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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1995.
AUTOIMMUNE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-348-9062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
128 Spring Street, Lexington, MA 02173
(Address of principal executive offices) (Zip Code)
(617) 860-0710
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered.
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /______/
On March 18, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $145,455,969. As of March 18, 1996, there
were outstanding 16,283,942 shares of the registrant's Common Stock, $0.01 par
value.
Documents Incorporated by Reference
-----------------------------------
Portions of the Company's definitive Proxy Statement for its annual meeting of
shareholders which the Company intends to file within 120 days after the end of
the Company's fiscal year ended December 31, 1995 are incorporated by reference
into Part II hereof as provided therein.
PART I
Item 1. Business
Overview
AutoImmune Inc. (the "Company" or "AutoImmune") is a biopharmaceutical
company developing a new class of orally administered pharmaceutical products
for the treatment of autoimmune and other cell-mediated inflammatory diseases
and conditions. The Company is conducting clinical trials for the following
products: Myloral/(R)/, for the treatment of multiple sclerosis ("MS"),
Colloral/(R)/, for the treatment of rheumatoid arthritis, and AI 300, for the
treatment of uveitis. A fourth product, AI 401, for the treatment of Type I
diabetes, is entering Phase II clinical trials funded by the Company's
collaborator, Eli Lilly and Company ("Lilly"). The Company believes, based on
preclinical and clinical data, that its proprietary approach to therapy can
induce tissue-specific immunosuppression without toxicity or significant side
effects. Additional clinical and commercial advantages of this approach include
the ability to administer products orally (the preferred method of treating
chronic diseases) and the potential application to a variety of inflammatory
diseases and conditions.
All of the Company's products are based upon the principles of oral
tolerance. Oral tolerance utilizes natural immune system mechanisms associated
with the gut (the small intestine). These mechanisms allow the body to accept
orally ingested proteins by suppressing the immune response that would otherwise
arise against a foreign substance. This suppression can be directed toward a
tissue under attack by the body's own immune system, which occurs in an
autoimmune disease, through appropriate selection and dosing of the protein in
an orally delivered product.
AutoImmune believes it is the leading company developing pharmaceutical
products based upon the principles of oral tolerance. The status of each of
AutoImmune's principal products in clinical trials is as follows:
Myloral----AutoImmune is conducting a two-year Phase III pivotal multi-
center trial in 515 patients to investigate the use of Myloral in treating MS.
Enrollment in the trial concluded in March 1995 and the last patient visit will
occur in March 1997. The primary endpoint is the reduction in frequency of
attacks in relapsing/remitting MS. This Phase III trial follows the conclusion
of a 30 patient double-blind Phase I/II trial that showed positive results.
Colloral----To date, AutoImmune has completed four human clinical trials of
Colloral in over 350 patients to investigate its use in treating rheumatoid
arthritis. In July 1995, the Company announced the results of its Phase II dose
ranging clinical trial involving 274 patients with severe, active rheumatoid
arthritis. The data showed that patients receiving the 20 microgram dose of
Colloral demonstrated statistically significant improvement compared to patients
receiving placebo as measured by the Paulus criteria, a commonly used method to
discriminate between drug and placebo response in rheumatoid arthritis trials.
Colloral was safe and well tolerated by patients at all dose levels. In
anticipation of Phase III pivotal trials, the Company is beginning additional
Phase II trials in the first half of 1996 to further refine dosage using
material produced by the Company's manufacturing process and to gather
additional data for use in designing Phase III trials.
AI 401----The Company has completed a successful Phase I safety study of AI
401 to treat autoimmune-mediated (Type I) diabetes. In December 1994, the
Company entered into a collaborative agreement with Lilly under which Lilly will
be responsible for all further clinical trials, commercialization and
manufacturing of the Company's autoimmune-mediated diabetes products.
AutoImmune will receive payments based on milestones achieved as well as
royalties based on sales. The Company expects Lilly to initiate Phase II
clinical trials of AI 401 during 1996.
-2-
AI 300----The Company is developing AI 300 for the treatment of uveitis, a
disease of the eye. The Company conducted a Phase I/II clinical trial in 45
patients in conjunction with the National Eye Institute of the National
Institutes of Health. Results of the trial are expected to be available in the
second quarter of 1996.
AutoImmune diseases represent a major worldwide health care problem in
terms of the number of people affected. The Company believes that each of these
products under development offers the potential for a therapeutic breakthrough.
The Company was incorporated in Delaware in September 1988 as AutoImmune
Technologies, Inc. The Company changed its name to AutoImmune Inc. in July
1991. The executive offices of AutoImmune are located at 128 Spring Street,
Lexington, Massachusetts 02173, and its telephone number is (617) 860-0710.
Strategy
The Company's objective is to become a leading provider of therapeutic
products to treat immune system disorders. The key elements of the Company's
strategy include the following:
Focusing on Myloral and Colloral. The Company is concentrating a
significant portion of its resources on its two most advanced products, Myloral
and Colloral. More than seven million people worldwide suffer from multiple
sclerosis or rheumatoid arthritis, the diseases addressed by Myloral and
Colloral, and current therapies for these diseases have significant limitations.
The Company has retained all rights to Myloral and Colloral. AutoImmune
currently plans to evaluate all of its options for these products, including
independently developing and marketing one or both of these products or seeking
to enter into licensing arrangements, exclusive marketing agreements in specific
foreign markets or joint ventures with established pharmaceutical companies with
respect to one or both of these products.
Leveraging the Company's Technology Platform. The Company believes its
technology is applicable to a variety of autoimmune and other cell-mediated
diseases and conditions. In addition to Myloral and Colloral, the Company has
several other products in various stages of development, including products to
treat Type I diabetes and uveitis. The Company plans to seek licensing
arrangements, joint ventures or other collaborative agreements to assist in
financing the development of one or more of these products. One result of this
strategy is the Company's collaboration with Lilly for the development and
commercialization of its products to treat autoimmune-mediated diabetes.
The Company continues to develop the technology underlying oral tolerance
therapy through research conducted primarily at The Brigham and Women's
Hospital, a teaching hospital affiliated with Harvard Medical School. This
research is designed to further the Company's understanding of the mechanisms of
oral tolerance with the goals of increasing the effectiveness of the Company's
products and exploring new therapeutic applications for this technology.
Protecting the Company's Competitive Position. From its inception, the
Company has sought to establish a strong proprietary position. As of December
31, 1995, the Company had pending 22 original and continuation-in-part United
States patent applications and numerous foreign counterparts. The Company has
received or has exclusive rights to nine U.S. and foreign patents. The European
Patent Office has granted a patent which the Company owns covering the use of
pharmaceuticals containing autoantigens to treat a group of human autoimmune
diseases, and the United States Patent Office has issued a patent to the Company
covering the use of Colloral to treat rheumatoid arthritis in humans. In
addition, the Company expects that Orphan Drug status may provide increased
proprietary protection for certain of its products. The Company has received
Orphan Drug status for Myloral for the treatment of MS, for Colloral for the
treatment of juvenile rheumatoid arthritis, and for AI 300 for the treatment of
uveitis. In addition, the Company anticipates that the United States Food and
Drug Administration (the "FDA") will classify its products as "biologics." If
the Company's products are so classified,
-3-
there is no provision for rapid approval of generic competitors after the
expiration of any proprietary protection the Company receives.
Minimizing Costly Infrastructure and Capital Investment. From its
inception, the Company has sought to conserve its financial resources. The
Company's early research was conducted at The Brigham and Women's Hospital, and
the Company did not begin to hire employees in significant numbers until 1993.
The Company has made extensive use of external resources, such as clinical
research organizations and consultants. The Company believes it will be able to
minimize costly infrastructure by continuing the use of external resources where
appropriate.
Autoimmune Diseases
The human immune system is the major biological defense mechanism
responsible for recognizing and fighting disease. The immune system
distinguishes foreign substances (antigens) from the body's tissue and rids the
body of a wide variety of disease-causing antigens such as bacteria and viruses.
T cells, which circulate in the blood, are a major component of this system.
There are several types of T cells, which play a critical role in recognizing
antigens, carrying out the immune response, and regulating the resulting chain
of events. These include "helper" T cells, which release factors to amplify the
immune response; "killer" T cells, which attack and destroy other cells
displaying the targeted antigen; and "regulatory" T cells, which release factors
to down-regulate or suppress the immune response and keep it in control.
Autoimmune diseases are generally believed to be a result of an
inappropriate response of the immune system. In many autoimmune diseases, the
helper and killer T cells go awry and attack the body's healthy tissues. T cells
which act in this manner are called autoreactive T cells. These T cells appear
to target the antigenic substances present in specific tissues (autoantigens).
The antigenic substances differ depending upon the disease and may change over
the course of a disease. In some diseases, the antigenic substances have not
been characterized, while in others a number of substances have been found, but
the particular role of each has not been identified.
Autoimmune diseases, which may be crippling or fatal, can strike virtually
any tissue or organ. The particular disease that occurs depends upon which
healthy tissue is attacked. For example, if the tissue attacked is the brain,
multiple sclerosis results; if synovial tissue in joints is the target,
rheumatoid arthritis results. Type I diabetes occurs when certain pancreatic
cells are the target, and uveitis occurs when cells of the uvea, the middle,
vascular layer in the eye, are attacked.
There is currently no method known for curing autoimmune diseases. They
are chronic and require lifelong treatment. Treatments tend to fall into two
major categories. The first category involves compounds for palliative
treatment, such as anti-inflammatory agents and pain killers for rheumatoid
arthritis, or insulin for diabetics. In some forms of the diseases, there is no
acceptable method of treating even the symptoms. The second category involves
the administration of non-specific immunosuppressants, which indiscriminately
shut down multiple parts of the immune system. These immunosuppressants usually
have serious toxicity and side effect problems with long-term use.
While there are numerous cell-mediated autoimmune diseases, the Company is
at present developing products for four: multiple sclerosis, rheumatoid
arthritis, Type I diabetes, and uveitis (or uveoretinitis). Multiple sclerosis
is a chronic inflammatory disease of the central nervous system that results
from damage to myelin, a substance that encircles and insulates nerve fibers.
Symptoms include impaired mobility, visual impairment, slurred speech, sexual
dysfunction and poor bladder control. Rheumatoid arthritis is a chronic disease
in which the body's immune system attacks synovial tissue in joints, resulting
in a progressive, painful inflammation of the joints, along with crippling
deformation of the hands, feet, hips, knees and shoulders. In advanced phases
of the disease,
-4-
symptoms include severe pain, body disfiguration and loss of mobility. The
autoimmune form of diabetes (Type I, also known as juvenile or insulin-dependent
diabetes) is the result of the body's immune system destroying the insulin-
producing islet cells in the pancreas. The result of this attack is a lifelong,
highly dangerous form of the disease that, after onset, can only be controlled
by administration of insulin. Although insulin treatment controls the metabolic
abnormalities of the disease, it does not always prevent major debilitating
effects, which can include neural degeneration, chronic pain, arteriosclerosis,
loss of limbs due to peripheral vascular disease, blindness and kidney failure.
In its most severe form, diabetes can result in death. The autoimmune form of
uveitis is a chronic, degenerative eye disease, resulting in inflammation,
discoloration and ultimately blindness.
In addition, AutoImmune is developing a product for the treatment of
transplant rejection which, while not an autoimmune disease, involves similar
mechanisms of action. As a result, the Company believes that its approach may
provide an effective therapy for this clinical condition.
The Company has directed its efforts in these areas because each of these
diseases and conditions is mediated by the T cells in the immune system, and
thus is well suited to AutoImmune's oral tolerance approach, which suppresses T
cell activity. No completely satisfactory treatment currently exists for any of
these conditions.
The Company's Technology
AutoImmune's products are based upon the principles of oral tolerance.
Oral tolerance utilizes the natural immune system mechanisms associated with the
gut (the small intestine). These mechanisms allow the body to accept
("tolerate") orally ingested proteins by actively suppressing the immune
response that would otherwise arise against a foreign substance. In a series of
extensive research studies directed by Dr. Howard Weiner, who is one of the
Company's principal scientific advisors, it was shown that, when properly
activated, these mechanisms can be used to treat autoimmune disorders by
selectively suppressing the immune system. This discovery forms the basis of
the Company's products and patent claims. See "Patents and Proprietary Rights."
The Company's method uses therapeutic substances -- antigenic proteins or
derivatives thereof found in the organs attacked by each disease -- which are
delivered orally and disassembled in the gut by the normal digestive processes.
Specific fragments of these substances (peptides) attach to antigen-presenting
cells on the surface of the gut. The cells involved are those associated with
Peyer's Patches, which are groupings of immune system cells surrounding the gut
that have been reported to induce immune tolerance. This triggers the immune
system to initiate a chain of events that results in the creation of regulatory
T cells that migrate through the blood and lymph system to suppress or down-
regulate the immune response at the targeted organ, thereby mitigating the
disease. This suppression can be directed toward the tissue under attack in an
autoimmune disease by appropriate selection and dosing of the protein in an
orally-delivered product.
AutoImmune has completed a wide range of human, animal and in vitro tests
relating to the oral administration of its products in a variety of disease
indications. The Company believes these experiments have demonstrated that
selective immune system tolerance can be induced by oral administration of
antigens, suppressing undesirable immune system attacks against healthy tissue
without suppressing the entire immune system.
AutoImmune's research has indicated that identification of the precise
autoantigen for a disease may not be necessary to develop an effective treatment
based on oral tolerance. Research has shown that oral tolerance induced by one
organ-specific protein is capable of suppressing autoreactive T cells that are
attacking a different protein in the same organ. The Company refers to this
phenomenon as "bystander suppression," and has filed a patent to protect its
rights to this discovery. In particular, bystander suppression allows an oral
tolerance treatment to be effective even if the autoantigen is not precisely
identified or changes during the course of a disease (an effect known as
"determinant spreading").
-5-
In contrast to existing treatments, which are limited to treating only the
symptoms of autoimmune disease or which run the risks and side effects of
shutting down the entire immune system, the Company's products are intended to
interrupt the disease process and be specific to each disease. Moreover,
because of the apparent freedom from significant side effects enjoyed by
AutoImmune's products, the Company believes they may be prescribed earlier in
the disease process than is now customary, and thus may allow patients to avoid
most or all of the debilitating effects of autoimmune diseases. The Company
believes its approach of developing products to induce the activation of
regulatory T cells in order to suppress disease distinguishes it from most
others currently conducting autoimmune disease research.
The Company's approach offers a number of important clinical and commercial
advantages:
Adverse Reactions Unlikely. The Company believes that since the
therapeutic substances it is developing are protein-based products taken in
small quantities, are digested like normal foodstuffs and stimulate natural
functions, they are unlikely to cause adverse reactions. AutoImmune's human
studies to date have shown a lack of both toxicity and significant side effects,
which the Company believes may expedite the regulatory process.
Tissue-Specific Immunosuppression. The Company's oral tolerance technique
utilizes the immune system itself to generate natural immunosuppression in the
specific tissue(s) attacked by a disease. It does not down-regulate the entire
immune system.
Oral Delivery. AutoImmune's products will be administered orally, the
preferred method of treating chronic diseases. Other forms of immunotherapy
which are being marketed or are known by the Company to be in development by
competitors are likely to require chronic intravenous or intra-muscular
administration.
Broad Application. The Company believes that, in addition to the diseases
and conditions on which it has been working to date, its oral tolerance approach
potentially could be applied to the treatment of a variety of other inflammatory
diseases and other clinical conditions, including psoriasis and Alzheimer's
disease.
Principal Products in Development
AutoImmune has products in various stages of development for treating
multiple sclerosis, rheumatoid arthritis, Type I diabetes, uveitis and
transplant rejection. The chart set forth below describes the stage of
development of each of the Company's principal products.
- -----------------------------------------------------------------------------------------------
PRINCIPAL PRODUCTS IN DEVELOPMENT
Product Disease/Condition Development Status
------- ----------------- ------------------
Myloral Multiple Sclerosis Phase III pivotal trial in progress
Colloral Rheumatoid Arthritis Multi-center Phase II dose ranging study
completed; further Phase II trials, including
a dose refinement study, beginning in the
first half of 1996
AI 401 Type I Diabetes Phase II trials to start in 1996
AI 300 Uveitis Phase I/II trial completed; results expected in
the second quarter of 1996
AI 502 Transplant Rejection Phase I/II trial planned for 1996
- -----------------------------------------------------------------------------------------------
-6-
Multiple Sclerosis. Myloral, AutoImmune's proprietary oral formulation of
bovine myelin for the treatment of multiple sclerosis, is currently in a double-
blind placebo-controlled Phase III clinical trial under a Company-sponsored
Investigational New Drug permit ("IND"). This pivotal trial, designed with the
FDA, encompasses 515 patients during a two-year observation period, making it
one of the largest therapeutic studies ever conducted on MS. Enrollment in this
trial was completed in March 1995, less than 12 months after initiation. As of
December 31, 1995, a total of 450 of these patients had completed their first of
two years in this trial. The last patient visit will occur in March 1997. The
trial is intended to demonstrate that Myloral reduces the frequency of attacks
in relapsing/remitting MS. Clinical observations will be supplemented by data
from MRI scans. The patients are stratified into subpopulations based on
gender, as well as genetic factors associated with immune response, to permit
subgroup analysis and thus determine appropriate labeling. In addition, a
pharmacoeconomic study is being simultaneously conducted to analyze the
potential savings in healthcare costs from the use of Myloral. In this study,
which will be based on the patients enrolled in the Phase III trial, the cost of
health-care associated events, such as hospitalizations, health professional
services, disease-related equipment and sick days, will be collected throughout
the study to compare the differences, if any, between the Myloral and the
placebo groups.
The clinical proof of principle study for Myloral was a Phase I/II trial on 30
patients at The Brigham and Women's Hospital. This trial demonstrated positive
clinical and immunological effects, especially for certain patient subgroups.
Results of this trial were published in the journal Science on February 26,
1993. Overall response rates and safety profiles of patients from this study
who have continued on Myloral, some up to five years, remain favorable.
AutoImmune has received Orphan Drug designation for Myloral.
Approximately 350,000 persons in the United States suffer from MS, of which
approximately 45% have relapsing/remitting MS. The patients in the Phase III
pivotal trial of Myloral suffer from relapsing/remitting MS. Approximately one-
third of individuals with MS stabilize and never reach a severe stage; others
have multiple acute attacks as frequently as two to three times a year. In its
most severe form, the disease is relentlessly progressive and can result in
complete disability within ten years. Since the early 1980s, non-specific
immunosuppressants, such as cyclophosphamide and azothioprine, have been used
with occasional success to slow the progression of this disease in some
patients. None of these treatments is capable of stopping MS attacks or halting
the progression of the disease without exposing patients to potentially serious
side effects. In 1993, the FDA approved the first human recombinant form of
beta interferon for relapsing/remitting MS, and later that year, Berlex began
commercial marketing of this product. This injectable product is indicated for
reduction of the frequency of MS exacerbations, but has side effects such as
flu-like symptoms and injection site reactions. Two additional companies filed
applications with the FDA in 1995 for approval of injectable products to treat
relapsing/remitting MS.
Rheumatoid Arthritis. Colloral, AutoImmune's proprietary oral formulation of
Type II collagen, is undergoing a series of Phase II human clinical trials.
These studies are designed to build the clinical database required for
regulatory approval. More than 350 patients have been involved in the four
Colloral trials completed to date.
In June 1995, under a physician-sponsored IND, the Company completed a six-
month, six-center double-blind Phase II clinical trial involving 274 patients
with severe, active rheumatoid arthritis. The goal of this study was to
identify the optimal dose(s) for testing in pivotal Phase III clinical trials.
Patients participating in this study who were not on placebo received a constant
dose of 20, 100, 500 or 2,500 micrograms of Colloral per day. Analysis of the
results of the study showed that patients receiving the 20 microgram dose of
Colloral demonstrated statistically significant improvement compared to patients
receiving placebo as measured by the therapeutic response standard known as the
Paulus criteria. Results of the study also demonstrated that patient
improvement increased as the dosage of Colloral decreased. Colloral was safe
and well tolerated by patients at all dose levels. The Paulus criteria, a
commonly used method to discriminate between drug and placebo response in
rheumatoid arthritis, require that patients achieve at least four of the
following six levels of response: 20% or greater improvement in tender joint
score, swollen joint score, morning stiffness, or sedimentation rate, and 40% or
greater improvement in patient and physician global scores. The intent-to-
treat, ever-response analysis showed 39% of patients given the 20
-7-
microgram dose of Colloral met this standard, compared with 19% of patients
receiving placebo. The data were controlled for confounding variables. No
patient met all criteria for complete remission of disease. The results of this
study were presented in October 1995 at the National Scientific Meeting of the
American College of Rheumatology.
The Company is beginning additional Phase II trials in the first half of 1996
under a Company-sponsored IND to further refine dosage using material produced
by the Company's manufacturing process and to gather additional data for use in
designing Phase III trials.
Drugs for rheumatoid arthritis are given chronically and, as a result, long-
term safety data are required for approval of all new drugs. AutoImmune has
begun to generate long-term safety data on Colloral through an open label
continuation trial with patients who have participated in the development
program. As of March 1, 1996, of the 237 patients who entered the continuation
trial, 155 patients were remaining in the trial.
Prior to the Phase II trial, three clinical studies had been conducted to
provide preliminary efficacy data for Colloral. The key study, conducted by
Beth Israel Hospital researchers and published in the September 1993 issue of
Science, was a double-blind, placebo-controlled three-month trial involving 60
patients. This trial followed a three-month, 10-patient, open label trial, also
conducted at Beth Israel Hospital. In addition, Harvard researchers conducted a
10-patient pilot trial in patients with juvenile rheumatoid arthritis ("JRA").
The results of the JRA study were presented in May 1995 at the joint Annual
Meeting of the Association of American Physicians, American Society for Clinical
Investigation and American Federation for Clinical Research. AutoImmune has
received Orphan Drug designation for Colloral for the treatment of JRA.
It is estimated that 1% of the worldwide population suffers from rheumatoid
arthritis. In the United States, 2.1 million patients currently seek treatment
for rheumatoid arthritis, including 71,000 patients with JRA. There is no known
cure, but several approaches are used in an attempt to alleviate two major
symptoms of the disorder, pain and inflammation. A number of pain relievers are
widely used, but most have undesirable side effects. Similarly, a wide variety
of anti-inflammatory agents, ranging from aspirin to nonsteroidal anti-
inflammatory ("NSAIDS") pharmaceuticals, are used with varying degrees of
success. The NSAIDS used to alleviate pain and inflammation have undesirable
gastrointestinal side effects that limit their use. None of the available
NSAIDS work with consistent efficacy on all types of patients. Broad
immunosuppressants are also used to treat rheumatoid arthritis but toxicity
limits their use.
Type I Diabetes. In August 1994, AutoImmune concluded a successful Phase I
safety trial of AI 401, a recombinant human protein. This trial was conducted
at Joslin Diabetes Center ("Joslin") in Boston and at the Barbara Davis Center
in Denver, under a physician-sponsored IND. The Company previously concluded a
series of animal studies at Joslin with respect to the efficacy of animal-
derived proteins in treating Type I diabetes. These studies have shown that
such proteins can suppress the disease in an animal model of Type I diabetes.
In December 1994, the Company entered into a collaborative agreement with
Lilly with respect to the Company's diabetes products. Under this agreement,
the Company granted to Lilly exclusive worldwide patent rights to its current
and any future oral tolerance products for autoimmune-mediated diabetes in
return for payments aggregating $20 million if certain milestones are achieved
and for royalties based on sales. A significant portion of the milestone
payments are creditable against royalties. AutoImmune has royalty-bearing, non-
exclusive rights outside the area of autoimmune-mediated diabetes to all
developments by Lilly in the field of oral tolerance. Lilly is responsible at
its expense for conducting all clinical trials and making all regulatory
submissions and product registrations. Lilly may terminate the agreement at any
time, in which event it will lose all rights to the products. The Company
anticipates that Lilly will begin Phase II clinical trials of AI 401 in patients
with Type I diabetes during 1996. The expenses of development and approval of
AI 401, estimated by the Company to be $20 million, will be paid by Lilly.
-8-
The National Institutes of Health ("NIH") has announced its intention to study
oral and subcutaneously delivered insulin and another therapy for the prevention
of Type I diabetes in a large multi-center trial. More than 60,000 individuals
have been screened for this trial by the NIH.
Approximately 1,000,000 people in the United States suffer from Type I
diabetes. It is estimated that there are 50,000 new patients diagnosed with
this disease each year. There is no known way of curing Type I diabetes; at
best it can be controlled. In addition, because insulin is a large protein that
is not appreciably absorbed through the gut, it must be administered
intravenously or intra-muscularly, rather than orally. The limitations of the
treatment delivery system and the inconsistency of the therapeutic results have
led to major efforts to discover effective new methods of treatment. The
Company believes that the preferred therapeutic approach would be an oral
treatment such as the Company's which could prevent the onset of the disease
(and the related destruction of the insulin-producing cells) in susceptible
populations. Methods to pre-screen persons who are genetically susceptible to
Type I diabetes are being developed by others. AutoImmune expects that
individuals who have been diagnosed in the early stages of Type I diabetes, as
well as those who may be identified through such pre-screening, will constitute
the primary market for AutoImmune's diabetes product.
Uveitis. A 45-patient placebo controlled Phase I/II clinical trial of AI 300
for uveitis has been completed and the Company expects data from this trial to
be available in the second quarter of 1996. This trial is being conducted under
the sponsorship of the Company pursuant to a Collaborative Research and
Development Agreement ("CRADA") with the National Eye Institute of the NIH. The
Company has received Orphan Drug designation for AI 300. In addition,
AutoImmune is conducting research on AI 301, a product based upon recombinant
protein, for treating uveitis. The Company expects that AI 301 is the product
most likely to be tested in future clinical trials because a recombinant product
for this disease is likely to be manufactured at a significantly lower cost than
a product based on animal protein.
Although uveitis can be caused by other factors such as external irritants,
the autoimmune form of the disease is particularly severe. Doctors have used
non-specific immunosuppressants, such as corticosteroids and cyclosporin, on
uveitis patients. Results, however, have not been consistent and serious side
effects may occur.
Transplant Rejection. AutoImmune has conducted preclinical studies in the
area of transplant rejection at The Brigham and Women's Hospital. These initial
studies have shown positive preliminary results in the suppression of the
rejection reaction using peptides. The Company plans to initiate a Phase I/II
clinical trial in the area of transplant rejection in 1996.
Although not an autoimmune disease, the rejection of a transplanted organ by
its new host is of interest to the Company since this phenomenon involves a
similar cell-mediated mechanism of action. For certain diseases such as end-
stage kidney, heart and liver failure, transplantation of donated organs is the
only means of keeping the patient alive. Two factors, however, have served to
limit the effectiveness of this approach. One factor is lack of donor organs,
while the other is the rejection of the transplanted organ as a foreign body by
the patient's immune system. The availability of the drug cyclosporin, which
suppresses the host's entire immune system, has significantly changed the nature
of organ transplantation in recent years. While this drug has allowed
transplantation to become a much more widespread clinical procedure, cyclosporin
is a powerful, non-specific immunosuppressant that has severe side effects,
especially in the kidneys, and exposes the patient to attacks from other
diseases and opportunistic infections. The Company believes that its approach
offers selective immunosuppression with a lack of toxicity or significant side
effects. Approximately 36,000 organ transplants are performed annually
worldwide.
-9-
Additional Products and Research Programs
The Company's other products in development utilize recombinant human proteins
and/or peptides, which may offer significant improvements from both clinical and
commercial perspectives. The Company has begun preclinical studies on AI 101, a
second generation product for the treatment of MS, which is based on recombinant
protein. Studies completed to date on AI 102, which is based upon synthetic
peptide fragments, demonstrated suppression of MS in animal models. In
addition, the Company is developing AI 201, a recombinant human form of
Colloral, and has conducted animal tests of AI 202, a peptide, both of which may
provide second generation products for treating rheumatoid arthritis. The
Company entered into a joint research project with Pharming B.V., of Leiden, The
Netherlands, to evaluate human collagen, produced in the milk of transgenic
animals, in animal models of rheumatoid arthritis. Following assessment of the
preclinical results, the companies will evaluate the opportunities for a more
extensive collaboration.
Recombinant human proteins and their derivatives are likely to be more
effective in humans than animal proteins because of genetic homology.
Genetically engineered products may increase the efficacy and enhance the
proprietary position of the Company's products. The Company also believes that,
in some cases, recombinant proteins, peptides and synthetic analogues may be
manufactured at lower cost and may allow lower dosages than animal proteins.
In addition to the products it currently is developing, AutoImmune has several
research programs involving possible future products or methods of delivery.
The Company believes its oral tolerance approach may lead to treatments for
cell-mediated inflammatory diseases in addition to those it is currently
studying. For example, the Company is conducting research on products to treat
other diseases, including psoriasis and Alzheimer's disease.
Manufacturing
All of the Company's products for clinical and commercial use must be produced
under controlled conditions and under current FDA Good Manufacturing Practices
("GMP"). To ensure compliance with GMP requirements, the Company will be
required to establish sufficient technical staff to oversee all production
operations, including quality control, quality assurance, technical support and
manufacturing management. To the extent the Company relies upon contract
manufacturing arrangements, the Company will depend upon third parties to
produce and deliver products in accordance with GMP.
The Company has obtained the small amount of products required for clinical
trials from contract manufacturing companies. In parallel, the Company has
developed its own commercial manufacturing processes for Myloral and Colloral.
The Company has established a long-term contract manufacturing arrangement with
Scientific Protein Laboratories ("SPL"), a subsidiary of American Home Products,
under which the Company is able to obtain, through SPL's facilities, clinical
and early commercial quantities of bulk Myloral produced using AutoImmune's
manufacturing process. The Company has also established a long-term contract
manufacturing arrangement with Global Pharm of Toronto, Canada for the
encapsulation and packaging of Myloral. In addition, the Company has begun
manufacturing Colloral for use in its next Phase II trials and intends to build
a pilot facility to manufacture Colloral in bulk form while continuing to meet
its filling, labeling and packaging requirements through arrangements with third
parties. The Company will continue to evaluate whether to manufacture bulk
product and finished dosage forms for all of its products through contract
suppliers, by leasing space in an existing facility, or by establishing its own
facility on a product-by-product basis.
-10-
Marketing and Sales
In order to market any of its products directly, the Company must develop a
marketing and sales organization. Because none of the Company's products is
expected to be commercially available for several years, the Company has not
begun to establish a marketing department and sales force. The Company may
elect to enter into agreements with established pharmaceutical companies with
respect to the marketing of one or more of its products. Such agreements may be
exclusive or non-exclusive and may provide for marketing rights worldwide or in
specific markets.
Collaborative Research Agreements
During the early stages of its development, the Company chose to operate
through a variety of agreements with medical research institutions.
AutoImmune's agreements with The Brigham and Women's Hospital and other leading
medical research institutions, together with the advantages of the oral
tolerance mechanism, have allowed the Company to conduct pilot human studies and
demonstrate the potential utility of its technique in a number of diseases at a
comparatively early stage of the Company's development. Although the Company is
expanding its research and development effort, it plans to continue working with
research institutions.
The Brigham and Women's Hospital. The Brigham and Women's Hospital ("BWH"), a
teaching hospital affiliated with Harvard Medical School, has been performing
sponsored research for the Company since 1988. The current agreement extends
until June 30, 1997 and is automatically renewed for successive two-year periods
unless one year's prior written notice is given. The current research budget at
BWH provides for expenditures by AutoImmune of approximately $1,722,000 during
the twelve months ending June 30, 1996. Under certain circumstances, the
Company may reduce its level of expenditures. The Company will own or have
exclusive rights to all inventions, improvements and discoveries made at BWH and
resulting from the research program, subject to certain rights retained by the
U.S. government in any patentable invention conceived or first reduced to
practice using federal funds. The Company will pay to BWH a royalty on all
products sold by the Company and subject to a patent covering an invention
developed under the research program or as to which rights were acquired by the
Company from BWH, and a percentage of any royalties received by AutoImmune with
respect to sales of such products by others. BWH also will receive a percentage
of any milestone payments which the Company is entitled to receive from
licensees or other transferees of such a patent after the first commercial sale
of a product covered by a patent. If the Company defaults in the payment of any
amount due to BWH, BWH will have an option to purchase all technology developed
under the research program at a purchase price equal to the sum of all amounts
previously paid by the Company to BWH.
BWH is a shareholder of the Company. Both of the scientists who made the
discoveries which led to the founding of AutoImmune are affiliated with BWH.
National Eye Institute. The National Eye Institute ("NEI") is party to a
CRADA with AutoImmune and BWH pursuant to which clinical trials of AutoImmune's
uveitis product are being conducted. The agreement runs through June 30, 1996.
The NEI is a co-owner with AutoImmune of a patent application directed to the
use of oral tolerance to treat uveitis. The NEI has granted BWH an exclusive
commercialization license for any and all products or processes developed
pursuant to the CRADA (including the uveitis patent application) in exchange for
one-half of any royalties with respect to uveitis products collected by BWH
pursuant to its agreement with the Company. BWH has in turn granted the Company
an exclusive commercialization license with respect to all such technology.
Joslin Diabetes Center. Joslin Diabetes Center, a research and educational
institution affiliated with New England Deaconess Hospital and Harvard Medical
School, has performed research funded by AutoImmune pertaining to oral tolerance
therapy in diabetes. All proprietary technology developed during the research
program
-11-
is the property of AutoImmune. In January 1995, the Company exercised its right
to terminate the funding of future research under this agreement. Joslin will
receive a royalty based on net sales of products by the Company which are
subject to a patent covering an invention developed under the research program
with the Company and on which patent the name of a Joslin medical staff member
or employee appears, and a percentage of any royalties received by AutoImmune
with respect to sales of such products by others. Joslin also receives a
percentage of any milestone payments which the Company is entitled to receive
from licensees or other transferees of such a patent after the first commercial
sale of a product covered by the patent.
Patents and Proprietary Rights
The establishment of a strong proprietary position is an important element of
AutoImmune's strategy. As of December 31, 1995, the Company had pending 22
original and continuation-in-part United States patent applications and numerous
foreign counterparts. The Company has received or has exclusive rights to nine
U.S. and foreign patents. The European Patent Office has granted a patent which
the Company owns covering the use of pharmaceuticals containing autoantigens to
treat a group of human autoimmune diseases, and the United States Patent office
has issued a patent to the Company covering the use of Colloral to treat
rheumatoid arthritis in humans.
The Company also owns a patent application originally filed by BWH for the
treatment of autoimmune diseases by oral administration of autoantigens,
including a number of specific patent claims directed to treatment of multiple
sclerosis. The disclosure contained in this initial patent application has been
significantly expanded in a chain of successor applications. There can be no
assurance, however, that these patents will be granted or that the Company will
succeed in developing additional products that are patentable.
The Company has also applied for patents, or acquired rights to patent
applications, covering oral tolerance methods of treating or preventing other
specific autoimmune diseases and related conditions, including uveitis, Type I
diabetes, transplant rejection and various skin disorders, including psoriasis.
It has also filed applications that claim tolerization treatment of autoimmune
diseases by inhalation of autoantigens in aerosol form, use of synergizing
compounds to enhance the treatment of autoimmune disorders, specific peptides
thought to be involved in multiple sclerosis, and bystander suppression, by
which oral tolerance can be induced without identifying the specific antigen
causing an autoimmune disease.
There can be no assurance that patent applications owned by, or licensed to,
the Company will issue or that, if issued, the Company's patents will be valid
or that they will provide the Company with meaningful protection against
competitors or with a competitive advantage. There can be no assurance that the
Company will not need to acquire licenses under patents belonging to others for
technology potentially useful or necessary to the Company and there can be no
assurance that such licenses will be available to the Company, if at all, on
terms acceptable to the Company. Moreover, there can be no assurance that any
patent issued to or licensed by the Company will not be infringed upon or
circumvented by others. In particular, if the Company is unable to obtain
issuance of a patent with broad method-of-use claims with respect to oral
tolerance treatment of autoimmune diseases, a competitor may be able to design
around the Company's patent rights by employing a treatment using an antigen
that is not covered by the Company's patents.
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. In addition, the Company's
business may be adversely affected by competitors who independently develop
competing technologies, especially if the Company obtains no, or only narrow,
patent protection.
Lastly, there can be no assurance that third-parties will not bring suit
against the Company for patent infringement or for declaratory judgment to have
the Company's patents declared invalid.
-12-
Competition
The pharmaceutical industry is highly competitive, and research on the causes
of and possible treatments for autoimmune diseases is developing rapidly. The
Company competes with a number of pharmaceutical and biotechnology companies
which have financial, technical and marketing resources significantly greater
than those of the Company. Some companies with established positions in the
pharmaceutical industry may be better equipped than the Company to develop and
market products based on the application of new technologies to the treatment of
autoimmune diseases. A significant amount of research in the field is also
being carried out at universities and other not-for-profit research
organizations. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for use of
technology that they have developed. These institutions may also market
competitive commercial products on their own or through joint ventures and will
compete with the Company in recruiting highly qualified scientific personnel.
The Company is pursuing areas of product development in which there is a
potential for extensive technological innovation in relatively short periods of
time. The Company's competitors may succeed in developing products that are
more effective than those of the Company. Rapid technological change or
developments by others may result in the Company's potential products becoming
obsolete or non-competitive.
For additional information concerning products developed and under development
by the Company's competitors to treat multiple sclerosis and rheumatoid
arthritis, see "Principal Products in Development-Multiple Sclerosis" and "-
Rheumatoid Arthritis."
Government Regulation
The manufacturing and marketing of the Company's products and certain areas of
its research are subject to regulation for safety and efficacy by numerous
government authorities in the United States and other countries. Domestically,
the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and
other federal and state statutes and regulations govern the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of the Company's products. There can be no assurance
that the Company will ever obtain the government approval necessary to make
commercial sales of any of its products.
Further, the FDA may grant Orphan Drug status, under the Orphan Drug Act, to
therapeutic agents which are intended to treat a "rare disease or condition,"
which is generally described as a disease or condition that affects fewer than
200,000 individuals in the United States, but also includes multiple sclerosis
and certain other diseases. Orphan Drug status confers upon the sponsor tax
credits for the amounts expended on clinical trials, as well as marketing
exclusivity for the proposed therapeutic indication for a period of seven years
following approval of a New Drug Application ("NDA") or Product License
Application ("PLA"). This status does not convey any advantage during
regulatory review, but it is possible that products may qualify both for Orphan
Drug status and also for fast-track regulatory review. Myloral, Colloral for
juvenile rheumatoid arthritis, and AI 300, the Company's initial uveitis
product, have been designated as Orphan Drugs. To receive the benefits of
Orphan Drug designation, however, the product must have been granted Orphan Drug
status for a particular indication and the Company must be first to receive FDA
approval of the product for that indication.
AutoImmune believes that many of its products under development will be
classified by the FDA as "biologic products," while others may be classified as
"drug products." As part of its regulatory strategy, the Company intends to
direct some of its products into the Biologics Divisions of the FDA. While both
biologics and drugs can qualify for Orphan Drug status, biologics, once
approved, have no provision for subsequent competitors
-13-
to market generic versions. Each biologic, even if it has the same composition
and is for the same indication, must undergo the entire development process in
order to be approved by a competitor firm.
New drug or biological products require several steps in order to receive
regulatory approval, including (i) preclinical laboratory and animal tests; (ii)
submission by the Company or an individual physician to the FDA of an
application for an IND, or submission to a research institution of an
Institutional Review Board approval for intrastate trials, one of which must
become effective before human clinical trials may start; (iii) the performance
of well-controlled clinical trials; and (iv) the submission of an NDA or PLA
containing the results of clinical trials and methods of manufacture of the
product prior to commercial sale or shipment of the product. During the
approval process, the FDA must confirm that good laboratory and clinical
practices were maintained during product testing. In addition to obtaining FDA
approval for each NDA or PLA, an Establishment License Application must be filed
and approved by the FDA for the manufacturing facilities for a biologic product.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess potential product safety and efficacy. The results of
the preclinical tests are submitted to the FDA as part of an IND, and, unless
the FDA objects, the IND becomes effective, and clinical trials may begin, 30
days after receipt of the filing.
The initial clinical evaluation, Phase I trials, generally involve
administration of a product to a small number of persons. The product is tested
for safety, dosage tolerance, metabolism, and pharmacokinetic properties. Phase
II trials generally involve administration of a product to a limited number of
patients with a particular disease to determine dosage, efficacy and safety.
Phase III trials generally examine the clinical efficacy and safety in an
expanded patient population at multiple clinical sites. The FDA reviews the
clinical plans and the results of trials and can discontinue the trials at any
time if there are significant safety issues or if there is convincing evidence
that a drug is not effective for the purpose for which it is being investigated.
Each of AutoImmune's clinical trials will be conducted with the approval of an
Institutional Review Board at the institution where the trial will be conducted.
The Institutional Review Board considers, among other things, ethical factors,
the safety of human subjects, and the possible liability of the institution.
Pivotal Phase III trials are designed to demonstrate definitive efficacy. More
than one trial is usually required for FDA approval to market a drug. The
results of the preclinical and clinical trials are submitted after completion of
the pivotal Phase III trials in the form of a PLA or NDA for approval to
commence commercial sales. The approval process is affected by several factors,
including the severity of the disease, the availability of alternative
treatments, and the risks and benefits demonstrated in clinical trials. The FDA
may also require post-marketing surveillance to monitor potential adverse
effects of the product. The regulatory process can be modified by Congress or
the FDA in specific situations.
The length of the regulatory review process cannot be predicted with certainty
for new individual products. The Drug Price Competition and Patent Term
Restoration Act of 1984, however, provides that a product patent or use patent
with a 17-year period of enforceability covering a particular drug may be
extended for up to five years under certain circumstances to compensate the
patent holder for the time required for FDA regulatory review. This Act also
establishes a period following FDA approval of a product during which the FDA
may not accept or approve short-form applications for generic versions of the
drug from other sponsors.
The Company will also be subject to government regulations enforced under the
Occupational Safety and Health Act, the Environmental Protection Act, the United
States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the National
Environmental Policy Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, and other national, state or local restrictions.
In addition, the Company's ability to successfully commercialize human
therapeutic products may depend in part on the extent to which reimbursement for
the cost of such products and related treatment will be available from
government health administration authorities, private health coverage insurers,
and other organizations. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third-party coverage will be available for the Company to maintain
price levels sufficient for realization of an appropriate return on its
investment in product development.
-14-
- --------------------------------------------------------------------------------
Employees
As of March 1, 1996, AutoImmune employed 60 individuals full-time, 17 of whom
hold Ph.D. or M.D. degrees. Of its total work force, 51 employees are engaged
in research and development activities and 9 are devoted to support and
administrative activities. AutoImmune believes it maintains good relations with
its employees.
Factors To Be Considered
The parts of this Annual Report on Form 10-K titled "Item 1 - Business" and
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking statements which involve risks
and uncertainties. Set forth below is a discussion of certain factors that
could cause the Company's actual results to differ materially from the results
projected in such forward-looking statements.
Developmental Stage of the Company's Products. The Company has not yet
completed the development of any products. The Company's products will require
significant additional clinical testing and investment prior to
commercialization. Products for therapeutic use in human health care must be
evaluated in extensive human clinical trials to determine their safety and
efficacy as part of a lengthy process to obtain government approval. The
Company has a number of products in clinical development, including Myloral,
Colloral, AI 401 and AI 300. Positive results for a product in a clinical trial
do not necessarily assure that positive results will be obtained in future
clinical trials or that government approval to commercialize the product will be
obtained. Clinical trials may be terminated at any time for many reasons,
including toxicity or a lack of efficacy based upon interim examinations of
clinical trial data or adverse event reporting. There can be no assurance that
any of the Company's products will be successfully developed, prove to be safe
and efficacious in clinical trials, meet applicable regulatory standards, obtain
required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs or be successfully marketed or that the Company
will not encounter problems in clinical trials that will cause the Company to
delay or suspend product development. None of the Company's products is
expected to be commercially available for several years.
History of Operating Losses; Lack of Product Revenues. The Company has
accumulated net losses, from its inception in 1988 through December 31, 1995, of
approximately $46,607,000. The Company expects to continue to incur loses for a
number of years as the Company's research, development and clinical trial
programs and related expenses expand. The Company's ability to achieve a
profitable level of operations is dependent on successfully completing the
development of its products, obtaining required regulatory approvals, and
manufacturing and marketing its products. There can be no assurance that the
Company will achieve a profitable level of operations.
The Company's revenues to date have been earned in connection with
collaborative agreements and the granting of short term rights. The Company has
granted exclusive worldwide patent rights to its autoimmune-mediated diabetes
products to Lilly in return for payments if certain milestones are achieved, as
well as royalties based on sales, if any. There can be no assurance that the
Company will derive any revenues from the Lilly agreement, which may be
terminated by Lilly at any time. At present there are no other outstanding
agreements pursuant to which the Company is entitled to receive revenues.
Additional Financing Requirements and Access to Capital. Since inception, the
Company has raised net proceeds of approximately $116,215,000 from the sale of
equity securities in private placements and public stock offerings. The Company
will require substantial funds for further research and development, existing
and planned clinical trials, regulatory approvals, establishment of commercial-
scale manufacturing capabilities, and the marketing of its products. Based upon
its current plans, the Company believes that current cash and marketable
securities and the interest earned from the investment thereof will be
sufficient to meet the Company's operating expenses and capital requirements
through at least mid-1998.
-15-
Thereafter, the Company will need to raise substantial additional capital to
fund its operations, including clinical trials. The Company intends to seek
such additional funding through public or private equity or debt financings,
collaborative arrangements with pharmaceutical companies or from other sources.
There can be no assurance, however, that additional financing will be available
on acceptable terms, if at all. If adequate funds are not available, the
Company will have to reduce certain areas of research, product development,
manufacturing or marketing activity, or otherwise modify its business strategy,
and its business will be materially adversely affected.
Dependence on Collaborative Agreements. The Company's historic objective has
been to enter into licensing agreements or joint ventures with established
pharmaceutical companies for products to be sold in foreign markets or for
products to treat diseases which involve large physician audiences and/or which
are expected to have longer regulatory approval cycles. The Company has such an
agreement with Lilly with respect to autoimmune-mediated diabetes products.
There can be no assurance that the Company will be able to negotiate other
acceptable arrangements in the future, to the extent the Company desires to do
so, or that such arrangements will be successful.
The majority of the Company's basic research to date has been done through
agreements with The Brigham and Women's Hospital and other medical research
institutions. Since 1993, the Company has conducted some research and most of
its development activities internally, and currently the Company has 51 full-
time employees engaged in research and product development. Nevertheless, the
Company expects to continue to be at least partially dependent upon research
performed under contract with The Brigham and Women's Hospital. If the Company
is unable to maintain this relationship, the Company would be adversely affected
and the Company's ability to commercialize future products would be delayed.
Manufacturing and Marketing. The Company has not yet introduced any products
and has limited manufacturing experience. To be successful, the Company's
products must be manufactured in commercial quantities in compliance with
regulatory requirements and at acceptable costs. The Company currently has
limited facilities for manufacturing its products under development and has
obtained the small amounts of its products required to date for clinical trials
from contract manufacturing companies. In order to manufacture its products in
commercial quantities, the Company will need to develop its own manufacturing
facilities or contract with third parties to manufacture its products. To the
extent the Company relies upon contract manufacturers, there can be no assurance
that such parties will perform their obligations in a timely fashion. Any
failures by third parties could cause a delay in clinical trials,
commercialization of product, or the ability to supply the market. The Company
has entered into agreements with Scientific Protein Laboratories, a subsidiary
of American Home Products, and Global Pharm, of Toronto, Canada, with respect to
Myloral. There can be no assurance that the Company will be able to enter into
agreements for its other products, to the extent the Company desires to do so,
on favorable terms, if at all.
To the extent that the Company chooses to establish its own manufacturing
capability, there can be no assurance that the Company will be successful in
doing so. Developing its own large-scale manufacturing facilities will also
require substantial additional funds. All manufacturing facilities must comply
with applicable regulations of the FDA. No assurance can be given that the
Company's products may require raw materials for which the sources and amount of
supply are limited. An inability to obtain adequate supplies of such raw
materials could significantly delay the development, regulatory approval and
marketing of the Company's products.
The Company has no sales organization or marketing force. In order to market
any of its products directly, the Company must develop a marketing and sales
force with sufficient technical expertise to generate demand for its products.
There can be no assurance that the Company will be able to establish effective
sales and distribution capabilities or be successful in gaining market
acceptance for its products.
Patents and Proprietary Rights. The Company's success will depend, in part,
on its ability to obtain patents and Orphan Drug protection, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties or having third parties circumvent the Company's rights. The
Company has received or has
-16-
exclusive rights to nine U.S. and foreign patents. The Company has filed and is
actively pursuing numerous applications for additional U.S. and foreign patents,
and is an assignee or licensee of the rights to other patent applications. The
patent positions of biotechnology and pharmaceutical companies can be highly
uncertain and involve complex legal and factual questions. For example, no
consistent policy has emerged regarding the breadth of biotechnology patent
claims that are granted by the United States Patent Office or enforced by the
federal courts. Thus, there can be no assurance that any patents issued to the
Company will provide the Company with any competitive advantages or will not be
challenged by any third parties, that the patents of others will not impede the
ability of the Company to do business or that third parties will not be able to
circumvent the Company's patents, that any of the Company's patent applications
will result in the issuance of patents or that the Company will develop
additional proprietary products that are patentable. Furthermore, there can be
no assurance that others will not independently develop similar products,
duplicate any of the Company's products, or, if patents are issued to the
Company, design around the patented products developed by the Company. Although
the Company has obtained Orphan Drug status in the United States for some of its
products, it also must be the first to market an effective treatment for a
particular disease in order to obtain the protections afforded to Orphan Drugs.
The Company may be required to obtain licenses from third parties to avoid
infringing patents or other proprietary rights. No assurance can be given that
any licenses required under any such patents or proprietary rights would be made
available, if at all, on terms acceptable to the Company. If the Company does
not obtain such licenses, it could encounter delays in product introductions, or
could find that the development, manufacture or sale of products requiring such
licenses could be prohibited. In addition, the Company could incur substantial
costs in defending itself in suits brought against the Company on patents it
might infringe or in filing suits against others to have such patents declared
invalid.
Much of the Company's know-how and technology may not be patentable. To
protect its rights, the Company requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Furthermore, the Company's business
may be adversely affected by competitors who independently develop competing
technologies, especially if the Company obtains no, or only narrow, patent
protection.
Technological Change and Competition. The biotechnology and pharmaceutical
industries are subject to rapid and significant technological change.
Competitors of the Company in the United States and abroad are numerous and
include, among others, major pharmaceutical companies, biotechnology firms,
universities and other research institutions. There can be no assurance that
the Company's competitors will not succeed in developing technologies and
products that are more effective than any being developed by the Company or that
would render the Company's technology and products obsolete or noncompetitive.
Many of these competitors have substantially greater financial and technical
resources and production and marketing capabilities than the Company. In
addition, many of the Company's competitors have significantly greater
experience than the Company in conducting preclinical testing and clinical
trials of pharmaceutical products and obtaining FDA and other regulatory
approvals of products for use in health care. Accordingly, the Company's
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company. If the Company commences significant commercial sales of its
products, it will also be competing with other companies with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited experience.
Government Regulation. The Company's production and marketing of its products
and ongoing research and development activities are subject to regulation by
numerous government authorities in the United States and other countries. Prior
to marketing, any therapeutic product developed by the Company must undergo
rigorous preclinical testing and clinical trials, as well as an extensive
regulatory approval process mandated by the FDA and foreign regulatory agencies.
These processes can take many years and require the expenditure of substantial
resources. The Company has limited experience in conducting and managing the
preclinical and clinical trials necessary to obtain government approvals.
Delays in obtaining regulatory approvals would adversely affect the
-17-
marketing of the Company's products and its ability to receive product revenues
or royalties. There can be no assurance that the Company will be able to obtain
the clearances and approvals necessary for the clinical testing or for the
manufacturing and marketing of its products. Existing or additional government
regulation could prevent or delay regulatory approval of the Company's products
or affect the pricing or marketing of such products. One such regulation
involves the potential transmission of bovine spongiform encephalopathy ("BSE"),
a bovine disease. Although there is no conclusive evidence that BSE can be
transmitted to humans, concern over the possibility of such transmissions could
adversely affect in certain jurisdictions regulatory approval of Myloral, which
is produced from bovine sources.
Item 2. Properties
AutoImmune's administrative offices and research facilities occupy
approximately 33,000 square feet of leased space in Lexington, Massachusetts.
The lease runs through November 1999. The Company believes that its facilities
are adequate for its present and anticipated purposes, except that additional
facilities will be needed if the Company expands its manufacturing operations.
Item 3. Legal Proceedings
The Company is not a party to any litigation or legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of fiscal 1995.
-18-
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol AIMM. The following table shows the quarterly high and low closing price
on Nasdaq for a share of the Company's common stock for the fiscal years ended
December 31, 1995 and 1994.
Price range of
common stock
-------------
High Low
----- -----
Fiscal year ending December 31, 1995
First quarter........................ $ 6.75 $4.75
Second quarter....................... $13.38 $6.38
Third quarter........................ $17.00 $9.75
Fourth quarter....................... $16.00 $8.50
Price range of
common stock
-------------
High Low
----- -----
Fiscal year ending December 31, 1994
First quarter........................ $8.75 $5.75
Second quarter....................... $8.00 $6.50
Third quarter........................ $7.25 $4.63
Fourth quarter....................... $6.75 $4.50
As of March 22, 1996, there were 277 record holders of the Company's Common
Stock.
AutoImmune has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain its earnings, if any, and therefore does
not anticipate paying any cash dividends on its capital stock in the foreseeable
future.
Item 6. Selected Financial Data
The selected financial data set forth below with respect to the Company's
statements of operations for each of the years in the five-year period ended
December 31, 1995, and with respect to the balance sheet at December 31, 1994
and 1995, are derived from financial statements that have been audited by Price
Waterhouse LLP, independent accountants, included elsewhere in this Form 10-K.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and related notes included elsewhere in this
Form 10-K.
-19-
Year ended December 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ------------ ------------ ------------ ------------
Statement of Operations Data:
Revenue:
Option fees $ -- $ 700,000 $ -- $ -- $ 1,500,000
----------- ------------ ------------ ------------ ------------
Research and development
revenue under collaborative
agreements -- 418,000 537,000 -- --
----------- ------------ ------------ ------------ ------------
Total revenue -- 1,118,000 537,000 -- 1,500,000
----------- ------------ ------------ ------------ ------------
Costs and expenses:
Research and development:
Related party 1,452,000 1,664,000 2,390,000 2,257,000 2,294,000
Other 1,054,000 2,506,000 5,860,000 11,381,000 12,554,000
General and administrative 227,000 999,000 1,555,000 1,662,000 2,213,000
----------- ------------ ------------ ------------ ------------
Total costs and expenses 2,733,000 5,169,000 9,805,000 15,300,000 17,061,000
----------- ------------ ------------ ------------ ------------
Loss from operations (2,733,000) (4,051,000) (9,268,000) (15,300,000) (15,561,000)
Interest income (expense), net 102,000 194,000 1,174,000 623,000 1,968,000
----------- ------------ ------------ ------------ ------------
Net loss $(2,631,000) $ (3,857,000) $ (8,094,000) $(14,677,000) $(13,593,000)
=========== ============ ============ ============ ============
Net loss per share (1) $ (1.77) $ (2.89) $ (0.85) $ (1.44) $ (1.01)
=========== ============ ============ ============ ============
Weighted average common shares
outstanding (1) 1,486,731 1,334,194 9,474,968 10,205,567 13,522,091
=========== ============ ============ ============ ============
December 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ------------ ------------ ------------ ------------
Balance Sheet Data:
Cash, cash equivalents and
marketable securities $ 7,220,000 $ 2,677,000 $ 29,963,000 $ 15,568,000 $ 70,453,000
Working capital 6,242,000 1,226,000 29,608,000 13,825,000 68,791,000
Total assets 7,696,000 3,998,000 32,142,000 18,218,000 72,981,000
Mandatorily redeemable
convertible preferred stock 12,559,000 12,559,000 -- -- --
Deficit accumulated during
development stage (6,390,000) (10,247,000) (18,341,000) (33,018,000) (46,611,000)
Total stockholders' equity
(deficit) (6,383,000) (10,140,000) 30,025,000 15,102,000 70,418,000
- -----------------------------------
(1) Net loss per share is calculated by dividing net loss by the weighted
average number of Common Stock and Common Stock equivalents outstanding
during the year. This calculation excludes antidilutive Common Stock
equivalents and stock options and warrants. In accordance with Staff
Accounting Bulletin No. 83, Common Stock and Common Stock options sold at
prices below the per share offering price in the twelve months preceding
the Company's initial public offering are included in the calculation as if
outstanding for all periods presented prior to the initial public offering.
-20-
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Overview
Since its inception through December 31, 1995, the Company has incurred
ongoing losses from operations and has cumulative losses as of December 31, 1995
totaling $46,607,000. To date, the Company has not recorded any revenues from
the sale of products. Revenues recorded through December 31, 1995 were earned
in connection with contract research and the granting of certain short-term
rights.
The Company expects that research and development and sales and marketing
expenses will increase in connection with new product development and the
creation of the Company's sales and marketing organization. Accordingly, the
Company expects to continue to incur substantial losses for the foreseeable
future.
Years Ended December 31, 1994 and 1995
No revenue was earned in 1994. Revenue for 1995 of $1,500,000 represents fees
paid by a Japanese pharmaceutical company for a short-term exclusive right among
Japanese companies to review the results of the Phase II dose ranging study of
Colloral.
Research and development expenses were $13,638,000 in 1994, as compared with
$14,848,000 in 1995. The increase is attributable to the continued expansion of
research and development efforts, including contract research, clinical trial
expenses and related clininical trial material manufacturing and personnel
costs.
General and administrative expenses were $1,662,000 in 1994, as compared with
$2,213,000 in 1995. The increase is due primarily to personnel costs related to
additional employee headcount and increased corporate activity.
Net interest income was $623,000 in 1994, as compared with $1,968,000 in 1995.
The increase is due to higher interest rates and a higher balance of cash
available for investment.
The net loss was $14,677,000 in 1994, as compared with $13,593,000 in 1995.
The decrease reflects the continued increase in activity levels offset by
revenues from fees and an increase in net interest income. The net loss per
share decreased from $1.44 in 1994 to $1.01 in 1995 due to a decrease in the net
loss and an increase in weighted average number of shares outstanding.
Years Ended December 31, 1993 and 1994
Revenue for 1993 was $537,000. No revenue was earned in 1994. Revenue in
1993 represents payments made by a pharmaceutical company in conjunction with
contract research support.
Research and development expenses were $8,250,000 in 1993, as compared with
$13,638,000 in 1994. The increase is attributable to the continued expansion of
research and development efforts, including contract research, clinical trial
expenses and related clinical trial material manufacturing and personnel costs.
General and administrative expenses were $1,555,000 in 1993, as compared with
$1,662,000 in 1994. The increase is primarily attributable to personnel costs
related to additional employee headcount in 1994 as compared with 1993.
-21-
Net interest income was $1,174,000 in 1993, as compared with $623,000 in 1994.
The decrease is due to a lower balance of cash available for investment, offset
slightly by higher interest rates.
The net loss was $8,094,000 in 1993, as compared with $14,677,000 in 1994.
The change reflects the continued increase in research and development activity
levels. The net loss per share increased from $0.85 in 1993 to $1.44 in 1994
due to an increase in the net loss, offset slightly by a higher weighted average
number of shares outstanding.
Liquidity and Capital Resources
The Company's needs for funds have increased from period to period as it has
increased the scope of its research and development activities. Since
inception, the Company has funded these needs almost entirely through sales of
its equity securities.
The Company's working capital and capital requirements will depend on numerous
factors, including the progress of the Company's research and development
activities, the level of resources that the Company devotes to the development,
clinical, regulatory and marketing aspects of its products, the extent to which
it proceeds by means of collaborative relationships with pharmaceutical
companies and its competitive environment. Based upon its current plans, the
Company believes that current cash and marketable securities and the interest
earned from the investment thereof will be sufficient to meet the Company's
operating expenses and capital requirements through at least mid-1998.
Thereafter, the Company will need to raise substantial additional capital to
fund its operations, including clinical trials. The Company intends to seek
such additional funding through public or private equity or debt financings,
collaborative arrangements with pharmaceutical companies or from other sources.
If adequate funds are not available, the Company will have to reduce certain
areas of research, product development, manufacturing or marketing activity, or
otherwise modify its business strategy, and its business will be materially
adversely affected.
In order to preserve principal and maintain liquidity, the Company's funds are
invested in U.S. Treasury obligations and other short-term instruments. As of
December 31, 1994 and 1995, the Company's cash and cash equivalents and
marketable securities totaled $15,568,000 and $70,453,000, respectively. In
January 1995, the Company received net proceeds of $9,136,000 through a private
placement of equity securities. In August and September 1995, the Company
received net proceeds of $58,878,000 from a public offering of common stock.
Current liabilities at December 31, 1994 and 1995 were $2,085,000 and
$1,994,000, respectively.
Item 8. Financial Statements and Supplementary Data
See index to financial statements and financial statement schedules at Item
14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-22-
PART III
Item 10. Directors and Executive Officers of the Registrant
Director information is incorporated by reference to the Company's proxy
statement which the Company intends to file with the Securities and Exchange
Commission and mail to shareholders within 120 days of the Company's fiscal year
ended December 31, 1995.
Executive officer information is as follows:
Robert C. Bishop, Ph.D., age 53, became a director of the Company in May 1992,
when he was also elected President and Chief Executive Officer. For more than
five years prior to joining the Company, Dr. Bishop held senior management
positions at Allergan, Inc., an eye and skin care company, including President
of Allergan Medical Optics from 1986 to 1988, Senior Vice President, Corporate
Development of Allergan, Inc. from 1988 to 1989, President of Allergan
Pharmaceuticals, Inc. from 1989 to 1991 and Group President, Therapeutics for
Allergan's worldwide pharmaceutical, surgical and neurotoxin businesses from
February 1991 to May 1992. From 1976 through 1986, Dr. Bishop served as an
executive of American Hospital Supply Corporation. Dr. Bishop received his B.A.
degree and a Ph.D. in biochemistry from the University of Southern California
and his M.B.A. from the University of Miami. Dr. Bishop is a director of
Quintiles Transnational Corp., a clinical trials management company.
Fredric G. Bader, Ph.D., age 48, joined the Company in September 1992. Prior
to joining AutoImmune, Dr. Bader held senior positions at Genetics Institute,
Inc., a biotechnology company, including Vice President of Process Development
and Manufacturing, 1987, Senior Vice President of Process Development and
Manufacturing, from 1987 to 1989, and Senior Vice President of Manufacturing and
Pharmaceutical Development, from 1990 to 1992. Dr. Bader was employed by
Bristol-Myers from 1983 to 1987, and by Upjohn Company from 1977 to 1983. Dr.
Bader received his B.S. degree from the University of Michigan and a Ph.D. in
chemical engineering from the University of Minnesota.
Malcolm J.F. Fletcher, M.D., age 48, joined the Company in November 1992.
From 1991 to 1992, he was employed by Cato Research, Ltd., one of the primary
consultants to AutoImmune. At Cato, Dr. Fletcher was a Medical Director with
primary responsibility for establishing a new subsidiary in Canada. From 1980
to 1990, Dr. Fletcher was employed by Burroughs Wellcome, Inc., the last eight
years as Medical Director for its Canadian operations. Dr. Fletcher trained in
medicine at the Medical College of St. Bartholomew's Hospital, University of
London, becoming a Licentiate of the Royal College of Physicians and a Member of
the Royal College of Surgeons in 1972. In 1975 he received a D.A. from the
Royal College of Surgeons.
Michael W. Rogers, age 36, joined the Company in July 1995. From 1994 to
1995, he was Vice President, Investment Banking at Lehman Brothers Inc. From
1990 to 1994, he was employed by PaineWebber Incorporated, most recently as Vice
President, Investment Banking Division. From 1986 to 1988, Mr. Rogers was
employed by Fidelity Bank N.A. Mr. Rogers received a B.A. from Union College
and his M.B.A. from the University of Virginia.
Jo Ann Wallace, age 41, joined the Company in October 1994. From 1993 to
1994, she was Vice President, Sales and Marketing at Greenwich Pharmaceuticals,
Inc. From 1981 to 1993, Ms. Wallace was employed by G.D. Searle & Co., most
recently as Senior Director in U.S. Marketing. Ms. Wallace was employed by
Baxter Travenol from 1975 to 1981. Ms. Wallace received her B.S. degree in
microbiology from the University of Texas.
-23-
Item 11. Executive Compensation
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's proxy statement which the Company
intends to file with the Securities and Exchange Commission and mail to
shareholders within 120 days of the Company's fiscal year ended December 31,
1995.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
Listed on page F-1 of the Financial Statements.
(a) (2) Financial Statements Schedule.
Listed on page F-1 of the Financial Statements.
(a) (3) Exhibits
Exhibits filed as part of this Form 10-K are listed in the
exhibit index appearing on page ___ of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of 1995.
-24-
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 28th day of March,
1996.
AUTOIMMUNE INC.
By /s/ Robert C. Bishop
-------------------------------------
Robert C. Bishop
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert C. Bishop March 28, 1996
- --------------------------------------------
Robert C. Bishop
President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ Michael W. Rogers March 28, 1996
- --------------------------------------------
Michael W. Rogers
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ Barry Weinberg March 28, 1996
- --------------------------------------------
Barry Weinberg
Chairman of the Board of Directors
/s/ Allan R. Ferguson March 28, 1996
- --------------------------------------------
Allan R. Ferguson
Director
/s/ R. John Fletcher March 28, 1996
- --------------------------------------------
R. John Fletcher
Director
-25-
/s/ Henri A. Termeer March 28, 1996
- --------------------------------------------
Henri A. Termeer
Director
/s/ Hugh A. D'Andrade March 28, 1996
- --------------------------------------------
Hugh A. D'Andrade
Director
-26-
AutoImmune Inc.
(A development stage company)
Index to Financial Statements
- --------------------------------------------------------------------------------
Page
Financial Statements:
Report of Independent Accountants F-2
Balance Sheet at December 31, 1994 and 1995 F-3
Statement of Operations for the three years ended December 31, 1995
and for the period from inception (September 9, 1988) through
December 31, 1995 F-4
Statement of Changes in Stockholders' Equity (Deficit) for the period
from inception (September 9, 1988) through December 31, 1995 F-5
Statement of Cash Flows for the three years ended December 31, 1995
and for the period from inception (September 9, 1988) through
December 31, 1995 F-6
Notes to the Financial Statements F-7
Financial Statement Schedule for the three years ended December 31, 1995:
II - Valuation and Qualifying Accounts and Reserves F-21
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders
of AutoImmune Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of
AutoImmune Inc. (a development stage company) at December 31, 1994 and
1995, and the results of its operations and its cash flows for each of
three years in the period ended December 31, 1995 and for the period from
inception (September 9, 1988) through December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 29, 1996
F-2
AutoImmune Inc.
(A development stage company)
Balance Sheet
- --------------------------------------------------------------------------------
December 31,
1994 1995
Assets
Current assets:
Cash and cash equivalents $ 3,368,000 $29,087,000
Marketable securities 12,200,000 41,366,000
Interest receivable 169,000 160,000
Prepaid expenses 173,000 172,000
----------- -----------
Total current assets 15,910,000 70,785,000
Fixed assets, net 2,278,000 2,166,000
Other assets 30,000 30,000
----------- -----------
$18,218,000 $72,981,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,107,000 $ 944,000
Accrued expenses 534,000 588,000
Current portion of obligations under capital leases 444,000 462,000
----------- -----------
Total current liabilities 2,085,000 1,994,000
=========== ===========
Obligations under capital leases 1,031,000 569,000
----------- -----------
Commitments and contingencies (Notes 6 and 11)
=========== ===========
Stockholders' equity:
Common stock, $.01 par value: 25,000,000 shares
authorized; 10,209,184 and 16,282,067 shares
issued and outstanding at December 31, 1994 and
1995, respectively 102,000 163,000
Additional paid-in capital 48,267,000 116,797,000
Deficit accumulated during the development stage (33,018,000) (46,611,000)
Valuation allowance for marketable securities (249,000) 69,000
----------- -----------
15,102,000 70,418,000
----------- -----------
$18,218,000 $72,981,000
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-3
AutoImmune Inc.
(A development stage company)
Statement of Operations
- --------------------------------------------------------------------------------
Period from
inception
(September 9,
1988)
through
For the year ended December 31, December 31,
1993 1994 1995 1995
Revenue:
Option fees $ - $ - $ 1,500,000 $ 2,200,000
Research and development revenue
under collaborative agreements 537,000 - - 955,000
------------ ------------ ------------- -------------
Total revenue 537,000 - 1,500,000 3,155,000
------------ ------------ ------------- -------------
Costs and expenses:
Research and development:
Related party 2,390,000 2,257,000 2,294,000 12,810,000
Other 5,860,000 11,381,000 12,554,000 34,155,000
General and administrative 1,555,000 1,662,000 2,213,000 6,899,000
------------ ------------ ------------- -------------
Total costs and expenses 9,805,000 15,300,000 17,061,000 53,864,000
------------ ------------ ------------- -------------
Interest income 1,179,000 666,000 2,021,000 4,254,000
Interest expense (5,000) (43,000) (53,000) (152,000)
------------ ------------ ------------- -------------
1,174,000 623,000 1,968,000 4,102,000
------------ ------------ ------------- -------------
Net loss $ (8,094,000) $(14,677,000) $ (13,593,000) $(46,607,000)
============ ============ ============= =============
Net loss per share $ (0.85) $ (1.44) $ (1.01)
============ ============ =============
Weighted average shares
outstanding 9,474,968 10,205,567 13,522,091
============ ============ =============
The accompanying notes are an integral
part of these financial statements.
F-4
AutoImmune Inc.
(A development stage company)
Statement of Changes in Stockholders' Equity (Deficit)
For the period from Inception (September 9, 1988)
through December 31, 1995
- --------------------------------------------------------------------------------
Deficit
Common stock accumulated Note Total
----------------------- Additional during the receivable stockholders'
Number Par paid-in development for stock Valuation equity
of shares value capital stage issuance allowance (deficit)
Issuance of common stock
during 1988 168,750 $ 2,000 $ - $ (1,000) $ - $ - $ 1,000
Conversion of junior convertible
preferred stock to common stock
during 1991 506,250 5,000 (3,000) 2,000
Issuance of common stock
during 1992 91,116 1,000 100,000 (1,000) 100,000
Net loss for the period from
inception (September 9, 1988)
through December 31, 1992 (10,243,000) (10,243,000)
---------- ---------- ---------- ------------ -------- ------- -----------
Balance at December 31, 1992 766,116 8,000 100,000 (10,247,000) (1,000) - (10,140,000)
Conversion of mandatorily
redeemable convertible
preferred stock to common
stock 6,353,568 63,000 12,496,000 12,559,000
Issuance of common stock,
net of issuance costs 3,022,000 30,000 35,669,000 35,699,000
Repayment of note receivable for
stock issuance 1,000 1,000
Net loss (8,094,000) (8,094,000)
---------- ---------- ---------- ------------ -------- ------- -----------
Balance at December 31, 1993 10,141,684 101,000 48,265,000 (18,341,000) - - 30,025,000
Issuance of common stock 67,500 1,000 2,000 3,000
Valuation allowance for
marketable securities (249,000) (249,000)
Net loss (14,677,000) (14,677,000)
---------- ---------- ---------- ------------ -------- ------- -----------
Balance at December 31, 1994 10,209,184 102,000 48,267,000 (33,018,000) - (249,000) 15,102,000
Issuance of common stock, net
of issuance costs 6,072,883 61,000 68,530,000 68,591,000
Valuation allowance for
marketable securities 318,000 318,000
Net loss (13,593,000) (13,593,000)
---------- ---------- ----------- ------------ -------- -------- ------------
Balance at December 31, 1995 16,282,067 $163,000 $116,797,000 $(46,611,000) $ - $ 69,000 $70,418,000
========== ========== =========== ============ ======== ======== ============
The accompanying notes are an integral
part of these financial statements.
F-5
AutoImmune Inc.
(A development stage company)
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
- --------------------------------------------------------------------------------
Period from
inception
(September 9,
1988)
through
For the year ended December 31, December 31,
1993 1994 1995 1995
Cash flows from operating activities:
Net loss $(8,094,000) $(14,677,000) $(13,593,000) $(46,607,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Interest expense related to demand notes
converted into mandatorily redeemable
convertible preferred stock - - - 48,000
Patent costs paid with junior convertible preferred
and common stock - - - 3,000
Depreciation and amortization 212,000 579,000 702,000 1,665,000
Decrease in patent costs 563,000 - - 563,000
(Increase) decrease in interest receivable (288,000) 123,000 9,000 (160,000)
(Increase) decrease in prepaid expenses (130,000) 22,000 1,000 (172,000)
Increase (decrease) in accounts payable (84,000) 299,000 (163,000) 944,000
Increase (decrease) in accrued expenses (312,000) 242,000 54,000 588,000
Increase (decrease) in amounts due to
related parties 16,000 (40,000) - -
Decrease in deferred revenue (59,000) - - -
----------- ------------ ------------ ------------
Net cash used by operating activities (8,176,000) (13,452,000) (12,990,000) (43,128,000)
----------- ------------ ------------ ------------
Cash flows from investing activities:
Purchase of available-for-sale marketable
securities (107,020,000) (2,283,000) (37,292,000) (158,371,000)
Proceeds from sale/maturity of available-for-sale
marketable securities 79,071,000 12,728,000 2,488,000 106,063,000
Proceeds from maturity of held-to-maturity
marketable securities - 5,055,000 5,956,000 11,011,000
Purchases of fixed assets (1,581,000) (1,195,000) (590,000) (3,706,000)
Increase in patent costs - - - (563.000)
(Increase) decrease in other assets 366,000 - - (155,000)
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (29,164,000) 14,305,000 (29,438,000) (45,721,000)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale-leaseback of fixed assets 1,012,000 821,000 - 1,833,000
Payments on obligations under capital leases (35,000) (323,000) (444,000) (802,000)
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock - - - 10,011,000
Proceeds from bridge notes - - - 300,000
Proceeds from issuance of common stock 35,700,000 3,000 68,591,000 104,394,000
Proceeds from issuance of convertible
notes payable - - - 2,200,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 36,677,000 501,000 68,147,000 117,936,000
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (663,000) 1,354,000 25,719,000 29,087,000
Cash and cash equivalents at beginning of period 2,677,000 2,014,000 3,368,000 -
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $2,014,000 $3,368,000 $29,087,000 $29,087,000
============ ============ =========== ===========
See Note 2 for supplemental disclosure of non-cash financing activities.
The accompanying notes are an integral
part of these financial statements.
F-6
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
1. Formation and Operations of the Company
AutoImmune Inc. (the "Company") was incorporated in Delaware on September 9,
1988. The Company is dedicated to the development of innovative
pharmaceutical products to treat people who suffer from immune systems
disorders. The Company's therapeutic approach is based upon "oral tolerance,"
a method designed to control disease by using the body's natural
immunosuppressive mechanisms. The Company is considered a development stage
company as defined in Statement of Financial Accounting Standards ("SFAS")
No. 7.
The Company has not yet completed the development of any products. The
Company's products will require significant additional clinical testing and
investment prior to commercialization. To date the Company has been dependent
on collaborative agreements for the majority of its basic research and has
primarily used contract manufacturers to produce its products for clinical
trials.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Cash Equivalents and Marketable Securities
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests primarily in U.S. Government debt securities. These investments are
subject to minimal credit and market risks. The Company specifically
identifies securities for purposes of determining gains and losses on the
sale of cash equivalents and marketable securities.
As of January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." There was no cumulative
effect of this change in accounting on the Company's financial position
through December 31, 1993. Under this standard, the Company is required to
classify its marketable securities into one or more of the following
categories: trading, held-to-maturity or available-for-sale. SFAS 115
requires that, except for debt securities classified as held-to-maturity,
investments in debt and equity securities be reported at fair value. At
December 31, 1994, cash equivalent's and a portion of the Company's
marketable securities are classified as available-for-sale. The remaining
investments are classified as held-to-maturity as defined in SFAS 115 and are
reported at amortized cost. At December 31, 1995, the Company has classified
all of its marketable securities as available-for-sale as defined in SFAS
115. Any unrealized gains and losses on available-for-sale securities are
reported as a separate component of stockholders' equity. Upon the sale of
securities, realized gains and losses are reported in the statement of
operations.
F-7
AutoImmune Inc.
(A development stage company)
Notes to the Finacial Statements
- --------------------------------------------------------------------------------
Disclosures about the Fair Value of Financial Instruments
In 1995, the Company adopted SFAS No. 107, "Disclosures about the Fair Value of
Financial Instruments." At December 31, 1995 the Company's financial
instruments consist of cash equivalents, marketable securities and interest
receivable, accounts payable and accrued expenses. The carrying amount of these
instruments approximate their fair values.
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line method
over the estimated useful life of the assets. Assets under capital leases and
leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the respective leases by use of the straight-line method.
Maintenance and repair expenditures are charged to expense as incurred.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities.
Contingent Stock Purchase Warrants
The value of contingent stock purchase warrants issued by the Company is
determined on the date that the Company estimates that it is probable that such
contingencies will be met. The difference between the quoted market price of
the Company's common stock and the exercise price of the warrants on the
measurement date is recorded as compensation expense. The Company periodically
assesses whether it is probable and estimable that the contingent warrants will
be earned.
Revenue Recognition
Revenue from research and development arrangements is recognized pursuant to the
related agreements as work is performed or defined milestones are attained.
Payments received under these arrangements prior to the completion of the
related work or attainment of milestones are recorded as deferred revenue.
Option fees represent payments made to the Company for a right to evaluate and
negotiate the terms of a potential licensing arrangement.
Net Loss Per Share
Net loss per share is determined by dividing net loss by the weighted average
number of common shares and common share equivalents outstanding during the year
as described below. Common stock equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles generally requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-8
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Reclassifications
Certain reclassifications have been made to prior period financial statements to
conform to current presentation. These reclassifications have no impact on the
Company's results of operations or financial position.
Statement of Cash Flows
Disclosure of Non-Cash Investing and Financing Activities
In 1988, 168,750 shares of common stock and 168,750 shares of junior convertible
preferred stock were issued to the Brigham and Women's Hospital in exchange for
patent rights and technology contributed or licensed in connection with the
formation of the Company.
Notes payable to stockholders totaling $2,200,000 and related interest of
$48,000 were converted into Series A mandatorily redeemable convertible
preferred stock in 1991.
Bridge notes of $300,000 were converted into Series C mandatorily redeemable
convertible preferred stock in 1991.
In 1991, 168,750 shares of junior convertible preferred stock were converted
into 506,250 shares of common stock.
In 1993, 2,117,856 shares of mandatorily redeemable convertible preferred stock
were converted into 6,353,568 shares of common stock in connection with the
Company's initial public offering of common stock.
The Company recorded a valuation allowance of ($249,000) and $69,000 related to
marketable securities classified as available-for-sale at December 31, 1994 and
1995, respectively.
Supplemental Disclosure of Cash Flow Information
The Company has paid interest of $53,000, $43,000 and $5,000 in 1995, 1994 and
1993, respectively, and $104,000 since inception. No income taxes have been
paid by the Company since inception.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." The Company has elected to adopt SFAS 123 in 1996 through
disclosure only.
F-9
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
3. Cash Equivalents and Marketable Securities
The following is a summary of cash equivalents held by the Company. Cash
equivalents are carried at fair market value, which approximated amortized
cost at December 31, 1994 and 1995.
December 31,
1994 1995
Money market $1,265,000 $12,736,000
U.S. Government debt securities 1,900,000 16,292,000
---------- -----------
$3,165,000 $29,028,000
========== ===========
The following is a summary of available-for-sale marketable securities held
by the Company at December 31, 1994 and 1995 which are carried at fair market
value:
Maturity Fair Unrealized Unrealized Amortized
term value gains losses cost
December 31, 1994:
U.S. Government debt
securities within 1 year $ 2,442,000 $ - $ (54,000) $ 2,496,000
U.S. Government debt
Securities between 1-5 years 3,808,000 - (195,000) 4,003,000
----------- -------- --------- -----------
$ 6,250,000 $ - $(249,000) $ 6,499,000
----------- -------- --------- -----------
December 31, 1995:
U.S. Government debt
securities within 1 year $32,252,000 $23,000 $ - $32,229,000
U.S. Government debt
securities between 1-5 years 9,114,000 46,000 - 9,068,000
----------- -------- --------- -----------
$41,366,000 $69,000 $ - $41,297,000
=========== ======== ========= ===========
At December 31, 1994 the Company held marketable securities with maturity
dates within one year which were classified as held-to-maturity. These
securities included U.S. Government debt securities with an aggregate market
value of $3,940,000, unrealized losses of $10,000 and amortized cost of
$3,950,000, and corporate debt securities with an aggregate market value of
$2,001,000, unrealized gains of $1,000 and amortized cost of $2,000,000. In
accordance with SFAS No. 115, these securities are carried at amortized cost.
All of the Company's marketable securities are classified as current at
December 31, 1995 and 1994 as these funds are highly liquid and are available
to meet working capital needs and to fund current operations. Gross realized
gains and losses on sales of marketable securities for the years ended
December 31, 1995 and 1994 were not significant.
F-10
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Marketable securities which were purchased and sold in periods prior to
adoption of FAS 115 on January 1, 1994 other than held-to-maturity marketable
securities, are included in the category available-for-sale marketable
securities in the "period from inception" column of the statement of cash
flows.
4. Fixed Assets
Fixed assets consist of the following:
Estimated
useful life December 31,
(years) 1994 1995
Laboratory equipment 4-5 $2,140,000 $2,638,000
Office equipment 4-5 300,000 417,000
Leasehold improvements 5-7 592,000 592,000
---------- ----------
3,032,000 3,647,000
Less - accumulated depreciation
and amortization 754,000 1,481,000
---------- ----------
$2,278,000 $2,166,000
========== ==========
Depreciation and amortization expense relating to fixed assets was $195,000,
$579,000 and $702,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Assets held under capital leases consisted of $1,833,000 of lab
equipment at December 31, 1994 and 1995. Accumulated amortization of these
assets totaled $379,000 and $858,000 at December 31, 1994 and 1995,
respectively. For the years ended December 31, 1993, 1994 and 1995,
amortization expense charged to operations on assets held under capital lease
obligations was $36,000, $343,000 and $479,000, respectively.
During 1994, the Company sold assets which had a net book value of $757,000
for $821,000 which were immediately leased back to the Company under capital
lease agreements. The gains resulting from these sales have been deferred and
are being amortized to operations in proportion to the amortization of the
related leased assets. There were no sale-leaseback transactions during 1995.
F-11
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
5. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1994 1995
Accrued employee costs $ 307,000 $ 372,000
Accrued professional fees 227,000 216,000
-------- --------
$ 534,000 $ 588,000
-------- --------
6. Related Party Transactions
Technology Transfer Agreement and Research and Development Agreement with the
Brigham and Women's Hospital
In connection with the formation of the Company and the issuance of 168,750
shares of common stock and 168,750 shares of junior convertible preferred
stock to the Brigham and Women's Hospital ("BWH"), the Company entered into
related technology transfer and research and development agreements with BWH.
The technology transfer agreement provides the Company with all rights and
interests in certain BWH patented technology in exchange for the issuance of
the aforementioned stock and the payment of royalties under certain
conditions. The research and development agreement provides that certain
research activities are performed by BWH on behalf of the Company.
The current research and development agreement terminates in June 1997. The
agreement provides for automatic two-year renewal periods, subject to the
Company's and BWH's mutual agreement annually, with respect to the budget for
research to be performed and related minimum payments made to BWH for each
following year. The Company has agreed to pay BWH minimum payments totaling
$1,722,000 for the one-year period ending June 30, 1996. There is no
guaranteed minimum payment for the one-year period ending June 30, 1997. This
agreement also provides for payments to BWH for royalties on sales of related
patented products by the Company, as well as for payments to BWH for a
portion, as defined in the agreement, of any proceeds received by the Company
in connection with the licensing of patented technology to, and royalty or
milestone payments received from, third parties. Royalty payments to BWH
begin upon the commercialization of the related products and will continue
for the life of the underlying patent. For a period not to exceed three years
after the first commercial sale of any product of the Company, the Company is
required to make payments to BWH in each quarter only to the extent that the
Company has a positive cash flow in such quarter with the balance deferred to
the succeeding quarter. Deferred payments will be subject to interest. If the
Company defaults in the payment of any amount due to BWH, BWH will have an
option to purchase all technology developed under the research program at a
purchase price equal to the sum of all amounts previously paid by the Company
to BWH.
F-12
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes
The components of deferred income tax benefit are as follows:
Year ended December 31,
1993 1994 1995
Income tax benefit:
Federal $ 2,772,000 $ 5,261,000 $ 4,477,000
State 1,059,000 1,682,000 1,366,000
------------ ------------ ------------
3,831,000 6,943,000 5,843,000
Deferred tax asset valuation
allowance (3,831,000) (6,943,000) (5,843,000)
------------ ----------- --------------
$ - $ - $ -
------------ ----------- --------------
No significant federal or state taxes were payable in any years as a result
of losses incurred and utilization of net operating losses and credits.
A reconciliation between the amounts of reported income tax (expense) benefit
and the amount determined by applying the U.S. federal statutory rate of 35%
for 1993, 1994 and 1995 to pre-tax loss is as follows:
Year ended December 31,
1993 1994 1995
Loss at statutory rate $2,833,000 $5,137,000 $4,758,000
Nondeductible research and
development expenses (147,000) (273,000) (158,000)
Federal and state research and
development and investment
tax credits 583,000 1,068,000 746,000
State tax benefit, net of federal
tax liability 525,000 806,000 595,000
Stock option compensation - 191,000 142,000
Utilization of net operating losses - - (364,000)
Other 37,000 14,000 124,000
---------- ---------- ----------
3,831,000 6,943,000 5,843,000
Benefit of loss not recognized,
increase in valuation allowance (3,831,000) (6,943,000) (5,843,000)
---------- ---------- ----------
$ - $ - $ -
---------- ---------- ----------
F-13
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Deferred tax assets are comprised of the following:
December 31,
1994 1995
Research costs capitalized for tax purposes $11,970,000 $17,774,000
Research and investment tax credits 2,324,000 2,890,000
Loss carryforwards 595,000 178,000
Net unrealized (gain) loss on investments
available-for-sale 100,000 (27,000)
Other temporary differences 135,000 152,000
----------- -----------
Gross deferred tax assets 15,124,000 20,967,000
Deferred tax asset valuation allowance (15,124,000) (20,967,000)
----------- -----------
$ - $ -
----------- -----------
The Company has provided a full valuation allowance for deferred tax assets
since the realization of these future benefits is not sufficiently assured as
of the end of each related year. As the Company achieves profitability, these
deferred tax assets will be available to offset future income tax liabilities
and expense. Of the $20,967,000 valuation allowance at December 31, 1995,
$381,000 relating to deductions for stock option compensation will be
credited to additional paid-in capital upon realization.
During 1995, the Company utilized $1,041,000 of federal and state net
operating loss carryforwards and $180,000 of state research and development
and investment tax credit carryforwards. At December 31, 1995, the Company
had the following net operating loss, research and development and investment
tax credit carryforwards available to reduce future tax liabilities, which
expire as follows:
Research and
Net development
operating and investment
Year of loss tax credit
expiration carryforwards carryforwards
2003 $ 19,000
2004 91,000
2005 121,000
2006 162,000
2007 234,000
2008 492,000
2009 $445,000 1,043,000
2010 728,000
-------- ----------
$445,000 $2,890,000
-------- ----------
F-14
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
Ownership changes, as defined in the Internal Revenue Code, resulting from
the Company's initial public offering of stock in January 1993 and subsequent
follow-on offerings, have no impact on the amount of net operating loss and
tax credit carryforwards that can be utilized annually to offset future
taxable income or tax liabilities. Subsequent significant ownership changes
could, however, limit the utilization of these carryforwards in future years.
8. Preferred Stock
Upon the closing of the Company's initial public offering on January 27, 1993
each share of Series A, B and C convertible preferred stock automatically
converted into three shares of common stock (Note 9). No dividends had been
paid to the preferred stockholders.
At December 31, 1995, the Company had authorized 5,000,000 shares of $.01 par
value preferred stock. Preferred stock may be issued at the discretion of the
Board of Directors of the Company (without stockholder approval) with such
designations, rights and preferences as the Board of Directors may determine
from time to time. The preferred stock may have dividend, liquidation,
redemption, conversion, voting or other rights which may be more expansive
than the rights accorded to the common stock.
On May 17, 1995, the Company's Board of Directors adopted a shareholder
rights plan. The Board declared a distribution of one right for each share of
common stock outstanding on June 1, 1995. Stock issued after that date will
be issued with an attached right. Each right will entitle the holder, upon
the occurrence of certain events, to purchase 1/100th of a share of preferred
stock at an exercise price of $73. The Board may, at any time, redeem the
rights until their expiration on June 1, 2005, and may amend the rights under
certain circumstances until they become exercisable.
9. Stockholders' Equity and Common Stock
In December 1992, the Company effected a three-for-one stock split of the
Company's common stock in the form of a stock dividend. All common shares and
per share amounts have been adjusted to give retroactive effect to the common
stock split for all years presented.
In January 1993, the Company completed its initial public offering of
3,000,000 shares of common stock. Proceeds to the Company, net of issuance
costs, amounted to $35,690,000.
In January 1995, the Company completed a private placement of 2,039,547
shares of common stock. Proceeds to the Company, net of issuance costs,
amounted to $9,136,000.
In August and September 1995, the Company completed its second public
offering of 3,925,000 shares of common stock. Proceeds to the Company, net of
issuance costs, amounted to $58,878,000.
F-15
AutoImmune Inc.
(A development stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1995, the Company has reserved 3,211,048 shares of common
stock for use in the Company's stock option plans and stock purchase plan
(Note 10).
10. Stock Option and Purchase Plans
Stock Option Plans
The Company's 1988 Stock Option Plan (the "Option Plan"), as amended
effective May 17, 1995, provides for the granting of incentive stock options
and non-qualified stock options to employees and other individuals
performing services on behalf of the Company. The Compensation Committee
(the "Committee"), appointed by the Board of Directors, is responsible for
the administration of the Option Plan. The Committee determines the term of
each option, option price, number of shares for which each option is
granted, whether restrictions will be imposed on the shares subject to
options and the rate at which each option is exercisable. The exercise price
for incentive stock options granted may not be less than 100% of the fair
market value per share of the underlying common stock on the date granted
(110% for options granted to holders of more than 10% of the voting stock of
the Company). The exercise price per share for non-qualified options may not
be less than 50% of the fair market value per share of the underlying common
stock on the date of grant. The term of options granted under the Option
Plan cannot exceed ten years (five years for options granted to holders of
more than 10% of the voting stock of the Company). During 1995, the Board of
Directors increased the maximum number of shares of common stock of the
Company reserved for issuance in accordance with the terms of the Option
Plan from 2,500,000 to 3,100,000.
A summary of option activity under the Option Plan is as follows:
Exercise
Shares price
Outstanding at December 31, 1992 1,319,316
Granted 506,000 $5.88-$10.00
Exercised (38,116) $ .03-$ 1.33
Cancelled (84,450) $ 1.33
----------
Outstanding at December 31, 1993 1,702,750
Granted 445,936 $4.88-$ 8.50
Exercised (67,500) $ .03
Cancelled (13,500) $5.88-$10.00
---------
Outstanding at December 31, 1994 2,067,686
Granted 307,900 $5.75-$15.75
Exercised (77,438) $1.33-$10.00
Cancelled (157,512) $1.33-$10.00
---------
Outstanding at December 31, 1995 2,140,636
=========
F-16
Autoimmune Inc.
(A devlopment stage company)
Notes to the Financial Statements
================================================================================
During 1993, the Company's Board of Directors approved a stock option plan
for non-employee directors. This plan was approved by the Company's
shareholders in 1994. Under this plan, each director who was eligible to
participate in the plan on May 19, 1993 and each other non-employee director
upon his first election to the Board of Directors received, at fair market
value on the date of grant, options to purchase 4,000 shares of common stock
and will receive options to purchase 4,000 additional shares every four
years thereafter if the individual remains a member of the Board of
Directors. In addition, an option to purchase 1,000 shares of common stock
was granted to each director who was a member of a standing committee of the
Board of Directors on May 19, 1993. An option for 1,000 shares will be
granted automatically to each member of a standing committee following his
first election to each such committee, and options to purchase 1,000
additional shares will automatically be granted every four years thereafter
for each standing committee of which the individual remains a member.
Options to purchase 26,000 shares of common stock have been granted under
this plan. A maximum of 75,000 shares of common stock of the Company is
reserved for issuance in accordance with the terms of this plan.
At December 31, 1995, options to purchase 1,063,561 shares were exercisable.
At December 31, 1994 and 1995, there were 379,698 and 825,310 shares,
respectively, available for future grant under the plans. Options granted
under the plans will become vested at various dates through 2003.
Stock Purchase Plan
On July 20, 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan (the "Purchase Plan"). This plan enables eligible employees to
purchase the Company's common stock at 85% of the fair market value of the
stock on the date an offering commences or on the date an offering
terminates, whichever is lower. The Purchase Plan is available to
substantially all employees, subject to certain limitations. An eligible
employee may elect to have up to 12% of his or her base pay withheld and
applied toward the purchase of shares in such an offering (not to exceed
$25,000 in any year). At December 31, 1995, 219,102 shares of common stock
were reserved for purchases under the Purchase Plan. During 1995, 30,898
shares were purchased under the Purchase Plan at an average price of $5.69
per share. There were no purchases under the Purchase Plan in 1994.
11. Commitments and Contingencies
Clinical Research Agreements
The Company entered into an agreement with CATO Research ("CATO"), effective
June 1993, under which the Company has agreed to pay approximately
$1,800,000 to have a clinical investigational study performed on the
Company's multiple sclerosis product. The total cost of the study is subject
to adjustment if the project specifications change. The agreement may be
terminated by either the Company or CATO, upon prior written notice. If the
Company terminates the agreement, CATO will be entitled to a termination
fee. Additionally, CATO was granted warrants to purchase 30,000 shares of
common stock of the Company at $10.50 per share. Certain of these warrants
become exercisable only upon the achievement of specified
F-17
Autoimmune Inc.
(A devlopment stage company)
Notes to the Financial Statements
- --------------------------------------------------------------------------------
milestones. Given the uncertainty surrounding the achievement of these
milestones, estimated fair value of the contingent stock purchase warrants
cannot be reasonably determined at December 31, 1995.
Research and Development Agreements
The Company entered into a contract research and development agreement with
the Beth Israel Hospital in July 1992, under which the Company agreed to
provide funding for research on the Company's rheumatoid arthritis product.
This research was completed at December 31, 1993. The agreement provides
that the Company will pay Beth Israel royalties on sales of products which
result from the utilization of compounds covered by patents which are in the
names of researchers employed by Beth Israel.
Option Fees and License Agreements
The Company received a payment of $1,500,000 in July 1995 in return for
granting to a Japanese pharmaceutical company the exclusive short-term right
among Japanese companies to review the results of the Phase II dose ranging
study of Colloral(R) and make an offer for an exclusive license to the
product covering Japan. No business arrangements resulted from this option
and the Company has no further obligations under this agreement.
In December 1994, the Company entered into a license agreement with Eli
Lilly and Company ("Lilly"). Under the agreement, Lilly agreed to provide
funding for the Company's research in AutoImmune-mediated diabetes in
exchange for certain worldwide license rights for the manufacture,
distribution and sale of the related products. The agreement provides that
Lilly will fund and conduct Phase II and III clinical trials. In addition,
Lilly will make payments to the Company upon achievement of certain
milestones as defined in the agreement and for royalties earned by the
Company based on sales by Lilly of related products. Lilly has the right to
terminate the agreement at any time, in which event the Company retains all
rights to the product. As of December 31, 1995, no payments had been earned
by the Company.
In October 1992, the Company entered into an agreement with the Joslin
Diabetes Center ("Joslin") in which the Company agreed to provide funds up
to $237,000 for research pertaining to oral tolerance therapy in diabetes.
In connection with this agreement, the Company will have exclusive rights to
all results of the research and will pay royalties to Joslin based on a
percentage of net sales, royalties and milestone payments received by the
Company after the first commercial sale of a product. The Company's
obligations under this agreement related to the payment of royalties will
terminate at such time as there are no pending patents and no unexpired
patents covered by this agreement. On January 6, 1995, the Company exercised
its right to terminate the funding of future research under this agreement.
Under a license agreement, effective in 1992, Schering Corporation
("Schering") provided funding of $537,000 for the year ended December 31,
1993 for an initial clinical study of the Company's rheumatoid arthritis
products. Upon completion of this study, Schering elected not to exercise an
option to develop and commercialize the Company's rheumatoid arthritis
products. The Company retains all rights to these products.
F-18
Autoimmune Inc.
(A devlopment stage company)
Notes to the Financial Statements
================================================================================
Purchase Agreement
In August 1994, the Company entered into a purchase agreement with
Scientific Protein Laboratories ("SPL") for the manufacture and supply of
the Company's multiple sclerosis product. The Company has minimum purchase
obligations of $330,000 and $360,000 for the years ending September 30, 1996
and 1997, respectively. Purchases aggregated $187,000 and $338,000 under
this agreement for the year ended December 31, 1994 and 1995, respectively.
Leases
The Company leases its facilities under an operating lease which includes
renewal and escalation clauses. The operating lease for facilities provides
for monthly rental payments and estimated monthly operating charges which
cover building maintenance costs and real estate taxes. Additionally, the
Company has the option to sublease office or laboratory space under the
agreement.
Total rent expense was $300,000 and $333,000 for the years ended December
31, 1994 and 1995, respectively. Future minimum lease commitments due under
non-cancelable operating leases and capital lease obligations at the end of
each year are as follows:
Capital Operating
leases leases
1996 $497,000 $417,000
1997 458,000 429,000
1988 131,000 500,000
1999 - 458,000
2000 - -
Thereafter - -
------------ -------------
Total obligations 1,086,000 $1,804,000
-------------
Less - amount representing interest 55,000
------------
$1,031,000
============
Subsequent to December 31, 1995 the Company received a $1,500,000 lease line
from an unaffiliated third party. The term for each lease under the
agreement is thirty-six months and bears interest at a rate determinable on
the lease date. The Company is required to meet certain financial covenants
during the lease term. If the Company violates any of the covenants the
Lessor may require additional cash collateral, not to exceed the amount of
the remaining balance.
12. Employee Savings Plan
In 1993, the Company initiated an employee savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is
available to substantially all employees. The Company has made no
contributions to the 401(k) Plan since inception.
F-19
AutoImmune Inc.
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves
Additions
(1) (2)
Balance at Charged to Charged to Balance at
beginning costs and to other Deductions- end
Description of period expenses accounts write-offs of period
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset
valuation allowance
Year ended December 31,
1995 $15,124,000 $5,843,000 $ - $ - $20,967,000
1994 8,181,000 6,943,000 - - 15,124,000
1993 4,350,000 3,831,000 - - 8,181,000
F-20
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
3.1 - Restated Certificate of Incorporation*
3.2 - By-Laws**
4.1 - Specimen Common Stock Certificate**
10.1 - Amended and Restated 1988 Stock Option Plan effective December 14,
1992*+
10.2 - Agreement, dated March 18, 1992, between AutoImmune Inc. and
Schering Corporation**++
10.3 - Lease Agreement, dated November 1992, between AutoImmune Inc. and
Ledgemont Realty Trust**
10.4 - Amended and Restated Research and Development Agreement, dated July 1,
1992, between AutoImmune Inc. and The Brigham and Women's Hospital,
Inc.**
10.5 - Research Agreement, dated October 21, 1992, and Royalty Agreement,
dated 1992, between AutoImmune Inc. and Joslin Diabetes Center.**
10.6 - Research Agreement, dated July 1, 1992, Royalty Agreement, dated June
6, 1990, and Research Agreement, dated July 1990, between AutoImmune
Inc. and the Beth Israel Hospital**
10.7 - Cooperative Research and Development Agreement, effective July 1,
1990, among the National Eye Institute of the National Institutes of
Health, The Brigham and Women's Hospital and AutoImmune Inc.**
10.8 - Retainer Agreement, dated June 1, 1992, between AutoImmune Inc. and
Cato Research Ltd.**
10.9 - Employment Agreement, dated April 2, 1992, between AutoImmune Inc. and
Robert C. Bishop**+
10.10 - Amended Consulting Agreement, dated July 1992, and Amended and
Restated Consulting Agreement, dated November 1988, between AutoImmune
Inc. and Howard L. Weiner, M.D.**
10.11 - Amended Consulting Agreement, dated July 1992, and Amended and
Restated Consulting Agreement, dated November 1988, between AutoImmune
Inc. and David A. Hafler, M.D.**
10.13 - Consulting Agreement, dated February 1, 1989, between AutoImmune Inc.
and James P. Tam, Ph.D.**
10.14 - Scientific Advisory Board Agreement, dated August 5, 1992, and
Consulting Service Agreement, dated August 5, 1992, between AutoImmune
Inc. and Jack L. Strominger, M.D.**
10.15 - Scientific Advisory Board Agreement, dated August 11, 1992, between
AutoImmune Inc. and Herman N. Eisen, M.D.**
10.16 - Scientific Consultant Agreement, dated July 16, 1992, between Auto-
Immune Inc. and Henry Oettinger, Ph.D.**
10.17 - Nonemployee Director Stock Option Plan***+
10.18 - Employee Stock Purchase Plan****+
10.19 - License and Collaboration Agreement dated December 1, 1994 between
AutoImmune Inc. and Eli Lilly and Company.++
10.20 - First Amendment to Lease dated October 31, 1993 between AutoImmune
Inc. and Ledgemont Realty Trust.
10.21 - Second Amendment to Lease dated February 1, 1996 between AutoImmune
Inc. and Ledgemont Realty Trust.
23 - Consent of Price Waterhouse LLP
- -------------------------------------
* Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 0-20948).
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-55430).
*** Incorporated by reference to Appendix A to the Companys' definitive Proxy
Statement dated April 6, 1994 for the Annual Meeting of Shareholders held
on May 18, 1994 filed pursuant to Section 14 of the Exchange Act.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on August 17, 1994
(Registration No. 33-82972).
+ Required to be filed pursuant to Item 14(c) of Form 10-K.
++ The Company has been granted confidential treatment of the redacted
portions of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, and has separately filed a complete copy
of this exhibit with the Securities and Exchange Commission.