November 1997 to review data from its Phase II program. At the
conclusion of that meeting the FDA supported the Company's plan for Phase III.
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 1997, Lilly sponsored
investigators continued to enroll patients in several Phase II clinical trials
to demonstrate human proof of principle for AI 401 in patients newly diagnosed
with Type I diabetes. The first study is a one-year, double-blind, placebo-
controlled trial of 300 patients. In addition, Lilly is providing AI 401 for
the Diabetes Prevention Trial (DPT-1) being conducted by the NIH. This oral arm
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 in late 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. Results of the trial were judged by the Company to be
encouraging and were published in the American Journal of Ophthalmology in May
of 1997. The Company expects that future clinical trials for uveitis will use
AI 301, due to the expected lower cost of manufacturing this recombinant product
compared to product based on animal protein.
Myloral----In first quarter 1997, the Company completed its Phase III
trial of Myloral for the treatment of relapsing-remitting multiple sclerosis.
In April 1997 the Company announced that preliminary analysis of its Phase III
trial showed no difference in response between active treatment and placebo.
The Myloral arm of the study showed a substantial reduction in the attack rate.
A similar reduction was seen in the placebo arm as well. Magnetic resonance
imaging conducted during the trial yielded positive information for a sub-group
of patients studied. In addition, patients who simultaneously received beta-
interferon therapy had a lower attack rate when treated with Myloral in
comparison to placebo. The Company plans to pursue further development of oral
tolerance therapeutics for multiple sclerosis in conjunction with corporate
partners. To date, the Company has no such corporate partner.
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.
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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 (781) 860-0710.
STRATEGY
The Company's objective is to become a leading provider of therapeutic
products to treat immune system disorders. The key elements of the Company's
strategy include the following:
Focusing on Colloral. The Company is concentrating a significant portion
of its resources on its most advanced product, Colloral, for the treatment of
rheumatoid arthritis. More than six million people worldwide suffer from
rheumatoid arthritis and current therapies have significant limitations. The
Company has retained all rights to Colloral. AutoImmune currently plans to
evaluate all of its options for this product, including independently developing
and marketing or seeking to enter into licensing arrangements, exclusive
marketing agreements in specific foreign markets or joint ventures with
established pharmaceutical companies.
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 Colloral, the Company has several other
products in various stages of development, including products to treat Type I
diabetes, chronic transplant rejection, uveitis and multiple sclerosis. 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, 1997, the Company had pending 23 original and continuation-in-part United
States patent applications and numerous foreign counterparts. The Company has
received or has exclusive rights to 32 U.S. and foreign patents. The United
States Patent and Trademark Office has issued to the Company: one patent
covering the use of oral Type II collagen to treat rheumatoid arthritis in
humans; five patents covering the treatment of cell-mediated autoimmune disease
by nasal or by inhalation administration of autoantigens, and in particular
covering treatment of multiple sclerosis or rheumatoid arthritis using nasal or
by inhalation administration of compositions containing myelin basic protein or
collagen (respectively) or active fragments thereof; two patents covering
suppression of allograft rejection by oral administration of a major
histocompatibility complex Class II antigen or an active fragment thereof, and
one patent covering the treatment, or prevention of the onset of, Type I
diabetes by oral administration of an insulin-containing composition. The
European and Japanese Patent Offices have granted patents which the Company own
covering the use of compositions containing autoantigens to treat a group of
human autoimmune diseases, but oppositions (proceedings challenging their
validity) have been filed against these patents by a third party. A number of
the pending U.S. patent applications which the Company owns or to which it has
exclusive rights have been allowed and are expected to issue.
In addition, the Company expects that Orphan Drug status may provide
increased proprietary protection for certain of its products in the United
States. The Company has received Orphan Drug status for Colloral for the
treatment of juvenile rheumatoid arthritis and for Myloral for the treatment of
multiple sclerosis. In addition, the Company anticipates that 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.
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
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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 three: rheumatoid arthritis, Type I diabetes,
and uveitis (or uveoretinitis). 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 also has a product for the treatment of multiple sclerosis.
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 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.
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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, Alzheimer's
disease, and atherosclerosis.
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PRINCIPAL PRODUCTS IN DEVELOPMENT
AutoImmune has products in various stages of development for treating
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
- ------- ----------------- ------------------
Colloral(R) Rheumatoid Arthritis Phase III trial to begin in the first
quarter of 1998; results expected in the
third quarter of 1999
AI 401 Type I Diabetes Phase II trials in progress
AI 502 Transplant Rejection Phase I/II trial in progress
AI 301 Uveitis Phase I/II trial completed (using AI 300)
Myloral(R) Multiple Sclerosis Phase III trial failed to meet primary
endpoint; development program suspended.
Rheumatoid Arthritis. Colloral, AutoImmune's proprietary oral formulation
of Type II collagen, will soon be in a Phase III human clinical trial. This
study is designed as the final pivotal trial for regulatory approval. More than
1200 patients have been involved in the five Phase II Colloral trials completed
to date. Integrated data analysis from these five trials showed that Colloral
is significantly more efficacious than placebo, the optimum dose is 60
micrograms, and the safety profile is unsurpassed.
During 1997, the Company completed three Phase II trials to gather
important additional data for use in designing the Phase III study, 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 were
conducted at 48 sites in the United States, consisted of (i) a 423-patient,
placebo-controlled dose refinement trial using three different doses, 5, 20 and
60 micrograms; (ii) a 203-patient, placebo-controlled trial testing Colloral in
patients who have been withdrawn from methotrexate, a frequently used DMARD; and
(iii) a 284-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 were treated for six months. While the results from these
individual trials did not reach statistical significance, all showed strong
positive trends for Colloral.
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, which were published in the February 1998
issue of Arthritis and Rheumatism, 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 open label
continuation trials with patients who have participated in the development
program. As of December 31, 1997, more than 35% of the patients
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who entered the first continuation trial, remained in the trial with an average
duration of 37 months. Nearly 70% of patients entering the second continuation
trial are still participating with an average duration of 15 months.
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. However, several companies are working on a new class of NSAIDs
described as COX-2 inhibitors. These products, which could be on the market in
1999, may alleviate some of the gastrointestinal side effects currently seen
with traditional NSAIDS. Another category, broad immunosuppressants, are also
used to treat rheumatoid arthritis but toxicity limits their use. A potential
new product in this category is leflunomide, which can be characterized as
methotrexate-like, but with supposedly less toxicity. An NDA may be filed on
this product in early 1998. Additionally, there are two biologic products which
may be submitted for approval in 1998 -- Enbrel and Avakine. Both products,
which are injectables, are anti-TNF (tumor necrosis factor) inhibitors.
Type I Diabetes. The Company has entered into a collaborative agreement
with Lilly with respect to the Company's diabetes product. In 1997, Lilly had
three Phase II clinical trials underway to demonstrate human proof of principle
for AI 401. The U.S. study is a one-year, double-blind, placebo-controlled
trial and now has nearly 50% of the 300 patients enrolled. This Phase II
clinical trial is designed to measure immunological changes, preservation of
pancreatic function and time to insulin dependence. Lilly initiated a second
Phase II trial in France and enrollment is two-thirds complete. The third trial
in Italy has begun enrolling patients. 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. Enrollment in DPT-1 is currently greater
than 25% complete.
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 worldwide there are 180,000 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 later this year. 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
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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. The results of the trial were
published in the American Journal of Ophthalmology in May 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
two 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; and (ii) 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 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.
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 has conducted 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 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. 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.
-8-
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.
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, 1999 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 $536,000
during the twelve months ending June 30, 1998. Under certain circumstances, the
Company may reduce its level of expenditures. The Company will own or have
exclusive rights to all inventions, improvements and discoveries made at BWH and
resulting from the research program, subject to certain rights retained by the
U.S. government in any patentable invention conceived or first reduced to
practice using federal funds. The Company will pay to BWH (i) a royalty on all
products sold by the Company that are subject to a patent covering an invention
developed under the research program or as to which rights were acquired by the
Company from BWH, and (ii) a percentage of any 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") was party to a
CRADA with AutoImmune and BWH pursuant to which clinical trials of AutoImmune's
uveitis product were conducted. The agreement expired June 30, 1996. The NEI
is a co-owner with AutoImmune of a patent application directed to the use of
oral tolerance to treat uveitis. The NEI has granted BWH an exclusive
commercialization license for any and all products or processes developed
pursuant to the CRADA (including the uveitis patent application) in exchange 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, 1997, the Company had pending 23
original and continuation-in-part United States patent applications and numerous
foreign counterparts. The Company has received or has exclusive rights to 32
U.S. and foreign patents. The United States Patent and Trademark Office has
issued to the Company: one patent covering the use of oral Type II collagen to
treat rheumatoid arthritis in humans; five patents covering treatment of cell-
mediated autoimmune disease by nasal or by inhalation administration of
autoantigens, and in particular covering treatment of multiple sclerosis or
rheumatoid arthritis using nasal or by inhalation administration of compositions
containing myelin basic protein or collagen (respectively) or active fragments
thereof; two patents covering suppression of allograft rejection by oral
administration of a major histocompatibility complex Class II antigen or an
active fragment thereof, and one patent covering treating, or preventing the
onset of, Type I diabetes by oral administration of an insulin containing
composition. The European and Japanese Patent Offices have granted patents
which the Company owns covering the use of compositions containing autoantigens
to treat a group of human autoimmune diseases, but oppositions (proceedings
challenging their validity) have been filed against these patents by a third
party. 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 the treatment of
multiple sclerosis. The disclosure contained in this initial patent application
has been significantly expanded in a chain of successor applications. There can
be no assurance, however, that patents will be granted on these applications or
that the Company will succeed in developing additional products that are
patentable.
The Company has applied for patents, or acquired rights to patent
applications, covering oral 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
-9-
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 as patents or that, if issued, the Company's patents
will be valid or that they will provide the Company with meaningful protection
against competitors or with a competitive advantage. There can be no assurance
that the Company will not need to acquire licenses under patents belonging to
others for technology potentially useful or necessary to the Company and there
can be no assurance that such licenses will be available to the Company, if at
all, on terms acceptable to the Company. Moreover, there can be no assurance
that any patent issued to or licensed by the Company will not be infringed or
circumvented by others. In particular, if the Company is unable to obtain
issuance of a patent with broad claims with respect to oral tolerance treatment
of autoimmune diseases or if the Company is unable to prevail in oppositions
against foreign patents of the Company with similar claim scope a competitor may
be able to design around the Company's patent rights by employing a treatment
that is not covered by the Company's subsisting patents.
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. In addition, the Company's
business may be adversely affected by competitors who independently develop
competing technologies, especially if the Company obtains no, or only narrow,
patent protection.
Lastly, there can be no assurance that third-parties will not bring suit
against the Company for patent infringement or for declaratory judgment to have
the Company's patents declared invalid.
COMPETITION
The pharmaceutical 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 rheumatoid arthritis, see
"Principal Products in Development-Rheumatoid Arthritis."
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products and certain areas
of its research are subject to regulation for safety and efficacy by numerous
government authorities in the United States and other countries. Domestically,
the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and
other federal and state statutes and regulations govern the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of the Company's products. There can be no assurance
that the Company will ever obtain the government approval necessary to make
commercial sales of any of its products.
Further, the FDA may grant Orphan Drug status, under the Orphan Drug Act,
to therapeutic agents which are intended to treat a "rare disease or condition,"
which is generally described as a disease or condition that affects fewer than
200,000 individuals in the United States, but also includes multiple sclerosis
and certain other diseases. Orphan Drug status confers upon the sponsor tax
credits for the amounts expended on clinical trials, as well as marketing
exclusivity for the proposed therapeutic indication for a period of seven years
following approval of a New Drug Application ("NDA") or Biologics License
Application ("BLA"). This status does not convey any advantage during
regulatory review, but it is possible that products may qualify both for Orphan
Drug status and also for fast-track regulatory review. Colloral for juvenile
rheumatoid arthritis has been designated as an Orphan Drug. The Company also
expects to apply for Orphan Drug
-10-
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 trials; and (iv) the submission of an NDA or BLA
containing the results of clinical trials and methods of manufacture of the
product prior to commercial sale or shipment of the product. During the
approval process, the FDA must confirm that good laboratory and clinical
practices were maintained during product testing as well as good manufacturing
practices were employed in product manufacture.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess potential product safety and efficacy. The results of
the preclinical tests are submitted to the FDA as part of an IND, and, unless
the FDA objects, the IND becomes effective, and clinical trials may begin, 30
days after the FDA receives the filing.
The initial clinical evaluation, Phase I trials, generally involve
administration of a product to a small number of persons. The product is tested
for safety, dosage tolerance, metabolism, and pharmacokinetic properties. Phase
II trials generally involve administration of a product to a limited number of
patients with a particular disease to determine dose level, efficacy and safety.
Phase III trials generally examine the clinical efficacy and safety in an
expanded patient population at multiple clinical sites. The FDA reviews the
clinical plans and the results of trials and can discontinue the trials at any
time if there are significant safety issues or if there is convincing evidence
that a drug is not effective for the purpose for which it is being investigated.
Each of AutoImmune's clinical trials will be conducted with the approval of an
Institutional Review Board at the institution where the trial will be conducted.
The Institutional Review Board considers, among other things, ethical factors,
the safety of human subjects and the possible liability of the institution.
Pivotal Phase III trials are designed to demonstrate definitive efficacy. More
than one trial is usually required for FDA approval to market a drug. The
results of the preclinical and clinical trials are submitted after completion of
the pivotal Phase III trials in the form of a BLA or NDA for approval to
commence commercial sales. The approval process is affected by several factors,
including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may also require post-marketing surveillance to monitor potential adverse
effects of the product. The regulatory process can be modified by Congress or
the FDA in specific situations.
The length of the regulatory review process cannot be predicted with
certainty for new individual products. The Drug Price Competition and Patent
Term Restoration Act, however, defines the original period of enforceability for
a product or use patent to be 17 years from issuance or 20 years from filing.
Under certain circumstances, to compensate the patent holder for the time
required for FDA regulatory review, this period may be extended for up to 5
years. This Act also establishes a period following FDA approval of a product
during which the FDA may not accept or approve short-form applications for
generic versions of the drug from other sponsors.
The Company also will be subject to government regulations enforced under
the Occupational Safety and Health Act, the Environmental Protection Act, the
United States Atomic Energy Act, the Clean Air Act, the 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 20, 1998, AutoImmune employed 20 individuals full-time, 5 of
whom hold Ph.D. or M.D. degrees. Of its total work force, 14 employees are
engaged in research and development activities and 6 are devoted to support and
administrative activities. AutoImmune believes it maintains good relations with
its employees.
-11-
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 Colloral, AI
401 and AI 502. Positive results for a product 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 1998.
History of Operating Losses; Lack of Product Revenues. The Company has
accumulated net losses, from its inception in 1988 through December 31, 1997, of
approximately $87,616,000. The Company expects to continue to incur losses for
a number of years as the Company continues its research, development and
clinical trial programs. 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 Phase III clinical program for Colloral. Thereafter, the Company
will need to raise substantial additional capital to fund its operations,
including clinical trials and commercialization efforts.
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 14 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.
-12-
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 a
product, or the ability to supply the market. There can be no assurance that
the Company will be able to enter into agreements for its 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 32 U.S. and foreign patents.
The Company has filed and is actively pursuing numerous applications for
additional U.S. and foreign patents, and is an assignee or licensee of the
rights to other patent applications. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions. For example, no consistent policy has emerged regarding the
breadth of biotechnology patent claims that are granted by the United States
Patent Office or enforced by the federal courts. Thus, there can be no
assurance that any patents issued to the Company will provide the Company with
any competitive advantages or will not be challenged by any third parties, that
the patents of others will not impede the ability of the Company to do business
or that third parties will not be able to circumvent the Company's patents, that
any of the Company's patent applications will result in the issuance of patents
or that the Company will develop additional proprietary products that are
patentable. Certain of the Company's patents are currently subject to
oppositions. See "Strategy -- Protecting the Company's Competitive Position."
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
-13-
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 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.
Year 2000 Issues. Certain computer programs use only two digits to
identify a year in the date field. As a result, many computer applications may
fail or create erroneous results by or at the Year 2000. The Company's business
is not dependent on its computer programs and does not electronically interact
in any significant manner with suppliers, customers, creditors, borrowers and
financial service organizations. Therefore, the impact on the Company should
the Year 2000 issue materialize is expected to be minimal.
ITEM 2. PROPERTIES
AutoImmune's administrative offices and research facilities occupy
approximately 11,000 square feet of leased space in Lexington, Massachusetts.
An additional 22,000 square feet of leased space in the same facility is
subleased through the end of the lease term. The leases run through November
1999. The Company believes that its facilities are adequate for its present and
anticipated purposes, except that additional facilities may 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 1997.
-14-
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, 1996 and 1997.
Price range of
common stock
---------------
High Low
------- ------
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
Fiscal year ending December 31, 1997
First quarter $18.25 $11.00
Second quarter $14.50 $ 1.63
Third quarter $ 2.88 $ 1.69
Fourth quarter $ 3.50 $ 2.56
As of February 20, 1998, there were 260 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, 1996 and 1997 and the related
statements of operations and of cash flows for the three years ended December
31, 1997 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.
-15-
Year ended December 31,
---------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ -------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenue:
Option fees $ __ $ -- $ 1,500,000 $ __ $ --
Research and development
revenue under collaborative __
agreements 537,000 __ -- --
------------ ------------ ------------ ------------ ------------
Total revenue 537,000 __ 1,500,000 __ --
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Research and development:
Related party 2,390,000 2,257,000 2,294,000 2,158,000 1,880,000
Other 5,860,000 11,381,000 12,554,000 22,029,000 15,426,000
General and administrative 1,555,000 1,662,000 2,213,000 2,414,000 2,214,000
------------ ------------ ------------ ------------ ------------
Total costs and expenses 9,805,000 15,300,000 17,061,000 26,601,000 19,520,000
------------ ------------ ------------ ------------ ------------
Loss from operations (9,268,000) (15,300,000) (15,561,000) (26,601,000) (19,520,000)
Interest income, net 1,174,000 623,000 1,968,000 3,117,000 1,995,000
------------ ------------ ------------ ------------ ------------
Net loss $ (8,094,000) $(14,677,000) $(13,593,000) $(23,484,000) $(17,525,000)
------------ ------------ ------------ ------------ ------------
Net loss per share -
basic and diluted (1) $(0.85) $(1.44) $(1.01) $(1.44) $(1.07)
------------ ------------ ------------ ------------ ------------
Weighted average common
shares outstanding -
basic and diluted (1) 9,474,968 10,205,567 13,522,091 16,303,051 16,385,629
============ ============ ============ ============ ============
December 31,
--------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities $ 29,963,000 $ 15,568,000 $ 70,453,000 $ 49,310,000 $ 30,025,000
Working capital 29,608,000 13,825,000 68,791,000 45,453,000 28,983,000
Total assets 32,142,000 18,218,000 72,981,000 52,462,000 31,498,000
Capital lease obligations
less current maturities 735,000 1,031,000 569,000 627,000 193,000
Deficit accumulated during
development stage (18,341,000) (33,018,000) (46,611,000) (70,095,000) (87,620,000)
Total stockholders' equity 30,025,000 15,102,000 70,418,000 47,341,000 29,880,000
- ------------------------------
(1) Basic net loss per share is calculated by dividing net loss by the weighted average number of Common shares outstanding
during the year in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." For each of the periods presented, basic and diluted net loss per share are the same due to the antidilutive
effect of potential common shares.
- -----------------------------------------------------------------------------------------------------------------------------
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Since its inception through December 31, 1997, the Company has incurred
ongoing losses from operations and has cumulative losses as of December 31, 1997
totaling $87,616,000. To date, the Company has not recorded any revenue from
the sale of products. Revenue recorded through December 31, 1997 was earned in
connection with contract research and the granting of certain short-term rights.
The Company expects to remain in the development stage for the foreseeable
future and accordingly, expects to continue to incur substantial losses.
Years Ended December 31, 1996 and 1997
No revenues were earned in the years ended December 31, 1996 and 1997.
Research and development expenses were $24,187,000 in 1996, as compared
with $17,306,000 for the year ended December 31, 1997. The decrease reflects
overall reduced research and clinical trial activity levels partially offset by
restructuring costs incurred as a result of a corporate downsizing.
General and administrative expenses were $2,414,000 in 1996, as compared
with $2,214,000 for the year ended December 31, 1997. The decrease is due
primarily to increased corporate activity and restructuring costs in the first
half of 1997 offset by reduced corporate activity in the second half of 1997
after the restructuring occurred.
Net interest income was $3,117,000 in 1996, as compared with $1,995,000 for
the year ended December 31, 1997. The decrease is due to a lower balance of
cash available for investment.
The net loss was $23,484,000 in 1996, as compared with $17,525,000 for the
year ended December 31, 1997. The net loss per share decreased from $1.44 for
the year ended December 31, 1996 to $1.07 for the year ended December 31, 1997.
This reflects the recent decrease in research and development activity levels
partially offset by restructuring costs incurred as a result of a corporate
downsizing.
In April 1997, the Company announced disappointing results from the Phase
III trial of Myloral(R), its product for multiple sclerosis. Very soon
thereafter, the Company also announced a corporate downsizing by eliminating 23
positions directly related to the Myloral program and an increased focus of
resources on the development of Colloral for rheumatoid arthritis. The Company
recorded a charge during the second quarter of 1997 of approximately $618,000
relating primarily to employee severance costs and costs associated with
terminating Myloral manufacturing and clinical trial functions. This estimated
charge was adjusted to $615,000 during the third quarter of 1997 to reflect
actual costs incurred.
In May 1997, the Company announced preliminary results from two Phase II
trials of Colloral for rheumatoid arthritis. Both trials demonstrated positive
trends for Colloral, although statistical significance was not demonstrated
versus placebo. A further restructuring plan was announced in June 1997, to
further focus the Company's efforts to the clinical program for Colloral. This
resulted in a further workforce reduction of 30 positions. The Company recorded
a charge during the second quarter of 1997 of approximately $2,689,000 relating
to employee severance, costs associated with vacating leased space and equipment
disposal and write-offs. This estimated charge was adjusted to $1,636,000
during the third quarter of 1997 to reflect the sublease of 22,000 square feet
of space and actual costs incurred.
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.
-17-
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.
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 although its
needs have been reduced as a result of downsizing which occurred during the
first half of 1997. 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 Phase III
clinical program of Colloral. At the appropriate time, 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 additional funds are necessary but not available, the Company will have to
reduce certain areas of research, product development, manufacturing or
marketing activity, or otherwise modify its business strategy, 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, 1997, the Company's cash and cash equivalents and marketable
securities totaled $30,025,000. Current liabilities at December 31, 1997 were
$1,425,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-18-
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, 1997.
Executive officer information is as follows:
Robert C. Bishop, Ph.D., age 55, 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. Dr. Bishop is also a director of Millipore
Corporation, a purification technologies/systems company serving the
microelectronics, biopharmaceutical and analytical laboratories markets.
Heather A. Ellerkamp, CPA, age 33, joined the Company in February 1994,
most recently as Director of Finance and Treasurer. From 1992 to 1994, she was
employed by Kendall Square Research Corporation, most recently as Corporate
Accounting Manager and Assistant Controller. Ms. Ellerkamp received her B.A.
degree in Management Science from the University of California, San Diego and
her M.B.A. from the University of Michigan.
Malcolm J.F. Fletcher, M.D., age 50, joined the Company in November 1992 as
Vice President of Clinical and Regulatory Affairs. 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.
Jo Ann Wallace, age 43, 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 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,
1997.
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,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-19-
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 22 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 1997.
-20-
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 27th day of
February, 1998.
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 February 27, 1998
- ----------------------------- Officer and Director
Robert C. Bishop
(Principal Executive Officer)
/s/ Heather A. Ellerkamp Director of Finance and February 27, 1998
- ----------------------------- Treasurer
Heather A. Ellerkamp
(Principal Financial and
Accounting Officer)
/s/ Barry Weinberg Chairman of the Board of February 27, 1998
- ----------------------------- Directors
Barry Weinberg
/s/ Allan R. Ferguson Director February 27, 1998
- -----------------------------
Allan R. Ferguson
/s/ R. John Fletcher Director February 27, 1998
- -----------------------------
R. John Fletcher
/s/ Henri A. Termeer Director February 27, 1998
- -----------------------------
Henri A. Termeer
/s/ Hugh A. D'Andrade Director February 27, 1998
- -----------------------------
Hugh A. D'Andrade
-21-
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 Agreement, dated July
1, 1992, between AutoImmune 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 Israel 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******
10.22 - Third Amendment to Lease, dated October 23, 1996 between
AutoImmune Inc. and Ledgemont Realty Trust
10.23 - Sublease agreement, dated November 1, 1997 between AutoImmune
Inc. and Antigenics, LLC
10.24 - Consent to Sublease Agreement, dated November 1, 1997 between
AutoImmune Inc., Antigenics, LLC, and Ledgemont Realty Trust
23 - Consent of Price Waterhouse LLP
27 - Financial Data Schedule
- -------------
* 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.
-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, 1996 and 1997 F-3
Statement of Operations for the three years
ended December 31, 1997 and for the period from
inception (September 9, 1988) through
December 31, 1997 F-4
Statement of Changes in Stockholders' Equity for
the period from inception (September 9, 1988)
through December 31, 1997 F-5
Statement of Cash Flows for the three years
ended December 31, 1997 and for the period from
inception (September 9, 1988) through
December 31, 1997 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, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 and for the period from inception (September 9,
1988) through December 31, 1997, 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.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 20, 1998
F-2
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
1996 1997
ASSETS
Current assets:
Cash and cash equivalents $ 6,432,000 $13,833,000
Marketable securities 42,878,000 16,192,000
Interest receivable 141,000 240,000
Prepaid expenses and other current assets 496,000 143,000
----------- -----------
Total current assets 49,947,000 30,408,000
Fixed assets, net 2,485,000 1,060,000
Other assets 30,000 30,000
----------- -----------
$52,462,000 $31,498,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,997,000 $ 476,000
Accrued expenses 782,000 664,000
Current portion of obligations under
capital leases 715,000 285,000
----------- -----------
Total current liabilities 4,494,000 1,425,000
----------- -----------
Obligations under capital leases 627,000 193,000
----------- -----------
Commitments and contingencies (Notes 6 and 11)
----------- -----------
Stockholders' equity:
Common stock, $.01 par value: 25,000,000 shares
authorized; 16,358,045 and 16,392,896 shares
issued and outstanding at December 31, 1996 and
1997, respectively 164,000 164,000
Additional paid-in capital 117,238,000 117,330,000
Deficit accumulated during the development stage (70,095,000) (87,620,000)
Net unrealized gain on marketable securities 34,000 6,000
----------- -----------
47,341,000 29,880,000
----------- -----------
$52,462,000 $31,498,000
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-3
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM
INCEPTION
(SEPTEMBER 9, 1988)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
1995 1996 1997 DECEMBER 31, 1997
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 2,294,000 2,158,000 1,880,000 16,848,000
All other 12,554,000 22,029,000 15,426,000 71,610,000
General and administrative 2,213,000 2,414,000 2,214,000 11,527,000
------------ ------------ ------------ ------------
Total costs and expenses 17,061,000 26,601,000 19,520,000 99,985,000
------------ ------------ ------------ ------------
Interest income 2,021,000 3,191,000 2,063,000 9,508,000
Interest expense (53,000) (74,000) (68,000) (294,000)
------------ ------------ ------------ ------------
1,968,000 3,117,000 1,995,000 9,214,000
------------ ------------ ------------ ------------
Net loss $(13,593,000) $(23,484,000) $(17,525,000) $(87,616,000)
============ ============ ============ ============
Net loss per share - basic and
diluted $ (1.01) $ (1.44) $ (1.07)
============ ============ ============
Weighted average shares outstanding -
basic and diluted 13,522,091 16,303,051 16,385,629
============ ============ ============
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, 1997
DEFICIT
ACCUMULATED NET UNREALIZED
COMMON STOCK DURING THE GAIN (LOSS) ON TOTAL
NUMBER PAR ADDITIONAL DEVELOPMENT MARKETABLE STOCKHOLDERS'
OF SHARES VALUE PAID-IN 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
Issuance of common stock
during 1994 67,500 1,000 2,000 3,000
Net unrealized loss on
marketable securities during 1994 (249,000) (249,000)
Net loss for the period
from inception (September 9,
1988) through December 31, 1994 (33,014,000) (33,014,000)
---------- -------- ------------ ------------ --------- ------------
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
Issuance of common stock 34,851 -- 92,000 92,000
Net unrealized loss on
marketable securities (28,000) (28,000)
Net loss (17,525,000) (17,525,000)
---------- -------- ------------ ------------ --------- ------------
Balance at December 31, 1997 16,392,896 $164,000 $117,330,000 $(87,620,000) $ 6,000 $ 29,880,000
========== ======== ============ ============ ========= ============
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
1995 1996 1997 DECEMBER 31, 1997
Cash flows from operating activities:
Net loss $(13,593,000) $(23,484,000) $(17,525,000) $(87,616,000)
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 702,000 961,000 960,000 3,586,000
Loss on sale/disposal of fixed assets -- -- 604,000 604,000
Decrease in patent costs -- -- -- 563,000
(Increase) decrease in interest receivable 9,000 19,000 (99,000) (240,000)
(Increase) decrease in prepaid expenses
and other current assets 1,000 (324,000) 353,000 (143,000)
Increase (decrease) in accounts payable (163,000) 2,053,000 (2,521,000) 476,000
Increase (decrease) in accrued expenses 54,000 194,000 (118,000) 664,000
----------- ---------- ----------- -----------
Net cash used by operating activities (12,990,000) (20,581,000) (18,346,000) (82,055,000)
----------- ---------- ----------- -----------
Cash flows from investing activities:
Purchase of available-for-sale marketable
securities (37,292,000) (44,563,000) (30,592,000) (233,526,000)
Proceeds from sale/maturity of available-for-sale
marketable securities 2,488,000 43,016,000 57,250,000 206,329,000
Proceeds from maturity of held-to-maturity
marketable securities 5,956,000 -- -- 11,011,000
Proceeds from sale of equipment -- -- 64,000 64,000
Purchases of fixed assets (590,000) (1,280,000) (203,000) (5,189,000)
Increase in patent costs -- -- -- (563,000)
Increase in other assets -- -- -- (155,000)
----------- ---------- ----------- -----------
Net cash provided (used) by investing
activities (29,438,000) (2,827,000) 26,519,000 (22,029,000)
----------- ---------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale-leaseback of fixed assets -- 1,039,000 -- 2,872,000
Payments on obligations under capital leases (444,000) (728,000) (864,000) (2,394,000)
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 68,591,000 442,000 92,000 104,928,000
Proceeds from issuance of convertible
notes payable -- -- -- 2,200,000
----------- ---------- ----------- -----------
Net cash provided (used) by financing activities 68,147,000 753,000 (772,000) 117,917,000
----------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 25,719,000 (22,655,000) 7,401,000 13,833,000
Cash and cash equivalents at
beginning of period 3,368,000 29,087,000 6,432,000 --
----------- ---------- ----------- -----------
Cash and cash equivalents at end of period $29,087,000 $6,432,000 $13,833,000 $13,833,000
=========== ========== =========== ===========
See Note 2 for supplemental disclosure of non-cash financing activities.
The accompanying notes are an integral
part of these financial statements.
F-6
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. FORMATION AND OPERATIONS OF THE COMPANY
AutoImmune Inc. (the "Company") was incorporated in Delaware on September 9,
1988. The Company is dedicated to the development of innovative
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
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, 1996 and 1997,
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, 1997, 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 in
connection with clinical research agreements is determined on the date that
the Company estimates that it is probable that such contingencies will be met.
The 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 compensation related to contingent warrants
will be earned.
REVENUE RECOGNITION
Revenue from research and development arrangements is recognized pursuant to
the related agreements as work is performed or defined milestones are
attained. Payments received under these arrangements prior to the completion
of the related work or attainment of milestones are recorded as deferred
revenue. Option fees representing payments to be made to the Company for a
right to evaluate and negotiate the terms of a potential licensing arrangement
are recognized as the options are granted as such fees are non-refundable and
the Company has no further obligations.
STOCK COMPENSATION
The Company's employee stock option plans are accounted for in accordance with
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees. The Company has adopted the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation.
F-7
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
NET LOSS PER SHARE - BASIC AND DILUTED
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. The
new standard replaces the presentation of primary earnings per share
prescribed by APB No. 15 "Earnings Per Share," with a presentation of basic
earnings per share and also requires dual presentation of basic and diluted
earnings per share on the face of the statement of operations for all entities
with complex capital structures. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed similarly to fully diluted earnings per share
pursuant to APB No. 15. The Company adopted SFAS No. 128 in the fourth
quarter of fiscal 1997. The basic and diluted net loss per share under SFAS
No. 128 is not different from the previous computation and presentation.
Potential common shares from stock options and warrants are excluded from the
computation of diluted net loss per share as their effect is antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
STATEMENT OF CASH FLOWS
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1988, 168,750 shares of common stock and 168,750 shares of junior
convertible preferred stock were issued to the Brigham and Women's Hospital in
exchange for patent rights and technology contributed or licensed in
connection with the formation of the Company.
Notes payable to stockholders totaling $2,200,000 and related interest of
$48,000 were converted into Series A mandatorily redeemable convertible
preferred stock in 1991.
Bridge notes of $300,000 were converted into Series C mandatorily redeemable
convertible preferred stock in 1991.
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 $34,000 and $6,000 related to
marketable securities classified as available-for-sale at December 31, 1996
and 1997, respectively.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company has paid interest of $53,000, $74,000 and $68,000 in 1995, 1996
and 1997, respectively, and $246,000 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, 1996 and 1997.
DECEMBER 31,
1996 1997
Money market $2,299,000 $ 71,000
U.S. Government debt securities 3,993,000 12,391,000
---------- -----------
$6,292,000 $12,462,000
========== ===========
F-8
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
The following is a summary of available-for-sale marketable securities held by
the Company at December 31, 1996 and 1997 which are carried at fair market
value:
UNREALIZED UNREALIZED AMORTIZED
MATURITY TERM FAIR VALUE GAINS LOSSES COST
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 year 10,036,000 24,000 -- 10,012,000
----------- ------- ------- -----------
$42,878,000 $40,000 $(6,000) $42,844,000
=========== ======= ======= ===========
December 31, 1997:
U.S. Government
debt securities within 1 year $10,935,000 $ 5,000 $(1,000) $10,931,000
U.S. Government debt
securities between 1-5 year 5,257,000 2,000 -- 5,255,000
----------- ------- ------- -----------
$16,192,000 $ 7,000 $(1,000) $16,186,000
=========== ======= ======= ===========
All of the Company's marketable securities are classified as current at
December 31, 1996 and 1997 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, 1996 and 1997 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) 1996 1997
Laboratory equipment 2-5 $3,181,000 $1,359,000
Office equipment 4-5 667,000 425,000
Leasehold improvements 5-7 1,058,000 461,000
---------- ----------
4,906,000 2,245,000
Less - accumulated depreciation
and amortization 2,421,000 1,185,000
---------- ----------
$2,485,000 $1,060,000
========== ==========
Depreciation and amortization expense relating to fixed assets was $702,000,
$961,000 and $960,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. Assets held under capital leases consisted of $2,872,000 and
$1,243,000 of lab equipment at December 31, 1996 and 1997, respectively.
Accumulated amortization of these assets totaled $1,488,000 and $765,000 at
December 31, 1996 and 1997, respectively. For the years ended December 31,
1995, 1996 and 1997, amortization expense charged to operations on assets held
under capital lease obligations was $479,000,
F-9
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
$630,000 and $552,000 respectively. In 1997, fixed assets totaling $2,931,000
were disposed or sold, of which $1,642,000 were held under capital leases.
Accumulated depreciation and amortization relating to these assets was
$923,000 and $1,341,000, respectively. Proceeds totaling $64,000 were received
upon the sale of certain equipment.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
1996 1997
Accrued employee costs $552,000 $289,000
Accrued professional fees 230,000 204,000
Accrued restructuring costs -- 146,000
Other -- 25,000
-------- --------
$782,000 $664,000
======== ========
6. RELATED PARTY TRANSACTIONS
In connection with the formation of the Company and the issuance of 168,750
shares of common stock and 168,750 shares of junior convertible preferred
stock to The Brigham and Women's Hospital ("BWH"), the Company entered into
related technology transfer and research and development agreements with BWH.
The technology transfer agreement provides the Company with all rights and
interests in certain BWH patented technology in exchange for the issuance of
the aforementioned stock and the payment of royalties under certain
conditions. The research and development agreement provides that certain
research activities are performed by BWH on behalf of the Company.
The current research and development agreement terminates in June 1999. 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
$536,000 for the one-year period ending June 30, 1998. There is no
guaranteed minimum payment for the one-year period ending June 30, 1999. 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.
In addition, certain expenses are paid by the Company for research conducted
at BWH.
F-10
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
7. INCOME TAXES
The components of deferred income tax benefit are as follows:
Year ended December 31,
1995 1996 1997
Income tax benefit:
Federal $ 4,477,000 $ 9,328,000 $ 7,332,000
State 1,366,000 1,964,000 1,517,000
----------- ------------ -----------
5,843,000 11,292,000 8,849,000
Deferred tax asset valuation allowance (5,843,000) (11,292,000) (8,849,000)
----------- ------------ -----------
$ -- $ -- $ --
=========== ============ ===========
No significant federal or state taxes were payable in any years as a result of
losses incurred and utilization of net operating losses and credits.
A reconciliation between the amounts of reported income tax (expense) benefit
and the amount determined by applying the U.S. federal statutory rate of 35%
for 1995, 1996 and 1997 to pre-tax loss is as follows:
Year ended December 31,
1995 1996 1997
Loss at statutory rate $ 4,758,000 $ 8,219,000 $ 6,134,000
Nondeductible research and
development expenses (158,000) (1,015,000) (948,000)
Federal and state research and development,
orphan drug, and investment tax credits 746,000 3,184,000 2,885,000
State tax benefit, net of federal tax liability 595,000 991,000 811,000
Stock option compensation 142,000 136,000 126,000
Utilization of net operating losses (364,000) (203,000) --
Other 124,000 (20,000) (159,000)
----------- ------------ -----------
5,843,000 11,292,000 8,849,000
Benefit of loss not recognized,
increase in valuation allowance (5,843,000) (11,292,000) (8,849,000)
----------- ------------ -----------
$ -- $ -- $ --
=========== ============ ===========
F-11
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Deferred tax assets are comprised of the following:
DECEMBER 31,
1996 1997
Research costs capitalized for tax purposes $ 26,208,000 $ 11,448,000
Research and development, orphan drug and investment tax 5,739,000 8,623,000
credits - 20,969,000
Loss carryforwards (13,000) (2,000)
Net unrealized gain on investments available-for-sale 325,000 70,000
Other temporary differences ------------ ------------
Gross deferred tax assets 32,259,000 41,108,000
Deferred tax asset valuation allowance (32,259,000) (41,108,000)
------------ ------------
$ -- $ --
------------ ------------
The Company has provided a full valuation allowance for net deferred tax assets
since the realization of these future benefits is not sufficiently assured as
of the end of each related year. As the Company achieves profitability, these
deferred tax assets will be available to offset future income tax liabilities
and expenses. Of the $41,108,000 valuation allowance at December 31, 1997,
$271,000 relating to deductions for stock option compensation will be credited
to additional paid-in capital upon realization.
At December 31, 1997, 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,
NET LOSS ORPHAN DRUG AND INVESTMENT
YEAR OF EXPIRATION CARRYFORWARD 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
2012 $52,423,000 2,978,000
----------- ----------
$52,423,000 $9,035,000
=========== ==========
Ownership changes, as defined in the Internal Revenue Code, resulting from the
Company's initial public offering of stock in January 1993 and subsequent
follow-on offerings in 1995, had no impact on the amount of net operating loss
and tax credit carryforwards that can be utilized annually to offset future
taxable income or tax liabilities. Subsequent significant ownership changes
could, however, limit the utilization of these carryforwards in future years.
F-12
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
8. PREFERRED STOCK
Upon the closing of the Company's initial public offering on January 27, 1993
each share of Series A, B and C convertible preferred stock automatically
converted into three shares of common stock (Note 9). No dividends had been
paid to the preferred stockholders.
At December 31, 1997, the Company had authorized 5,000,000 shares of $.01 par
value preferred stock. Preferred stock may be issued at the discretion of
the Board of Directors of the Company (without stockholder approval) with
such designations, rights and preferences as the Board of Directors may
determine from time to time. The preferred stock may have dividend,
liquidation, redemption, conversion, voting or other rights which may be more
expansive than the rights accorded to the common stock.
On May 17, 1995, the Company's Board of Directors adopted a shareholder
rights plan. The Board declared a distribution of one right for each share
of common stock outstanding on June 1, 1994. Stock issued after that date
will be issued with an attached right. Each right will entitle the holder,
upon the occurrence of certain events, to purchase 1/100th of a share of
preferred stock at an exercise price of $73. The Board may, at any time,
redeem the rights until their expiration on June 1, 2005, and may amend the
rights under certain circumstances until they become exercisable.
9. STOCKHOLDERS' EQUITY AND COMMON STOCK
In December 1992, the Company effected a three-for-one stock split of the
Company's common stock in the form of a stock dividend. All common shares
and per share amounts have been adjusted to give retroactive effect to the
common stock split for all years presented.
In January 1993, the Company completed its initial public offering of
3,000,000 shares of common stock. Proceeds to the Company, net of issuance
costs, amounted to $35,690,000.
In January 1995, the Company completed a private placement of 2,039,547
shares of common stock. Proceeds to the Company, net of issuance costs,
amounted to $9,136,000.
In August and September 1995, the Company completed its second public
offering of 3,925,000 shares of common stock. Proceeds to the Company, net
of issuance costs, amounted to $58,878,000.
As of December 31, 1997, the Company has reserved 3,925,219 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 15, 1996, 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 1997,
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 3,100,000 to 3,700,000.
F-13
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
On June 19, 1997, the Company repriced 338,850 options with exercise prices
ranging from $4.88 to $16.38 per share to 254,138 options at a price of $2.00
per share. Employees had the option not to reprice certain options
previously granted. The repriced options were subject to the same vesting
schedule as the previous options except that any vesting would be forfeited
unless the optionee remains in the Company's employ through June 19, 1998.
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 96,000 shares of common stock have been granted
under this plan. A maximum of 300,000 shares of common stock of the Company
is reserved for issuance in accordance with the terms of this amended plan.
A summary of option activity under the Stock Option Plan and the Director
Option Plan for the years ended December 31, 1995, 1996 and 1997 is as
follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
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
Granted 1,218,608 5.19
Exercised (31,198) 2.72
Cancelled (1,479,356) 9.47
-----------
Outstanding at December 31, 1997 2,064,565 $ 1.85
-----------
Options exercisable at year end 1,203,539 $ 1.56
-----------
Weighted average fair value of options granted
during the year $2.93
===========
F-14
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
The following table summarizes information about employee and director stock
options outstanding at December 31, 1997:
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 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
$ .03 303,500 3.2 years $ .03 303,500 $ .03
$ 1.33 - $ 2.00 1,565,429 6.9 years 1.62 804,503 1.38
$ 2.06 - $ 3.06 62,700 9.5 years 2.64 -- --
$ 5.25 - $ 7.75 49,836 6.8 years 5.94 38,936 5.91
$ 8.13 - $ 10.88 83,100 6.8 years 9.71 56,600 9.44
--------- ---------
2,064,565 1,203,539
========= =========
EMPLOYEE STOCK PURCHASE PLAN
On July 20, 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan (the "Purchase Plan"). This plan enables eligible employees to
purchase the Company's common stock at 85% of the fair market value of the
stock on the date an offering commences or on the date an offering terminates,
whichever is lower. The Purchase Plan is available to substantially all
employees, subject to certain limitations. An eligible employee may elect to
have up to 12% of his or her base pay withheld and applied toward the purchase
of shares in such an offering (not to exceed $25,000 in any year). At
December 31, 1997, 184,571 shares of common stock were reserved for purchases
under the Purchase Plan. During 1996 and 1997, 30,878 and 3,653 shares were
purchased under the Purchase Plan at an average price of $7.68 and $2.12 per
share, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic based
method prescribed in APB No. 25. The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for the Company's stock option plans and employee stock purchase
plan. Had compensation cost been determined based on the fair value at the
grant dates for awards in 1995, 1996 and 1997 consistent with the provisions
of SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
1995 1996 1997
Net loss:
As reported $(13,593,000) $(23,484,000) $(17,525,000)
Pro forma (13,920,000) (24,540,000) (18,059,000)
Net loss per share - basic and diluted:
As reported $ (1.01) $ (1.44) $ (1.07)
Pro forma (1.03) (1.51) (1.10)
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, 1996 and 1997: no dividend yield for all
years; expected volatility of 61%, 65% 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 all years.
Because additional option grants are expected to be made each year, the pro
forma impact on the three years ended December 31, 1997 is not representative
of the pro forma effects which may be expected in future years.
F-15
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
CLINICAL RESEARCH AGREEMENT
The Company entered into an agreement with CATO Research ("CATO"), effective
June 1993, under which the Company agreed to pay, as amended, $3,602,000 to
have a clinical investigational study performed on the Company's multiple
sclerosis product. The total cost of the study was subject to adjustment if
the project specifications changed. The agreement allowed for termination by
either the Company or CATO, upon prior written notice. In 1997, the Company
terminated the agreement, therefore CATO was entitled to a termination fee
totaling $257,000. Additionally, CATO was granted 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, 1997.
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,
1997, no payments had been earned by the Company.
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. On November 1, 1997
the Company exercised its option to sublease 22,000 square feet of the 33,000
square feet total through the end of the lease term. In 1997, the Company
received rent payments from the subtenant totalling $52,000. Future minimum
rent payments from the subtenant are $324,000 and $297,000 for 1998 and 1999,
respectively.
Total rent expense was $333,000, $421,000 and $507,000 for the years ended
December 31, 1995, 1996 and 1997, 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
1998 $292,000 $500,000
1999 194,000 458,000
-------- --------
Total obligations 486,000 $958,000
Less - amount representing interest 8,000
-------- ========
$478,000
========
During February 1997, the Company received a $2,750,000 lease line from an
unaffiliated third party which expires on March 31, 1998. As of December 31,
1997 the total leaseline was unused. During 1997, the Company disposed of
equipment under various leases entered into prior to 1997 and combined the
remaining assets from those various leases into one lease agreement. The term
for the combined lease under the agreement is twenty-four months and bears
interest at a rate determined 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.
F-16
AUTOIMMUNE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
12. EMPLOYEE SAVINGS PLAN
In 1993, the Company initiated an employee savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is
available to substantially all employees. The Company has made no
contributions to the 401(k) Plan since inception.
13. RESTRUCTURING COSTS
In the second quarter of 1997, the Company recorded $3,307,000 of
restructuring costs as a result of a corporate downsizing. This charge
consisted of severance costs of $1,009,000 for 53 employees; lease costs of
$1,510,000; equipment disposal and write-offs of $531,000; and the termination
of certain contractual requirements of $257,000. During the third quarter of
1997, this estimated charge was adjusted to $2,251,000 to reflect the sublease
of 22,000 square feet of space and actual costs incurred. The adjusted charge
consists of severance costs of $1,138,000 for 53 employees; lease costs of
$261,000; equipment disposal and write-offs of $599,000; and the termination
of certain contractual requirements of $253,000. As of December 31, 1997,
approximately $2,105,000 of the restructuring costs had been paid. All
restructuring payments were paid by the end of the fourth quarter, with the
exception of lease related costs. Future lease payments for the portion of
the space not used by the Company, net of the sublease, have been reserved
through November 1999.
F-17