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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-028386
CELL THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1533912
(State of Incorporation) (I.R.S. Employer Identification No.)
201 Elliott Avenue West, Suite 400
Seattle, Washington 98119
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 282-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Stock Purchase Rights
(Title of classes)
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Indicate by check mark whether the registrant (1) has filed all reports
required 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 the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
On March 15, 2000, Cell Therapeutics, Inc. had 21,294,772 outstanding shares
of Common Stock. Of those, 17,773,882 shares of Common Stock were held by
nonaffiliates. The aggregate market value of such Common Stock held by
nonaffiliates, based on the closing price of such shares on the Nasdaq National
Market on March 15, 2000, was approximately $426,573,168. Shares of Common
Stock held by each executive officer and director and by each person known to
the Company who beneficially owns more than 5% of the outstanding Common Stock
have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
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DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the registrant's 2000 Annual Meeting of Shareholders (Part
III)
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PART I
Item 1. Business
Overview
We focus on developing, acquiring and commercializing novel treatments for
cancer. Our goal is to build a leading, vertically-integrated
biopharmaceutical company with a diversified portfolio of oncology drugs and
drug candidates. Our research and in-licensing activities are concentrated on
identifying new, less toxic and more effective ways to treat cancer. We plan
to submit a NDA for ATO for the treatment of patients with resistant or
relapsed APL by the end of March 2000. We received fast-track designation from
the FDA for this indication and expect to receive priority review, which would
expedite the FDA's review of our application. The FDA's current goal is to act
on 90% of priority NDAs within six months of receipt. ATO is also in phase II
or III clinical trials for ten other cancer indications. In addition, we are
developing a novel cancer drug delivery technology that links chemotherapy
drugs to a polymer to improve the efficacy and reduce the side effects of
these drugs. Our first application, PG-TXL, is a polyglutamate polymer linked
to the active ingredient in Taxol, which is the highest selling chemotherapy
agent in the world. We are currently conducting a phase I trial using PG-TXL
to treat solid tumors and also are developing other drug conjugates. We have
another product candidate, Apra, in a phase II clinical trial for treatment of
soft tissue sarcomas.
The Oncology Market
Overview. Cancer is the second leading cause of death in the United States,
resulting in over 550,000 deaths annually. The National Cancer Advisory Board
reports that more than 8 million people in the United States have cancer, and
it is estimated that one in three Americans will develop cancer in their
lifetime. Approximately 1.2 million new cases of cancer are diagnosed each
year in the United States.
The most commonly used methods for treating cancer patients are surgery,
radiation and chemotherapy. A cancer patient usually receives a combination of
these treatments depending upon the type and extent of the disease. At some
point in their disease treatment, 60% of all cancer patients will receive
radiation therapy and 50% of all cancer patients will receive chemotherapy.
Unfortunately, there are significant limitations and complications associated
with radiation and chemotherapy that result in a high rate of treatment
failure. The principal limitations of chemotherapy include:
. treatment related toxicities
. inability to selectively target killing effects to cancer cells
. the development of resistance to the cancer killing effects of
chemotherapy
Treatment related toxicities. The majority of current chemotherapy agents
kill cancer cells by disrupting the cell division process. Chemotherapy drugs
disrupt the process by killing cells once they begin to undergo division and
replication. Although this mechanism often works in cancer cells, which grow
rapidly through cell division, non-cancerous cells are also killed because
they too undergo routine cell division. This is especially true for cells that
line the mouth, stomach and intestines, hair follicles, blood cells and
reproductive cells (sperm and ovum). Because the mechanism by which
conventional cancer drugs work is not limited to cancer cells, their use is
often accompanied by toxicities. These toxicities limit the effectiveness of
cancer drugs and seriously impact the patient's quality of life.
Selective targeting of tumor tissue. When administered, chemotherapy drugs
circulate through the bloodstream, reaching both tumor and normal tissues.
Normal tissues are generally as sensitive as tumor cells to the killing
effects of chemotherapy. These toxic effects on normal tissues prevent use of
higher, potentially more effective, doses of chemotherapy.
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Chemotherapy resistance. Resistance to the cancer killing effects of
conventional chemotherapy drugs is a major impediment to effective treatment
of cancer. Approximately 90% of all cancer patients undergoing chemotherapy
ultimately develop resistance to chemotherapy and die from their disease.
Because many chemotherapy drugs share similar properties, when a tumor
develops resistance to a single drug, it may become resistant to many other
drugs as well. Drugs that work differently from existing chemotherapies, and
are not susceptible to the same mechanisms of resistance, could play a very
important role in treating resistant tumors.
Strategy
Our goal is to become a leading cancer drug company. The key elements of our
business strategy are to:
. Accelerate commercialization by focusing on products that qualify for
fast-track designation. We initially develop our cancer drug candidates
to treat life threatening types or stages of cancer for which current
treatments are inadequate. The FDA has adopted fast-track and priority
procedures for accelerating the approval of oncology agents addressing
such needs, potentially reducing the time required to bring new drugs to
market. Once approved, we would seek to expand the market potential of
our products by seeking approval for indications in larger cancer patient
populations. We believe this strategy will facilitate more rapid entry
into the market for our products and accelerate their acceptance by
health care providers and third-party payors.
. Establish specialized sales and marketing capabilities. We plan to
develop our own sales and marketing capabilities in North America and
establish collaborations to commercialize our products outside North
America. We believe that oncologists and hematologists are a concentrated
group of physicians that can be targeted successfully through a
relatively small, specialized sales force. We plan to have our own sales
force in place in time for us to launch ATO if and when approved by the
FDA.
. Maximize the market opportunity for ATO. A substantial portion of our
efforts will be devoted to the further development and commercialization
of ATO. We are initially seeking approval of ATO for the treatment of
patients with resistant or relapsed APL. If approved, we intend to expand
the use of the product into other indications by performing clinical
trials independently and in collaboration with the NCI and other
cooperative oncology groups. ATO is currently in 14 clinical trials in
the United States.
. Leverage our polymer drug delivery technology. We are applying our
patented polymer drug delivery technology to develop improved versions of
currently marketed, well known anti-cancer drugs and to newly discovered
agents with the goal of improving their ease of administration, side
effect profile and effectiveness. Given the proven efficacy of the agents
we choose to link to our polymer, we believe this strategy will provide
us a broad portfolio of cancer products with less development risk.
Furthermore, we believe that linking our polymers to existing drugs will
yield patentable subject matter. We also plan to make this technology
available to selected collaborators, where linking our polymer to their
drugs can improve the efficacy and extend the patent life of their drugs.
. In-license or acquire complementary products or technologies. We use the
expertise of our management, scientific team and scientific advisory
board to identify and evaluate potential product opportunities that fit
within our overall portfolio strategy. We have identified and acquired
attractive oncology product candidates by following three key principles:
. We focus on identifying products that more selectively target tumor
cells (making them potentially less toxic and more effective than
existing drugs) and products that kill tumor cells by unique
mechanisms of action (making them potentially able to overcome
resistance to existing drugs)
. We leverage key relationships at leading cancer research institutions
to uncover potential new product opportunities that meet our criteria
. We act quickly to secure licensing rights once an attractive
opportunity is identified
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Products in Development
The following table summarizes the potential therapeutic indications for,
and current development status of, our products in development. Trials
designated with an asterisk are being conducted under a Cooperative
Development and Research Agreement with the NCI.
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Drug Candidate Indication/Intended Use Status
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ATO (arsenic NDA being prepared
trioxide) Relapsed acute promyelocytic leukemia, or APL
Combination with ATRA for first line treatment Phase III *
of APL
Refractory multiple myeloma Phase II
Relapsed or refractory non-Hodgkin's lymphoma, Phase II *
or NHL
Relapsed or refractory Hodgkin's lymphoma Phase II *
Relapsed or refractory acute lymphoblastic Phase II *
leukemia, or ALL
Relapsed and refractory acute myelogenous Phase II *
leukemia, or AML; secondary leukemia
Relapsed or refractory chronic myelogenous Phase II *
leukemia, or CML
Advanced hormone refractory prostate cancer Phase II *
Advanced cervical cancer Phase II *
Advanced renal cell cancer Phase II *
Combination with ascorbic acid for relapsed and Phase I/II *
refractory multiple myeloma
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PG-TXL(TM) Advanced cancers not previously treated with Phase I
taxanes
(polyglutamate Combination with anthracylines or cisplatin for Phase I planned
earlier stage breast, lung, ovarian cancer
paclitaxel) Taxane refractory cancers including breast Phase II planned
and ovarian cancer
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PG-CPT Treatment of advanced colon cancer and other Preclinical
(polyglutamate cancers
camptothecin)
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Apra(TM) Second line treatment for soft tissue sarcoma Phase II
Treatment of hormone/chemotherapy-resistant Phase II
prostate cancer
Combination with cisplatin for non-small cell Phase I planned
lung cancer other advanced cancers
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Arsenic Trioxide (ATO)
We are developing ATO initially for the treatment of patients with drug
resistant or relapsed APL and are planning to submit our NDA by the end of
March 2000. ATO is a synthetic version of arsenic, a natural element. ATO
appears to work by forcing immature cancer cells to self destruct through a
process called programmed cell death or apoptosis. Apoptosis is a normal part
of a normal cell's life cycle. Because cancer is often associated with a
malfunction of the normal process of apoptosis, drugs that can induce
apopotosis offer the hope of affecting cancer cells more selectively without
the typical toxic side effects of conventional treatments. Direct induction of
apoptosis represents a new method of killing tumor cells that is different
from that of the majority of conventional cancer drugs. As a result, in
addition to its use as single agent therapy, ATO may work well when
administered in combination with other cancer therapies to produce more
durable cancer response rates.
The FDA has granted ATO fast track designation based on the fact that APL is
a life threatening cancer that can result in rapid death if not treated
promptly and that the use of ATO may result in remissions in patients who have
not been able to attain remissions using currently approved drugs. If ATO is
approved for the first indication, we plan on expanding the use of ATO in
other cancers such as multiple myeloma, lymphoma, other leukemias and solid
tumors if clinical trials results indicate that ATO can lead to major
responses. More than 150 patients have received ATO in the United States and
14 clinical trials of ATO are underway.
We intend to protect ATO by obtaining orphan drug exclusivity in the U.S.
and Europe. When granted orphan exclusivity, products usually receive seven
years of marketing exclusivity in the U.S. and 10 years in the E.U. We have
received orphan drug designation for the use of ATO in APL and have filed for
orphan drug designation, the first step toward orphan drug exclusivity, for
multiple myeloma, myelodysplasia and non-Hodgkin's lymphoma. We also plan to
pursue orphan drug designation for other indications. In addition, we have
exclusive rights to several patent applications filed by Memorial Sloan-
Kettering Institute and the Sam Waxman Cancer Foundation which cover methods
of treating a variety of cancers and conditions with ATO.
ATO for Acute Promyleocytic Leukemia. APL is a malignant disorder of the
white blood cells which typically occurs in patients over the age of 30.
Approximately 1,500 to 2,000 patients are diagnosed with APL each year in the
United States. Current treatment for APL includes the use of all-trans
retinoic acid, commonly called ATRA, followed by anthracyline based
chemotherapy. Without chemotherapy, 90% of patients will relapse within 6
months of ATRA treatment. Combined with chemotherapy, still only about 50% of
APL patients will survive three years or longer. The high treatment failure
rates may be explained by the fact that combination treatment results in
eradication of the mutant APL gene in the bone marrow in only 20% to 30% of
patients. For patients who relapse following ATRA and chemotherapy, survival
rates are low, with median survival being limited to just four to five months
and only approximately 20% of patients surviving one year. Moreover, these
patients are exposed to, and some actually die from, the toxic effects of high
cumulative doses of anthracycline chemotherapy.
The initial pilot trial results and accompanying editorial were published in
the November 5, 1998 issue of The New England Journal of Medicine. The results
of this study were confirmed in a recently completed pivotal trial whose
preliminary results were presented at the 1999 Annual Meeting of the American
Society of Hematology. As reported in the two trials, 30 of 34 (88%) patients
with resistant APL and 16 of 18 (89%) patients with relapsed APL achieved a
complete remission with ATO.
Investigators reported that in the pivotal trial, 40 patients with relapsed
APL following chemotherapy and/or bone marrow transplants were treated with
low dose intravenous ATO over a one to two hour daily infusion until remission
was achieved. Patients required on average 30 days of treatment and, following
a month off treatment, received an additional 25 days of maintenance therapy.
Of the 40 patients treated, 34 patients (85%) achieved a complete response,
with 73% of the patients demonstrating molecular eradication of the malignant
APL gene on bone marrow testing. Although the median survival has not yet been
reached, median survival already exceeds 12 months, substantially higher than
the four to five months generally observed in these patients. Side effects of
ATO noted in that study by the investigators were mild and manageable, for the
most part, as outpatients. The most common side effects included fever, weight
gain, fatigue, skin rash, numbness in the hands and an asymptomatic change in
electrocardiogram, or EKG.
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Based on these results, we plan to submit a NDA in the United States by the
end of March 2000 and for marketing approval in Europe by the end of the year.
Also, given the high complete response rates reported for ATO in the end-
stage, salvage therapy setting for APL, the NCI is currently conducting a
randomized phase III of ATRA and ATO as first line therapy for APL. If
successful, we would plan to file a supplemental NDA for ATO as first line
treatment for APL.
ATO for Multiple Myeloma. Multiple myeloma is a malignant disease of the
bone marrow that is invariably fatal. It is the second most common blood cell
malignancy, affecting approximately 40,000 people in the United States with
over 13,000 new cases reported annually. The disease is initially treated with
oral chemotherapy drugs. Once the disease can no longer be controlled with
oral drugs, treatments include aggressive high dose chemotherapy, bone marrow
transplant and recently, thalidomide. Fewer than 50% of patients experience a
response to these treatment options.
In December 1999, investigators reported interim results of a phase II study
conducted at the University of Arkansas on the use of ATO in nine patients
with advanced stage multiple myeloma who had failed treatment with high dose
chemotherapy and bone marrow transplants and who had also failed treatment
with thalidomide. Three of nine patients (33%) had a response to ATO. However,
only four patients had completed more than 30 days of ATO therapy at the time
of the report, of which two had a major response (>50% reduction in myeloma
protein levels), one had stable disease and one progressed. The investigators
concluded that ATO had activity in end stage, high risk myeloma and should be
investigated in earlier stage disease prior to use of thalidomide. We are
currently conducting a phase II trial of ATO in earlier stage myleoma. In
addition, the NCI is conducting a phase I/II trial of ATO in combination with
ascorbic acid for treating relapsed and refractory myeloma. We are seeking
orphan drug designation for the treatment of myeloma with ATO.
ATO for Advanced Hematologic Malignancies. Hematologic malignancies are
cancers of the blood system, and include leukemias and lymphomas. In 1998,
more than 80,000 people had acute and chronic leukemia and approximately
31,000 new cases are diagnosed annually in the United States. Non-Hodgkin's
lymphoma affects almost 180,000 people in the United States, with
approximately 55,000 new cases reported in the U.S. in 1999. For patients who
relapse, fewer than 25% survive five years, with the majority dying within 14
months of relapse. Clinical trials with ATO have demonstrated encouraging
responses in advanced leukemias other than APL and myeloma, including CML, AML
and myelodysplasia. Promising results have also been achieved in advanced
lymphomas including non-Hodgkin's lymphoma. The NCI is conducting six phase II
or phase III clinical trials investigating the utility of ATO in treating
advanced leukemia and lymphoma. If these trials are successful and provide
sufficient data, we intend to use data from these trials, where appropriate,
to support additional uses and indications for ATO.
ATO for Solid Tumors. Solid tumors include malignancies that develop in
various tissues throughout the body, as opposed to hematologic cancers
described above. Genitourinary cancers, such as cervical, renal cell and
prostate cancer, affect approximately 850,000 patients in the United States,
with over 240,000 new cases diagnosed annually. Preclinical tests and clinical
trials have demonstrated that ATO may have significant anti-tumor activity
among patients with cervical, renal cell and prostate cancer. The NCI is
currently conducting three phase II trials in these cancers to further
evaluate these preliminary observations. If these trials are successful and
provide sufficient data, we intend to use the information from these trials
and new trials in other solid tumors to extend the indications of ATO.
Polyglutamate Drug Delivery Technology
We are also developing a new way to deliver cancer drugs more selectively to
tumor tissue with the goal of reducing the toxic side effects and improving
the anti-tumor activity of existing chemotherapy agents. Our technology links
cancer drugs to proprietary polyglutamate polymers. Polyglutamate, which we
call PG, is a biodegradable polymer made of glutamic acid, a naturally
occurring amino acid. To build these polymers, we repetitively link together
glutamic acid molecules to an optimized size. Unlike blood vessels found in
normal tissues, tumor blood vessels contain openings or pores. Because of
these pores, tumors are more permeable to molecules, such as our PG polymers,
that are within a specific size range. As the polymer, carrying its tumor
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killing drug, circulates in the bloodstream and passes through the tumor blood
vessels, it becomes trapped in the tumor tissue allowing a significantly
greater percentage of the anticancer drug to accumulate preferentially in
tumor tissue as compared to normal tissue. The toxicity of the chemotherapy
drug may be further reduced because the drug is inactive as long as it is
bound to the polymer. Once the polymer drug conjugate enters the tumor, the
polymer is digested, freeing the cancer killing drug.
Based on preclinical animal studies, we believe that our polyglutamate-
chemotherapy drug conjugates may be able to achieve a number of benefits over
existing chemotherapy drugs:
. More drug reaches the tumor
. Increased efficacy using the same amount of drug
. Ability to use higher doses of the active drug
. Less toxicity at the same or higher doses of drug
. Broader applicability due to differentiated tumor uptake mechanism
. Potential to overcome resistance to the underlying chemotherapy drug
In addition, we believe that linking our polymers to existing drugs will
yield patentable subject matter and that our polymer-drug conjugates will not
infringe any third-party patents covering the underlying drug. However, there
can be no assurance that we will receive a patent for our polymer conjugates
or that we will not be challenged by the holder of a patent covering the
underlying drug.
We licensed the worldwide exclusive rights to PG and related polymers and
their applications from PG-TXL Company in 1998. The technology was originally
developed at the MD Anderson Cancer Center. The initial patent, which issued
in November 1999, covers the ability to use PG coupled with commonly used
cancer drugs such as paclitaxel, docetaxel, etopside, teniposide, camptothecin
or epothilone. These drug classes represented over 40% of U.S. chemotherapy
sales in 1998.
Our strategy is to use this novel polymer to build a portfolio of
potentially safer and more effective versions of well-known anti-cancer
agents. We believe that our PG drug development program may lower the risks
inherent in developing new drugs because we are linking PG to well defined and
widely used chemotherapy drugs. We are initially focusing our development
efforts on applying PG to two of the fastest growing classes of anticancer
drugs, taxanes and the camptothecins.
PG-TXL(TM) (polyglutamate paclitaxel). PG-TXL is PG linked to paclitaxel,
the active ingredient in Taxol, the world's best selling cancer drug. Taxol is
difficult to administer because it must be mixed in castor oil and ethanol,
which is toxic when given intravenously, and requires a lengthy three hour
intravenous infusion. PG-TXL is 80,000 fold more water soluble than
paclitaxel, allowing it to be administered in just two tablespoons of water in
minutes. Also, because PG-TXL is water soluble, its administration should not
require premedication with steroids and antihistamines to prevent severe
reactions. PG-TXL may also allow for delivery of higher doses that can be
achieved with the currently marketed version of paclitaxel.
It is estimated that more than 2 million people have breast, ovarian, lung
and colon cancer, with more than 470,000 new cases diagnosed each year in the
United States. Despite the difficulties associated with administration and
serious dose limiting toxicities, 1999 U.S. sales of Taxol and Taxotere grew
to $1.2 billion, with worldwide sales approaching $2.0 billion. The majority
of taxane usage has been in breast, ovarian and lung cancer indications. Most
recently, Taxol received approval as a first line treatment in node positive
breast cancer, which is expected to add up to an additional 75,000 eligible
patients annually in the U.S.
We have performed multiple preclinical animal studies using PG-TXL and
comparing PG-TXL to paclitaxel alone. Our results suggested superior efficacy
and lower toxicity for PG-TXL, and an ability for PG-TXL to treat tumors
resistant to Taxol. Specifically:
. In animal testing, when administered at equivalent doses of paclitaxel,
treatment with PG-TXL cured established breast cancer tumors whereas
treatment with paclitaxel only slowed tumor growth by several days.
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. When examined for the ability of PG-TXL to accumulate in tumor tissue,
administration of PG-TXL to tumor bearing animals resulted in 600% more
paclitaxel reaching the tumor than an equivalent dose of paclitaxel
alone. At the end of seven days, there was still as much paclitaxel in
the tumor being released from the polymer than the maximum amount that
was achieved on day one with free paclitaxel.
. PG-TXL significantly enhanced anti-tumor activity in tumors that are
resistant to the killing effects of paclitaxel suggesting the polymer may
expand the potential utility of paclitaxel to a wider population of
cancer types than the currently available form of the drug can achieve.
The Cancer Research Campaign is currently sponsoring a U.K. phase I clinical
trial of PG-TXL which we expect to be completed by the end of 2000. We plan to
begin phase II trials in the U.S. and the U.K. in the second half of 2000. Our
registration strategy for PG-TXL is to examine its potential safety and
efficacy as single agent therapy in solid tumors that either have become
unresponsive to Taxol or Taxotere or for which Taxol and Taxotere are not
indicated. We believe this strategy could allow us to accelerate the
development and regulatory submission for PG-TXL under the FDA fast track
program. We also intend to investigate the safety and efficacy of PG-TXL when
used in combination with drugs commonly used in first line treatment regimens
in combination with Taxol or Taxotere, such as cisplatin or doxorubicin.
The phase I trial is testing PG-TXL in patients with cancers who have failed
other chemotherapies but who have not previously been treated with taxanes
such as Taxol or Taxotere. We expect to enroll 12 to 18 patients to determine
the maximum tolerated dose of PG-TXL when administered by a 10 to 30 minute
infusion every three weeks. We chose to initiate human trials in the U.K.
because of the CRC's experience with polymer cancer drug conjugates and
because of the ability to perform trials in patients who have not received
taxol. We believe this data will expedite initiation of phase II testing in
the United States.
PG-CPT (polyglutamate camptothecin). PG-CPT (polyglutamate camptothecin) is
camptothecin linked to PG. Camptothecins are an important and rapidly growing
class of anticancer drugs. However, like taxanes, their full clinical benefit
is limited by poor solubility and significant toxicity. To avert solubility
limitations, oral analogs such as Hycamtin and Camptosar were developed.
However, conversion to oral dosage forms has been accompanied by a reduction
in antitumor potency. Despite these limitations, camptothecins are becoming
standard drugs in the treatment of advanced colon, lung and ovarian cancer.
U.S. sales for camptothecins exceeded $330 million in 1999.
Linking camptothecin to PG renders it water soluble and in animal studies
permits up to 400% more drug to be administered without an increase in
toxicity. PG-CPT demonstrated significantly enhanced anti-tumor activity in
animal models of lung, colon and breast cancer, with up to 500% improvement
over the free drug. We are currently optimizing a camptothecin for selection
as a clinical development candidate and plan to file an IND by mid 2001.
Apra
Apra belongs to a new class of cancer drugs, called phospholipid regulators,
developed by our scientists. At effective concentrations, Apra selectively
kills tumor cells but spares normal cells. Also, because the structure and
mechanism of action for Apra are unique, tumors that are or become resistant
to standard anti-cancer drugs may not be resistant to Apra. Preclinical
studies have demonstrated that Apra, when used in combination with
conventional agents such as the widely used cancer drug cisplatin, can
sensitize tumors to the killing effects of cisplatin making the combination
treatment more effective than either agent used alone.
We are currently conducting two phase II trials of Apra in patients with
drug resistant soft tissue sarcoma and prostate cancer. The FDA has granted
orphan drug designation for Apra in the treatment of both sarcoma and
refractory prostate cancer. Our strategy is to initially pursue fast track
designation for sarcoma and then seek to expand the potential indications of
the drug by investigating it in combination with conventional cancer drugs for
larger disease indications such as non-small cell lung cancer and prostate
cancer.
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Apra for Sarcoma. Sarcomas are malignant tumors of the muscle, cartilage or
cells which make up the connective tissues of other organs. Over 12,000
patients have sarcoma in the United States, with 7,000 new cases diagnosed
each year. First line chemotherapy treatment for sarcomas consists primarily
of anthracycline therapy, which produces responses in approximately 10% to 20%
of patients. Patients with sarcoma that do not respond to chemotherapy
generally die within 12 months.
We previously completed two phase I trials in 52 patients with end stage
cancers which provide preliminary data on the maximum tolerated dose, safety
and potential efficacy of Apra when used alone in the treatment of advanced
stage cancers. Among those 52 patients, 17 had advanced stage sarcoma. Six of
17 (35%) had a response with 5 of 6 (83%) remaining alive a median of 19
months from commencing therapy. Based on these results, we initiated a phase
II trial of Apra as second line treatment for sarcoma. In November 1999,
investigators reported encouraging data among the first 24 evaluable patients.
Based upon the responses that were observed in a particular subtype of sarcoma
called gastrointestinal stromal cell sarcoma, or GIST, we announced we were
expanding the size of the sarcoma trial from 40 patients to 80 patients. We
expect to complete enrollment for this trial by the end of 2000.
Apra for Treatment of Other Cancers. We are also investigating whether the
combination of Apra with cisplatin, a commonly used cancer drug for solid
tumors, can result in better tumor response rates than with cisplatin alone.
We intend to initiate a phase Ib trial of Apra in combination with cisplatin
for lung cancer and other advanced cancers in the second half of 2000. Our
strategy is to expand the use of Apra over time to larger cancer markets such
as lung cancer and prostate cancer where Apra may improve efficacy when
combined with conventional cancer drugs.
Collaboration and Licensing Arrangements
BioChem Pharma. We have a collaboration and supply agreement with BioChem
Pharma for the development and commercialization of Apra in Canada. Under this
collaboration agreement, BioChem Pharma will be responsible for obtaining
regulatory approval for Apra in Canada. Although BioChem Pharma will have no
obligation to conduct any research and development activities, it will have
the right to have us perform clinical trials in Canada at BioChem Pharma's
expense. BioChem Pharma will have the exclusive right to commercialize Apra in
Canada, subject to the payment of royalties to us. We will also receive
payments under the collaboration agreement if certain milestones are achieved.
BioChem Pharma may terminate this agreement with respect to any product at any
time for any reason upon 30 days' notice.
PG-TXL Company, L.P. On June 30, 1998, we entered into an agreement with PG-
TXL Company, L.P. granting us an exclusive worldwide license for the rights to
PG-TXL and to all potential uses of PG-TXL Company's polymer technology. Under
the terms of the agreement, we acquired the rights to fund the research,
development, manufacture, marketing and sale of anti-cancer drugs developed
using this polymer technology. We are obligated to make payments upon the
attainment of significant development milestones, as defined in the agreement.
We are obligated to meet certain development requirements by June 30, 2002 to
maintain these exclusive license rights.
Johnson & Johnson. In November 1996, we entered into a Collaboration and
License Agreement with Johnson & Johnson for the joint development and
commercialization of lisofylline. Neither party is currently pursuing any
further development of lisofylline at this time.
Patents and Proprietary Rights
We dedicate significant resources to protecting our intellectual property.
We have acquired through our acquisition of PolaRx rights to four pending
patent applications covering dosage formulations, methods of administration
and methods of use for various forms of arsenic trioxide and related
compounds. We have exclusive rights to one issued patent and 21 U.S. and
foreign pending patent applications relating to our polymer drug delivery
technology. Thirteen issued U.S. patents cover the chemical entity,
pharmaceutical compositions and methods of use of Apra and related compounds.
We intend to file additional patent applications when
9
appropriate, with respect to improvements in our core technology and to
specific products and processes that we develop. There can be no assurance
that any patents will issue from any present or future applications or, if
patents do issue, that such patents will be issued on a timely basis or that
claims allowed on issued patents will be sufficient to protect our technology.
In addition, there can be no assurance that the patents issued to us will not
be challenged, invalidated or circumvented or that the rights granted
thereunder will provide proprietary protection or commercial advantage to us.
With respect to such issued U.S. patents or any patents that may issue in the
future, there can be no assurance that they will effectively protect the
technology involved, foreclose the development of competitive products by
others or otherwise be commercially valuable.
We have sought and intend to aggressively seek patent protection in the
United States, Europe and Japan to protect any products that we may develop.
We also intend to seek patent protection or rely upon trade secrets to protect
certain of our enabling technologies that will be used in discovering and
evaluating new drugs which could become marketable products. However, there
can be no assurance that such steps will effectively protect the technology
involved. To protect any such trade secrets and other proprietary information,
we rely on confidentiality and material transfer agreements with our corporate
partners, employees, consultants, outside scientific collaborators and
sponsored researchers and other advisors. There can be no assurance that these
agreements will not be breached, that we will have adequate remedies for
breach or that our trade secrets will not otherwise become known or
independently discovered by competitors. We also have members of our
Scientific Advisory and Clinical Boards, our consultants and, in most cases,
our employees enter into agreements requiring disclosure to us of ideas,
developments, discoveries or inventions conceived during employment or
consulting and assignment to us of proprietary rights to such matters related
to our business and technology.
Manufacturing
We currently use, and expect to continue to be dependent upon, contract
manufacturers to manufacture each of our product candidates. We have
established a quality control and quality assurance program, including a set
of standard operating procedures and specifications, designed to ensure that
our products are manufactured in accordance with cGMPs and other applicable
domestic and foreign regulations. There can be no assurance that these
manufacturers will meet our requirements for quality, quantity or timeliness.
We will need to develop additional manufacturing resources, and may seek to
enter into additional collaborative arrangements with other parties which have
established manufacturing capabilities or may elect to have a third party
manufacture our products on a contract basis. We have an agreement with a
third-party vendor to furnish ATO, PG-TXL and Apra drug substances for
clinical studies and in the case of ATO, for initial commercial launch, if and
when approved by the FDA. We will be dependent upon these third parties to
supply us in a timely manner with products manufactured in compliance with
cGMPs or similar standards imposed by foreign regulators. Contract
manufacturers may violate cGMPs, and the FDA has intensified its oversight of
drug manufacturers. There can be no assurance that the FDA would not take
action against a contract manufacturer who violates cGMPs. Such actions may
include requiring the contract manufacturer to cease its manufacturing
activities.
Marketing
We intend to develop our own sales and marketing infrastructure in North
America to commercialize our portfolio of oncology products. We plan to enter
into commercialization arrangements to market our products outside of North
America.
We have no experience in marketing, sales or distribution. We believe,
however, that the United States oncology market is accessible by a limited
marketing staff and field sales organization. This market is highly
concentrated. It is comprised primarily of the approximately 5,000 physicians
who order the vast majority of cancer therapeutics.
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Competition
Competition in the pharmaceutical and biotechnology industries is intense.
We face competition from a variety of companies focused on developing oncology
drugs. We compete with large pharmaceutical companies and with other
specialized biotechnology companies. Many of our existing or potential
competitors have substantially greater financial, technical and human
resources than us and may be better equipped to develop, manufacture and
market products. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. Many of these
competitors have significant products that have been approved or are in
development and operate large, well funded research and development programs.
We expect to encounter significant competition for the principal
pharmaceutical products we plan to develop. Companies that complete clinical
trials, obtain required regulatory approvals and commence commercial sales of
their products before their competitors may achieve a significant competitive
advantage. Accordingly, the relative speed with which we and any future
collaborators can develop products, complete preclinical testing and clinical
trials and approval processes, and supply commercial quantities of the
products to the market are expected to be important competitive factors. A
number of biotechnology and pharmaceutical companies are developing new
products for the treatment of the same diseases being targeted by us. In some
instances, such products have already entered late-stage clinical trials or
received FDA approval. Significant levels of research in biotechnology,
medicinal chemistry and pharmacology occur in academic institutions,
governmental agencies and other public and private research institutions.
These entities have become increasingly active in seeking patent protection
and licensing revenues for their research results. They also compete with us
in recruiting and retaining skilled scientific talent.
We believe that our ability to compete successfully will be based on our
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent
or other protection for its products, obtain required regulatory approvals and
manufacture and successfully market our products either alone or through
outside parties. We will continue to seek licenses with respect to technology
related to our field of interest and may face competition with respect to such
efforts.
Government Regulation
The research, development, testing, manufacture, labeling, promotion,
advertising, distribution, and marketing, among other things, of our products
are extensively regulated by governmental authorities in the United States and
other countries. In the United States, the FDA regulates drugs under the
Federal Food, Drug, and Cosmetic Act ("the FDCA") and its implementing
regulations. Failure to comply with the applicable U.S. requirements may
subject us to administrative or judicial sanctions, such as FDA refusal to
approve pending new drug applications, warning letters, product recalls,
product seizures, total or partial suspension of production or distribution,
injunctions, and/or criminal prosecution.
Drug Approval Process. None of our drugs may be marketed in the U.S. until
the drug has received FDA approval. We have not yet submitted an application
for approval for any of our drug product candidates. The steps required before
a drug may be marketed in the U.S. include:
. preclinical laboratory tests, animal studies, and formulation studies
. submission to the FDA of an investigational new drug application, or IND,
for human clinical testing, which must become effective before human
clinical trials may begin
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for each indication
. submission to the FDA of a NDA
. satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess compliance
with current Good Manufacturing Procedures ("cGMP") and
. FDA review and approval of the NDA.
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Preclinical tests include laboratory evaluation of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
preclinical tests, together with manufacturing information and analytical
data, are submitted to the FDA as part of an IND, which must become effective
before human clinical trials may begin. An IND will automatically become
effective 30 days after receipt by the FDA, unless before that time the FDA
raises concerns or questions about issues such as the conduct of the trials as
outlined in the IND. In such a case, the IND sponsor and the FDA must resolve
any outstanding FDA concerns or questions before clinical trials can proceed.
We cannot be sure that submission of an IND will result in FDA allowing
clinical trials to begin.
Clinical trials involve the administration of the investigational drug to
human subjects under the supervision of qualified investigators. Clinical
trials are conducted under protocols detailing the objectives of the study,
the parameters to be used in monitoring safety, and the effectiveness criteria
to be evaluated. Each protocol must be submitted to the FDA as part of the
IND.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap or be combined. Each trial must be reviewed and approved by
an independent Institutional Review Board before it can begin. Study subjects
must sign an informed consent form before participating in a clinical trial.
Phase I usually involves the initial introduction of the investigational drug
into people to evaluate its safety, dosage tolerance, pharmacodynamics, and,
if possible, to gain an early indication of its effectiveness. Phase II
usually involves trials in a limited patient population to (i) evaluate dosage
tolerance and appropriate dosage; (ii) identify possible adverse effects and
safety risks; and (iii) evaluate preliminarily the efficacy of the drug for
specific indications. Phase III trials usually further evaluate clinical
efficacy and test further for safety by using the drug in its final form in an
expanded patient population. There can be no assurance that phase I, phase II,
or phase III testing will be completed successfully within any specified
period of time, if at all. Furthermore, the Company or the FDA may suspend
clinical trials at any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing, the results
of the preclinical studies and of the clinical studies, together with other
detailed information, including information on the manufacture and composition
of the drug, are submitted to the FDA in the form of an NDA requesting
approval to market the product for one or more indications. Before approving
an NDA, the FDA usually will inspect the facility or the facilities at which
the drug is manufactured, and will not approve the product unless cGMP
compliance is satisfactory. If FDA evaluates the NDA and the manufacturing
facilities as acceptable, the FDA will issue an approval letter. If the FDA
evaluates the NDA submission or manufacturing facilities as not acceptable,
the FDA will outline the deficiencies in the submission and often will request
additional testing or information. Even if we submit the requested additional
information, the FDA ultimately may decide that the NDA does not satisfy the
regulatory criteria for approval. The testing and approval process requires
substantial time, effort, and financial resources, and we cannot be sure that
any approval will be granted on a timely basis, if at all. After approval,
certain changes to the approved product, such as adding new indications,
manufacturing changes, or additional labeling claims are subject to further
FDA review and approval.
FDA's "fast track" program is intended to facilitate the development and
expedite the review of drugs intended for the treatment of serious or life-
threatening diseases and that demonstrate the potential to address unmet
medical needs for such conditions. Under this program, FDA can, for example,
review portions of an NDA for a fast track product before the entire
application is complete, thus potentially beginning the review process at an
earlier time. We have received fast track designation for ATO for the
treatment of patients with drug resistant or relapsed APL and we intend to
seek to have some of our other drug products designated as fast track
products, with the goal of reducing review time. There can be no guarantee
that FDA will grant any of our additional requests for fast track designation,
that any fast track designation would affect the time of review, or that FDA
will approve the NDA submitted for any of our drug candidates, whether or not
fast track designation is granted. Additionally, FDA approval of a fast track
product can include restrictions on the product's use or distribution (such as
permitting use only for specified medical procedures or limiting distribution
to physicians or facilities with special training or experience), and can be
conditioned on the performance of additional clinical studies after approval.
12
FDA procedures also provide priority review of NDAs submitted for drugs
that, compared to currently marketed products, offer a significant improvement
in the treatment, diagnosis, or prevention of a disease.
NDAs that are granted priority review are intended to be acted upon more
quickly than NDAs given standard review. FDA's current goal is to act on 90%
of priority NDAs within six months of receipt. We anticipate seeking priority
review of ATO for the indication of relapsed APL and intend to do so with
regard to some of our other drug candidates. There can be no guarantee that
FDA will grant priority review status in any instance, that priority review
status will affect the time of review, or that FDA will approve the NDA
submitted for any of our drug candidates, whether or not priority review
status is granted.
Post-Approval Requirements. If FDA approval of one or more of our drug
products is obtained, we will be required to comply with a number of post-
approval requirements. For example, holders of an approved NDA are required to
report certain adverse reactions to the FDA, and to comply with certain
requirements concerning advertising and promotional labeling for their
products. Also, quality control and manufacturing procedures must continue to
conform to cGMP after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with cGMP. Accordingly,
manufacturers must continue to expend time, money, and effort in the area of
production and quality control to maintain cGMP compliance. We use and will
continue to use third-party manufacturers to produce our products in clinical
and commercial quantities, and we cannot be sure that future FDA inspections
will not identify compliance issues at our facilities or at the facilities of
our contract manufacturers that may disrupt production or distribution, or
require substantial resources to correct. In addition, discovery of problems
with a product after approval may result in restrictions on a product,
manufacturer, or holder of an approved NDA, including withdrawal of the
product from the market. Also, new government requirements may be established
that could delay or prevent regulatory approval of our products under
development.
Orphan Drug. The FDA may grant orphan drug designation to drugs intended to
treat a "rare disease or condition," which generally is a disease or condition
that affects fewer than 200,000 individuals in the United States. Orphan drug
designation must be requested before submitting an NDA. After the FDA grants
orphan drug designation, the identity of the therapeutic agent and its
potential orphan use are publicly disclosed by the FDA. Orphan drug
designation does not convey an advantage in, or shorten the duration of, the
regulatory review and approval process. If a product which has an orphan drug
designation subsequently receives the first FDA approval for the indication
for which it has such designation, the product is entitled to orphan
exclusivity, meaning that the FDA may not approve any other applications to
market the same drug for the same indication, except in certain very limited
circumstances, for a period of seven years.
We have obtained orphan drug designation for ATO to treat patients with drug
resistant or relapsed APL, and for Apra to treat patients with soft tissue
sarcoma and refractory prostate cancer. We have also filed for orphan drug
designation for ATO for the treatment of patients with refractory multiple
myeloma, myelodysplasia, and non-Hodgkins lymphoma. However, we cannot be sure
that ATO will receive an orphan drug designation for these indications, or
that ATO, Apra, or any of our drug products will receive orphan drug
exclusivity for any indication. Also, it is possible that our competitors
could obtain approval, and attendant orphan drug exclusivity, for products
that would preclude us from marketing our products for specified indications
for some time.
Non-United States Regulation. Before our products can be marketed outside of
the United States, they are subject to regulatory approval similar to that
required in the United States, although the requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. No action can be taken to market any product in a
country until an appropriate application has been approved by the regulatory
authorities in that country. The current approval process varies from country
to country, and the time spent in gaining approval varies from that required
for FDA approval. In certain countries, the sales price of a product must also
be approved. The pricing review period often begins after market approval is
granted. No assurance can be given that even if a product is approved by a
regulatory authority, satisfactory prices will be approved for such product.
13
Environmental Regulation
In connection with its research and development activities and its
manufacturing materials and products, we are subject to federal, state and
local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal
of certain materials, biological specimens and wastes. Although we believe
that we have complied with these laws, regulations and policies in all
material respects and has not been required to take any significant action to
correct any noncompliance, there can be no assurance that we will not be
required to incur significant costs to comply with environmental and health
and safety regulations in the future. Our research and development involves
the controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and radioactive materials. Although we believe
that our safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources.
Employees
As of March 15, 2000, we employed 97 individuals, including 35 holding
doctoral or other advanced degrees. Our employees do not have a collective
bargaining agreement. We consider our relations with our employees to be good.
Scientific and Clinical Advisory Boards
We have a Scientific Advisory Board which consists of recognized scientists
with expertise in the fields of immunology, cell and molecular biology, and
synthetic and medical chemistry. Our Scientific Advisory Board meets with our
management and key scientific employees on a semi-annual basis and in smaller
groups or individually from time to time on an informal basis. The members
assist us in identifying scientific and product development opportunities,
reviewing with management the progress of our specific projects and recruiting
and evaluating our scientific staff. We also have a Clinical Advisory Board
which assists us from time to time on clinical matters.
The following are members of our Scientific Advisory Board:
Lewis Cantley, Ph.D., is a noted authority in cellular biochemical signaling
pathways that employ phosphatidyl inositol and its metabolites and is the
discoverer of one of the most critical enzymes in those pathways, the
PI3 Kinase. He is currently Professor of Cell Biology at Harvard Medical
School and Chief of the Division of Signal Transduction in the Department of
Medicine, Beth Israel Hospital, Boston and the author of over
180 publications.
Edward A. Dennis, Ph.D., is the Vice Chair of Medical Biochemistry at the
University of California, San Diego. He is a noted authority on
phospholipases, cell signaling and phospholipid metabolism. Dr. Dennis serves
on the Scientific Advisory Board and Management Committee of, and chairs the
Management Executive Board of, the Keystone Symposia. He sits on the Editorial
Board of the Journal of Cellular Biochemistry and on the Publications
Committee of the American Society for Biochemistry and Molecular Biology. He
has authored over 185 manuscripts.
Edwin Krebs, M.D., is a Professor Emeritus, Department of Pharmacology and
Biochemistry, at the University of Washington in Seattle and a Senior
Investigator Emeritus at the Howard Hughes Medical Institute. He is a
recognized authority on mechanisms of action of second messengers, including
protein kinases and phosphorylation reactions. He is the recipient of numerous
awards and honors and has authored 297 manuscripts. In 1992, Dr. Krebs was
awarded the Nobel Prize in Physiology of Medicine for his work on second
messenger pathways.
14
L. Jackson Roberts, II, M.D., is an internationally recognized authority on
the oxidative metabolism of polyunsaturated fatty acids. He is known for
having identified PGD2 on the major mast cell lipid mediator and, more
recently, for having originated the field of studying non enzymatically-
generated prostanoids, including the isprostanes and neuroprostanes. He is
currently Profession of Pharmacology and Medicine at Vanderbilt University and
is the author of over 170 publications.
The following are members of our Clinical Advisory Board:
Donnall Thomas, M.D., is the Chairman of our Clinical Advisory Board. He is
the former Associate Director of Clinical Research and presently a Professor
Emeritus at the Fred Hutchinson Cancer Research Center, of which he was a
founding member. His research has spanned a wide array of fields from
radiation biology to developmental immunology, and from cancer causing genes
to gene transfer therapies. For his pioneering work in bone marrow transplant,
Dr. Thomas was awarded the Nobel Prize for Medicine in 1990. Among the other
honors awarded to Dr. Thomas in recognition of his medical research are the
American Cancer Society Award for Distinguished Service in Basic Research and
the Kettering Prize of the General Motors Cancer Research Foundation. He is a
member of the U.S. Academy of Sciences.
Karen H. Antman, M.D., is the Chief of the Division of Medical Oncology,
College of Physicians & Surgeons of Columbia University. Dr. Antman is an
expert in emerging treatment strategies for solid tumors, notably breast
cancer and sarcomas. From 1994 to 1995 she served as President of the American
Society of Clinical Oncology. Since 1993, Dr. Antman has served on the Sarcoma
Committee of the Southwest Oncology Groups, and has been its chairperson since
1995. From 1993 to 1994 she was program committee chair of the American
Association for Cancer Research. She is on the editorial board of several
prestigious journals, including Associate Editor of The New England Journal of
Medicine.
Factors Affecting Our Operating Results
This annual report on Form 10-K contains "forward-looking" statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks faced by us described below and elsewhere
in this annual report on Form 10-K.
If we do not successfully develop products, we may be unable to generate any
revenue.
Our leading drug candidates, arsenic trioxide, or ATO, PG-TXL and Apra, are
currently in clinical trials. These clinical trials of the drug candidates
involve the testing of potential therapeutic agents, or effective treatments,
in humans in three phases (phases I, II, and III) to determine the safety and
efficacy of the drug candidates necessary for an approved drug. Many drugs in
human clinical trials fail to demonstrate the desired safety and efficacy
characteristics. Even if our drugs progress successfully through initial human
testing, they may fail in later stages of development. A number of companies
in the pharmaceutical industry, including CTI, have suffered significant
setbacks in advanced clinical trials, even after reporting promising results
in earlier trials. For example, in our first phase III human trial for
lisofylline, completed in March 1998, we failed to meet our two primary
endpoints, or goals, even though we met our endpoints in two earlier phase II
trials for lisofylline. As a result, we are no longer developing lisofylline
as a potential product. In addition, data obtained from clinical trials are
susceptible to varying interpretations. Government regulators and our
collaborators may not agree with our interpretation of our future clinical
trial results. The clinical trials of ATO, PG-TXL and Apra or any of our
future drug candidates may not be successful.
Many of our drug candidates are still in research and preclinical
development, which means that they have not yet been tested on humans. We will
need to commit significant time and resources to develop these and additional
product candidates. We are dependent on the successful completion of clinical
trials and obtaining regulatory approval in order to generate revenues. The
failure to generate such revenues may preclude us from continuing our research
and development of these and other product candidates.
15
Even if our drug candidates are successful in clinical trials, they may not be
successfully commercialized.
Since our inception in 1991, we have dedicated substantially all of our
resources to the research and development of our technologies and related
compounds. All of our compounds currently are in research or development, and
none has been submitted for marketing approval. There can be no assurance that
any of our other compounds will enter human clinical trials on a timely basis,
if at all, or that we will develop any product candidates suitable for
commercialization. Prior to commercialization, each product candidate will
require significant additional research, development and preclinical testing
and extensive clinical investigation before submission of any regulatory
application for marketing approval. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may:
. be found ineffective or cause harmful side effects during preclinical
testing or clinical trials
. fail to receive necessary regulatory approvals
. be difficult to manufacture on a large scale
. be uneconomical to produce
. fail to achieve market acceptance
. be precluded from commercialization by proprietary rights of third
parties
We cannot assure you that our product development efforts or that our
collaborative partners' efforts will be successfully completed, that required
regulatory approvals will be obtained or that any products, if introduced,
will be successfully marketed or achieve customer acceptance.
Several of our drug candidates are based on novel technologies that have not
yet been proven.
Many of our product candidates are based upon novel delivery technologies
which we are using to discover and develop drugs for the treatment of cancer.
This technology has not been proven. Furthermore, preclinical results in
animal studies may not predict outcome in human clinical trials. Our product
candidates may not be proven safe or effective. If this technology does not
work, our drug candidates may not develop into commercial products.
Our clinical trials could take longer to complete than expected.
Although for planning purposes we forecast the commencement and completion
of clinical trials, the actual timing of these events can vary dramatically
due to factors such as delays, scheduling conflicts with participating
clinicians and clinical institutions and the rate of patient accruals. We
cannot assure you that clinical trials involving our product candidates will
commence or be completed as forecasted. We have limited experience in
conducting clinical trials. In certain circumstances we rely on academic
institutions or clinical research organizations to conduct, supervise or
monitor some or all aspects of clinical trials involving our products. In
addition, certain clinical trials for our products will be conducted by
government-sponsored agencies and consequently will be dependent on
governmental participation and funding. We will have less control over the
timing and other aspects of these clinical trials than if we conducted them
entirely on our own. We cannot assure you that these trials will commence or
be completed as we expect or that they will be conducted successfully. Failure
to commence or complete, or delays in, any of our planned clinical trials
could delay or prevent the commercialization of our products and harm our
business.
If we continue to incur net losses, we may not achieve or maintain
profitability.
We were incorporated in 1991 and have incurred a net operating loss every
year. As of December 31, 1999, we had an accumulated deficit of approximately
$158.4 million. We have not generated any product revenue from sales to date.
We may never generate revenue nor become profitable, even if we are able to
commercialize any products. We will need to conduct significant research,
development, testing and regulatory compliance activities that, together with
projected general and administrative expenses, we expect will result in
substantial increasing operating losses for at least the next several years.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
16
If we fail to adequately protect our intellectual property, our competitive
position could be harmed.
Development and protection of our intellectual property are critical to our
business. If we do not adequately protect our intellectual property,
competitors may be able to practice our technologies. Our success depends in
part on our ability to:
. obtain patent protection for our products or processes both in the United
States and other countries
. protect trade secrets
. prevent others from infringing on our proprietary rights
In particular we believe that linking our polymers to existing drugs will
yield patentable subject matter. We do not believe that our polymer-drug
conjugates will infringe any third-party patents covering the underlying drug.
However, there can be no assurance that we will receive a patent for our
polymer conjugates or that we will not be challenged by the holder of a patent
covering the underlying drug.
The patent position of biopharmaceutical firms generally is highly uncertain
and involves complex legal and factual questions. The U.S. Patent and
Trademark Office has not established a consistent policy regarding the breadth
of claims that it will allow in biotech patents. If it allows broad claims,
the number and cost of patent interference proceedings in the U.S. and the
risk of infringement litigation may increase. If it allows narrow claims, the
risk of infringement may decrease, but the value of our rights under our
patents, licenses and patent applications may also decrease.
We cannot assure you that patent applications in which we have rights will
ever issue as patents or that the claims of any issued patents will afford
meaningful protection for our technologies or products. In addition, patents
issued to us or our licensors may be challenged and subsequently narrowed,
invalidated or circumvented. Litigation, interference proceedings or other
governmental proceedings that we may become involved in with respect to our
proprietary technologies or the proprietary technology of others could result
in substantial cost to us. Patent litigation is widespread in the
biotechnology industry, and any patent litigation could harm our business.
Costly litigation might be necessary to protect our orphan drug designations
or patent position or to determine the scope and validity of third-party
proprietary rights, and we may not have the required resources to pursue such
litigation or to protect our patent rights. An adverse outcome in litigation
with respect to the validity of any of our patents could subject us to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require us to cease using a product or
technology.
We also rely upon trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. Third parties may
independently develop such know-how or otherwise obtain access to our
technology. While our employees, consultants and corporate partners with
access to proprietary information are generally required to enter into
confidentiality agreements, these agreements may not be honored.
If any of our license agreements for intellectual property underlying ATO, PG-
TXL or any other product are terminated, we may lose our rights to develop or
market that product.
Patents issued to third parties may cover our products as ultimately
developed. We may need to acquire licenses to these patents or challenge the
validity of these patents. We may not be able to license any patent rights on
acceptable terms or successfully challenge such patents. The need to do so
will depend on the scope and validity of these patents and ultimately on the
final design or formulation of the products and services that we develop.
We have licensed intellectual property, including patent applications from
Memorial Sloan Kettering Cancer Institute, Samuel Waxman Cancer Research
Foundation, Beijing Medical University and others, including the intellectual
property underlying our most advanced product candidate, ATO. We have also in-
licensed the intellectual property relating to our polymer drug delivery
technology, including PG-TXL. Some of our product development programs depend
on our ability to maintain rights under these licenses. Each licensor has the
power
17
to terminate its agreement with us if we fail to meet our obligations under
that license. We may not be able to meet our obligations under these licenses.
If we default under any of these license agreements, we may lose our right to
market and sell any products based on the licensed technology.
Our products could infringe on the intellectual property rights of others,
which may cause us to engage in costly litigation and, if we are not
successful, could cause us to pay substantial damages and prohibit us from
selling our products.
Although we attempt to monitor the patent filings of our competitors in an
effort to guide the design and development of our products to avoid
infringement, third parties may challenge the patents that have been issued or
licensed to us. We may have to pay substantial damages, possibly including
treble damages, for past infringement if it is ultimately determined that our
products infringe a third party's patents. Further, we may be prohibited from
selling our products before we obtain a license, which, if available at all,
may require us to pay substantial royalties. Even if infringement claims
against us are without merit, defending a lawsuit takes significant time, may
be expensive and may divert management attention from other business concerns.
Our lack of operating experience may cause us difficulty in managing our
growth.
We have no experience in selling pharmaceutical products and only limited
experience in negotiating, establishing and maintaining strategic
relationships, in manufacturing or procuring products in commercial quantities
and conducting other later-stage phases of the regulatory approval process.
Furthermore, our first leading drug candidate, ATO, was only recently acquired
in January from PolaRx. We have no experience with respect to the launch of a
commercial product. Our ability to manage our growth, if any, will require us
to improve and expand our management and our operational and financial systems
and controls (particularly with respect to ATO). If our management is unable
to manage growth effectively, our business and financial condition would be
materially harmed. In addition, if rapid growth occurs, it may strain our
operational, managerial and financial resources.
If we fail to keep pace with rapid technological change in the biotechnology
and pharmaceutical industries, our products could become obsolete.
Biotechnology and related pharmaceutical technology have undergone and are
subject to rapid and significant change. We expect that the technologies
associated with biotechnology research and development will continue to
develop rapidly. Our future will depend in large part on our ability to
maintain a competitive position with respect to these technologies. Any
compounds, products or processes that we develop may become obsolete before we
recover any expenses incurred in connection with developing these products.
We are faced with direct and intense competition from our rivals in the
biotechnology and pharmaceutical industries.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Our
competitors include major, multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions. Many of these competitors have greater financial and other
resources, larger research and development staffs and more effective marketing
and manufacturing organizations, than we do. In addition, academic and
government institutions have become increasingly aware of the commercial value
of their research findings. These institutions are now more likely to enter
into exclusive licensing agreements with commercial enterprises, including our
competitors, to market commercial products.
Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for
drug candidates before we do. In particular, we face direct competition from
many companies focusing on delivery technologies. Drugs resulting from our
research and development efforts, if approved for sale, may not compete
successfully with our competitors' existing products or products under
development.
18
If we fail to raise substantial additional capital, we will have to curtail or
cease operations.
We expect that our existing capital resources and the interest earned
thereon will enable us to maintain our current and planned operations through
at least mid-2001. Beyond that time, if our capital resources are insufficient
to meet future capital requirements, we will have to raise additional funds to
continue the development of our technologies and complete the
commercialization of products, if any, resulting from our technologies. We
will require substantial funds to: (1) continue our research and development
programs, (2) in-license or acquire additional technologies, and (3) conduct
preclinical studies and clinical trials. We may need to raise additional
capital to fund our operations repeatedly. We may raise such capital through
public or private equity financings, partnerships, debt financings, bank
borrowings, or other sources. Our capital requirements will depend upon
numerous factors, including the following:
. the establishment of additional collaborations
. the development of competing technologies or products
. changing market conditions
. the cost of protecting our intellectual property rights
. the purchase of capital equipment
. the progress of our drug discovery and development programs, the progress
of our collaborations and receipt of any option/license, milestone and
royalty payment resulting from those collaborations
. in-licensing and acquisition opportunities
Additional funding may not be available on favorable terms or at all. If
adequate funds are not otherwise available, we may curtail operations
significantly. To obtain additional funding, we may need to enter into
arrangements that require us to relinquish rights to certain technologies,
drug candidates, products and/or potential markets. To the extent that
additional capital is raised through the sale of equity, or securities
convertible into equity, you may experience dilution of your proportionate
ownership of the company.
Our stock price is extremely volatile, which may affect our ability to raise
capital in the future.
The market price for securities of biopharmaceutical and biotechnology
companies, including that of ours, historically has been highly volatile, and
the market from time to time has experienced significant price and volume
fluctuations that are unrelated to the operating performance of such
companies. For example, in the last twelve months, our stock price has ranged
from a low of $1.3125 to a high of $52.00. Fluctuations in the trading price
or liquidity of our common stock may adversely affect our ability to raise
capital through future equity financings.
Factors that may have a significant impact on the market price and
marketability of our common stock include:
. announcements of technological innovations or new commercial therapeutic
products by us, our collaborative partners or our present or potential
competitors
. our quarterly operating results
. announcements by us or others of results of preclinical testing and
clinical trials
. developments or disputes concerning patent or other proprietary rights
. developments in our relationships with collaborative partners
. acquisitions
. litigation
19
. adverse legislation, including changes in governmental regulation and the
status of our regulatory approvals or applications
. third-party reimbursement policies
. changes in securities analysts' recommendations
. changes in health care policies and practices
. economic and other external factors
. general market conditions
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation.
Our dependence on third-party manufacturers means that we may not have
sufficient control over the manufacture of our products.
We currently do not have internal facilities for the manufacture of any of
our products for clinical or commercial production. We will need to develop
additional manufacturing resources, enter into collaborative arrangements with
other parties which have established manufacturing capabilities or elect to
have other third parties manufacture our products on a contract basis. For
example, we are a party to an agreement with Aerojet to furnish Apra bulk drug
substance for future clinical studies. We are dependent on such collaborators
or third parties to supply us in a timely way with products manufactured in
compliance with standards imposed by the FDA and foreign regulators. The
manufacturing facilities of contract manufacturers may not comply with
applicable manufacturing regulations of the FDA nor meet our requirements for
quality, quantity or timeliness.
We may face difficulties in achieving acceptance of our products in the market
due to our lack of sales and marketing capabilities and other factors.
We have no direct experience in marketing, sales or distribution. The
creation of infrastructure to commercialize pharmaceutical products is an
expensive and time-consuming process. In the event that ATO achieves
regulatory approval, we will need to build a sales and marketing force to
market the product. Should we have to market and sell our other products
directly, we would need to further develop a marketing and sales force with
sufficient technical expertise and distribution capability. We may be unable
to develop the necessary marketing and sales capabilities and we may fail to
gain market acceptance for our products.
If we lose our key personnel or are unable to attract and retain additional
personnel, we may be unable to pursue collaborations or develop our own
products.
We are highly dependent on Dr. James A. Bianco, Chief Executive Officer, and
Dr. Jack Singer, Executive Vice President, Research Program Chairman. The loss
of these principal members of our scientific or management staff, or failure
to attract or retain other key scientific personnel employees, could prevent
us from pursuing collaborations or developing our products and core
technologies. Recruiting and retaining qualified scientific personnel to
perform research and development work are critical to our success. There is
intense competition for qualified scientists and managerial personnel from
numerous pharmaceutical and biotechnology companies, as well as from academic
and government organizations, research institutions and other entities. In
addition, we rely on consultants and advisors, including our scientific and
clinical advisors, to assist us in formulating our research and development
strategy. All of our consultants and advisors are employed by other employers
or are self-employed, and have commitments to or consulting or advisory
contracts with other entities that may limit their availability to us.
20
If we fail to obtain regulatory approvals, we will be unable to commercialize
our products.
We do not have a drug product approved for sale in the U.S. or any foreign
market. We must obtain approval from the FDA in order to sell our drug
products in the U.S. and from foreign regulatory authorities in order to sell
our drug products in other countries. We have not yet submitted any
application for approval to the FDA. Once an application is submitted, the FDA
could reject the application or require us to conduct additional clinical or
other studies as part of the regulatory review process. Delays in obtaining or
failure to obtain FDA approvals would prevent or delay the commercialization
of our drug products, which prevent, defer or decrease our receipt of
revenues.
The regulatory review and approval process is lengthy, expensive and
uncertain. Extensive preclinical and clinical data and supporting information
must be submitted to the FDA for each indication for each drug in order to
secure FDA approval. We have limited experience in obtaining such approvals,
and cannot be certain when we will receive these regulatory approvals, if
ever.
In addition to initial regulatory approval, our drug products will be
subject to extensive and rigorous ongoing domestic and foreign government
regulation, as we discuss in more detail in "Business--Government Regulation."
Any approvals, once obtained, may be withdrawn if compliance with regulatory
requirements is not maintained or safety problems are identified. Failure to
comply with these requirements may subject us to stringent penalties.
Because there is a risk of product liability associated with our products, we
face potential difficulties in obtaining insurance.
Our business exposes us to potential product liability risks inherent in the
testing, manufacturing and marketing of human pharmaceutical products, and we
may not be able to avoid significant product liability exposure. Except for
insurance covering product use in our clinical trials, we do not currently
have any product liability insurance, and it is possible that we will not be
able to obtain or maintain such insurance on acceptable terms or that any
insurance obtained will provide adequate coverage against potential
liabilities. Our inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or limit the commercialization of any products we
develop. A successful product liability claim in excess of our insurance
coverage could exceed our net worth.
Uncertainty regarding third-party reimbursement and health care cost
containment initiatives may limit our returns.
Our ability to commercialize our products successfully will be affected by
the ongoing efforts of governmental and third-party payors to contain or
reduce the cost of health care. Governmental and other third-party payors
increasingly are attempting to contain health care costs by:
. challenging the prices charged for health care products and services
. limiting both coverage and the amount of reimbursement for new
therapeutic products
. denying or limiting coverage for products that are approved by the FDA
but are considered experimental or investigational by third-party payors
. refusing in some cases to provide coverage when an approved product is
used for disease indications in a way that has not received FDA marketing
approval
In addition, the trend toward managed health care in the United States, the
growth of organizations such as health maintenance organizations, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and
products, resulting in lower prices and reducing demand for our products.
21
Even if we succeed in bringing any of our proposed products to the market,
they may not be considered cost-effective and third-party reimbursement might
not be available or sufficient. If adequate third-party coverage is not
available, we may not be able to maintain price levels sufficient to realize
an appropriate return on our investment in research and product development.
In addition, legislation and regulations affecting the pricing of
pharmaceuticals may change in ways adverse to us before or after any of our
proposed products are approved for marketing. While we cannot predict whether
any such legislative or regulatory proposals will be adopted, the adoption of
such proposals could make it difficult or impossible to sell our products.
Although we believe that we adequately prepared for Year 2000 issues, it is
possible that Year 2000 problems of other companies could impact our business.
Although we have not experienced any Year 2000 problems, the systems of
other companies on which we rely may still remain vulnerable to the Year 2000
issue. Potential impacts could include, but are not limited to, future revenue
delays due to delayed research, development, clinical trials or agency
approvals. We presently believe the Year 2000 issue will not pose significant
operational problems for our computer systems or third-party relationships. We
believe that the Year 2000 issues have been effectively avoided, but we have
developed for each critical activity a contingency plan to allow operations to
continue even if significant issues are experienced.
Since we use hazardous materials in our business, we may be subject to claims
relating to improper handling, storage or disposal of these materials.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain
waste products. Although we believe that our safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated completely. In the event of such an
accident, we could be held liable for any damages that result and any such
liability not covered by insurance could exceed our resources. Compliance with
environmental laws and regulations may be expensive, and current or future
environmental regulations may impair our research, development or productions
efforts.
Our ability to conduct animal testing could be limited in the future.
Certain of our research and development activities involve animal testing.
Such activities have been the subject of controversy and adverse publicity.
Animal rights groups and other organizations and individuals have attempted to
stop animal testing activities by pressing for legislation and regulation in
these areas. To the extent the activities of these groups are successful, our
business could be materially harmed.
Because our charter documents contain certain anti-takeover provisions and we
have a rights plan, it may be more difficult for a third party to acquire us,
and the rights of some shareholders could be adversely affected.
Our Restated Articles of Incorporation and Bylaws contain provisions that
may make it more difficult for a third party to acquire or make a bid for us.
These provisions could limit the price that certain investors might be willing
to pay in the future for shares of our common stock. In addition, shares of
our preferred stock may be issued in the future without further shareholder
approval and upon such terms and conditions and having such rights, privileges
and preferences, as the board of directors may determine. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of any holders of preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of our outstanding
voting stock. We have no present plans to issue any shares of preferred stock.
In addition, we have adopted a shareholder rights plan that, along with
certain provisions of our Restated Articles of Incorporation, may have the
effect of discouraging certain transactions involving a change of control of
the company.
22
Item 2. Properties
We lease approximately 66,000 square feet of space at 201 Elliott Avenue
West in Seattle, Washington for our executive office, laboratory and
administrative operations. The lease expires on January 31, 2003, with two
consecutive five-year renewal options at the then prevailing market rent. We
believe our existing and planned facilities are adequate to meet our present
requirements. Despite a decrease in local vacancy rates for commercial space,
we currently anticipate that additional space will be available to us, when
needed, on commercially reasonable terms.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock commenced trading on the Nasdaq National Market
under the symbol "CTIC" March 21, 1997. The following table sets forth, for
the periods indicated the high and low reported sales prices per share of the
common stock as reported on the Nasdaq National Market.
High Low
---- ---
1997
First Quarter (commencing March 21, 1997)............... $10 7/8 $10
Second Quarter.......................................... 13 5/8 7 5/8
Third Quarter........................................... 16 1/4 10 5/8
Fourth Quarter.......................................... 18 3/4 14 7/8
1998
First Quarter........................................... $16 3/4 $ 4
Second Quarter.......................................... 4 3/4 2 1/2
Third Quarter........................................... 3 3/16 1 1/2
Fourth Quarter.......................................... 3 3/4 1 3/4
1999
First Quarter........................................... $ 4 5/8 $2 13/16
Second Quarter.......................................... 5 2 1/16
Third Quarter........................................... 3 9/32 2 1/32
Fourth Quarter.......................................... 7 1/2 1 5/16
2000
First Quarter (through March 23, 2000).................. $ 52 $5 5/16
On March 23, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $27.00 per share. As of February 29, 2000, there
were approximately 335 holders of record of our common stock.
Dividend Policy
The Company has not declared or paid any cash dividends on its capital stock
since its inception. The Company currently intends to retain all of its cash
and any future earnings to finance the growth and development of its business
and therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
In November 1999, we issued an aggregate of 6,198,087 shares of Series D
preferred stock and warrants in connection with a private placement. These
shares are convertible into common stock at the option of the holder. We
relied upon the exeption provided by Section 4(2) of the Securities Act.
24
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below with respect to our
consolidated statements of operations for each of the three years in the
period ended December 31, 1999 and for the period from September 4, 1991 (date
of incorporation) to December 31, 1999, and with respect to the consolidated
balance sheets at December 31, 1998 and 1999, are derived from the audited
consolidated financial statements of the Company included elsewhere in this
report, and is qualified by reference to such financial statements and the
notes related thereto. The selected consolidated balance sheet data at
December 31, 1995, 1996 and 1997 and the selected consolidated statement of
operations data for the years ended December 31, 1995 and 1996 are derived
from our audited financial statements not included in this report. The data
set forth below should be read in conjunction with Item 7. "--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto appearing at Item 8 of
this report.
Period from
September 4,
1991 (Date of
Year Ended December 31, Incorporation) To
------------------------------------------------ December 31,
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- -----------------
(in thousands, except per share data)
Consolidated Statements
of Operations Data:
Revenues:
Collaboration
agreements............ $ 100 $ 9,121 $ 11,831 $ 13,200 $ -- $ 34,252
Operating expenses:
Research and
development........... 14,606 16,109 27,285 29,942 27,682 145,069
General and
administrative........ 6,145 7,602 10,090 10,889 9,788 56,221
-------- -------- -------- -------- -------- ---------
Total operating
expenses............. 20,751 23,711 37,375 40,831 37,470 201,290
-------- -------- -------- -------- -------- ---------
Loss from operations.... (20,651) (14,590) (25,544) (27,631) (37,470) (167,038)
-------- -------- -------- -------- -------- ---------
Other income (expense):
Investment income...... 1,167 1,174 2,895 3,094 1,692 11,654
Interest expense....... (509) (512) (377) (435) (502) (2,967)
-------- -------- -------- -------- -------- ---------
Net loss................ (19,993) (13,928) (23,026) (24,972) (36,280) (158,351)
======== ======== ======== ======== ======== =========
Preferred stock
dividend............... -- -- -- -- (5,201) (5,201)
-------- -------- -------- -------- -------- ---------
Net loss................ $(19,993) $(13,928) $(23,026) $(24,972) $(41,481) $(163,552)
======== ======== ======== ======== ======== =========
Basic and diluted net
loss per common
share(1)............... $ (4.19) $ (2.82) $ (1.98) (1.62) $ (2.67)
======== ======== ======== ======== ========
Shares used in
computation of basic
and diluted net loss
per common share....... 4,771 4,939 11,634 15,410 15,552
======== ======== ======== ======== ========
December 31,
--------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
(in thousands)
Consolidated Balance
Sheets Data:
Cash, cash equivalents,
and securities available-
for-sale................. $ 21,906 $ 30,987 $ 70,444 $ 46,435 $ 23,880
Collaboration agreement
receivables.............. -- -- 3,683 3,254 --
Working capital........... 18,342 26,300 67,594 44,143 17,705
Total assets.............. 28,048 37,002 80,433 58,156 30,848
Long-term obligations,
less current portion..... 2,606 2,005 2,039 3,888 2,653
Deficit accumulated during
development stage........ (60,144) (74,083) (97,098) (122,070) (158,350)
Total shareholders'
equity................... 21,858 30,054 71,760 47,165 20,904
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the number of shares and net loss per common share.
25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We focus on developing, acquiring and commercializing novel treatments for
cancer. Our goal is to build a leading, vertically-integrated pharmaceutical
company with a diversified portfolio of oncology drugs and drug candidates.
Since commencement of operations in 1992, we have been engaged in research
and development activities, including conducting preclinical studies and
clinical trials. We have not received any revenue from product sales to date.
As of December 31, 1999, we had incurred aggregate net losses of approximately
$158.4 million since inception. We expect to continue to incur significant
additional operating losses over the next several years from our research and
development efforts. Operating losses may fluctuate from quarter to quarter as
a result of differences in the timing of expenses incurred and revenues
recognized.
In the fourth quarter of 1995, we began to receive revenue under a
collaboration agreement with BioChem Pharma, Inc., and in the fourth quarter
of 1996, we began to receive revenue under a collaboration agreement with
subsidiaries of Johnson & Johnson. Under the terms of the collaboration,
Johnson & Johnson paid 60% of the U.S. development costs of lisofylline, a
product we are no longer developing. In November 1998, after reviewing the
results of our phase III clinical trial for lisofylline, we and Johnson &
Johnson formally amended our collaboration. Under the terms of the amended
collaboration, Johnson & Johnson agreed to pay us $13.1 million for
development cost reimbursements for the year ended December 31, 1998, and we
anticipate no further payments under this agreement.
On June 30, 1998, we entered into an agreement with PG-TXL Company, L.P. and
scientists at the M.D. Anderson Cancer Center, granting us an exclusive
worldwide license to the rights to PG-TXL, and to all potential uses of its
polymer technology. Under the terms of the agreement, we will fund the
research, development, manufacture, marketing and sale of drugs developed
using PG-TXL's polymer technology.
In January 2000, we acquired ATO upon our acquisition of PolaRx, a single
product company that owned the rights to ATO. In connection with the
acquisition, we issued 2,000,000 shares of our common stock at signing and
will issue an additional 3,000,000 shares to PolaRx shareholders upon the
earlier of approval of an NDA by the FDA for ATO or five years from the
acquisition date. The acquisition agreement requires shareholder approval for
2,000,000 of the 3,000,000 additional shares. If our shareholders do not
approve the issuance of these additional shares, we will pay the PolaRx
shareholders in cash. Two additional payouts tied to sales thresholds of
$10 million and $20 million in any four consecutive quarters, may be payable
in tranches of $4 million and $5 million at the then fair market value of our
stock, at the time such thresholds are achieved. For annual sales of ATO in
excess of $40 million, PolaRx shareholders will receive a 2% royalty on net
sales payable at the then fair market value of our common stock or, in certain
circumstances, cash. We assumed $5 million of PolaRx's outstanding liabilities
and commitments and expect to incur substantial pre-commercialization expenses
associated with the launch of ATO, should we receive marketing approval from
the FDA.
Results of Operations
Years ended December 31, 1999 and 1998
Revenues. We did not record any collaboration agreement revenues during
1999. In 1998, we recorded revenues of approximately $13.1 million from our
collaboration agreement with Johnson & Johnson and $100,000 under a
collaboration agreement from BioChem Pharma.
Research and development. Research and development expenses decreased to
approximately $27.7 million for the year ended December 31, 1999 from
approximately $29.9 million for the year ended December 31, 1998. This
decrease was due primarily to the winding down of manufacturing and
preclinical development activities for lisofylline offset in part by
development activities for PG-TXL. We have almost eliminated research and
development expenses for lisofylline and anticipate increased research and
development expenses in connection with our other products.
26
General and administrative expenses. General and administrative expenses
decreased to approximately $9.8 million for the year ended December 31, 1999
from approximately $10.9 million for the year ended December 31, 1998. This
decrease was due primarily to reduction in general and administrative staff
personnel and operating expenses required to support our research and
development activities. General and administrative expenses are expected to
increase to support our expected increase in research, development and
commercialization efforts.
Investment income. Investment income decreased to approximately $1.7 million
for the year ended December 31, 1999 from approximately $3.1 million for the
year ended December 31, 1998. This decrease was associated primarily with
lower average cash balances on hand during the year ended December 31, 1999
compared to the year ended December 31, 1998.
Interest expense. Interest expense increased to approximately $502,000 for
the year ended December 31, 1999 from approximately $435,000 for the year
ended December 31, 1998. This increase was due primarily to higher average
balances of outstanding long-term obligations.
Preferred stock dividend. We issued preferred stock and common stock
warrants in November 1999. On the date of issuance, the effective conversion
price of the preferred stock after allocating the portion of the proceeds to
the common stock warrants based on the relative fair values, was at a discount
to the price of the common stock into which the preferred stock is
convertible. The discount of $5.2 million was recorded as a preferred stock
dividend.
Years Ended December 31, 1998 and 1997
Revenues. During the year ended December 31, 1998, we recorded $13.2 million
of collaboration agreement revenues. During the year ended December 31, 1997,
we recorded approximately $11.8 million of collaboration agreement revenue
from Johnson & Johnson.
Research and development. Research and development expenses increased to
approximately $29.9 million for the year ended December 31, 1998 from
approximately $27.3 million for the year ended December 31, 1997. This
increase was due primarily to expanded development activities with respect to
lisofylline, Apra, and commencing development activities for PG-TXL.
General and administrative expenses. General and administrative expenses
increased to approximately $10.9 million for the year ended December 31, 1998
from approximately $10.1 million for the year ended December 31, 1997. This
increase was due primarily to operating expenses associated with supporting
our increased research, development and clinical activities. Additionally,
during 1998 we incurred transaction costs with respect to acquiring the rights
to PG-TXL.
Investment income. Investment income increased to approximately $3.1 million
for the year ended December 31, 1998 from approximately $2.9 million for the
year ended December 31, 1997. The increase was associated primarily with
higher average cash balances on hand during 1998 due to the proceeds from
follow-on offering in the fourth quarter of 1997.
Interest expense. Interest expense increased to approximately $435,000 for
the year ended December 31, 1998 from approximately $378,000 for the year
ended December 31, 1997. This increase was due primarily to higher average
balances of outstanding long-term obligations, partially offset by lower
average interest rates on those obligations.
27
Liquidity and Capital Resources
We have financed our operations since inception primarily through the sale
of equity securities and our collaboration with Johnson & Johnson. As of
December 31, 1999, we had raised aggregate net proceeds of approximately
$177.1 million through the sale of equity securities. We have received
approximately $40.8 million from Johnson & Johnson including $10 million from
the sale of equity securities. In addition, we financed the purchase of $16.2
million of property and equipment through financing agreements and capital
lease obligations of which approximately $3.4 million remained outstanding as
of December 31, 1999.
As of December 31, 1999, we had $23.9 million in cash, cash equivalents and
securities available-for-sale. In February 2000, we received proceeds of $37.1
million from a private placement of common stock. Pro forma for this
placement, we had $61.0 million in cash, cash equivalents and securities
available-for-sale as of December 31, 1999.
We expect to generate losses from operations for several years due to
substantial additional research and development costs, including costs related
to clinical trials, and increased sales and marketing expenditures. We expect
that our existing capital resources will enable us to maintain our current and
planned operations through at least mid-2001. Our future capital requirements
will depend on many factors, including:
. success of our sales and marketing efforts
. progress in and scope of our research and development activities
. competitive market developments
. success in acquiring complementary products, technologies or businesses
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. If we should
require additional financing due to unanticipated developments, additional
financing may not be available when needed or, if available, we may not be
able to obtain this financing on terms favorable to us or to our stockholders.
Insufficient funds may require us to delay, scale back or eliminate some or
all of our research and development programs, or may adversely affect our
ability to operate as a going concern. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders may
result.
Income Taxes
As of December 31, 1999, we had available for Federal income tax purposes
net operating loss carryforwards of approximately $152.0 million and research
and development credit carryforwards of approximately $5.6 million. These
carryforwards begin to expire in 2007. Our ability to utilize these net
operating loss and research and development credit carryforwards is subject to
annual limitations of $5.6 million for losses incurred prior to March 26, 1997
and may be subject to additional limitations thereafter pursuant to the
"change in ownership" rules under Section 382 of the Internal Revenue Code of
1986.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to market risk related to changes in interest rates that could
adversely affect the value of our investments. We do not use derivative
financial instruments for speculative or trading purposes. We maintain a
short-term investment portfolio consisting of interest bearing securities with
an average maturity of less than one year. These securities are classified as
"available-for-sale" securities. These securities are interest bearing and
thus subject to interest rate risk and will fall in value if market interest
rates increase. Because we have the ability to hold our fixed income
investments until maturity, we do not expect our operating results or cash
flows to be affected to any significant degree by a sudden change in market
interest rates on our securities portfolio.
28
We have operated primarily in the United States and all revenues to date
have been in U.S. dollars. Accordingly, we do not have material exposure to
foreign currency rate fluctuations. We have not entered into any foreign
exchange contracts to hedge any exposure to foreign currency rate fluctuations
because such exposure is immaterial.
Year 2000
Based on a review of our computer and business systems and significant third
party vendors, we have concluded that the change from the year 1999 to the
year 2000 did not have an effect on our day-to-day operations or otherwise
pose significant operational problems. However, we will continue to monitor
our mission critical computer applications and those of our suppliers and
vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are promptly addressed.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 8.Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors.......................... 30
Consolidated Balance Sheets................................................ 31
Consolidated Statements of Operations...................................... 32
Consolidated Statements of Shareholders' Equity............................ 33
Consolidated Statements of Cash Flows...................................... 37
Notes to Consolidated Financial Statements................................. 38
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cell Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Cell
Therapeutics, Inc. (a development stage company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cell
Therapeutics, Inc. (a development stage company) at December 31, 1999 and
1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 and for the
period from September 4, 1991 (date of incorporation) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Seattle, Washington
February 25, 2000
30
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 5,674,386 $ 4,362,486
Securities available-for-sale.................. 18,205,630 42,072,276
Interest receivable............................ 367,636 637,330
Collaboration agreement receivables............ -- 3,254,491
Prepaid expenses and other current assets...... 748,506 920,136
------------- -------------
Total current assets....................... 24,996,158 51,246,719
Property and equipment, net...................... 5,035,683 6,825,897
Other assets and deferred charges................ 816,050 83,879
------------- -------------
Total assets............................... $ 30,847,891 $ 58,156,495
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 1,224,994 $ 1,106,832
Accrued expenses............................... 4,940,626 4,816,385
Current portion of long-term obligations....... 1,125,211 1,180,702
------------- -------------
Total current liabilities.................... 7,290,831 7,103,919
Long-term obligations, less current portion...... 2,653,111 3,887,603
Commitments
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--10,000,000................
Series A and B, 161,118.645 shares
designated, none issued or outstanding..... -- --
Series D, 10,000 shares designated, issued
and outstanding, liquidation preference--
$10,000,000................................ 11,384,029 --
Common Stock, no par value:
Authorized shares--100,000,000...............
Issued and outstanding shares--15,595,536 and
15,534,359 at December 31, 1999 and 1998,
respectively................................ 168,235,338 169,618,635
Notes receivable from officers................. (330,000) (380,000)
Deficit accumulated during development stage... (158,350,182) (122,070,032)
Accumulated other comprehensive loss........... (35,236) (3,630)
------------- -------------
Total shareholders' equity................. 20,903,949 47,164,973
------------- -------------
Total liabilities and shareholders'
equity.................................... $ 30,847,891 $ 58,156,495
============= =============
See accompanying notes.
31
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
September 4,
Year Ended December 31, 1991 (Date of
---------------------------------------- Incorporation) To
1999 1998 1997 December 31, 1999
------------ ------------ ------------ ----------------- ---
Revenues:
Collaboration
agreements........... $ -- $ 13,200,426 $ 11,831,420 $ 34,252,652
Operating expenses:
Research and
development.......... 27,682,174 29,941,772 27,284,544 145,069,602
General and
administrative....... 9,788,292 10,889,402 10,090,253 56,220,765
------------ ------------ ------------ -------------
37,470,466 40,831,174 37,374,797 201,290,367
------------ ------------ ------------ -------------
Loss from operations.... (37,470,466) (27,630,748) (25,543,377) (167,037,715)
Other income (expense):
Investment income..... 1,691,912 3,094,116 2,894,627 11,654,414
Interest expense...... (501,596) (435,279) (377,544) (2,966,881)
------------ ------------ ------------ -------------
Net loss................ (36,280,150) (24,971,911) (23,026,294) (158,350,182)
============ ============ ============ =============
Preferred stock
dividend............... (5,200,513) -- -- (5,200,513)
------------ ------------ ------------ -------------
Net loss applicable to
common shareholders.... $(41,480,663) $(24,971,911) $(23,026,294) $(163,550,695)
============ ============ ============ =============
Basic and diluted net
loss per share......... $ (2.67) $ (1.62) $ (1.98)
============ ============ ============
Shares used in
calculation of basic
and diluted net loss
per share.............. 15,551,526 15,409,848 11,634,032
============ ============ ============
See accompanying notes.
32
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Deficit
-------------------------------------------------- Notes Accumulated
Common Stock Series A Series B Series D Receivable During the
---------------------- ---------------------- ------------- ------------- from Development
Shares Amount Shares Amount Shares Amount Shares Amount Officers Stage
--------- ----------- ---------- ----------- ------ ------ ------ ------ ---------- ------------
Issuance of
common stock to
founders for
cash............. 1,914,313 $ 87,612 -- $ -- -- $ -- -- $ -- $ -- $ --
Cash proceeds
received from the
issuance of
shares and
warrants to
chairman of the
Board of
Directors........ 178,572 2,004,000 -- -- -- -- -- -- -- --
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
net of offering
costs of
$3,467,352....... 2,225,139 35,083,440 -- -- -- -- -- -- -- --
Net loss for the
year ended
December 31,
1992............. -- -- -- -- -- -- -- -- -- (5,323,737)
--------- ----------- ---------- ----------- --- ---- --- ---- ---- ------------
Balance at
December 31,
1992............. 4,318,024 37,175,052 -- -- -- -- -- -- -- (5,323,737)
Repurchase and
cancellation of
common stock..... (60,343) (2,522) -- -- -- -- -- -- -- --
Share
cancellation..... (1,072) -- -- -- -- -- -- -- -- --
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
net of offering
costs of
$1,486,383....... 438,540 12,326,885 -- -- -- -- -- -- -- --
Net loss for the
year ended
December 31,
1993............. -- -- -- -- -- -- -- -- -- (15,328,143)
--------- ----------- ---------- ----------- --- ---- --- ---- ---- ------------
Balance at
December 31,
1993............. 4,695,149 49,499,415 -- -- -- -- -- -- (20,651,880)
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
net of offering
costs of
$85,823.......... 25,001 701,677 -- -- -- -- -- -- -- --
Proceeds from
stock options
exercised........ 79 1,375 -- -- -- -- -- -- -- --
Net loss for the
year ended
December 31,
1994............. -- -- -- -- -- -- -- -- -- (19,499,283)
--------- ----------- ---------- ----------- --- ---- --- ---- ---- ------------
Balance at
December 31,
1994............. 4,720,229 50,202,467 -- -- -- -- -- -- -- (40,151,163)
Net proceeds from
the issuance of
Series A
convertible
preferred stock
via private
placement equity
offering, net of
offering costs of
$1,478,541....... -- -- 95,447.004 30,496,204 -- -- -- -- -- --
Share
cancellation..... (179) -- -- -- -- -- -- -- -- --
Exchange of
warrants for
common stock..... 104,418 -- -- -- -- -- -- -- -- --
Issuance of
common stock for
purchased
research and
development...... 98,574 1,155,750 -- -- -- -- -- -- -- --
December 1995
proceeds received
from issuance of
shares to a
member of the
Board of
Directors........ 5,715 67,000 -- -- -- -- -- -- -- --
Proceeds from
stock options
exercised........ 4,653 56,264 -- -- -- -- -- -- -- --
Comprehensive
loss:
Unrealized gains
on securities
available-for-
sale............ -- -- -- -- -- -- -- -- -- --
Net loss for the
year ended
December 31,
1995............ -- -- -- -- -- -- -- -- -- (19,992,475)
Comprehensive
loss............. -- -- -- -- -- -- -- -- --
--------- ----------- ---------- ----------- --- ---- --- ---- ---- ------------
Balance at
December 31,
1995............. 4,933,410 $51,481,481 95,447.004 $30,496,204 -- $ -- -- $ -- $ -- $(60,143,638)
========= =========== ========== =========== === ==== === ==== ==== ============
Accumulated
Other
Comprehensive
Income/(Loss) Total
------------- -------------
Issuance of
common stock to
founders for
cash............. $ -- $ 87,612
Cash proceeds
received from the
issuance of
shares and
warrants to
chairman of the
Board of
Directors........ -- 2,004,000
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
net of offering
costs of
$3,467,352....... -- 35,083,440
Net loss for the
year ended
December 31,
1992............. -- (5,323,737)
------------- -------------
Balance at
December 31,
1992............. -- 31,851,315
Repurchase and
cancellation of
common stock..... -- (2,522)
Share
cancellation..... -- --
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
net of offering
costs of
$1,486,383....... -- 12,326,885
Net loss for the
year ended
December 31,
1993............. -- (15,328,143)
------------- -------------
Balance at
December 31,
1993............. -- 28,847,535
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
net of offering
costs of
$85,823.......... -- 701,677
Proceeds from
stock options
exercised........ -- 1,375
Net loss for the
year ended
December 31,
1994............. -- (19,499,283)
------------- -------------
Balance at
December 31,
1994............. -- 10,051,304
Net proceeds from
the issuance of
Series A
convertible
preferred stock
via private
placement equity
offering, net of
offering costs of
$1,478,541....... -- 30,496,204
Share
cancellation..... -- --
Exchange of
warrants for
common stock..... -- --
Issuance of
common stock for
purchased
research and
development...... -- 1,155,750
December 1995
proceeds received
from issuance of
shares to a
member of the
Board of
Directors........ -- 67,000
Proceeds from
stock options
exercised........ -- 56,264
Comprehensive
loss:
Unrealized gains
on securities
available-for-
sale............ 24,178 24,178
Net loss for the
year ended
December 31,
1995............ -- (19,992,475)
-------------
Comprehensive
loss............. -- (19,968,297)
------------- -------------
Balance at
December 31,
1995............. $24,178 $ 21,858,225
============= =============
See accompanying notes.
33
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
Preferred Stock Deficit
----------------------------------------------------------- Notes Accumulated
Common Stock Series A Series B Series D Receivable During the
--------------------- ----------------------- --------------------- ------------- from Development
Shares Amount Shares Amount Shares Amount Shares Amount Officers Stage
--------- ----------- ----------- ----------- ---------- ---------- ------ ------ ---------- ------------
Net proceeds from
the issuance of
Series A
convertible
preferred stock
via private
placement equity
offering, net of
offering costs of
$130,000......... -- $ -- 50,746.268 $16,870,000 -- $ -- -- $ -- $ -- $ --
Net proceeds from
the issuance of
Series B
convertible
preferred stock
via private
placement equity
offering, net of
offering costs of
$40,000.......... -- -- -- 14,925.373 4,960,000 -- -- -- --
Exchange of
warrants for
common stock..... 151 -- -- -- -- -- -- -- -- --
Proceeds from
stock options
exercised........ 1,974 23,121 -- -- -- -- -- -- -- --
Proceeds from
common stock
warrants
exercised........ 7,937 305,558 -- -- -- -- -- -- -- --
Comprehensive
loss:
Unrealized
losses on
securities
available-for-
sale............ -- -- -- -- -- -- -- -- -- --
Net loss for the
year ended
December 31,
1996............ -- -- -- -- -- -- -- -- -- (13,928,189)
Comprehensive
loss............. -- -- -- -- -- -- -- -- -- --
Balance at
December 31,
1996............. 4,943,472 51,810,160 146,193.272 47,366,204 14,925.373 4,960,000 -- -- -- (74,071,827)
Net proceeds from
the issuance of
common stock via
initial public
offering, net of
offering costs of
$3,197,750....... 3,000,000 26,802,250 -- -- -- -- -- -- -- --
Net proceeds from
the issuance of
common stock via
follow-on public
offering, net of
offering costs of
$2,538,000....... 2,300,000 34,262,000 -- -- -- -- -- -- -- --
Net proceeds from
the issuance of
common stock via
private placement
equity offering.. 300,000 3,000,000 -- -- -- -- -- -- -- --
Accumulated
Other
Comprehensive
Income/(Loss) Total
------------- -------------
Net proceeds from
the issuance of
Series A
convertible
preferred stock
via private
placement equity
offering, net of
offering costs of
$130,000......... $ -- $ 16,870,000
Net proceeds from
the issuance of
Series B
convertible
preferred stock
via private
placement equity
offering, net of
offering costs of
$40,000.......... -- 4,960,000
Exchange of
warrants for
common stock..... -- --
Proceeds from
stock options
exercised........ -- 23,121
Proceeds from
common stock
warrants
exercised........ -- 305,558
Comprehensive
loss:
Unrealized
losses on
securities
available-for-
sale............ (34,995) (34,995)
Net loss for the
year ended
December 31,
1996............ -- (13,928,189)
-------------
Comprehensive
loss............. -- (13,963,184)
-------------
Balance at
December 31,
1996............. (10,817) 30,053,720
Net proceeds from
the issuance of
common stock via
initial public
offering, net of
offering costs of
$3,197,750....... -- 26,802,250
Net proceeds from
the issuance of
common stock via
follow-on public
offering, net of
offering costs of
$2,538,000....... -- 34,262,000
Net proceeds from
the issuance of
common stock via
private placement
equity offering.. -- 3,000,000
See accompanying notes.
34
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
Preferred Stock
------------------------------------------------------------------- Notes
Common Stock Series A Series B Series D Receivable
----------------------- -------------------------- ------------------------ ------------- from
Shares Amount Shares Amount Shares Amount Shares Amount Officers
---------- ------------ ------------ ------------ ----------- ----------- ------ ------ ----------
Conversion of
preferred stock
to common stock.. 4,784,902 $ 52,326,204 (146,193.272) $(47,366,204) (14,925.373) $(4,960,000) -- $ -- $ --
Proceeds from
stock options
exercised and
stock awards..... 50,045 592,274 -- -- -- -- -- -- --
Non-employee
stock option
compensation
expense.......... -- 100,186 -- -- -- -- -- -- --
Comprehensive
loss:............
Unrealized losses
on securities
available-for-
sale............. -- -- -- -- -- -- -- -- --
Net loss for the
period ended
December 31,
1997............. -- -- -- -- -- -- -- -- --
Comprehensive
loss............. -- -- -- -- -- -- -- -- --
---------- ------------ ------------ ------------ ----------- ----------- --- ---- ---------
Balance at
December 31,
1997............. 15,378,419 168,893,074 -- -- -- -- -- -- --
Proceeds from
stock options
exercised and
stock awards..... 8,570 86,992 -- -- -- -- -- -- --
Non-employee
stock option
compensation
expense.......... -- 422,923 -- -- -- -- -- -- --
Restricted shares
issued to non-
employees........ 51,835 -- -- -- -- -- -- -- --
Proceeds from
stock sold via
employee stock
purchase plan.... 95,535 215,646 -- -- -- -- -- -- --
Notes receivable
from officers.... -- -- -- -- -- -- -- -- (380,000)
Comprehensive
loss:
Unrealized gains
on securities
available-for-
sale............ -- -- -- -- -- -- -- -- --
Net loss for the
period ended
December 31,
1998............ -- -- -- -- -- -- -- -- --
Comprehensive
loss............. -- -- -- -- -- -- -- -- --
---------- ------------ ------------ ------------ ----------- ----------- --- ---- ---------
Balance at
December 31,
1998............. 15,534,359 $169,618,635 -- $ -- -- $ -- -- $ -- $(380,000)
========== ============ ============ ============ =========== =========== === ==== =========
Deficit
Accumulated Accumulated
During the Other
Development Comprehensive
Stage Income/(Loss) Total
-------------- ------------- -------------
Conversion of
preferred stock
to common stock.. $ -- $ -- $ --
Proceeds from
stock options
exercised and
stock awards..... -- -- 592,274
Non-employee
stock option
compensation
expense.......... -- -- 100,186
Comprehensive
loss:............
Unrealized losses
on securities
available-for-
sale............. -- (23,832) (23,832)
Net loss for the
period ended
December 31,
1997............. (23,026,294) -- (23,026,294)
-------------
Comprehensive
loss............. -- -- (23,050,126)
-------------- ------------- -------------
Balance at
December 31,
1997............. (97,098,121) (34,649) 71,760,304
Proceeds from
stock options
exercised and
stock awards..... -- -- 86,992
Non-employee
stock option
compensation
expense.......... -- 422,923
Restricted shares
issued to non-
employees........ -- -- --
Proceeds from
stock sold via
employee stock
purchase plan.... -- -- 215,646
Notes receivable
from officers.... -- -- (380,000)
Comprehensive
loss:
Unrealized gains
on securities
available-for-
sale............ -- 31,019 31,019
Net loss for the
period ended
December 31,
1998............ (24,971,911) -- (24,971,911)
-------------
Comprehensive
loss............. -- -- (24,940,892)
-------------- ------------- -------------
Balance at
December 31,
1998............. $(122,070,032) $ (3,630) $ 47,164,973
============== ============= =============
See accompanying notes.
35
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
Preferred Stock Deficit
-------------------------------------------------- Notes Accumulated
Common Stock Series A Series B Series D Receivable During the
----------------------- ------------- ------------- ---------------------- from Development
Shares Amount Shares Amount Shares Amount Shares Amount Officers Stage
---------- ------------ ------ ------ ------ ------ ---------- ----------- ---------- -------------
Net proceeds from
the issuance of
Series D
convertible
preferred stock
and warrants to
acquire common
stock via private
placement equity
offering, net of
offering costs of
$755,040
(including
warrants issued
to placement
agent value at
$100,000) ....... -- $ 3,117,000 -- $ -- -- $ -- 10,000.000 $ 6,227,960 $ -- $ --
Preferred stock
dividend......... -- (5,200,513) -- -- -- -- -- 5,156,069 -- --
Proceeds from
stock options
exercised and
stock awards..... 4,932 14,002 -- -- -- -- -- -- -- --
Non-employee
equity based
compensation
expense.......... -- 568,767 -- -- -- -- -- -- --
Proceeds from
stock sold via
employee stock
purchase plan.... 56,245 117,447 -- -- -- -- -- -- -- --
Reclass to
current asset for
former officer... -- -- -- -- -- -- -- -- 50,000 --
Comprehensive
loss:
Unrealized
losses on
securities
available-for-
sale............ -- -- -- -- -- -- -- -- -- --
Net loss for the
period ended
December 31,
1999............ -- -- -- -- -- -- -- -- -- (36,280,150)
Comprehensive
loss............. -- -- -- -- -- -- -- -- -- --
---------- ------------ --- ---- --- ---- ---------- ----------- --------- -------------
Balance at
December 31,
1999............. 15,595,536 $168,235,338 -- $ -- -- $ -- 10,000.000 $11,384,029 $(330,000) $(158,350,182)
========== ============ === ==== === ==== ========== =========== ========= =============
Accumulated
Other
Comprehensive
Income/(Loss) Total
------------- -------------
Net proceeds from
the issuance of
Series D
convertible
preferred stock
and warrants to
acquire common
stock via private
placement equity
offering, net of
offering costs of
$755,040
(including
warrants issued
to placement
agent value at
$100,000) ....... $ -- $ 9,344,960
Preferred stock
dividend......... -- (44,444)
Proceeds from
stock options
exercised and
stock awards..... -- 14,002
Non-employee
equity based
compensation
expense.......... -- 568,767
Proceeds from
stock sold via
employee stock
purchase plan.... -- 117,447
Reclass to
current asset for
former officer... -- 50,000
Comprehensive
loss:
Unrealized
losses on
securities
available-for-
sale............ (31,606) (31,606)
Net loss for the
period ended
December 31,
1999............ -- (36,280,150)
-------------
Comprehensive
loss............. -- (36,311,756)
------------- -------------
Balance at
December 31,
1999............. $(35,236) $ 20,903,949
============= =============
See accompanying notes
36
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period From
September 4,
1991 (Date of
Year Ended December 31, Incorporation)
---------------------------------------- To December 31,
1999 1998 1997 1999
------------ ------------ ------------ ---------------
Operating Activities
Net loss applicable to
common shareholders.... $(41,480,663) $(24,971,911) $(23,026,294) $(163,550,695)
Adjustments to reconcile
net loss applicable to
common shareholders to
net cash used in
operating activities:
Preferred stock
dividend.............. 5,200,513 -- -- 5,200,513
Depreciation and
amortization.......... 1,822,593 1,880,535 1,748,618 11,913,007
Noncash research and
development expense... -- -- -- 1,155,750
Noncash interest
expense............... -- -- -- 25,918
Noncash rent expense
(benefit)............. (171,088) (42,986) 74,109 354,323
Noncash compensation
expense............... 568,767 422,923 100,186 1,091,876
Loss on disposition of
property and
equipment............. 525,784 -- 15,831 693,084
Investment premium
(discount)
amortization
(accretion)........... 366,054 200,118 (177,947) 910,286
(Gain) loss on sale of
investment
securities............ 4,563 (31,603) -- (27,040)
Changes in operating
assets and
liabilities:
Interest receivable.. 269,694 (36,726) (401,162) (97,942)
Collaboration
agreement
receivables......... 3,254,491 428,540 (3,683,031) --
Prepaid expenses and
other current
assets.............. 221,630 (819,009) 256,651 (698,506)
Other assets......... (732,171) 215,985 239,551 (927,275)
Accounts payable..... 118,162 944,363 (488,661) 1,224,994
Accrued expenses..... 79,797 104,153 1,646,935 4,896,182
------------ ------------ ------------ -------------
Total adjustments.. 11,528,789 3,266,293 (668,920) 25,715,170
------------ ------------ ------------ -------------
Net cash used in
operating
activities........ (29,951,874) (21,705,618) (23,695,214) (137,835,525)
------------ ------------ ------------ -------------
Investing activities
Purchases of
securities available-
for-sale.............. (29,561,916) (63,891,102) (85,364,597) (254,913,894)
Proceeds from sales of
securities available-
for-sale.............. 11,111,339 26,025,226 1,999,444 54,026,322
Proceeds from
maturities of
securities available-
for-sale.............. 41,915,000 56,622,884 47,845,281 181,482,952
Purchases of property
and equipment......... (558,163) (2,801,332) (2,540,798) (17,235,229)
------------ ------------ ------------ -------------
Net cash provided
by (used in)
investing
activities........ 22,906,260 15,955,676 (38,060,670) (36,639,849)
------------ ------------ ------------ -------------
Financing activities
Sale of common stock to
founders............... -- -- -- 80,000
Proceeds from borrowings
from shareholders...... -- -- -- 850,000
Sale of common stock via
public offerings, net
of offering costs...... -- -- 61,064,250 61,064,250
Sale of Series A
preferred stock via
private placement, net
of offering costs...... -- -- -- 47,366,204
Sale of Series B
preferred stock via
private placement, net
of offering costs...... -- -- -- 4,960,000
Sale of Series D
preferred stock via
private placement, net
of offering costs...... 9,344,960 -- -- 9,344,960
Sale of common stock via
private placement, net
of offering costs...... -- -- 3,000,000 52,307,084
Repurchase of common
stock.................. -- -- -- (2,522)
Notes receivable from
officers to acquire
common stock........... -- (380,000) -- (380,000)
Proceeds from common
stock options
exercised.............. 14,002 86,992 592,274 774,028
Proceeds from common
stock warrants
exercised.............. -- -- -- 305,558
Proceeds from employee
stock purchase plan.... 117,447 215,646 -- 333,093
Repayment of long-term
obligations............ (1,118,895) (1,880,361) (1,226,971) (12,697,496)
Proceeds from the
issuance of long-term
obligations............ -- 3,193,161 1,719,806 15,844,601
------------ ------------ ------------ -------------
Net cash provided by
financing activities... 8,357,514 1,235,438 65,149,359 180,149,760
------------ ------------ ------------ -------------
Net increase (decrease)
in cash and cash
equivalents............ 1,311,900 (4,514,504) 3,393,475 5,674,386
Cash and cash
equivalents at
beginning of period.... 4,362,486 8,876,990 5,483,515 --
------------ ------------ ------------ -------------
Cash and cash
equivalents at end of
period................. $ 5,674,386 $ 4,362,486 $ 8,876,990 $ 5,674,386
============ ============ ============ =============
Supplemental schedule of
noncash investing and
financing activities
Acquisition of equipment
pursuant to capital
lease obligations...... $ -- $ -- $ -- $ 362,425
============ ============ ============ =============
Conversion of
convertible debt and
related accrued
interest into
common stock........... $ -- $ -- $ -- $ 875,918
============ ============ ============ =============
Conversion of Series A
and B preferred stock
into common stock...... $ -- $ -- $ 52,326,204 $ 52,326,204
============ ============ ============ =============
Common stock warrants
issued in conjunction
with Series D.......... $ 3,117,000 $ -- $ -- $ 3,117,000
============ ============ ============ =============
Reclass to current
assets of note
receivable from former
officer................ $ 50,000 $ -- $ -- $ 50,000
============ ============ ============ =============
Supplemental disclosure
of cash flow
information
Cash paid during the
period for interest
obligations............ $ 501,596 $ 435,279 $ 377,544 $ 2,966,881
============ ============ ============ =============
See accompanying notes.
37
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Summary of Significant Accounting Policies
Description of Business
Cell Therapeutics, Inc. (the "Company") focuses on the discovery,
development, and commercialization of drugs for the treatment of cancer. The
Company currently anticipates being a development stage company until
commercialization begins. The Company's principal business strategy is to
focus its activities on cancer therapeutics, an area that represents a large
market opportunity which is not adequately served by existing therapies. The
Company commenced operations February 1992.
The Company operates in a highly regulated and competitive environment. The
manufacturing and marketing of pharmaceutical products require approval from,
and are subject to, ongoing oversight by the Food and Drug Administration in
the United States and by comparable agencies in other countries. Obtaining
approval for a new therapeutic product is never certain and may take several
years and involve expenditure of substantial resources. Competition in
researching, developing, and marketing pharmaceutical products is intense. Any
of the technologies covering the Company's existing products under development
could become obsolete or diminished in value by discoveries and developments
of other organizations. As the Company operates as one segment, no additional
disclosures are required in accordance with FASB Statement No. 131
"Disclosures about Segments of an Enterprise and Related Information."
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary, and its 70% interest in a joint venture. All
intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less at the time acquired to be cash equivalents. Cash
equivalents represent short-term investments consisting of investment-grade
corporate and government obligations, carried at market value, which
approximates cost.
Securities Available-for-Sale
Management determines the appropriate classification of debt securities at
the time of purchase. Management currently classifies its investment portfolio
as available-for-sale and carries the securities at fair value based on quoted
market prices with unrealized gains and losses included in accumulated other
comprehensive income and loss. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretion are included in investment
income. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest on securities classified as available-for-sale is included in
investment income.
Management of Credit Risk
The Company is subject to concentration of credit risk primarily from its
cash investments. Under the Company's investment guidelines, credit risk is
managed by diversification of the investment portfolio and by the purchase of
investment-grade securities.
38
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Collaboration Agreement Receivables and Revenues
Collaboration agreement receivables represent amounts earned, but not yet
collected, under collaboration and license agreements. Revenue under
collaboration agreements represents reimbursement of development costs,
license fees, and milestone payments. Revenue from milestone payments is
recognized upon satisfaction of related obligations. Other revenue under
collaboration agreements is recognized as the earnings process is completed,
based on the provisions of each agreement.
Property and Equipment
Property and equipment, including assets pledged as security in financing
agreements, are carried at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the lesser of the
useful life or the term of the applicable lease using the straight-line
method. Depreciation commences at the time assets are placed in service and is
computed using the straight-line method over the estimated useful lives of the
assets (three to five years).
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the market price of the Company's common stock at the date of grant
over the stock option exercise price. Under the Company's plans, stock options
are generally granted at fair market value.
Stock compensation expense for options granted to non-employees has been
determined in accordance with SFAS 123 and the Emerging Issues Task Force
consensus in Issue No. 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services" ("EITF 96-18"), as the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured. The fair value of options granted to non-employees is
periodically remeasured as the underlying options vest.
Net Loss per Share
Basic loss per share is calculated based on the net loss applicable to
common shareholders divided by the weighted average number of common shares
outstanding for the period excluding any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share, if separately
presented, would assume the conversion of all dilutive securities, such as
options, warrants and convertible preferred stock. Due to the Company's
history of losses, all such securities are anti-dilutive.
Other Financial Instruments
At December 31, 1999 and 1998, the carrying value of financial instruments
such as receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. Additionally, the carrying value
of long-term liabilities approximated fair values because the underlying
interest rates reflect market rates at the balance sheet dates.
Income Taxes
The Company accounts for income taxes using the liability method under
Statement of Accounting Standards No. 109, "Accounting for Income Taxes."
39
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"), which provides the Staff's views on applying generally accepted
accounting principles to revenue recognition issues. The Company is currently
evaluating its revenue recognition policies and has not yet determined the
impact of SAB 101 on the results of operations or financial position.
Reclassifications
Certain prior year items have been reclassified to conform to the current
year presentation.
2. Securities Available-for-Sale
Securities available-for-sale consist of the following as of December 31:
1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
Municipal government
obligations.................... $ 398,339 $-- $ (663) $ 397,676
Corporate obligations........... 17,842,527 419 (34,992) 17,807,954
----------- ---- -------- -----------
$18,240,866 $419 $(35,655) $18,205,630
=========== ==== ======== ===========
1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
U.S. government obligations..... $ 498,510 $ 397 $ -- $ 498,907
Municipal government
obligations.................... 1,107,616 1,815 -- 1,109,431
Corporate obligations........... 40,469,780 39,862 (45,704) 40,463,938
----------- ------- -------- -----------
$42,075,906 $42,074 $(45,704) $42,072,276
=========== ======= ======== ===========
As of December 31, 1999 and 1998, the securities available-for-sale had
contractual maturities of less than one year. Expected maturities will differ
from contractual maturities because issuers of the securities may have the
right to prepay obligations without prepayment penalties. Gross realized gains
and losses have not been material.
40
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment are composed of the following as of December 31:
1999 1998
----------- -----------
Leasehold improvements.............................. $ 4,551,176 $ 4,877,241
Lab equipment....................................... 5,843,911 5,630,646
Furniture and office equipment...................... 6,154,966 6,009,787
----------- -----------
16,550,053 16,517,674
Less: accumulated depreciation and amortization..... 11,514,370 9,691,777
----------- -----------
$ 5,035,683 $ 6,825,897
=========== ===========
As of both December 31, 1999 and 1998, furniture and office equipment
included $232,585 of equipment acquired under capitalized leases. Accumulated
depreciation related to this equipment totaled $212,628 and $195,521 at
December 31, 1999 and 1998, respectively. These leases are secured by the
underlying assets.
4. Capital Stock
In 1992, the Company completed a private placement of 2,225,139 shares of
common stock generating net proceeds of $35.1 million. In 1993, the Company
concluded a second equity financing through a private offering of common stock
and warrants generating net proceeds of $12.3 million.
In 1994, the Company sold additional units of common stock and warrants
under terms equivalent to those of the second round of equity financing. The
Company received net proceeds of $702,000.
In 1995, the Company concluded a third round of equity financing through a
private offering of Series A convertible preferred stock generating net
proceeds of $30.5 million. In 1996, the Company concluded two rounds of equity
financing through private offerings of Series A convertible preferred stock
generating net proceeds of $16.9 million.
In 1996, the Company also completed a placement of Series B convertible
preferred stock to Johnson & Johnson Development Corporation generating net
proceeds of $5.0 million.
In November 1996, the Board of Directors approved a shareholder rights plan
whereby a Right attaches to each share of common stock. Upon the occurrence of
certain acquisition related events, each Right entitles the holder of each
outstanding share of common stock to purchase one one-thousandth of a share of
Series C preferred stock at $175 per unit, subject to adjustment. Upon
exercise, each holder of a Right will have the right to receive value equal to
two times the exercise price of the Right. A total of 100,000 shares of
Series C preferred stock are reserved for issuance upon exercise of the
Rights.
On March 26, 1997 the Company completed an initial public offering (the
"IPO") of 3 million shares of its common stock at an offering price of $10.00
per share, resulting in net proceeds of $26.8 million. Concurrent with the
closing of the IPO, the Company sold 300,000 shares of common stock to Johnson
& Johnson at a price of $10.00 per share, resulting in net proceeds of $3.0
million. All outstanding shares of Series A and B were converted into common
stock at the closing of the IPO. On October 27, 1997 the Company completed a
follow- on public offering of 2.3 million shares of its common stock at an
offering price of $16 per share, resulting in net proceeds of $34.3 million.
41
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1999, the Company completed a $10,000,000 private placement of
10,000 shares of Series D convertible preferred stock (Series D) and warrants
to acquire 1,523,810 shares of common stock, resulting in net proceeds of
$9,344,960. Each share of Series D is convertible into shares of common stock,
subject to adjustment as provided in the Articles of Amendment to Restated
Articles of Incorporation. Each share of Series D is currently convertible
into 462.427 shares of common stock. The warrants were valued at $3,017,000,
have exercise prices of $2.625 per share of common stock and expire in
November, 2004. The Company also issued warrants to purchase 50,000 shares of
common stock to the placement agent of the Series D. These warrants expire in
2004, and have exercise prices of $2.38. The value of the warrants of
approximately $100,000 was accounted for as a cost of the offering. All
warrants were valued using the Black-Scholes pricing model with input
assumptions for volatility, risk-free interest rate, dividends, and life of
1.01, 5.5%, none, and five, respectively.
Holders of the Series D are entitled to receive cumulative dividends at a
rate per share of 5% per annum payable on each September 30, commencing
September 30, 2000. At the Company's option, subject to certain restrictions
and penalties, dividends may be paid in cash or in shares of the Company's
common stock. The Company is to pay each Series D investor four annual
dividend payments notwithstanding any conversion, redemption or sale of the
preferred stock held by such investor. The Company has accrued a Series D
stock dividend of $44,000 at December 31, 1999.
The Company's obligation to issue dividends after the fourth annual dividend
payment will terminate for any shares of the Series D that have not been
converted into shares of common stock if on the earlier of the fourth
anniversary or any subsequent annual anniversary of the original issue date,
as defined, the average share closing price of the common stock is greater
than 20% of the fixed conversion price of $2.1625, compounded annually.
Notwithstanding the above, the Company's obligation to pay dividends
terminates on the seven-year anniversary of the original issue date, as
defined.
The Series D is convertible at the option of the holder or may automatically
convert if the per share market value of the Company's shares of common stock
exceeds specified returns when compared to the conversion price.
The holders of the Series D have a liquidation preference of $1,000 per
share. The Series D holders have the right to vote with the common stock on an
as-converted basis. The Company is also precluded from carrying out certain
actions without the approval of at least 51% of the Series D holders.
The shares of common stock issuable upon the conversion and exercise of the
Series D preferred stock and warrants, respectively, have certain registration
rights.
On the date of the preferred stock issuance, the effective conversion price
of the preferred stock (after allocating the portion of the proceeds to the
common stock warrants based on the relative fair values) was at a discount to
the price of the common stock into which the preferred stock is convertible.
In accordance with EITF 98-5 "Convertible Securities with Beneficial
Conversion Features," the discount was recorded as a preferred stock dividend
valued at $5,156,069.
42
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock Reserved
A summary of common stock reserved for issuance is as follows as of December
31:
1999
----------
Series D preferred stock.......................................... 4,624,277
Equity incentive plan............................................. 3,766,465
Common stock warrants............................................. 2,073,810
Employee stock purchase plan...................................... 133,934
Restricted share rights........................................... 103,665
----------
10,702,151
==========
5. Consulting and Employment Agreements
Corporate Officers
In 1998, the Company extended loans totaling $380,000 to executive officers
on a full-recourse basis. Each of the notes has a term of four years and bears
interest at approximately 5%. The full balance of principal and accumulated
interest is due at maturity. The executives used the funds to purchase shares
of the Company's common stock on the open market.
In 1999, an executive officer's employment with the Company was terminated.
Contemporaneously upon termination of employment, the Company entered into a
consulting agreement with the former executive to act as an independent expert
in manufacturing and to assist the Company in its development of therapeutic
products for clinical testing and commercial sale. In exchange for such
services, the Company extended the exercisability of the executive's vested
options for three years and will apply the value of services against an
outstanding loan balance. The $50,000 remaining loan balance due from this
former officer was reclassified to a current asset. The Company recognized
stock based compensation expense of $29,000 during 1999 in connection with the
consulting agreement.
The Company has severance agreements with certain of its officers having a
term of one year.
Advisory Boards
The Company has entered into consulting agreements with the members of its
Scientific and Clinical Advisory Boards ("Advisory Boards") providing for the
periodic issuance of common stock and options to purchase common stock, and
consulting fees. One agreement has an annual retainer of $10,000. The
remaining advisory board members are paid consulting fees on a per diem basis.
The consulting agreements with members of the Advisory Boards are cancelable
upon 30 days notice. The Company has issued stock options to members of its
Advisory Boards. In July 1998 the Board of Directors approved the repricing of
outstanding options. All options held by advisory board members are accounted
for at fair market value in accordance with EITF 96-18. Compensation related
expense recognized in 1999 and 1998 was $156,000 and $157,000, respectively.
Consultants
The Company has issued stock options to other consultants for various
services. In July 1998 the Board of Directors approved the repricing of
outstanding options. All options held by consultants are accounted for at fair
market value in accordance with EITF 96-18. Compensation related expense
recognized in 1999 and 1998 was $256,000 and $266,000.
43
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related Party Disclosure
In 1999, the Company entered into an agreement with a clinical medical
consultant who is the spouse of an executive officer of the Company. During
1999 the Company paid the clinical medical consultant approximately $107,000
in fees for services rendered.
6. Contractual Arrangements and Commitments
Licensed Technology
In March 1992, the Company entered into agreements with the Fred Hutchinson
Cancer Research Center ("FHCRC") under the terms of which the Company has
received worldwide licenses and options to technology, or technology claimed,
for five U.S. patent applications. The Company paid initial license fees
totaling $100,000 and issued 76,572 shares of common stock valued at $3,200 to
the FHCRC for such technology. The Company is obligated to pay royalties on
revenues resulting from future sales of products employing the technology and
on revenues received from sublicenses for the technology, with minimum annual
royalties of $50,000 prior to, and $100,000 after, the first commercial sale
of such products. The agreements are for a term equal to the later of 15 years
or the expiration of the last issued patent included within the licensed
technology, unless terminated earlier for certain specified events, including
the failure of the Company to take reasonable efforts to engage in research
and development with respect to the licensed technology. The Company
recognized expense of $50,000 in 1999, 1998 and 1997 related to this
agreement.
Facilities Lease
The Company has executed noncancelable operating leases for office and
laboratory space that expire in 2003, with two five-year renewal options at
the then-current market rates. The lessor provided approximately $575,000 for
leasehold improvements and rent concessions, which is being amortized over the
initial lease term. In 1998 the Company executed an operating lease for
additional office space that expires in August, 2001, with one three-year
renewal option at the then-current market rate. In November 1999, the Company
cancelled and terminated this lease. Rent expense amounted to $1,396,289,
$1,152,340, and $1,144,290 for the years ended December 31, 1999, 1998, and
1997, respectively. Future minimum annual rental payments under the leases
approximate the following for the years ended December 31:
2000.......................................................... $1,164,942
2001.......................................................... 1,164,942
2002.......................................................... 1,164,942
2003.......................................................... 97,079
----------
$3,591,905
==========
44
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Long-term Obligations
Long-term obligations consist of the following as of December 31:
1999 1998
---------- ----------
Master financing agreements:
Due December 2001, monthly payments of $44,196,
including interest at 12.5%....................... $1,040,699 $1,415,150
Due September 2002, monthly payments of $59,811
including interest at 12.4%....................... 1,796,650 2,259,775
Due December 2002, monthly payments of $18,290
including interest at 12.4%....................... 586,649 713,251
Repaid in August 1999.............................. -- 154,718
Deferred rent........................................ 354,324 525,411
---------- ----------
3,778,322 5,068,305
Less current portion................................. 1,125,211 1,180,702
---------- ----------
$2,653,111 $3,887,603
========== ==========
For each borrowing, the Company granted the lessor a security interest in
specified fixed assets.
Annual maturities of the master financing agreements for 2000 through 2002,
respectively, are $1,117,274, $1,387,110 and $919,614.
8. Stock Options and Warrants
Stock Options
In 1994, shareholders approved the 1994 Equity Incentive Plan (the "1994
Plan") in replacement of the 1992 Stock Option Plan. The 1994 Plan provides
for (a) the grant of incentive stock options (with terms not to exceed ten
years), nonstatutory stock options and stock appreciation rights, (b) the
award of stock bonuses, (c) the sale of stock, and (d) any other equity-based
or equity-related awards which the Plan Administrator determines to be
consistent with the purpose of the 1994 Plan and the interests of the Company.
Option-vesting schedules are specified by the Plan Administrator. The 1994
Plan also provides for the automatic grant of nonstatutory options to non-
employee directors.
45
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, the Board of Directors approved the exchange of all outstanding
options with exercise prices ranging from $3.03 to $16.06 per share for
options with an exercise price of $2.906 per share, the fair value of the
underlying common stock at that time. Accordingly, 1,612,934 shares were
exchanged for new options with 10-year terms commencing July 31, 1998. These
amounts have been included as granted and canceled options during 1998 in the
summary activity table shown below.
Shares Weighted Average
Under Exercise Price
Option Per Share
---------- ----------------
Balance January 1, 1997....................... 1,294,945 $11.77
Granted..................................... 575,874 13.90
Canceled.................................... (52,331) 11.78
Exercised................................... (50,045) 11.15
----------
Balance December 31, 1997 (791,265
exercisable)................................. 1,768,443 12.48
Granted..................................... 2,510,999 2.93
Canceled.................................... (1,762,045) 12.29
Exercised................................... (8,570) 9.82
----------
Balance December 31, 1998 (57,477
exercisable)................................. 2,508,827 3.07
Granted..................................... 1,198,459 2.96
Canceled.................................... (517,718) 3.03
Exercised................................... (4,932) 2.84
----------
Balance December 31, 1999 (1,666,822
exercisable)................................. 3,184,636 $ 3.04
==========
Exercisable Options
Outstanding
Options Outstanding (Without Restriction)
--------------------------------------------- ----------------------------
Number Weighted Average
Range of Outstanding Remaining Weighted Average Number Weighted Average
Exercise Prices 12/31/99 Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$2.000-$2.703........... 823,015 9.28 Years $2.665 133,969 $2.657
$2.906-$2.906........... 1,479,748 8.33 Years $2.906 1,318,632 $2.906
$2.969-$3.688........... 782,555 9.41 Years $3.124 142,907 $3.001
$3.813-$16.063.......... 99,318 7.70 Years $7.372 71,314 $8.534
--------- ---------
$2.000-$16.063.......... 3,184,636 8.82 Years $3.037 1,666,822 $3.135
========= =========
The weighted average fair value of options granted during 1999, 1998, and
1997 was $1.94, $1.85, and $5.53, respectively. As of December 31, 1999,
581,829 shares of common stock were available for future grants.
SFAS 123 encourages, but does not require, entities to adopt the fair value
method of accounting for their stock-based compensation plans. Under this
method, compensation cost for stock-based compensation plans is measured at
the grant date based on the fair value of the award and is recognized over the
vesting period. Fair value is determined using a Black-Scholes option pricing
model that takes into account (1) the stock price at the grant date, (2) the
exercise price, (3) a two-year expected life in 1999 and a four-year expected
life in 1998 and 1997, (4) no expected dividends, (5) risk-free interest rate
of 5.5% in both 1999 and 1998 and rates ranging from 5.4% to 6.7% during 1997,
respectively, and (6) volatility factor of 1.006, .91 and .48 in 1999, 1998
and 1997, respectively. In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans and, accordingly,
does not recognize compensation cost for options granted with exercise prices
equal to or greater than fair value. Although
46
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
not reflective of the effects of reported net loss in future years until the
rules of SFAS 123 are applied to all outstanding non-vested options, if the
Company elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS 123, basic and diluted net
loss and basic and diluted net loss per share would have been adjusted
(increased) as follows for the years ended December 31:
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss applicable to common
shareholders:
As reported................... $(41,480,663) $(24,971,911) $(23,026,294)
As adjusted................... (43,530,183) (27,553,633) (23,800,008)
Basic and diluted net loss per
share:
As reported................... $ (2.67) $ (1.62) $ (1.98)
As adjusted................... (2.80) (1.79) (2.05)
In accordance with EITF 96-18, the Company considers all equity instruments
issued to non-employees to be accounted for as fair value equity instruments.
The value of the instrument is amortized to expense over the vesting period
with final valuation measured on the latter of the vesting date or date on
which they become exercisable. At December 31, 1999, options to acquire
247,708 shares of common stock are considered fair value options. During 1999
and 1998, the Company recognized total EITF 96-18 non-employee equity based
compensation related expense of $569,000 and $423,000, respectively.
In December 1999, the Compensation Committee of the Board of Directors
authorized the issuance of 243,903 restricted shares to executive officers and
certain employees. The shares which will be issued in early 2000, fully vest
in December 2002. The shares were valued at $746,953, are recorded as deferred
compensation expense at December 31, 1999, and will be amortized over the
three year vesting period.
As discussed in Note 11, the Company has issued 103,665 restricted share
rights to non-employees in 1998 for which ownership vests upon the achievement
of a future event. Compensation related to these rights will be measured as
the event becomes probable with final valuation on the vesting date.
Warrants
In 1998, the Company issued warrants to purchase 350,000 shares of common
stock of the Company in connection with a license agreement. The warrants
expire November 12, 2008 and become exercisable only upon the occurrence of
certain exercise events, including a license or sale by the Company of any
licensed patent rights subject to the agreement to a third party or a change
of control of the Company, as defined. The exercise price per share is the
lesser of $20.00 or the average closing stock price for the 30 consecutive
trading days ending on the date of the exercise event. Compensation related to
these warrants will be measured as any of the exercise events become probable
with the final valuation on the exercisable date.
In 1999, the Company entered into an agreement with two consulting companies
to develop and execute a communication plan for the Company. In connection
with this agreement, the Company granted warrants to purchase 150,000 shares
of common stock to the consultants, whereby each warrant entitles the holder
to purchase one share of the Company's common stock at strike prices ranging
from $3.00 to $18.00 per share. Except for those warrants with a strike price
of $3.00 per share which vested immediately (valued at $37,500, in accordance
with EITF 96-18), the warrants vest individually if and when the closing price
for the Company's common stock equals or exceeds its strike price for a
specified period of time. All unvested warrants expire 30 days after the
expiration of the one-year consulting agreement which may be terminated by
either party upon
47
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
30 days written notice for any reason whatsoever. Compensation related to
these warrants will be measured as any of the exercise events become probable
with the final valuation on the exercisable date.
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (the "Purchase Plan"),
under which eligible employees may purchase a limited number of shares of the
Company's common stock at 85% of the lower of the subscription date fair
market value and the purchase date fair market value. There are two six-month
offerings per year. Under the Purchase Plan, the Company issued 56,245 shares
to employees in 1999. There is a balance of 133,934 shares reserved for future
purchases at December 31, 1999.
9. Net Loss Per Share
Basic and diluted loss per share is calculated using the average number of
common shares outstanding.
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss applicable to common
shareholders(A).................... $(41,480,663) $(24,971,911) $(23,026,294)
============ ============ ============
Weighted average common stock
outstanding(B)..................... 15,551,526 15,409,848 11,634,032
------------ ------------ ------------
Loss per share:
Basic and diluted(A/B)............ $ (2.67) $ (1.62) $ (1.98)
============ ============ ============
As of December 31, 1999, 1998 and 1997, options, warrants and convertible
preferred stock were not included in the calculation of net loss per share as
they are anti-dilutive.
10. Income Taxes
As of December 31, 1999, the Company had net operating tax loss
carryforwards of approximately $152 million and research and development
credit carryforwards of approximately $5.6 million. The carryforwards begin to
expire in the year 2007. Due to rounds of equity financings (and other
ownership changes as defined in Section 382 of the Internal Revenue Code of
1986, as amended ("the Code") see Notes 4 and 12), the Company has incurred
"ownership changes" pursuant to the Code, as amended. Accordingly, the
Company's use of its net operating loss carryforwards is limited to $5.6
million annually for losses incurred prior to March 26, 1997 and may be
subject to additional limitations thereafter. To the extent that any single-
year loss is not utilized to the full amount of the limitation, such unused
loss is carried over to subsequent years until the earlier of its utilization
or the expiration of the relevant carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. The Company's valuation
allowance increased $13,609,000, $9,905,000, and $8,772,000 during 1999, 1998
and 1997, respectively.
48
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax liabilities and assets
as of December 31 are as follows:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards............. $ 51,688,000 $ 39,646,000
Research and development tax credit
carryforwards............................... 5,555,000 4,248,000
Accruals on financial statements in excess of
tax returns................................. 649,000 573,000
Charitable contributions carryforward........ 73,000 42,000
Depreciation in financial statements in
excess of tax............................... 831,000 684,000
------------ ------------
Gross deferred tax assets...................... 58,796,000 45,193,000
Less valuation allowance....................... (58,746,000) (45,137,000)
------------ ------------
Gross deferred tax liability: 50,000 56,000
Accruals on tax returns in excess of
financial statements........................ (50,000) (56,000)
------------ ------------
Net deferred tax............................... $ -- $ --
============ ============
11. Significant Agreements
BioChem Therapeutic Inc.: On March 7, 1995, the Company and BioChem
Therapeutic Inc. ("BioChem"), a wholly owned subsidiary of BioChem Pharma,
Inc., signed collaboration and supply agreements (the "BioChem Collaboration
Agreement" and the "BioChem Supply Agreement," respectively). The BioChem
Collaboration Agreement grants an exclusive license to enable BioChem to seek
Canadian regulatory approval for, and to use and sell, the Company's
lisofylline and/or Apra compounds (and compositions thereof) (collectively,
the "cti Compounds") in Canada. Under the BioChem Collaboration Agreement, the
Company is entitled to receive payments upon the satisfaction of specified
product development milestones and royalties on all sales, if any. The BioChem
Collaboration Agreement terminates upon the expiration of the last to expire
patents covering the cti Compounds or, absent a patent, upon the tenth
anniversary of the first commercial sale of such cti Compound. The Company
recorded milestone payments of $100,000, $250,000 and $100,000 under the
BioChem Collaboration Agreement in 1998, 1996 and 1995, respectively. Under
the BioChem Supply Agreement, the Company is to supply BioChem the cti
Compounds at a percentage mark-up above cost. The BioChem Supply Agreement
terminates 20 years from the date of termination of the BioChem Collaboration
Agreement with respect to each of the cti Compounds.
Johnson & Johnson: In November 1996, the Company entered into a
collaboration and license agreement with Ortho Biotech Inc. and the R.W.
Johnson Pharmaceutical Research Institute (a division of Ortho Pharmaceutical
Corporation) each of which are wholly owned subsidiaries of Johnson & Johnson
(collectively, "Johnson & Johnson") for the joint development and
commercialization of LSF, to prevent or reduce the toxic side effects among
cancer patients receiving high-dose radiation and/or chemotherapy followed by
BMT. Upon execution of the collaboration agreement, Johnson & Johnson paid the
Company a $5.0 million license fee. In addition, Johnson & Johnson Development
Corporation ("JJDC"), a wholly owned subsidiary of Johnson & Johnson,
purchased 14,925.373 shares of the Company's newly issued Series B convertible
preferred stock at $335 per share for an aggregate purchase price of $5.0
million. In September 1997, Johnson & Johnson made a $1.0 million payment to
the Company to expand its participation in development of LSF to include the
treatment of patients with acute myeloid leukemia ("AML") undergoing high-dose
chemotherapy. Under the terms of the Collaboration Agreement, Johnson &
Johnson funded $10.8 million of the Company's development costs for 1997. In
July 1998, after reviewing the results of the Company's Phase III clinical
trial for LSF among patients receiving BMT from related donors, in which the
primary endpoints were not met, Johnson & Johnson reached
49
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
an agreement in principle with the Company to revise the Collaboration
Agreement. On November 16, 1998, the Company and Johnson & Johnson formally
amended the Collaboration Agreement. Under the terms of the amended
Collaboration Agreement, Johnson & Johnson agreed to pay the Company $13.1
million for development cost reimbursements for BMT and AML for the year ended
December 31, 1998. After reviewing both the interim data from the Company's
pivotal Phase II/III trial for LSF in patients with acute lung injury and
acute respiratory distress syndrome and the results of the Company's Phase III
trial for LSF following induction chemotherapy for AML, Johnson & Johnson may
elect to resume responsibility for the development and commercialization of
LSF subject to certain additional payments upon resumption of its obligations.
If Johnson & Johnson does not elect to resume development activities, then the
Company will be free to license LSF to other third parties. In accordance with
the amended Collaboration Agreement, the Company is preparing the data from
each of these trials for Johnson and Johnson's review. The Company does not
anticipate that Johnson and Johnson will elect to resume responsibility for
development and commercialization of LSF. As of December 31, 1998, the Company
had recorded approximately $40.8 million in equity payments, license and
milestone fees, and development cost reimbursements with Johnson & Johnson.
On May 28, 1999, the Company announced it had received a recommendation from
a National Heart, Lung and Blood Institute ("NHLBI") appointed Data Safety and
Monitoring Board to discontinue enrollment in the Phase II/III trial of LSF
for ALI and ARDS. The decision was based on predetermined criteria, which
required a positive trend toward improvement in day 28 survival among the LSF
recipients for the trial to continue as a Phase III trial. On May 28, 1999,
the NHLBI discontinued enrollment in this trial in accordance with this
recommendation.
On October 11, 1999, the Company announced the results of its Phase III
trial for LSF in treating patients with AML. The Phase III trial studied LSF
in preventing serious infections among patients undergoing high dose induction
chemotherapy for AML. The preliminary endpoint of reduction in the incidence
of serious neutropenia-associated infections was not met. The Company
announced that it has completed enrollment in its LSF bone marrow transplant
trial among unrelated donors and will wind down all other LSF related
expenditures and maintain a cash neutral position with respect to further
expenditures on this compound.
Supply Agreement
ChiRex, Ltd.: In January 1997, the Company entered into a supply agreement
with ChiRex, Ltd. ("ChiRex"), a British manufacturer of pharmaceutical
intermediates and active ingredients, for the manufacture and supply of LSF
and corresponding intermediate compounds. Under the terms of the agreement,
ChiRex will manufacture and supply LSF bulk drug product and a key
intermediate compound in sufficient quantities to meet the Company's
requirements for ongoing and future clinical trials and commercial
requirements during launch and commercialization. The agreement will expire on
December 31, 2001, but may be terminated by the Company upon 12 months'
written notice prior to such date. In October 1998, the Company entered into
an additional agreement with ChiRex for additional manufacturing services for
pre-validation lots of LSF.
Other Agreements
Lipomed: In October 1995, the Company purchased all of the intellectual
property of Lipomed Corporation ("Lipomed") for $1,155,750 consisting of
98,574 shares of common stock. In accordance with this agreement, in 1999,
upon issuance of a patent, $100,000 was paid to Lipomed.
PG-TXL Company, L.P.: In 1998, the Company entered into an agreement with
PG-TXL Company, L.P. granting the Company an exclusive worldwide license for
the rights to polyglutamic acid paclitaxel ("PG-TXL"),
50
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a water soluble form of the cancer drug, Taxol(R) and to all potential uses of
PG-TXL Company, L.P.'s polymer technology. Under the terms of the agreement,
the Company acquired the rights to fund the research, development,
manufacture, marketing and sale of anti-cancer drugs developed using this
polymer technology. The Company will be obligated to make milestone payments
upon the attainment of significant achievements, as defined in the agreement.
The Company also granted warrants to purchase 350,000 shares of the Company's
common stock (see Note 8) to PG-TXL Company, L.P. The Company is obligated to
meet certain development requirements by June 30, 2002 to maintain exclusive
license rights.
The Company also entered into Signing Bonus and Restricted Stock and Share
Grant Agreements and Consulting Agreements with certain individuals affiliated
with PG-TXL Company, L.P. (the "PG-TXL Affiliates"). Under the terms of these
agreements, the Company has issued 51,835 restricted shares of common stock.
These shares vested in November 1999 upon the issuance of a patent, whereupon
the Company recorded an expense of $90,711 in accordance with EITF 96-18. The
Company also granted 103,665 restricted share rights to the PG-TXL Affiliates,
which also vest upon certain performance conditions. The Company will begin to
record compensation expense at the time the vesting of the share rights become
probable. The Company will pay approximately $300,000 in consulting fees to
the PG-TXL Affiliates over three years.
12. Subsequent Events
Acquisition of PolaRx Biopharmaceuticals, Inc.: In January 2000, the Company
completed the acquisition of PolaRx Biopharmaceuticals, Inc. (PolaRx), a
biopharmaceutical company that owns the rights to Arsenic Trioxide (ATO), an
anti-cancer compound for which the Company intends to file a New Drug
Application with the FDA. Under the terms of the Agreement and Plan of Merger
and Reorganization, dated January 7, 2000, (the Agreement), the Company
assumed PolaRx's liabilities and commitments which are estimated to be
$5,000,000, of which approximately $3,500,000 represents notes payable due
between March and November, 2000. In addition, PolaRx's shareholders received
2,000,000 shares of the Company's common stock at signing and will earn
3,000,000 additional shares upon the earlier of the approval of a New Drug
Application by the FDA of PolaRx's anti-cancer compound, Arsenic TriOxide
(ATO), or five years from the acquisition date. Two additional payments tied
to annualized sales thresholds of $10 million and $20 million are to be
payable in tranches of $4 million and $5 million, respectively, at the then
fair market value of the Company's stock. For annual sales in excess of $40
million, the Company will pay a 2% royalty on net sales payable at the then
fair market value of the Company's common stock or in certain circumstances,
cash.
The Agreement requires shareholder approval for the issuance of the
Company's common stock for all but the initial 2,000,000 shares of common
stock distributed at signing and 1,000,000 of the additional shares of common
stock to be earned upon the earlier of the approval of an NDA or five years
from the acquisition date. Shareholder approval is to occur on or before the
earlier of the Company's next Annual Meeting of shareholders and September 30,
2000. To the extent that the Company's shareholders do not approve the
issuance of such common stock on or before the time such shares of common
stock would otherwise be required to be issued, then within 120 days of the
relevant delivery date as defined, the Company will pay to the PolaRx
shareholders an amount of cash equal to the fair market value of the Company's
common stock at the time of such delivery date.
Upon the closing of the Agreement, the Company incurred and subsequently
paid $750,000 to an advisor, pursuant to an advisory agreement with PolaRx,
dated June 30, 1998. The Chief Executive Officer and other certain employees
of the advisor owned shares of common stock of PolaRx which were exchanged for
shares of common stock of the Company. In addition, the advisor also acted as
placement agent for two private placements of the Company and in connection
therewith received placement agent fees and warrants to purchase shares of
common stock of the Company.
51
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sale of Common Stock: In February, 2000, the Company completed a $40,000,000
private placement of 3,333,334 shares of common stock at an offering price of
$12.00 per share, resulting in net proceeds of approximately $37,080,000. In
connection with the offering the Company issued 170,000 warrants to purchase
shares of common stock to a placement agent and finder. The warrants are
exercisable for a period of five years at a price equal to 110% of the price
per share of common stock sold in the offering. The shares of common stock
issued and issuable upon the exercise of the warrants have certain registration
rights.
52
Item 9. Changes in Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
PART III
The information required under Part III, Items 10,11,12, and 13, is included
in our Proxy Statement relating to our annual meeting of shareholders, and
will be incorporated herein by reference. Such Proxy Statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of our fiscal year end, December 31, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
None.
All schedules have been omitted since they are either not required,
are not applicable, or the required information is shown in the
financial statements or related notes.
(b) Reports on Form 8-K.
None.
(c) Exhibits
Exhibit
Number Description
------- -----------
3.1(1) Registrant's Restated Articles of Incorporation.
3.2(1) Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series A
Convertible Preferred Stock).
3.3(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation Reducing the Number of Authorized Shares of Series A
Convertible Preferred Stock.
3.4(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series B
Convertible Preferred Stock).
3.5(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series C
Preferred Stock).
3.6(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation of Cell Therapeutics, Inc. Effecting a Reverse Stock
Split.
3.7(3) Registrant's Articles of Amendment to Restated Articles of
Incorporation of Undesignating Series A and Series B Preferred Stock.
53
Exhibit
Number Description
------- -----------
3.7(4) Registrant's Restated Bylaws.
4.1(5) Form of Rights Agreement dated as of November 11, 1996, between the
Registrant and Harris Trust Company of California, which includes
the Form of Rights Certificate as Exhibit A, the Summary of Rights
to Purchase Preferred Stock as Exhibit B and the Form of Certificate
of Designation of the Series C Preferred Stock as Exhibit C.
10.1(6) Lease Agreement between David A. Sabey and Sandra L. Sabey and the
Registrant, dated March 27, 1992, as amended March 31, 1993 and
October 13, 1993.
10.2(2) Third Amendment to Lease Agreement between David A. Sabey and Sandra
L. Sabey and the Registrant, dated as of September 10, 1996.
10.3(1) Assignment of Lease between Manlove Travel and the Registrant, dated
April 23, 1993.
10.4(2) Letter Agreement between David A. Sabey, Sandra L. Sabey and the
Registrant, dated as of September 6, 1996, amending the Assignment
of Lease.
10.5(2) Employment Agreement between the Registrant and James A. Bianco,
dated as of December 17, 1996.
10.6(6) Employment Agreement between the Registrant and Louis A. Bianco,
dated as of February 1, 1992, as amended May 27, 1994.
10.7(1) Employment Agreement between the Registrant and Maurice J. Schwarz,
dated May 2, 1994.
10.8(7) Employment Agreement between the Registrant and Jack W. Singer,
dated September 23, 1997.
10.9(1) Severance Agreement between the Registrant and Robert A. Lewis,
dated April 1, 1996.
10.10(2) Form of Strategic Management Team Severance Agreement.
10.11(1) Promissory Note between James A. Bianco, M.D. and the Registrant,
dated December 23, 1993.
10.12(1) Stock Pledge Agreement between James A. Bianco, M.D. and the
Registrant, dated December 23, 1993.
10.13(1) 1994 Equity Incentive Plan, as amended.
10.14(1) 1992 Stock Option Plan, as amended.
10.15(1) 1996 Employee Stock Purchase Plan.
10.16(1) Form of Sales Agent Warrant for the 1992 Private Placement.
10.17(1) Warrant, dated November 25, 1992, between the Registrant and David
H. Smith, M.D.
10.18(1) Registration Agreement between the Registrant and the other parties
included therein, dated as of November 23, 1993.
10.19(1) Form of Sales Agent Warrant for the 1993 Private Placement.
10.20(1) Subscription Agreement between the Registrant and the other parties
included therein, dated as of March 21, 1995.
10.21(1) Registration Rights Agreement between the Registrant and the other
parties included therein, dated as of March 21, 1995.
10.22(4) Registration Rights Agreement between the Company and the other
parties included therein, dated as of September 17, 1996, as amended
by Amendment No. 1 thereto dated as of October 11, 1996.
10.23(4) Letter Agreement between the Company and Kummell Investments
Limited, dated September 17, 1996.
10.24+(6) Collaboration Agreement by and between BioChem Therapeutic Inc. and
the Registrant, dated March 7, 1995, as amended November 30, 1995
and December 6, 1995.
54
Exhibit
Number Description
------- -----------
10.25+(6) Supply Agreement by and between BioChem Therapeutic Inc. and the
Registrant, dated March 7, 1995.
10.26+(2) Supply Agreement by and between ChiRex, Ltd. and the Registrant,
dated January 21, 1997.
10.27+(8) Pre-Validation Agreement dated as of October 16, 1998, between the
Registrant and ChiRex, Ltd.
10.28+(2) Collaboration and License Agreement, dated as of November 8, 1996,
by and between the Registrant and Ortho Biotech Inc. and The R.W.
Johnson Pharmaceutical Research Institute, a division of Ortho
Pharmaceutical Corporation.
10.29+(1) Amendment No. 1, dated November 16, 1998, to the Collaboration and
License Agreement dated as of November 8, 1996, by and between the
Registrant and Ortho Biotech Inc. and The R.W. Johnson
Pharmaceutical Corporation.
10.30(2) Stock Purchase Agreement, dated as of November 8, 1996, by and
between the Registrant and Johnson & Johnson Development
Corporation.
10.31(1) Master Lease Agreement, dated as of December 28, 1994 between the
Registrant and Aberlyn Capital Management Limited Partnership.
10.32(1) Common Stock Purchase Warrant, dated December 28, 1994 between the
Registrant and Aberlyn Capital Management Limited Partnership.
10.33(1) Loan and Security Agreement, dated as of May 30, 1995, between the
Registrant and Financing for Science International, Inc.
10.34(9) Loan and Security Agreement, dated as of June 28, 1996, between the
Registrant and Financing for Science International, Inc.
10.35(1) Asset Purchase Agreement, dated of October 17, 1995, between Lipomed
Corporation, its Stockholders and the Registrant, as amended.
10.36(6) Form of Scientific Advisory Board Consulting Agreement.
10.37(6) Form of Clinical Advisory Board Consulting Agreement.
10.38(7) Master Loan and Security Agreement between the Company and the
Transamerica Business Credit Corporation, dated as of December 9,
1997.
10.39+(1) License Agreement dated as of November 13, 1998, by and between PG-
TXL Company, L.P. and the Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
27.1 Financial Data Schedule.
- --------
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(1) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form S-1 (No. 33-4154).
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-20855).
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 333-36603).
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(5) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 8-A.
(6) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 10.
(7) Incorporated by reference to exhibits to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(8) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(9) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
55
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, in the City of
Seattle, State of Washington, on March 24, 2000.
Cell Therapeutics, Inc.
/s/ James A. Bianco
By___________________________________
James A. Bianco, M.D.
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James A. Bianco and Louis A. Bianco, and each
of them his attorney-in-fact, with the power of substitution, for him in any
and all capacities, to sign any amendment or post-effective amendment to this
Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board and March , 2000
____________________________________ Director
Max E. Link, Ph.D.
/s/ James A. Bianco President, Chief Executive March 24, 2000
____________________________________ Officer and Director
James A. Bianco, M.D. (Principal Executive
Officer)
/s/ Louis A. Bianco Executive Vice President, March 24, 2000
____________________________________ Finance and Administration
Louis A. Bianco (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Jack W. Singer Director March 24, 2000
____________________________________
Jack W. Singer, M.D.
/s/ Jack L. Bowman Director March 24, 2000
____________________________________
Jack L. Bowman
Director March , 2000
____________________________________
Jeremy L. Curnock Cook
56
Signature Title Date
--------- ----- ----
/s/ Wilfred E. Jaeger Director March 24, 2000
____________________________________
Wilfred E. Jaeger, M.D.
/s/ Mary O'Neil Mundinger Director March 24, 2000
____________________________________
Mary O'Neil Mundinger, DrPH
/s/ Phillip M. Nudelman Director March 24, 2000
____________________________________
Phillip M. Nudelman, Ph.D.
57