Back to GetFilings.com
1
================================================================================
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, 1997
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 13, 1998 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 $42,045,808*
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 13, 1998:
NUMBER OF
TITLE OF CLASS SHARES
-------------- ---------
Common Stock, $.01 par value 32,859,887
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K PARTS
-------- ---------------
(1) Definitive Proxy Statement to be filed on or before III
April 30, 1998 (specified portions)
- ---------------
* Excludes 14,428,848 shares of Common Stock held by directors and executive
officers and stockholders whose ownership exceeds five percent of the shares
outstanding at March 13, 1998. 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.
================================================================================
2
FORM 10-K
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.
Unless otherwise indicated, all references to "Cytel" are to Cytel Corporation,
all references to "Epimmune" are to Epimmune Inc. and all references to the
"Company" are to the combined entity of Cytel Corporation and Epimmune Inc.
Glytec(TM), SNC(TM), Cylexin(TM), PADRE(TM) and Epimmune(TM) are trademarks of
the Company.
GENERAL
The Company was founded in 1987 to develop therapeutic products for treatment of
immunological diseases. Subsequently, the Company evolved three core technology
platforms that define the Company's business focus: the Glytec business unit,
which encompasses the Company's proprietary manufacturing technology for the
enzymatic synthesis of bioactive complex carbohydrates; the Company's
therapeutic anti-inflammatory program, which is based on cell adhesion
inhibitors; and Epimmune, a subsidiary of the Company formed in 1997, that is
developing novel vaccines that stimulate the body's immune system to treat and
prevent infectious diseases and cancer.
Cytel's business strategy is to become a leading manufacturer of bioactive
carbohydrates for consumer and medical product applications, and to develop and
commercialize therapeutics for acute and chronic inflammation. Cytel's strategy
is driven by its expertise and proprietary position in the cost-effective
synthesis of carbohydrates and by the innovative research it has carried out in
cell adhesion blockers for treatment of inflammatory diseases. The goal of the
Glytec carbohydrate manufacturing business unit is to generate revenues under
existing and future collaborations through license fees, process development and
milestone payments and, following product introduction, from royalties on
product sales and payments under supply agreements.
Cytel has developed a proprietary enzymatic sugar nucleotide cycling technology
("SNC Technology") to enable commercial-scale manufacturing of bioactive
carbohydrates for both consumer and medical products. Although many
opportunities exist for carbohydrate products because of the important role that
bioactive carbohydrates play in the body, commercialization of these products
has not been fully exploited due to the difficulties associated with their
efficient and cost-effective manufacture. Traditional chemical synthesis of
bioactive carbohydrates is very expensive, making large-scale chemical
manufacturing impractical for all but the most simple structures. Cytel's SNC
Technology enables bioactive carbohydrates to be manufactured efficiently and at
significantly reduced costs compared to alternative chemical or enzymatic
methods of synthesis. The Company has established a proprietary position for its
SNC Technology through a combination of United States and foreign patents and
trade secrets covering enzyme compositions and uses, efficient methods of enzyme
production, carbohydrate compositions and uses and methods of carbohydrate
manufacture.
Cytel is also pursuing therapeutic anti-inflammatory products by leveraging its
experience in the discovery, design and development of molecules based on
inhibiting the adhesion of white blood cells
1
3
(cell adhesion blockers). The Company's therapeutic program is directed toward
treating acute and chronic inflammatory conditions by blocking specific cell
adhesion molecules that are responsible for the recruitment of white blood cells
to sites of inflammation.
Cylexin, Cytel's lead cell adhesion inhibitor compound, is in Phase II/III
clinical trials for prevention of reperfusion injury in infants following
cardiopulmonary bypass ("CPB"). The Company believes that this trial can serve
as a pivotal trial for the registration of Cylexin as an approved drug product,
although the Company anticipates that an additional clinical trial will be
required before submission of the product for regulatory approval. Cylexin
targets an unmet medical need in newborn infants with life-threatening
congenital heart defects who must undergo CPB to facilitate corrective surgery.
Cytel believes that it is positioned to be the first to the market with a drug
for this indication. Approximately 300 hospitals perform the majority of the
estimated 20,000 open-heart surgical procedures on patients less than one year
of age in the United States and Canada each year. Cytel expects either to sell
the drug itself using a small, specialty sales force or to partner the
development and commercialization with a pharmaceutical company, preferably one
already positioned in the pediatric intensive care market. The Company will use
its SNC Technology for the cost-effective manufacture of Cylexin and is
currently producing Cylexin at a scale suitable for anticipated product launch.
Cytel's second class of cell adhesion blockers, VLA-4 integrin blockers, is
directed toward the treatment of chronic inflammatory diseases, including
multiple sclerosis and asthma. This class of cell adhesion blockers has been
shown to be effective in accepted animal models of chronic inflammatory disease.
Cytel's compounds exhibit potential for bronchial and oral administration,
essential for a chronic-use drug. The Company will seek to identify potential
strategic partners who are willing to share in development and commercialization
of these compounds.
Epimmune was established as a subsidiary of Cytel in 1997 and is now managed and
financed separately from Cytel. Capitalizing on the immunology research
expertise developed under Cytel's prior immune stimulation program, Epimmune's
business strategy is to develop novel vaccines which stimulate the body's immune
system to treat and prevent infectious diseases and cancer. Epimmune and G.D
Searle & Co., a wholly-owned subsidiary of Monsanto Company ("Searle"), entered
into a collaborative relationship, in February 1998, to develop novel cancer
vaccines. Since formation, Epimmune has received an aggregate of $16.5 million
in cash from Searle and Cytel and has the potential under the Searle agreement
to receive substantial preclinical and clinical milestone payments from Searle
as products of the Searle collaboration are developed and launched. Cytel
currently owns 86.6% of the capital stock of Epimmune.
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.
GLYTEC MANUFACTURING BUSINESS
Strategy
Cytel's Glytec business unit intends to use the Company's broad-based
carbohydrate synthesis technology to manufacture or enable the manufacture by
its partners of bioactive carbohydrates for consumer products and medical
products. The Company intends to generate revenues from license fees, contract
process development and milestone payments, as well as royalties upon product
introduction and compensation under supply agreements.
Cytel currently is completing a new facility that will comply with current Good
Manufacturing Practices ("cGMP") regulations promulgated by the United States
Food and Drug Administration ("FDA") and will be licensed by the State of
California for production of carbohydrate products for use in clinical
2
4
trials. Cytel's new facility is a pilot-scale 10,000 square foot cGMP
manufacturing facility that will meet regulatory requirements for initial
commercialization of Cylexin and for cGMP production of other products. For
larger-scale production, the Company intends to enter into a contract
manufacturing relationship with one or more specialty chemical manufacturers. As
the Company's carbohydrate manufacturing business develops, Cytel will
reevaluate its strategy for contracting versus making its carbohydrate products,
but does not intend to build internal large-scale manufacturing capacity until
its business would support such an investment.
Background on Bioactive Carbohydrates
Bioactive carbohydrates are found throughout the human body on cell surfaces and
in the bloodstream. These biologically active molecules are carriers of chemical
information mediating immune system responses and disease processes such as
inflammation, cancer and microbial infections.
Each cell type (e.g., white blood cells, cancer cells, etc.) carries a
characteristic set of bioactive carbohydrates which allows them to be
selectively recognized by other cells, antibodies, viruses, bacteria and toxins
which bind to cell surface carbohydrates. For example, migration of neutrophils,
specialized white blood cells, to sites of acute inflammation is initiated by
cells lining the blood vessels, which recognize neutrophil-specific
carbohydrates as the neurophils pass through the bloodstream. Similarly, cancer
cells can be distinguished from normal cells by antibodies that recognize the
cancer-specific cell surface carbohydrate antigens. Many pathogenic viruses,
bacteria and microbial toxins target their host cells through recognition of
specific cell surface carbohydrate receptors. Because of the role that bioactive
carbohydrates play in the body, numerous opportunities exist for therapeutic
products that interfere with these actions or enhance their activity. Despite
these opportunities, the commercialization of this class of molecules has not
been fully exploited due to the lack of efficient and cost-effective
manufacturing techniques for complex bioactive carbohydrates.
Traditional chemical synthesis of bioactive carbohydrates is very expensive,
making large-scale chemical manufacturing impractical for all but the most
simple structures. Because two sugar units can be linked together in many
different combinations, complex strategies requiring six to ten chemical steps
are required to make a single combination. This complexity, which results in low
yields, presents a barrier to efficient production of carbohydrates at
commercial scale. As a result, the cost of production of most bioactive
carbohydrates through chemical synthesis is prohibitively expensive.
An alternative to chemical synthesis of carbohydrates is enzymatic synthesis
that emulates nature's own process for synthesizing bioactive carbohydrates. In
vivo, bioactive carbohydrates are synthesized using a biochemical assembly line
where the assemblers are specialized enzymes called glycosyltransferases. These
enzymes in the cell cause sugar subunits to be sequentially added in the
correct, specific orientation to form bioactive structures. The starting
materials used by the enzymes (sugar subunits linked to nucleotides called
sugar-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 reactions
on a commercial scale.
Cytel's SNC Technology
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
3
5
be used with one or more additional glycosyltransferases and additional sugar
units until the desired carbohydrate product is completed.
SNC Technology allows bioactive carbohydrates to be manufactured efficiently and
at significantly reduced cost relative to alternative chemical or enzymatic
methods of synthesis. First, the technology offers high efficiency. A single
reaction allows the complete addition of a sugar subunit with typical yields
approaching 100%, an efficiency difficult to achieve with alternative chemical
and enzymatic methods. 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 used at a reduced cost compared
to alternative enzymatic methods of synthesis. 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. An important cost advantage of SNC Technology over alternative
methods of synthesis (both chemical and enzymatic) results from the combined
high efficiency and specificity resulting in ease of purification and recovery
of the final product at commercial scale.
Cytel has a broad patent position covering its Glytec manufacturing business
including 21 issued United States patents and 39 pending United States patent
applications with corresponding international applications. These patents and
patent applications cover enzyme compositions and uses, efficient methods of
enzyme production, carbohydrate composition and uses and methods of manufacture
of carbohydrates. In addition, the Company has extensive know-how in the
production of recombinant enzymes and in the manufacture of bioactive
carbohydrates on a multi-kilogram scale.
Glytec Manufacturing and Collaborations
Cytel has two existing Glytec manufacturing collaborations and intends to
pursue other product opportunities using its SNC Techology, by itself or in
collaboration with others.
Baxter Healthcare's Nextran unit ("Nextran"). In December 1997, as an extension
of its collaboration initiated in September 1996, Cytel entered an exclusive
agreement with Nextran to supply an alpha-galactose carbohydrate for products
that treat hyperacute rejection associated with xenotransplantation. As part of
the exclusive collaboration, Baxter made a milestone payment and invested $1
million in Cytel's private placement in December 1997. Under the expanded
agreement, Nextran will make product development milestone payments to Cytel and
has the option to enter into an exclusive supply agreement to purchase the
carbohydrates. Cytel will develop and manufacture these carbohydrate products
using its proprietary sugar nucleotide cycling technology. Xenotransplantation,
which is transplanting animal organs into human recipients, is a promising
procedure for those requiring organ transplants. Without intervention, an animal
organ would typically survive less than one hour in a patient due to the
antibodies found in human blood which immediately recognize and attack a
carbohydrate expressed on the surface of the donor organ. This immune-response
attack results in hyperacute rejection, thus preventing the acceptance of the
transplanted organ into the body. Cytel has developed a process for
manufacturing an alpha-galactose carbohydrate, similar to the carbohydrate
located on the tissues of animal donor organs, which can be used to selectively
remove the patient antibodies directed against the foreign organ.
Abbott Laboratories ("Abbott"). Cytel initiated its first manufacturing
collaboration in early 1996 with Abbott. The companies' project teams
collaborated to deploy Cytel's SNC Technology to make bioactive carbohydrates
that will be used in Abbott's nutritional products. To date, Cytel has received
more than $4 million in fees and milestone payments. Abbott is obligated to make
additional payments if
4
6
it meets certain milestones and to pay royalties to Cytel
on sales of products containing any sugar manufactured using Cytel's SNC
Technology.
Other Product Opportunities. Because of the varying role that bioactive
carbohydrates play in the body, the ability to inhibit or enhance their activity
can give rise to numerous product opportunities. Cytel intends to develop
additional products itself or in collaboration with others in two broad
categories: consumer products and medical products.
- Consumer Products
Cytel believes that there is a significant opportunity for the manufacture of
bioactive carbohydrates for consumer products. In addition to food additives
such as Abbott's pediatric products, potential opportunities include
cosmetic, skin care and oral hygiene products utilizing biologically active
carbohydrates through either topical application or oral administration.
Consumer products may be more rapidly developed and commercialized as
compared to medical products because they are not subject to the same
approval process as are drugs or medical devices.
- Medical Products
- Carbohydrate Vaccines. Cell surface carbohydrates on cancer cells
differ from those on normal cells and can be selectively recognized by the
immune system as tumor antigens. Several carbohydrate-based cancer vaccines
in development by other companies have demonstrated the ability to stimulate
an immune response and extend the life of the vaccinated patients. In
addition to cancer vaccines, prophylactic carbohydrate vaccines may be
important for prevention of infections by bacterial pathogens.
- Anti-Infectives and Anti-Toxins. Because many viruses, bacteria and
bacterial toxins bind to host cells by attachment to cell surface
carbohydrate groups, there are numerous opportunities for development of
bioactive carbohydrate products that are anti-infectives or anti-toxins.
Cytel is pursuing opportunities to manufacture bioactive carbohydrates that
will be incorporated into products for treatment of diarrhea induced by
either viruses or bacteria.
- Glycoprotein Remodeling. Cytel is pursuing collaborations with
biotechnology and pharmaceutical companies for the remodeling of therapeutic
glycoproteins developed by those companies. Recombinant glycoproteins, such
as Amgen Inc.'s erythropoetin (EPO) and Genentech Inc.'s tissue plasminogen
activator (tPA), represent the largest class of approved products sold by the
biotechnology industry to date, as reflected by sales. 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
recombinant 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. Application of Cytel's technology may reduce the
effective dose, improve the consistency of manufacture, and reduce the risk
of an immune response to certain recombinant glycoproteins in preclinical
development.
License Agreements
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 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
5
7
modify complex carbohydrates and related glycoconjugates for medical, diagnostic
and therapeutic applications as well as certain consumer products. Cytel also
holds licenses from The University of California, The University of Michigan,
The University of Arkansas and the National Research Council of Canada
pertaining to enzyme compositions and methods of production. These licenses
generally obligate the Company to make minimum annual royalty payments,
milestone payments, and royalty payments upon commercialization of products
covered by licensed technology. Cytel is also 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.
THERAPEUTIC PROGRAM
Background
Cytel's therapeutic program is directed toward treating acute and chronic
inflammatory conditions by blocking specific cell adhesion molecules that are
responsible for the recruitment of white blood cells to sites of inflammation.
Cytel's lead cell adhesion blocker compound, Cylexin, is in Phase II/III
clinical trials for prevention of reperfusion injury in infants following CPB,
although the Company anticipates that an additional clinical trial will be
required before submission of the product for regulatory approval.
Cytel's scientists were at the forefront in the identification and
characterization of 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
inflammatory response. The adhesion of white blood cells to the cells lining the
blood vessel wall is a pivotal event in acute and chronic inflammatory
responses. It therefore serves as an ideal point of intervention in a number of
inflammatory diseases such as reperfusion injury, an acute inflammatory response
which occurs when blood flow into a tissue is restored following ischemia due to
a temporary blockade of or reduction in blood flow, as well as chronic
inflammatory diseases such as asthma and multiple sclerosis. Most of these
conditions are characterized by massive infiltration of white blood cells which
cause tissue injury by releasing bioactive substances such as enzymes.
The Company currently has two different research efforts in the cell adhesion
area: a selectin receptor blocker approach, with Cylexin as the lead drug
candidate, addressing reperfusion injury; and an integrin receptor blocker
approach addressing chronic inflammatory diseases.
Cylexin
Cylexin, the Company's most advanced drug candidate, is a carbohydrate that
blocks certain classes of selectins. The Company's development program for
Cylexin addresses a therapeutic indication which targets an unmet medical need:
the prevention of reperfusion injury in infants with congenital heart disease
who must undergo CPB to facilitate life-saving corrective surgery. Reperfusion
injury in these infants causes damage to many organs including the heart, lungs,
kidneys and nervous system. Results from two relevant animal studies conducted
with Cylexin by Harvard Medical School researchers, together with clinical data
from the Company's Phase II trial of Cylexin in reperfusion injury following CPB
in adult patients undergoing surgery to remove chronic blood clots from their
lungs, provided a compelling rationale for pursuing this indication. Currently,
Cylexin is in a Phase II/III clinical trial at a number of centers in the United
States and Canada, although the Company anticipates that an additional clinical
trial will be required before submission of the product for regulatory
approval.
In the animal studies conducted in neonatal lambs and piglets, the use of
Cylexin resulted in substantial improvement in cardiac and pulmonary function,
reduction of edema and faster recovery of neurologic function. The same group of
physicians at Harvard, who conducted the research with Cylexin in these neonatal
animal models, also conducted a Phase II dose confirmation and tolerance study
in infants.
6
8
Clinical Experience in Cardiopulmonary Bypass. Human clinical data from a Phase
II study previously conducted by the Company in adults who underwent CPB during
surgery to remove blood clots from their lungs supports the rationale for the
pediatric CPB trial. In the adult lung study, Cylexin resulted in a 50%
reduction in the number of patients assessed by the investigators to have
developed lung reperfusion injury as a consequence of the bypass procedure. The
use of CPB in this adult trial is directly analagous to its use in the newborn
infants undergoing corrective heart surgery in the Company's ongoing pivotal
clinical trial.
In addition, Cytel recently completed a Phase II open-label, dose-ranging study
in infants undergoing CPB with circulatory arrest during corrective or
palliative surgery for repair of congenital heart defects. This study was
designed to provide safety and pharmacokinetic data and was not designed to test
the efficacy of Cylexin in infants. However, Cytel collected efficacy data
during the trial and has conducted preliminary analyses of those efficacy
parameters for which useable data were available for the first 17 patients
studied at Boston Children's Hospital. The results indicate good tolerability
and a favorable response with respect to inhibiting some of the important
clinical manifestations of reperfusion injury as well as reducing the length of
hospital stay. A comparison of data from three groups of infants favored the
highest dose group for reduction in intubation time, reduction in post-operative
edema and shortened hospital stay. There was also a one-day (30%) decrease in
median intensive care unit time for the high dose infants.
Future Clinical Development. Based on the results obtained from the Phase I and
II trials described above, Cytel has initiated a Phase II/III study that Cytel
believes will be the first pivotal clinical study for this important indication.
It is a 250-patient double-blind, placebo-controlled efficacy and safety study
to be conducted at a number of centers in the United States and Canada,
including Boston Children's Hospital, The Cleveland Clinic Foundation,
Children's Hospital of Los Angeles and Cincinnati Children's Hospital Medical
Center. It is designed to evaluate efficacy and safety in infants undergoing
surgery to correct congenital heart defects. The current registration plan
projects approximately 800 patients being enrolled in clinical studies including
a second pivotal trial in infants. The efficacy parameters to be studied by the
Company in its clinical trials include improvement in postoperative cardiac,
pulmonary and renal function and reduction in neurological sequelae. These
parameters represent the same quantitative measurements for which significant
improvements were seen in the studies in neonatal lambs and piglets. The Company
will also focus on important measures of pharmacoeconomic value, including
reduction in ventilator time, reduction in the use of drugs for cardiac
stabilization, reduction in days in the intensive care unit and reduction in
overall hospital stay.
Commercialization Plans. Heart defects are among the most common birth defects
and are one of the leading causes of birth defect-related deaths. Over 30,000
infants are born each year with heart defects in the United States and Canada.
Many newborns (3-4 per 100 live births) have life-threatening defects that
require immediate surgical intervention. The majority of these undergo open
heart surgery requiring use of CPB techniques. Approximately 20,000 such heart
surgeries involving CPB are conducted each year in the United States and Canada
in infants less than one year of age. Although advances in surgical techniques
and medical care have led to a dramatic improvement in survival of infants with
congenital heart defects, open heart surgery can result in considerable
morbidity in the early post-operative period (such as reduced cardiac function,
compromised kidney and lung function, severe edema and seizures) and subsequent
impairment of neurological development. Reperfusion injury following CPB plays a
significant causative role in post-operative morbidity.
Currently, there are no drugs approved for the prevention or reduction of
reperfusion injury following CPB-facilitated procedures. Cytel has the
opportunity to be the first to market with such an agent. The target customer
base is relatively small and well-defined. Approximately 300 hospitals in the
United States and Canada perform open-heart surgery on patients less than one
year of age. Therefore, a relatively small number of sales representatives would
be required to reach a significant portion of the
7
9
target audience. In the United States and Canada, Cytel will market Cylexin
directly or with a pharmaceutical corporate partner. Cytel will seek a partner
for Europe.
Pursuant to the terms of a technology development agreement, from March 1991
through January 1997, Cytel and Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo")
worked together to develop drugs based on Cytel's selectin technology for the
treatment of white blood cell-mediated diseases. Sumitomo has licensed rights to
develop and commercialize compounds resulting from the collaboration in Pacific
Rim countries. Although Sumitomo has rights to Cylexin in the Pacific Rim, it
has stated that it will not pursue Cylexin for the CPB indication and may not
pursue Cylexin for any indication.
In addition to sales generated for the treatment of infants, there is the
potential to expand the indication for use in adults undergoing complex
open-heart surgery requiring extended time on CPB. Moreover, if Cylexin is shown
to prevent reperfusion injury during cardiac surgery, it may also prove to be
beneficial in preventing reperfusion injury in other indications, such as organ
transplantation.
There can be no assurance that Cylexin will be approved by the FDA for any
indication or that Cylexin will generate revenues for the Company. In addition,
there can be no assurance that the Company will pursue any additional
indications, or, if they are pursued, that the Company will ultimately be
successful in developing, obtaining approval or marketing a product for such
indications.
Integrin Blockers
The migration of certain classes of white blood cells into organs or tissues is
central to the pathogenesis of a variety of chronic inflammatory diseases.
Integrins are a group of adhesion receptors on the surface of these white blood
cells which bind to ligands on epithelial cells lining blood vessels in a
lock-and-key manner and thereby initiate a chronic inflammatory response.
Integrin blockers should therefore inhibit white blood cell infiltration and the
resulting pathology in the target tissues. Cytel scientists selected the VLA-4
integrin as the most relevant molecular target for its integrin blocker program
based on the Company's own work and supporting data reported in the literature
from a variety of animal models of chronic inflammation (including asthma,
colitis, diabetes, transplantation, multiple sclerosis and arteriopathy). In
addition, because VLA-4 receptors, unlike other integrin receptors, do not occur
on circulating neutrophils, the use of VLA-4 blockers to reduce chronic
inflammation should not enhance the risk of bacterial infection.
Cytel continues to progress in its efforts to develop small molecule drug
candidates that will reduce white blood cell migration into sites of
inflammation by blocking the VLA-4 integrin-receptor interaction. Cytel has
demonstrated that these inhibitors are effective in several animal models
including multiple models of asthma. In vivo studies have shown: (i) a
protective effect against antigen-induced late responses and airway
hyperresponsiveness in allergic sheep; (ii) a significant reduction in
eosinophil recruitment to the airways in antigen-challenged mice; and (iii) an
improvement in pulmonary function and reduction in white blood cell recruitment
in antigen-challenged rabbits.
Cytel will seek to identify potential strategic partners who are willing to
share in the development and commercialization of these compounds.
Fred Hutchinson Cancer Research Center ("FHCRC"). Cytel has an exclusive license
from the FHCRC to lymphocyte adhesion technology related to blocking the
VLA-4/CS-1 interaction. A United States patent was granted to FHCRC covering the
use of antibodies directed at VLA-4 to treat or prevent inflammation. Additional
claims from this application are in prosecution for peptides and other agents.
Cytel is obligated to make milestone and royalty payments to FHCRC during the
development and commercialization of products that are covered by FHCRC patents.
8
10
Potential Markets. Cytel has completed a strategic assessment of a broad range
of potential indications for its integrin blocker molecules and has selected
asthma and multiple sclerosis as its primary therapeutic targets. The Company
believes VLA-4 blockade may have beneficial effects on these diseases for the
following reasons:
- Asthma. In established animal models of asthma (sheep, mouse and rabbit),
Cytel VLA-4 blockers have been shown to reduce migration of eosinophils to
the airway following allergen challenge and have improved pulmonary
function as compared to control animals.
- Multiple Sclerosis. In models of experimental autoimmune
encephalomyelitis, a well-established model of multiple sclerosis in
humans, a Cytel VLA-4 blocker was shown to prevent development of
neurological symptoms and to promote improvement in weight gain as compared
to control animals.
Discovery Research
Cytel's research program is based on the inhibition of glycosyltransferase
enzymes and leverages the Company's medicinal chemistry and carbohydrate
synthesis technology capabilities and strong patent position. Bioactive
carbohydrates mediate important biological processes, and, specific
glycosyltransferases are responsible for the production of bioactive
carbohydrates. By inhibiting these enzymes, there is the potential to provide
therapeutic benefit. The target indications include chronic inflammation,
autoimmune disease and transplant rejection. The Company expects that this
program will be pursued with a corporate partner.
EPIMMUNE INC.
Background
In September 1997, Cytel entered into a letter of intent to collaborate
with Searle (the "Searle LOI") with respect to Cytel's cancer epitopes and the
use thereof in ex vivo therapies and therapeutic vaccines. Pursuant to the
Searle LOI, Searle purchased 2,222,222 million shares of Cytel's Common Stock at
an adjusted $2.25 per share for an investment of $5 million.
In October 1997, Cytel funded Epimmune as an independently financed and managed
subsidiary. Epimmune is developing novel vaccines that stimulate the body's
immune system to treat and prevent infectious diseases and cancer. Cytel
invested a total of $6.5 million in cash and transferred certain patents, fixed
assets and approximately 25 full-time employees.
Under the terms of a definitive agreement executed between Epimmune and Searle
in February 1998, Searle made an additional investment of $10 million in
Epimmune, of which $6.1 million was in Epimmune convertible preferred stock and
$3.9 million in a new issue of Cytel convertible preferred stock. Cytel
simultaneously purchased $3.9 million of Epimmune's convertible preferred stock.
Searle has the right to convert the Cytel convertible preferred stock into Cytel
common stock after three years or to convert to Epimmune common stock at any
time. In addition to the $15 million investment made to date, Searle will make
milestone payments to Epimmune upon achievement of certain preclinical and
clinical milestones. Searle has the option to deliver shares of the Cytel
convertible preferred stock in lieu of up to 50% of certain milestone payments.
Searle will also pay royalties to Epimmune on product sales. In addition, Searle
has rights of first refusal with respect to newly-issued securities of Cytel,
enabling Searle to maintain its percentage ownership in Cytel. As of March 1,
1998, Cytel owned 86.6% of the outstanding capital stock of Epimmune and Searle
owned 13.4%.
9
11
Epimmune Strategy
Epimmune is developing novel vaccines that stimulate the body's immune system to
treat and prevent infectious diseases and cancer. Its core technology stems from
the knowledge of how the immune system is stimulated and which arms of the
immune system need to be stimulated for treatment or prevention of different
infectious diseases and cancer.
Epimmune will focus on the treatment of breast, colon and lung cancer under its
collaboration with Searle. With numerous opportunities in the infectious disease
field and the rights to use developments under the Searle collaboration in that
field, Epimmune plans to build its infectious disease business though internal
development and corporate partnering. Product targets include prophylactic
vaccines for the hepatitis C virus ("HCV"), the human immunodeficiency virus
("HIV") and malaria, and therapeutic vaccines for the hepatitis B virus ("HBV"),
HCV and HIV and other infectious diseases.
Epimmune Technology Platform
Antigen-Specific Epitopes. Eliciting a strong cellular immune response is
critical in order to treat and prevent certain infectious diseases and tumors.
It has been shown in individuals who spontaneously clear chronic viral
infection, and in cancer patients who respond to immunotherapy, that a cellular
immune response is associated with viral clearance and tumor regression. This
cellular response is comprised of activated cytotoxic T cells (CTL) and helper T
cells (HTL). The activated CTL and HTL are directed toward multiple discrete and
specific antigen fragments known as antigen-specific epitopes, which are
portions of antigens capable of being recognized by immune cells. Recreating
this "multi-specific" CTL and HTL response is the objective of a number of
industry and academic groups in the immunotherapy and vaccine fields. Many have
taken the approach of using whole antigens and letting the immune system
"decide" which epitopes to recognize. To date, this approach has been successful
for many prophylactic vaccines, but has not been successful for stimulating the
cellular immune response critical to treating chronic infectious diseases and
cancer and preventing certain diseases such as HCV, HIV and malaria. Epimmune's
approach is to recreate the multi-specific cellular immune response by
delivering those specific epitopes which are critical to preventing or fighting
disease. Accordingly, two classes of antigen-specific epitopes have been
identified: (i) CTL epitopes that bind MHC-1 and are recognized by cytotoxic T
cells, and (ii) HTL epitopes that bind MHC-II and are recognized by helper T
cells.
Use of selected antigen-specific epitopes or synthetic genes encoding these
epitopes offers a number of benefits over using whole antigens or DNA encoding
whole antigens.
- - First, the epitopes are selected from conserved regions of viral or
tumor-associated antigens, reducing the likelihood of immune escape due
to viral or tumor mutations. When using whole antigens, there is
evidence that the immune response is directed largely toward variable
regions of the antigen, allowing for such immune escape due to
mutations.
- - Second, the ability to combine selected epitopes (CTL and HTL) and to
alter their composition to enhance immunogenicity allows for
manipulation of the immune response as appropriate for the target
disease. Similar engineering of the response is not possible with whole
antigens.
- - Third, a major benefit of epitope-based immune-stimulating vaccines is
their safety. The possible pathological side-effects caused by
infectious agents or whole-protein antigens, which might have their own
intrinsic biological activity, is eliminated.
- - Finally, in order to develop the most effective vaccines, multiple
epitopes from several proteins should be included. Combining multiple
epitopes into a single vaccine should result in a well-characterized
product that contains minimal extraneous biological material.
PADRE Carrier / Adjuvant. The PADRE technology consists of a family of
proprietary molecules which are potent, synthetic, "universal" immunostimulants.
When combined with epitopes, PADRE induces important "co-stimulatory" signals
which potentiate the antigen-specific immune response. If the epitopes are CTL
epitopes, PADRE increases the magnitude and duration of the immune response. If
the epitopes are antibody (or B-cell) epitopes, PADRE serves as an antigen
"carrier," inducing a long-term,
10
12
high-titer antibody response. PADRE molecules are easy to manufacture and
provide many potential advantages over common antigen carriers and broad
immunostimulants.
Epimmune Collaborations
Epimmune plans to enter into collaborations with multiple pharmaceutical and
biotechnology companies to commercialize therapeutic and prophylactic vaccines.
Epimmune's unique capabilities include expertise in identifying those epitopes
from viral and tumor-associated antigens which elicit the desired immune
response, and creating and evaluating product candidates which elicit a potent
immune response. Epimmune's current partners include:
Searle. The scope of the worldwide collaboration, established in February 1998,
is the treatment of cancer, excluding ex vivo cellular therapy in Japan. The
parties are combining Epimmune's proprietary cancer-specific epitope and PADRE
technologies with Searle's cytokine technology to develop a new class of cancer
therapies designed to induce highly-specific immune responses.
Takara Shuzo Co., Ltd. ("Takara"). In 1994, the Company established a
collaboration with Takara, focused on ex vivo cellular therapy for treatment of
cancer. Takara, who is collaborating with Japanese investigators on the
evaluation and optimization of ex vivo cellular therapies, has rights to
Epimmune technology for ex vivo treatment of cancer in Japan. Takara will pay
the Company royalties on sales from products resulting from the collaboration.
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
March 24, 1998, the Company's patent estate consisted of 139 United States and
304 international pending patent applications, and 29 United States and 31
international issued patents. Included in this patent estate is Cytel's broad
proprietary position covering its Glytec business unit, including 21 issued
United States patents and 39 pending United States patent applications, with
corresponding international applications. The core SNC technology is covered
both by patents and patent applications exclusively licensed from Scripps, and
additional patent applications filed by Cytel covering improvements and multiple
applications. In addition to the SNC technology, Cytel has developed and filed
patent applications to the expression, production and purification of enzymes,
as well as their use in carbohydrate manufacturing and has exclusively licensed
enzymes and efficient methods for their production. In February 1998, the
Company entered into a non-exclusive licensing agreement with Glycomed, a
wholly-owed subsidiary of Ligand Pharmaceuticals, Inc. under which Cytel will
receive rights to a family of Glycomed patents relating to certain carbohydrate
compounds for the treatment of acute inflammation, including Cytel's most
advanced product, Cylexin. This non-exclusive license, for which Cytel paid a
license fee of $900,000 in restricted common stock of Cytel, enhances the
segment of the Company's patent portfolio covering Cytel's carbohydrate-based
cell adhesion inhibitor program for the treatment of acute inflammation. The
Company recently had a patent issue for some of its VLA-4 integrin blocker
compounds.
Included in the Company's patent estate is Epimmune's patent portfolio which
covers proprietary technology relevant to the development of vaccines, including
coverage to antigen-specific epitopes that are associated with certain cancer
cells and infectious diseases. In addition, the patent portfolio covers a
potent, synthetic "universal" immunostimulant, known as PADRE.
11
13
epitopes. Epimmune has 67 United States and 113 international pending patent
applications, with three United States and nine international issued patents.
These applications and patents are either owned by or are 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.
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 some of its integrin compounds may
infringe one or more claims of a pending patent application by a third party.
The Company is continuing to investigate the validity and scope of this patent
application. Subject to this further investigation, the Company believes that
should the patent issue to the third party, it may be required to either obtain
a license from the third party in order to manufacture and market such integrin
molecules or, alternatively, to shift its development effort to an attractive
alternative integrin compound. There can be no assurance that the Company will
be able to obtain any necessary licenses at a reasonable cost. 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, may have a material
adverse impact on the Company. Litigation, which could result in substantial
costs to the Company, would 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.
The Company 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.
MANUFACTURING
The Company has little 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
bioactive carbohydrates, including Cylexin, 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.
Cytel has produced Cylexin bulk drug chemical substance for Phase I and Phase II
trials in the Company's pilot plant manufacturing facilities. Cylexin is
produced under cGMP and bulk pharmaceutical chemical ("BPC") guidelines. Cylexin
is further processed to form bulk drug substance and product in the clean room.
Final vialed product is produced at an FDA-inspected contract manufacturing
facility. The Company believes that the current facilities will be adequate for
production of Phase III clinical supplies and registration batches for NDA
submission. Cylexin is currently manufactured at a scale suitable for
anticipated product launch. Additional manufacturing of product candidates may
be performed in the future by third parties at FDA-inspected contract
manufacturing facilities.
12
14
To be successful, the Company's products and products of its partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. The Company has not commercialized any bioactive
carbohydrate products or any other pharmaceutical products, nor has it
demonstrated its ability to manufacture commercial quantities of its or its
partners' product candidates in accordance with regulatory requirements. Some of
the pharmaceutical products that 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. If the Company is unable to develop itself or contract
with a third-party manufacturing capabilities to produce suitable quantities of
its or its partners' products in accordance with regulatory standards, the
ability of the Company or its partners to conduct clinical trials, obtain
regulatory approvals and market such products may be adversely affected, which
could adversely affect the Company's competitive position and its chances of
achieving profitability. 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.
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 Investigational New Drug Application
("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 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
13
15
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 prior to
product approval, 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. Even after the NDA approval, the FDA may require
additional Phase IV clinical trials. 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 cGMP 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 and Canada. The Company
intends to seek input from the FDA, and where appropriate the Canadian Health
Protection Board ("HPB"), 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 may
be the responsibility of its collaborative partners. Where appropriate, Cytel
intends to pursue available opportunities 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
14
16
FDA and/or HPB policy during the period of product development and FDA and/or
HPB regulatory review of each submitted NDA or PLA. 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.
The regulatory process for pharmaceutical products in Canada as regulated by the
HPB is similar to that in the United States.
COMPETITION
The Company is engaged in a highly competitive industry. The Company competes
with many public and private companies, including pharmaceutical companies,
chemical companies, specialized biotechnology companies and academic
institutions. Many of the Company's competitors have substantially greater
financial, scientific and technical resources, and manufacturing and marketing
capabilities than the Company. In addition, many of the Company's competitors
have significantly greater experience conducting preclinical studies and
clinical trials of new pharmaceutical products and in obtaining regulatory
approvals for pharmaceutical products. Competitors of the Company and its
collaborators may develop and commercialize such products more rapidly than the
Company and its collaborators. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any being developed by the Company, or that would render the
Company's technology and products obsolete or noncompetitive.
Competition may increase further as a result of potential advances from the
study of complex carbohydrates and greater availability of capital for
investment in this field. The Company is aware of companies that are
investigating methods of enzymatic synthesis for production of commercial
quantities of complex carbohydrates. There can be no assurance that these and
other efforts by potential competitors will not be successful, or that other
methods of carbohydrate synthesis will not be developed to compete with the
Company's technology.
For some indications, the Company anticipates developing drugs which 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 the Company 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. 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 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 the Company or its collaborative partners can develop products,
complete the clinical trials and approval processes and
15
17
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
effectiveness, safety, reliability, availability, price and patent position.
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.
EMPLOYEES
As of March 17, 1998, Cytel employed 90 individuals full-time, of whom 65 were
engaged in research and development, including 25 who hold Ph.D. and/or MD
degrees and 24 who were engaged in finance and general administration. Included
in the above figures are 23 full-time persons employed by Cytel's subsidiary,
Epimmune. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. The Company believes 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 13, 1998 are as
follows:
Name Age Position
Virgil Thompson 58 President, Chief Executive Officer and Director
Robert L. Roe, M.D., F.A.C.P. 57 Executive Vice President, Chief Operating Officer and
Director
James C. Paulson, Ph.D. 50 Vice President, General Manager Glytec Business Unit,
Chief Scientific Officer and Director
Edward C. Hall 57 Vice President, Finance and Chief Financial Officer
Jennifer L. Lorenzen 44 Vice President, Business Development
Deborah A. Schueren 34 Vice President, Cytel and President, Epimmune
BUSINESS EXPERIENCE
Mr. Thompson joined Cytel in January 1996 as President and Chief Executive
Officer, and member of the Board of Directors. Previously he was President and
Chief Executive Officer for CIBUS Pharmaceutical, Inc., a privately held oral
drug delivery company from July 1994 to December 1995. 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 Pharmaceutical
Corporation and Aradigm Corporation.
16
18
Dr. Roe joined Cytel in January 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 January 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 and Senior Vice President of the corporation.
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.
Dr. Paulson has served as a director since January 1991 and has been Vice
President since 1990. He has been employed by Cytel in various positions since
September 1990, most recently as General Manager, Glytec Business Unit, Chief
Scientific Officer and member of the Board of Directors. Prior to joining Cytel
in 1990, Dr. Paulson was Professor and Vice Chairman of the Department of
Biological Chemistry at the University of California School of Medicine, 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.
Mr. Hall was elected Vice President, Finance and Chief Financial Officer in
February 1998. Prior to Cytel, Mr. Hall served as Chief Financial Officer of
Medical Device Technologies, Inc., a developer and marketer of monitoring and
diagnostic medical devices. From 1993 to the time he joined Medical Device
Technologies in 1995, Mr. Hall was a consultant and interim chief financial
officer for medical industry and high technology companies in the San Diego
area. Prior to that he was a turnaround consultant and worked on a variety of
corporate restructuring and sale assignments in the western United States. Mr.
Hall received his Bachelor of Science from Princeton University and an MBA from
the Harvard Business School.
Ms. Lorenzen was elected Vice President of Business Development in February
1998. She joined Cytel in August 1996 as Director, Strategic Marketing and
Program Management and was elected Vice President and Development Program
Director in April 1997. Prior to joining Cytel, Ms. Lorenzen was with Chugai
Biopharmaceuticals, Inc. where she held the position of Vice President and
Development Program Director. Before joining Chugai Biopharmaceuticals in 1995,
she spent 10 years at Syntex, USA, Inc. where she held a variety of marketing
and management positions, including Vice President and Program Director of
Syntex' Ganciclovir Program. Ms. Lorenzen received her BA in Biological Sciences
from the University of California at Davis.
Ms. Schueren was elected President of Epimmune in October 1997 and continues to
serve as a Vice President of Cytel Corporation. She joined Cytel in October 1992
and has had responsibility at different times during that period for a variety
of functions including investor relations, business development and finance. She
served as Director, Business Development from 1994 until March 1997 when she was
appointed Vice President, Finance and Chief Financial Officer. Prior to joining
Cytel, Ms. Schueren was a consultant with The Boston Consulting Group, a
management consulting firm, from 1990 to 1992 and was with Lehman Brothers
Investment Banking Division, Health Care Corporate Finance from 1986 to 1988.
She received her Bachelor of Science in Chemical Engineering from Texas A&M
University and an MBA from the Harvard Business School.
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.
17
19
RISK FACTORS
Cytel wishes to caution readers that the following important factors, among
others, in some cases have affected the Company's results and in the future
could cause actual results and needs of the Company to vary materially from
forward-looking statements made from time to time by the Company on the basis of
management's then-current expectations. The business in which the Company is
engaged is in rapidly changing and competitive markets and involves a high
degree of risk, and accuracy with respect to forward-looking projections is
difficult.
Early Stage of Development; Absence of Products
The Company is a development stage company. It has not completed the development
of any products and, accordingly, has not begun to market or generate revenues
from the commercialization of products. The Company does not expect to market
any therapeutic products for a number of years. Few companies have successfully
developed and commercialized complex carbohydrates for pharmaceutical
applications. The Company's products under development will require significant
time-consuming and costly research, development, preclinical studies, clinical
testing, regulatory approval and significant additional investment prior to
their commercialization, which may never occur. There can be no assurance that
the Company's research and development programs will be successful, that the
Company will be able to manufacture products in commercial quantities in
compliance with regulatory requirements at an acceptable cost, that any of its
products under development will be successfully commercialized or will prove to
be safe and efficacious in clinical trials or that the Company or its
collaborators will be successful in obtaining market acceptance of any of its
products. The Company or its collaborators may encounter problems and delays
relating to research and development, regulatory approval, manufacturing and
marketing. The failure by the Company to address such problems and delays
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
Reliance on Collaborative Partners
The Company expects to rely on collaborative arrangements both to develop and
commercialize pharmaceutical products and to exploit its carbohydrate
manufacturing technology in the areas of consumer and medical products. The
Company has relied on certain established pharmaceutical companies interested in
its technology to fund a portion of its research and development expenses for
pharmaceutical product candidates. The Company has entered into collaborative
research agreements with these collaborative partners, whereby the partners
provide capital in exchange for certain technology, product, manufacturing and
marketing rights. The Company expects that substantially all of its revenues for
the foreseeable future will result from payments under its existing, and any
future, manufacturing and collaborative research arrangements, including
royalties on product sales, and interest income. There can be no assurance that
the Company will receive royalty revenues, license fees or milestone payments
from any of its existing collaborative partners or that the Company will be
successful in entering into additional collaborative arrangements that will
result in significant revenues. There can also 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 or 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 program of the Company.
Cytel's collaborations with Nextran and Abbott provide, in part, for the receipt
by the Company of certain license fees, milestone payments, and, if
commercialization occurs, royalty payments or compensation for supply of
products. The success of the collaborations will depend, in significant part, on
Nextran's and Abbott's respective development, competitive marketing and
strategic considerations, including the relative advantages of alternative
products being developed or marketed by competitors. Although Cytel believes
that Nextran and Abbott each will have an economic motivation to commercialize
products incorporating carbohydrates manufactured by Cytel or using Cytel's
technology,
18
20
the amount and timing of resources committed to these activities are entirely
within the control of Nextran and Abbott, respectively. There can be no
assurance that Nextran or Abbott will pursue the development and
commercialization of products utilizing Cytel's technology, that either party
will perform its obligations as expected or that any future milestone payments
or fees will be received by the Company. The suspension or termination of
Cytel's collaborations with Nextran or Abbott, the failure of such
collaborations to be successful or the delay in their development or
commercialization of carbohydrate products could have a material adverse effect
on the Company's business, financial condition and results of operations.
Epimmune recently entered into a collaboration with Searle with respect to the
production, use and sale of pharmaceutical products derived from Epimmune's
cancer epitopes and the use thereof in ex vivo therapies and therapeutic
vaccines. The Searle collaboration is Epimmune's most significant collaboration,
and Epimmune is substantially dependent upon it. The success of the
collaboration will depend, in significant part, on Searle's development,
competitive marketing and strategic considerations, including the relative
advantages of alternative products being developed or marketed by competitors.
There can be no assurance that Searle will perform its obligations as expected
or that any future milestone payments or fees will be received by Epimmune. The
suspension or termination of the Epimmune collaboration with Searle, the failure
of such collaboration to be successful or the delay in the development or
commercialization of pharmaceutical products pursuant to such collaboration
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company may be required to enter into licenses or other
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
licenses or other collaborative arrangements that allow it to access such
technology. In addition, there can be no assurance that any technology accessed
through such licenses or other collaborations will successfully meet the
Company's requirements.
Continuing Operating Losses; Accumulated Deficit
The Company has experienced significant operating losses since its inception in
1987. As of December 31, 1997, the Company had an accumulated deficit of
approximately $107.2 million. The Company expects to incur substantial
additional operating losses as the Company's research and development and
clinical trial efforts continue to expand. All of the Company's revenues to date
have consisted of contract research and development revenues, license and
milestone payments, research grants and interest income. To achieve profitable
operations, the Company, alone or with others, must identify, develop, register,
manufacture and market proprietary products and successfully develop commercial
applications of its carbohydrate manufacturing technology for consumer and
medical products. There can be no assurance that the Company will be successful
in its efforts to achieve profitable operations.
Manufacturing Limitations
To be successful, the Company's products and products of its partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. The Company has not commercialized any bioactive
carbohydrate products or any other pharmaceutical products, nor has it
demonstrated its ability to manufacture commercial quantities of its or its
partners' product candidates in accordance with regulatory requirements. Some of
the pharmaceutical products that 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. If the Company is unable to develop itself or contract
with a third-party manufacturing capabilities to produce suitable quantities of
its or its partners' products in accordance with regulatory standards, the
ability of the Company or its partners to conduct clinical trials, obtain
regulatory approvals
19
21
and market such products may be adversely affected, which could adversely affect
the Company's competitive position and its chances of achieving profitability.
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.
Future Capital Needs; Uncertainty of Additional Funding
The Company will require substantial funds to conduct research and development,
to conduct preclinical and clinical testing of products, to establish
commercial-scale manufacturing facilities and to market products. The Company's
future capital requirements will depend on many factors, including: the ability
of the Company to establish and maintain collaborative arrangements,
particularly with respect to commercial application of the Company's
carbohydrate manufacturing technology; 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; continued scientific progress in its drug discovery programs; the
magnitude of these programs; 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 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
existing collaborative agreements and research grants will be adequate to
satisfy its capital requirements and fund operations through the end of 1998.
The estimate for the period for which the Company expects its available cash
balances, investment income and estimated cash flow from collaborative
agreements and research grants to be sufficient to meet its capital requirements
is a forward-looking statement that involves risks and uncertainties as set
forth herein and in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report on Form 10-K.
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, Canada and other countries. Before any drug
developed by the Company can be marketed, it will undergo rigorous preclinical
and clinical testing and an extensive regulatory approval process mandated by
the FDA and equivalent foreign authorities, including the Canadian HPB. 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 FDA, the HPB
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 or limited benefit in patients treated with the drug compared to
patients in the control group.
Cytel is currently conducting human clinical testing of its lead product
candidate, Cylexin, in infants undergoing surgery to correct congenital heart
defects. Cylexin was evaluated in a Phase II clinical trial for its ability to
prevent reperfusion injury to cardiac (heart) muscle during treatment of acute
myocardial infarction 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
this and the
20
22
Company's other 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. There can be no assurance that the
Company will not encounter additional problems in clinical trials that will
cause the FDA, the HPB 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 or the HPB for any indication. Products, if any,
resulting from the Company'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 highly competitive industry. The Company competes
with many public and private companies, including pharmaceutical companies,
chemical companies, specialized biotechnology companies and academic
institutions. Many of the Company's competitors have substantially greater
financial, scientific and technical resources, and manufacturing and marketing
experience and capabilities than the Company. In addition, many of the Company's
competitors have significantly greater experience conducting preclinical studies
and clinical trials of new pharmaceutical products, and in obtaining regulatory
approvals for pharmaceutical products. Competitors of the Company and its
collaborators may develop and commercialize such products more rapidly than the
Company and its collaborators. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any being developed by the Company, or that would render the
Company's technology and products obsolete or noncompetitive.
Competition may increase further as a result of potential advances from the
study of complex carbohydrates and greater availability of capital for
investment in this field. The Company is aware of companies that are
investigating methods of enzymatic synthesis for production of commercial
quantities of complex carbohydrates. There can be no assurance that these and
other efforts by potential competitors will not be successful, or that other
methods of carbohydrate synthesis will not be developed to compete with the
Company's technology.
For some indications, the Company anticipates developing drugs which 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 the Company 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. 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 products under development are expected to 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 the Company 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 effectiveness, safety, reliability, availability, price and
patent position.
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.
Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, 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 and pursue patent prosecution
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 products and
processes. In addition, there can be no
21
23
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 some of its integrin compounds may
infringe one or more claims of a third-party patent application. The Company is
continuing to investigate the validity and scope of any issued patents. 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
such integrin molecules or, alternatively, to shift its development effort to an
attractive alternative integrin compound. There can be no assurance that the
Company will be able to obtain any necessary licenses at a reasonable cost.
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 United States Patent and Trademark
Office which could result in substantial costs to the Company to determine the
priority of inventions.
The Company 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. Before it
can 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 Nextran, Searle, 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
The Company'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 the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development.
Dependence on Key Personnel
The Company is highly dependent on the principal members of its scientific and
management staff. The Company does not maintain key-person life insurance on the
life of any employee. The Company's
22
24
future success also will depend in part on the continued service of its key
scientific personnel and its ability to identify, hire and retain additional
qualified personnel.
There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain such personnel necessary for the
development of the Company's business. Because of the intense competition, there
can be no assurance that the Company will be successful in adding technical
personnel as needed to meet the staffing requirements of additional
collaborative relationships. Failure to attract and retain key personnel could
have a material adverse effect on the Company.
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 Company may incur substantial cost to comply with environmental
regulations if the Company develops commercial 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.
23
25
ITEM 2. PROPERTIES
The Company's administrative offices and laboratories are located in San Diego.
Cytel currently 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 occupies a 9,700 square foot facility under a lease which
expires in 2002 into which all pilot and commercial manufacturing will be
consolidated in 1998. 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 and will not be renewed. Cytel also has 7,500 square
feet of GMP warehouse space under a lease expiring in 2000. Epimmune occupies
approximately 8,600 square feet of offices and laboratory facilities which are
leased through 2002.
The Company believes its existing and contracted 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
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
1997 1st Quarter $3.86 $2.13
2nd Quarter $2.75 $1.38
3rd Quarter $2.81 $1.44
4th Quarter $2.56 $1.41
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
As of March 13, 1998, there were approximately 425 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.
Since January 1, 1997, the Company has sold and issued the following securities
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
(1) In December 1997, pursuant to the terms of an equity financing of the
Company, the Company issued 4,777,139 shares of common stock to 11 investors at
a purchase price of $1.75 per share. Gross proceeds to the Company for such
financing totaled $8,359,993. The Company paid approximately $480,000 to BT
Alex. Brown Incorporated for services as placement agent in connection with such
financing.
(2) In September 1997, the Company entered into a letter of intent with Searle
regarding a proposed collaboration. In connection therewith, the Company issued
2,222,222 shares of common stock to Searle
24
26
at a purchase price of $2.25 per share for an aggregate of $5,000,000. The
Company paid $300,000 to BT Alex. Brown Incorporated for services related to
such proposed collaboration and the associated formation and funding of
Epimmune.
The sales and issuances of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Company or had access, through employment or other relationships.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- -------------------------------- -------- -------- -------- -------- --------
(IN MILLIONS EXCEPT FOR NET LOSS
PER SHARE)
Operating revenues $ 5.1 $ 10.9 $ 16.8 $ 6.3 $ 3.5
Net loss (14.4) (12.5) (8.0) (17.0) (22.4)
Net loss per share (0.56) (0.50) (0.36) (0.98) (1.41)
BALANCE SHEET DATA:
AS OF DECEMBER 31
Working capital 17.8 21.6 34.6 32.2 32.7
Total assets 28.1 34.3 48.1 45.0 44.6
Long-term obligations under
capital leases, equipment notes
payable and line of credit 0.7 1.1 1.8 1.2 1.9
Stockholders' equity $ 24.4 $ 27.5 $ 38.5 $ 35.5 $ 35.2
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 any documents incorporated herein by reference.
Since its inception in July 1987, the Company has devoted substantially all of
its resources to the discovery and development of its potential therapeutic
products. To date, the Company 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, 1997, the Company's accumulated deficit was approximately $107.2 million.
Results of Operations
The Company had total revenues of $5.1 million for the year ended December 31,
1997, compared to $10.9 million in 1996 and $16.8 million in 1995. Total
revenues decreased $5.8 million or 53% in 1997 from 1996 and decreased $5.9
million or 35% in 1996 from 1995, primarily attributable to a decline in
research and development revenues.
25
27
Revenues in each year consisted mainly of research and development revenues,
which were $3.4 million in 1997, $8.6 million in 1996 and $15.3 million in 1995.
Research and development revenues for 1997 consisted of funding received under
the Company's collaborative research agreements with Abbott and Nextran, as well
as a new collaboration with Searle. Research grant revenues were $1.6 million in
1997, $2.3 million in 1996 and $1.5 million in 1995.
The Company had total operating expenses for the year ended December 31, 1997 of
$20.3 million, compared to $24.8 million in 1996, and $20.7 million, excluding
non-recurring, non-cash charges of $5.9 million, in 1995. Operating expenses
decreased $4.5 million or 18% in 1997 from 1996 and increased $4.1 million or
20% in 1996 from 1995. The non-recurring, non-cash charges totaling $5.9 million
in 1995 were for acquired in-process research and development relating to the
acquisition of Receptor Laboratories, Inc. ("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. RLI
was sold in January 1997.
Research and development expenses decreased $ 4.4 million or 21% to $16.5
million in 1997 from $20.9 million in 1996 and increased $4.4 million or 27% to
$20.9 million in 1996 from $16.5 million in 1995. The decrease in 1997 from 1996
was due to a continued Company-wide effort to control costs and a reduction in
the number of clinical trials the Company was conducting. The increase in 1996
from 1995 reflects the increased costs associated with the Company's clinical
trials.
General and administrative expenses decreased to $3.7 million in 1997 from $3.9
million in 1996 and $4.2 million in 1995. These decreases were primarily due to
the Company's cost reduction efforts during these periods.
Net interest income was $0.8 million in 1997 compared to $1.4 million in 1996
and $1.9 million in 1995. The decreases in 1997 compared to 1996 and 1996
compared to 1995 were primarily attributable to lower average cash balances.
The Company 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
The Company 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. In September 1997, Searle, one of the Company's research and
development collaborators, made an equity investment in the Company and the
Company's new subsidiary, Epimmune, totaling $5.0 million. Also in December
1997, the Company completed a private placement in which it received net
proceeds of $8.4 million. Through December 1997, the Company has raised
approximately $131.6 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 $17.8 million as of December 31, 1997
compared to $21.6 million as of December 31, 1996. As of December 31, 1997, the
Company's cash, cash equivalents, restricted cash and short-term investments
decreased to $18.8 million from $25.3 million at December 31, 1996. The decrease
was due to an increase in cash used in operations that resulted from reduced
research and development revenues from collaborators relative to expenditures
for the development of the Company's priority drug candidates and the Company's
research programs offset by the net proceeds from the sale of common stock.
Capital expenditures, primarily for laboratory equipment, totaled $0.6 million
compared to $2.1 million in 1996. The decrease was due primarily to the lower
laboratory equipment expenditures required in 1997 as compared to 1996.
The Company's cash, cash equivalents and short-term investments are expected to
decline primarily due to the continued clinical development of its therapeutic
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.
26
28
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 funding from collaborative agreements and research
grants will be adequate to satisfy its capital requirements and fund operating
losses through late 1998. The estimate for the period for which the company
expects its available cash balances, investment income and estimated cash flow
from collaborative agreements and research grants to be sufficient to meet its
capital requirements is a forward-looking statement that involves risks and
uncertainties as set forth herein and elsewhere in this Report on Form 10-K. 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.
The Company has determined that it will need to update some of its off-the-shelf
financial applications software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company
currently expects the project to be substantially complete in early 1999. The
cost is expected to be minimal and absorbed through normal operating costs of
software maintenance contracts currently in place for these third party software
products. The project is not expected to have a significant effect on
operations.
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'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, failure 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-20.
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 1998 Annual Meeting of Stockholders to
be held on June 12, 1998 (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. The information required by this item is
incorporated by
27
29
reference to the information set forth in the section entitled "Compliance with
the Reporting Requirements of Section 16(a) of the Securities Exchange Act of
1934" contained in the Proxy statement.
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.
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, 1997 and 1996 .......................... F-2
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1997 ............................................................... F-3
Consolidated Statement of Stockholders' Equity for each of the three years in
the period ended December 31, 1997 .................................................... F-4
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997 ............................................................... F-5
Notes to Consolidated Financial Statements ............................................ F-6 - F-20
(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
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. **
28
30
Exhibit
Number Document Description
3.4 Form of Certificate of Amendment to the Company's Amended and
Restated Certificate of Incorporation.#
3.5 Certificate of Designation of the Series B Convertible Preferred
Stock.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
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"). /*/*
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.#
10.16 Industrial Lease, between the Registrant and COAST/USC I, dated as of
May 17, 1990, as amended June 27, 1990 and July 13, 1990. *
10.19 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)
10.24 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)
10.28 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. *
10.35 Amendment to License Agreement between the Registrant and Scripps
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./*
29
31
Exhibit
Number Document Description
10.43 Amended and Restated Technology Development Agreement between the
Registrant and Sumitomo, dated February 17, 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. /*/*
10.52 Letter of Intent between the Registrant and G.D. Searle & Co., dated
September 5, 1997 (with certain confidential portions deleted).
/*/*/*(3)
10.53 Stock Purchase Agreement between Registrant and G.D. Searle & Co.,
dated September 18, 1997. /*/*/*
10.54 Employment agreement between Registrant, Epimmune Inc. and Deborah A.
Schueren dated October 1, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to the signature page of this
report on Form 10-K.
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. /*/*
10.49 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. /*/*
10.54 Employment agreement between Registrant, Epimmune Inc. and Deborah A.
Schueren dated October 1, 1997.
30
32
Exhibit
Number Document Description
* 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.
# 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 Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, filed on March 22,
1996.
/*/* Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1996, filed on March 31,
1997.
/*/*/* Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended September 30, 1997, filed on
November 14, 1997.
(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.
(3) 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 December 17, 1997.
------------------
(b) Report on Form 8-K
On December 8, 1997, the Company filed a current report on Form 8-K
that disclosed information regarding a private placement of the
Company's common stock to a limited number of institutional and other
accredited investors. See Item 5, Market for Registrant's Common
Equity and Related Stockholder Matters.
31
33
(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).
32
34
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,
1998.
CYTEL CORPORATION
By /s/ Virgil Thompson
Virgil 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 Thompson and Edward C. Hall, 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/ David L. Anderson March 31, 1998 /s/ Robert L. Roe March 31, 1998
- ---------------------------------------- --------------------------------------------
David L. Anderson Robert L. Roe, M.D., F.A.C.P.
Director Executive Vice President, Chief Operating Officer
and Director
/s/ William T. Comer March 31, 1998 /s/ David Mahoney March 31, 1998
- ---------------------------------------- --------------------------------------------
William T. Comer, Ph.D. David Mahoney
Director Director
/s/ Edward C. Hall March 31, 1998 /s/ Virgil Thompson March 31, 1998
- ---------------------------------------- --------------------------------------------
Edward C. Hall Virgil Thompson
Vice President-Finance, Chief Financial Officer President, Chief Executive Officer and Director
(Principal Financial and Accounting Officer)
/s/ Howard E. Greene, Jr. March 31, 1998 /s/ Nicole Vitullo March 31, 1998
- ---------------------------------------- --------------------------------------------
Howard E. Greene, Jr. Nicole Vitullo
Chairman of the Board Director
and Director
/s/ Nancy D. Rasmussen March 31, 1998 /s/ James C. Paulson March 31, 1998
- ---------------------------------------- ---------------------------------------------
Nancy D. Rasmussen James C. Paulson, Ph.D
Director Vice President, Chief Scientific Officer,
General Manager/Glytec and Director
33
35
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, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 5, 1998,
except for Note 10, as
to which the date is
February 27, 1998
F-1
36
Cytel Corporation
Consolidated Balance Sheets
DECEMBER 31
1997 1996
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,187,000 $ 3,231,000
Short-term investments 11,616,000 20,645,000
Current portion of restricted cash 375,000 375,000
Prepaids and other current assets 1,312,000 1,422,000
----------------------------------
Total current assets 19,490,000 25,673,000
Restricted cash 656,000 1,031,000
Property and equipment, net 1,704,000 2,935,000
Deposits and other assets 6,297,000 4,651,000
----------------------------------
$ 28,147,000 $ 34,290,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 755,000 $ 1,991,000
Deferred contract revenues 78,000 732,000
Accrued payroll and related expenses 463,000 650,000
Line of credit 375,000 375,000
Current portion of obligations under
capital leases and equipment notes payable 40,000 341,000
----------------------------------
Total current liabilities 1,711,000 4,089,000
Deferred rent 1,388,000 1,640,000
Obligations under capital leases and
equipment notes payable -- 40,000
Line of credit 656,000 1,031,000
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, 32,222,497 shares
and 25,091,309 shares issued and outstanding
at December 31, 1997 and 1996, respectively 322,000 251,000
Additional paid-in capital 131,288,000 120,095,000
Accumulated deficit (107,188,000) (92,792,000)
Unrealized (losses) on available-for-sale
securities (30,000) (64,000)
----------------------------------
Total stockholders' equity 24,392,000 27,490,000
----------------------------------
$ 28,147,000 $ 34,290,000
==================================
See accompanying notes.
F-2
37
Cytel Corporation
Consolidated Statements of Operations
YEARS ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------------
REVENUES
Research and development $ 3,428,000 $ 8,641,000 $ 15,287,000
Research grants and other income 1,623,000 2,251,000 1,484,000
----------------------------------------------------
5,051,000 10,892,000 16,771,000
OPERATING EXPENSES
Research and development 16,537,000 20,861,000 16,507,000
General and administrative 3,735,000 3,919,000 4,204,000
Acquired in-process research
and development -- -- 5,934,000
----------------------------------------------------
20,272,000 24,780,000 26,645,000
Interest income, net 825,000 1,437,000 1,881,000
----------------------------------------------------
Net loss $(14,396,000) $(12,451,000) $ (7,993,000)
====================================================
Net loss per share-basic and
diluted $ (.56) $ (.50) $ (.36)
====================================================
Shares used in computing net
loss per share-basic and
diluted 25,677,546 24,865,807 22,469,949
====================================================
See accompanying notes.
F-3
38
Cytel Corporation
Consolidated Statement of Stockholders' Equity
For each of the three years in the period ended December 31, 1997
Unrealized
gains (losses)
Common stock Additional on available- Total
------------------------ paid-in Accumulated Deferred for-sale stockholders'
Shares Amount capital deficit compensation securities equity
---------------------------------------------------------------------------------------------------
Balance at December 31, 1994 21,451,827 $ 215,000 $ 109,068,000 $ (72,348,000) $ (896,000) $(563,000) $ 35,476,000
Issuance of common stock for
acquisitions 2,097,102 21,000 7,423,000 -- -- -- 7,444,000
Issuance of common stock 1,007,470 10,000 2,690,000 -- -- -- 2,700,000
Amortization of deferred -- -- (432,000) -- 735,000 -- 303,000
compensation, net
Unrealized gains on -- -- -- -- -- 594,000 594,000
available-for-sale securities
Net loss -- -- -- (7,993,000) -- -- (7,993,000)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 24,556,399 246,000 118,749,000 (80,341,000) (161,000) 31,000 38,524,000
Issuance of common stock 534,910 5,000 1,363,000 -- -- -- 1,368,000
Amortization of deferred -- -- (17,000) -- 161,000 -- 144,000
compensation, net
Unrealized losses on
available-for-sale securities -- -- -- -- -- (95,000) (95,000)
Net loss -- -- -- (12,451,000) -- -- (12,451,000)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 25,091,309 251,000 120,095,000 (92,792,000) -- (64,000) 27,490,000
Issuance of common stock 7,131,188 71,000 11,193,000 -- -- -- 11,264,000
Unrealized gains on
available-for-sale
securities -- -- -- -- -- 34,000 34,000
Net loss -- -- -- (14,396,000) -- -- (14,396,000)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1997 32,222,497 $ 322,000 $ 131,288,000 $(107,188,000) $ -- $(30,000) $ 24,392,000
==================================================================================================
See accompanying notes.
F-4
39
Cytel Corporation
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (14,396,000) $ (12,451,000) $ (7,993,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 841,000 1,620,000 1,409,000
Acquired in-process research and
development -- -- 5,934,000
Deferred rent (252,000) (192,000) (143,000)
Amortization of deferred compensation -- 144,000 303,000
Deferred revenue (654,000) (2,025,000) (243,000)
Gain on sale of equipment (55,000) -- --
Changes in operating assets and
liabilities:
Receivable under collaborative agreement -- 2,000,000 (2,000,000)
Other current assets 110,000 135,000 (735,000)
Accounts payable and accrued liabilities (1,236,000) 371,000 (128,000)
Accrued payroll and related expense (187,000) (7,000) (59,000)
-------------------------------------------------
Net cash used in operating activities (15,829,000) (10,405,000) (3,655,000)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (33,612,000) (110,774,000) (255,532,000)
Maturities of available-for-sale securities 21,875,000 64,787,000 147,434,000
Sales of available-for-sale securities 20,800,000 53,143,000 107,052,000
Proceeds from the sale of equipment 55,000 -- --
Proceeds from the sale of assets of
subsidiary 211,000 -- --
Property and equipment (644,000) (2,067,000) (397,000)
Assets transferred to subsidiary at net book
value 84,000 -- --
Deposits and other assets (907,000) (1,023,000) (695,000)
-------------------------------------------------
Net cash provided by (used in) investing
activities 7,862,000 4,066,000 (2,138,000)
FINANCING ACTIVITIES
Principal payments under capital lease
obligations and equipment notes payable (341,000) (841,000) (814,000)
Principal payments under line of credit
obligations (375,000) (94,000) --
Proceeds from line of credit -- -- 1,500,000
Restricted cash for line of credit
collateral 375,000 94,000 (1,500,000)
Net proceeds from issuance of common stock 11,264,000 1,368,000 4,210,000
-------------------------------------------------
Net cash provided by financing activities 10,923,000 527,000 3,396,000
-------------------------------------------------
Increase (decrease) in cash and cash
equivalents 2,956,000 (5,812,000) (2,397,000)
Cash and cash equivalents at beginning of
year 3,231,000 9,043,000 11,440,000
-------------------------------------------------
Cash and cash equivalents at end of year $ 6,187,000 $ 3,231,000 $ 9,043,000
================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 119,000 $ 199,000 $ 185,000
================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Unrealized gains (losses) on
available-for-sale securities $ 34,000 $ (95,000) $ 594,000
================================================
Promissory note and stock received for sale
of assets of subsidiary $ 800,000 $ -- $ --
=================================================
See accompanying notes
F-5
40
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1997
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), Receptor Laboratories, Inc. from its purchase in July
1995 to its sale in January 1997 (Note 3) and Epimmune Inc. (Epimmune) from its
funding in October 1997. All significant intercompany accounts and transactions
have been eliminated.
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.
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 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.
F-6
41
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Patent costs will be amortized over the estimated useful lives of the patents
when issued. Organization costs for the formation of Epimmune will be amortized
over a five-year period.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses 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. There have not been any impairments of long-lived assets to date.
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
42
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Research and development revenues are recorded as earned based on the
performance requirements of the contracts. Research and development costs are
expensed as incurred. Expenses under research and development contracts were
$3,500,000, $13,100,000 and $11,700,000 for 1997, 1996 and 1995, respectively.
RESEARCH GRANTS
Research grants represent research and development revenues primarily from
National Institutes of Health grants.
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128
replaces the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported primary earnings per share. Since such securities are
antidilutive there is no difference between basic and diluted earnings (loss)
per share for any of the periods presented and none of the prior periods were
required to be restated.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Segment Information." Both
of these standards are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company believes that comprehensive income or loss
will not be materially different than net income or loss. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined by SFAS No. 131, are components of an enterprise for which financial
information is available and evaluated regularly by the Company in deciding how
to allocate resources and in assessing performance. The financial information is
required to be reported on the basis that it is used internally for evaluating
the segment performance. The Company believes it operates in one business and
operating segment
F-8
43
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and that adoption of SFAS No. 131 will not have a material impact on the
Company's financial statements.
2. SHORT-TERM INVESTMENTS
The following tables summarize available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------
DECEMBER 31, 1997
U.S. Government Securities $ 2,523,000 $ 1,000 $ (5,000) $ 2,519,000
Corporate Obligations 9,123,000 3,000 (29,000) 9,097,000
-----------------------------------------------------------
$ 11,646,000 $ 4,000 $ (34,000) $ 11,616,000
===========================================================
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
============================================================
The above tables exclude an aggregate of $5,477,000 and $1,985,000 in U.S.
government securities and corporate obligations which are classified as cash
equivalents in the accompanying balance sheets at December 31, 1997 and 1996,
respectively.
The gross realized gains on sales of available-for-sale securities totaled
$2,000 and $38,000, respectively, and the gross realized losses totaled $58,000
and $78,000, respectively, for 1997 and 1996.
The amortized cost and estimated fair value of debt securities at December 31,
1997, 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.
F-9
44
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
2. SHORT-TERM INVESTMENTS (CONTINUED)
ESTIMATED
COST FAIR VALUE
-------------------------
Due in one year or less $10,127,000 $10,096,000
Due in one to three years 1,519,000 1,520,000
--------------------------
$11,646,000 $11,616,000
==========================
3. ACQUISITIONS
SEQUEL THERAPEUTICS, INC.
In June 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.
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. In April 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 were subject to certain resale restrictions. At December 31, 1997
Scripps had disposed of all shares. 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, which license has been assigned to Epimmune.
F-10
45
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
4. BALANCE SHEET INFORMATION
Other current assets consist of the following:
DECEMBER 31
1997 1996
----------------------------
Investment income and grant revenue receivable $ 852,000 $ 1,150,000
Prepaid expenses 360,000 266,000
Note receivable - current portion 100,000 6,000
----------------------------
$ 1,312,000 $ 1,422,000
============================
Property and equipment consist of the following:
DECEMBER 31
1997 1996
----------------------------
Furniture and equipment $ 6,362,000 $ 8,040,000
Leasehold improvements 1,597,000 1,977,000
Construction in progress 138,000 --
----------------------------
8,097,000 10,017,000
Less accumulated depreciation and amortization (6,393,000) (7,082,000)
----------------------------
$ 1,704,000 $ 2,935,000
============================
Deposits and other assets consist of the following:
DECEMBER 31
1997 1996
----------------------------
Patents $ 5,235,000 $ 4,357,000
Note receivable - long-term portion 750,000 --
Deposits 312,000 294,000
----------------------------
$ 6,297,000 $ 4,651,000
============================
F-11
46
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
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. The aggregate number of shares that may be issued under the
Stock Plan is set at 500,000. As of December 31, 1997, 452,334 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 varying periods of one to 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 was 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 four and 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
47
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, 1997:
WEIGHTED
SHARES AVERAGE PRICE
--------------------------
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 1,647,649 5.74
Exercised (280,899) 2.21
Cancelled (166,308) 4.21
-----------
Balance at December 31, 1996 4,121,464 4.65
Granted 936,518 2.85
Exercised (13,516) .30
Cancelled (1,260,311) 3.97
-----------
Balance at December 31, 1997 3,784,155 $4.42
===========
As of December 31, 1997, 1,014,991 shares are reserved for future issuance under
these option plans.
Following is a summary of the options outstanding as of December 31, 1997:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE
RANGE OF REMAINING AVERAGE PRICE OF
EXERCISE PRICES OPTIONS LIFE IN EXERCISE OPTIONS OPTIONS
OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
- -------------------------------------------------------------------------------
$.20 - $2.563 533,626 8.59 $1.67 120,517 $ .96
$2.688 - $4.00 1,346,676 7.27 3.44 557,820 3.11
$4.375 - $6.125 1,454,577 6.93 5.39 946,440 5.25
$6.50 - $12.00 449,276 7.95 7.52 222,636 7.55
------------- -------------
3,784,155 7.41 $4.42 1,847,413 $4.60
============= =============
F-13
48
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
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
1997, 1996 and 1995: risk-free interest rates of 6%; dividend yield of 0; and a
weighted average expected life for all options of six years. The volatility
factor assumptions of the expected market price of the Company's common stock
were 105%, 94% and 94% for 1997, 1996 and 1995, respectively.
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:
1997 1996 1995
-----------------------------------------------
Pro forma net loss $(17,273,000) $(14,316,000) $(8,349,000)
Pro forma net loss per share $ (.67) $ (.58) (.37)
The weighted average fair value of options granted during 1997, 1996 and 1995
was $2.07, $4.54 and $3.84, respectively.
STOCKHOLDER RIGHTS PLAN
In March 1993, the Company adopted a Stockholder Rights Plan. The Plan provides
for the distribution of a preferred stock purchase right (Rights) as a dividend
for each share of the Company's common stock held as of the record date at the
close of business on April 8, 1993. Under certain conditions involving an
acquisition by any person or group 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.
F-14
49
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
6. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
Numerator:
Net loss/numerator $(14,396,000) $(12,451,000) $(7,993,000)
-------------------------------------------
Numerator for basic and diluted
net loss per share $(14,396,000) $(12,451,000) $(7,993,000)
Denominator:
Denominator for basic and
diluted net loss per share
- - weighted average shares 25,677,546 24,865,807 22,469,949
===========================================
Basic and diluted net loss
per share $ (.56) $ (.50) $ (.36)
===========================================
All potential common shares have been excluded from the diluted net loss per
share calculations as they are antidilutive.
7. 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 $303,000 and $294,000 deposited
under these agreements at December 31, 1997 and 1996, 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 unpaid principal is payable in 16 successive equal quarterly
installments with final payment due in 2000. Annual interest of 7.5% is payable
monthly. Restricted cash consists of a time deposit maintained as collateral for
the line of credit.
F-15
50
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS (CONTINUED)
Annual future minimum lease, note and line of credit payments as of December 31,
1997 are as follows:
OBLIGATIONS
UNDER CAPITAL
LEASES AND
OPERATING EQUIPMENT LINE OF
YEAR LEASES NOTES PAYABLE CREDIT
- ---- ---------------------------------------
1998 $2,315,000 $40,000 $ 375,000
1999 2,218,000 - 375,000
2000 2,274,000 - 281,000
2001 1,175,000
2002 269,000 - -
---------------------------------------
Total minimum lease, note and line
of credit payments $8,251,000 40,000 1,031,000
==========
Less amount representing interest - -
---------------------------
Present value of remaining minimum
capital lease, equipment note and
line of credit payments 40,000 1,031,000
Less amounts due in one year (40,000) (375,000)
===========================
Long-term portion of obligations
under capital leases, equipment
notes payable and line of credit $ - $656,000
===========================
Rent expense for 1997, 1996 and 1995 was $1,783,000, $1,842,000 and $1,736,000,
respectively.
All equipment acquired under capital leases and equipment notes payable has been
fully depreciated at December 31, 1997.
8. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
In September 1997, the Company signed a letter of intent with G.D. Searle
(Searle) to collaborate to develop new cancer therapies through its newly-formed
subsidiary, Epimmune. As part of the letter of intent, Searle purchased
2,222,222 shares of the Company's common stock for $5 million for an exclusive
right to negotiate a definitive agreement. The Company then invested $6.5
million in cash and transferred $1.5 million in other assets to fund Epimmune.
The definitive agreement was signed in February 1998 and is more thoroughly
disclosed in Note 10 - Subsequent events.
F-16
51
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
8. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
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. In January 1997, the
Company achieved a milestone with delivery of the initial batch of a bioactive
carbohydrate to Nextran. As a result, Nextran made the first milestone payment
in the amount of $500,000. In December 1997, Nextran paid an option fee of
$500,000 and purchased an additional 571,428 shares of the Company's common
stock for $1 million for the right to extend and expand the original 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 for use in nutritional products. Abbott paid a $2 million
non-refundable 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. 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. An additional option fee of
$250,000 was earned in August 1997 and paid in two equal installments of
$125,000 in September 1997 and January 1998.
In May 1995, the Company entered into a collaborative agreement with Schwarz
Pharma AG (Schwarz) for the development and marketing of carbohydrate selectin
blockers, including Cylexin(TM). 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 funded 75% of clinical development costs
associated with the Phase II acute myocardial infarction trial from 1995 until
termination of the agreement. 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. In April 1997, the
Company and Schwarz agreed to terminate their collaboration.
F-17
52
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
8. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
Under two agreements with Takara Shuzo Co., Ltd. Biomedical Group (Takara),
which were assigned to Epimmune in October 1997, Epimmune's technology is being
applied to fungal disease targets and cellular therapy for the treatment of
cancer. Under the anti-fungal collaboration initiated in June 1994, Takara
obtained rights to any anti-fungal products resulting from the collaboration for
commercialization in Japan. Epimmune has the right to develop products in North
America, and the companies share rights in the rest of the world. Research in
the anti-fungal field, using Epimmune technology, is now being conducted
independently by Takara in Japan. Under the cellular therapy collaboration,
initiated in October 1994, Takara obtained rights to Epimmune's technology
relevant to the development of ex vivo cellular therapies for the treatment of
cancer in Japan. Epimmune retains all rights to ex vivo cellular therapy outside
Japan. Takara will pay royalties to Epimmune 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 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 million. In October 1996, the agreement was extended for three
months and Sumitomo paid $375,000. In January 1997, the collaborative research
agreement expired. Sumitomo has certain rights and obligations with respect to
development of compounds which resulted from the collaboration for Pacific Rim
markets. Sumitomo 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.
9. INCOME TAXES
Significant components of the Company's deferred tax assets as of December 31,
1997 and 1996 are shown below. At December 31, 1997, a valuation allowance of
$47,843,000 of which $5,247,000 is related to 1997, has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.
F-18
53
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
1997 1996
--------------------------
Deferred tax assets:
Capitalized research expenses $ 4,207,000 $ 4,501,000
Net operating loss carryforwards 35,641,000 29,210,000
Research and development credits 7,211,000 6,376,000
Other 784,000 2,509,000
--------------------------
Total deferred tax assets 47,843,000 42,596,000
Valuation allowance for
deferred tax assets (47,843,000) (42,596,000)
--------------------------
Net deferred tax assets $ - $ -
==========================
At December 31, 1997, the Company has federal and California net operating loss
carryforwards of approximately $98,828,000 and $25,420,000, 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 $2,630,000 and $230,000
expired in 1997 and 1996, respectively. The Company also has federal and
California research and development tax credit carryforwards of $5,589,000 and
$2,495,000, 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.
10. SUBSEQUENT EVENTS
In February 1998, Epimmune entered into a collaborative agreement with Searle
to develop immune-stimulating products for the treatment of cancer. Under the
terms of the agreement, Epimmune has granted Searle exclusive worldwide rights
to its epitope and PADRE technologies in the cancer field, excluding rights
previously granted to Takara for the ex vivo treatment of cancer in Japan. As
part of the agreement, Searle purchased 1,032,149 shares of Epimmune's
convertible preferred stock for $6.1 million and 659,898 shares of Cytel's
convertible preferred stock for $3.9 million. Cytel simultaneously purchased
659,898 shares of Epimmune's convertible preferred stock for $3.9 million.
Searle has the right to convert the Cytel convertible preferred stock into Cytel
common stock at an initial conversion price of $7.50 per share after three years
or to convert to Epimmune common stock at any time. In addition to the $15
million investment made to date, Searle will make milestone payments to Epimmune
upon achievement of certain preclinical and clinical milestones. Searle has the
option to deliver shares of the Cytel convertible preferred stock in lieu of up
to 50% of certain milestone payments. Searle will also pay royalties to Epimmune
on product sales. In addition, Searle has rights of first refusal with respect
to newly-issued securities of Cytel, enabling Searle to maintain its percentage
ownership in Cytel. As of March 1, 1998, Cytel owned 86.6% of the outstanding
capital stock of Epimmune, and Searle owned 13.4%.
F-19
54
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENTS (CONTINUED)
In February 1998, the Company entered into a non-exclusive licensing agreement
with Glycomed Incorporated (Glycomed), a wholly-owned subsidiary of Ligand
Pharmaceuticals, Inc., under which the Company will receive rights to a family
of Glycomed patents relating to certain carbohydrate compounds for the treatment
of acute inflammation, including the Company's most advanced product, Cylexin.
The Company paid a license fee of $900,000 consisting of 591,327 shares of the
Company's common stock at $1.52 per share. Glycomed will receive milestone
payments upon the first new drug application (NDA) and the first FDA approval of
each licensed product. These payments may also be made in company stock, at the
Company's option. Glycomed will also receive royalties on worldwide net sales of
a licensed or sub-licensed product.
F-20