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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
OR
[ ] 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: 0-19591
CYTEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
33-0245076
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
3525 JOHN HOPKINS COURT, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 552-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of voting stock held by
nonaffiliates of the Registrant, as of March 3, 1997 based upon the last sale
price of the Company's Common Stock reported on the National Association of
Securities Dealers Automated Quotation National Market System, was $57,106,303*
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 3, 1997:
NUMBER OF
TITLE OF CLASS SHARES
----------------------------- -----------
Common Stock, $.01 par value 25,133,504
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K PARTS
----------------------------------------------------- ----------------
(1) Definitive Proxy Statement to be filed on or III
before April 30, 1997 (specified portions)
- ---------------
* Excludes 7,562,334 shares of Common Stock held by directors and executive
officers and stockholders whose ownership exceeds five percent of the shares
outstanding at March 3, 1997. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant, or that such person is controlled by or under common control
with the Registrant.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in the description of the Company's business below
and the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed in any documents incorporated herein by reference.
GENERAL
Cytel Corporation was founded in 1987 to develop therapeutic products for
treatment of immunological diseases. The Company has built three core technology
platforms which serve as the basis for the Company's three programs: the
Theradigm(TM) Vaccine program under which the Company is developing therapeutic
vaccines for infectious diseases and cancers; the Inflammation program, which is
based on anti-inflammatory cell adhesion inhibitors; and the Glycotechnology
business unit, which encompasses the Company's proprietary manufacturing
technology for the enzymatic synthesis of bioactive complex carbohydrates.
The Company's core Theradigm technology is focused on the use of peptides in
either an in vivo or ex vivo approach to stimulate cytotoxic T lymphocytes
("CTLs"), or killer T cells. T cells have been shown to play a central role in
regulating the immune response and in directly combating infectious diseases and
cancer. In the Theradigm program, the Company has completed two Phase I clinical
trials of Therdigm-HBV(TM) under an investigational new drug application for
treatment of hepatitis B infection. These trials successfully demonstrated the
ability of the drug candidate to induce a cytotoxic T lymphocyte response in
healthy human volunteers. The Company is currently conducting two separate Phase
II clinical trials with Theradigm-HBV, one in chronic active hepatitis and the
second trial in chronic carriers of the virus. Interim results from the ongoing
Phase II study, demonstrate that Theradigm-HBV induced an HBV-specific CTL
response in chronically infected patients and that the compound was well
tolerated. In December 1996, the Company announced that data suggest that the
effectiveness of Theradigm in generating a cellular immune response may be
stronger in patients with lower amounts of virus in their bodies. As a result,
the Company believes that Theradigm-HBV may be more effective in combination
with an anti-viral agent and has no plans to conduct additional clinical studies
of Theradigm-HBV as a monotherapy.
In the Company's Inflammation program, the lead drug candidate is Cylexin(TM), a
small molecule carbohydrate designed to block both E- and P-selectin. The
Company has conducted two separate Phase II clinical trials of Cylexin in
patients. The first trial evaluated the ability of Cylexin to reduce reperfusion
injury following cardiopulmonary bypass during surgical removal of persistent
blood clots from the lungs by a procedure called pulmonary thromboendarterectomy
("PTE"). This study, concluded in April 1996, provided evidence of a clinical
benefit. In a second trial, Cylexin was evaluated for its ability to prevent
reperfusion injury to cardiac (heart) muscle during treatment of acute
myocardial infarction ("AMI") with primary angioplasty. This trial was
terminated in June 1996 after the independent safety and data monitoring panel
determined that the drug was safe, but that there was no benefit in patients
treated with Cylexin over those patients in the placebo control group. The
favorable outcome in the PTE trial was an important factor in initiating in
February 1997 a Phase II clinical trial with researchers at the Harvard Medical
School to evaluate the ability of Cylexin to reduce reperfusion injury that
frequently follows cardiopulmonary bypass during surgery to correct congenital
heart defects in newborn infants.
During 1996, the Company established a Glycotechnology business unit to focus on
commercializing its proprietary enzymatic synthesis technology for therapeutic
and non-therapeutic applications. Dr. James Paulson was named General Manager of
the unit. The
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Company's core technology in this unit is its enzymatic sugar nucleotide cycling
technology (SNC(TM) Technology) that enables the manufacture of large quantities
of bioactive carbohydrates at commercially viable costs. The Company's business
strategy in this unit is to pursue opportunities to collaborate with companies
on the development and manufacture of bioactive carbohydrate products in two
broad categories, medical products and consumer products. During 1996, the
Company achieved a major milestone in its collaboration with Abbott Laboratories
("Abbott"), and also entered into a new collaboration with Baxter Healthcare
Corporation's Nextran unit ("Nextran") to develop a product for
xenotransplantation.
None of the products under development by the Company have been approved for
their intended use, and the Company does not anticipate that such products will
be available for a number of years, if at all.
THERADIGM(TM) VACCINE PROGRAM
TECHNOLOGY OVERVIEW
Cytel is a leader in discovering how the immune system recognizes antigens and
in applying that knowledge to the design of novel therapeutic vaccines for the
treatment of certain immune diseases. The immune system has complex mechanisms
to ensure that it can recognize the numerous and diverse antigens that it may
encounter, such as microorganisms, toxins or cancer, while not reacting against
self molecules. Microorganisms fall into two broad categories: those that can
only survive by invading the cells of the infected individual (viruses and some
bacteria), and those that survive outside of cells in the "extracellular"
environment (most bacteria). Accordingly, the immune system has one mechanism to
recognize and destroy antigens that originate outside of cells and another
mechanism for antigens that originate within cells.
Antibodies defend the body against those microorganisms that live outside of
cells. Classic prophylactic vaccines protect against diseases such as
diphtheria, tetanus and whooping cough by eliciting an antibody response which
prevents infection of cells by these organisms. In contrast, once viruses have
infected cells, they are hidden from antibodies. In these cases, another
mechanism is triggered to defend against the disease. This mechanism involves
CTLs, which do not recognize whole antigens directly. Antigens are generally
large proteins, which first must be broken down into peptides ("antigenic
peptides") to be presented to CTLs by cells known as "antigen presenting cells."
To mount a proper attack against viral infection or tumors, CTLs or killer T
cells must interact with key receptors, known as MHC Class I molecules found on
the surface of infected cells. The MHC "presents" a piece of the viral protein
(a peptide) being synthesized within the cell, and it is this MHC-peptide
complex which can be recognized by the CTL. The initial interaction of T cells
with the MHC-antigenic peptide complex activates T cells and causes them to
proliferate. Activated CTLs in turn stimulate and kill infected cells or cancer
cells bearing the same MHC-antigenic peptide complex. In human viral diseases,
it has been shown that during acute infection and during spontaneous clearance
of a chronic infection, the activation of a strong CTL response is associated
with clearance of the virus.
Cytel's core technology is centered around identifying the most effective
antigenic peptides from viral antigens and tumor-associated antigens which bind
to MHC and induce a CTL response capable of killing diseased cells. These
disease-specific antigenic peptides are not effective by themselves at
stimulating a CTL response, so they must be delivered to patients in a form that
is immunogenic. Cytel has developed a proprietary "delivery" module that allows
delivery of a single antigenic peptide. This delivery module consists of a
T-helper peptide, for the local production of lymphokines required for CTL
activation, and two lipid carriers. For developing and commercializing drugs
that would use multiple peptides, the Company is evaluating the use of DNA
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delivery systems, allowing the combination of DNA encoding multiple peptides in
a single minigene.
PROPHYLACTIC APPLICATIONS
Development of safe yet effective prophylactic vaccines against a number of
infectious agents and cancers requires induction of long lasting T cell
responses directed at appropriate antigenic peptides, either alone or in
combination with B cell epitopes that will lead to antibody production.
Infectious diseases in this category include HIV, hepatitis C virus ("HCV"),
human papillomavirus ("HPV"), the herpes viruses, tuberculosis, malaria and
others. It has been shown that antibodies to the viruses causing some of these
diseases do not lead to neutralization of virus and, in some diseases including
HIV, those antibodies may facilitate the spread of infection. In these diseases,
T cells are critical, as the T cells have the ability to control and destroy the
virus. Cytel has developed two technologies for use in the development of
prophylactic vaccines - antigenic peptides and a specially designed, broadly
reactive helper epitope, termed PADRE.
Antigenic Peptides. Cytel believes that antigenic peptides are a central
component of a vaccine strategy for the infectious diseases and cancers listed
above for several reasons. With these diseases, the target antigens have a high
mutation rate or there are many antigenic variants, making it important to
target the immune response toward regions of the antigen that are highly
conserved. This also allows one to reduce the likelihood of escape mutants
emerging and to provide the broadest possible population coverage. These
benefits can only be realized by providing a vaccine containing conserved
antigenic peptides.
For most pathogens, it is important to combine a number of antigens to increase
the potential of the immune system to prevent infection. At the same time, this
combination of antigens must be extremely safe when delivered to a large,
diverse population of healthy individuals. Whole antigens are generally not
appropriate since many express their own intrinsic biologic activity, ranging
from immunosuppression to oncogenicity. Safe delivery of multiple antigens is
most effectively achieved when using combinations of antigenic peptides rather
than whole antigens or genes that code for them.
Experimental models investigated by several groups have proven the ability of
antigenic peptides to induce long lasting protective immunity. Cytel's work
using lymphocytic choriomeningitis virus ("LCMV") infection in mice has
demonstrated that a single immunization using a Theradigm construct containing
an LCMV antigenic peptide resulted in the complete protection of the animals
from viral challenge even if the viral challenge occurred more than 6 months
following immunization. Similar studies at Cytel using influenza virus antigenic
peptides have shown that T cell immunity induced in this manner persists
throughout the life of the animal.
Based upon the broad body of data across academia and industry, the Company
believes that effective prophylactic immunity can be achieved using antigenic
peptides to stimulate T cell immunity. Furthermore, a mixture of these peptides
may provide the ability to produce safe and effective vaccines against those
diseases that have eluded conventional vaccine approaches. However results
obtained in animal models are not necessarily indicative of results that may be
obtained in human clinical testing.
PADRE Helper Epitope. In addition to the antigenic peptides, Cytel has
discovered a potent universal immunostimulant known as PADRE that enables the
development of synthetic peptide vaccines. PADRE can be used in combination with
the disease-specific antigenic peptides to enhance a T cell response, and it may
also be used with B cell epitopes or carbohydrate antigens to stimulate a potent
antibody response.
The practical application of synthetic vaccines for human use has been limited
by the inability of such vaccines to elicit appropriate activation of
antibody-producing B cells or helper T cells, which secrete chemicals to
reinforce the activation of B cells. Linking the synthetic peptides to
immunogenic protein carriers, such as Keyhole limpet hemocyanin ("KLH"), or
large, cross-
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linked peptide constructs can increase the immunogenicity of a synthetic
antigen; but these approaches present other problems, which result in the loss
of effectiveness associated with repeated use of the same carrier.
Taking a new approach, Cytel has shown that a monovalent construct using PADRE
effectively induces a long-lived IgG antibody response and that the response is
as potent as that generated using larger complex KLH conjugates or multiple
antigenic peptides constructs. Cytel has found that using the PADRE technology
with linear synthetic peptide antigens provides universal stimulation of helper
T cells and efficiently stimulates B cells in mice. Immune responses stimulated
with the PADRE synthetic vaccine exhibited the hallmark of protective
immunity-high titers of antibody consisting mainly of IgG lasting longer than 12
months. In addition, manufacturing of the PADRE construct is straightforward,
and there is no carrier-suppression effect since PADRE alone does not induce an
anti-PADRE antibody response.
THERAPEUTIC APPLICATIONS
Theradigm-HBV. Cytel's first immunotherapeutic drug candidate to enter human
trials, Theradigm-HBV, is designed to treat patients chronically infected with
the hepatitis B virus ("HBV"). It is estimated that in excess of 1.2 million
people in the United States and 350 million people worldwide are chronically
infected with HBV. An estimated 50 million new acute cases worldwide and 300,000
new cases in the U.S. occur each year. Of these, approximately 10% become
chronic. Although effective prophylactic vaccines exist to prevent the
occurrence of many infectious diseases, including hepatitis B, there is no
completely effective treatment of these diseases once an individual is
chronically infected. Alpha interferon is the only effective drug approved for
treatment of the disease, but fewer than 30% of treated patients have a
long-lasting response to this therapy. Virtually all patients treated with alpha
interferon for hepatitis B suffer from side effects.
The rationale for believing that the activation of HBV specific CTLs can be
important in treating chronic HBV infection comes from three scientific
observations in infected patients. First, it has been shown that, during acute
infection, the activation of a strong CTL response is associated with the
clearance of the infection. Second, the clearance of chronic infection can occur
spontaneously at a low rate, about 1% per year, and spontaneous clearance of
chronic infection is associated with a strong CTL response. Third, the
elimination of chronic infection as a result of alpha interferon therapy is also
associated with a strong CTL response. Taken together, these three findings,
along with evidence from studies in animal models, all support the concept that
activation of a CTL response in patients with chronic disease should be
effective at clearing the virus. Cytel's antigenic peptide is part of the core
protein of the virus and is appropriate for the treatment of about 50% of all
major ethnic groups.
In two Phase I clinical trials, Cytel has demonstrated the safety of
Theradigm-HBV, its tolerability and its ability to induce a CTL response in
healthy volunteers. Both Phase I trials were double-blind, placebo-controlled
studies conducted in normal volunteers, with subjects receiving an initial
inoculation followed by at least one booster. In addition to safety information,
Cytel obtained important data from the Phase I studies indicating that
Theradigm-HBV induces a cellular immune response, specific to hepatitis B, in
man. The CTL response to the drug, measured in the peripheral blood, was shown
to be dose-dependent, both in relation to the proportion of subjects exhibiting
a positive response as well as to the magnitude of the response.
The Company's two Phase II clinical trials in which Theradigm-HBV is
administered to chronically infected patients are ongoing, one in patients with
chronic active disease and one in chronic carriers of the virus. The purpose of
these initial trials is to determine an effective dose
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and regimen for activating HBV-specific CTL in patients and to establish the
safety of stimulating specific CTL. The objectives do not include statistical
proof of efficacy. Accordingly, both Phase II trials are open-label, dose
escalation, non-controlled studies.
Early results from the Phase II study demonstrated that Theradigm-HBV induced an
HBV-specific CTL response in chronically infected patients and that the compound
was well tolerated. However, the effectiveness of Theradigm in generating a
cellular immune response may be stronger in patients with lower amounts of virus
in their bodies. As a result, the Company believes that Theradigm-HBV may be
more effective in combination with an anti-viral agent, and has no plans to
conduct additional clinical studies of Theradigm-HBV as a monotherapy.
HCV. There is currently no prophylactic vaccine available to prevent HCV
infection and no effective anti-viral drugs have been developed that can control
or eliminate the infection. The prevalence of hepatitis C is estimated to be 3.9
million in the U.S. and approximately 200 million people worldwide. Hepatitis C
causes acute infection, and like hepatitis B, also causes chronic infection,
liver disease and most cases of post-transfusion hepatitis. While alpha
interferon is currently used for treating active disease, this therapy suffers
the same drawbacks as described for hepatitis B above.
Evidence is emerging from both animal and human studies which suggests that CTL
may be able to play a role in the control and elimination of HCV infection.
Experience gained in the Theradigm-HBV program should help in the development of
vaccines for the prevention and treatment of HCV infection.
As with other infectious diseases, Cytel's strategy is to identify those
antigenic peptides that are highly conserved among the different strains of the
virus and then focus the immune response on those conserved regions with a
Theradigm drug. In contrast, the natural immune response is often directed to
the highly variable regions of the virus, which, through frequent mutations,
allows the virus to escape immune elimination. The ability to focus a strong
immune response is essential for effective immunotherapy of HCV and HIV
infection. Cytel has selected several antigenic peptides which would be
appropriate for use in a HCV therapeutic or prophylactic vaccine. These peptides
have been shown to induce CTL in vitro and to kill cells expressing HCV
antigens.
HIV. The World Health Organization ("WHO") estimates that 16.5 million people
world-wide are infected with HIV, and by the year 2000 that number is expected
to increase to 30-40 million. More than 1.2 million individuals in the U.S. are
estimated to harbor the virus. A number of drugs such as AZT and DDI have been
approved for therapy and appear to confer continuing survival benefits. More
recently, multiple protease inhibitors and nucleoside analogs have been
approved, mostly for use in combination with other drugs. The emergence of drug
resistant strains of the virus is a problem and underlies the need for
alternative strategies for treating HIV infection. CTL have been shown to play a
critical role in the control of HIV infection and it is proposed that
augmenting, broadening, or redirecting CTL responses to highly conserved
epitopes may be of therapeutic benefit. Cytel's HIV project is being conducted
under a Strategic Programs for Innovative Research on Aids Treatment ("SPIRAT")
grant provided by the National Institute of Allergy and Infectious Diseases
("NIAID"). A proof of concept clinical study was initiated in early 1997 with
investigators at The Massachusetts General Hospital in Boston.
This pilot clinical program combines two lipidated peptide constructs which are
being administered to 12 HIV positive patients with CD4 counts greater than 500.
The primary objectives are to determine if patients at this stage of disease can
mount a substantial CTL response and, if so, the resultant effect on viral
burden. Follow-on studies would test the therapeutic benefit using a cocktail of
anti-HIV drugs to reduce viral burden with multiple conserved antigenic HIV
peptides to induce potent and effective T cell immunity.
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Cancer. The Company's tumor program contains two separate but complementary
approaches: an in vivo therapeutic vaccine approach, which targets early stage
disease or serves as an adjunct to surgery where all of the detectable tumor has
been resected, and an ex vivo cellular therapy approach which delivers large
numbers of CTLs generated outside of the patient's body in patients with late
stage metastatic disease. The near term strategy is to initiate in 1997, an ex
vivo cellular therapy proof of concept clinical study in late stage metastatic
disease, using antigenic peptides to generate large numbers of CTLs specifically
activated against the target antigen outside of the body. Once fully activated,
the CTLs will then be reinfused into patients and measurements of an objective
tumor response will be taken.
There is substantial evidence in animal tumor models that large numbers of CTLs
specifically activated against the target tumor antigen can effectively
eliminate large solid tumors. Such CTL are most effectively activated outside of
the patient's body and therefore outside of the immunosuppressive environment of
the tumor. Supportive evidence using ex vivo expanded tumor infiltrating
lymphocytes suggests that similar results may be possible in man, although ex
vivo therapy with tumor antigen specific CTLs have not been tested. Thus, this
proof of concept study will represent an initial step toward developing
effective anti-cancer therapy not only for late stage cancer using ex vivo
therapy but also for early stage disease or as an adjunct to surgery using in
vivo immunization.
INFLAMMATION PROGRAM
TECHNOLOGY OVERVIEW
Cytel's inflammation program focuses on several cell adhesion receptors that
play an important role in the immune response by recruiting white blood cells to
sites of inflammation. The Company believes that the drugs developed in this
program may be useful in treating a broad range of both acute and chronic
inflammatory conditions by suppressing the immune response. Cytel is a leader in
the discovery, design and development of molecules that suppress the immune
response by inhibiting cell adhesion. Cytel's scientists have been at the
forefront in identifying and characterizing cell adhesion molecules, including
the receptors present on one cell that bind to ligands on another cell and
mediate cell adhesion. The receptors and ligands operate in a lock-and-key
manner to initiate an immune response.
The adhesion of white blood cells to the blood vessel wall is a pivotal event in
the immune response and therefore serves as an ideal point of intervention in a
number of diseases. These diseases include classic inflammatory diseases (such
as asthma and rheumatoid arthritis) as well as reperfusion injury which occurs
when blood flow into a tissue is restored following a temporary blockade or
reduction in blood flow. Most of these diseases are characterized by massive
infiltration of white blood cells which cause tissue injury.
Cytel scientists and others have demonstrated that the initial adhesion of white
blood cells is mediated by cell adhesion molecules expressed on both the white
blood cells and the blood vessel wall. The Company currently has two different
research efforts in the cell adhesion area: a selectin receptor blockade
approach addressing acute inflammatory diseases and reperfusion injury; and an
integrin receptor blockade approach addressing chronic inflammatory diseases.
Selectin Receptor Blockade. The consequences of acute inflammation and
reperfusion injury may be severe and occasionally life threatening and occur
within minutes of the body's exposure to an antigen or reperfusion of
blood-deprived tissue. Although these conditions have multiple causes, each
involves neutrophil adhesion to the blood vessel wall and the subsequent
migration of neutrophils into the tissue. Once in the tissue, neutrophils
release toxins which attack normal cells as well as the antigen. Normal cell
death leads to tissue damage and ultimately organ dysfunction.
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Cell adhesion receptor molecules on the blood vessel walls, called selectins,
facilitate the migration of neutrophils out of the blood stream and into the
surrounding tissue by binding to a carbohydrate ligand (a sugar molecule) on the
surface of neutrophils. Cytel's scientists have focused on two selectins,
E-selectin and P-selectin. Cytel scientists discovered the structure of the
carbohydrate ligand known as "Sialyl Lewis X" ("SLex") which binds to both E-
and P-selectin. E-selectin is expressed on cells lining the blood vessels of
tissues involved in acute inflammation, and P-selectin is expressed on cells
lining the blood vessels of tissues that have been reperfused following a period
of ischemia (temporary blockage). As a result, the ability to block E-selectin
and P-selectin is expected to be of value in treatment of diseases associated
with acute inflammation and reperfusion injury, respectively.
Once expressed on the surface of cells lining the blood vessel walls, E- and
P-selectin bind to SLex located on the surface of the neutrophils. It is the
binding of this carbohydrate ligand to E- and P-selectin that enables the
recruitment of neutrophils to the tissue injury site. Cytel is developing
selectin blockers that it believes will prevent neutrophil adhesion and may be
useful in treating two classes of disease, reperfusion injury and acute
inflammation.
Integrin Receptor Blockade. Unlike acute inflammation which is mediated by
neutrophils, chronic inflammation results primarily from infiltration by
lymphocytes, a second class of white blood cells, into tissue. A family of cell
adhesion molecules, called integrins, are known to mediate normal lymphocyte
trafficking and movement into inflammatory sites. Integrins are thus likely to
be involved in lymphocyte infiltration during chronic inflammation and their
inhibition is an attractive target for therapeutic intervention.
Scientists at the Fred Hutchinson Cancer Research Center ("FHCRC") in Seattle
first described an interaction between the lymphocyte integrin receptor, known
as VLA-4, and its corresponding ligand, CS-1 fibronectin. In a "lock and key"
analogy, VLA-4 is the lock and CS-1 the key. Cytel has an exclusive license to
this technology from FHCRC. See "Research Collaborations and License
Agreements."
Cytel scientists have continued work in this area and have made a number of key
advances. They discovered that the CS-1 ligand is selectively expressed on the
blood vessels in the joints of patients suffering from rheumatoid arthritis.
These observations provide evidence that the VLA-4/CS-1 ligand interaction plays
a role in mediating the migration of lymphocytes from the bloodstream into
joints in this disorder. Similar data have been obtained for other chronically
inflamed tissues, such as skin inflammation. Cytel scientists have utilized
their discovery of the VLA-4/CS-1 adhesion interaction to design proprietary
receptor blockers which mimic CS-1 and thus bind to the VLA-4 integrin receptor.
To leverage its proprietary position in VLA-4 blockers, Cytel sought to develop
more potent orally available inhibitors through medicinal chemistry. At present,
Cytel has a panel of small molecule VLA-4 blockers (approximately 30, MW< 600)
whose potency in vitro is in the submicromolar range, and have a wide spectrum
of physiochemical properties. This represents a potency improvement of up to six
orders of magnitude relative to the native CS-1 sequence. In addition, Cytel's
VLA-4 blockers have been optimized for stability to serum proteolysis, a common
problem of conventional peptides which limits their therapeutic usefulness.
Cytel scientists have also made substantial progress in establishing
structure-activity relationships for VLA-4 using conformationally constrained
analogs whose in vitro potency equals that of VLA-4 blockers described above.
More importantly, within these conformationally constrained inhibitors, the
Company has identified the nature and orientation of the side chains and the
atoms that are involved in making molecular contacts with VLA-4. Cytel believes
this information is extremely valuable for the development of new classes of
VLA-4 inhibitors.
Cytel's current drug discovery strategy has focused on the antagonists of VLA-4
which can be orally absorbed. Its scientists have developed pro-drug derivatives
of the VLA-4 blockers
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described above that are amenable to epithelial permeability in vitro and in
animals can be absorbed into the blood from the digestive system. The Company is
continuing to further optimize the properties of these compounds and identify a
lead candidate which could be developed as an orally administered drug. The
Company's initial targets in chronic inflammation are asthma, rheumatoid
arthritis and multiple sclerosis.
THERAPEUTIC APPLICATIONS
Surgical Repair of Congenital Heart Defects. Heart defects are among the most
common birth defects and are the leading cause of birth defect-related deaths.
Approximately 30,000 infants are born each year with heart defects in the United
States. Many newborns (3-4 per 1000 live births) have life-threatening defects
that require surgical intervention. The majority of these undergo open heart
surgery requiring use of cardiopulmonary bypass (CPB) techniques. Advances in
surgical techniques and medical care have led to a dramatic improvement in
survival of infants with congenital heart defects. However, open heart surgery
can result in considerable morbidity in the early postoperative period (such as
reduced cardiac index, severe edema and seizures) and impairment of neurological
development. Ischemia and reperfusion injury following cardiopulmonary bypass
play a significant role in the postoperative morbidity.
Cylexin, the Company's leading drug candidate in its Inflammation program, is a
carbohydrate small molecule blocker of P-and E- selectins. Cylexin's
demonstrated efficacy with Cylexin in certain animal models of inflammation and
reperfusion injury was the basis for the conduct of two Phase II clinical
trials. However, results obtained in animal models are not necessarily
indicative of results that may be obtained in human clinical testing. One trial
evaluated the ability of Cylexin to reduce reperfusion injury following
cardiopulmonary bypass surgery through surgical removal of persistent blood
clots from the lungs by a procedure called pulmonary thromboendarterectomy to
treat severe pulmonary hypertension. This study, concluded in April 1996,
provided evidence of a clinical benefit. In a second trial, Cylexin was
evaluated for its ability to prevent reperfusion injury to cardiac (heart)
muscle during treatment of AMI with primary angioplasty. This trial was
terminated in June 1996, after the independent safety and data monitoring panel
determined that the drug was safe, but that there was no benefit in patients
treated with Cylexin over those patients in the placebo control group.
Researchers at Cytel believe that this difference in results may have occurred
because reperfusion injury is more relevant in the cardiopulmonary bypass
setting than in the myocardial infarction setting and because the Cylexin drug
concentration achieved was higher in the lung trial than that achieved in the
AMI trial. This evaluation was also a factor in initiating in February 1997 a
Phase II clinical trial with researchers at the Harvard Medical School to
evaluate the ability of Cylexin to reduce reperfusion injury that frequently
follows cardiopulmonary bypass during surgery to correct congenital heart
defects in newborn infants.
Reperfusion Injury. CY-1748 is a humanized anti P-selectin monoclonal antibody.
These molecules have been shown to provide protection in certain animal models
of reperfusion injury, including models of hemorrhagic shock and organ
transplantation. However, results obtained in animal models are not necessarily
indicative of results that may be obtained in human clinical testing.
Reperfusion injury occurs following resumption of blood flow to tissue in which
there has been earlier ischemia. The injury is caused by recruitment of
neutrophils to the reperfused tissue. The neutrophils migrate through the blood
vessel wall and release toxins and enzymes into the surrounding tissue, a
process which results in varying degrees of injury. Sumitomo Pharmaceuticals
Co., Ltd. ("Sumitomo") has exercised its option to CY-1748 giving it the right
to develop the drug for Pacific Rim markets. Under the terms of the
collaborative agreement with Sumitomo signed in October 1991 to develop and
market products based on the Company's selectin technology for the treatment of
white blood cell-mediated diseases in Pacific Rim countries, Cytel has retained
the right to manufacture products for Sumitomo. See "Development and Marketing
Arrangements--Sumitomo." In 1995, Cytel entered into a license agreement with
Upjohn, Inc., now a part of Pharmacia and Upjohn, Inc. ("P&U"), granting the
rights to develop, manufacture and commercialize CY-1748 worldwide, except for
the Pacific Rim markets. In early 1997 Cytel announced that P&U decided not to
go forward with development of CY-1748
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after a strategic review of the consolidated development pipeline of the merged
companies. P&U made significant progress in developing preclinical information
to support development of CY-1748 for use in treating deep vein thrombosis. The
Company is evaluating its options, including the potential for seeking another
commercial partner to sponsor clinical development of CY-1748.
Other selectin inhibitor applications. Other potential applications for Cytel's
selectin inhibitors include traumatic shock, organ transplantation and stroke.
Traumatic shock is a result of blood loss associated with trauma of various
types, including accidents and gunshots. Damage is caused by inadequate blood
supply to critical organs, frequently causing multiple organ failure.
Restoration of blood flow to the damaged organs by medical resuscitation may
result in further tissue damage. There are 240,000 to 300,000 cases of traumatic
shock in the United States annually. Organ transplantation is the most extreme
scenario of oxygen deprivation followed by reperfusion, bringing oxygen-rich
blood and neutrophils to the previously ischemic tissue. The outcome of organ
transplantation has markedly improved due to improvements in surgical technique,
improved organ preservation procedures and the availability of more selective
and effective immunosuppressants. However, despite these improvements, the
complications resulting from poor graft function in the early post transplant
period continue to be a significant problem. The pathogenesis of delayed or
initial poor graft function appears to be multifactorial including both ischemic
and immunological mechanisms. Early injury to the transplanted organ can occur
as a consequence of tissue hypoxia during cold storage and the process of
reperfusion. Infiltration of neutrophils following reperfusion can release
destructive oxygen species and proteolytic enzymes. Animal model data suggest
that blocking of adhesion molecules responsible for adhesion of neutrophils to
endothelial cells mitigates the structural and functional damage associated with
reperfusion in transplanted kidneys. Worldwide, over 40,000 solid organ
transplant procedures are performed each year. Stroke is the third leading cause
of death in the United States. Every year there are 550,000 new or recurrent
strokes in the United States and 3 million Americans are permanently disabled
because of stroke. Stroke is a cerebrovascular injury that occurs when blood
flow to the brain is interrupted by a clogged or ruptured artery. The
interruption deprives the brain of blood and oxygen and causes brain cells to
die. When brain cells die, function of the body parts they control is impaired
or lost, causing memory and reasoning defects, speech problems, paralysis, and
possibly death.
Integrin receptor applications. The Company's initial targets in chronic
inflammation are asthma, rheumatoid arthritis and multiple sclerosis. Asthma is
characterized by a narrowing of the air passages and affects an estimated 10
million people in the U.S. Chronic inflammatory asthma is believed to result
from white blood cells migrating into the lungs which then cause intermittent
airway narrowing. Rheumatoid arthritis is a chronic, systemic disease
characterized by persistent inflammation in the joints. The cause of rheumatoid
arthritis is believed to be due to lymphocytes which mediate damage through an
autoimmune response against the joint's lining. Rheumatoid arthritis is
estimated to affect 1% of the United States population, or approximately 2.5
million people, and causes swelling, tenderness or pain and may cause limitation
of motion. The disease can occur at any age, but it is estimated that 80% of
patients develop the disease between ages 35-50. Currently therapy for
rheumatoid arthritis is directed at suppression of the later stages of the
inflammatory process to reduce symptoms and prevent progressive damage to the
joints. These treatments can have significant side effects. Multiple sclerosis
is a chronic disease of the central nervous system. People with multiple
sclerosis may have any number of its many symptoms that range from dizziness to
loss of motor skills. There are an estimated 350,000 Americans with multiple
sclerosis with nearly 200 new cases diagnosed each week. Currently, there is no
cure for multiple sclerosis.
GLYCOTECHNOLOGY BUSINESS UNIT
During 1996, Cytel established a separate Glycotechnology business unit. A core
strategic asset of this unit is its proprietary enzymatic synthesis technology,
which enables the manufacture of
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large quantities of bioactive carbohydrates at commercially viable costs.
Potential commercial applications of Cytel's glycotechnology include a range of
medical and consumer products.
Bioactive carbohydrates are found throughout the human body on cell surfaces and
in body fluids. These biologically active molecules are carriers of chemical
information, mediating immune system responses and disease processes such as
inflammation, cancer and microbial infections. Cytel has formed several
strategic relationships and is seeking additional opportunities to collaborate
with companies on the development and manufacture of bioactive carbohydrate
products.
CYTEL'S SNC (TM) TECHNOLOGY
Traditional chemical synthesis of bioactive carbohydrates is very expensive,
making large-scale manufacturing impractical for all but the most simple
structures. Cytel, through its proprietary SNC Technology, has achieved
significant cost reductions from chemical processes, making large-scale
manufacturing of complex carbohydrates commercially viable.
In nature, bioactive carbohydrates are synthesized by a "molecular assembly
line" where the assemblers are specialized enzymes called glycosyltransferases.
These enzymes cause sugar subunits to be added in the correct, specific
orientation to form bioactive structures. The starting materials (sugar subunits
linked to nucleotides) are synthesized by another set of enzymes adjacent to the
"assembly line" in the cell. Cytel's SNC Technology recreates nature's own
efficient, specific assembly of bioactive carbohydrates in biochemical reactors
on commercial scale.
Cytel's SNC Technology employs proprietary recombinant glycosyltransferases to
provide for the transfer of one sugar molecule from a sugar-nucleotide donor to
a growing carbohydrate chain in a highly specific manner. Cytel and its
collaborators at The Scripps Research Institute ("Scripps") developed the SNC
Technology to generate the sugar-nucleotide donor molecules enzymatically during
the course of the reaction. After the transfer of one sugar molecule to the
carbohydrate chain, the nucleotide carrier can be recombined with another sugar
molecule, thus completing the cycle and generating a new donor molecule for
attachment to another chain. After the first reaction is complete, the SNC
Technology can be used with one or more additional glycosyltransferases until
the desired carbohydrate product is completed.
The use of SNC Technology allows bioactive carbohydrates to be manufactured at
lower costs than other alternatives. First, the technology offers efficiency. A
single reaction allows the complete addition of a sugar subunit with yields
approaching 100%, whereas chemical synthesis generally requires 6 to 10 steps
for each sugar addition with low overall yields. Second, the enzymes bring
specificity. Each glycosyltransferase cycle makes only the desired chemical
linkage between the carbohydrate chain and a particular sugar subunit, providing
products with high purity. Third, the technology offers flexibility. The
construction of a complex bioactive carbohydrate is done in a modular manner.
Judicious utilization of cycles with inexpensive backbone sugars and appropriate
glycosyltransferases can yield most bioactive carbohydrates of commercial
interest with only a few reaction steps. Finally, SNC Technology can be
conducted at a reduced cost compared to other enzymatic methods employing
glycosyltransferases. Without SNC Technology, expensive nucleotide sugars must
be either purchased or prepared chemically, and a large excess must be utilized
in the reaction, often substantially increasing the cost of the carbohydrate. In
addition, Cytel's glycosyltransferases and other cycle enzymes are recombinantly
produced so that they are inexpensive and available in large quantities.
POTENTIAL COMMERCIAL APPLICATIONS
Because of the role that bioactive carbohydrates play in the body, numerous
opportunities exist to interfere with their actions or to enhance their
activity. Cytel is pursuing product opportunities
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in two broad categories: medical products and consumer products. In each
business segment, Cytel is seeking additional opportunities to collaborate with
companies on the development and manufacture of bioactive carbohydrate products.
Carbohydrate Drugs. Products which mimic selected carbohydrates could be
beneficial as therapeutics by inhibiting the binding of specific cells, thereby
interrupting a cascade of events leading to illness or tissue damage. In its
Inflammation Program, Cytel is developing small molecule carbohydrates,
including Cylexin, to block selectin receptors expressed in blood vessels during
inflammatory conditions. Soluble bioactive carbohydrates may also serve as
anti-infective agents by intercepting pathogens before they attach to cells and
inducing the clearance of pathogens out of the body, thereby preventing the
onset or reducing the severity of disease.
Medical Devices. In a collaboration initiated in September, 1996, Cytel will
work with Nextran on the manufacture of a specific bioactive carbohydrate which
is implicated in the hyperacute rejection of organs transplanted from non-human
species to humans (i.e. xenotransplantation). This hyperacute rejection is
caused by circulating natural human antibodies that recognize the sugar
structure (Gal alpha1,3Gal) on the surface of the non-human organ. By using this
sugar in a column to remove the antibodies from the blood of a transplant
recipient prior to transplantation, the antibodies will not be in circulation to
cause hyperacute organ rejection.
Glycoprotein Remodeling. Carbohydrates presented on a recombinant glycoprotein
(proteins produced by expression in cultured cell lines or transgenic animals)
are not identical to those presented on the naturally occurring glycoprotein.
Cytel's SNC technology can be applied to alter the carbohydrate structures
covalently attached to these glycoproteins to recreate the desired natural
structure. This provides the Company the opportunity to improve structural and
functional characteristics of therapeutic proteins developed by other
biotechnology or pharmaceutical companies. Cytel is working with several
companies to measure the benefit of `repairing' the carbohydrates of certain
recombinantly produced therapeutic glycoproteins. Application of Cytel's
technology may reduce the effective dose, improve the homogeneity and
consistency, and reduce the antigenicity of certain recombinant glycoproteins in
preclinical development.
Consumer Products. Consumer product applications offer the advantage over
medical products of more rapid development and commercialization because they
are not subject to the same approval process as are drugs or medical devices.
Cytel initiated its first consumer product collaboration early in 1996 with
Abbott. The companies' project teams are working together to use Cytel's SNC
technology to make carbohydrates that will be used in Abbott's nutritional
products. In the case of Abbott's infant formula products, the addition of one
or more carbohydrates is expected to make the product more like human milk.
Other consumer product applications may utilize biologically active
carbohydrates through either topical application or oral administration.
DEVELOPMENT AND MARKETING ARRANGEMENTS
Cytel's commercial strategy is to develop products both independently and in
collaboration with established pharmaceutical and biotechnology companies. Where
appropriate, the Company seeks to complement its internal efforts with
collaborative arrangements. These collaborative partners may provide financial
resources, research and manufacturing capabilities and marketing infrastructure
to aid in the commercialization of Cytel's potential drug discoveries. The
Company evaluates, on an ongoing basis, potential collaborative relationships
with established pharmaceutical and biotechnology companies.
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SUMITOMO
In October 1991, the Company entered into a five-year technology development
agreement with Sumitomo to develop drugs based on Cytel's selectin technology
for the treatment of white blood cell-mediated diseases. That agreement expired
in January 1997. The companies continue to have a licensing relationship with
Sumitomo covering the development of compounds resulting from the collaboration
and their commercialization in Pacific Rim countries. During the period of
research and development collaboration, Sumitomo provided research and
development support to the Company of $15.4 million, paid option exercise fees
of $2.5 million and purchased $5.0 million of Cytel stock. Sumitomo has
exercised its option to include CY-1787/88, Cylexin and CY-1748 as potential
development compounds in Pacific Rim countries and is obligated to make payments
if certain milestones are met and to pay royalties to Cytel on sales of such
products. These milestone payments and royalties will depend on Sumitomo's
efforts in discharging its obligations in the Pacific Rim to complete product
research and development, conduct clinical trials, obtain regulatory approvals
and market any products. Total option fees and milestone payments to the Company
will not exceed $25.0 million.
In connection with the agreement, Sumitomo has granted to the Company a
royalty-free license covering any technology arising from the collaboration
within the field either jointly owned or owned solely by Sumitomo for use by
Cytel in territories outside of the Pacific Rim.
SCHWARZ
In May 1995, the Company entered into a collaboration agreement with Schwarz
Pharma AG ("Schwarz") for the development and marketing of carbohydrate selectin
blockers, including Cylexin, in North America and Europe. During 1996, the
companies completed the Phase II clinical study of Cylexin in patients
undergoing primary angioplasty as treatment for AMI. Subsequent to the negative
outcome of the AMI study, the Company entered into discussions with Schwarz to
consider an ongoing collaboration with a new indication or an alternative
molecule. Cytel is continuing to develop Cylexin in North America and has
initiated in early 1997 a Phase II clinical study in infants undergoing surgery
to correct congenital heart defects.
GLYCOTECHNOLOGY COLLABORATORS
In December 1995, the Company signed an agreement with Abbott under which the
companies are collaborating to develop manufacturing processes for the
production of certain carbohydrates for use in nutritional products. Abbott has
paid the Company $4.0 million for an option to license the Company's
carbohydrate synthesis technology for use in making nutritional products and for
milestones achieved during 1996. Abbott will make an additional milestone
payment to the Company upon achievement of commercial milestones and will pay
royalties based on the volume of product sold.
In September 1996, the Company entered a collaborative agreement with Nextran to
manufacture a specific carbohydrate for use in a medical device. Nextran has
made an equity investment in Cytel and has made additional payments for an
option to enter into a supply agreement, whereby Cytel would provide the bulk
carbohydrate to Nextran for use in clinical development and commercial products.
Nextran will make additional payments to the Company upon option exercise,
achievement of milestones and supply of carbohydrate.
ADDITIONAL COLLABORATIONS
Under agreements with Takara Shuzo Co., Ltd. Biomedical Group ("Takara")
initiated in 1994, Cytel's Theradigm technology is being applied to fungal
disease targets and cellular therapy for the treatment of cancer. Under the
anti-fungal collaboration, Takara obtained rights to any anti-fungal products
resulting from the collaboration for commercialization in Japan. Cytel has the
right to develop products in North America, and the companies share rights in
the rest of the
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world. In conjunction with the agreement, Takara made a $3.0 million equity
investment in the Company and supported research at Cytel for 18 months.
Research in the anti-fungal field, using Cytel technology, is now being
conducted independently by Takara in Japan. Under the cellular therapy
collaboration, Takara obtained rights to the Company's technology relevant to
the development of ex vivo cellular therapies for the treatment of cancer in
Japan. Cytel was granted a license to any patents or know-how in the field, and
the Company also retains all rights to cellular therapy outside Japan. Takara
will pay Cytel royalties on sales from products resulting from collaboration
under both agreements.
In 1995, the Company signed an exclusive licensing agreement with P&U to
develop, manufacture and commercialize Cytel's P-selectin monoclonal antibody,
CY 1748, in all markets outside of the Pacific Rim. In early 1997 Cytel
announced that P&U decided not to go forward with development of CY-1748 after a
strategic review of the consolidated development pipeline of the merged
companies. P&U made significant progress in developing preclinical information
to support development of CY-1748 for use in treating deep vein thrombosis. All
rights, including pharmacology and safety data generated by P&U, have reverted
to Cytel. The Company is evaluating its options, including the potential for
seeking another commercial partner to sponsor clinical development of CY-1748.
FUTURE ARRANGEMENTS
The Company may be required to enter into collaborative agreements with third
parties in order to access technologies that may be necessary to successfully
develop certain of its products. There can be no assurance that the Company will
be able to successfully negotiate acceptable collaborative arrangements that
allow access to such technology. In addition, there can be no assurance that any
technology accessed through such collaboration will successfully meet the
Company's requirements.
In addition, Cytel expects to rely on additional collaborative arrangements to
develop and commercialize some of its products in the future. There can be no
assurance that the Company will be able to negotiate acceptable collaborative
arrangements in the future, or that such collaborative arrangements or its
existing collaborative arrangements will be successful. In addition,
collaborative partners may pursue alternative technologies or develop
alternative compounds either on their own or in collaboration with others,
including the Company's competitors, as a means of developing treatments for the
diseases targeted by any collaborative programs.
RESEARCH COLLABORATIONS AND LICENSE AGREEMENTS
Cytel is actively engaged in collaborations with scientists at a number of
universities and medical centers in areas directly related to its research
programs. The Company has entered into agreements to secure the Company's right
to certain technologies, processes and compounds that it believes may be
important to the development of its products. In certain cases, these agreements
require the Company to pay license fees, milestone payments and, upon commercial
introduction of certain products, royalties.
FRED HUTCHINSON CANCER RESEARCH CENTER
Integrins. Cytel has an exclusive agreement with the FHCRC to lymphocyte
adhesion technology related to blocking the VLA-4/CS-1 interaction. Cytel is
obligated to make milestone and royalty payments to FHCRC during the development
and commercialization of products that are covered by FHCRC patents.
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THE SCRIPPS RESEARCH INSTITUTE
Carbohydrate Synthesis. Cytel is the exclusive licensee of technology developed
by Dr. Chi-Huey Wong, Department of Chemistry at Scripps in the area of
carbohydrate synthesis. Dr. Wong's technology is recognized for its ability to
dramatically lower the cost of production of complex carbohydrates by in situ
generation of nucleotide-sugars, key substrates used in enzymatic synthesis of
carbohydrates. Cytel is obligated to make royalty payments to Scripps upon
commercialization of products made using processes covered by Scripps patents.
Hepatitis B Vaccines. Cytel is the exclusive licensee of technology developed by
Dr. Francis Chisari, Department of Molecular and Experimental Medicine at
Scripps, in the area of T cells specific for the hepatitis B virus. The Company
is obligated to pay royalties to Scripps upon commercialization of products
covered by Scripps patents.
UNIVERSITY OF VIRGINIA
Melanoma Vaccines. In January 1997, the Company sold certain assets utilized by
Receptor Laboratories, Inc. ("RLI"), a wholly-owned subsidiary in
Charlottesville, Virginia, to Argonex Holdings, Inc. RLI held an exclusive
license from the University of Virginia ("UVA") to certain technology, including
melanoma peptides. In conjunction with the sale, Cytel maintains non-exclusive
rights to melanoma peptides identified prior to the sale under a sublicensing
arrangement, subject to payment of royalties on sales of products covered by UVA
patents.
THE UNIVERSITY OF LEIDEN
HPV Vaccines. In January 1996, the Company exercised its option to enter into an
exclusive license agreement with Seed Capital Investments ("SCI"), the assignee
of all right, title and interest in and to the work of Dr. C.J.M. Melief of the
University of Leiden, relating to HPV peptides. Cytel has a two-year research
collaboration with the University of Leiden and is obligated to make milestone
and royalty payments upon development and commercialization of products which
are covered by SCI patents.
GLYCOTECHNOLOGY COLLABORATIONS
Cytel holds licenses from several companies and universities pertaining to the
compositions, methods of production and methods of use of various enzymes which
are important components of Cytel's carbohydrate manufacturing technology. Cytel
holds a royalty-free license from Genencor International, Inc. ("Genencor") to
certain fungal expression systems for making enzymes to be used in carbohydrate
synthesis. The license agreement covers all of Genencor's technology applicable
to enzymes to couple or modify complex carbohydrates and related glycoconjugates
for medical, diagnostic and therapeutic applications. Cytel also holds licenses
from The University of California, The University of Michigan and The University
of Arkansas pertaining to enzyme compositions and methods of production. These
licenses generally obligate the Company to make annual minimum royalty payments,
milestone payments, and royalty payments upon commercialization of products
covered by licensed technology.
MANUFACTURING
The Company has no experience in, or facilities for, the large scale manufacture
of bulk chemicals or final dosage forms. However, the Company believes that its
current proprietary process technology for manufacture of its therapeutic drug
candidates provides a competitive advantage, and, therefore, it is an important
priority for the Company to continue to build its manufacturing capability as
rapidly as possible or to identify a contract manufacturer.
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Toward that end, the Company has completed construction of one pilot scale
manufacturing facility. The facility is a 1,500 square foot chemical pilot plant
in which both Cylexin and Theradigm-HBV bulk chemical substance for Phase I and
Phase II trials have been produced. Cylexin is being produced under current good
manufacturing practices ("cGMP") and bulk pharmaceutical chemical ("BPC")
guidelines. Theradigm-HBV is being produced under cGMP. The second facility is a
1,100 square foot class 10,000 clean room with class 100 working areas. These
two manufacturing areas are supported by a 7,500 square foot warehouse which
inventories raw materials and clinical supplies. All three facilities are
licensed by the State of California, food and drug branch. In the clean room
both Cylexin and Theradigm-HBV are further processed to form bulk drug substance
and product. Final vialed product is produced at an Food and Drug Administration
inspected contract manufacturing facility. There can be no assurance that the
current formulation of Cylexin or Theradigm-HBV will be the final formulation of
these products. Additional manufacturing of product candidates may be performed
in the future by third parties at FDA inspected contract manufacturing
facilities.
The Company has not yet introduced any products. To be successful, the Company's
products must be manufactured in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. The Company has limited
experience in pilot scale manufacturing and does not have an adequate supply of
compounds to meet its requirements for large, multi-center clinical trials. In
addition, the Company has no experience in large scale manufacturing and
currently lacks the capability to manufacture commercial quantities of its
product candidates in accordance with regulatory requirements. If the Company is
unable to develop or contract for large scale manufacturing capabilities on
acceptable terms, the Company's ability to conduct clinical trials may be
adversely affected, resulting in the delay of submission of products for
regulatory approval, which in turn could adversely affect the Company's
competitive position and its chances of achieving profitability.
Some of the pharmaceutical products which the Company is trying to develop
belong to classes of products that have never been manufactured on a commercial
scale. In some cases, the manufacturing process may require the synthesis of
complex carbohydrates. Such synthesis may require the development of new
manufacturing technology and expertise. There can be no assurance that such
products can be manufactured by the Company or any other party at a cost or in
quantities which are commercially viable.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and other countries. The
patent position of biotechnology and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. The Company files
patent applications as appropriate covering its proprietary technology. As of
February 14, 1997, the Company's patent estate consists of 152 U.S. and 319
international pending patent filings, and 24 U.S. and 22 international issued
patents. Included in this patent estate is Cytel's broad proprietary position
covering its Glycotechnology business unit, including 19 issued U.S. patents and
37 U.S. patent applications, 3 with a notice of allowance, and corresponding
applications worldwide. The core SNC technology is covered by patents and patent
applications exclusively licensed from Scripps, and Cytel has filed additional
patent applications covering improvements and multiple applications. Cytel has
also exclusively licensed a number of enzymes and efficient methods for their
production from collaborators. The Company has filed additional patent
applications and acquired extensive know-how in the expression, production and
purification of enzymes, as well as carbohydrate manufacturing.
These applications and patents are either owned or under exclusive license to
the Company. There can be no assurance that patents will issue from any of the
applications the Company has filed or licensed; or that if patents do issue,
that claims allowed will be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.
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As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. The Company is aware of third party patent applications
and issued patents that may require the Company to alter products or processes,
obtain licenses or cease certain activities. Based on a preliminary
investigation, the Company believes that its compound Cylexin, which is
currently in Phase II clinical trials in infants undergoing surgery to correct
congenital heart defects, may infringe one or more claims of a patent issued to
a third party. The Company is continuing to investigate the validity and scope
of the patent. Subject to this further investigation, the Company believes that
it may be required to either obtain a license from the third party in order to
manufacture and market Cylexin, or, alternatively, to shift its development
effort to another compound with attendant delay. There can be no assurance that
the Company will be able to obtain necessary licenses at reasonable cost.
Failure by the Company to obtain a license to any technology that it requires to
commercialize its products may have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' proprietary rights. In addition, the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office which could result in substantial costs to the Company.
Cytel also protects its proprietary technology and processes in part by
confidentiality agreements with its collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
GOVERNMENT REGULATION
The Company's research and development activities and the future manufacturing
and marketing of products by the Company are subject to regulation for safety
and efficacy by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation by
FDA. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act
govern the testing, manufacture, safety, efficacy, labeling, storage, record
keeping, approval, advertising and promotion of the Company's products. In
addition to FDA regulations, the Company is also subject to other federal and
state regulations such as the Occupational Safety and Health Act and the
Environmental Protection Act. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of the Company's product development which may affect
approval or delay an application or require additional expenditures by the
Company.
The steps required before a pharmaceutical agent may be marketed in the United
States include (i) preclinical laboratory and animal tests, (ii) the submission
to the FDA of an application for an IND, which must become effective before
human clinical trials may commence in the United States, (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (iv) the submission of a New Drug Application ("NDA") or Product
License Application ("PLA") to the FDA and (v) the FDA approval of the NDA or
PLA prior to any commercial sale or shipment of the drug. In addition to
obtaining FDA approval for each product, each domestic drug manufacturing
establishment must be registered with, and approved by, the FDA. Drug product
manufacturing establishments located in California also must be licensed by the
State of California in compliance with separate regulatory requirements.
Preclinical tests include laboratory evaluation of product chemistry and animal
studies to assess the safety and efficacy of the product and its formulation.
The results of the preclinical tests are
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submitted to the FDA as part of an IND, and unless the FDA objects, the IND will
become effective 30 days following its receipt by the FDA.
Clinical trials involve the administration of the drug to healthy volunteers or
to patients identified as ones with the condition for which the drug is being
tested under the supervision of a qualified principal investigator. Clinical
trials are conducted in accordance with protocols that detail the objectives of
the study, the parameters to be used to monitor safety and the efficacy criteria
to be evaluated. Each protocol is submitted to the FDA as part of the IND. Each
clinical study is conducted under the auspices of an independent Institutional
Review Board ("IRB") at the institution at which the study will be conducted.
The IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to (i) determine the
efficacy of the drug for specific targeted indications, (ii) determine dosage
tolerance and optimal dosage and (iii) identify possible adverse side effects
and safety risks. When a compound is found to be effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to evaluate clinical efficacy further and to test further for safety
within an expanded patient population at multiple clinical study sites. The FDA
reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to the
FDA in the form of an NDA or PLA for marketing approval. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The approval process is affected by a number of factors, including the severity
of the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review period and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials may be necessary to gain approval for the use of the product for
additional indications. The FDA mandates that adverse effects be reported to the
FDA and may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to good manufacturing practices prescribed by the FDA. Domestic manufacturing
facilities are subject to biennial FDA inspections and foreign manufacturing
facilities are subject to periodic FDA inspections or inspections by the foreign
regulatory authorities with reciprocal inspection agreements with the FDA.
The Prescription Drug Act of 1992 requires companies engaged in pharmaceutical
development, such as the Company, to pay user fees in the amount of at least
$100,000 upon submission of an NDA. The Company does not believe that this
requirement will have a material adverse effect on the Company's business.
For marketing outside the United States, the Company also is subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
The Company's regulatory strategy is to pursue clinical development and
marketing approval of its products in the United States. The Company intends to
seek input from the FDA at each stage of the clinical process to facilitate
appropriate and timely clinical development, focusing on issues such as trial
design and clinical endpoints. The clinical development of certain products
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may be the responsibility of its collaborative partners. Where appropriate,
Cytel intends to pursue available opportunities, to the extent available, for
accelerated approval of products.
The time required for completing such testing and obtaining such approvals is
uncertain and approval itself may not be obtained. In addition, delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each submitted new drug
application or product license application. Similar delays may also be
encountered in foreign countries. There can be no assurance that even after such
time and expenditures regulatory approval will be obtained for any drugs
developed by the Company. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which the drug
may be marketed. Further, even if such regulatory approval is obtained, a
marketed drug, its manufacturer and the facilities in which the drug is
manufactured are subject to continual review and periodic inspections. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
COMPETITION
The drugs which Cytel is anticipating developing will be competing with existing
therapies for market share. In addition, a number of companies are pursuing the
development of novel pharmaceuticals which target the same diseases that Cytel
is targeting. These companies include pharmaceutical and biotechnology
companies. Furthermore, academic institutions, government agencies and other
public and private organizations conducting research may seek patent protection
with respect to potentially competing products or technologies and may establish
collaborative arrangements with competitors of the Company.
Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in preclinical testing and human
clinical trials. These companies may develop and introduce products and
processes competitive with or superior to those of the Company.
The Company's products under development are expected to address a broad range
of markets. The Company's competition will be determined in part by the
potential indications for which the Company's compounds are developed and
ultimately approved by regulatory authorities. For certain of the Company's
potential products, an important factor in competition may be the timing of
market introduction of its or competitive products. Accordingly, the relative
speed with which Cytel or its collaborative partners can develop products,
complete the clinical trials and approval processes and supply commercial
quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based, among other things, on product efficacy,
safety, reliability, availability, price and patent position.
The development by others of new treatment methods for those indications for
which the Company is developing pharmaceuticals could render such
pharmaceuticals noncompetitive or obsolete.
The Company's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
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EMPLOYEES
As of March 1, 1997, Cytel employed 97 individuals full-time, of whom 74 were
engaged in research and development, including 32 who hold Ph.D. and/or M.D.
degrees and 23 who were engaged in finance and general administration. A
significant number of the Company's management and professional employees have
had prior experience with pharmaceutical, biotechnology or medical product
companies. Cytel believes that it has been highly successful in attracting
skilled and experienced scientific personnel; however, competition for such
personnel is intensifying. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of March 1, 1997 are as
follows:
Name Age Position
- ---- --- --------
Virgil D. Thompson 57 President, Chief Executive Officer and Director
Robert L. Roe, M.D., F.A.C.P. 56 Executive Vice President, Chief Operating Officer and
Director
Karin Eastham 47 Vice President, Finance and Administration and Chief
Financial Officer
James C. Paulson, Ph.D. 49 Vice President and General Manager, Glycotechnology
Business Unit and Director
Robert W. Chesnut, Ph.D. 53 Vice President and Chief Scientific Officer
BUSINESS EXPERIENCE
Mr. Thompson joined Cytel in January 1996 as President and Chief Executive
Officer, and member of the Board of Directors. His most recent position was that
of President and Chief Executive Officer for CIBUS Pharmaceutical, Inc., a
privately held oral drug delivery company from July 1994 to January 1996. He
served as a consultant to the pharmaceutical industry from 1993 to 1994. From
1969 to 1993, Mr. Thompson was employed by Syntex Corporation ("Syntex"). During
his tenure with Syntex, he held several key executive positions including
President, Syntex Laboratories, Inc., Chief Operating Officer, Syntex
Laboratories, Inc. and Vice President, Corporate Regulatory Affairs. Mr.
Thompson earned a Bachelor of Science degree in Pharmacy from Kansas University
and a Juris Doctor degree from the George Washington University Law School. He
also serves on the boards of directors of Biotechnology General Corporation,
Cypros Pharmaceuticals and Aradigm Corporation.
Dr. Roe joined Cytel in 1996 as Executive Vice President and Chief Operating
Officer, and member of the Board of Directors. In his most recent position prior
to joining the Company, Dr. Roe served as Executive Vice President, Chief
Operating Officer, and member of the Board of Directors of Chugai
Biopharmaceuticals, Inc., a San Diego based subsidiary of Chugai Pharmaceuticals
Co., Ltd. of Japan, from August 1995 to February 1996. From 1976 to 1995, Dr.
Roe was employed by Syntex in senior-level positions in medical research,
pharmaceutical development and regulatory affairs, prior to becoming President
of Development Research. Dr. Roe earned his Doctor of Medicine degree from the
University of California at San Francisco, School of Medicine, and his Bachelor
of Arts degree with Honors from Stanford University, in Biological Sciences. He
is a Fellow of the American College of Physicians and the American College of
Rheumatology.
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Ms. Eastham has served as Vice President, Finance and Administration and Chief
Financial Officer since 1992. Prior to Cytel, Ms. Eastham served as Vice
President, Finance and Administration of Pritsker Corporation, a computer
software company, from 1990 to 1992. From 1988 to 1990, Ms. Eastham was Vice
President, Finance and Administration for Paper Art Company, Inc. Previously,
Ms. Eastham held key executive positions, including Vice President, Finance,
during her 12-year tenure with Boehringer Mannheim Diagnostics. Ms. Eastham
received her Bachelor of Science degree in accounting and her Master of Business
Administration degree in finance from Indiana University. She is a Certified
Public Accountant. Ms. Eastham has notified the Company of her resignation
effective in April 1997.
Dr. Paulson has served as a director since January 1991. He has been employed by
Cytel in various positions since September 1990, most recently as Vice President
and General Manager, Glycotechnology Business Unit. Prior to joining Cytel in
1990, Dr. Paulson was Professor and Vice Chairman of the Department of
Biological Chemistry at the University of California, Los Angeles. He has also
been an adjunct member of Scripps since July 1990. Dr. Paulson received his
Bachelor of Arts degree in chemistry and biology from MacMurray College in
Jacksonville, Illinois. He received his Master of Science degree and Doctor of
Philosophy degree in biochemistry from the University of Illinois at Champaign
Urbana and completed his postdoctoral fellowship at Duke University Medical
Center.
Dr. Chesnut joined Cytel in 1988 and has held various positions, most recently
Vice President and Chief Scientific Officer. He has also served as an Associate
Member of the Department of Immunology, Scripps Clinic and Research Foundation
since 1988. From 1977 to 1988, Dr. Chesnut was with the Department of Medicine,
National Jewish Center for Immunology and Respiratory Medicine in Denver. Dr.
Chesnut also served as an Assistant Professor of Microbiology, Immunology and
Medicine at the University of Colorado Health Science Center. Dr. Chesnut
received his Bachelor of Science and Doctor of Philosophy degree in microbiology
from Oklahoma State University in Stillwater, Oklahoma.
All officers are elected annually by the Board of Directors. Each officer serves
at the discretion of the Board of Directors. There are no family relationships
among any of the directors, officers or key employees of the Company.
RISK FACTORS
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is at an early stage of development. It has not completed the
development of any products and, accordingly, has not begun to market or
generate revenues from the commercialization of products. In December 1996, the
Company announced that data suggest that the effectiveness of Theradigm in
generating a cellular immune response may be stronger in patients with lower
amounts of virus in their bodies. As a result, the Company believes that
Theradigm-HBV may be more effective in combination with an anti-viral agent and
has no plans to conduct additional clinical studies of Theradigm-HBV as a
monotherapy. In a Phase II trial, Cylexin was evaluated for its ability to
prevent reperfusion injury to cardiac (heart) muscle during treatment of AMI
with primary angioplasty. This trial was terminated in June 1996 after the
independent safety and data monitoring panel determined that the drug was safe,
but that there was no benefit in patients treated with Cylexin over those
patients in the placebo control group. As a result, the Company's potential
products will require significant additional development, laboratory and
clinical trials, regulatory approval and additional investment prior to their
commercialization. The Company does not expect to market any products for a
number of years. There can be no assurance that the Company's product
development efforts will progress any further or be successfully completed. In
addition, there can be no assurance that the Company's products will be capable
of being produced in commercial quantities at reasonable costs, that required
regulatory approvals can be obtained or that any products, if introduced, will
be successfully marketed or achieve customer acceptance.
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RELIANCE ON COLLABORATIVE PARTNERS
The Company may be required to enter into collaborative agreements with third
parties in order to access technologies that may be necessary to successfully
develop certain of its products. There can be no assurance that the Company will
be able to successfully negotiate acceptable collaborative arrangements that
allow it to access such technology. In addition, there can be no assurance that
any technology accessed through such collaboration will successfully meet the
Company's requirements.
Cytel has relied on certain established pharmaceutical companies interested in
its technology to fund a portion of its research and development expenses. The
Company has entered into collaborative research agreements with collaborative
partners, whereby the partners provide capital in exchange for certain
technology, product, manufacturing and marketing rights. The Company is also
entitled to receive certain milestone payments, royalties on product sales
and/or other payments under these collaboration agreements. Accordingly, the
Company will be dependent in part upon the efforts of its collaborative partners
in discharging their obligations in order to develop and commercialize products
and to generate revenues under the collaboration agreements.
Cytel also expects to rely on additional collaborative arrangements to develop
and commercialize some of its products in the future. There can be no assurance
that the Company will be able to negotiate acceptable collaborative arrangements
in the future, or that such collaborative arrangements or its existing
collaborative arrangements will continue to be successful. In addition,
collaborative partners may pursue alternative technologies or develop
alternative compounds either on their own or in collaboration with others,
including the Company's competitors, as a means of developing treatments for the
disease targeted by any collaborative programs.
CONTINUING OPERATING LOSSES; ACCUMULATED DEFICIT
The Company has experienced significant operating losses since its inception in
1987 through December 31, 1996. As of December 31, 1996, the Company had an
accumulated deficit of approximately $92.8 million. The Company expects to incur
substantial additional operating losses over the next several years and expects
cumulative losses to increase as the Company's research and development and
clinical trial efforts expand. All of the Company's revenues to date have
consisted of contract research and development revenues, research grants and
interest income. To achieve profitable operations, the Company, alone or with
others, must successfully identify, develop, manufacture and market proprietary
products.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial funds to conduct the research and
development and preclinical and clinical testing of its products, to establish
commercial scale manufacturing facilities and to market its products. The
Company's future capital requirements will depend on many factors, including:
continued scientific progress in its drug discovery programs; the magnitude of
these programs; progress with preclinical testing and clinical trials; the time
and costs involved in obtaining regulatory approvals; the costs involved in
filing, prosecuting and enforcing patent claims; competing technological and
market developments; changes in its existing research relationships; the ability
of the Company to establish and maintain collaborative arrangements; the cost of
manufacturing scale-up; and effective commercialization activities and
arrangements. The Company intends to seek such additional funding either through
collaborative arrangements or through public or private financings. There can be
no assurance that additional financing will be available, or, if available, that
it will be available on acceptable terms. If additional funds are raised by
issuing securities, further dilution to existing stockholders may result. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its drug discovery programs or obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish
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rights to certain of its technologies, product candidates or products that the
Company would not otherwise relinquish. If additional financing is not
available, Cytel anticipates its existing available cash, cash equivalents and
short-term investments, investment income and research and development funding
from collaborative agreements and research grants will be adequate to satisfy
its capital requirements and fund operating losses through the beginning of
1998.
GOVERNMENT REGULATION; UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS
The production and marketing of the Company's products and its ongoing research
and development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. Any drug developed by the
Company will undergo rigorous preclinical and clinical testing and an extensive
regulatory approval process mandated by the FDA and equivalent foreign
authorities before it can be marketed. These processes can take a number of
years and require the expenditure of substantial resources. The time required
for completing such testing and obtaining such approvals is uncertain and
approval itself may not be obtained. The Company is conducting human clinical
testing of its lead product candidates, Theradigm-HBV and Cylexin. In December
1996, the Company announced that data suggest that the effectiveness of
Theradigm in generating a cellular immune response may be stronger in patients
with lower amounts of virus in their bodies. As a result, the Company believes
that Theradigm-HBV may be more effective in combination with an anti-viral agent
and has no plans to conduct additional clinical studies of Theradigm-HBV as a
monotherapy. Cylexin was evaluated for its ability to prevent reperfusion injury
to cardiac (heart) muscle during treatment of AMI with primary angioplasty. This
trial was terminated in June 1996 after the independent safety and data
monitoring panel determined that the drug was safe, but that there was no
benefit in patients treated with Cylexin over those patients in the placebo
control group. Further testing of these and the Company's product candidates in
research and development may reveal other undesirable and unintended side
effects or other characteristics that may prevent or limit their commercial use.
The FDA or the Company and its collaborators may decide to discontinue or
suspend clinical trials at any time if the subjects or patients who are
participating in such trials are being exposed to unacceptable health risks or
if the results show no benefit in patients treated with the drug compared to
patients in the control group. There can be no assurance that the Company will
not encounter additional problems in clinical trials that will cause the FDA or
the Company to delay or suspend clinical trials. Furthermore, there can be no
assurance that any of the Company's products will be approved by the FDA for any
indication. Products, if any, resulting from Cytel's research and development
programs are not expected to be commercially available for a number of years.
Even if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which the drug may be marketed. In
addition, a marketed drug, its manufacturer and the facilities in which the drug
is manufactured are subject to continual review and periodic inspections. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
TECHNOLOGICAL CHANGE AND COMPETITION
The Company is engaged in a rapidly evolving field. Competition from other
biotechnology companies, pharmaceutical companies and research and academic
institutions is intense and expected to increase. There can be no assurance that
the Company's competitors will not succeed in developing products based on the
Company's technology or other technologies that are more effective than any
which are being developed by the Company or which would render Cytel's
technology and products obsolete and noncompetitive.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company. In addition, many of these
competitors have significantly greater experience than the Company in
undertaking preclinical testing and clinical trials of new pharmaceutical
products and obtaining regulatory approvals of human therapeutic products.
Accordingly, the Company's competitors may succeed in obtaining FDA approval for
products more rapidly than the Company. Furthermore, if the Company is permitted
to commence
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commercial sales of products, it will be competing with respect to manufacturing
efficiency and marketing capabilities, areas in which it has limited or no
experience.
The Company's products under development address an array of markets. The
Company's competition will be determined in part by the potential indications
for which the Company's compounds are developed and ultimately approved by
regulatory authorities. For certain of the Company's potential products, an
important factor in competition may be the timing of market introduction of its
or competitive products. Accordingly, the relative speed with which Cytel can
develop products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor. The Company expects that competition among
products approved for sale will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position.
MANUFACTURING LIMITATIONS
The Company has not yet introduced any products. To be successful, the Company's
products must be manufactured in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. The Company has limited
experience in pilot scale manufacturing and does not have an adequate supply of
compounds to meet its requirements for large, multi-center clinical trials. In
addition, the Company has no experience in large scale manufacturing and
currently lacks the capability to manufacture commercial quantities of its
product candidates in accordance with regulatory requirements. If the Company is
unable to develop or contract for large scale manufacturing capabilities on
acceptable terms, the Company's ability to conduct clinical trials may be
adversely affected, resulting in the delay of submission of products for
regulatory approval, which in turn could adversely affect the Company's
competitive position and its chances of achieving profitability.
Some of the pharmaceutical products which the Company is trying to develop
belong to classes of products that have never been manufactured on a commercial
scale. In some cases, the manufacturing process may require the synthesis of
complex carbohydrates. Such synthesis may require the development of new
manufacturing technology and expertise. There can be no assurance that such
products can be manufactured by the Company or any other party at a cost or in
quantities which are commercially viable.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and other countries. The
patent position of biotechnology and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There is no
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The Company intends to file applications as appropriate for patents
covering both its products and processes. There can be no assurance that patents
will issue from any of the patent applications owned or licensed by the Company
or that, if patents do issue, that claims allowed will be sufficiently broad to
protect the Company's technology. In addition, there can be no assurance that
any patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company.
As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. The Company is aware of third party patent applications
and issued patents that may require the Company to alter products or processes,
obtain licenses or cease certain activities. Based on a preliminary
investigation, the Company believes that its compound Cylexin, which is
currently in Phase II clinical trials for treatment of acute inflammation, may
infringe one or more claims of a patent issued to a third party. The Company is
continuing to investigate the validity and scope of the patent. Subject to this
further investigation, the Company believes that
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it may be required to either obtain a license from the third party in order to
manufacture and market Cylexin or, alternatively, to shift its development
effort to another compound with attendant delay. There can be no assurance the
Company will be able to obtain any necessary licenses at a reasonable cost or
that it can successfully develop an alternative compound and obtain FDA approval
for it. Failure by the Company to obtain a license to any technology that it
requires to commercialize its products, or to develop an alternative compound
and obtain FDA approval within an acceptable period of time if required to do
so, would have a material adverse effect on the Company. Litigation, which could
result in substantial costs to the Company, may also be necessary to enforce any
patents issued to the Company or to determine the scope and validity of others'
proprietary rights. In addition, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office which
could result in substantial costs to the Company to determine the priority of
inventions.
Cytel also protects its proprietary technology and processes in part by
confidentiality agreements with its collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
ABSENCE OF SALES AND MARKETING EXPERIENCE
The Company has no experience in sales, marketing or distribution. To market any
of its products directly, the Company must develop a substantial marketing and
sales force with technical expertise and supporting distribution capability.
Alternatively, the Company may obtain the assistance of a pharmaceutical company
with a large distribution system and a large direct sales force. Other than its
agreements with Schwarz, Sumitomo and Takara, the Company does not have any
existing distribution arrangements with any pharmaceutical company for its
products. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or be successful in gaining market
acceptance for its products.
DEPENDENCE ON REIMBURSEMENT
Cytel's ability to commercialize its products successfully may depend in part on
the extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third-party coverage will
be available to enable Cytel to maintain price levels sufficient to realize an
appropriate return on its investment in product development.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. While the Company currently has product liability insurance, there can
be no assurance that it will be able to maintain such insurance on acceptable
terms or that insurance will provide adequate coverage against potential
liabilities.
USE OF HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of hazardous
materials, chemicals and radioactive compounds. Although the Company believes
that its 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 completely
eliminated. In the event of such an accident, the Company could be held liable
for any damage that results, which liability could exceed the resources of the
Company. The
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Company may incur substantial cost to comply with environmental regulations if
the Company develops manufacturing capacity.
Although the Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations and currently does not expect
to make material capital expenditures for environmental control facilities in
the near term there can be no assurance that it will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, or that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
VOLATILITY OF COMMON STOCK PRICE
The market price for securities of biotechnology companies, including Cytel,
have historically 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. Factors such as announcements of
technological innovations or new commercial therapeutic products by the Company
or others, governmental regulation, developments in patent or other proprietary
rights, developments in the Company's relationships with its collaborative
partners, public concern as to the safety of drugs developed by the Company or
others and general market conditions may have a significant effect on the market
price of the Company's common stock. Fluctuations in financial performance from
period to period also may have a significant impact on the market price of the
common stock.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
ITEM 2. PROPERTIES
Cytel's administrative offices and laboratories are located in San Diego. The
Company occupies approximately 48,000 square feet of space under a lease which
expires in 2001, with options to renew the lease for two additional five-year
terms. Cytel has approximately 4,500 additional square feet of space in a nearby
science park being utilized for Cytel's pilot plant under a lease which expires
in 1998 with options to renew the lease for two additional five-year terms.
Cytel also has 7,500 square feet of warehouse space under a lease expiring in
November of 1997.
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes it will be able to secure additional space at
commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (NASDAQ symbol "CYTL") is traded publicly through the
NASDAQ National Market System. The following table presents quarterly
information on the price range of the Company's common stock. This information
indicates the high and low sale prices reported by the NASDAQ National Market
System. These prices do not include retail markups, markdowns or commissions.
High Low
1996
1st Quarter $ 8.25 $ 5.25
2nd Quarter $ 9.00 $ 3.63
3rd Quarter $ 4.50 $ 2.63
4th Quarter $ 4.88 $ 2.63
1995
1st Quarter $ 4.75 $ 2.88
2nd Quarter $ 6.63 $ 3.69
3rd Quarter $ 9.38 $ 5.13
4th Quarter $ 7.00 $ 4.06
As of March 3, 1997, there were approximately 439 shareholders of record of the
Company's common stock. The Company has never declared or paid dividends on its
common stock and does not anticipate the payment of dividends in the foreseeable
future.
In September 1996, the Company sold 158,228 shares of common stock for $1
million to Baxter Healthcare Corporation's Nextran unit under a collaborative
agreement. The securities were issued in a private placement exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
There were no underwriters' commissions paid in connection with the transaction.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(IN MILLIONS EXCEPT FOR NET LOSS
PER SHARE)
Operating revenues $ 10.9 $ 16.8 $ 6.3 $ 3.5 $ 9.6
Net Loss (12.5) (8.00) (17.0) (22.4) (14.9)
Net loss per share (0.50) (0.36) (0.98) (1.41) (1.15)
AS OF DECEMBER 31
BALANCE SHEET DATA:
Working Capital 21.6 34.6 32.2 32.7 33.0
Total Assets 34.3 48.1 45.0 44.6 44.0
Long-term obligations under
capital leases, equipment
notes payable and line of
credit 1.1 1.8 1.2 1.9 1.9
Stockholders' equity 27.5 38.5 35.5 35.2 35.2
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in Item 1. - Business, including the section
entitled "Risk Factors," as well as those discussed in any documents
incorporated herein by reference.
Since its inception in July 1987, Cytel has devoted substantially all of its
resources to the discovery and development of its potential immunotherapeutic
products. To date, Cytel has not received any revenues from the sale of
products. The Company has funded its research and development primarily from
equity-derived working capital and through strategic alliances with other
companies. The Company has been unprofitable since its inception and expects to
incur substantial operating losses for the next several years. As of December
31, 1996, the Company's accumulated deficit was $92.8 million.
RESULTS OF OPERATIONS
The Company had total revenues of $10.9 million for the year ended December 31,
1996, compared to $16.8 million in 1995 and $6.3 million in 1994. Total revenues
decreased $5.9 million or 35% in 1996 from 1995 and increased $10.5 million or
167% in 1995 from 1994. Revenues in each year consisted mainly of research and
development revenues, which were $8.6 million in 1996, $15.3 million in 1995 and
$5.5 million in 1994. Research and development revenues for 1996 consisted of
funding received under the Company's collaborative research agreements with
Sumitomo, Schwarz and Abbott, as well as a new collaboration with Nextran.
Information regarding these collaborative agreements is contained in
"Development and Marketing Arrangements" in Item 1 of Part I of this Annual
Report on Form 10-K. Research and development revenues for 1995 resulted from
the Company's collaborative research agreements with Sumitomo, Takara, Schwarz,
P&U and Abbott. Research and development revenues for 1994 consisted of
collaborative research funding from Sumitomo, Takara, and other amounts received
from third parties. Research grant revenues were $2.3 million in 1996, $1.5
million in 1995 and $0.8 million in 1994.
The Company had operating expenses for the year ended December 31, 1996 of $24.8
million, compared to $20.7 million in 1995, excluding non-recurring non-cash
charges of $5.9 million, and $24.1 million in 1994. Operating expenses increased
$4.1 million or 20% in 1996 from 1995 and decreased $3.4 million or 14% in 1995
from 1994. The non-recurring, non-cash charges totaling $5.9 million were for
acquired in-process research and development relating to the acquisition of RLI
in July 1995, and the acquisition of Scripps' minority interest in Sequel
Therapeutics, Inc. in October 1995. Both acquisitions were completed in exchange
for Cytel stock.
Research and development expenses increased $4.4 million or 26% to $20.9 million
in 1996 from $16.5 million in 1995 and decreased $3.3 million or 17% in 1995
from $19.8 million in 1994. The increase in 1996 from 1995 reflects the
increased costs associated with the Company's clinical trials. The decrease in
1995 from 1994 was due to a continued Company wide effort to control costs.
Additionally, the decrease reflects the expiration of the Genencor research and
development agreement in the third quarter of 1994.
General and administrative expenses decreased to $3.9 million in 1996 from $4.2
million in 1995 and $4.3 million in 1994. This decrease was primarily due to the
Company's cost reduction efforts during 1995 and 1996.
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29
Net interest income was $1.4 million during 1996 compared to $1.9 million in
1995 and $0.8 million in 1994. The decrease in 1996 from 1995 was primarily
attributable to a lower average cash balance in 1996. The increase in 1995 from
1994 was attributable to a higher average cash balance in 1995, due to proceeds
from the collaborative research agreements entered into during 1995.
Cytel expects to incur substantial operating losses over the next several years
due to continuing and increasing expenses associated with its research and
development programs, including preclinical testing and clinical trials.
Operating losses may fluctuate from quarter to quarter as a result of
differences in the timing of revenues received and expenses incurred, and such
fluctuations may be substantial.
LIQUIDITY AND CAPITAL RESOURCES
Cytel has financed operations since inception primarily through private
placements of its equity securities, two public common stock offerings, revenues
under collaborative research and development agreements, grant revenues and
interest income. During 1996, Nextran, one of the Company's research and
development collaborators, made an equity investment in the Company totaling
$1.0 million. Through December 1996, the Company has raised approximately $120.3
million from the sale of equity securities. The Company has financed its
laboratory equipment and research and office facilities primarily through
capital and operating lease arrangements.
The Company had net working capital of $21.6 million as of December 31, 1996
compared to $34.6 million as of December 31, 1995. As of December 31, 1996, the
Company's cash, cash equivalents, restricted cash and short-term investments
decreased to $25.3 million from $38.4 million at December 31, 1995. The decrease
was due to expenditures for the development of the Company's priority drug
candidates and the Company's research programs. Cash used by operating
activities in 1996 was $10.4 million compared to $3.7 million in 1995, due
primarily to increased costs associated with the clinical trials combined with
lower research and development revenues from collaborators.
Capital expenditures, primarily for laboratory equipment, totaled $2.1 million
in 1996 compared to $0.4 million in 1995. The increase was due primarily to the
$1.2 million expenditure to improve and equip the laboratory space leased in
conjunction with the acquisition of RLI in 1995.
The Company's cash, cash equivalents and short-term investments are expected to
decline primarily due to the continued clinical development of its
immunotherapeutic product candidates and the conduct of its research programs.
While the Company's investments may periodically reflect unrealized losses,
management attempts to schedule the maturities of the Company's investments to
coincide with the Company's expected cash requirements.
The Company expects to incur substantial additional research and development
expenditures, including costs related to preclinical testing, clinical trials
and manufacturing, as well as marketing and distribution expenses. It is the
Company's intention to seek additional collaborative research and development
relationships with suitable corporate partners. There can be no assurance that
any agreements that may result from these discussions will successfully reduce
the Company's funding requirements. Additional equity or debt financing will be
required, and there can be no assurance that these funds will be available on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its drug discovery
or development programs or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products that the Company would not
otherwise relinquish.
If additional financing is not available, Cytel anticipates its existing
available cash, cash equivalents and short-term investments, investment income
and research and development
28
30
funding from collaborative agreements and research grants will be adequate to
satisfy its capital requirements and fund operating losses through at least the
beginning of 1998. The Company's future capital requirements depend on many
factors, including continued scientific progress in its drug discovery programs,
the magnitude of these programs, progress with preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, changes in the existing collaborative
research relationships, the ability of the Company to establish and maintain
development arrangements, the cost of manufacturing scale-up and effective
commercialization activities and arrangements.
As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. The Company is aware of third party patent applications
and issued patents that may require the Company to alter products or processes,
obtain licenses or cease certain activities. Based on preliminary investigation,
the Company believes that its compound Cylexin, which is currently in Phase II
clinical trials for infants undergoing surgery to correct congenital heart
defects, may infringe one or more claims of a patent issued to a third party.
The Company is continuing to investigate the validity and scope of the patent.
Subject to this further investigation, the Company believes that it may be
required to either obtain a license from the third party in order to manufacture
and market Cylexin or, alternatively, to shift its development effort to another
compound with attendant delay. There can be no assurance the Company will be
able to obtain any necessary license at a reasonable cost or that it can
successfully develop an alternative compound and obtain FDA approval for it.
Failure by the Company to obtain a license to any technology that it requires to
commercialize its products, or to develop an alternative compound and obtain FDA
approval within an acceptable period of time if required to do so, would have a
material adverse effect on the Company.
The Company's business is also subject to other significant risks, including the
uncertainties associated with the lengthy regulatory approval process and with
potential competition from other products. Even if the Company's products appear
promising at an early stage of development, they may not reach the market for a
number of reasons. Such reasons include, but are not limited to, the
possibilities that the potential products will be found ineffective during
clinical trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale, or be uneconomical to market.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The Report of Ernst & Young LLP, Independent Auditors, the Consolidated
Financial Statements and Notes to Consolidated Financial Statements are included
in the report on pages F-1 through F-19.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the directors of the Company is
incorporated by reference to the section entitled "Election of Directors" in the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission with respect to the Company's 1997 Annual Meeting of Stockholders to
be held on June 27, 1997 (the "Proxy Statement"). Information concerning the
current executive officers of the Company is contained in Item 1 of Part I of
this Annual Report on Form 10-K.
29
31
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation" appearing in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Transactions" appearing in the Proxy Statement is
incorporated herein by reference.
30
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Report.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors............................F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995.................F-2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996........................................F-3
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996............................F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1996........................................F-5
Notes to Consolidated Financial Statements............................F-6 - F-19
(2) Index to Financial Statement Schedules
The consolidated financial statement schedules required by this item are omitted
because they are not applicable or the required information is shown in the
Financial Statements or the notes thereto.
(3) Listing of Exhibits
See Index to Exhibits on pages 31 and 35.
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
3.1 Amended and Restated Certificate of Incorporation. *
3.2 Bylaws of the Registrant. *
3.3 Preferred Share Purchase Rights Plan. **
3.4 Form of Certificate of Amendment to the Company's Amended and
Restated Certificate of Incorporation.#
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 Specimen certificate of the Common stock. *
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers. *
10.3 Letter Agreement, between the Registrant and James C. Paulson,
dated March 2, 1990. *
10.5 Registrant's 1989 Stock Plan, as amended September 20, 1996 (the
"1989 Plan").
31
33
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
10.6 Forms of Incentive Stock Option Agreement under the 1989 Plan. *
10.7 Form of Nonstatutory Stock Option Agreement under the 1989 Plan. *
10.8 Employee Stock Purchase Plan, as amended.#
10.14 Lease Agreement, between the Registrant and Balit-Torrey Pines
Associates, the assignee of First Capital Life Insurance Company,
dated as of May 13, 1988, as amended December 23, 1988. *
10.16 Industrial Lease, between the Registrant and COAST/USC I, dated as
of May 17, 1990, as amended June 27, 1990 and July 13, 1990. *
10.17 Agreement and Plan of Reorganization, among the Registrant, Cytel
Acquisition Subsidiary, Inc., and Glycogen, Inc., dated as of
October 10, 1991. *
10.19 Research Agreement, between the Registrant and The Scripps Research
Institute, formerly Scripps Clinic and Research Foundation
("Scripps"), dated as of September 1, 1990, as amended August 5,
1991 (with certain confidential portions deleted). *(1)
10.20 Research Agreement, between the Registrant and the Regents of the
University of California (the "Regents"), dated as of January 3,
1991 (with certain confidential portions deleted). *(1)
10.21 Option Agreement, between the Registrant and the Regents, dated as
of January 3, 1991 (with certain confidential portions deleted).
*(1)
10.22 Research Agreement, between the Registrant and The University of
Washington, dated as of January 22, 1991 (with certain confidential
portions deleted). *(1)
10.23 Exclusive License Agreement, between the Registrant and the FHCRC,
dated as of May 24, 1991 (with certain confidential portions
deleted).*(1)
10.24 License Agreement, between the Registrant and Scripps, dated as of
September 23, 1991 (with certain confidential portions deleted).
*(1)
10.25 Research and Option Agreement, between the Registrant and Scripps,
dated October 1, 1991 (with certain confidential portions deleted).
*(1)
10.26 Amended and Restated License Agreement, between GlycoGen and
Genencor International, Inc. ("Genencor"), dated as of October 7,
1991.*
10.27 Letter Agreement, between the Registrant and Genencor, dated as of
October 10, 1991. *
10.28 Technology Development Agreement, between the Registrant and
Sumitomo Pharmaceuticals, Co., Ltd. ("Sumitomo") dated as of
October 30, 1991 (with certain confidential portions deleted). *(1)
10.29 Letter Agreement, between the Registrant and Sumitomo, dated as of
October 30, 1992. *
32
34
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ --------------------
10.32 Collaborative Research and License Agreement between the
Registrant, Sequel Therapeutics, Inc. ("Sequel") and Scripps dated
as of June 17, 1992 (with certain confidential portions deleted).
***(2)
10.34 Scripps Research Agreement between Scripps and Sequel dated as of
April 1, 1992 (with certain confidential portions deleted). ***(2)
10.35 Amendment to License Agreement between the Registrant and Scripps
dated as of June 17, 1992 (with certain confidential portions
deleted). ***(2)
10.36 Assignment and Assumption Agreement between the Registrant and
Pharmacia Biosystems AB, formerly known as Pharmacia AB dated as of
June 17, 1992 (with certain confidential portions deleted). ***(2)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as amended
March 21, 1997.
10.38 Investment Agreement, between the Registrant and Sumitomo, dated as
of December 22, 1993.****
10.39 Sublease Agreements, between the Registrant and Agouron
Pharmaceuticals, Inc. and the Registrant and Balit Torrey Pines
Associates, dated as of December 17, 1993 and January 17, 1994,
respectively.****
10.40 Letter Agreement, between the Registrant and Karin Eastham, dated
September 14, 1992.****
10.43 Amended and Restated Technology Development Agreement between the
Registrant and Sumitomo, dated February 17, 1995 (with certain
confidential portions deleted).##(2)
10.44 Stock Purchase Agreement by and between the Registrant and Schwarz
Pharma AG ("Schwarz") (with certain confidential portions
deleted.)+(2)
10.45 Development, License, Supply and Marketing Agreement by and between
the Registrant and Schwarz, dated May 18, 1995 (with certain
confidential portions deleted).+(2)
10.48 Second Amendment to License Agreement between the Registrant and
Scripps dated as of June 17, 1992 (with certain confidential
portions deleted).+++(2)
10.49 Letter Agreement, between the Registrant and Virgil D. Thompson,
dated December 19, 1995. +++
10.50 Letter Agreement, between the Registrant and Robert L. Roe, M.D.,
F.A.C.P., dated January 18, 1996. +++
10.51 Directors' Deferred Compensation Plan, effective as of March 17,
1995, as amended September 20, 1996.
33
35
Exhibit
Number Document Description
- ------ --------------------
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to page 36.
27.1 Financial Data Schedule
(a)(4) Executive Compensation Plans and Arrangements
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers. *
10.3 Letter agreement, between the Registrant and James C. Paulson,
dated March 2, 1990. *
10.5 Registrant's 1989 Stock Plan, as amended September 20, 1996 (the
"1989 Plan").
10.6 Forms of Incentive Stock Option Agreement under the 1989 Plan. *
10.7 Form of Nonstatutory Stock Option Agreement under the 1989 Plan. *
10.8 Employee Stock Purchase Plan, as amended.#
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as amended
March 21, 1997.
10.40 Letter Agreement, between the Registrant and Karin Eastham, dated
September 14, 1992.****
10.49 Letter Agreement, between the Registrant and Virgil D. Thompson,
dated December 19, 1995. +++
10.50 Letter Agreement, between the Registrant and Robert L. Roe, M.D.,
F.A.C.P., dated January 18, 1996. +++
10.51 Directors' Deferred Compensation Plan, effective as of March 17,
1995 as amended September 20, 1996.
* Incorporated by reference to the Company's Form S-1 Registration
Statement and Amendments thereto (File No. 33-43356)
** Incorporated by reference to the Company's Form 8-K, dated March
19, 1993.
*** Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1992, filed on March
26, 1993.
**** Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1993, filed on March
29, 1994.
34
36
# Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1994, filed on March
31, 1995.
## Incorporated by reference to the Company's Quarterly Report on Form
10-Q/A, Amendment No. 1, for the quarterly period ended March 31,
1995, filed on August 17, 1995.
+ Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended June 30, 1995, filed on August
14, 1995.
++ Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended September 30, 1995, filed on
November 13, 1995.
+++ Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, filed on March
22, 1996.
(1) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933 and Rule 406
Thereunder Respecting Confidential Treatment dated November 21,
1991.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule
24b-2 Thereunder Respecting Confidential Treatment dated May 15,
1996.
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of
1996.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
The consolidated financial statement schedules required by this
Item are listed under Item 14(a)(2).
35
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 31st day of March,
1997.
CYTEL CORPORATION
By /s/ Virgil D. Thompson
----------------------------------------
Virgil D. Thompson
President and Chief Executive Officer
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Virgil D. Thompson and Karin Eastham, and each of them,
his attorney-in-fact, with the full power of substitution, for him in any and
all capacities, to sign any amendments to this Report, 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
each of said attorneys-in-fact, or his or her 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 below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Robert L. Roe March 31, 1997
/s/ David L. Anderson March 31, 1997 --------------------------------------------
- --------------------------------------- Robert L. Roe, M.D., F.A.C.P.
David L. Anderson Executive Vice President, Chief Operating Officer
Director and Director
/s/ William T. Comer March 31, 1997 /s/ David Mahoney March 31, 1997
- --------------------------------------- --------------------------------------------
William T. Comer, Ph.D. David Mahoney
Director Director
/s/ Karin Eastham March 31, 1997 /s/ Virgil D. Thompson March 31, 1997
- --------------------------------------- --------------------------------------------
Karin Eastham Virgil D. Thompson
Chief Financial Officer President, Chief Executive Officer and Director
(Principal Financial and Accounting Officer)
/s/ Nicole Vitullo March 31, 1997
--------------------------------------------
Nicole Vitullo
/s/ Howard E. Greene, Jr. March 31, 1997 Director
- ---------------------------------------
Howard E. Greene, Jr.
Chairman of the Board
and Director
/s/ James C. Paulson March 31, 1997
- ---------------------------------------
James C. Paulson, Ph.D.
Vice President, General Manager, Glycotechnology and Director
36
38
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Cytel Corporation
We have audited the accompanying consolidated balance sheets of Cytel
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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 Cytel Corporation
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 31, 1997
F-1
39
Cytel Corporation
Consolidated Balance Sheets
DECEMBER 31
1996 1995
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,231,000 $ 9,043,000
Short-term investments 20,645,000 27,896,000
Current portion of restricted cash 375,000 94,000
Receivable under collaborative agreement -- 2,000,000
Other current assets 1,422,000 1,557,000
------------- -------------
Total current assets 25,673,000 40,590,000
Restricted cash 1,031,000 1,406,000
Property and equipment, net 2,935,000 2,488,000
Deposits and other assets 4,651,000 3,628,000
------------- -------------
$ 34,290,000 $ 48,112,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,991,000 $ 1,620,000
Deferred contract revenues 732,000 2,757,000
Accrued payroll and related expenses 650,000 657,000
Line of credit 375,000 94,000
Current portion of obligations under capital leases and
equipment notes payable 341,000 842,000
------------- -------------
Total current liabilities 4,089,000 5,970,000
Deferred rent 1,640,000 1,832,000
Obligations under capital leases and equipment notes
payable 40,000 380,000
Line of credit 1,031,000 1,406,000
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 25,091,309 shares and 24,556,399
shares issued and outstanding at December 31, 1996
and 1995, respectively 251,000 246,000
Additional paid-in capital 120,095,000 118,749,000
Accumulated deficit (92,792,000) (80,341,000)
Deferred compensation -- (161,000)
Unrealized gains (losses) on available-for-sale
securities (64,000) 31,000
------------- -------------
Total stockholders' equity 27,490,000 38,524,000
------------- -------------
$ 34,290,000 $ 48,112,000
============= =============
See accompanying notes.
F-2
40
Cytel Corporation
Consolidated Statements of Operations
YEARS ENDED DECEMBER 31
1996 1995 1994
------------ ------------ ------------
Revenues:
Research and development $ 8,641,000 $ 15,287,000 $ 5,500,000
Research grants 2,251,000 1,484,000 793,000
------------ ------------ ------------
10,892,000 16,771,000 6,293,000
Operating expenses:
Research and development 20,861,000 16,507,000 19,776,000
General and administrative 3,919,000 4,204,000 4,334,000
Acquired in-process research and
development -- 5,934,000 --
------------ ------------ ------------
24,780,000 26,645,000 24,110,000
Interest income, net 1,437,000 1,881,000 813,000
------------ ------------ ------------
Net loss $(12,451,000) $ (7,993,000) $(17,004,000)
============ ============ ============
Net loss per share $ (.50) $ (0.36) $ (0.98)
============ ============ ============
Shares used in computing net loss per
share 24,865,807 22,469,949 17,362,315
============ ============ ============
See accompanying notes.
F-3
41
Cytel Corporation
Consolidated Statement of Stockholders' Equity
For each of the three years in the period ended December 31, 1996
Common stock Additional
---------------------------- paid-in Accumulated Deferred
Shares Amount capital deficit compensation
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1993 16,339,831 $ 163,000 $ 92,069,000 $ (55,344,000) $ (1,725,000)
Cumulative effect of change in accounting
principle -- -- -- -- --
Issuance of common stock from private
offerings, net of issuance costs 4,811,650 49,000 17,011,000 -- --
Issuance of common stock 300,346 3,000 288,000 -- --
Amortization of deferred compensation,
net -- -- (300,000) -- 829,000
Unrealized losses on available-for-sale
securities -- -- -- -- --
Net loss -- -- -- (17,004,000) --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1994 21,451,827 215,000 109,068,000 (72,348,000) (896,000)
Issuance of common stock for acquisitions 2,097,102 21,000 7,423,000 -- --
Issuance of common stock 1,007,470 10,000 2,690,000 -- --
Amortization of deferred compensation,
net -- -- (432,000) -- 735,000
Unrealized gains on available-for-sale
securities -- -- -- -- --
Net loss -- -- -- (7,993,000) --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 24,556,399 246,000 118,749,000 (80,341,000) (161,000)
Issuance of common stock 534,910 5,000 1,363,000 -- --
Amortization of deferred compensation,
net -- -- (17,000) -- 161,000
Unrealized losses on available-for-sale
securities -- -- -- -- --
Net loss -- -- -- (12,451,000) --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 25,091,309 $ 251,000 $ 120,095,000 $ (92,792,000) $ --
============= ============= ============= ============= =============
Unrealized
gains (losses)
on available- Total
for-sale stockholders'
securities equity
------------- -------------
Balance at December 31, 1993 $ -- $ 35,163,000
Cumulative effect of change in accounting
principle 15,000 15,000
Issuance of common stock from private
offerings, net of issuance costs -- 17,060,000
Issuance of common stock -- 291,000
Amortization of deferred compensation,
net -- 529,000
Unrealized losses on available-for-sale
securities (578,000) (578,000)
Net loss -- (17,004,000)
------------- -------------
Balance at December 31, 1994 (563,000) 35,476,000
Issuance of common stock for acquisitions -- 7,444,000
Issuance of common stock -- 2,700,000
Amortization of deferred compensation,
net -- 303,000
Unrealized gains on available-for-sale
securities 594,000 594,000
Net loss -- (7,993,000)
------------- -------------
Balance at December 31, 1995 31,000 38,524,000
Issuance of common stock -- 1,368,000
Amortization of deferred compensation,
net -- 144,000
Unrealized losses on available-for-sale
securities (95,000) (95,000)
Net loss -- (12,451,000)
------------- -------------
Balance at December 31, 1996 $ (64,000) $ (27,490,000)
============= =============
See accompanying notes.
F-4
42
Cytel Corporation
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31
1996 1995 1994
------------- ------------- -------------
OPERATING ACTIVITIES
Net loss $ (12,451,000) $ (7,993,000) $ (17,004,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,620,000 1,409,000 1,355,000
Acquired in-process research and development -- 5,934,000 --
Deferred rent (192,000) (143,000) (110,000)
Amortization of deferred compensation 144,000 303,000 529,000
Deferred revenue (2,025,000) (243,000) 250,000
Changes in operating assets and liabilities:
Receivable under collaborative agreement 2,000,000 (2,000,000) --
Other current assets 135,000 (735,000) 321,000
Accounts payable and accrued liabilities 371,000 (128,000) 307,000
Accrued payroll and related expenses (7,000) (59,000) 120,000
------------- ------------- -------------
Net cash used in operating activities (10,405,000) (3,655,000) (14,232,000)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (110,774,000) (255,532,000) (57,718,000)
Maturities of available-for-sale securities 64,787,000 147,434,000 30,018,000
Sales of available-for-sale securities 53,143,000 107,052,000 36,061,000
Property and equipment (2,067,000) (397,000) (599,000)
Deposits and other assets (1,023,000) (695,000) (787,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities 4,066,000 (2,138,000) 6,975,000
FINANCING ACTIVITIES
Principal payments under capital lease obligations and
equipment notes payable (841,000) (814,000) (701,000)
Principal payments under line of credit obligations (94,000) -- --
Net proceeds from refinancing of equipment -- -- 144,000
Proceeds from line of credit -- 1,500,000 --
Restricted cash for line of credit collateral 94,000 (1,500,000) --
Net proceeds from issuance of common stock 1,368,000 4,210,000 17,351,000
------------- ------------- -------------
Net cash provided by financing activities 527,000 3,396,000 16,794,000
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (5,812,000) (2,397,000) 9,537,000
Cash and cash equivalents at beginning of year 9,043,000 11,440,000 1,903,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 3,231,000 $ 9,043,000 $ 11,440,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 199,000 $ 185,000 $ 256,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Unrealized gains (losses) on available-for-sale securities $ (95,000) $ 594,000 $ (563,000)
============= ============= =============
See accompanying notes.
F-5
43
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Cytel Corporation (the Company) was incorporated in Delaware on July 10, 1987.
The Company was established to design and develop a new class of drugs for the
more effective treatment of acute and chronic inflammatory diseases, infectious
diseases and cancer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, Cytel
Acquisition Subsidiary, Inc. from its inception in October 1991 through its
dissolution in June 1996, Sequel Therapeutics, Inc. from June 1992 through
October 1995 (Note 3), and Receptor Laboratories, Inc. since its purchase in
July 1995. All significant intercompany accounts and transactions have been
eliminated.
NEW ACCOUNTING STANDARD
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. ("SFAS") 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective
January 1, 1996. SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The adoption of SFAS
121 did not have any effect on the Company's financial position or results of
operations.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid U.S. government securities and
corporate obligations with original maturities of 90 days or less when
purchased.
SHORT-TERM INVESTMENTS
The Company has classified its investments as available-for-sale and accordingly
carries them at fair value. Unrealized holding gains or losses on these
securities are carried as a separate component of stockholders' equity. The
amortized cost of debt securities in this
F-6
44
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are also included in interest income. The cost of
securities sold is based on the specific identification method.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Management attempts to schedule the maturities of the Company's investments to
coincide with the Company's expected cash requirements.
PROPERTY AND EQUIPMENT
Furniture and equipment is stated at cost and depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful life of the assets or the lease term.
INTANGIBLE ASSETS
Included in deposits and other assets are patent filing and organization costs.
Patent filing costs will be amortized over the estimated useful lives of the
patents when issued.
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the terms of the
leases. Accordingly, rent expense incurred in excess of rent paid is reflected
as deferred rent.
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations (APB 25)
in accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options is not less than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
F-7
45
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Research and development revenues are recorded as earned based on the
performance requirements of the contract. Research and development costs are
expensed as incurred. Expenses under research and development contracts were
$13,100,000, $11,700,000 and $12,700,000 for 1996, 1995 and 1994, respectively.
RESEARCH GRANTS
Research grants represent research and development revenues primarily from
National Institutes of Health grants.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the year.
2. SHORT-TERM INVESTMENTS
The following table summarizes available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
DECEMBER 31, 1996
U.S. Government Securities $13,419,000 $ 5,000 $ (62,000) $13,362,000
Corporate Obligations 7,290,000 9,000 (16,000) 7,283,000
----------- ----------- ----------- -----------
$20,709,000 $ 14,000 $ (78,000) $20,645,000
=========== =========== =========== ===========
F-8
46
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
2. SHORT-TERM INVESTMENTS (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
DECEMBER 31, 1995
U.S. Government Securities $22,243,000 $ 63,000 $ (35,000) $22,271,000
Corporate Obligations 5,622,000 13,000 (10,000) 5,625,000
----------- ----------- ----------- -----------
$27,865,000 $ 76,000 $ (45,000) $27,896,000
=========== =========== =========== ===========
The above tables exclude an aggregate of $1,985,000 and $3,487,000 in U.S.
government securities and corporate obligations which are classified as cash
equivalents in the accompanying balance sheets at December 31, 1996 and 1995,
respectively.
The gross realized gains on sales of available-for-sale securities totaled
$38,000 and $113,000, respectively, and the gross realized losses totaled
$78,000 and $302,000, respectively, for 1996 and 1995.
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
ESTIMATED
COST FAIR VALUE
----------- -----------
Due in one year or less $10,486,000 $10,475,000
Due in one to three years 10,223,000 10,170,000
----------- -----------
$20,709,000 $20,645,000
=========== ===========
3. ACQUISITIONS
SEQUEL THERAPEUTICS, INC.
On June 17, 1992, the Company and The Scripps Research Institute (Scripps)
formed Sequel Therapeutics, Inc. (Sequel) to develop immunotherapeutics for the
treatment of chronic infectious diseases and cancer. The Company and Scripps
each transferred certain technologies to Sequel in exchange for initial
percentage ownership interests in Sequel of 53% and 47%, respectively.
F-9
47
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS (CONTINUED)
In connection with the formation of Sequel, the Company entered into a Research
and Administrative Services Agreement with Sequel and a Collaborative Research
and License Agreement with Scripps and Sequel. Commencing April 1, 1992, the
Company and Scripps received additional shares of Sequel stock in exchange for
costs incurred by each shareholder under these agreements. The Company has
expensed all of the research and development funding provided to Sequel under
these agreements.
In October 1995, the Company acquired Scripps' minority interest in Sequel in
exchange for 1,300,000 shares of Cytel common stock valued at $4.1 million.
These shares are subject to certain resale restrictions. The total purchase
price was expensed to acquired in-process research and development.
RECEPTOR LABORATORIES, INC.
In July 1995, the Company acquired Receptor Laboratories, Inc. ("RLI"), a
private company conducting research in Charlottesville, Virginia, which was
accounted for as a purchase. The Company acquired RLI for $1.8 million in Cytel
common stock, which was expensed to acquired in-process research and
development. Additionally, certain former RLI shareholders and other parties
invested $1.5 million in the Company to provide initial funding for the
Charlottesville operation. In January 1997, the Company sold certain assets of
RLI for aggregate consideration valued at approximately $950,000. In conjunction
with the sale, the Company maintained certain nonexclusive rights to technology
licensed from the University of Virginia.
The following unaudited pro forma combined results of operations of the Company
for the years ended December 31, 1995 and 1994 have been prepared assuming that
the acquisition of Receptor Laboratories, Inc. had occurred as of January 1,
1994. This pro forma information is not necessarily indicative of the results
that would have occurred nor is it indicative of future results.
YEARS ENDED DECEMBER 31
1995 1994
------------ ------------
Revenues $ 16,771,000 $ 6,363,000
Net loss (8,719,000) (19,737,000)
Net loss per share (.38) $ (1.10)
F-10
48
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
4. BALANCE SHEET INFORMATION
Other current assets consist of the following:
DECEMBER 31
1996 1995
---------- ----------
Investment income and grant revenue receivable $1,150,000 $1,027,000
Prepaid expenses 266,000 524,000
Notes receivable from officers and employees 6,000 6,000
---------- ----------
$1,422,000 $1,557,000
========== ==========
Property and equipment consist of the following:
DECEMBER 31
1996 1995
----------- -----------
Furniture and equipment $ 4,949,000 $ 5,043,000
Leasehold improvements 1,898,000 1,466,000
Construction in progress -- 22,000
----------- -----------
6,847,000 6,531,000
Less accumulated depreciation and amortization (3,912,000) (4,043,000)
----------- -----------
$ 2,935,000 $ 2,488,000
=========== ===========
Deposits and other assets consist of the following:
DECEMBER 31
1996 1995
---------- ----------
Patents $4,357,000 $3,171,000
Deposits 294,000 457,000
---------- ----------
$4,651,000 $3,628,000
========== ==========
5. STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN
In October 1991, the Company adopted an Employee Stock Purchase Plan (the Stock
Plan) whereby employees, at their option, can purchase shares of Company common
stock through payroll deductions at the lower of 85% of the fair market value on
the plan offering date or 85% of the fair market value of the common stock at
the purchase date.
F-11
49
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The aggregate number of shares that may be issued under the Stock Plan is set at
500,000. As of December 31, 1996, 334,023 shares of common stock have been
purchased under the Plan.
STOCK PLANS
In November 1989, the Company adopted a Stock Plan (the Plan), under which
options may be granted to employees, directors, consultants or advisors of the
Company. The Plan provides for the grant of both incentive stock options and
nonstatutory stock options. The exercise price of an incentive stock option is
not less than the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory options is not less than 85% of the fair
market value of the common stock on the date of grant. No options granted under
the Plan have a term in excess of ten years from the date of grant. Shares and
options issued under the Plan vest over four and five years. For certain options
granted prior to the Company's initial public offering, the Company recognized
deferred compensation expense for the excess of the deemed value for accounting
purposes of the common stock issuable upon exercise of such options over the
aggregate exercise price of such options. This deferred compensation expense is
amortized ratably over the vesting period of each option.
In June 1994, the Company adopted the 1994 Non-Employee Directors' Stock Option
Plan (the "Directors' Plan"). On January 1 of each year beginning January 1,
1995, each Non-Employee Director who has been a Non-Employee Director for at
least three months shall be granted an option to purchase 5,000 shares of common
stock of the Company. In addition, each person who becomes a Non-Employee
Director of the Company after the adoption of the Directors' plan shall be
granted an option to purchase 25,000 shares of common stock of the Company. The
exercise price of options issued under the Directors' Plan shall be equal to
100% of the fair market value of the common stock on the date of grant. Options
issued under the Directors' Plan vest over five years. No options issued under
the Directors' Plan have a term in excess of ten years from the date of grant.
An aggregate of 6,400,000 shares of common stock have been reserved for issuance
under both plans.
F-12
50
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity for the three years ended
December 31, 1996:
WEIGHTED-
SHARES AVERAGE PRICE
----------------------------
Balance at December 31, 1993 3,297,004 $4.79
Granted 1,770,962 3.03
Exercised (245,182) .52
Cancelled (1,458,066) 6.92
----------
Balance at December 31, 1994 3,364,718 3.82
Granted 945,468 4.83
Exercised (593,024) 2.02
Cancelled (796,140) 3.70
----------
Balance at December 31, 1995 2,921,022 3.80
Granted 2,027,649 5.41
Exercised (280,899) 2.21
Cancelled (166,308) 4.21
----------
Balance at December 31, 1996 4,501,464 4.60
==========
As of December 31, 1996, 311,198 shares are reserved for future issuance under
the Plans.
Following is a summary of the options outstanding as of December 31, 1996:
WEIGHTED
AVERAGE
WEIGHTED EXERCISE
AVERAGE WEIGHTED PRICE OF
RANGE OF EXERCISE OPTIONS REMAINING LIFE AVERAGE OPTIONS OPTIONS
PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
- ----------------- ----------- -------------- -------------- ----------- -----------
$.20 - $1.25 93,037 4.61 $ .41 93,037 $ .41
$2.688 - $4.00 1,884,556 7.81 3.34 405,979 2.89
$4.375 - $6.125 2,065,669 8.22 5.30 703,353 5.04
$6.50 - $12.00 458,202 8.94 7.51 19,880 8.34
--------- ---------
4,501,464 8.05 $ 4.60 1,222,249 $ 4.03
========= =========
F-13
51
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1994, the Board of Directors approved a plan for which employee
option holders, excluding non-employee directors of the Company, could have
exchanged all of their current vested and unvested options on a one-for-one
basis for new options priced at the market value as of December 15, 1994. An
aggregate of 1,343,887 options at an average price of $7.16 were exchanged for
options with an exercise price of $2.69. These replacement options expire 10
years from the original grant date and vest over 5 years beginning December 16,
1994. The replacement options are included in grants and cancellations in the
above summary of stock option activity.
Adjusted pro forma information regarding net income or loss is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the "Black-Scholes"
method for option pricing with the following weighted average assumptions for
both 1995 and 1996: risk-free interest rates of 6%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
.94; and a weighted average expected life of the option of six years.
For purposes of adjusted pro forma disclosures, the estimated fair value of the
option is amortized to expense over the option's vesting period. The Company's
adjusted pro forma information is as follows:
1996 1995
------------ -----------
Pro forma net loss $(14,316,000) $(8,349,000)
Pro forma net loss per share (0.58) (0.37)
Weighted average fair value of options granted during the year 1996 and 1995 was
$4.28 and $3.84, respectively.
The pro forma effect for 1996 and 1995 is not likely to be representative of the
effects on reported net loss in future years because these amounts reflect only
two or one year vesting, respectively.
STOCKHOLDER RIGHTS PLAN
In March 1993, the Company adopted a Stockholder Rights Plan. The Plan provides
for the distribution of a preferred share purchase right ("Rights") as a
dividend for each share of the Company's common stock held as of record date at
the close of business on April 8, 1993. Under certain conditions involving an
acquisition by any person or group
F-14
52
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
of 15% or more of the common stock, the Rights permit the holders (other than
the 15% holder) to purchase one one-hundredth of a share of Series A Preferred
Stock at a price of $80 per one one-hundredth of a preferred share per Right.
Each one one-hundredth of a share of preferred stock has rights, privileges and
preferences which make its value approximately equal to the value of a common
share. In addition, in the event of certain business combinations, the Rights
permit the purchase of the common stock of an acquirer at a 50% discount. Under
certain conditions, the Rights may be redeemed by the Board of Directors at a
price of $.01 per Right. The Rights have no voting privileges and are attached
to and automatically trade with the Company's common stock. The Rights will
expire on March 19, 2003.
6. COMMITMENTS
The Company has financed its office and research facilities and certain
equipment under operating and capital leases and equipment notes payable.
Provisions of the facilities leases provide for abatement of rent during certain
periods and escalating rent payments during the lease terms.
The minimum annual rents are subject to increases based on changes in the
Consumer Price Index, taxes, insurance and operating costs. Included in other
current assets and deposits and other assets is $294,000 and $591,000 deposited
under these agreements at December 31, 1996 and 1995, respectively.
In connection with the RLI acquisition (Note 3), the Company entered into a $1.5
million line of credit for funding to construct and equip the Charlottesville
facility. The credit agreement expired September 1, 1996 and the unpaid
principal is payable in 16 successive equal quarterly installments beginning
December 1, 1996. Interest is payable monthly at 7.50% beginning December 31,
1996. Restricted cash consists of a time deposit maintained as collateral for
the line of credit.
F-15
53
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS (CONTINUED)
Annual future minimum lease, note and line of credit payments as of December 31,
1996 are as follows:
OBLIGATIONS
UNDER CAPITAL
LEASES AND
OPERATING EQUIPMENT LINE OF
Year LEASES NOTES PAYABLE CREDIT
----------- ----------- -----------
1997 $ 2,000,000 $ 360,000 $ 375,000
1998 2,008,000 41,000 375,000
1999 1,893,000 -- 375,000
2000 1,906,000 -- 281,000
2001 842,000 -- --
----------- ----------- -----------
Total minimum lease, note and line of credit
payments $ 8,649,000 401,000 1,406,000
===========
Less amount representing interest (20,000) --
----------- -----------
Present value of remaining minimum capital
lease, equipment note and line of credit
payments 381,000 1,406,000
Less amounts due in one year (341,000) (375,000)
=========== ===========
Long-term portion of obligations under
capital leases, equipment notes payable
and line of credit $ 40,000 $ 1,031,000
=========== ===========
Rent expense for 1996, 1995 and 1994 was $1,842,000, $1,736,000 and $1,932,000,
respectively.
Cost and accumulated depreciation of equipment under capital leases and
equipment notes payable were as follows:
ACCUMULATED
COST DEPRECIATION
---------- ----------
December 31, 1996 $1,803,000 $1,702,000
December 31, 1995 $3,110,000 $2,373,000
F-16
54
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
7. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
In September 1996, the Company entered into a collaborative agreement with
Baxter Healthcare Corporation's Nextran unit (Nextran) to develop a carbohydrate
product for use in xenotransplantation. Under the agreement, the Company will
manufacture and sell a carbohydrate which Nextran will incorporate into a
xenotransplant product. Nextran made an up-front payment of $500,000 and
purchased 158,228 shares of the Company's common stock at $6.32 per share for
the right to enter into an exclusive supply agreement. Nextran will make
additional payments to the Company upon option exercise, achievement of
milestones and supply of carbohydrate.
In December 1995, the Company entered into a collaborative agreement with Abbott
Laboratories (Abbott) to develop manufacturing processes for the production of
certain carbohydrates. Abbott paid a $2 million up-front fee in January 1996 for
an option to obtain a worldwide license for limited applications under the
Company's patents and know-how in the area of carbohydrate synthesis for use in
nutritional products. Abbott will make milestone payments to the Company upon
achievement of production and commercial milestones and will pay royalties on
the volume of product sold. In December 1996, Abbott made the first milestone
payment to the Company in the amount of $2 million.
In May 1995, the Company entered into a collaborative agreement with Schwarz
Pharma AG (Schwarz) for the development and marketing of carbohydrate selection
blockers, including Cylexin(TM). Schwarz and the Company will share the
marketing responsibility in North America. Schwarz will have sole responsibility
for marketing products in Europe. Under the terms of the agreement, Schwarz made
an up-front license payment and purchased 241,546 shares of the Company's common
stock at $8.28 per share. Schwarz will also make milestone payments and fund 75%
of clinical development costs to commercialize product in Europe and North
America. Additionally, the Company will receive manufacturing profits and
royalties on product sales in Europe, and Schwarz and the Company will evenly
share profits in North America. In December 1995, Schwarz made the first
milestone payment to the Company in the form of the purchase of an additional
241,546 shares of the Company's common stock at $8.28 per share.
Under agreements with Takara Shuzo Co., Ltd. Biomedical Group ("Takara")
initiated in 1994, the Company's Theradigm technology is being applied to
fungal disease targets and cellular therapy for the treatment of cancer. Under
the anti-fungal collaboration, Takara obtained rights to any anti-fungal
products resulting from the collaboration for commercialization in Japan. The
Company has the right to develop products in North America, and the companies
share rights in the rest of the world.
F-17
55
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
7. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
In September 1994, Takara completed its equity investment in the Company with
the purchase of 400,000 shares of the Company's common stock at $7.50 per share
and supported research at the Company for 18 months. Research in the anti-fungal
field, using Cytel technology, is now being conducted independently by Takara in
Japan. Under the cellular therapy collaboration, Takara obtained rights to the
Company's technology relevant to the development of ex vivo cellular therapies
for the treatment of cancer in Japan. The Company was granted a license to any
patents or know-how in the field, and also retains all rights to cellular
therapy outside Japan. Takara will pay royalties on sales from products
resulting from collaboration under both agreements.
In October 1991, the Company entered into a five-year collaborative agreement
with Sumitomo Pharmaceuticals Co., Ltd. (Sumitomo) to develop drugs based on the
Company's CAM technology for the treatment of white blood cell-mediated diseases
and cancer. Under the terms of the agreement, Sumitomo provided research support
payments of $15.4 million. Sumitomo exercised an option to license candidate
compounds emerging from the collaboration for Pacific Rim markets, and is
obligated to make payments if certain milestones are met and pay royalties to
the Company on sales of such products. Total option fees and milestone payments
will not exceed $25 million. The Company has retained worldwide manufacturing
rights and all rights to sell drugs resulting from the collaboration in the
United States and other markets. In October 1994, Sumitomo completed its equity
investment in the Company with the purchase of 1,408,450 shares of the Company's
common stock at $3.55 per share. In October 1992 and December 1994, Sumitomo
exercised its option to license candidate compounds and made milestone payments
of $0.5 million and $1.0 million, respectively. In 1995, Sumitomo exercised its
option on all additional compounds to be generated within the collaboration and
made an additional milestone payment of $1.0 million.
8. INCOME TAXES
Significant components of the Company's deferred tax assets as of December 31,
1996 and 1995 are shown below. At December 31, 1996, a valuation allowance of
$42,596,000 of which $7,526,000 is related to 1996, has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.
1996 1995
------------ ------------
Deferred tax assets:
Capitalized research expenses $ 4,501,000 $ 2,722,000
Net operating loss carryforwards 29,210,000 26,540,000
Research and development credits 6,376,000 4,903,000
Other 2,509,000 905,000
------------ ------------
Total deferred tax assets 42,596,000 35,070,000
Valuation allowance for deferred tax assets (42,596,000) (35,070,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
F-18
56
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
At December 31, 1996, the Company has federal and California net operating loss
carryforwards of approximately $82,179,000 and $7,462,000, respectively. The
difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and the fifty percent limitation on
California loss carryforwards. The federal tax loss carryforwards will begin
expiring in 2002, unless previously utilized. The California tax loss
carryforwards began expiring in 1996. Approximately $230,000 expired in 1996.
The Company also has federal and California research and development tax credit
carryforwards of $4,920,000 and $2,240,000, respectively, which will begin
expiring in 2002 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss and credit carryforwards will be limited because of
greater than 50% cumulative changes in ownership which occurred during 1989 and
1995. However, the Company believes that this limitation will not have a
material impact on the financial statements.
F-19