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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 333-02015
CYTOGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2322400
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
600 College Road East, CN5308, Princeton, New Jersey 08540-5308
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (609) 750-8200.
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 aggregate market value of the registrant's shares of common stock
held by non-affiliates of the registrant on February 14, 2000, based on $13.438
per share, the last reported sale price on the NASDAQ National Market on that
date, was $823 million. The determination of affiliate status for this purpose
is not necessarily a conclusive determination for other purposes.
The number of shares of Common Stock outstanding as of February 14, 2000 was
70,811,959 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10K
Document Part
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Portions of the definitive Proxy Statement with respect to III
the 2000 Annual Meeting of Stockholders (hereinafter
referred to as the "Proxy Statement") to be filed by Cytogen
Corporation with the Commission, but specifically excluding
the sections titled "Compensation Committee Report on
Executive Compensation" and "Performance Graph", which shall
not be deemed to be incorporated by reference herein.
2
PART I
Item 1. Business
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Business
OVERVIEW
Cytogen is an established biopharmaceutical company with two principal lines of
business, proteomics and oncology. We are extending our expertise in antibodies
and molecular recognition to the development of new products and a proteomics-
driven drug discovery platform. We have established a pipeline of product
candidates based upon our proprietary antibody and prostate specific membrane
antigen, or PSMA, technologies. We are also developing a proprietary protein
pathway database as a drug discovery and development tool for the
pharmaceutical and biotechnology industries.
Our cancer management franchise currently comprises three marketed FDA-approved
products: ProstaScint, used to image the extent and spread of prostate cancer;
OncoScint CR/OV, marketed as a diagnostic imaging agent for colorectal and
ovarian cancer and Quadramet, marketed for the relief of cancer-related bone
pain. We are extending our cancer pipeline by exploiting PSMA, which we
exclusively licensed from Memorial Sloan-Kettering Cancer Center. PSMA is a
unique antigen highly expressed in prostate cancer cells and in the
neovasculature of a variety of other solid tumors, including breast, lung and
colon. We are developing our PSMA technology as part of our approach to
offering a full range of prostate cancer management products and services
throughout the progression of the disease, including gene-based immunotherapy
vaccines, antibody-delivered therapeutic compounds and novel assays for
detection of primary prostate cancer. We also plan to apply our PSMA
technology, including therapeutics and in vitro diagnostics, toward other types
of cancer based upon our experience in prostate cancer. Our in vivo
immunotherapeutic development program is being conducted in collaboration with
Progenics Pharmaceuticals, Inc.
Proteomics is the study of the expression and interaction of proteins. Genomics
is the study and identification of an organism's genetic makeup. While genomics
provides important information regarding genetic makeup, it does not directly
provide information regarding protein functions or protein interactions.
However, genomics data can prove useful in proteomics research as a source of
obtaining complete protein sequences of ligands we have identified. Public
availability of this genomics information allows for effective integration in
our database of public and proprietary information. We recognized in our past
research that the key to understanding or developing the means to intervene in
diseases was primarily based on understanding protein interactions rather than
only through the use or study of genomics. We undertook this approach on our
own initiative and with our own funds. Our proteomics program, under
development by our subsidiary, AxCell Biosciences Corporation, is focused on
the identification of protein interaction and signaling pathways within cells
as relating to disease processes.
We utilize our proprietary proteomics technology to map selective protein-
protein interactions and to develop a database, called the Inter-Functional
Proteomic Database, or IFP Database, which includes data relating to protein
signaling pathways linked to a variety of other bioinformatic data. The IFP
Database is designed to permit customers to integrate existing databases, both
public and proprietary, with our proprietary data to create a "virtual
laboratory' on the computer desktop of researchers involved in drug discovery.
We believe this database has significant potential commercial value to the
pharmaceutical and biotechnology industries as a means of expediting drug
target identification, validation, screen development and lead compound
optimization faster and cheaper than with current methodologies. These
proprietary technologies are designed to provide a platform from which we can
quickly and cost-effectively determine protein-protein interactions and build
pathways of intracellular signaling data. Our IFP Database also offers a
consolidated platform to enable statistical and mathematical modeling of
complex protein pathways.
PROTEOMICS
We are developing a proprietary protein pathway database called the Inter-
Functional Proteomic Database, or IFP Database, as a discovery and development
tool for subscribers in the pharmaceutical and biotechnology industries. Our
bioinformatics platform is designed to identify drug targets for optimization
and development, through the application of our novel, innovative and rapid
techniques for deriving intracellular protein-pathway data. We are designing
the IFP Database, with our partner InforMax, Inc., to permit use of the
Internet to integrate our information with a customer's proprietary data and
other information, including public genomics data.
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Our technology potentially shortens the drug discovery process by providing
efficacy and potential toxicity information while utilizing existing high-
throughput screening instrumentation. We believe that using the IFP Database
may permit pharmaceutical and biotechnology companies to validate protein
targets for drug discovery faster and cheaper than with current methodologies.
In addition, we believe that the development of the database will continue to
lead to the identification of novel proteins that we may develop exclusively or
with partners. We plan to offer customers multi-year subscriptions to the IFP
Database. We also plan to chart increasingly greater portions of the proteome
and add these results to the IFP Database. Additionally, we will price our
subscriptions in relation to the amount and quality of information that the IFP
Database provides, thus allowing us to scale our price structure as the
database grows.
Drug discovery
The traditional drug discovery process involves testing or screening compounds
in disease models. Researchers often engage in the process with little
knowledge of the intracellular processes underlying the disease or the specific
drug target within the cell. Thus, companies must screen a very large number of
arbitrarily selected compounds to obtain a desired change in a disease model.
While this approach sometimes produces drugs successfully, we believe it has
the following limitations:
.inefficiency: it is capital intensive and time consuming in identifying and
validating targets;
.low productivity: it yields relatively few new drug candidates;
.lack of information: it provides little information about the intracellular
processes or targets, to guide target selection and subsequent drug
development; and
.risk of side effects: it often results in drug candidates with a risk of
serious side effects.
In an effort to overcome some of the difficulties associated with traditional
drug discovery, scientists have turned to genomics as a means of better
understanding the roots of disease. Scientists believed that a comprehensive
knowledge of an organism's genetic makeup would lead to more efficient drug
discovery. While useful, DNA sequence analysis alone does not lead efficiently
to new target identification, because one cannot easily infer the functions of
gene products, or proteins, and protein pathways from DNA sequence.
Proteomic technologies offer significant opportunities to improve the drug
discovery process. By focusing on protein activity levels, or expression
levels, researchers are able to learn more about the role proteins play in
causing and treating disease. Proteomics also aids in deciphering the
mechanisms of disease and increasing both the opportunity to develop drugs with
reduced side effects and an increased probability of clinical trial success. We
believe proteomics has the potential to increase substantially the number of
drug targets and thereby the number of new drugs.
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The current environment
The drive to understand basic biological mechanisms has led to two distinct,
yet related, approaches to the study of molecular biology, genomics and
proteomics. Genomics is the study and identification of an organism's genetic
makeup. Proteomics is the study of protein expression and protein interaction
within cells.
[Genomics to Proteomics Flowchart]
As seen above, drug discovery research has undergone a transition from emphasis
on structural genomics, to functional genomics, to structural proteomics and
finally to functional proteomics.
The two main components of genomics research are structural and functional. The
structural effort is comprised of identifying gene sequences and identifying
gene variants. This research has primarily been approached through the use of
DNA sequencing, gene mapping and positional cloning. Identification of gene
sequence does not lead directly to targets for drug discovery but does give
information that is useful to functional genomics and proteomics.
Identification of gene variants can lead to targets for drug discovery, but for
the most part they lead to pathways associated with disease. Some of the
protein components of those pathways are the ultimate targets for drug
discovery.
The functional study of genomics consists primarily of gene expression. The
genes expressed in normal and diseased tissue differ, and gene expression
techniques can comprehensively distinguish between the two. Gene expression has
been studied using gel-based and chip-based technologies. Although the genes
expressed lead to potential targets in the proteins for which they code, there
are several limitations to consider:
.there may be no correlation between gene expression and protein production;
.interactions between proteins cannot be predicted; and
.gene expression cannot account for changes to the protein once the protein has
been created.
Due to these limitations, gene expression cannot give a full explanation of the
biological function of proteins within cells.
Proteomics research efforts can also be categorized as structural and
functional. Structural proteomics, or protein expression, measures the number
and types of proteins existent in normal and diseased cells. Two-dimensional
gel electrophoresis and mass spectrometry are the primary tools used in protein
expression analysis. This approach is useful in defining the structure of
proteins in a cell. Some of these proteins may be targets for drug discovery.
However, the role of the protein in the disease is still not defined.
Functional proteomics is the study of proteins' biological activities. An
important function of proteins is the transmission of signals using intricate
pathways populated by proteins which interact with one another. Understanding
the role proteins play in these signaling pathways allows a better
understanding of their function in cellular behavior. Aberrations in the
interaction of proteins with one another are at the heart of the molecular
basis of many diseases. We believe analysis of protein pathways will identify
those proteins that play a role in causing or preventing disease. Our
proteomics business is focused upon this area.
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The most widely used method for studying protein interactions is the yeast two-
hybrid system. We believe that this method has numerous limitations. We have
developed a different, and proprietary approach to the study of functional
proteomics.
The two-hybrid system Our system
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The rate of the throughput of We will be measuring 200,000 interactions
the yeast two-hybrid systems has per month and anticipate charting signaling
been improved; however, the pathways in the human proteome in 2 to 4
methodology does not reach the years.
throughput of our technology.
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The results of the yeast two- Results are passed through a series of
hybrid method may be misleading, bioinformatic filters, such as affinity and
because the interactions tissue expression, to better determine
determined using this method are biologically significant interactions.
not always present in human
cells.
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Researchers must possess Knowledge of a protein's role in a
knowledge about a protein's role signaling pathway is determined through the
in a signaling pathway prior to application of our system.
using this system.
We believe our approach to detecting protein pathways has the following
distinct advantages compared to the yeast two-hybrid system: simplicity, higher
throughput data generation, direct protein interaction measurement, fewer false
positives, rapid formatting of high-throughput screening assays and
identification of specific ligands, which provide a starting point for rational
drug design.
[Graphic of Drug Discovery and Development Process]
We believe that target identification may be facilitated by the use of the IFP
Database. We anticipate the IFP Database will allow identification of disease-
related alterations in protein pathways by comparing protein pathways in cells
and tissues associated with a disease model with pathways in normal tissue. We
believe that this technology will enable researchers to identify more
efficiently potential targets.
We are developing high-throughput screens for drug development in cases where
targets are proprietary to us. Customers may license these targets and receive
the components necessary for a high-throughput screen.
Finally, we believe that we can accelerate lead compound optimization through
the supply of related protein-component family members, or protein arrays. We
believe that these protein arrays contain the proteins with which a researcher
can test a lead compound for cross-protein interaction. Such cross-protein
interactions may represent the side effects which the lead compound might
invoke. We believe that modifications of the structure of the lead compound
followed by further testing with the target array will lead to more efficient
lead compound optimization.
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Background
Our founding technology was based on an understanding of the principles of the
binding, or molecular recognition, of antibodies to antigens. Through a
sponsored research program at the University of North Carolina at Chapel Hill,
coupled with our internal research, we studied the interactions between peptide
ligands and proteins. This research led to a better understanding of protein-
protein interactions, and ultimately to proprietary methods for identifying and
quantifying such interactions. We have an established portfolio of patents and
patent applications based on inventions generated both internally and at the
University of North Carolina at Chapel Hill, relating to methods for
identification of proteins which interact in cellular pathways, and the
compositions of such proteins. Certain patents and patent applications filed on
behalf of the University of North Carolina at Chapel Hill are the subject of a
worldwide, exclusive license to us. We established AxCell Biosciences
Corporation as a subsidiary to exploit the commercial potential of this
proprietary platform technology in the area of proteomics.
Our technology
We have developed several integrated, high-throughput technologies designed to
determine protein pathways quickly and cost effectively. The identification of
protein pathways is a critical step in drug discovery.
[TECHNOLOGY FLOW CHART]
As part of functional signaling pathways, protein interaction is mediated
through binding of a ligand sequence on one protein and a domain on another -
similar to the relationship between a lock and a key. Domains are functional
portions of proteins where the actual interaction occurs with another protein.
Ligands are the regions of the other proteins that interact with the domains.
As seen in the above illustration, we identify domain-ligand interactions
through the use of proprietary phage display libraries. The process begins with
a domain from a known protein family. A library of peptides, which are short
sequences of amino acids (the building blocks of proteins), is exposed to this
domain to identify those peptides that act as ligands and have binding affinity
to the domain. (Step 1)
We then use these ligands as probes to find other proteins that contain a
domain which exhibits affinity to the ligands. This technique identifies the
complete family of domains that interacts with a set of ligands. (Step 2) Once
a set of ligands and domains are identified, we measure the strength of
affinity between each domain and ligand. (Step 3) These steps are repeated with
all signaling domains and their corresponding ligands. This approach allows us
to create the IFP Database of ligand-domain binding interactions and thus
establish a functional relationship between the set of ligands and domains.
(Step 4)
Using this database and computational methods, or bioinformatics, we define the
rules of interaction between domains and ligands. Using bioinformatic analyses,
each interacting protein can be identified, and through ligand-domain pairing
biological pathways can be constructed. (Step 5)
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Analyses of the aberrations in the interaction of proteins with one another can
then be studied to identify those proteins that play a role in causing or
preventing disease and can be targeted for drug development. (Step 6)
Proprietary algorithm development
Through the use of our platform technologies described above and the data
generated with them, we plan to develop proprietary modeling and
characterization algorithms. Our IFP Database will contain comprehensive
protein interaction and pathway data that we believe will allow the modeling
and characterization of ligands using connections to the corresponding domains.
We also plan to develop pathway models using the data in our IFP Database.
These models will be made available as tools within the IFP Database to our
subscription customers.
Our products
We use our proprietary proteomic technology to offer pharmaceutical companies
the following products and services:
IFP Database
The Inter-Functional Proteomic Database, or IFP Database, is designed to offer
customers the opportunity to evaluate many proteins at once by overlaying
protein pathway data with other bioinformatic information in a user friendly
format. Users will be able to visualize and correlate protein pathway data with
all sequence, expression, tissue distribution, structural and bibliographic
information that exists for that particular protein and pathway. The IFP
Database can also be used to generate protein pathway information according to
a customer's needs or interests. The end result is that companies can evaluate
a large number of targets and rationally select a subset with which they can
advance to experimentation. This database is also designed to allow a
researcher to define the best point for intervention in a protein pathway to
maximize beneficial pharmacological effects while minimizing potential
toxicity.
We established a collaboration with InforMax, Inc., a privately held
bioinformatics provider. InforMax is a leader in the development of
bioinformatics software for accelerated drug discovery and has a proven track
record in software development. We are jointly designing an interface for the
IFP Database that will be integrated with InforMax's GenoMax(TM) product.
GenoMax is a bioinformatics system that offers high-speed analysis of both
public and proprietary genetic databases within the security of a corporate
firewall. This system is designed to allow the subscriber to evaluate data in
the IFP Database, while accessing other public and private databases. We are
also developing an application programming interface for the IFP Database, to
permit integration with other bioinformatics platforms, including those
developed by the customers themselves. By taking advantage of an existing
bioinformatic platform, we plan to concentrate our efforts on the development
of tools specific to protein pathway data. InforMax will also lead in marketing
the IFP Database.
We plan to chart the entire human proteome of intracellular protein signaling
pathways. Our existing robotics systems are designed to permit generation of
approximately 200,000 data points per month. We expect to reach this level of
data generation by mid-year 2000. We believe we can map the signaling pathways
in the entire human proteome in a four-year time period based upon our existing
robotics systems. We also believe that with additional resources, we could
accelerate computation of this project to a two-to-four-year time period. We
intend to sell multi-year subscriptions to pharmaceutical and biotechnology
companies, pricing the product according to the depth and breadth of
information it contains.
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Novel Protein Targets
We view proteins by their modular building blocks or domains. Every signaling
protein can be defined by its domain composition and this composition can be
compared to known proteins to determine if a protein is a novel composition of
matter. The figure below gives an example of a known protein, which consists of
two domain 1s and one domain 2. Also shown are several novel proteins, such as
Novel 2, which is made up of five domain Cs. Since we are measuring domain-
ligand interactions, we not only define the protein but have knowledge of the
protein's function. This method of defining proteins has been used by us in a
successful composition of matter patent around novel WW-domain-containing
proteins.
[Graphic of Modular View of Proteins]
In the course of identifying pathways to create the IFP Database, we are
discovering and, where appropriate, filing patent applications on novel
proteins. We believe that some of these proprietary proteins will be important
biological targets. In these instances, we will offer those targets to our
customers for licensing fees, milestone payments and royalty payments.
Protein Arrays
We plan to sell defined sets of known protein families, or protein arrays, for
use in lead optimization. The signaling proteins in our IFP Database are
organized based on their domains. Domains are interaction modules, or defined
structural regions on proteins, which are the sites of specific interaction
between one protein and another. These domains are the parts of signaling
proteins where a drug may interact and alter a pathway. There are estimated to
be 30 to 60 domain families in signaling pathways. Each family may have 100 to
300 members. Customers who identify potential targets in the IFP Database based
on a specific interaction involving a particular domain will need that physical
protein for screening. They will also need the other family members which have
that domain in common. The relative degrees of binding to these other family
members represent the toxicity and possible side effects of a drug candidate.
Marketing
We intend to market our IFP Database, novel protein targets and protein arrays
to pharmaceutical and biotechnology companies. InforMax will take the lead in
marketing our IFP Database in conjunction with their enterprise bioinformatics
software, GenoMax. InforMax currently has 15,000 licenses at over 850
organizations worldwide for their desktop software and they have used this
desktop software market strength to establish themselves in the bioinformatics
enterprise software market. InforMax has nine current GenoMax installations and
expects to double the number by the end of the calendar year. They have
established relationships with major pharmaceutical and biotechnology companies
as well as with leading universities conducting life science research.
We plan to market the IFP Database as multi-year subscriptions allowing access
to our IFP Database inside the customers' corporate firewall. This subscription
delivery is facilitated using InforMax's GenoMax product. These subscriptions
may include collaborative bioinformatics research projects to analyze specific
pathways as requested by a customer. Such collaborations would typically
provide additional revenues, and could also include milestone payments and
royalty-based revenues from any products emerging from the collaborative
research and developed by our partner.
Initially, we plan to enroll subscribers who are interested in early access to
the database. These early subscribers will have the opportunity to provide
direction on both the disease areas of research and the computational aspects
of the database that are relative to their internal research areas. As the
amount of information in the IFP Database increases, we plan to offer
subscriptions broadly and to increase the price of a subscription.
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Our proteomics patents and proprietary rights position
We will market protein targets under arrangements that we anticipate would
include licensing fees, milestone payments and royalty payments as our
customers develop products based on these targets. We plan to market protein
arrays under a license for use structure and, where possible, obtain
commitments for milestone payments and royalty-based payments if the arrays
contain novel protein targets proprietary to us.
We intend to pursue aggressively patent production for novel synthetic peptides
and novel naturally occurring polypeptides that we identify as binding to
ligands of interest, as well as for products and methods relating to the use of
these polypeptides and their respective genes as possible drug targets in
screening assays. We also intend to seek patent protection for methods and
products relating to our data analysis procedures.
Among our patents are two issued U.S. patents relating to peptides that bind to
certain molecules expressed on cancer cells. We also co-own with the University
of North Carolina at Chapel Hill an issued U.S. patent covering certain
polypeptides that contain a WW domain.
We are the exclusive licensee of certain patents and patent applications owned
by the University of North Carolina at Chapel Hill, covering parts of the
proteomics technology. These include seven issued U.S. patents relating to our
phage display libraries, methods of using phage display libraries to identify
peptides that bind to a target molecule of interest, as well as peptides that
bind to certain molecules.
Our strategy
We intend to be a premier provider of proteomic systems and services that
enable our customers to analyze genomic and proteomic data, understand
biochemical pathways and elucidate the mechanisms of disease for optimal drug
selection. Key elements of our proteomics strategy include:
.becoming the leading company to market a comprehensive database of information
relating to the human proteome;
.developing an expansive and proprietary database of signaling pathways within
the human proteome;
.establishing a position as the leading company in providing protein-protein
interaction to the pharmaceutical, and other industries;
.developing a strong intellectual property position with respect to novel
protein targets; and
.developing target arrays to be used for lead optimization.
Competition
We are subject to significant and increasing competition. Many companies
compete in the overall effort to understand the complex flow from gene
sequence, to transcription into messenger riboneucleic acid, to protein
expression and finally to biological activity. In addition, most major
pharmaceutical and biotechnology companies have some level of internal activity
and high interest in these areas.
The technology for analyzing the functions of proteins in the disease setting,
and for mapping interactions between proteins, is relatively new. This
technology is evolving rapidly and developments by competitors, including
potential customers, could make our technology obsolete. A number of companies
compete with our approach to analyzing the proteome, and others compete with
our technology for identification of novel proteins and use of proteins for
possible drug targets.
Of the several approaches used commercially to analyze the proteome, the main
direct competitor with our technology is the yeast two-hybrid system. Two
companies, Myriad Genetics, Inc. and CuraGen Corporation, use this method to
perform large-scale cataloguing of protein-protein interactions.
Strategic alliances
InforMax, Inc.
In September 1999, AxCell and InforMax, Inc. concluded an agreement to market
our IFP Database as part of an enterprise bioinformatics solution to the
pharmaceutical and biotechnology industries. The multi-year agreement provides
for technology development by InforMax to link our database to InforMax's
GenoMax, a new generation of molecular biology and genetics software.
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Compaq Computer Corporation
In December 1999, AxCell entered into a developer partnership with Compaq
Computer Corporation. This development program will be facilitated by Compaq's
proven Alpha architecture, high performance 64-bit systems that deliver speed
and scalability advantages. Under the agreement, Compaq has provided us with
hardware for the development of our proteomics database.
University of North Carolina
We sponsored research at, and are the exclusive licensee of certain patent and
patent applications and technology owned by the University of North Carolina at
Chapel Hill, covering the creation of long peptides that may fold to form
three-dimensional functional structures, and of libraries composed of these
peptides. The technology covered by this collaboration has been utilized, with
other technology we developed, in our proteomics program.
ONCOLOGY
Background
Cancer encompasses a large number of discrete diseases that afflict many
different parts of the human body. The diversity of cancer diseases and their
overall prevalence creates a large need for new and improved treatments. Cancer
is the second leading cause of death in the United States. It is estimated that
one in three Americans will be diagnosed with cancer. The worldwide oncology
drug market was estimated at $16 billion in 1998, representing 15% growth from
1997. This market is not saturated: novel treatments often enjoy premium
pricing and rapid market acceptance. Fundamentals of the oncology market that
are particularly advantageous for us include:
.accelerated approval procedures adopted by the US Food and Drug Administration
to shorten the development process and review time for cancer drugs;
.in-licensing opportunities created by a trend among large pharmaceutical
companies to concentrate on products with larger market potential than most
anticancer drugs;
.favorable pricing and reimbursement for oncology drugs, with some novel agents
commanding $6,000 to $15,000 per course of therapy; and
.a highly concentrated population of oncologists, urologists and technicians
which we believe allows a small sales force to be effective.
We develop, commercialize and market products to improve the diagnosis and
treatment of cancer. We were founded based upon our knowledge of monoclonal
antibodies. Our research efforts in this area led to our marketed products. In
the development of our current products, we also developed expertise in
molecular recognition and in linking radioisotopes to carriers, including
antibodies, for diagnostic and therapeutic purposes. We also developed
expertise with nuclear imaging, including training of technicians and
physicians, utilized for diagnostic purposes. We have applied this knowledge
primarily in the field of prostate cancer, and for imaging/diagnostic agents
for colorectal and ovarian cancers. Our historical knowledge led to research
programs, both internally and in collaborations with academic and scientific
institutions, in which we gained additional knowledge about antibodies,
proteins, identification and synthesis of novel proteins, and antigens located
by those compounds. We plan to apply our experience, coupled with our
proprietary technology rights and developmental expertise, to build an oncology
business utilizing innovative techniques for an integrated approach in
intervention in the progression of disease. We have also established a sales
force, consisting of experienced salespersons and technical representatives. We
intend to use this sales force to sell current products and any products which
we develop or acquire.
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Product Indication Status Development/Marketing
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ProstaScint Diagnostic imaging Approved and marketed Cytogen (US & Canada)
agent for staging the in US. Regulatory
spread of prostate approval pending in
cancer Canada. European
filing targeted for
mid-2000.
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OncoScint CR/OV Diagnostic imaging Approved for sale in Cytogen (US and
agent for spread of eleven European Canada); CIS
colorectal and countries and Canada. biointernational
ovarian cancer Approved in US (Europe)
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Quadramet Relief of bone pain Approved in US and Berlex (US); Cytogen
from cancer spread to Canada (Canada)
the bone from primary
tumor
Treatment of Evaluating Phase I Berlex (US); Cytogen
Refractory Rheumatoid results has marketing rights
Arthritis in Canada, Europe,
Japan and certain
other countries
Treatment of disease Phase III Berlex (US); Cytogen
progression by use of (Canada)
Quadramet, prior to
onset of pain
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PSMA Development Immunotherapeutic Pre-clinical Developed by
product for cancer development Progenics; Cytogen to
vaccine utilizing market; Profit-
gene-based therapy sharing
Prostate cancer Pre-clinical Developed by
antibody- based development Progenics; Cytogen to
therapy market; Profit-
sharing
In vitro diagnostic Development of a Cytogen to market
tests for prostate trial assay
cancer
Ex vivo dendritic Phase I/II clinical Northwest
cell processing trials Biotherapeutics, Inc.
Pipeline--PSMA technology
Prostate specific membrane antigen, or PSMA, is a transmembrane protein that
can be used as an important marker associated with prostate cancer. PSMA has
also been found to be present in new blood vessel formation associated with
other major solid tumors. It is overexpressed in primary prostate cancer, but
it is expressed most highly in the more aggressive forms of prostate cancer,
including those that do not express prostate specific antigen, or PSA, and
those that do not respond to hormone therapy. When PSMA was compared to various
PSA tests, the presence of PSMA was a more accurate guide of the extent of
cancer. However, there are currently no commercially available assays for PSMA.
Memorial Sloan-Kettering Cancer Center identified PSMA using a monoclonal
antibody supplied by us. A patent entitled "Prostate Specific Membrane Antigen"
was issued to Sloan-Kettering Institute for Cancer Research, an affiliate of
Memorial Sloan-Kettering Cancer Center, and we have the exclusive worldwide
license covering this technology. Subsequently, the antibody for PSMA was the
basis of our FDA-approved ProstaScint imaging product. We believe that
technology utilizing PSMA can yield novel products for the treatment and
diagnosis of cancer because of the unique characteristics of this antigen.
In 1999, Cytogen entered into a joint venture with Progenics Pharmaceuticals,
Inc. to develop in vivo immunotherapeutic products utilizing PSMA. The first of
these product candidates is a therapeutic prostate cancer vaccine utilizing the
PSMA gene and a vector delivery system as a basis of immune stimulation. Our
current plans are that this approach, if successful in pre-clinical
development, will proceed to human trials by early 2001. We are also developing
through this venture an antibody-based immunotherapy for prostate cancer. We
believe that these product candidates, if successfully developed, could play an
important role in
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the treatment of prostate cancer. We believe there are significant unmet needs
for treatment and monitoring of this disease. In addition, we intend to
evaluate the utility of these therapies, as an anti-angiogenesis approach, in
other cancers where PSMA is expressed.
The joint venture is owned equally by Progenics and us. We have exclusively
licensed to the joint venture certain immunotherapeutic applications of our
PSMA patents and know-how. Progenics will fund up to $3 million of development
costs of the program, which we anticipate will be adequate to fund the project
through the pre-clinical stage. We and Progenics will share costs of the
program in excess of the initial $3 million. Progenics is responsible for pre-
clinical and clinical development of product candidates. We have the exclusive
North American marketing rights to products developed by the venture and
anticipate marketing any products developed. We anticipate marketing these
products with our own sales force and will be reimbursed by the joint venture
for these costs. We will split the revenues minus marketing expenses equally
with Progenics on any products developed by the venture. In connection with the
licensing of the PSMA technology to the joint venture, we will receive $2
million in payments, of which $1 million was received during 1999, and the
balance will be received by the end of 2001. We have exclusively licensed in
vivo immunotherapy rights to PSMA to this joint venture.
We licensed PSMA through our subsidiary, Prostagen, Inc., to Northwest
Biotherapeutics, Inc., for development of in vitro dendritic cell processing
immunotherapy to prostate cancer. That license remains in effect. Prostagen
also licensed exclusive PSMA manufacturing rights for immunotherapy to
Northwest Clinicals, LLC, a corporation formed and co-owned by Northwest
Biotherapeutics and Prostagen. We are currently engaged in a dispute with
Northwest Biotherapeutics as to the extent of these rights and whether
Northwest Clinicals has complied with the terms of the license. If Northwest
Clinicals holds these manufacturing rights, we would be required to purchase
PSMA for immunotherapy products from this co-owned corporation. Certain rights
to exclusive marketing in our Progenics venture could be affected if we do not
obtain the ability to manufacture PSMA independently of Northwest Clinicals.
Our joint venture agreement with Progenics requires that we reacquire our PSMA
manufacturing rights by June 15, 2000, or the following will occur:
.Progenics will acquire co-exclusive marketing rights with us;
.we will be obligated to contribute an additional $500,000 to the joint venture
to fund research and development; and
.Progenics' research and development expense obligation will be reduced to $2.5
million.
In addition, we have agreed to indemnify each party to the joint venture for
all costs relating to our inability to require our PSMA manufacturing rights.
We are in negotiations with Northwest Clinicals to terminate the license,
however we cannot assure you that we will reacquire our PSMA marketing rights
and avoid the provisions described above.
We have also entered into a letter of intent to obtain an exclusive, world-wide
license from Molecular Staging, Inc. for technology to be used in developing in
vitro diagnostic tests using both PSMA and PSA. Molecular Staging's Rolling
Circle Amplification Technology is a novel, patented process that creates new
diagnostic opportunities. Rolling Circle Amplification Technology is a highly
sensitive, quantitative and efficient amplification method that allows the user
to detect the presence of target molecules in a wide array of testing formats.
It offers a practical method that allows solid phase recognition and detection
of target molecules either directly, on a cell or on a biochip. Our initial
goal is to deploy Molecular Staging's technology in a new diagnostic kit for
managing prostate cancer based on detection of PSMA. We anticipate initiating a
clinical trial of the assay this year. We also plan to develop assays for
diagnosis of other tumors where PSMA is found in associated neovasculature.
Market potential
Diagnostic Screening Tests
The measurement of prostate specific antigen, or PSA, levels in the circulation
is the only in vitro test approved for the diagnosis, monitoring and screening
of prostate cancer in the United States. The American Cancer Society, American
College of Radiology and American Urologic Association have recommended PSA for
use in screening of asymptomatic men, in combination with a digital rectal
examination. However, in 1997, the American College of Physicians concluded
that there was no evidence of benefit from routine screening using PSA and
recommended against regular screening using this test. The American Urologic
Association, which supports screening tests for eligible men over 50 years of
age, claims that PSA and digital
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rectal examination screening increases the rate of early cancer diagnosis from
30% to 40% for those not screened to 70% to 85% for those screened with PSA.
Even though a PSA test combined with a digital rectal exam increases the
chances of detection, the method generates a high number of false positives
that often lead to unnecessary biopsies. We believe new tests based on PSMA may
offer higher specificity in diagnosing primary and recurrent prostate cancer.
The US market for PSA tests is estimated to be approximately $170 million. This
estimate is based on the 1997 figures of the government Health Care Finance
Administration, where there were 7.5 million diagnostic tests performed plus
21.4 million screening PSA tests. In addition, approximately one million
biopsies are performed annually in the United States to confirm the presence of
prostate cancer following a screening. While normal ranges for PSA test values
have been established, significant inter-test variability exists and detection
of ultra-low levels of PSA which allows earlier diagnosis is not feasible with
current technology. Furthermore, the correlation of PSA values and prostatic
biopsy results has failed to achieve a level of predictability which avoids
unnecessary biopsies. A serum test for PSMA may provide more relevant
prognostic value and improve the accuracy of evaluating prostate cancer.
Immunotherapy/Vaccines
We are developing as part of our collaboration with Progenics,
immunotherapeutics for treatment of prostate cancer. We believe immunotherapy
is a particularly attractive alternative for the treatment of advanced prostate
cancer and for prevention of recurrent disease by eliminating metastases
because:
.advanced prostate cancer is a slow growing malignancy and, therefore, is not
effectively treated with high-intensity cytotoxic chemotherapy; and
.PSMA has been identified as an antigen linked to prostate cancer that may
serve as an excellent immunotherapy target.
We believe that there are approximately 80,000 to 100,000 men in the United
States who are at risk for recurrent disease or who have advanced prostate
cancer. We estimate that the potential market for a vaccine or antibody-based
treatment is greater than $500 million annually in the United States.
Our approved products
We have three marketed products, each of which have been approved by the FDA:
ProstaScint, used as an imaging agent in the diagnosis of prostate cancer;
OncoScint CR/OV, used as a diagnostic imaging agent of colorectal and ovarian
cancer; and Quadramet, used for relief of bone pain from cancer that has spread
to the bone from the primary tumor.
Cancer diagnostic imaging products
Our cancer diagnostic products, ProstaScint and OncoScint CR/OV, are monoclonal
antibody-based imaging agents for prostate, colorectal and ovarian cancers.
These products utilize our proprietary targeted delivery system, employing
whole monoclonal antibodies, which directs the radioisotope Indium/111/ to
malignant tumor sites. A radioisotope is an element which, because of nuclear
instability, undergoes radioactive decay and emits radiation. The imaging
products are supplied to hospitals, diagnostic imaging centers and
radiopharmacies.
During an imaging procedure, the radiolabeled monoclonal antibody product is
administered intravenously into the patient. The antibody travels through the
bloodstream and binds to specific antigens expressed by the tumors being
studied. The radioactivity from the isotope that has been attached to the
antibody can be detected from outside the body by a gamma camera. Gamma cameras
are universally found in all nuclear medicine departments. The image captured
by the camera identifies the existence, location and extent of the radio-
labelled pharmaceutical thus identifying the sites of tumor. Based on clinical
studies conducted to date by physicians on our behalf, the imaging agents may
provide new and useful information not available from other diagnostic
modalities regarding the existence, location and extent of a specific disease
throughout the body. We believe that this information has the potential to
affect the way physicians manage their patients' individual treatments.
ProstaScint
ProstaScint is a diagnostic monoclonal antibody linked to Indium/111/ which
specifically targets PSMA. Due to the selective expression of PSMA, the
ProstaScint imaging procedure can detect the extent and spread of
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prostate cancer in the body. ProstaScint is approved by the FDA for marketing
in two clinical settings: as a diagnostic imaging agent in newly diagnosed
patients with biopsy-proven prostate cancer thought to be clinically localized
after standard diagnostic evaluation and who are at high risk for spread of
their disease to pelvic lymph nodes and for use in post-prostatectomy patients
in whom there is a high suspicion that the cancer has recurred.
According to the American Cancer Society, about 179,000 American men were
diagnosed with prostate cancer in 1998, of whom approximately 20% are at high
risk for metastatic spread of their disease. In addition, estimates indicate
that in 1999, 40,000 to 60,000 patients previously treated for prostate cancer
developed symptoms of recurrent cancer which had not yet progressed to the
point of skeletal involvement. We believe that there are approximately 75,000
to 100,000 patients with prostate cancer in the United States who are
candidates, based on current indications, to receive a ProstaScint scan each
year. We believe that the potential market for ProstaScint is over $50 million
in the United States.
When deciding on an initial course of therapy for prostate cancer, physicians
must first determine the extent of disease in the patient. The accuracy of this
information is vital in deciding upon an appropriate course of therapy. Prior
to the availability of ProstaScint, determining whether newly diagnosed disease
was limited to the prostate or had spread beyond the gland was based upon
statistical inference from the biopsy appearance of the tumor and the patient's
serum level of PSA. Conventional imaging methods are all relatively insensitive
because they rely on identifying significant changes to normal anatomic
structure to indicate the presence of disease. The ProstaScint disease scan
images are based upon expression of the PSMA molecule and, therefore, can
identify disease not readily detectable with conventional procedures.
In the United States, following initial therapy, prostate cancer patients are
monitored to ascertain changes in the level of PSA. In this setting, a rise in
PSA is evidence of recurrence of the patient's prostate cancer. Knowledge of
the extent and location of disease recurrence is important in choosing the most
appropriate form of treatment. The National Comprehensive Cancer Network, a
consortium of leading cancer hospitals, recently included ProstaScint in its
Practice Guidelines for Prostate Cancer. These guidelines are published to
serve as the practice standard for the oncology community.
We also believe that ProstaScint may be useful for imaging the extent of
prostate cancer within the prostate gland. This information may be useful to
help guide specific treatments such as prostate brachytherapy or highly
targeted external beam radiation. Brachytherapy is a treatment which implants
radiation sources into the site of the tumor; while external beam radiation
utilizes a beam of radiation directed at the cancer from a source outside the
body. We estimate that approximately half of newly diagnosed prostate cancer
patients will undergo a form of radiation treatment. The current generation of
imaging technologies enables physicians to view ProstaScint scans incorporated
with conventional imaging modalities. We believe these technologies will create
greater acceptance of ProstaScint. There are no other agents approved for the
imaging and diagnosis of prostate cancer.
OncoScint CR/OV
OncoScint CR/OV is approved by the FDA for single use with other appropriate,
commercially available diagnostic tests, to locate malignancies outside the
liver in patients with known colorectal or ovarian cancer. OncoScint CR/OV is
also approved for sale in eleven European countries and Canada. To date,
OncoScint CR/OV has not realized substantial sales. We believe this product is
effective in imaging both primary and metastatic colorectal and ovarian tumors.
However, this product has not yet been widely adopted by physicians for
patients with these conditions. We market OncoScint CR/OV in the United States
directly through our own sales force. The market for OncoScint CR/OV for
colorectal cancer diagnosis has been negatively affected by positron emission
tomography, or "PET", scans. The sensitivity of the PET scan in colon cancer
appears to be similar or higher than the OncoScint CR/OV scan. However, PET
studies are very expensive and available only at highly specialized
institutions. We are emphasizing marketing of OncoScint CR/OV for the recurrent
ovarian setting as an aid in determining whether second look surgery, following
initial surgery, is advisable.
Cancer therapeutic product
Quadramet
Quadramet, a proprietary cancer therapeutic agent, is approved by the FDA for
the relief of pain in patients with metastatic bone lesions that image on
conventional bone scan, a routinely performed nuclear medicine
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procedure. Quadramet consists of a radioactive isotope, Samarium/153/, which
emits beta radiation, and a chelating agent, EDTMP, which targets the drug to
sites of new bone formation.
Once tumors have metastasized to the skeleton, they continue to grow and cause
destruction of the adjacent bone. This erosion of bone stimulates new bone
formation which encircles the metastatic tumor. By targeting these areas of
bone formation, Quadramet delivers site-specific radiation which may result in
significant pain reduction.
According to American Cancer Society and National Cancer Institute statistics,
approximately 600,000 new cases of cancer that typically metastasize to bone
occurred in the United States in 1997. We believe that over 200,000 patients
each year will suffer from bone pain that is severe enough to require
intervention. Based on this information, we believe that the market for
Quadramet is $80 million in the United States based on 20% of this patient
population.
Quadramet has many characteristics which we believe are advantageous for the
treatment of cancer bone pain, including early onset of pain relief, lasting up
to four months with a single injection; predictability of recovery from bone
marrow toxicity; ease of administration and length of pain relief. In addition,
due to its pharmacokinetic properties, the radioactive plasma half-life is only
five to six hours. Quadramet is administered as a single intravenous injection
on an outpatient basis and directly targets sites of new bone formation which
include those areas in the skeleton that have been invaded by metastatic
tumors. Quadramet exhibits high and very selective uptake in bone with little
or no detectable accumulation in soft tissue.
Berlex has initiated a Phase III clinical trial to evaluate the extension of
the use of Quadramet to patients whose bone metastases can be visualized on
conventional bone scan, but who are not yet experiencing pain from these
metastases. We believe earlier use in the care of cancer patients could expand
the potential market for Quadramet significantly. Our continuation of these
trials will depend upon their progress and success of the trial, and on
decisions by our marketing partner Berlex to continue to fund the trial. If
this trial is successful, we plan to seek expansion of the FDA approved
indication of Quadramet for this therapeutic use in delaying progression of the
onset of pain.
Current competitive treatments for severe bone cancer pain include narcotic
analgesics, external beam radiation therapy, Metastron and Novantrone.
The first non-cancer use of Quadramet under investigation is the treatment of
patients with refractory rheumatoid arthritis. We believe Quadramet can target
the diseased joints and provide a high but localized dose of radiation to the
area which may relieve the symptoms of refractory rheumatoid arthritis. We are
determining how to proceed with this possible use based upon analyzing the data
from a Phase I dose escalation study.
Our strategy
Our objective is to be a leading oncology drug discovery and development
company. We have and intend to continue to market, co-market or license our
oncology products in the future to become an oncology-focused specialty
biopharmaceutical company.
We believe that we are well positioned to create a strong oncology product
pipeline and we will be seeking, on an opportunistic basis, strategic
acquisitions that will complement our existing products.
The key elements of our oncology strategy are:
.to capitalize on the unique biological characteristics of PSMA for the
diagnosis and treatment of major cancers;
.greater penetration of existing oncology markets by pursuing an integrated
patient approach;
.expansion of product sales into new geographic markets;
.seeking new indications of our existing products;
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.leveraging our oncology and urology sales force by adding complementary
products through in-licensing, acquisitions or other marketing arrangements;
and
.reducing risk by developing a broad portfolio of products.
Oncology product sales, marketing and distribution
We currently employ a 24 person sales and marketing force with a targeted force
of 27 persons. The primary objective of the sales force is to make sales calls
to urologists and, as a secondary audience, to radiation oncologists. We also
employ technical specialists who assist in the training of nuclear medicine
technologists and nuclear medicine physicians, and qualify nuclear imaging
centers to conduct ProstaScint imaging. We depend on our own sales force for
our ProstaScint and OncoScint CR/OV products and on Berlex for US sales,
marketing and distribution of Quadramet. Distribution of ProstaScint and
OncoScint CR/OV is handled by outside contractors and Berlex and DuPont handle
the distribution of Quadramet.
Historically, ProstaScint has been marketed under a co-marketing arrangement
with the urological division of CR Bard, Inc., a marketer of a broad range of
urology products. In 1999, we reached an agreement with Bard to phase out the
co-marketing agreement so that we could undertake direct marketing
responsibility for the product. We took this step because of our view that a
highly trained and dedicated internal sales force will be able to market our
high technology products most effectively and to build a marketing capability
for possible future products. The transition will be complete by mid-year 2000.
In the meantime, Bard will continue to make sales calls for the product and
will assist in transition.
ProstaScint is a technique-dependent product that requires a high degree of
proficiency in nuclear imaging technology in order to interpret the scan. We
have established a network of accredited nuclear medicine imaging centers
through our PIE, or Partners in Excellence, Program. Each PIE site receives
rigorous training, undergoes proficiency testing and is subject to ongoing
quality assurance protocols. As of March 1, 2000, there were over three hundred
PIE sites, including a majority of the National Cancer Institute-designated
Comprehensive Cancer Centers. ProstaScint may only be used at PIE sites. We
plan to add PIE sites on a selective basis in order to ensure that new sites
are adequately qualified and committed to a minimum number of scans for
maintaining a high level of competence. At the present time, we bear partial
expense of qualification of each site.
In 1999, we reacquired rights to our ProstaScint and OncoScint CR/OV products
in Canada, which were to be marketed by Faulding (Canada), Inc. We did not pay
for the return of these rights. OncoScint CR/OV is approved by the Canadian
Health Care Branch and ProstaScint is under expedited review. We believe these
products may be marketed to major cancer centers in Canada and will not require
a significant level of resources. However, we cannot be certain that
ProstaScint will be approved in Canada, that these products will be
reimbursable under the Canadian health care system or reimbursed on favorable
economic terms, or that they will be accepted by physicians.
We plan to file applications for regulatory approval for ProstaScint in Europe
during 2000.
Since May 1994, we have been the sole marketer of OncoScint CR/OV in the US. We
also intend to market OncoScint CR/OV in Canada. In 1996, we entered into a
distribution agreement with CIS biointernational, granting to CIS
biointernational the exclusive right to distribute and sell OncoScint CR/OV
worldwide, except for in the United States and Canada.
In October 1998, we entered into an exclusive agreement with Berlex for the
marketing of Quadramet, after terminating our previous marketing relationship
with the DuPont Merck radiopharmaceutical division. Berlex re-launched
Quadramet in March 1999. Berlex maintains a sales force that targets its sales
efforts on the oncological community. Pursuant to our agreement with Berlex, we
are entitled to royalty payments based on net sales of the Quadramet product
and milestone payments based upon sales levels achieved.
During the first year of launch, Quadramet was marketed principally to the
nuclear medicine community, which administers the treatment to patients.
However, the treatment is more typically prescribed by caregiving physicians,
including medical oncologists, radiation oncologists and urologists. We believe
that successful commercialization of Quadramet will depend upon marketing to
these referring physicians.
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We plan to market Quadramet in Canada. We paid no costs to obtain these
marketing rights. We are evaluating whether to market Quadramet directly in
Canada or through a marketing partner.
We have no significant foreign revenues. Although we plan to sell our products
internationally, we cannot assure you that the products will be accepted by the
foreign medical community or that we will be able to sell at adequate prices.
We will incur expenses if we sell our products in foreign countries, and if our
products do not generate adequate revenues we may not be able to recover these
expenses or a significant return.
Strategic alliances
Progenics Pharmaceuticals, Inc.
In 1999, we entered a joint venture with Progenics Pharmaceuticals, Inc. to
develop products utilizing our proprietary PSMA technology. The first of these
products, currently under development, is a therapeutic prostate cancer vaccine
utilizing a gene-based approach. Our current plans are that this approach, if
successful in pre-clinical development, will proceed to human trials by early
2001. We are also developing through this venture antibody based immunotherapy
for prostate cancer. We believe that these drugs, if successfully developed,
could play an important role in the treatment or prevention of advanced
prostate cancer. We believe there are significant unmet needs for treatment of
this disease.
The Dow Chemical Company
In March 1993, we obtained an exclusive license from The Dow Chemical Company
to North American rights to use Quadramet as a therapeutic radiopharmaceutical
for metabolic bone disease or tumor regression for cancer caused by metastatic
or primary cancer in bone in humans, and for the treatment of disease
characterized by osteoblastic response in humans. In November 1998, Dow also
extended our exclusive rights for use of Quadramet in treating advanced
rheumatoid arthritis to Europe, Japan and other countries in addition to North
America.
Memorial Sloan-Kettering Cancer Center
In 1993, we began a development program with Memorial Sloan-Kettering Cancer
Center involving PSMA and our proprietary monoclonal antibody. In November
1996, we exercised an option for and obtained an exclusive worldwide license to
this technology.
Molecular Staging, Inc.
We have entered into a letter of intent to obtain an exclusive, world-wide
license from privately held Molecular Staging, Inc. for technology to be used
in developing in vitro diagnostic tests utilizing PSMA and PSA. We anticipate
that the novel technology applications in conjunction with our technology, may
allow entry into the domestic market for PSA-based testing.
Elan Corp. plc
We entered into a license agreement granting Elan worldwide rights to a group
of peptides and associated technology for orally administered drugs that are
transported across the gastrointestinal epithelium, as well as rights to other
orally delivered drugs derived from the research program. Elan is responsible
for the further development and commercialization of this technology. We are
entitled to royalties from sales of any product developed and commercialized
based on this technology.
PRODUCT CONTRIBUTION TO REVENUES
Our currently marketed products and other sources of income constitute a single
business segment. ProstaScint and Quadramet account for a significant
percentage of our product-related revenues. For the year ended December 31,
1999, revenues related to ProstaScint and Quadramet accounted for approximately
79% and 13%, respectively, of our product related revenues.
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RESEARCH AND DEVELOPMENT
Our research and development expenditures include projects we conducted and
payments we made to customer sponsored research programs. Our expenses for
research and development activities, including customer sponsored programs,
were:
.1999--$3.8 million
.1998--$10.0 million
.1997--$17.9 million
Research and development expenditures for customer sponsored programs were:
.1999--$0.2 million
.1998--$0.2 million
.1997--$1.1 million
We intend to pursue research and development activities having commercial
potential and to review all of our programs to determine whether possible
market opportunities, near and longer term, provide an adequate return to
justify the commitment of human and economic resources to their initiation or
continuation. We expect a significant increase in our research and development
expenditures during 2000 for development of proteomics technology, for
development of assays utilizing PSMA for diagnostics, and for our share of
expenses for the development with Progenics Pharmaceuticals, Inc. of
immunotherapies for prostate and other cancers.
COMPETITION
The biotechnology and pharmaceutical industries are subject to intense
competition, including competition from large pharmaceutical companies,
biotechnology companies and other companies, universities and research
institutions. Our existing therapeutic products compete with a wide variety of
other firms, including firms that provide products used in more traditional
treatments or therapies, such as external beam radiation, chemotherapy agents
and narcotic analgesics. In addition, our existing and potential competitors
may be able to develop technologies that are as effective as, or more effective
than those offered by us, which would render our products noncompetitive or
obsolete. Moreover, many of our existing and potential competitors have
substantially greater financial, marketing, sales, manufacturing, distribution
and technological resources than we do, which may allow these competitors to
develop new products in advance of us. Our existing and potential competitors
may be in the process of seeking FDA or foreign regulatory approval for their
respective products or may also enjoy substantial advantages over us in terms
of research and development expertise, experience in conducting clinical
trials, experience in regulatory matters, manufacturing efficiency, name
recognition, sales and marketing expertise and distribution channels.
We expect competition to intensify in the fields in which we are involved as
technical advances in such fields are made and become more widely known. We can
not assure you, however, that we or our collaborative partners will be able to
develop our products successfully or that we will obtain patents to provide
protection against competitors. Moreover, we cannot assure you that our
competitors will not succeed in developing therapeutic products that circumvent
our products, that these competitors will not succeed in developing
technologies or products that are more effective than those developed by us. In
addition, many of these companies may have more experience in establishing
third-party reimbursement for their products. Accordingly, we cannot assure you
that we will be able to compete effectively against existing or potential
competitors or that competition will not have a material adverse effect on our
business, financial condition and results of operations.
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MANUFACTURING
ProstaScint and OncoScint CR/OV are manufactured at a current good
manufacturing practices, or cGMP, compliant manufacturing facility in
Princeton, New Jersey which is operated by Bard BioPharma L.P., a subsidiary of
Purdue BioPharma. We have access to the facility for continued manufacture of
these products until January 2002. An Establishment License Application for the
facility was approved by the FDA for the manufacture of ProstaScint in October
1996 and for OncoScint CR/OV in December 1992. Our facility is subject to
routine inspections by the FDA to assure compliance with current Good
Manufacturing Practices. As a result of an inspection held in April through May
of 1999, we received an FDA Warning Letter which identified a number of
deviations from FDA requirements and required their correction. We have adopted
corrective measures for each of the concerns identified and in January 2000 we
received a letter from the FDA informing us that our corrective actions
appeared to be adequate.
We expect that this facility will allow us to meet our projected production
requirements for ProstaScint and OncoScint CR/OV for the foreseeable future. We
do not anticipate that this arrangement will be continued, and are actively
engaged in discussions with other third party manufacturers for these products.
Any new manufacturing arrangement will be subject to FDA oversight, and
qualification of a new manufacturer with the FDA could take a significant
amount of time.
Our products must be manufactured in compliance with regulatory requirements
and at commercially acceptable costs. We believe that our manufacturing
arrangements currently meet our needs.
We believe that outsourcing manufacturing operations currently represents the
most cost effective method of manufacturing our products.
Raw materials and suppliers
The active raw materials used for the manufacture of our products include
antibodies. OncoScint CR/OV, uses a monoclonal antibody which is being supplied
in commercial quantities by a single contract manufacturer, Lonza Biologics. We
anticipate that Lonza Biologics will be able to meet our needs for commercial
quantities of monoclonal antibody.
We currently have arrangements necessary for the production of the monoclonal
antibody for ProstaScint.
Certain components of Quadramet, particularly Samarium/153/ and EDTMP, are
provided to DuPont by sole source suppliers. Due to its radiochemical
properties, Samarium/153/ must be produced on a weekly basis by its supplier in
order to meet DuPont's manufacturing requirements. On one occasion, DuPont was
unable to manufacture Quadramet on a timely basis due to the failure of the
supplier to provide an adequate supply of Samarium/153/. In the event that
DuPont is unable to obtain sufficient quantities of the components on
commercially reasonable terms, or in a timely manner, DuPont would be unable to
manufacture Quadramet on a timely and cost-competitive basis. In addition,
sources for certain of these components may not be readily available. Thus, the
loss by DuPont of its sources for such components could result in an
interruption of supply and could have a material adverse effect on our
business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
Consistent with industry practice, we have a policy of using patent and trade
secret protection to preserve our right to exploit the results of our research
and development activities and, to the extent it may be necessary or advisable,
to exclude others from appropriating our proprietary technology.
Our policy is to aggressively protect our proprietary technology by selectively
seeking patent protection in a worldwide program. In addition to the United
States, we file patent applications in Canada, major European countries, Japan
and additional foreign countries on a selective basis to protect inventions
important to the development of our business. We believe that the countries in
which we have obtained and are seeking patent coverage for our proprietary
technology represent the major focus of the pharmaceutical industry in which we
and certain of our licensees will market our respective products.
We hold 38 current US patents and 66 current foreign patents. We have filed and
currently have pending a number of additional US and foreign patent
applications, relating to certain aspects of our technology for
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diagnostic and therapeutic products, and the methods for their production and
use. We intend to file patent applications with respect to subsequent
developments and improvements, when we believe such protection is in our the
best interest.
We are the exclusive licensee of certain patents and patent applications owned
by the University of North Carolina at Chapel Hill, covering parts of the
proteomics technology. These include seven issued US patents relating to our
phage display libraries, methods of using phage display libraries to identify
peptides that bind to a target molecule of interest, as well as peptides that
bind to certain molecules. We hold an exclusive license under certain patents
and patent applications held by the Memorial Sloan-Kettering Institute covering
PSMA. We are the exclusive licensee of certain US patents and applications held
by Dow covering Quadramet.
Among our patents are two issued US patents relating to peptides that bind to
certain molecules expressed on cancer cells. We also co-own with the University
of North Carolina at Chapel Hill an issued US patent covering certain
polypeptides that contain a WW domain.
We may be entitled under certain circumstances to seek extension of the terms
of our patents.
We also rely upon, and intend to continue to rely upon, trade secrets,
unpatented proprietary know-how and continuing technological innovation to
develop and maintain our competitive position. We typically enter into
confidentiality agreements with our licensees and any scientific consultants,
and each of our employees has entered into agreements requiring that they
forbear from disclosing confidential information, and in some cases assign to
us all rights in any inventions made while in our employ. We believe that our
valuable proprietary information is protected to the fullest extent
practicable; however, we cannot assure you that:
.additional patents will be issued to us in any or all appropriate
jurisdictions;
.litigation will not be commenced seeking to challenge our patent protection or
that challenges will not be successful;
.our processes or products do not or will not infringe upon the patents of
third parties; or
.the scope of patents issued will successfully prevent third parties from
developing similar and competitive products.
The technology applicable to our products is developing rapidly. A substantial
number of patents have been issued to other biotechnology companies. In
addition, competitors have filed applications for, or have been issued, patents
and may obtain additional patents and proprietary rights relating to products
or processes that are competitive with ours. In addition, others may have filed
patent applications and may have been issued patents to products and to
technologies potentially useful to us or necessary to commercialize our
products or to achieve our business goals. We cannot assure you that we will be
able to obtain licenses of patents on acceptable terms.
We cannot predict how any patent litigation will affect our efforts to develop,
manufacture or market our products.
We are defendants in litigation filed against us in the United States Federal
Court for the District of New Jersey by M. David Goldenberg and Immunomedics,
Inc. We were served with this lawsuit on March 17, 2000. The litigation claims
that our ProstaScint product infringes a patent purportedly held by the
plaintiffs. We believe that the purported patent sought to be enforced in the
litigation has now expired. As a result, the claim, even if successful, would
not result in a bar of the continued sale of ProstaScint or affect any other of
our products or technology. However, given the uncertainty associated with
litigation, we cannot give any assurance that the litigation could not result
in a material expenditure to us.
GOVERNMENT REGULATION AND PRODUCT TESTING
The development, manufacture and sale of medical products utilizing our
technology are governed by a variety of statutes and regulations in the United
States and by comparable laws and agency regulations in most foreign countries.
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The Food, Drug and Cosmetic Act requires that our products be manufactured in
FDA registered facilities subject to inspection. The manufacturer must be in
compliance with cGMP which imposes certain procedural and documentation
requirements upon us and our manufacturing partners with respect to
manufacturing and quality control activities. Noncompliance with cGMP can
result in, among other things, fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for drugs,
withdrawal of marketing approvals and criminal prosecution. Any failure by us
or our manufacturing partners to comply with the requirements of cGMP could
have a material adverse effect on our business, financial condition and results
of operations.
Diagnostic and therapeutic products in the United States are regulated by the
Food Drug and Cosmetic Act and the Public Health Service Act, and by FDA rules
and regulations promulgated thereunder. These laws and regulations require
carefully controlled research and testing of products, government notification,
review and/or approval prior to marketing the products, inspection and/or
licensing of manufacturing and production facilities, adherence to Good
Manufacturing Practices, compliance with product specifications, labeling, and
other applicable regulations.
Medical products that we develop or intend to market are subject to substantial
governmental regulation and may be classified as new drugs or biologics under
the Food Drug and Cosmetic Act. The FDA and similar health authorities in most
other countries must approve or license the diagnostic and therapeutic products
before they can be commercially marketed. In order to obtain FDA approval, an
applicant must submit, as relevant for the particular product, proof of safety,
purity, potency and efficacy. In most cases this proof entails extensive pre-
clinical, clinical and laboratory studies. The studies and the preparation and
prosecution of those applications by the FDA is expensive and time consuming,
and may take several years to complete. Difficulties or unanticipated costs may
be encountered by us or our licensees in their respective efforts to secure
necessary governmental approval or licenses, which could delay or preclude us
or our licensees from marketing their products. Limited indications for use or
other conditions could also be placed on any approvals that could restrict the
commercial applications of products. With respect to patented products or
technologies, delays imposed by the government approval process may materially
reduce the period during which we will have the exclusive right to exploit
them, because patent protection lasts only for a limited time, beginning on the
date the patent is first granted in the case of US patent applications filed
prior to June 6, 1995, and when the patent application is first filed in the
case of patent applications filed in the United States after June 6, 1995, and
applications filed in the European Economic Community. We intend to seek to
maximize the useful life of our patents under the Patent Term Restoration Act
of 1984 in the United States and under similar laws if available in other
countries.
The majority of our diagnostic and therapeutic products will likely be
classified as new drugs or biologics and will be evaluated in a series of in
vitro, non-clinical and human clinical testing. Typically, clinical testing is
performed in three phases to further evaluate the safety and efficacy of the
drug. In Phase I, a product is tested in a small number of patients primarily
for safety at one or more dosages. Phase II evaluates, in addition to safety,
the efficacy of the product against particular diseases in a patient population
that is generally somewhat large than Phase I. Clinical trials of certain
diagnostic and cancer therapeutic agents frequently combine Phase I and Phase
II into a single Phase I/II study. In Phase III, the product is evaluated in a
larger patient population sufficient to generate data to support a claim of
safety and efficacy within the meaning of the Food Drug and Cosmetic Act.
Permission by the FDA must be obtained before clinical testing can be initiated
within the United States. This permission is obtained by submission of an
Investigational New Drug application which typically includes the results of in
vitro and non-clinical testing and any previous human testing done elsewhere.
The FDA has 30 days to review the information submitted and makes a final
decision whether to permit clinical testing with the drug or biologic. However,
this process can take longer if the FDA raises questions or asks for additional
information regarding the Investigational New Drug application. A similar
procedure applies to medical device and diagnostic products.
After completion of in vitro, non-clinical and clinical testing, authorization
to market a drug or biologic must be granted by FDA. The FDA grants permission
to market through the review and approval of either a New Drug Application for
drugs or a Biologic License Application for biologics. These applications
provide detailed information on the results of the safety and efficacy of the
drug conducted both in animals and humans. Additionally, information is
submitted describing the facilities and procedures for manufacturing the drug
or biologic.
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The Prescription Drug User Fee Act and subsequently, the Food and Drug
Administration Modernization Act of 1997 have established application review
times for both New Drug Applications and Biologic License Applications. For new
drugs and biologics, FDA is to review and make a recommendation for approval
within 12 months. For drugs and biologics designated as "priority," the review
time is six months. This review process, however, can and frequently does
exceed these targets.
Once a drug or biologic is approved, we are required to maintain approval
status of the products by providing certain safety and efficacy information at
specified intervals. Additionally, we are required to meet other requirements
specified by the Food Drug and Cosmetic Act including but not limited to the
manufacture of products, labeling and promotional materials and the maintenance
of other records and reports. Failure to comply with these requirements or the
occurrence of unanticipated safety effects from the products during commercial
marketing, could lead to the need for product recall, or FDA initiated action,
which could delay further marketing until the products are brought into
compliance. Similar laws and regulations apply in most foreign countries where
these products are likely to be marketed.
Orphan Drug Act
The Orphan Drug Act is intended to provide incentives to manufacturers to
develop and market drugs for rare diseases or conditions affecting fewer than
200,000 persons in the United States at the time of application for orphan drug
designation. A drug that receives orphan drug designation and is the first
product to receive FDA marketing approval for a particular indication is
entitled to orphan drug status, a seven-year exclusive marketing period in the
United States for that indication. Clinical testing requirements for orphan
drugs are the same as those for products that have not received orphan drug
designation. OncoScint CR/OV has received an orphan drug designation for the
detection of ovarian carcinoma. Under the Orphan Drug Act, the FDA cannot
approve any application by another party to market an identical product for
treatment of an identical indication unless the party has a license from the
holder of orphan drug status, or the holder of orphan drug status is unable to
assure an adequate supply of the drug. However, a drug that is considered by
FDA to be different from a particular orphan drug is not barred from sale in
the United States during the seven-year exclusive marketing period even if it
receives marketing approval for the same product claim.
Other regulations
In addition to regulations enforced by FDA, we are also subject to regulation
under the state and local authorities and other federal statutes and agencies
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and the Nuclear Regulatory Commission.
Foreign regulatory approval
The regulatory approval process in Europe has changed over the past few years.
There are two regulatory approval processes in Europe for products developed by
us. Beginning in 1995, the centralized procedure became mandatory for all
biotechnology products. Under this regulatory scheme, the application is
reviewed by two scientific project leaders referred to as the rapporteur and
co-rapporteur, respectively. Their roles are to prepare assessment reports of
safety and efficacy and for recommending the approval for full European Union
marketing.
The second regulatory scheme, referred to as the Mutual Recognition Procedure,
is a process whereby a product's national registration in one member state
within the European Union may be "mutually recognized" by other member states
within the European Union.
Substantial requirements, comparable in many respects to those imposed under
the Food Drug and Cosmetic Act, will have to be met before commercial sale is
permissible in most countries. There can be no assurance, however, as to
whether or when governmental approvals, other than those already obtained, will
be obtained or as to the terms or scope of those approvals.
HEALTH CARE REIMBURSEMENT
Our business, financial condition and results of operations will continue to be
affected by the efforts of governments and third-party payors to contain or
reduce the costs of healthcare through various means. There have been, and we
expect that there will continue to be, federal and state proposals to implement
government control of pricing and profitability of therapeutic and diagnostic
imaging agents. In addition, an
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23
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increasing emphasis on managed care has and will continue to increase the
pressure on pricing of these products. While we cannot predict whether
legislative or regulatory proposals will be adopted or the effects proposals or
managed care efforts may have on our business, the announcement of proposals
and the adoption of proposals or efforts could have a material adverse effect
on our business, financial condition and results of operations. Further, to the
extent proposals or efforts have a material adverse effect on other companies
that are our prospective corporate partners, our ability to establish strategic
alliances may be materially and adversely affected. In certain foreign markets,
the pricing and profitability of our products generally are subject to
government controls.
Sales of our products depend in part on the availability of reimbursement to
the consumer from third-party payors, including Medicare, Medicaid, and private
health insurance plans. Third-party payors are increasingly challenging the
prices charged for medical products and services. To the extent we succeed in
bringing products to market, we cannot assure you that these products will be
considered cost-effective and that reimbursement to consumers will be available
or sufficient to allow us to sell our products on a competitive basis.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that our products are clinically useful and
cost-effective, medically necessary and not experimental or investigational.
Since reimbursement approval is required from each payor individually, seeking
approvals can be a time consuming and costly process which could require us to
provide supporting scientific, clinical and cost-effectiveness data for the use
of our products to each payor separately. If we or our collaborators are unable
to secure adequate third party reimbursement for our products, there would be
material adverse effect on its business, financial condition and results of
operations.
CUSTOMERS
During the year ended December 31, 1999, we received 56% of our total product
related, license and contract revenues from four customers: Berlex
Laboratories, Inc., Progenics Pharmaceuticals, Inc. and the radiopharmacy
chains of Medi-Physics and Mallinckrodt Medical, Inc.
EMPLOYEES
As of March 1, 2000, we employed 68 persons full-time, of whom 14 were in our
proteomics subsidiary, seven in operations and manufacturing, 12 in clinical
and regulatory activities, 11 in administration and management, and 24 in
marketing and sales. We believe that we have been successful in attracting
skilled and experienced employees. None of our employees is covered by a
collective bargaining agreement. All of our employees have executed
confidentiality agreements. We consider relations with our employees to be
excellent.
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Important Factors Regarding Forward Looking Statements.
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This report includes forward-looking statements about our business and
results of operations that are subject to risks and uncertainties that could
cause our actual results to vary materially from those reflected in the
forward-looking statements. Words such as "believes," "anticipates," "plans,"
"estimates," "future," "could," "may," "should," "expect," "envision,"
"potentially," variations of such words and similar expressions are intended to
identify such forward-looking statements. Factors that could cause or
contribute to these differences include those discussed previously under the
caption "Risk factors" and elsewhere in this report. Investors are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date hereof. We disclaim any intent or obligation to update these
forward-looking statements.
You should not unduly rely on forward-looking statements contained or
incorporated by reference in this report. Actual results or outcomes may
differ materially from those predicted in our forward-looking statements due to
the risks and uncertainties inherent in our business, including among other
items, risks and uncertainties in:
.our ability to successfully execute our business model;
.our ability to compete successfully against direct and indirect competitors;
.our ability to launch our proteomics program successfully;
.market acceptance of and continuing demand for our products;
.our ability to develop new products;
.our ability to protect our intellectual property, including patents and know-
how;
.our ability to obtain additional financing to support our operations;
.the continuation of our corporate collaborations; and
.changing market conditions and other risks detailed below.
You should read and interpret any forward-looking statements together with the
following documents:
.this Annual Report on Form 10-K including the risk factors contained in this
report under the caption "Risk factors"; and
.our other filings with the Securities and Exchange Commission.
Any forward-looking statement speaks only as of the date on which that
statement is made. We will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which such statement is
made.
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Item 2. Properties
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We currently lease approximately 20,000 square feet of administrative space in
Princeton, New Jersey. The lease on this space expires in 2002. We intend to
remain in Princeton, New Jersey for the foreseeable future. In addition, we
have the right to access space located in a facility in Princeton, which was
previously leased by us, for manufacture of our products.
We also lease approximately 9,000 square feet of laboratory and office space in
Newtown, Pennsylvania which is occupied by our AxCell Biosciences subsidiary,
under a lease expiring in 2004.
We own substantially all of the equipment used in the laboratories and offices.
We believe our facilities are adequate for our operations at present.
Item 3. Legal Proceedings
In February 2000, we received information as to litigation filed against us in
the United States Federal Court for the District of New Jersey by M. David
Goldenberg and Immunomedics, Inc. We were served with this lawsuit on March 17,
2000. The litigation claims that our ProstaScint product infringes a patent
purportedly held by the plaintiffs. We believe that it is invalid and
unenforceable and that ProstaScint does not infringe it. In addition, we have
certain rights to indemnification against litigation and litigation expenses
from the inventor of technology used in ProstaScint, which may be obtained by
withholding royalty payments on sales of ProstaScint. We believe, based upon
advice of counsel, that we have valid defenses against the claims in this
litigation, and that if it is pursued we will vigorously defend our position. We
also understand that the purported patent sought to be enforced in the
litigation has now expired; as a result, the claim even if successful would not
result in a bar of the continued sale of ProstaScint or affect any other of our
products or technology. However, given the uncertainty associated with
litigation, we cannot give any assurance that the litigation could not result in
a material expenditure to us.
Item 4. Submission of Matters to a Vote of Security Holders
--None
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Executive Officers of the Registrant
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The executive officers of the Company and their respective ages and positions
with the Company as of March 1, 2000 are as follows:
Name Age Title
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James A. Grigsby (1)...................... 57 Chairman of the Board
H. Joseph Reiser, Ph.D. ................... 53 Director, President and Chief Executive Officer
Nicholas Borys, M.D. ...................... 40 Vice President, Medical Affairs
Donald F. Crane............................ 49 Vice President, General Counsel and Corporate
Secretary
Richard W. Krawiec, Ph.D. ................. 52 Vice President, Investor Relations and Corporate
Communications
Jane M. Maida.............................. 44 Vice President, Finance and Administration;
Principal Financial and Accounting Officer
John D. Rodwell, Ph.D. .................... 53 Acting President and Chief Technical Officer, AxCell
Biosciences Corporation, a subsidiary
- ------
All executive officers are elected annually by Board of Directors. There is no
family relationship among any of the executive officers or directors.
James A. Grigsby, Chairman of our Board of Directors, has been our director
since May 1996 and Chairman since June 1998. Since April, 1999, Mr. Grigsby has
been affiliated with the consulting firm of Nachman, Hays & Associates.
Previously, since 1994, Mr. Grigsby was president of Cancer Care Management
LLC, a consulting firm providing consulting services regarding cancer disease
management issues. From 1989 to 1994, Mr. Grigsby was President of CIGNA
Corporation's International Life and Employee Benefits Division, which operated
in over 20 countries worldwide, and during that period also served as the head
of CIGNA's national health care sales force. Prior to that time, since 1978, he
held a number of executive positions with CIGNA Corporation. Mr. Grigsby
received a B.A. in Mathematics from Baylor University and is a Fellow of the
Society of Actuaries.
H. Joseph Reiser, Ph.D., joined us in August 1998 as President and Chief
Executive Officer and as a member of our Board of Directors. Most recently, Dr.
Reiser was Corporate Vice President and General Manager, Pharmaceuticals, for
Berlex Laboratories Inc., the U.S. subsidiary of Schering AG. During his 17
year tenure at Berlex, Dr. Reiser held positions of increasing responsibility,
serving as the first President of Schering Berlin's Venture Corporation, Vice
President, Technology and Industry Relations, and Vice President, Drug
Development and Technology. Dr. Reiser received his Ph.D. in Physiology from
the Indiana University School of Medicine, where he also earned his M.S. in
Physiology and B.S. in Biology.
Nicholas Borys, M.D., joined us as Vice President of Medical Affairs in
January, 2000. Previously, Dr. Borys was Vice President and Medical Director of
Anthra Pharmaceuticals from October, 1998 to January, 2000. From December 1992
to July 1998, he was Director of Medical Affairs at Amersham Healthcare. From
1987 to 1992, he was Director of Medical and Clinical Services at Hoffmann-La
Roche. Dr. Borys received his undergraduate education at Rutgers University and
his M.D. from American University of the Caribbean.
Donald F. Crane joined us in June 1997 as Vice President, General Counsel and
Corporate Secretary. From 1993 until 1997, Mr. Crane was Senior SEC Counsel for
U.S. Surgical Corporation. Previously, Mr. Crane was Assistant Secretary and
Corporate Counsel at BellSouth Corporation in Atlanta, Georgia. Mr. Crane holds
a B.A. in Communications from the University of Georgia and a J.D. from the
University of Georgia School of Law.
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Richard W. Krawiec, Ph.D., joined us in January 2000 as Vice President,
Investor Relations and Corporate Communications. During 1999, Dr. Krawiec was
Vice President, Investor Relations at La Jolla Pharmaceutical Company, a
publicly held biotechnology company which develops drugs for autoimmune
diseases. From 1994 to 1998, he was Director of Investor Relations at Amylin
Pharmaceuticals, Inc., a publicly held biotechnology company focused on
diabetes and metabolic disorders. Dr. Krawiec holds a B.S. in Biology from
Boston University and a Ph.D. in Biological Sciences from the University of
Rhode Island.
Jane M. Maida currently serves as our Vice President--Finance and
Administration. Ms. Maida joined us in March 1997 as Chief Accounting Officer,
Corporate Controller and Assistant Secretary. Before joining us, Ms. Maida
served as Chief Financial and Information Officer for Mustard Seed, Inc., a
behavioral health care company, from 1995. Prior to that position, she was
Chief Financial Officer of Morphogenesis, Inc., a biotechnology company focused
on cellular immunology. From 1986 to 1994, Ms. Maida was Corporate Controller
and Assistant Secretary for The Liposome Company, Inc., a biotechnology
company. Ms. Maida holds a B.S. in Education from the University of
Pennsylvania and a M.S. in Accounting from the State University of New York at
Albany. She is also a Certified Public Accountant.
Our key AxCell employees are:
John D. Rodwell, Ph.D., acting President and Chief Technical Officer of AxCell
Biosciences Corporation, our subsidiary, joined us in September 1981. He served
as Director, Chemical Research, then as Vice President, Discovery Research from
1984 to 1989, as Vice President, Research and Development from 1989 to July
1996, and as Senior Vice President and Chief Scientific Officer from July 1996
through June 1999, at which time he assumed full time duties as Acting
President and Chief Technical Officer of AxCell. From 1980 to 1981, Dr. Rodwell
was a Research Assistant Professor and, from 1976 to 1980, he was a
postdoctoral fellow, both in the Department of Microbiology at the University
of Pennsylvania School of Medicine, where he currently is an Adjunct Associate
Professor in the Department of Microbiology. He holds a B.A. in Chemistry from
the University of Massachusetts, an M.S. in Organic Chemistry from Lowell
Technological Institute and a Ph.D. in Biochemistry from the University of
California at Los Angeles.
Brian R. Bullard, 36, joined the company in January 1999 as Vice President and
Chief Information Officer of AxCell. Most recently he was with Perkin-Elmer's
life sciences divisions, PE Biosystems, where as Manager, Data Products, he was
in charge of scientific and market evaluation of data in conjunction with
Perkin-Elmer's bioinformatics software platform. Previously, Mr. Bullard was
Director of Bioinformatics, Development at Gene Logic in Maryland, responsible
for the biotechnology firm's information technology. Mr. Bullard has sixteen
years of information technology experience and has held a number of other
information technology positions with firms including Science and Technology
Corporation, OptiMetrics, Inc. and The Physical Sciences Laboratory.
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28
Risk Factors
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Risk factors
You should carefully consider the risks described below together with all of the
other information included in or incorporated by reference into this Form 10-K
Annual Report before making an investment decision. If any of the following
risks occurs, our business, financial condition or results of operations could
be harmed. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
We have a history of operating losses and accumulated deficit and expect to
incur losses in the future.
We have a history of operating losses since our inception. We had net income of
$729,000 during the year ended December 31, 1999 which included certain non-
operating gains. We had net losses of $13,152,000 during the year ended
December 31, 1998 and $30,712,000 during the year ended December 31, 1997. We
had an accumulated deficit of $301,283,000 as of December 31, 1999. In order to
develop and commercialize our technologies, particularly our proteomics program
and prostate specific membrane antigen, or PSMA, technology, and expand our
oncology products, we expect to incur significant increases in our expenses
over the next several years. As a result, we may continue to report operating
losses for the near future and we may never be profitable or achieve
significant revenues.
Our ability to achieve significant revenues or profitability will depend upon
numerous factors, including:
.successful product development;
.our ability to acquire, develop and commercialize complementary products and
technologies; and
.our ability to achieve increased sales for our existing products and sales for
any new products.
We are in the early stages of development and commercialization of our
technology platforms and may never achieve the goals of our business plan.
Early last year, we completed our restructuring to focus on development of our
prostate specific membrane antigen, or PSMA, and proteomics technologies and
the marketing of our existing products. We may be unable to continue to
successfully develop or commercialize these technologies. Our PSMA and
proteomics technology are still in the early stages of development. We have
only recently begun to incorporate our proteomics technology into
commercialized products.
We began operations in 1980 and have been engaged primarily in research
directed toward the development, commercialization and marketing of products to
improve diagnosis and treatment of cancer and other disease. In December 1992,
we introduced for commercial use our OncoScint imaging agent. In October 1996,
we introduced for commercial use our ProstaScint imaging agent. In March 1997,
we introduced for commercial use our Quadramet therapeutic product. These
products have not yet achieved significant commercial success. In 1998, we
began a restructuring of our company to focus on the development of our PSMA
and proteomics technologies and marketing of these existing products.
Our business is therefore subject to the risks inherent in the development of
an early stage business enterprise, such as the need:
.to obtain sufficient capital to support the expenses of developing our
technology and commercializing our products;
.to ensure that our products are safe and effective;
.to manufacture our products in sufficient quantities and at a reasonable cost;
.to develop a sufficient market for our products; and
.to attract and retain qualified management, sales, technical and scientific
staff.
The problems frequently encountered using new technologies and operating in a
competitive environment also may affect our business. If we fail to properly
address these risks and attain our business objectives, our business, results
of operations and financial condition will suffer.
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Our proteomics program is at an early stage of development.
We have developed and intend to continue to develop our proteomics program.
This technology involves new approaches and remains commercially unproven. Our
technology and development focus is primarily directed toward offering an
infrastructure to companies for the development of drugs to treat a variety of
complex human diseases. There is limited understanding generally relating to
the role of proteins in diseases, and few products based on protein interaction
discoveries have been developed and commercialized. Even if our proteomics
program was successful in identifying and validating biological targets, there
is no guarantee that our customers will be able to develop or commercialize
products to improve human health.
In addition, the success of our proteomics technology will depend upon our
ability to use software tools to generate data that relates protein signaling
pathways to a variety of other bioinformatic information. Because of the
complexity of this data, we may not be able to detect and remedy any design
defects or software errors in our existing or future technologies, including
databases.
Due to the specialized nature and price of our proteomics technology and
services, there are a limited number of pharmaceutical and biotechnology
companies that are potential customers. Additional reasons why there may not be
a great demand for our proteomics technology and services include:
.our potential customers may determine to conduct in-house research;
.our competitors may offer similar services at competitive prices;
.we may not be able to service satisfactorily the needs of our potential or
actual customers;
.others may publicly disclose or patent proprietary information contained in
our IFP Database (including information related to protein signaling pathways
or target candidates) or relating to prostate antigens or antibodies; and
.technological innovations may be discovered that are more advanced than those
used by or available to us.
Our technology program for proteomics is still in the early stages of
development. We may not be able to populate our IFP Database with information
that is useful to potential customers in a timely manner. Even if we complete
and develop successfully our proteomics technology, the technology may not be
accepted by, or be useful to, our customers.
Our PSMA product development program is novel and, consequently, inherently
risky.
We are subject to the risks of failure inherent in the development of product
candidates based on new technologies, including our PSMA technology. These
risks include the possibility that:
.the technologies we use will not be effective;
.our product candidates will be unsafe or otherwise fail to receive the
necessary regulatory approvals;
.our product candidates will be hard to manufacture on a large scale or will be
uneconomical to market; and
.we will not successfully overcome technological challenges presented by our
products.
Our objectives include developing our PSMA technology into novel cancer
therapeutics, including a cancer vaccine. To our knowledge, no cancer
therapeutic vaccine has been approved for marketing. Our other research and
development programs involve similarly novel approaches to human therapeutics.
Consequently, there is no precedent for the successful commercialization of
therapeutic products based on our PSMA technologies. We cannot assure you that
any of our products will be successfully developed.
We are heavily dependent on market acceptance of ProstaScint and Quadramet for
near-term revenues.
ProstaScint and Quadramet are expected to account for a significant percentage
of our product-related revenues in the near future. For the year ended December
31, 1999, revenues from ProstaScint and Quadramet accounted for approximately
92% of our product related revenues.
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Because these products contribute the majority of our product-related revenues,
our business, financial condition and results of operations depend on their
acceptance as safe, effective and cost-efficient alternatives to other
available treatment and diagnostic protocols by the medical community,
including:
.health care providers, such as hospitals and physicians; and
.third-party payors, including Medicare, Medicaid, private insurance carriers
and health maintenance organizations.
Our customers, including technologists and physicians, must successfully
complete our Partners in Excellence Program, or PIE Program, a proprietary
training program designed to promote the correct acquisition and interpretation
of ProstaScint images. This approach is, therefore, technique dependent and
requires a learning commitment on the part of users. We cannot assure you that
additional physicians will make this commitment or otherwise accept this
product as part of their treatment practices.
Berlex Laboratories, Inc. markets Quadramet in the United States through an
agreement that we entered into in October 1998. We cannot assure you that
Berlex will be able to successfully market Quadramet or that this agreement
will result in significant revenues for us. We recently obtained marketing
rights to Quadramet in Canada, but have not yet implemented a selling program.
We cannot assure you that Quadramet can be marketed effectively in Canada, or
that it will contribute significantly to our revenues.
We cannot assure you that Quadramet will be approved for additional
indications, due to uncertainty as to efficacy or safety for other purposes, to
regulatory obstacles and to physician preferences for existing or competing
practices.
Accordingly, we cannot assure you that ProstaScint or Quadramet will achieve
market acceptance on a timely basis, or at all. If ProstaScint or Quadramet do
not achieve broad market acceptance, we may not be able to generate sufficient
product revenue to become profitable.
We may need to raise additional capital which may not be available.
We have incurred negative cash flows from operations since inception. We have
expended, and will need to continue to expend, substantial funds to complete
our planned product development efforts, including our proteomics and PSMA
programs. While we believe that the proceeds from this offering will be
sufficient to meet our development and commercialization needs for the
foreseeable future, our future capital requirements and the adequacy of our
available funds depend on many factors, including:
.successful commercialization of our products;
.acquisition of complementary products and technologies;
.magnitude, scope and results of our product development efforts;
.progress of preclinical studies and clinical trials;
.progress of regulatory affairs activities;
.costs of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights;
.competing technological and market developments; and
.expansion of strategic alliances for the sale, marketing and distribution of
our products.
We may raise additional capital through public or private equity offerings,
debt financings or additional collaborations and licensing arrangements.
Additional financing may not be available to us when we need it, or, if
available, we may not be able to obtain financing on terms favorable to us or
our stockholders. If we raise additional capital by issuing equity securities,
the issuance will result in ownership dilution to our stockholders. If we raise
additional funds through collaborations and licensing arrangements, we may be
required to relinquish rights to certain of our technologies or product
candidates or to grant licenses on
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unfavorable terms. If we relinquish rights or grant licenses on unfavorable
terms, we may not be able to develop or market products in a manner that is
profitable to us. If adequate funds are not available, we may not be able to
conduct research activities, preclinical studies, clinical trials or other
activities relating to the successful commercialization of our products.
Competition in our field is intense and likely to increase.
We face, and will continue to face, intense competition from one or more of
the following entities:
.pharmaceutical companies;
.biotechnology companies;
.bioinformatics companies;
.diagnostic companies;
.academic and research institutions; and
.government agencies.
All of our lines of business are subject to significant competition from
organizations that are pursuing technologies and products that are the same as
or similar to our technology and products. Many of the organizations competing
with us have greater capital resources, research and development staffs and
facilities and marketing capabilities.
We believe that our future success will depend in large part on our ability to
maintain a competitive position in proteomics and in the development of
oncology products. Before we recover development expenses for our products and
technologies, the products or technologies may become obsolete as a result of
technological developments by us or others. Our products could also be made
obsolete by new technologies which are less expensive or more effective. We
may not be able to make the enhancements to our technology necessary to
compete successfully with newly emerging technologies.
We have experienced fluctuating results of operations.
Our results of operations have fluctuated on an annual and quarterly basis and
may fluctuate significantly from period to period in the future, due to, among
other factors:
.variations in revenue from sales of and royalties from our products;
.timing of regulatory approvals and other regulatory announcements relating to
our products;
.variations in our marketing, manufacturing and distribution channels;
.timing of the acquisition and successful integration of complementary
products and technologies;
.timing of new product announcements and introductions by us and our
competitors; and
.product obsolescence resulting from new product introductions.
Many of these factors, and others not listed above, are outside our control.
Due to one or more of these factors, our results of operations may fall below
the expectations of securities analysts and investors in one or more future
quarters. If this happens, the market price of our common stock could decline.
We rely heavily on our collaborative partners.
Our success depends in significant part upon the success of our collaborative
partners. We have entered into the following agreements for the sales,
marketing, distribution and manufacture of our products, product candidates
and technologies:
.sub-license and marketing agreement with Berlex Laboratories, Inc. relating
to the Quadramet technology which we licensed from The Dow Chemical Company.
Berlex is responsible for marketing, selling and
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arranging for the manufacture and distribution of Quadramet in the United
States. This agreement expires on the later of October 28, 2018 or upon the
expiration of the patents covering Quadramet;
.agreement for manufacture of Quadramet by The DuPont Pharmaceuticals Company
(formerly the radiopharmaceuticals division of The DuPont Merck Company);
.marketing and platform development agreement with Informax, Inc. related to
our proteomics program;
.a joint venture with Progenics Pharmaceuticals, Inc. for the development of
PSMA for immunotherapy for prostate and other cancers; and
.letter of intent for a licensing agreement with Molecular Staging, Inc. for
technology to be used in developing in vitro diagnostic tests using PSMA and
PSA.
Because our collaborative partners are responsible for certain of our sales,
marketing, manufacturing and distribution activities, these activities are
outside our direct control. We cannot assure you that our partners will
perform their obligations under these agreements with us. In the event that
our collaborative partners do not successfully market and sell our products or
breach their obligations under our agreements, our products may not be
commercially successful, any success may be delayed and new product
development could be inhibited.
Our business could be harmed if our collaborations expire or are terminated
early.
We cannot assure you that we will be able to maintain our existing
collaborative arrangements. If they expire or are terminated, we cannot assure
you that they will be renewed or that new arrangements will be available on
acceptable terms, if at all. In addition, we cannot assure you that any new
arrangements or renewals of existing arrangements will be successful, that the
parties to any new or renewed agreements will perform adequately or that any
potential collaborators will not compete with us.
We cannot assure you that our existing or future collaborations will lead to
the development of product candidates or technologies with commercial
potential, that we will be able to obtain proprietary rights or licenses for
proprietary rights for our product candidates or technologies developed in
connection with these arrangements or that we will be able to ensure the
confidentiality of proprietary rights and information developed in such
arrangements or prevent the public disclosure thereof.
We have limited sales, marketing and distribution capabilities for our
products.
We recently established a sales force and have limited internal sales,
marketing and distribution capabilities for our products. We depend on Berlex
for the sale, marketing and distribution of Quadramet in the United States. In
locations outside the United States, we have not established a selling
presence. If we are unable to establish and maintain significant sales,
marketing and distribution efforts, either internally or through arrangements
with third parties, our business may be harmed.
There are risks associated with the manufacture of our products.
If we are to be successful, our products will have to be manufactured either
internally or through third-party manufacturers in compliance with regulatory
requirements and at costs acceptable to us. We cannot assure you that we will
be able to continue to manufacture, arrange for manufacture on reasonable
terms or successfully outsource the manufacturing of our products. If we are
unable to successfully manufacture or arrange for the manufacture of our
products and product candidates, we would not be able to successfully
commercialize our products and our business may be seriously harmed.
Our business may be adversely affected by the uncertainty associated with our
third-party manufacturers' dependence on single source suppliers.
Quadramet is manufactured by DuPont pursuant to an agreement with both Berlex
and Cytogen. Some components of Quadramet, particularly Samarium/153/ and
EDTMP, are provided to DuPont by outside suppliers. Due to radioactive decay,
Samarium/153/ must be produced on a weekly basis. DuPont obtains its
requirements for Samarium/153/ from one supplier. Alternative sources for
these components may not be readily available. On one occasion, DuPont was
unable to manufacture Quadramet on a timely basis due to the failure of its
supplier to provide Samarium/153/. If DuPont cannot obtain sufficient
quantities of the components on commercially reasonable terms, or in a timely
manner, it would be unable to manufacture Quadramet on a timely and cost-
effective basis which could affect our ability to generate sufficient revenues
to become profitable.
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Compliance with manufacturing regulations is critical to our business.
We and our third-party manufacturers are required to adhere to US Food & Drug
Administration regulations setting forth requirements for current Good
Manufacturing Practices, or cGMP, and similar regulations in other countries,
which include extensive testing, control and documentation requirements.
Ongoing compliance with cGMP, labeling and other applicable regulatory
requirements are monitored through periodic inspections and market surveillance
by state and federal agencies, including the FDA, and by comparable agencies in
other countries. Failure of our third-party manufacturers or us to comply with
applicable regulations could result in sanctions being imposed on us, including
fines, injunctions, civil penalties, failure of the government to grant
premarket clearance or premarket approval of drugs, delays, suspension or
withdrawal of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions.
Failure of consumers to obtain adequate reimbursement from third-party payors
could limit market acceptance and affect pricing of our products, which would
materially adversely affect our business.
Our business, financial condition and results of operations will continue to be
affected by the efforts of governments and other third-party payors to contain
or reduce the costs of healthcare. There have been, and we expect that there
will continue to be, a number of federal and state proposals to implement
government control of pricing and profitability of therapeutic and diagnostic
imaging agents such as our products. In addition, an emphasis on managed care
increases possible pressure on pricing of these products. While we cannot
predict whether these legislative or regulatory proposals will be adopted, or
the effects these proposals or managed care efforts may have on our business,
the announcement of these proposals and the adoption of these proposals or
efforts could affect our stock price or our business. Further, to the extent
these proposals or efforts have a material adverse effect on other companies
that are our prospective corporate partners, our ability to establish strategic
alliances may be adversely affected.
Sales of our products depend in part on reimbursement to the consumer from
third-party payors, including Medicare, Medicaid and private health insurance
plans. Third-party payors are increasingly challenging the prices charged for
medical products and services. We cannot assure you that our products will be
considered cost-effective and that reimbursement to consumers will continue to
be available, or will be sufficient to allow us to sell our products on a
competitive basis. Approval of our products for reimbursement by a third- party
payor may depend on a number of factors, including the payor's determination
that our products are clinically useful and cost-effective, medically necessary
and not experimental or investigational. Reimbursement is determined by each
payor individually and in specific cases. The reimbursement process can be time
consuming. If we cannot secure adequate third-party reimbursement for our
products, there would be a material adverse effect on our business, financial
condition and results of operations.
Our potential oncology products will be subject to the risks of failure
inherent in the development of diagnostic or therapeutic products based on new
technologies.
Product development involves a high degree of risk. We cannot assure you that
the product candidates we develop, pursue or offer will prove to be safe and
effective, will receive the necessary regulatory approvals, will not be
precluded by proprietary rights of third parties or will ultimately achieve
market acceptance. These product candidates will require substantial additional
investment, laboratory development, clinical testing and regulatory approvals
prior to their commercialization. We cannot assure you that we will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products. If we are unable to develop and
commercialize products on a timely basis or at all, our business will be
harmed.
Before we obtain regulatory approvals for the commercial sale of any of our
products under development, we must demonstrate through preclinical studies and
clinical trials that the product is safe and efficacious for use in each target
indication. The results from preclinical studies and early clinical trials may
not be predictive of results that will be obtained in large-scale testing. We
cannot assure you that our clinical trials will demonstrate the safety and
efficacy of any products or will result in marketable products. A number of
companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
Clinical trials or marketing of any potential diagnostic or therapeutic
products may expose us to liability claims for the use of these diagnostic or
therapeutic products. We may not be able to obtain product liability insurance
or, if obtained, sufficient coverage may not be available at a reasonable cost.
In addition, as we develop diagnostic or therapeutic products internally, we
will have to make significant investments in diagnostic or therapeutic product
development, marketing, sales and
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regulatory compliance resources. We will also have to establish or contract for
the manufacture of products, including supplies of drugs used in clinical
trials, under the current Good Manufacturing Practices of the FDA. We also
cannot assure you that product issues will not arise following successful
clinical trials and FDA approval.
The rate of completion of clinical trials also depends on the rate of patient
enrollment. Patient enrollment depends on many factors, including the size of
the patient population, the nature of the protocol, the proximity of patients
to clinical sites and the eligibility criteria for the study. Delays in planned
patient enrollment may result in increased costs and delays, which could have a
harmful effect on our ability to develop the products in our pipeline.
If we are unable to comply with applicable governmental regulations, we may not
be able to continue our operations.
Any products tested, manufactured or distributed by us or on our behalf
pursuant to FDA clearances or approvals are subject to pervasive and continuing
regulation by numerous regulatory authorities, including primarily the FDA. We
may be slow to adapt, or we may never adapt to changes in existing requirements
or adoption of new requirements or policies. Our failure to comply with
regulatory requirements could subject us to enforcement action, including
product seizures, recalls, withdrawal of clearances or approvals, restrictions
on or injunctions against marketing our products based on our technology, and
civil and criminal penalties. We cannot assure you that we will not be required
to incur significant costs to comply with laws and regulations in the future or
that laws or regulations will not create an unsustainable burden on our
business.
Numerous federal, state and local governmental authorities, principally the
FDA, and similar regulatory agencies in other countries, regulate the
preclinical testing, clinical trials, manufacture and promotion of any
compounds or agents we or our collaborative partners develop, and the
manufacturing and marketing of any resulting drugs. The drug development and
regulatory approval process is lengthy, expensive, uncertain and subject to
delays.
The regulatory risks we face also include the following:
.any compound or agent we or our collaborative partners develop must receive
regulatory agency approval before it may be marketed as a drug in a particular
country;
.the regulatory process, which includes preclinical testing and clinical trials
of each compound or agent in order to establish its safety and efficacy,
varies from country to country, can take many years and requires the
expenditure of substantial resources;
.in all circumstances, approval of the use of previously unapproved
radioisotopes in certain of our products requires approval of either the
Nuclear Regulatory Commission or equivalent state regulatory agencies. A
radioisotope is an unstable form of an element which undergoes radioactive
decay, thereby emitting radiation which may be used, for example, to image or
destroy harmful growths or tissue. We cannot assure you that such approvals
will be obtained on a timely basis, or at all;
.data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory agency
approval; and
.delays or rejections may be encountered based upon changes in regulatory
agency policy during the period of drug development and/or the period of
review of any application for regulatory agency approval. These delays could
adversely affect the marketing of any products we or our collaborative
partners develop, impose costly procedures upon our activities, diminish any
competitive advantages we or collaborative partners may attain and adversely
affect our ability to receive royalties.
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We cannot assure you that, even after this time and expenditure, regulatory
agency approvals will be obtained for any compound or agent developed by or in
collaboration with us. Moreover, regulatory agency approval for a drug or
agent may entail limitations on the indicated uses that could limit the
potential market for any such drug. Furthermore, if and when such approval is
obtained, the marketing, manufacture, labeling, storage and record keeping
related to our products would remain subject to extensive regulatory
requirements. Discovery of previously unknown problems with a drug, its
manufacture or its manufacturer may result in restrictions on such drug,
manufacture or manufacturer, including withdrawal of the drug from the market.
Failure to comply with regulatory requirements could result in fines,
suspension of regulatory approvals, operating restrictions and criminal
prosecution.
The U.S. Food, Drug and Cosmetics Act requires that our products be
manufactured in FDA registered facilities subject to inspection. The
manufacturer must be in compliance with cGMP, which imposes certain procedural
and documentation requirements upon us, and our manufacturing partners with
respect to manufacturing and quality assurance activities. If we or our
manufacturing partners do not comply with cGMP we may be subject to sanctions,
including fines, injunctions, civil penalties, recalls or seizures of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for drugs, withdrawal of
marketing approvals and criminal prosecution.
We depend on attracting and retaining key personnel.
We are highly dependent on the principal members of our management and
scientific staff. The loss of their services might significantly delay or
prevent the achievement of development or strategic objectives. Our success
depends on our ability to retain key employees and to attract additional
qualified employees. Competition for personnel is intense, and we cannot
assure you that we will be able to retain existing personnel or attract and
retain additional highly qualified employees in the future.
We have an employee retention agreement with our President and Chief Executive
Officer, H. Joseph Reiser, Ph.D., which provides for vesting of stock options
for the purchase of shares of our common stock based on continued employment
and on the achievement of performance objectives defined by the board of
directors. We do not have similar retention agreements with our other key
personnel. If we are unable to hire and retain personnel in key positions, our
management and operations will suffer unless a qualified replacement can be
found.
Our business exposes us to potential liability claims that may exceed our
financial resources, including our insurance coverage, and may lead to the
curtailment or termination of our operations.
Our business is subject to product liability risks inherent in the testing,
manufacturing and marketing of our products. We cannot assure you that product
liability claims will not be asserted against us, our collaborators or our
licensees. While we currently maintain product liability insurance in amounts
we believe are adequate, we cannot assure you that such coverage will be
adequate to protect us against future product liability claims or that product
liability insurance will be available to us in the future on commercially
reasonable terms, if at all. Furthermore, we cannot assure you that we will be
able to avoid significant product liability claims and adverse publicity. If
liability claims against us exceed our financial resources we may have to
curtail or terminate our operations.
Our business involves environmental risks that may result in liability for us.
We are subject to a variety of local, state and federal government regulations
relating to storage, discharge, handling, emission, generation, manufacture
and disposal of toxic, infectious or other hazardous substances used to
manufacture our products. If we fail to comply with these regulations, we
could be liable for damages, penalties or other forms of censure.
If our patent applications do not result in issued patents, then our
competitors may obtain rights to commercialize our discoveries.
Our business and competitive positions are dependent upon our ability to
protect our proprietary technology. Because of the substantial length of time
and expense associated with development of new products, we, like the rest of
the biopharmaceutical industry, place considerable importance on obtaining and
maintaining patent and trade secret protection for new technologies, products
and processes. We have filed patent applications for our technology for
diagnostic and therapeutic products and the methods for their production and
use.
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The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including us, are generally uncertain and involve complex legal and
factual questions. Our patent applications may not protect our technologies and
products because of the following reasons:
.there is no guarantee that any of our pending patent applications will result
in additional issued patents;
.we may develop additional proprietary technologies that are not patentable;
.there is no guarantee that any patents issued to us, our collaborators or our
licensors will provide a basis for a commercially viable product;
.there is no guarantee that any patents issued to us or our collaborators will
provide us with any competitive advantage;
.there is no guarantee that any patents issued to us or our collaborators will
not be challenged, circumvented or invalidated by third parties; and
.there is no guarantee that any patents previously issued to others or issued
in the future will not have an adverse effect on our ability to do business.
In addition, patent law in the technology fields in which we operate is
uncertain and still evolving, and we cannot assure you as to the degree of
protection that will be afforded any patents we are issued or license from
others. Furthermore, we cannot assure you that others will not independently
develop similar or alternative technologies, duplicate any of our technologies,
or, if patents are issued to us, design around the patented technologies
developed by us. In addition, we could incur substantial costs in litigation if
we are required to defend ourselves in patent suits by third parties or if we
initiate such suits. We cannot assure you that, if challenged by others in
litigation, the patents we have been issued, or which we have been assigned or
have licensed from others will not be found invalid. We cannot assure you that
our activities would not infringe patents owned by others. Defense and
prosecution of patent matters can be expensive and time-consuming and,
regardless of whether the outcome is favorable to us, can result in the
diversion of substantial financial, managerial and other resources. An adverse
outcome could:
.subject us to significant liability to third parties;
.require us to cease any related research and development activities and
product sales; or
.require us to obtain licenses from third parties.
We cannot assure you that any licenses required under any such third-party
patents or proprietary rights would be made available on commercially
reasonable terms, if at all. Moreover, the laws of certain countries may not
protect our proprietary rights to the same extent as U.S. law.
The issuance of patents may not provide us with sufficient protection.
We depend on our patents and proprietary rights. The issuance of a patent is
not conclusive as to its validity or enforceability, nor does it provide the
patent holder with freedom to operate without infringing the patent rights of
others. Our patents and the patents we license could be challenged by
litigation and, if the outcome of such litigation was adverse, competitors
could be free to use the subject matter covered by the patent, or we may
license the technology to others in settlement of such litigation. Invalidation
of our key patents or non-approval of pending patent applications could
increase competition. In addition, any application or exploitation of our
technology could infringe patents or proprietary rights of others and any
licenses that we might need as a result of such infringement might not be
available to us on commercially reasonable terms, if at all.
We cannot predict whether our or our competitors' pending patent applications
will result in the issuance of valid patents. Litigation, which could result in
substantial cost to us, may also be necessary to enforce our patent and
proprietary rights and/or to determine the scope and validity of others'
proprietary rights. We may participate in interference proceedings that may in
the future be declared by the Patent and Trademark Office to determine priority
of invention, which could result in substantial cost to us. The outcome of any
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litigation or interference proceeding might not be favorable to us, and we
might not be able to obtain licenses to technology that we require at a
reasonable cost, if at all.
We are a defendant in litigation filed against us in the United States Federal
Court for the District of New Jersey by M. David Goldenberg and Immunomedics,
Inc. We were served with this lawsuit on March 17, 2000. The litigation claims
that our ProstaScint product infringes a patent purportedly held by the
plaintiffs. We believe that the purported patent sought to be enforced in the
litigation has now expired. As a result, the claim, even if successful, would
not result in a bar of the continued sale of ProstaScint or affect any other of
our products or technology. However, given the uncertainty associated with
litigation, we cannot give any assurance that the litigation could not result
in a material expenditure to us.
The termination of one or more license agreements that are important in the
manufacture of our current products and new product research and development
activities would harm our business.
We are a party to license agreements under which we have rights to use
technologies owned by other companies in the manufacture of our products and in
our proprietary research, development and testing processes. We are the
exclusive licensee of certain patents and patent applications held by the
University of North Carolina at Chapel Hill covering part of the technology
used in the proteomics program and of certain patents and patent applications
held by the Memorial Sloan-Kettering Institute covering PSMA. We depend upon
the enforceability of our license with The Dow Chemical Company with respect to
Quadramet. If the licenses were terminated, we may not be able to find suitable
alternatives to this technology on timely or reasonable terms, if at all. The
loss of the right to use these technologies that we have licensed would
significantly harm our business.
We cannot be certain that our security measures protect our unpatented
proprietary technology.
We also rely upon trade secret protection for some of our confidential and
proprietary information that is not subject matter for which patent protection
is being sought. To help protect our rights, we require all employees,
consultants, advisors and collaborators to enter into confidentiality
agreements that require disclosure, and in most cases, assignment to us, of
their ideas, developments, discoveries and inventions, and that prohibit the
disclosure of confidential information to anyone outside Cytogen. We cannot
assure you, however, that these agreements will provide adequate protection for
our trade secrets, know-how or other proprietary information in the event of
any unauthorized use or disclosure.
If we make any acquisitions, we will incur a variety of costs and may never
realize the anticipated benefits.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any acquisitions other than those described in this prospectus. If
we do undertake any transaction of this sort, the process of integrating an
acquired business, technology, service or product may result in operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for ongoing development of our business.
Moreover, we may never realize the anticipated benefits of any acquisition.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and amortization
expenses related to goodwill and other intangible assets. These factors could
adversely affect our results of operations and financial condition, which could
cause a decline in the market price of our common stock.
We may invest or spend the proceeds of this offering in ways with which you may
not agree.
We will retain broad discretion over the use of proceeds from this offering.
You may not agree with how we spend the proceeds, and our use of the proceeds
may not yield a significant return or any return at all. We intend to use a
majority of the proceeds from this offering to fund our operations, including
continued development, manufacturing and commercialization of our proteomics
technologies, research and development of additional products, expansion of our
sales and marketing capabilities, and for general corporate purposes, including
working capital and capital expenditures. Because of the number and variability
of factors that determine our use of the net proceeds from this offering, we
cannot assure you that these uses will not vary substantially from our
currently planned uses. Until we use the net proceeds of this offering for the
above purposes, we intend to invest the funds in investment grade, interest
bearing securities.
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Our stock price has been and may continue to be volatile, and your investment
in our stock could decline in value.
The market prices for securities of biotechnology and pharmaceutical companies
have historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. The market price of our
common stock has fluctuated over a wide range and may continue to fluctuate
for various reasons, including, but not limited to, announcements concerning
our competitors or us regarding:
.results of clinical trials;
.technological innovations or new commercial products;
.changes in governmental regulation or the status of our regulatory approvals
or applications;
.changes in earnings;
.changes in health care policies and practices;
.developments or disputes concerning proprietary rights;
.litigation or public concern as to safety of the our potential products; and
.changes in general market conditions.
We have adopted various anti-takeover provisions which may affect the market
price of our common stock.
Our Board of Directors has the authority, without further action by the
holders of common stock, to issue from time to time, up to 5,400,000 shares of
preferred stock in one or more classes or series, and to fix the rights and
preferences of the preferred stock. Pursuant to these provisions, we have
implemented a stockholder rights plan by which one preferred stock purchase
right is attached to each share of common stock, as a means to deter coercive
takeover tactics and to prevent an acquirer from gaining control of us without
some mechanism to secure a fair price for all of our stockholders if an
acquisition was completed. These rights will be exercisable if a person or
group acquires beneficial ownership of 20% or more of our common stock and can
be made exercisable by action of our board of directors if a person or group
commences a tender offer which would result in such person or group
beneficially owning 20% or more of our common stock. Each right will entitle
the holder to buy one one-thousandth of a share of a new series of our junior
participating preferred stock for $20. If any person or group becomes the
beneficial owner of 20% or more of our common stock (with certain limited
exceptions), then each right not owned by the 20% stockholder will entitle its
holder to purchase, at the right's then current exercise price, common shares
having a market value of twice the exercise price. In addition, if after any
person has become a 20% stockholder, we are involved in a merger or other
business combination transaction with another person, each right will entitle
its holder (other than the 20% stockholder) to purchase, at the right's then
current exercise price, common shares of the acquiring company having a value
of twice the right's then current exercise price.
We are subject to provisions of Delaware corporate law which, subject to
certain exceptions, will prohibit us from engaging in any "business
combination" with a person who, together with affiliates and associates, owns
15% or more of our common stock for a period of three years following the date
that the person came to own 15% or more of our common stock unless the
business combination is approved in a prescribed manner.
These provisions of the stockholder rights plan, our certificate of
incorporation, and of Delaware law may have the effect of delaying, deterring
or preventing a change in control of us, may discourage bids for our common
stock at a premium over market price and may adversely affect the market
price, and the voting and other rights of the holders, of our common stock.
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A large number of our shares are eligible for future sale which may adversely
impact the market price of our common stock.
A large number of shares of common stock already outstanding, or issuable upon
exercise of options and warrants, are eligible for resale, which may adversely
affect the market price of the common stock. As of March 13, 2000, we had
72,649,096 shares of common stock outstanding. An additional 4,580,331 shares
of common stock are issuable upon the exercise of outstanding stock options and
warrants. Substantially all of such shares subject to outstanding options will,
when issued upon exercise thereof, be available for immediate resale in the
public market pursuant to currently effective registration statements under the
Securities Act of 1933, as amended, or pursuant to Rule 701 promulgated
thereunder.
Berlex Laboratories, Inc. exercised its registration rights with respect to
1,000,000 shares of common stock and we are contractually obligated to register
these shares. We expect to file this registration statement in the immediate
future. Berlex has agreed not to sell its shares for 90 days following the date
of this prospectus. Following this 90-day period, Berlex may sell these shares
from time to time.
- --------------------------------------------------------------------------------
40
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Cytogen Common Stock is traded on the NASDAQ National Market tier of The
NASDAQ Stock Market under the trading symbol "CYTO."
The table below sets forth the high and low sale prices for Cytogen common
stock for each of the calendar quarters indicated, as reported by the NASDAQ
National Market.
1998 High Low
- ---- ---- -----
First Quarter.................................................. 2 7/16 1 1/4
Second Quarter................................................. 2 5/8
Third Quarter.................................................. 2 9/16 3/4
Fourth Quarter................................................. 1 7/8 11/16
1999
- ----
First Quarter.................................................. 1 1/2 27/32
Second Quarter................................................. 2 7/8
Third Quarter.................................................. 2 3/8 1 3/8
Fourth Quarter................................................. 3 23/64 1 3/8
As of February 14, 2000, there were approximately 4,818 holders of record
of the common stock.
Cytogen has never paid any cash dividends on its common stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain any future earnings to fund the
development and growth of its business. Any future determination to pay
dividends will be at the discretion of the Company's board of directors.
41
Item 6. Selected Financial Data
The following selected financial information has been derived from the
consolidated financial statements of the Company for each of the five years in
the period ended December 31, 1999, which have been audited by Arthur Andersen
LLP, the Company's independent public accountants. The selected financial data
set forth below should be read in conjunction with the consolidated financial
statements, including the notes thereto, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other information provided
elsewhere in this report.
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------
Statements of Operations Data: (All amounts in thousands, except per share date)
Revenues:
Product sales .................................... $ 6,971 $ 8,976 $ 5,252 $ 1,507 $ 1,377
Royalties ........................................ 1,060 1,664 3,282 - -
License and contract ............................. 3,171 9,239 5,886 4,223 3,608
-------- -------- -------- -------- --------
Total revenues ................................. 11,202 19,879 14,420 5,730 4,985
-------- -------- -------- -------- --------
Operating Expenses:
Cost of product and contract
manufacturing revenues (1)...................... 4,111 12,284 5,939 - -
Research and development .......................... 3,849 9,967 17,913 20,539 22,594
Acquisition of technology rights.................. 1,214 - - - 45,878
Equity loss in Targon subsidiary................... - 1,020 9,232 288 -
Selling and marketing ............................. 4,210 5,103 5,492 4,143 4,493
General and administrative......................... 3,501 7,420 6,871 5,494 4,804
-------- -------- -------- -------- --------
Total operating expenses ....................... 16,885 35,794 45,447 30,464 77,769
-------- -------- -------- -------- --------
Operating loss.................................. (5,683) (15,915) (31,027) (24,734) (72,784)
Gain on sale of laboratory and manufacturing
facilities........................................ 3,298 - - - -
Gain on sale of Targon subsidiary.................... - 2,833 - - -
Other income (expense) .............................. 412 (70) 315 968 264
-------- -------- -------- -------- --------
Loss before income taxes ...................... (1,973) (13,152) (30,712) (23,766) (72,520)
Income tax benefit .................................. (2,702) - - - -
-------- -------- -------- -------- --------
Net income (loss).................................... 729 (13,152) (30,712) (23,766) (72,520)
Dividends, including deemed
dividends on preferred stock...................... - (119) (1,352) (4,571) -
-------- -------- -------- -------- --------
Net income (loss) to common stockholders............. $ 729 $(13,271) $(32,064) $(28,337) $(72,520)
======== ======== ======== ======== ========
Basic and diluted net income (loss) per
common share..................................... $ 0.01 $ (0.24) $ (0.63) $ (0.59) $ (2.11)
======== ======== ======== ======== ========
Weighted average common shares outstanding
Basic ............................................ 67,179 56,419 51,134 48,401 34,333
======== ======== ======== ======== ========
Diluted .......................................... 68,187 56,419 51,134 48,401 34,333
======== ======== ======== ======== ========
42
December 31,
--------------------------------------------------------------------------
Consolidated Balance Sheet Data: 1999 1998 1997 1996 1995
--------- ------------ ---------- ------------ ----------
(in thousands)
Cash, short term investments and
restricted cash ................................ $ 12,394 $ 3,015 $ 7,401 $ 24,765 $ 29,135
Total assets ........................................ 18,605 10,900 27,555 41,543 37,149
Long-term liabilities ............................... 2,416 2,223 10,171 1,855 3,275
Accumulated deficit ................................. (301,283) (302,012) (288,741) (256,677) (228,340)
Stockholders' equity ................................ 10,549 443 9,983 32,927 25,276
(1) Prior to 1997, product sales were minimal and no revenues were derived from
contract manufacturing, therefore, cost of product sales was immaterial and
was included in research and development expenses.
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Cytogen Corporation ("Cytogen" or "The Company" which includes the Company
and its subsidiaries) is an established biopharmaceutical company with two
principal lines of business, proteomics and oncology. The Company is extending
its expertise in antibodies and molecular recognition to the development of new
products and a proteomics-driven drug discovery platform. The Company has
established a pipeline of product candidates based upon its proprietary antibody
and prostate specific membrane antigen, or PSMA, technologies. Cytogen is also
developing a proprietary protein pathway database as a drug discovery and
development tool for the pharmaceutical and biotechnology industries.
Cytogen's cancer management franchise currently comprises three marketed
FDA-approved products: ProstaScint, used to image the extent and spread of
prostate cancer; OncoScint CR/OV, marketed as a diagnostic imaging agent for
colorectal and ovarian cancer and Quadramet, marketed for the relief of cancer-
related bone pain. The Company is extending its cancer pipeline by exploiting
PSMA, which Cytogen exclusively licensed from Memorial Sloan-Kettering Cancer
Center. PSMA is a unique antigen highly expressed in prostate cancer cells and
in the neovasculature of a variety of other solid tumors, including breast, lung
and colon. The Company is developing its PSMA technology as part of its approach
to offering a full range of prostate cancer management products and services
throughout the progression of the disease, including gene-based immunotherapy
vaccines, antibody-delivered therapeutic compounds and novel assays for
detection of primary prostate cancer. Cytogen also plans to apply its PSMA
technology, including therapeutics and in vitro diagnostics, toward other types
of cancer based upon the Company's experience in prostate cancer. The Company's
in vivo immunotherapeutic development program is being conducted in
collaboration with Progenics Pharmaceuticals, Inc.
Proteomics is the study of the expression and interaction of proteins.
Genomics is the study and identification of an organism's genetic makeup. While
genomics provides important information regarding genetic makeup, it does not
directly provide information regarding protein functions or protein
interactions. However, genomics data can prove useful in proteomics research as
a source of obtaining complete protein sequences of ligands the Company has
identified. Public availability of this genomic information allows for effective
integration in the Company's database of public and proprietary information. The
Company recognized in its past research that the key to understanding or
developing the means to intervene in diseases was primarily based on
understanding protein interactions rather than only through the use or study of
genomics. The Company undertook this approach on its own initiative and with its
own funds. Cytogen's proteomics program, under development by its subsidiary,
AxCell Biosciences Corporation, is focused on the identification of protein
interaction and signaling pathways within cells as relating to disease
processes.
The Company utilizes its proprietary proteomics technology to map selective
protein-protein interactions and to develop a database, called the Inter-
Functional Proteomic Database, or IFP Database, which includes data relating to
protein signaling pathways linked to a variety of other bioinformatic data. The
IFP Database is designed to permit customers to integrate existing databases,
both public and proprietary, with the Company's proprietary data to create a
"virtual laboratory" on the computer desktop of researchers involved in drug
discovery. The Company believes this database has significant potential
commercial value to the pharmaceutical and biotechnology industries as a means
of expediting drug target identification, validation, screen development and
lead compound optimization faster and cheaper than with current methodologies.
These proprietary technologies are designed to provide a platform from which the
Company can quickly and cost-effectively determine protein-protein interactions
and build pathways of intracellular signaling data. The Company's IFP Database
also offers a consolidated platform to enable statistical and mathematical
modeling of complex protein pathways.
Results of Operations
Years ended December 31, 1999, 1998 and 1997
Revenues. Total revenues were $11.2 million in 1999, $19.9 million in 1998
and $14.4 million in 1997. The decrease in 1999 from 1998 and 1997 was primarily
due to lower product related revenues, the phasing out of contract manufacturing
services and lower license and research revenues. Product related revenues,
44
including product sales and royalty revenues, accounted for 72%, 54% and 59% of
revenues in 1999, 1998 and 1997, respectively. License and contract revenues
accounted for the remainder of revenues.
Product related revenues were $8.0 million, $10.6 million and $8.5 million
in 1999, 1998 and 1997, respectively. ProstaScint accounted for 79%, 60% and 48%
of the revenues in 1999, 1998 and 1997, respectively, while Quadramet royalties
and sales accounted for 13%, 31% and 38% of revenues in 1999, 1998 and 1997
respectively. Sales from ProstaScint were $6.4 million, $6.4 million and $4.1
million in 1999, 1998 and 1997, respectively. In the fourth quarter of 1999, the
Company began transitioning sales of ProstaScint from C.R. Bard, Inc. to
Cytogen's in-house sales force. The Company cannot give any assurance as to the
impact on sales by assuming the sole responsibility for marketing and sales of
ProstaScint. Royalties and sales from Quadramet were $1.1 million, $3.3 million
and $3.3 million in 1999, 1998 and 1997, respectively. From the time of product
launch in the second quarter of 1997 through June 1998, Cytogen recorded royalty
revenues for Quadramet based on minimum contractual payments, which were in
excess of actual sales. Subsequent to June 1998, the minimum royalty arrangement
was discontinued and Cytogen recorded product revenues from Quadramet based on
actual sales. Beginning in 1999, Quadramet royalties are based on net sales of
Quadramet by Berlex, Cytogen's marketing partner for Quadramet. Berlex
relaunched the product in March 1999. Although Cytogen believes that Berlex is
an advantageous marketing partner, there can be no assurance that Quadramet
will, following the re-launch of the product, achieve market acceptance on a
timely basis or result in significant revenues for Cytogen.
Other product revenues, including sales from OncoScint CR/OV, were
$620,000, $923,000 and $1.2 million in 1999, 1998 and 1997, respectively. Sales
from OncoScint CR/OV were $620,000, $872,000 and $950,000 in 1999, 1998 and
1997, respectively. The Company sells OncoScint CR/OV for diagnostic use in
ovarian and colorectal cancer. The Company is experiencing competition in the
colorectal market and expects this competition to increase. In 1998 and 1997,
other product revenues included $51,000 and $245,000, respectively from
autologous lymphocyte therapy ("ALT") treatments for metastatic renal cell
carcinoma. Due to the discontinuance of the program in September 1998, the
Company received no additional revenues from ALT treatments in 1999.
License and contract revenues for 1999, 1998 and 1997 were $3.2 million,
$9.2 million and $5.9 million, respectively, and included up-front licensing and
milestone payments, contract manufacturing and research revenues. License and
contract revenues have fluctuated in the past and may fluctuate in the future.
Revenues from up-front licensing and milestone payments were $2.0 million, $7.2
million and $2.1 million in 1999, 1998 and 1997, respectively. In 1999, the
Company recorded $1.8 million for the licensing of certain applications of
PSMA to a joint venture formed by Cytogen and Progenics Pharmaceuticals Inc.
(see Note 3 to the Consolidated Financial Statements). In 1998, the Company
recorded a $7.1 million up-front licensing payment from Berlex for the marketing
and manufacturing rights of Quadramet. In 1997, Cytogen received a $2.0 million
milestone payment from DuPont upon FDA approval of Quadramet.
Revenues from contract manufacturing and research revenues were $1.2
million, $2.0 million and $3.8 million in 1999, 1998 and 1997, respectively.
Revenues from contract manufacturing were $604,000, $1.7 million and $984,000 in
1999, 1998 and 1997, respectively. The Company is phasing out contract
manufacturing services and expects to receive no further revenues from this
service after 1999. The 1997 revenues included $1.5 million from DuPont
Pharmaceutical Company ("DuPont") for the continued clinical development of
Quadramet (see Note 6 of Notes to the Consolidated Financial Statements) and
$924,000 from Elan Corporation, plc ("Elan") for a combined research program
between Cytogen and Elan to collaboratively develop orally administered
products.
Operating Expenses. Total operating expenses were $16.9 million, $35.8
million and $45.4 million in 1999, 1998, and 1997, respectively. The 1999
decrease from 1998 and 1997 was the result of savings from the implementation of
the Company's restructuring plan. The plan, implemented in 1998 and completed in
1999, included the sale of the manufacturing facility which eliminated excess
capacity and reduced the cost of manufacturing the Company's products, closure
of Cellcor, a subsidiary, corporate downsizing, the termination of product
45
development efforts through Targon, a subsidiary, and termination and curtailing
of certain basic research and clinical programs. The 1999 operating expenditures
included a $1.2 million non-cash charge for the acquisition of exclusive
technology rights for immunotherapy to PSMA from Prostagen Inc. ("Prostagen").
The 1998 operating expenses included $1.4 million of restructuring costs
associated with the closure of Cellcor and corporate downsizing, $539,000 in
costs related to the implementation of the Company's turn-around plan, $4.0
million for a Quadramet manufacturing commitment and $995,000 for manufacturing
and distribution of Quadramet. The 1997 operating expenses included a one-time
license fee of $7.5 million for the acquisition of a product from Elan and a
milestone payment of $4.0 million to The Dow Chemical Company ("Dow") upon the
FDA's marketing approval of Quadramet.
Costs of product and contract manufacturing revenues were $4.1 million,
$12.3 million and $5.9 million in 1999, 1998 and 1997, respectively. The 1999
decrease from 1998 and 1997 was due to decreased manufacturing costs associated
with decreased contract manufacturing activities in 1999 and lower manufacturing
costs for Cytogen products as a result of the sale of the manufacturing
facility. The 1999 decrease compared to 1998 is also due to the 1998 costs
associated with a one-time charge of $4.0 million for a Quadramet manufacturing
commitment and $995,000 for the manufacturing and distribution of Quadramet (see
Note 6 of Notes to the Consolidated Financial Statements).
Research and development expenses were $3.8 million in 1999, $10.0 million
in 1998 and $17.9 million in 1997. These expenses principally reflect product
development efforts and support for various ongoing clinical trials. The 1999
decrease from 1998 and 1997 is due to the curtailing of certain of the Company's
product development efforts including the closure of Cellcor, the termination of
basic research programs and the scale back of various clinical programs. The
1999 decrease from 1997 is also due to a $4.0 million milestone payment to Dow
upon FDA's marketing approval of Quadramet in 1997.
Acquisition of technology rights of $1.2 million in 1999 represents a
non-cash charge related to the acquisition of Prostagen (see Note 2 to the
Consolidated Financial Statements).
Equity losses in Targon subsidiary were $1.0 million and $9.2 million in
1998 and 1997, respectively. The Company sold Targon in 1998.
Selling and marketing expenses were $4.2 million, $5.1 million and $5.5
million in 1999, 1998 and 1997, respectively. These expenses reflect marketing
efforts for the ProstaScint and expenses to establish and maintain the Partners
in Excellence ("PIE") program. The 1999 decrease from 1998 and 1997 is due to
open sales positions and lower commission due Bard under the Co-Marketing
Agreement. The Company is phasing out this agreement to assume sole
responsibility for marketing and sales of ProstaScint. The transition is
expected to be concluded by mid-year 2000, with the Co-Marketing Agreement
will terminate at that time. The Company is currently expanding its sales
force in preparation for this change.
General and administrative expenses were $3.5 million, $7.4 million and
$6.9 million in 1999, 1998 and 1997, respectively. The 1999 decrease from 1998
and 1997 is due to various cost containing efforts in the Company's
restructuring plan implemented in 1999 and 1998 such as the closure of Cellcor
and corporate downsizing. The 1999 decrease from 1998 is also due to the 1998
restructuring costs of $1.9 million including severance and implementation of a
turn-around plan.
Gain on sale of laboratory and manufacturing facilities. The Company
recorded a gain of $3.3 million during 1999 resulting from a sale of certain of
the Company's laboratory and manufacturing facilities to Purdue Bio Pharma for
net proceeds of $3.6 million in January 1999.
Gain on sale of Targon subsidiary was $2.8 million in 1998 as a result of
the sale of Cytogen's ownership interest in Targon to Elan (see Note 4 of Notes
to the Consolidated Financial Statements).
46
Interest Income/Expense. Interest income was $441,000, $582,000 and
$606,000 for 1999, 1998 and 1997, respectively. The 1999 decrease from 1998 and
1997 is due primarily to interest income realized beginning July 1997 from the
$10.0 million note from Targon payable to Cytogen. The note was canceled as a
result of the sale of Targon to Elan in August 1998 (see Note 4 of Notes to the
Consolidated Financial Statements).
Interest expense was $29,000, $652,000 and $291,000 in 1999, 1998 and
1997, respectively. The 1999 decrease from 1998 and 1997 was due to the
cancellation and satisfaction of liabilities associated with Elan and Knoll
Pharmaceuticals Company ("Knoll"), respectively. The $10.0 million note due to
Elan was canceled as a result of the sale of Targon to Elan in August 1998. The
Company paid the balance of the obligation to Knoll in December 1998.
Income tax benefit. During 1999, the Company sold New Jersey State
operating loss carryforwards and research and development credits which
resulted in the recognition of a $2.7 million tax benefit. Under the current
legislation, the Company will be able to sell at least $1.6 million of the
approved $5.6 million of tax benefits in 2000. The actual amount of tax credits
the Company may sell will depend upon the allocation among qualifying companies
of an annual pool established by the State of New Jersey.
Net Income/Loss. Net income to common stockholders was $729,000 in 1999
compared to a net loss of $13.3 million and $32.1 million in 1998 and 1997,
respectively. Basic and fully diluted net income per common share in 1999 was
$0.01 based on average common shares outstanding of 67.2 million for basic and
68.2 million for diluted. The net loss per common share is $0.24 and $0.63 in
1998 and 1997, respectively, based on 56.4 million and 51.1 million average
common shares outstanding in each year, respectively. The 1997 net loss was
increased by $1.4 million of deemed and accrued dividends on the Series B
Preferred Stock.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments were $12.4
million as of December 31, 1999, compared to $3.0 million as of December 31,
1998 and $7.4 million as of December 31, 1997. The cash used for operating
activities in 1999 was $3.9 million compared to $8.0 million in the same period
of 1998. The decrease in cash used for operating activities from 1998 was
primarily due to lower spending in all areas as a result of the implementation
of the Company's restructuring plan.
Historically, the Company's primary sources of cash have been proceeds
from the issuance and sale of its stock through public offerings and private
placements, product related revenues, revenues from contract manufacturing and
research services, fees paid under license agreements and interest earned on
cash and short term investments. In February 2000, the Company received $1.0
million from Berlex for the exercise of a warrant to purchase 1,000,000 shares
of Cytogen common stock at $1.002 per share. In December 1999, the Company
received $2.7 million for the sale of New Jersey State tax losses and research
and development credits. Under the current legislation, the Company will be able
to sell at least $1.6 million of the approved $5.6 million of tax benefits in
2000. The actual amount of tax credits the Company may sell will depend upon the
allocation among qualifying companies of an annual pool established by the state
of New Jersey. In October 1999, the Company sold its undeveloped land in New
Jersey for net proceeds of $714,000.
In August 1999, the Company sold 3,105,590 shares of Cytogen common stock
at an aggregate price of $5.0 million or $1.61 per share to the State of
Wisconsin Investment Board. As a result of this funding, the Company terminated
the remaining $11.5 million of a $12 million equity line agreement with an
institutional investor that was entered into in October 1998. Previously, the
Company sold $500,000 of Cytogen common stock at $1.0519 per share under this
equity line agreement in January 1999.
47
In connection with the acquisition of Prostagen in June 1999, the Company
received $550,000 in cash along with other assets held by Prostagen (see Note 2
to the Consolidated Financial Statements). During 1999, the Company received
payments of $1.0 million related to the licensing of PSMA technology to a joint
venture between Cytogen and Progenics. The remaining balance of $1.0 million
will be paid in installments through December 31, 2001 (see Note 3 to the
Consolidated Financial Statements).
In January 1999, the Company sold its manufacturing and laboratory
facilities for net proceeds of $3.6 million, of which $744,000 of the net
proceeds were used to repay the outstanding balance of a term loan entered in
1998. In addition, Cytogen sold 2,666,667 shares of common stock to a subsidiary
of The Hillman Company at $0.75 per share for a total of $2.0 million.
The Company expects to significantly increase the funding of AxCell for
the proteomics program in 2000. The operating requirement for AxCell will be
funded by Cytogen's existing cash balance. The capital requirement for AxCell
may be funded by a $1.4 million line-of-credit agreement entered into in
February 2000 between the Company and Finova Capital Corporation ("Finova
Facility"). From time to time, until November 2000, the Company will draw on the
Finova Facility ("Each Loan") to finance the acquisition of computers and
equipment. Each Loan will have a fixed term of 42 months at an interest rate
equal to 8.65% plus the Index Rate and will be collateralized by the newly
purchased equipment.
The Company's capital and operating requirements may change depending upon
various factors, including: (i) whether the Company and its strategic partners
achieve success in manufacturing, marketing and commercialization of its
products; (ii) the amount of resources which the Company devotes to clinical
evaluations and the expansion of marketing and sales capabilities; (iii) results
of clinical trials and research and development activities; and (iv) competitive
and technological developments, in particular the Company may expend funds for
development of its proteomics and PSMA technologies.
The Company's financial objectives are to meet its capital and operating
requirements through revenues from existing products, license and research
contracts, and control of spending. To achieve its strategic objectives, the
Company may enter into research and development partnerships and acquire, in-
license and develop other technologies, products or services. Certain of these
strategies may require payments by the Company in either cash or stock in
addition to the costs associated with developing and marketing a product or
technology. The Company currently has no commitments or specific plans for
acquisitions or strategic alliances. However, the Company believes that, if
successful, such strategies may increase long-term revenues. There can be no
assurance as to the success of such strategies or that resulting funds will be
sufficient to meet cash requirements until product revenues are sufficient to
cover operating expenses. To fund these strategic and operating activities, the
Company may sell equity and debt securities as market conditions permit or enter
into credit facilities.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to implement its planned product development efforts,
including acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further its
marketing and sales programs. The Company expects that its existing capital
resources as of December 31, 1999, together with the net proceeds of $1.0
million from a sale of equity to Berlex in February 2000 and decreased operating
costs will be adequate to fund the Company's operations through the year 2001.
No assurance can be given that the Company will not consume a significant amount
of its available resources before that time. In addition, the Company expects
that it will have additional requirements for debt or equity capital,
irrespective of whether and when it reaches profitability, for further
development of products, product and technology acquisition costs, and working
capital.
48
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including the successful
commercialization of its products, the costs associated with the acquisition of
complementary products and technologies, progress in its product development
efforts, the magnitude and scope of such efforts, progress with clinical trials,
progress with regulatory affairs activities, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the expansion of strategic
alliances for the sales, marketing, manufacturing and distribution of its
products. To the extent that the currently available funds and revenues are
insufficient to meet current or planned operating requirements, the Company will
be required to obtain additional funds through equity or debt financing,
strategic alliances with corporate partners and others, or through other
sources. Based on the Company's historical ability to raise capital and current
market conditions, the Company believes other financing alternatives are
available. There can be no assurance that the financing commitments described
above or other financial alternatives will be available when needed or at terms
commercially acceptable to the Company or that the Company would have adequate
authorized unissued shares available for issuance without stockholder approval.
If adequate funds are not available, the Company may be required to delay,
further scale back or eliminate certain aspects of its operations or attempt to
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates, products or potential markets. If adequate funds are not available,
the Company's business, financial condition and results of operations will be
materially and adversely affected.
Year 2000 Compliance
The "Year 2000 problem" describes the concern that certain computer
applications, which use two digits rather than four to represent dates, will
interpret the year 2000 as 1900 and malfunction on or after January 1, 2000.
Cytogen's Internal Systems. The Company's programs and systems did not
fail or malfunction upon the arrival of January 1, 2000. The Company internal
systems were modified and replaced with fully compliant systems, prior to
December 31, 1999. The Company believes that it has achieved its goals regarding
year 2000 compliance on all of its critical and non-critical systems.
Readiness of Third Parties. The Company worked with its processing banks,
network providers and manufacturing partners to ascertain that their systems
were year 2000 compliant.
Risks Associated with the Year 2000. The Company is not aware, at this
time, of any year 2000 non-compliance issues that were not addressed and
repaired prior to December 31, 1999.
Recently Enacted Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied, and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The Company is evaluating SAB 101 and the effect it may have
on the Company's financial position or results of operations.
49
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does it use derivative financial instruments in its operations
or investment portfolio. The Company does not have exposure to market risks
associated with changes in interest rates, as it has no variable interest rate
debt outstanding. The Company does not believe it has any other material
exposure to market risks associated with interest rates.
Item 8. Financial Statements and Supplementary Data
The response to Item 8 is submitted as a separate section of this Form
10-K
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
Information regarding the Company's Directors is incorporated by reference
to the information contained under the captions "Nominees for Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement. Information regarding the Company's Executive Officers is set forth
in Part I of this Form 10-K.
Item 11. Executive Compensation
Incorporated by reference to the information contained under the caption
"Executive Compensation" in the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the information contained under the caption
"Security Ownership of Management and Principal Stockholders" in the Company's
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
In June 1999, Cytogen entered into an agreement with S. Leslie Misrock, and
others, to reacquire rights for immunotherapy to its PSMA technology by
acquiring Prostagen, Inc., of which Mr. Misrock was a principal holder. Mr.
Misrock was elected to the Board of Directors of the Company in August 1999. In
connection with the acquisition, Mr. Misrock received shares of the Company's
common stock. The Company may also issue additional shares upon completion of
certain objectives, including up to 450,000 shares of Cytogen common stock upon
the satisfactory termination of lease obligations assumed in the acquisition; up
to 500,000 shares upon beneficial resolution of other contractual arrangements
entered by Prostagen; and up to an additional $4.0 million in shares of Cytogen
common stock (calculated at the time of issuance) if certain milestones are
achieved in development of the PSMA technology. Mr. Misrock would receive a
portion of these shares.
50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as a part of the Report:
(1) and (2)
The response to this portion of Item 14 is submitted as a separate section of
this Form 10-K.
(3) Exhibits --
--------
Exhibit No.
-----------
1.1 - Rights Agreement, dated as of June 19, 1998, between
Cytogen Corporation and Chase Mellon Shareholder
Services, L.L.C., as Rights Agent. The Rights Agreement
included the Form of Certificate of Designations of
Series C Junior Preferred Stock as Exhibit A, the form
of Rights Certificate as Exhibit B and the Summary of
Rights as Exhibit C. Filed as an exhibit to Form 8-K
dated June 17, 1998 (Commission File No. 333-020015)
and incorporated herein by reference.
1.2 - Amended and Restated Rights Agreement, dated as of
October 19, 1998 between Cytogen Corporation and Chase
Mellon Shareholder Services, L.L.C., as Rights Agent.
The Amended and Restated Rights Agreement includes the
Form of Certificate of Designations of Series C Junior
Preferred Stock as Exhibit A, the form of Rights
Certificate as Exhibit B and the Summary of Rights as
Exhibit C. Filed as an exhibit to Form 10-Q Quarterly
Report for the quarter ended September 30, 1998
(Commission File No. 333-02015) and incorporated herein
by reference.
3.1 - Restated Certificate of Incorporation of Cytogen
Corporation, as amended. Filed as an exhibit to Form
10-Q Quarterly Report for the quarter ended June 30,
1996 (Commission File No. 0-14879) and incorporated
herein by reference.
3.2 - By-Laws of Cytogen Corporation, as amended. Filed as an
exhibit to Form 10-Q Quarterly Report for the quarter
ended June 30, 1999 (Commission File No. 333-02015) and
incorporated herein by reference.
4.1 - Specimen of Common Stock Certificate. Filed as an
exhibit to Amendment No. 1 to Form S-1 Registration
Statement (No. 33-5533) and incorporated herein by
reference.
10.1 - Form of Registration Rights Agreement for Common Stock
between Cytogen Corporation and certain persons listed
on Schedule A thereto. Filed as an exhibit to Form S-4
Registration Statement (No. 33-62617) and incorporated
herein by reference.
10.2.1 - Lease Agreement, dated as of March 16, 1987, by and
between Peregrine Investment Partners I, as lessor, and
Cytogen Corporation, as lessee. Filed as an exhibit to
Form 10-K Annual Report for Year Ended January 2, 1988
(Commission File No. 0-14879) and incorporated herein
by reference.
51
10.2.2 - Amendment, dated as of October 16, 1987, to Lease
Agreement between Peregrine Investment Partners I and
Cytogen Corporation. Filed as an exhibit to Form S-8
Registration Statement (No. 33-30595) and incorporated
herein by reference.
10.3 - 1989 Employee Stock Option Plan. Filed as an exhibit to
Form S-8 Registration Statement (No. 33-30595) and
incorporated herein by reference.+
10.4.1 - 1988 Stock Option Plan for Non-Employee Directors.
Filed as an exhibit to Form S-8 Registration Statement
(No. 33-30595) and incorporated herein by reference.+
10.4.2 - Amendment to the Cytogen Corporation 1988 Stock Option
Plan for Non-Employee Directors dated May 22, 1996.
Filed as an exhibit to Form 10-Q Quarterly Report for
the quarter ended June 30, 1996 (Commission File No. 0-
14879) and incorporated herein by reference.+
10.5 - Standard Form of Indemnification Agreement entered into
between Cytogen Corporation and its officers,
directors, and consultants. Filed as an exhibit to
Amendment No. 1 to Form S-1 Registration Statement (No.
33-31280) and incorporated herein by reference.+
10.6 - 1989 Stock Option Policy for Outside Consultants. Filed
as an exhibit to Amendment No. 1 to Form S-1
Registration Statement (No. 33-31280) and incorporated
herein by reference.+
10.7.1 - License Agreement dated as of March 31, 1993 between
Cytogen Corporation and The Dow Chemical Company. Filed
as an exhibit to Form 10-Q/A-1 Amendment to Quarterly
Report for the quarter ended July 3, 1993 (Commission
File No. 0-14879) and incorporated herein by
reference.*
10.7.2 - Amendment of the License Agreement between Cytogen
Corporation and The Dow Chemical Company dated
September 5, 1995. Filed as an exhibit to Form 10-Q
Quarterly Report for the quarter ended March 31, 1996
(Commission File No. 0-14879) and incorporated herein
by reference.*
10.7.3 - Second Amendment to the License Agreement between
Cytogen Corporation and The Dow Chemical Company dated
May 20, 1996. Filed as an exhibit to Form 10-Q/A-1
Amendment to Quarterly Report for the quarter ended
June 30, 1996 (Commission File No. 0-14879) and
incorporated herein by reference.*
10.8 - 1992 Cytogen Corporation Employee Stock Option Plan II,
as amended. Filed as an exhibit to Form S-4
Registration Statement (No. 33-88612) and incorporated
herein by reference. +
10.9 - License Agreement, dated March 10, 1993, between
Cytogen Corporation and The University of North
Carolina at Chapel Hill, as amended. Filed as an
exhibit to Form 10-K Annual Report for the year ended
December 31, 1994 (Commission File No. 0-14879) and
incorporated herein by reference.*
10.10 - Option and License Agreement, dated July 1, 1993,
between Cytogen Corporation and Sloan-Kettering
Institute for Cancer Research. Filed as an exhibit to
Form 10-K Annual Report for the year ended December 31,
1994 (Commission File No. 0-14879) and incorporated
herein by reference.*
52
10.11.1 - Cytogen Corporation 1995 Stock Option Plan. Filed as an exhibit
to Form 10-K Annual Report for the year ended December 31, 1995
(Commission File No. 0-14879) and incorporated herein by
reference.
10.11.2 - Amendment No. 1 to the Cytogen Corporation 1995 Stock Option
Plan dated May 22, 1996. Filed as an exhibit to Form 10-Q
Quarterly Report for the quarter ended June 30, 1996 (Commission
File No. 0-14879) and incorporated herein by reference.+
10.12 - Horosziewicz - Cytogen Agreement, dated April 20, 1989, between
Cytogen Corporation and Julius S. Horosziewicz, M.D., DMSe.
Filed as an exhibit to Form 10-K Annual Report for the year
ended December 31, 1995 (Commission File No. 0-14879) and
incorporated herein by reference.*
10.13 - Marketing and Co-Promotion Agreement between Cytogen Corporation
and C.R. Bard, Inc. effective August 1, 1996. Filed as an
exhibit to Form 10-Q Quarterly Report for the quarter ended
September 30, 1996 (Commission File No. 0-14879) and
incorporated herein by reference.*
10.14 - Severance Agreement effective as of March 26, 1996 between
Cytogen Corporation and John D. Rodwell, Ph.D. Files as an
exhibit to Form 10-K Annual Report for the year ended December
31, 1996 (Commission File No. 0-14879) and incorporated herein
by reference. +
10.15 - Cytogen Corporation Employee Stock Purchase Plan. Filed as an
exhibit to Form S-8 Registration Statement (No. 333-27673) and
incorporated herein by reference. +
10.16 - License Agreement between Targon Corporation and Elan
Corporation, plc dated July 21, 1997. Filed as an exhibit to
Form 10Q Quarterly Report for the quarter ended June 30, 1997
(Commission File No. 0-14879) and incorporated herein by
reference.*
10.17 - Employment Agreement effective as of December 23, 1996 between
Cytogen Corporation and Dr. Graham S. May. Filed as an exhibit
to Form 10-K/A-1 Amendment to Annual Report for the Year Ended
December 31, 1997 (Commission File No. 333-02015) and
incorporated herein by reference. +
10.18 - Convertible Promissory Note dated as of August 12, 1998 between
Cytogen Corporation and Elan International Services, Ltd. Filed
as an exhibit to Form 10-Q Quarterly Report for the quarter
ended June 30, 1998 (Commission File No. 333-02015) and
incorporated herein by reference.
10.19 - Employment agreement effective as of August 20, 1998 between
Cytogen Corporation and H. Joseph Reiser. Filed as an exhibit to
Form 10-Q Quarterly Report for the quarter ended September 30,
1998 (Commission File No. 333-02015) and incorporated herein by
reference. +
10.21 - License Agreement by and between Berlex Laboratories, Inc. and
Cytogen Corporation dated as of October 28, 1998. Filed as an
exhibit to Form 10-Q/A-1 Amendment to Quarterly Report for the
quarter ended September 30, 1998 (Commission File No. 333-02015)
and incorporated herein by reference.
53
10.22 - Manufacturing Space Agreement between Bard BioPharma L.P. and
Cytogen Corporation dated as of January 7, 1999. Filed as an
exhibit to Form S-1/A-1 Amendment to Registration Statement
(Commission File No. 333-67947) and incorporated herein by
reference.
10.23 - Employment Agreement effective as of June 10, 1997 between
Cytogen Corporation and Donald F. Crane, Jr. Filed herewith.+
10.24 - The 1999 Cytogen Corporation Non-Employee Directors Stock Option
Plan. Filed as an exhibit to Form 10-Q Quarterly Report for the
quarter ended June 30, 1999 (Commission File No. 333-02015) and
incorporated herein by reference.+
10.25 - Strategic Alliance Agreement between AxCell Biosciences
Corporation and InforMax, Inc. dated as of September 15, 1999.
Filed herewith.**
10.26 - AxCell Biosciences Corporation Employee Stock Option Plan. Filed
herewith.+
10.27 - Master Loan and Security Agreement No. S7600 among Cytogen
Corporation, AxCell Biosciences Corporation and Finova Capital
Corporation dated December 30, 1999. Filed herewith.
21 - Subsidiaries of Cytogen Corporation.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule (submitted to SEC only in electronic
format).
+ Management contract or compensatory plan or arrangement.
* Cytogen Corporation has received confidential treatment of certain provisions
contained in this exhibit pursuant to an order issued by the Securities and
Exchange Commission. The copy filed as an exhibit omits the information
subject to the confidentiality grant.
**Cytogen Corporation has requested confidential treatment of certain provisions
contained in this exhibit. The copy filed as an exhibit omits the information
subject to the confidential request.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
The Exhibits filed with this Form 10-K are listed above in response
to Item 14(a)(3).
(d) Financial Statement Schedules:
None
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 27th day of
March 2000.
Cytogen Corporation
By: /s/ H. Joseph Reiser
-------------------------------
H. Joseph Reiser
President and Chief Executive Officer
55
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ H. Joseph Reiser Chief Executive Officer and President March 28, 2000
-------------------------------
H. Joseph Reiser (Principal Executive Officer), and
Director
/s/ Jane M. Maida Vice President Finance & Administration March 28, 2000
-------------------------------
Jane M. Maida
/s/ John E. Bagalay, Jr. Director March 28, 2000
-------------------------------
John E. Bagalay, Jr.
/s/ Ronald J. Brenner Director March 28, 2000
-------------------------------
Ronald J. Brenner
/s/ Stephen K. Carter Director March 28, 2000
-------------------------------
Stephen K. Carter
/s/ James A. Grigsby Director and Chairman of the Board March 28, 2000
-------------------------------
James A. Grigsby
/s/ Robert F. Hendrickson Director March 28, 2000
-------------------------------
Robert F. Hendrickson
/s/ S. Leslie Misrock Director March 28, 2000
-------------------------------
S. Leslie Misrock
56
Annual Report on Form 10-K
Year Ended December 31, 1999
Item 8, Item 14(a)(1) and (2)
Cytogen Corporation
Princeton, New Jersey
57
Form 10-K Item 14(a)(1) and (2)
Cytogen CORPORATION AND SUBSIDIARIES
(1) Consolidated Financial Statements
---------------------------------
The following consolidated financial statements of Cytogen Corporation
and Subsidiaries together with the related notes and report of Arthur Andersen
LLP, independent public accountants.
Page in
Form 10-K
Report of Independent Public Accountants.............................................. 21
Consolidated Balance Sheets as of December 31, 1999 and 1998 ......................... 22
Consolidated Statements of Operations--Years Ended December 31, 1999, 1998
and 1997......................................................................... 23
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1999,
1998 and 1997.................................................................... 24
Consolidated Statements of Cash Flows--Years Ended December 31, 1999, 1998
and 1997......................................................................... 25
Notes to Consolidated Financial Statements............................................ 26
58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cytogen Corporation:
We have audited the accompanying consolidated balance sheets of Cytogen
Corporation (a Delaware Corporation) and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 financial position of Cytogen Corporation and
Subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA
January 27, 2000
59
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(all amounts in thousands, except share data)
December 31,
----------------------
1999 1998
---------- ----------
ASSETS:
Current Assets:
Cash and cash equivalents.......................................... $ 10,801 $ 3,015
Short-term investments............................................. 1,593 -
Receivable on common stock sold.................................... - 2,500
Accounts receivable, net........................................... 2,150 1,362
Inventories........................................................ 685 250
Other current assets............................................... 465 330
--------- ---------
Total current assets............................................ 15,694 7,457
Property and Equipment, net.......................................... 1,997 2,625
Other Assets......................................................... 914 818
--------- ---------
$ 18,605 $ 10,900
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term liabilities........................... $ 162 $ 848
Accounts payable and accrued liabilities........................... 5,478 7,386
--------- ---------
Total current liabilities....................................... 5,640 8,234
--------- ---------
Long-Term Liabilities................................................ 2,416 2,223
--------- ---------
Commitments and Contingencies (Notes 7 and 17)
Stockholders' Equity:
Preferred stock, $.01 par value, 5,400,000 shares authorized -
Series C Junior Participating Preferred Stock, $.01 par value,
200,000 shares authorized, none issued and outstanding........ - -
Common stock, $.01 par value, 89,600,000 shares authorized,
70,527,000 and 61,950,000 shares issued and outstanding
in 1999 and 1998, respectively................................ 705 619
Additional paid-in capital......................................... 311,209 301,836
Deferred compensation.............................................. (82) -
Accumulated deficit................................................ (301,283) (302,012)
--------- ---------
Total stockholders' equity...................................... 10,549 443
--------- ---------
$ 18,605 $ 10,900
========= =========
The accompanying notes are an integral part of these statements.
60
CONSOLIDATED STATEMENTS OF OPERATIONS
(all amounts in thousands, except per share data)
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Product related:
ProstaScint....................................................... $ 6,351 $ 6,378 $ 4,057
Quadramet......................................................... - 1,675 -
Others............................................................ 620 923 1,195
-------- -------- --------
Total product sales......................................... 6,971 8,976 5,252
Quadramet royalties............................................... 1,060 1,664 3,282
-------- -------- --------
Total product related....................................... 8,031 10,640 8,534
License and contract.................................................. 3,171 9,239 5,886
-------- -------- --------
Total revenue...............................................
11,202 19,879 14,420
-------- -------- --------
Operating Expenses:
Cost of product and contract manufacturing revenues................... 4,111 12,284 5,939
Research and development.............................................. 3,849 9,967 17,913
Acquisition of technology rights...................................... 1,214 - -
Equity loss in Targon subsidiary...................................... - 1,020 9,232
Selling and marketing................................................. 4,210 5,103 5,492
General and administrative............................................ 3,501 7,420 6,871
-------- -------- --------
Total operating expenses.................................... 16,885 35,794 45,447
-------- -------- --------
Operating loss.............................................. (5,683) (15,915) (31,027)
Gain on sale of laboratory and manufacturing facilities................. 3,298 - -
Gain on sale of Targon subsidiary....................................... - 2,833 -
Interest income......................................................... 441 582 606
Interest expense........................................................ (29) (652) (291)
-------- -------- --------
Loss before income taxes.................................... (1,973) (13,152) (30,712)
Income tax benefit...................................................... (2,702) - -
-------- -------- --------
Net income (loss)....................................................... 729 (13,152) (30,712)
Dividends, including deemed dividends on preferred stock................ - (119) (1,352)
-------- -------- --------
Net income (loss) to common stockholders................................ $ 729 $(13,271) $(32,064)
======== ======== ========
Net income (loss) per common share
Basic....................................................... $ 0.01 $ (0.24) $ (0.63)
======== ======== ========
Diluted..................................................... $ 0.01 $ (0.24) $ (0.63)
======== ======== ========
Weighted average common shares outstanding
Basic....................................................... 67,179 56,419 51,134
======== ======== ========
Diluted..................................................... 68,187 56,419 51,134
======== ======== ========
The accompanying notes are an integral part of these statements.
61
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
(All amounts in thousands, except share data)
Unrealized
Gain
Additional Deferred (Loss) on Acc- Total
Common Paid-in Compel- Short-Term umlauted Stockholders'
Stock Capital station Investments Deficit Equity
---------- --------- --------- ------------ ----------- -------------
Balance, December 31, 1996 $511 $ 289,098 $ - $ (5) $ (256,677) $ 32,927
Sale of 750 shares of Series B preferred
stock.................................... - 7,455 - - - 7,455
Sale of 100,282 shares of common
stock.................................... 1 335 - - - 336
Series B preferred stock conversion discount
deemed dividends......................... - 1,324 - - (1,324) -
Accrued dividends on Series B preferred
stock.................................... - - - - (28) (28)
Unrealized gain on investments.............. - - - 5 - 5
Net loss.................................... - - - - (30,712) (30,712)
---------- --------- --------- ------------ ----------- -------------
Balance, December 31, 1997.................. 512 298,212 - - (288,741) 9,983
Sale of 3,403,011 shares of common
stock.................................... 34 2,583 - - - 2,617
Dividends on Series B preferred
stock.................................... - - - - (119) (119)
Issuance of 7,377,054 shares of common stock
Upon conversion of Series B preferred
stock and accumulated dividends......... 73 55 - - - 128
Sale of warrants to purchase 1,000,000
shares of common stock................... - 855 - - - 855
Modification of existing warrants to
purchase
260,000 shares of common stock........... - 131 - - - 131
Net loss.................................... - - - - (13,152) (13,152)
---------- --------- --------- ------------ ----------- -------------
Balance, December 31, 1998 619 301,836 - - (302,012) 443
Issuance of 2,050,000 shares of common stock
in connection with the acquisition of
Prostagen, Inc........................... 21 1,824 - - - 1,845
Sale of 6,527,002 shares of common
stock.................................... 65 7,244 - - - 7,309
Issuance of options and warrants to purchase
338,778 shares of common stock........... - 221 - - - 221
Deferred compensation related to stock
options.................................. - 84 (84) - - -
Amortization of deferred
compensation............................. - - 2 - - 2
Net income.................................. - - - - 729 729
---------- --------- --------- ------------ ----------- -------------
Balance, December 31, 1999.................. $705 $ 311,209 $ (82) $ - $ (301,283) $ 10,549
========== ========= ========= ============ =========== =============
The accompanying notes are an integral part of these statements.
62
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Cash Flows From Operating Activities:
Net income (loss)................................................................ $ 729 $(13,152) $(30,712)
-------- -------- --------
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Acquisition of technology rights............................................... 1,214 - -
Depreciation and amortization.................................................. 1,051 1,196 1,513
Imputed interest............................................................... (59) 81 261
Warrant, stock and stock option grants......................................... 221 163 45
Write down of property and equipment........................................... 79 657 384
Gain on sale of laboratory and manufacturing facilities........................ (3,298) - -
Gain on sale of Targon subsidiary.............................................. - (2,833) -
Gain on sale of land........................................................... (54) - -
Equity loss in Targon subsidiary............................................... - 1,020 9,232
Changes in assets and liabilities
Accounts receivable, net.................................................... (715) 2,702 (3,625)
Inventories................................................................. (435) 193 (185)
Other assets................................................................ (97) 4 (74)
Accounts payable and accrued liabilities.................................... (2,659) 1,944 727
Other liabilities........................................................... 146 - -
-------- -------- --------
Total adjustments...................................................... (4,606) 5,127 8,278
-------- -------- --------
Net cash used in operating activities....................................... (3,877) (8,025) (22,434)
-------- -------- --------
Cash Flows From Investing Activities:
Net cash acquired from Prostagen, Inc. (see Note 2).............................. 550 - -
Net proceeds from sale of laboratory and manufacturing facilities................ 3,584 - -
Net proceeds from the sale of land............................................... 714 - -
(Increase) decrease in short-term investments.................................... (1,593) - 4,474
Purchases of property and equipment.............................................. (523) (100) (621)
Investment in Targon subsidiary.................................................. - - (10,000)
Proceeds from sale of Targon subsidiary.......................................... - 2,000 -
-------- -------- --------
Net cash provided by (used in) investing activities......................... 2,732 1,900 (6,147)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of notes payable.......................................... - 2,750 10,000
Payments of long-term liabilities................................................ (878) (1,898) (2,030)
Proceeds from issuance of common stock........................................... 9,809 51 261
Proceeds from issuance of Series B preferred stock............................... - - 7,455
Dividends on Series B preferred stock............................................ - (19) -
Proceeds from issuance of warrant................................................ - 855 -
-------- -------- --------
Net cash provided by financing activities................................... 8,931 1,739 15,686
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............................. 7,786 (4,386) (12,895)
Cash and cash equivalents, beginning of year..................................... 3,015 7,401 20,296
-------- -------- --------
Cash and cash equivalents, end of year........................................... $ 10,801 $ 3,015 $ 7,401
======== ======== ========
The accompanying notes are an integral part of these statements.
63
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
Cytogen Corporation ("Cytogen" or "The Company" which includes the Company
and its subsidiaries) is an established biopharmaceutical company with two
principal lines of business, proteomics and oncology. The Company is extending
its expertise in antibodies and molecular recognition to the development of new
products and a proteomics-driven drug discovery platform. The Company has
established a pipeline of product candidates based upon its proprietary antibody
and prostate specific membrane antigen, or PSMA, technologies. Cytogen is also
developing a proprietary protein pathway database as a drug discovery and
development tool for the pharmaceutical and biotechnology industries.
Cytogen's cancer management franchise currently comprises three marketed
FDA-approved products: ProstaScint, used to image the extent and spread of
prostate cancer; OncoScint CR/OV, marketed as a diagnostic imaging agent for
colorectal and ovarian cancer and Quadramet, marketed for the relief of cancer-
related bone pain. The Company is extending its cancer pipeline by exploiting
PSMA, which Cytogen exclusively licensed from Memorial Sloan-Kettering Cancer
Center. PSMA is a unique antigen highly expressed in prostate cancer cells and
in the neovasculature of a variety of other solid tumors, including breast, lung
and colon. The Company is developing its PSMA technology as part of its approach
to offering a full range of prostate cancer management products and services
throughout the progression of the disease, including gene-based immunotherapy
vaccines, antibody-delivered therapeutic compounds and novel assays for
detection of primary prostate cancer. Cytogen also plans to apply its PSMA
technology, including therapeutics and in vitro diagnostics, toward other types
of cancer based upon the Company's experience in prostate cancer. The Company's
in vivo immunotherapeutic development program is being conducted in
collaboration with Progenics Pharmaceuticals, Inc.
Proteomics is the study of the expression and interaction of proteins.
Genomics is the study and identification of an organism's genetic makeup. While
genomics provides important information regarding genetic makeup, it does not
directly provide information regarding protein functions or protein
interactions. However, genomics data can prove useful in proteomics research as
a source of obtaining complete protein sequences of ligands the Company has
identified. Public availability allows for effective integration in the
Company's database of public and proprietary information. The Company recognized
in its past research that the key to understanding or developing the means to
intervene in diseases was primarily based on understanding protein interactions
rather than only through the use or study of genomics. The Company undertook
this approach on its own initiative and with its own funds. Cytogen's proteomics
program, under development by its subsidiary, AxCell Biosciences Corporation, is
focused on the identification of protein interaction and signaling pathways
within cells as relating to disease processes.
The Company utilizes its proprietary proteomics technology to map selective
protein-protein interactions and to develop a database, called the Inter-
Functional Proteomic Database, or IFP Database, which includes data relating to
protein signaling pathways linked to a variety of other bioinformatic data. The
IFP Database is designed to permit customers to integrate existing databases,
both public and proprietary, with the Company's proprietary data to create a
"virtual laboratory" on the computer desktop of researchers involved in drug
discovery. The Company believes this database has significant potential
commercial value to the pharmaceutical and biotechnology industries as a means
of expediting drug target identification, validation, screen development and
lead compound optimization faster and cheaper than with current methodologies.
These proprietary technologies are designed to provide a platform from which the
Company can quickly and cost-effectively determine protein-protein interactions
and build pathways of intracellular signaling data. The Company's IFP Database
also offers a consolidated platform to enable statistical and mathematical
modeling of complex protein pathways.
Basis of Consolidation
The consolidated financial statements include the accounts of Cytogen and
its wholly owned subsidiaries, AxCell Biosciences Corporation ("AxCell"),
Cellcor Inc. ("Cellcor") and Prostagen Inc. ("Prostagen"). The financial
statements also included the investment results of Targon Corporation
("Targon"), which were accounted for on the equity method (see Investment in
Targon Subsidiary). Intercompany balances and transactions have been eliminated
in consolidation. In the third quarter of 1998, the Company sold Targon and
closed Cellcor.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statement of Cash Flow
Cash and cash equivalents include cash on hand; cash in banks and all
highly liquid investments with maturity of three months or less at the time of
purchase. Cash paid for interest expense was $44,000, $500,000 and $524,000 in
1999, 1998, and 1997, respectively. During 1999, the Company purchased $223,000
of equipment under various capital leases.
64
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-Term Investments
At December 1999, the Company's short-term investments are classified as
available for sale and are carried at fair value based on quoted market prices.
Receivables
At December 31, 1999 and 1998, accounts receivable were net of an allowance
for doubtful accounts of $83,000 and $73,000, respectively. The Company charged
to expense $10,000 and $23,000 as a provision for doubtful accounts in 1999 and
1998, respectively. At December 31, 1999, approximately $870,000 of the
Company's accounts receivable balance was due from Progenics Pharmaceuticals,
Inc. ("Progenics") to be paid in installments through December 31, 2001 (see
Note 3).
At December 31, 1998, the Company had a $2.5 million receivable due from
The State of Wisconsin Investment Board relating to a sale of Cytogen common
stock. The Company received the proceeds from the stock sale in January 1999
(see Note 11).
Inventory
The Company's inventory is primarily related to ProstaScint and OncoScint
CR/OV. Inventory is stated at the lower of cost or market using the first-in,
first-out method and consisted of the following:
December 31,
-----------------------
1999 1998
--------- ---------
Raw materials ..................... $ 529,000 $ 57,000
Work-in process ................... 28,000 143,000
Finished goods .................... 128,000 50,000
--------- ---------
$ 685,000 $ 250,000
========= =========
Property and Equipment
Equipment and furniture are stated at cost, net of depreciation and a
$102,000 reserve for idle equipment. Leasehold improvements are amortized on a
straight-line basis over the lease period or the estimated useful life,
whichever is shorter. Equipment and furniture are depreciated on a straight-line
basis over five years. Expenditures for repairs and maintenance are charged to
expense as incurred. Property and equipment consisted of the following:
December 31,
--------------------------
1999 1998
----------- ------------
Leasehold improvements ............................. $ 3,196,000 $ 9,438,000
Equipment and furniture ............................ 4,764,000 7,350,000
----------- ------------
7,960,000 16,788,000
Less - accumulated depreciation and amortization.... (5,963,000) (14,163,000)
----------- ------------
$ 1,997,000 $ 2,625,000
=========== ============
65
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In January 1999, the Company sold certain of its laboratory and
manufacturing facilities to Bard BioPharma L.P., a subsidiary of Purdue Pharma
L.P. ("Purdue"), for $3.6 million, net of approximately $300,000 of transaction
costs. Cytogen also signed a three-year agreement under which two of Cytogen's
products, ProstaScint and OncoScint CR/OV, will continue to be manufactured by
Cytogen at its former facility. As a result of the sale, the Company recognized
a gain of approximately $3.3 million during the first quarter of 1999.
Investment in Targon Subsidiary
As a result of the 1998 reduction of Cytogen's ownership interest in Targon,
the Company began accounting for its investment in Targon using the equity
method. Under the equity method, the Company recognized 100% of Targon's losses
through March 31, 1998 in its consolidated statement of operations as "Equity
Loss in Targon Subsidiary," with a corresponding reduction in the carrying
amount of its investment. The Company did not recognize Targon's losses after
March 31, 1998 based on the completion of the sale of Targon.
In August 1998 the Company sold its remaining ownership interest in Targon
to Elan Corporation, plc ("Elan") for $2.0 million (see Note 4). As a result,
the Company recorded a gain of approximately $2.8 million in 1998.
Other Assets
In October 1999, the Company sold its undeveloped land in Ewing, New Jersey
for net proceeds of $714,000. As a result of the sale the company recognized a
gain of approximately $54,000. During 1998 and 1997, the Company charged to
expense $240,000 and $384,000, respectively, to write down the land to its
estimated market value.
Revenue Recognition
Product related revenues include product sales by Cytogen to its customers
and Quadramet royalties. Product sales are recognized upon shipment of the
finished goods. From the time of Quadramet's launch in the second quarter of
1997 to June 1998, Cytogen recorded Quadramet royalty revenues from DuPont based
on minimum contractual payments, which were in excess of actual Quadramet sales.
Pursuant to an agreement between Cytogen and DuPont, the minimum royalty
arrangement was discontinued and Cytogen reclaimed the marketing rights to
Quadramet. Subsequent to June 1998, Cytogen recorded product revenues from
Quadramet based on actual sales. Starting in 1999, Quadramet royalties are based
on sales of Quadramet by Berlex Laboratories ("Berlex"), Cytogen's new marketing
partner for Quadramet (see Note 5).
License and contract revenues include milestone payments and fees under
collaborative agreements with third parties, revenues from contract
manufacturing and research services, and revenues from other miscellaneous
sources. The Company's contract manufacturing services included filling,
testing, validation, and process development of monoclonal antibodies; process
development and clinical development of biopharmaceutical products; and the
preclinical manufacturing of an antibody product. The Company is phasing out
contract manufacturing services, concurrent with the sale of the manufacturing
and laboratory facilities (see Property and Equipment above) and expects to
receive no further revenues from
66
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
this service after 1999. Revenues from milestone payments are recognized when
all parties concur that the events stipulated in the agreement have been
achieved. Revenues from cost-plus contracts are recognized when the costs are
incurred. Revenues from up-front payments are recognized when the Company has no
obligation to return the fee under any circumstances.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied, and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The Company is evaluating SAB 101 and the effect it may have
on the Company's financial position or results of operations.
Cost of Product and Contract Manufacturing Revenues
In June 1998, the Company paid DuPont $995,000 for manufacturing and
distributing Quadramet as a result of Cytogen's reacquiring the marketing rights
of Quadramet. In addition, the Company recorded a $4 million charge for securing
a long-term manufacturing commitment for Quadramet from DuPont (see Note 6).
Beginning in 1999, pursuant to the marketing agreement with Berlex (see Note 5),
there is no manufacturing and distribution costs related to Quadramet. In
addition, the Company is phasing out the contract manufacturing services to
third parties which is resulting in lower costs associated with these services
and expects no further costs in 2000.
Research and Development
Research and development expenditures consist of projects conducted by the
Company and payments made to sponsored research programs and consultants. All
research and development costs are charged to expense as incurred. Research and
development expenditures for customer sponsored programs were $194,000, $228,000
and $1.1 million in 1999, 1998 and 1997, respectively.
Patent Costs
Patent costs are charged to expense as incurred.
Net Income (Loss) Per Share
Basic net income (loss) per common share is based upon the weighted average
common shares outstanding during each period. Diluted net income per common
share is based upon the weighted average common stock outstanding and common
stock equivalents which represent the incremental common shares that would have
been outstanding under certain employee stock options and warrants, upon assumed
exercise of dilutive stock options and warrants. Diluted net loss per share for
1998 and 1997 is the same as basic net loss per share, as the inclusion of
common stock equivalents would be antidilutive
67
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. ACQUISITION OF PROSTAGEN, INC.:
On June 15, 1999, Cytogen reacquired the rights for immunotherapy to its
PSMA technology by acquiring 100% of the outstanding capital stock of Prostagen
for 2,050,000 shares of Cytogen common stock, plus transaction costs. The
acquisition was accounted for using the purchase method of accounting, whereby
the purchase price was allocated to the assets acquired and liabilities assumed
from Prostagen based on the respective fair values at the acquisition date. The
excess of the purchase price over the fair value of the net tangible assets of
approximately $1.2 million was assigned to acquire technology rights and has
been recorded as a non-cash charge to operations in the accompanying financial
statements. Acquired technology rights reflects the value of the PSMA technology
development projects underway at the time of the Prostagen acquisition. The
Company may issue up to an additional 450,000 shares of Cytogen common stock
upon the satisfactory termination of lease obligations assumed in the Prostagen
acquisition.
The Company had sublicensed PSMA to Prostagen for prostate cancer
immunotherapy in 1996. In connection with the acquisition, Cytogen acquired
approximately $550,000 in cash, a minority ownership in Northwest
Biotherapeutics, Inc., which is developing PSMA for cell therapy, and a contract
with Velos, Inc. for marketing a cancer patient software management program for
hospitals and health care payors. In addition, the Company may issue up to an
additional $4.0 million worth of Cytogen common stock (based on the value at the
time of issuance) if certain milestones are achieved in the PSMA development
program. The Company may also issue up to 500,000 shares of Cytogen common stock
upon beneficial resolution of other contractual arrangements entered into by
Prostagen.
3. PROGENICS PHARMACEUTICALS, INC. JOINT VENTURE:
On June 15, 1999, Cytogen entered into a joint venture with Progenics to
develop vaccine and antibody-based immunotherapeutic products utilizing
Cytogen's proprietary PSMA technology. The joint venture will be owned equally
by Cytogen and Progenics. Progenics will fund up to $3 million of development
costs of the program. After that point, the Company and Progenics will equally
share the future costs of the program. Cytogen has the exclusive North American
marketing rights on products developed by the joint venture. In connection with
the licensing of the PSMA technology to the joint venture, Cytogen will receive
$2 million in payments of which $1 million was received in 1999, with the
balance to be paid in installments through December 31, 2001. As a result,
Cytogen recorded approximately $1.8 million in license fee revenue in the second
quarter of 1999, based on the net present value of the future payments (using a
discount rate of 10%).
4. SALE OF TARGON CORPORATION:
Targon was established in September 1996 pursuant to agreements between
Cytogen and Elan, and was a majority-owned (99.75%) subsidiary of Cytogen. In
March 1998, Elan exchanged its shares of the Company's Series A Convertible and
Exchangeable Preferred Stock for 50% of Cytogen's interest in Targon. In August
1998, Cytogen sold its remaining 49.875% interest in Targon to Elan for $2.0
million (see Note 1). As a result of the sale, a warrant to purchase up to
1,000,000 shares of Cytogen common stock previously granted to Elan and all
notes among Cytogen, Elan and Targon were cancelled. In addition, in August
1998, Cytogen received $2.0 million from Elan in exchange for a convertible
promissory note (see Note 10). The Company recognized a gain of approximately
$2.8 million in 1998 on the Targon transaction.
68
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. BERLEX LABORATORIES:
In October 1998, Cytogen entered into an exclusive license and marketing
agreement ("Berlex Agreement") with Berlex for the manufacture and sale of
Quadramet. Under the terms of the Berlex Agreement, Cytogen received a one-time
license fee of $8 million in 1998 and Berlex pays Cytogen royalties on net sales
of Quadramet, as well as milestone payments based on achievement of certain
sales levels. Quadramet was re-launched by Berlex in the first quarter of 1999.
In connection with the Berlex Agreement, Cytogen granted Berlex a warrant to
purchase 1,000,000 shares of Cytogen common stock at an exercise price of $1.002
per share. Using the Black-Scholes option pricing model, the estimated value of
the warrant was calculated at $855,000, and was recorded as a reduction of the
one-time license fee revenue, with a corresponding increase in stockholders'
equity.
6. THE DUPONT PHARMACEUTICAL COMPANY:
Pursuant to the terms of an agreement between Cytogen and DuPont, Cytogen
received from DuPont (i) $1.5 million in 1997 to fund clinical programs to
expand the use and marketing of Quadramet; (ii) a $2.0 million milestone payment
in 1997 upon the FDA clearance of Quadramet and (iii) royalty revenues of $1.7
million and $3.3 million in 1998 and 1997, respectively, based on minimum
contractual payments which were in excess of actual sales. In June 1998, the
agreement was amended and the minimum royalty arrangement was discontinued. In
1998, Cytogen terminated its marketing agreement with DuPont and recorded as a
charge to Costs of Product payments to DuPont of $4 million for securing a
long-term manufacturing commitment for Quadramet from DuPont and $995,000 for
manufacturing and distributing Quadramet in 1998.
7. THE DOW CHEMICAL COMPANY:
In 1993, Cytogen acquired from The Dow Chemical Company ("DOW") an exclusive
license for the treatment of osteoblastic bone metastases in the U.S. for
Quadramet. This license was amended in 1995 and 1998 to expand the territory to
include Canada, Latin America, Europe and Japan, in 1996 to expand the field to
include all osteoblastic diseases and in 1998 to include rheumatoid arthritis.
In 1997, the Company recorded a $4.0 million milestone payment to Dow upon FDA
clearance of Quadramet. The agreement also requires the Company to pay Dow
royalties based on a percentage of net sales of Quadramet, or a guaranteed
contractual minimum payments, whichever is greater, and future payments upon
achievement of certain milestones. The Company recorded $500,000, $500,000 and
$375,000, in royalty expense for 1999, 1998 and 1997, respectively. Future
annual minimum royalties due to Dow are $750,000 in both 2000 and 2001 and $1.0
million per year thereafter through 2012.
69
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. REVENUES FROM MAJOR CUSTOMERS:
Revenues from major customers as a percentage of total were as follows:
Year Ended December 31,
-------------------------
1999 1998 1997
------ ------ ------
Berlex (see Note 5) 9% 36% -%
DuPont (see Note 6) - 8 47
Progenics Pharmaceuticals, Inc. (see Note 3) 16 - -
Mallinckrodt Medical Inc. 16 8 6
Medi-Physics 15 10 9
Mallinckrodt Medical Inc. and Medi-Physics are chains of radiopharmacies,
which distribute ProstaScint and OncoScint CR/OV kits.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
December 31,
--------------------------
1999 1998
---------- ----------
Accounts payable............................................. $1,785,000 $2,465,000
Accrued payroll and related expenses......................... 1,309,000 1,222,000
Restructuring accruals....................................... - 856,000
Accrued research contracts and materials..................... 236,000 474,000
Accrued commission and royalties............................. 404,000 828,000
Accrued professional and legal............................... 422,000 655,000
Facility payable............................................. 689,000 -
Other accruals............................................... 633,000 886,000
---------- ----------
$5,478,000 $7,386,000
========== ==========
In connection with the closure of the Company's Cellcor subsidiary and
corporate downsizing in 1998, Cytogen incurred a restructuring charge of
approximately $1.9 million relating to severances, other closure related
expenses and costs to implement a corporate turnaround plan, of which $856,000
was accrued at December 31, 1998 and paid in full in 1999.
10. LONG-TERM LIABILITIES:
December 31,
--------------------------
1999 1998
---------- ----------
Due to Elan ................................................. $2,200,000 $2,054,000
Due to CIT Group/Credit Finance ............................. - 744,000
Capital lease obligations.................................... 378,000 273,000
---------- ----------
2,578,000 3,071,000
Less: Current portion....................................... (162,000) (848,000)
---------- ----------
$2,416,000 $2,223,000
========== ==========
70
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In August 1998, Cytogen received $2.0 million from Elan in exchange for a
convertible promissory note. The note is convertible into shares of Cytogen
common stock at $2.80 per share, subject to adjustments, and matures in seven
years. The note bears annual interest of 7%, compounded semi-annually, however,
such interest is not payable in cash but will be added to the principal for the
first 24 months; thereafter, interest is payable in cash. In 1999 and 1998, the
Company accrued $146,000 and $54,000 in interest expense on this note.
In October 1998, the Company entered into a $750,000 term loan agreement
with The CIT Group/Credit Finance Inc., using the Company's tangible assets as
collateral. In January 1999, the Company paid the remaining balance of the loan
with the proceeds from the sale of its laboratory and manufacturing facilities
(see Note 1).
The Company leases certain equipment under capital lease obligations, which
will expire on various dates through 2002. Property and equipment leased under
non-cancelable capital leases have a net book value of $484,000 at December 31,
1999. Payments to be made under capital lease obligations (including interest of
$86,000) are $204,000 in 2000, $176,000 in 2001 and $84,000 in 2002.
11. COMMON STOCK:
In December 1998, the Company sold to The State of Wisconsin Investment
Board 3,333,334 shares of Cytogen common stock at an aggregate price of $2.5
million, or $0.75 per share.
In January 1999, the Company sold 2,666,667 shares of Cytogen common stock
to a subsidiary of The Hillman Company for an aggregate price of $2.0 million,
or $0.75 per share. Also in January, the Company exercised a put right granted
to Cytogen under a $12.0 million equity line agreement with an institutional
investor, for the sale of 475,342 shares of common stock at an aggregate price
of $500,000, or $1.0519 per share. The Company will not draw on the remaining
$11.5 million of the equity line agreement and has deregistered shares, which
were previously registered with the Securities and Exchange Commission to be
issued under the facility.
In August 1999, the Company sold to the State of Wisconsin Investment Board
3,105,590 shares of Cytogen common stock at an aggregate price of $5.0 million,
or $1.61 per share.
12. CONVERTIBLE PREFERRED STOCK:
In December 1997, Cytogen obtained a financing commitment from private
investors for the purchase of up to $20.0 million of its Convertible Preferred
Stock subject to satisfaction of certain conditions. Cytogen completed the first
tranche of the financing in December 1997 by issuing 750 shares of Series B
Preferred Stock ("Series B") for an aggregate price of $7.5 million. The Series
B carried a dividend rate of 6% which was payable in cash or common stock at the
option of Cytogen.
In connection with the conversion feature of the Series B, the Company
recorded a deemed dividend of $1.3 million in 1997, which represented the
maximum 15% conversion discount given to the holders of the Series B. In 1998,
all of the outstanding Series B was converted into 7,377,054 shares of Cytogen
common stock including $128,000 of accrued dividends.
71
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. STOCK OPTIONS AND WARRANTS:
The Company has various stock option plans that provide for the issuance of
incentive and non-qualified stock options to employees, non-employee directors
and outside consultants, for which an aggregate of 6,733,357 shares of common
stock have been reserved. The persons to whom options may be granted and the
number, type, and terms of the options vary among the plans. Options are granted
with an exercise term of 10 years and generally become exercisable in
installments over periods of up to 5 years at an exercise price determined
either by the plan or equal to the fair market value of the common stock at the
date of grant. Under certain circumstances, vesting may accelerate. In January
1998, the Company cancelled unexercised stock option grants to purchase 671,555
shares ranging in price from $3.687 to $16.50 per share and issued stock option
grants to purchase 537,244 shares at $1.95 per share which equaled fair market
value at the date of grant. This repricing was not available to officers,
directors, executives and consultants of the Company. Activity under these plans
was as follows:
Aggregate
Number of Price Range Exercise
Shares Per Share Price
----------- -------------- ------------
Balance at December 31, 1996 3,522,940 $ 2.69 - 17.00 $ 19,164,910
Granted 822,400 2.06 - 6.13 2,745,830
Exercised (60,350) 1.77 - 5.47 (197,267)
Cancelled (459,530) 2.69 - 8.88 (2,171,735)
----------- ------------
Balance at December 31, 1997 3,825,460 $ 2.06 - 17.00 19,541,738
Granted 2,285,920 0.70 - 2.13 3,927,819
Cancelled (2,319,085) 1.36 - 17.00 (10,480,467)
----------- ------------
Balance at December 31, 1998 3,792,295 $ 0.70 - 16.63 12,989,090
Granted 536,155 0.95 - 2.67 1,068,223
Exercised (231,842) 0.81 - 2.69 (306,507)
Cancelled (1,266,609) 0.80 - 8.06 (5,963,368)
----------- ------------
Balance at December 31, 1999 2,829,999 $ 0.70 - 16.63 $ 7,787,438
=========== ============
72
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information about stock options at December 31,
1999:
Outstanding Stock Options Exercisable Stock Options
- ------------------------------------------------------------------------ --------------------------------
Weighted-Average
Remaining Weighted-Average
Range of Outstanding Contractual Weighted-Average Exercisable Exercise
Exercise Prices Shares Life Exercise Price Shares Price
- --------------- ----------- ---------------- ---------------- ------------ ----------------
$ 0.70 - 1.83 716,822 8.4 $1.11 405,390 $ 1.00
1.84 - 3.67 1,465,042 6.3 2.13 674,233 2.10
3.68 - 5.50 444,075 4.7 5.10 356,772 5.11
5.51 - 7.33 118,060 4.8 5.99 98,660 6.07
7.34 - 9.17 58,000 5.5 7.74 38,800 7.78
9.17 - 11.00 500 6.1 9.28 300 9.28
14.66 - 16.50 15,000 1.9 15.69 15,000 15.69
16.50 - 16.63 12,500 2.8 16.51 12,500 16.51
--------- ---------
$ 0.70 - 16.63 2,829,999 6.5 $2.75 1,601,655 $ 3.12
========= =========
At December 31, 1999, options to purchase 1,601,655 shares of common stock
were exercisable and 1,776,926 shares of common stock were available for
issuance under approved plans of additional options that may be granted under
the plans.
In August 1998, the Company granted to a key employee an option to purchase
2,250,000 shares of Cytogen common stock at an exercise price of $1.0937 per
share, of which, the vesting of 1,350,000 shares ("Performance Options") are
subject to the completion of certain performance based milestones as determined
by the Board of Directors (the "Board"). This option was granted outside of the
approved plans. During 1999, the Board approved the commencement of vesting for
675,000 of the Performance Options upon the achievement of certain milestones.
In 1999, the Company recorded $84,000 of deferred compensation related to the
vesting of the Performance Options, which represents the fair market value of
Cytogen's common stock in excess of the exercise price of the option on the
date, which the Board determined the performance milestones had been met.
Deferred compensation is being amortized over the three-year vesting period of
the Performance Options. As of December 31, 1999, 300,000 shares under this
option were exercisable.
In 1999, the Company granted options to purchase 152,384 shares of common
stock to certain former employees that are employed by Purdue and involved in
the manufacture of Cytogen's products. During 1999, the Company recorded $62,000
of expense related to these option grants.
In 1997, the Company adopted an employee stock purchase plan under which
eligible employees may elect to purchase shares of common stock at the lower of
85% of fair market value as of the first trading day of each quarterly
participation period, or as of the last trading day of each quarterly
participation period. In 1999, 1998 and 1997, employees purchased 29,209, 54,023
shares and 16,017 shares, respectively, for aggregate proceeds of $29,000,
$41,000 and $32,000, respectively. The Company has reserved 400,751 shares for
future issuance under its employee stock purchase plan.
73
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company applies Accounting Principle Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and the related interpretations in accounting
for its stock option plans. The disclosure requirement of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," was adopted by the Company in 1996. Had compensation cost of the
Company's common stock option plan been determined under SFAS No. 123, the
Company's net loss would have been increased to the following pro forma amounts:
Year Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ------------ ------------
Net income (loss) to common stockholders, as reported $ 729,000 $(13,271,000) $(32,064,000)
Pro forma net loss to common stockholders $(1,103,000) $(16,601,000) $(34,946,000)
Diluted net income (loss) per common share, as reported $ 0.01 $ (0.24) $ (0.63)
Diluted pro forma net loss per common share $ (0.02) $ (0.29) $ (0.68)
The average fair value per option of the options granted under the stock
option plans during 1999, 1998 and 1997 is estimated as $1.29, $0.92 and $2.10,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following assumptions for 1999, 1998 and 1997: dividend yield of zero,
volatility of 87.99%, 78.42% and 69.87%, respectively, risk-free interest rate
of 5.85%, 5.37% and 6.07%, respectively, and an expected life of 5 years. The
average fair value per option ascribed to the employee stock purchase plan
during 1999, 1998 and 1997 is estimated at $0.40, $0.65 and $2.17, respectively,
on the date of grant using the Black-Scholes option pricing model with the
following assumptions for 1999, 1998 and 1997: divided yield of zero, volatility
of 111.48%, 84.75% and 50.20%, respectively, risk free interest rate of 4.46%,
4.88% and 5.13%, respectively, and expected life of three months. Because the
SFAS No. 123 method of accounting is not required to be applied to options
granted prior to January 1, 1995, the resulting pro forma compensation charge
may not be representative of that to be expected in future years.
14. RELATED PARTY TRANSACTION:
Consulting services have been provided to the Company under an agreement
with the Chairman of the Board of Directors related to time spent in that
function on Company matters. Fees and expenses under this agreement were
$136,000 and $172,000 in 1999 and 1998, respectively.
15. PENSION PLANS:
The Company maintains a defined contribution pension plan. The contribution
is determined by the Board of Directors each year and is based upon a percentage
of gross wages of eligible employees. The plan provides for vesting over five
years, with credit given for prior service. The Company also makes contributions
under a 401(k) plan in amounts, which match up to 50% of the salary deferred by
the participants. Matching is capped at 6% of deferred salaries. Total pension
expense was $182,000, $310,000 and $405,000 for 1999, 1998 and 1997,
respectively.
74
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. INCOME TAXES:
As of December 31, 1999, Cytogen had federal net operating loss
carryforwards of approximately $187 million. The Company also had federal and
state research and development tax credit carryforwards of approximately $6.5
million. Certain operating loss and credit carryforwards began to expire in
1995.
The Tax Reform Act of 1986 contains provisions that limit the utilization of
net operating loss and tax credit carryforwards if there has been an "ownership
change". Such an "ownership change", as described in Section 382 of the Internal
Revenue Code may limit the Company's utilization of its net operating loss and
tax credit carryforwards.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Based upon the Company's
loss history, a valuation allowance for deferred tax assets has been provided:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 63,700,000 $ 60,300,000
Capitalized research and development expenses 17,400,000 19,500,000
Research and development credit 6,500,000 5,400,000
Acquisition of in-process technology 1,200,000 1,200,000
Other, net 6,400,000 300,000
------------ ------------
Total deferred tax assets 95,200,000 86,700,000
Valuation allowance for deferred tax assets (95,200,000) (86,700,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
In 1995, Cytogen acquired CytoRad and Cellcor, both of which had net
operating loss carryforwards. Due to Section 382 limitations, approximately $10
million of CytoRad and $12.0 million of Cellcor carryforwards may be available
to offset future taxable income. A 100% valuation allowance was established on
the acquisition dates as realization of these tax assets is uncertain.
During 1999, the Company sold New Jersey state operating loss carryforwards
and research and development credits, which resulted in the recognition of a
$2.7 million tax benefit.
17. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under non-cancelable
operating leases that expire at various times through 2004. Rent expense
incurred on these leases was $998,000, $1.6 million and $1.8 million in 1999,
1998 and 1997, respectively. Minimum future obligations under the operating
leases are $3.6 million as of December 31, 1999 and will be paid as follows:
$1.3 million in 2000, $1.4 million in 2001, $496,000 in 2002, $214,000 in 2003
and $209,000 in 2004.
The Company is obligated to make minimum future payments under research and
development contracts that expire at various times. As of December 31, 1999, the
minimum future payments under contracts are $130,000 each year from 2000 and
thereafter. In addition, the Company is obligated to pay performance-based
compensation through mid-year 2000 to its marketing partner for ProstaScint and
royalties on revenues from commercial product sales including certain guaranteed
minimum payments.
75
EXHIBIT INDEX
-------------
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.25 Strategic Alliance Agreement between AxCell Biosciences
Corporation and InforMax, Inc. dated as of September 15, 1999. 39
10.26 Master Loan and Security Agreement No. S7600 among Cytogen
10.27 Master Loan and Security Agreement No. S7600 among Cytogen
Corporation, AxCell Biosciences Corporation and Finova Capital Corporation
dated December 30, 1999.
21 Subsidiaries of Cytogen Corporation
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (Submitted to SEC only in electronic format)
76