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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended JULY 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934: For the transition period from
__________________________ to ___________________.
Commission file number: 0-27756.
ALEXION PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3648318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 SCIENCE PARK, SUITE 360, NEW HAVEN, CONNECTICUT 06511
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(Address of principal executive offices) (Zip Code)
203-776-1790
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $0.0001
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. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on October 21, 1996, was $51,214,970.
The number of shares of Common Stock outstanding as of October 21, 1996 was
7,339,084.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with solicitations of proxies for the Registrant's 1996
Annual Meeting of Stockholders on December 13, 1996 is incorporated by reference
in Part III, Item 11 of this Form 10-K.
When used in this discussion, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
to preserve its trade secrets and proprietary rights which could cause
actual results to differ materially from those projected.
The risks and uncertainties which could affect actual results include,
but are not limited to, the Company's past operating losses and lack of
revenue from product sales, the Company's anticipated need for additional
funds for its research and product development programs, for operating
expenses and for other development costs, the early stage of the Company's
product development, the rapid technological changes and intense
competition in the pharmaceutical industry, the uncertainty of the
Company's ability to obtain patent protection for its technology, to
preserve its trade secrets and proprietary rights and to operate without
infringing the proprietary rights of third parties, the Company's ability
to compete successfully in its industry, the ability of the Company to
obtain required governmental approvals for testing, and thereafter,
manufacturing and marketing products, the eligibility of the Company's
products, if developed, for reimbursement from the government and private
health insurers, the Company's ability to attract and retain qualified
personnel, the Company's dependence on outside parties and collaborators
for certain research and development and other product development
functions, the Company's ability to develop or arrange with third parties
for manufacturing, marketing, sales, clinical testing and regulatory
compliance capabilities, and the ability of the Company to obtain
sufficient liability insurance coverage at an acceptable cost or otherwise
to protect against potential product liability claims.
These forward-looking statements speak only as of the date hereof. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
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PART I.
ITEM 1. BUSINESS
GENERAL
Alexion Pharmaceuticals, Inc. ("Alexion" or the "Company") is a
biopharmaceutical company engaged in the research and development of proprietary
immunoregulatory compounds for the treatment of autoimmune and cardiovascular
diseases. The Company is developing C5 Complement Inhibitors ("C5 Inhibitors")
and Apogens ("Apogens"), two classes of potential therapeutic compounds designed
to selectively target specific disease-causing segments of the immune system.
The Company believes that its C5 Inhibitors and Apogens, which are based upon
distinct immunoregulatory technologies, may have the advantage of achieving a
higher level of efficacy with the potential for reduced side effects when
compared to existing therapeutic approaches. The Company will need to undertake
and complete further tests in order to confirm its belief, and there can be no
assurance as to the results of any such tests. Primary therapeutic targets for
the C5 Inhibitor products are cardiovascular disorders, including prevention of
bleeding and inflammation in cardiopulmonary bypass procedures ("CPB") during
open heart surgery and myocardial infarction, and autoimmune disorders including
lupus nephritis and rheumatoid arthritis. Key disease targets for the Apogen
program include the autoimmune disorders multiple sclerosis and diabetes
mellitus.
As an outgrowth of its core technologies, the Company is developing, in
collaboration with United States Surgical Corporation ("US Surgical"), non-human
UniGraft organ products designed for transplantation into humans.
ALEXION'S DRUG DEVELOPMENT STRATEGY
Alexion's strategy is to develop novel immunoregulatory therapeutics
for disease states, disorders and clinical indications for which the Company
believes treatment options are either non-existent or inadequate. Consequently,
Alexion's product candidates may represent significant therapeutic advances
which might be expected to afford the Company's products, if successfully
developed, important advantages in achieving market acceptance, third party
reimbursement and support of its products from cost/benefit and health economic
perspectives.
Currently available therapies for certain autoimmune, cardiovascular and
neurologic diseases, in which the immune system attacks the patient's own
tissue, broadly suppress the entire immune system, thus causing potentially
severe side effects. In contrast, Alexion's proprietary compounds are designed
to be more effective with reduced side effects when compared to currently
available therapies by generally
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targeting only the specific disease-causing segments of the immune system,
leaving the remaining segments of the immune system intact to perform their
normal protective functions. The Company is developing two classes of potential
therapeutic compounds, C5 Inhibitors and Apogens. C5 Inhibitors are designed to
specifically block the formation of disease-causing complement proteins, while
Apogens are designed to selectively eliminate disease-causing T-cells. In the
longer term, as an outgrowth of its core technologies and in collaboration with
US Surgical, the Company is developing non-human UniGraft organ products which
are designed for transplantation into humans without clinical rejection.
ALEXION DRUG DEVELOPMENT PROGRAMS
The Human Immune System. The role of the human immune system is to defend
the body from attack or invasion by infectious agents or pathogens. This is
accomplished through a complex system of proteins and cells, primarily
complement proteins, antibodies and various types of white blood cells, each
with a specialized function. Under normal circumstances, complement proteins,
together with antibodies and white blood cells, act beneficially to protect the
body by removing pathogenic microorganisms, cells containing antigens (foreign
proteins), and disease-causing immune complexes (combinations of antigens and
antibodies). However, any number of stimuli, including antibodies, pathogenic
microorganisms, injured tissue, normal tissue, proteases (inflammatory enzymes)
and artificial surfaces can locally activate complement proteins in a cascade of
enzymatic and biochemical reactions (the "complement cascade") to form
inflammatory byproducts leading, for example, in the case of cardiovascular
disorders such as myocardial infarction (death of heart tissue), to additional
significant damage to the heart tissue and, in the case of rheumatoid arthritis,
to severe joint inflammation. T-cells, a type of white blood cell, play a
critical role in the normal immune response by recognizing cells containing
antigens, initiating the immune response, attacking the antigen-containing
tissue and directing the production of antibodies directed at the antigens, all
of which lead to the elimination of the antigen-bearing foreign organism. When a
T-cell mistakenly attacks host tissue, the T-cell may cause an inflammatory
response resulting in tissue destruction and severe autoimmune disease leading,
for example, in the case of multiple sclerosis to severe and crippling
destruction of nerve fibers in the brain.
C5 Inhibitor Immunotherapeutics
Alexion is developing specific and potent biopharmaceutical C5 Inhibitors
which are designed to intervene in the complement cascade at what the Company
believes to be the optimal point so that the disease-causing actions of
complement proteins generally are inhibited while the normal disease-preventing
functions of complement proteins generally remain intact. In laboratory and
animal models of human disease, Alexion has shown that C5 Inhibitors are
effective in substantially preventing inflammation during CPB, reducing tissue
damage during myocardial infarction, reducing the incidence and severity of
inflammation and joint damage in rheumatoid
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arthritis, enhancing survival in lupus and preserving kidney function in
nephritis (kidney inflammation). The Company is developing two C5 Inhibitors, a
short acting humanized (compatible for human use) single chain antibody
(5G1.1-SC) designed for acute therapeutic settings such as in CPB procedures and
in treating myocardial infarctions, and a long acting humanized monoclonal
antibody (5G1.1) designed for treating chronic disorders such as lupus and
rheumatoid arthritis.
Cardiopulmonary Bypass Surgery
In performing certain complex cardiac surgical procedures, it is necessary
to detour blood from the patient's heart and lungs to a cardiopulmonary
(heart-lung) bypass machine in the operating room which artificially adds oxygen
to the blood and then circulates the oxygenated blood to the organs in the
patient's body. The Company believes that excessive bleeding during and after
surgery and impaired oxygenation after surgery, both significant complications
of CPB, may be the result of an inflammatory process that begins when CPB is
initiated. The CPB related inflammatory response is associated with the rapid
activation of the complement cascade caused when the patient's blood is perfused
through the CPB machine and comes into contact with artificial surfaces. The
inflammation is also characterized by activation of platelets (cells responsible
for clotting) and neutrophils (a type of white blood cell). The Company believes
that platelet activation and subsequent platelet dysfunction during CPB impair
the patient's ability to arrest the bleeding that occurs after extensive surgery
and that neutrophil activation is associated with impaired lung function.
The short acting humanized single chain antibody C5 Inhibitor (5G1.1-SC) is
designed to inhibit complement activation in patients immediately before and
during CPB in order to prevent the acute bleeding complications and other
morbidities associated with CPB. Those effects might reduce the need for blood
transfusions, the time spent by patients in the intensive care unit, and the
scope of other required treatments associated with CPB. Preliminary studies by
the Company indicate that the Company's C5 Inhibitor can substantially prevent
activation of platelets and neutrophils and the subsequent inflammatory process
that occurs during circulation of human blood in a closed-loop CPB circuit.
An Investigational New Drug application ("IND") was filed with the United
States ("U.S.") Food and Drug Administration ("FDA") at the end of March 1996
for the C5 Inhibitor, 5G1.1-SC, and after receiving FDA authorization, a Phase I
clinical trial in healthy male volunteers began in June 1996. In September 1996,
the Company received authorization from the FDA to begin its second clinical
trial, a Phase I/II trial, of 5G1.1-SC in patients undergoing CPB.
The American Heart Association ("AHA") estimates that approximately 450,000
CPB surgical procedures were performed in the United States during 1992 (the
latest year for which AHA data is available).
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Myocardial Infarction
Myocardial infarction (heart attack) is an acute cardiovascular
disorder where the coronary arteries (the arteries feeding the heart muscle) are
blocked to such an extent that the flow of blood is insufficient to supply
enough oxygen and nutrients to keep the heart muscle alive. With insufficient
supply of blood, oxygen, and nutrients, the underperfused heart muscle
subsequently infarcts (dies). Myocardial infarction most often occurs due to a
blockage in a coronary artery, caused by atherosclerosis. Upon the reduction in
flow in the coronary artery, a complicated cascade of inflammatory events
commences within the blood vessel involving platelets and leukocytes and their
secreted factors, complement proteins, and endothelial cells. The subsequent
severe inflammatory response targeting the area of the underperfused cardiac
muscle is associated with subsequent necrosis (death) of the heart muscle. In
addition to the high incidence of sudden cardiac death at the onset, severe
complications associated with the initial survival of an acute myocardial
infarction include congestive heart failure, stroke, and death.
The Company is developing the C5 Inhibitor, 5G1.1-SC (currently being
applied to the treatment of patients undergoing CPB, as discussed above) to
inhibit complement activation in patients suffering an acute myocardial
infarction in order to reduce the extent of infarcted myocardium. The Company
and its collaborators have performed preliminary preclinical studies in rodents
which have demonstrated that administration of a C5 Inhibitor, at the time of
myocardial ischemia (insufficient supply of blood to the heart muscle) and prior
to reperfusion, significantly reduces the extent of subsequent myocardial
infarction compared to control studies.
The AHA estimates that approximately 1,000,000 Americans survived a heart
attack in 1992 and thus be potentially eligible for such drug treatment.
Rheumatoid Arthritis
Rheumatoid arthritis is an autoimmune disease directed at various organ and
tissue linings, including the lining of the joints, causing inflammation and
tissue destruction. Clinical signs and symptoms of the disease include weight
loss, joint pain, morning stiffness and fatigue. Further, the joint destruction
can progress to redness, swelling and pain with frequent, severe joint
deformity. Rheumatoid arthritis is generally believed to be due to
antigen-specific T-cells which both directly attack the patient's joints and
also activate B-cells (a type of white blood cell) to produce antibodies which
deleteriously activate complement proteins in the joint, leading to
inflammation, with subsequent tissue and joint destruction.
Alexion is developing a long acting humanized recombinant monoclonal
antibody (5G1.1), a C5 Inhibitor which is designed to inhibit complement
activation and thereby reduce the severity and frequency of flares of joint
inflammation and arrest progressive tissue damage in joints caused by complement
activation. The Company has performed
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preclinical studies in rodent models of rheumatoid arthritis. Treatment with the
Company's specific C5 Inhibitor substantially prevented the onset of
inflammation and pathology in the joints and disease progression, ameliorated
established disease and also substantially prevented the onset of clinical signs
of rheumatoid arthritis. 5G1.1 is currently in the early stages of process
development for the production of material for use in clinical trials.
In the United States approximately 2,500,000 patients receive treatment
from a physician for rheumatoid arthritis.
Nephritis
The kidneys are responsible for filtering blood to remove toxic metabolites
and maintain the blood minerals that are required for normal metabolism. Each
kidney consists of millions of individual filtering units, each filtering unit
called a glomerulus. When glomeruli are damaged, the kidney can no longer
adequately maintain its normal filtering function. Clinically severe nephritis,
found in many patients suffering from systemic lupus erythematosus ("lupus" or
"SLE") and other autoimmune diseases, occurs when more than 90% of the kidney is
destroyed by disease. Kidney failure is frequently associated with hypertension,
strokes, infections, anemia, heart inflammation, joint inflammation, coma and
death. Most forms of damage to the glomerulus are mediated by the immune system
and particularly by antibodies and activated complement proteins.
Alexion is developing the C5 Inhibitor 5G1.1 (also being applied to the
treatment of rheumatoid arthritis, as discussed above) for the prevention and
treatment of inflammation in lupus patients. The Company has performed
preclinical studies in a mouse model of acute nephritis. In this model, the
Company's specific C5 Inhibitor substantially prevented inflammation in the
kidney tissue. Further, in a separate chronic mouse model that spontaneously
develops a disease similar to lupus with concomitant nephritis, substantially
more animals treated with the Company's specific C5 Inhibitor survived as
compared to untreated control animals.
Alexion's proposed product to treat and prevent nephritis is directed at a
patient population which includes SLE as well as diseases with lower prevalence
such as Goodpastures disease and others. According to the Lupus Foundation, 1.4
million Americans suffer from lupus. Further, an estimated 70% of individuals
afflicted with Lupus suffer nephritis.
Apogen Immunotherapeutics
The Company's Apogen compounds are based upon discoveries at the National
Institutes of Health ("NIH") which are exclusively licensed to Alexion and upon
further discoveries by Alexion. These discoveries involve a mechanism by which
substantially
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all disease-causing T-cells are selectively eliminated in vivo in animal models
of disease. The highly specific recombinant Apogens under development by the
Company are designed to selectively eliminate disease-causing T-cells in
patients with certain autoimmune diseases including multiple sclerosis and
diabetes mellitus. The Company has demonstrated that its lead proprietary
Apogen, MP4, is effective at preventing neurologic disease in animal models of
multiple sclerosis. MP4 is currently in process development and the Company
believes it will file an IND for the multiple sclerosis indication in 1997.
Multiple Sclerosis
Multiple Sclerosis ("MS") is an autoimmune disease of the central nervous
system which hinders the ability of the brain and spinal cord to control
movement, speech and vision. MS can be severely debilitating with long term
disability a common outcome. In severe cases, the reduced motor strength may
confine the patient to a wheelchair. MS is widely believed to be due to the
attack of a patient's antigen-specific T-cells on the protective myelin sheath
surrounding nerve cells in the central nervous system.
Preclinical animal studies performed by Alexion in the experimental
autoimmune encephalomyelitis mouse model of MS, have demonstrated that
administration of the Company's proprietary Apogen MS product candidate, MP4, at
the time of disease induction, effectively prevents the development of severe
neurologic disease and administration of MP4 after the onset of disease
ameliorates established disease. In in vitro studies, Alexion and NIH scientists
have observed that MP4 is also capable of eliminating antigen-specific human
T-cells from patients with MS. MP4 is in the later stage of preclinical studies
and process development. The Company anticipates that it will file an IND for
MP4 in 1997. There can be no assurance that an IND will be filed, or that the
Company will be permitted to commence clinical trials on a timely basis.
According to the National Multiple Sclerosis Society, an estimated
250,000 people in the United States suffer from MS.
Diabetes Mellitus
Type I Diabetes Mellitus, or Insulin Dependent Diabetes Mellitus ("IDDM"),
is the most severe form of diabetes and is generally believed to be caused by an
autoimmune T-cell attack and destruction of the insulin producing cells in the
pancreas. This process, which usually begins in childhood, causes reduced
production of insulin, which is responsible for the breakdown of glucose,
resulting in uncontrolled elevations in the patient's blood sugar. Without
treatment, IDDM can be fatal.
Alexion is currently developing Apogen DM which is designed to prevent and
treat IDDM by eliminating antigen-specific T-cells which are responsible for the
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pancreatic B-cell destruction. Alexion has established animal models of diabetes
and has commenced initial preclinical studies with an Apogen DM prototype.
According to the American Diabetes Association, up to 800,000 Americans are
insulin dependent diabetics. The Company intends to design its potential product
as a preventative for individuals at high risk of developing the disease and as
a therapy for patients who still have a population of insulin producing cells,
in order to arrest progression of the disease and the subsequent development of
longer term complications.
The UniGraft Program
As an outgrowth of its core technologies, the Company is also developing,
in collaboration with U.S. Surgical, non-human cell and organ UniGraft products
which are designed for transplantation into humans without clinical rejection.
Rejection of non-human tissue by patients is generally believed to occur in two
stages, a very rapid hyperacute phase extending over minutes to hours and a
somewhat less rapid acute phase, extending from days to months. Hyperacute
rejection is generally believed to be mediated by naturally-occurring antibodies
in the patient, most of which target a carbohydrate antigen uniquely present on
the surface of non-human tissue (but not on the patient's own tissue). After
binding to the foreign tissue, these antibodies activate the cascade of
complement proteins on the surface of the donor tissue with subsequent
destruction of the donor tissue. Subsequently, acute rejection of xenografts
(tissue from different species) is generally believed to be mediated by T-cells,
many of which are specific to the transplanted tissue.
UniGraft products are being designed to resist both complement/antibody-
mediated hyperacute rejection and T-cell-mediated acute rejection. Alexion has
commenced studies employing the UniGraft technologies during transplantation of
genetically engineered and proprietary porcine cells and organs into primates.
Pigs are a preferred source of organ supply because the anatomy, size, and
physiology of their hearts and other organs are similar to human organs. Alexion
has genetically engineered swine so that the porcine cells are resistant to
lysis (break-up) and activation by human complement proteins. Alexion has also
discovered and designed porcine specific antibodies which have been demonstrated
to selectively and significantly block the human T-cell response to porcine
tissue in in vitro studies.
Alexion has tested genetically engineered pig hearts, livers and lungs
transplanted into primates and has observed pig organ function for as long as 48
hours, as compared to less than one hour for porcine organs that have not been
genetically engineered. Alexion is currently employing its immunoregulatory and
molecular engineering technologies in order to develop UniGraft hearts, lungs,
livers, pancreases and kidneys.
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According to the United Network of Organ Sharing, there are approximately
18,000 organ transplants performed annually in the U.S. and there are an
additional 35,000 patients on waiting lists for transplant organs. The Company
believes that the availability and viability of xenograft organs for
transplantation could increase the transplant market significantly.
Gene Transfer Vector Products
Gene therapy is an emerging field of science based on the delivery of genes
into living cells to produce therapeutic proteins intracellularly. Gene transfer
technology may permit intracellular treatment of cancers, viral infections and
other diseases. Therapeutic genes are carried by vectors, or gene transporters,
into targeted cells. All commonly used clinical gene transfer vectors, including
modified retroviruses, modified adenoviruses, and DNA-liposome conjugates, are
large molecules that, if injected into a patient, are recognized as foreign and
subject to rejection by the human immune system. Certain of these vectors, known
as modified retroviruses, have been particularly useful for ex vivo gene therapy
because of their versatility, efficiency, stability of expression and relative
safety. Retroviral vectors can be modified to deliver genes for a variety of
different therapeutic applications. However, as these vectors are derived from
non-human cells, they are recognized as foreign by the recipient's immune system
and thus are eliminated in human blood prior to having a significant therapeutic
effect.
The Company is applying its research in, and knowledge of the body's
rejection response to engineer retroviral vector producer cells and particles
which, when employed in gene transfer products, would be able to survive and
function in vivo following implantation or direct injection, respectively. By
protecting retroviral vector producer cells and particles from the initial phase
of rejection, the Company believes that its proprietary gene transfer vectors
will survive in vivo and be able to deliver therapeutic genes to patients'
cells. The Company has developed proprietary retroviral-based gene transfer
vectors, producer cells, and particles which survive in human blood ex vivo. The
Company is currently evaluating various options for commercializing its gene
transfer technologies.
STRATEGIC ALLIANCES, COLLABORATIONS AND LICENSES
The Company's plan is to develop and commercialize on its own those product
candidates for which the clinical trial and marketing requirements can
realistically be managed by the Company. For certain of the Company's C5
Inhibitor and Apogen products for which greater resource commitments will be
required, a key element of Alexion's strategy is the formation of corporate
partnerships with major pharmaceutical companies for product development and
commercialization. For licensed applications, a corporate partner would be
likely to bear the substantial cost and much of the manpower-intensive effort of
clinical development, scale-up production, FDA approval
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and marketing. Alexion has entered into a strategic alliance with US Surgical
with respect to the Company's UniGraft program, and intends to develop
additional strategic alliances with major pharmaceutical companies for certain
of its other technologies. There can be no assurance that the Company will enter
into additional strategic alliances, or, if entered into, what the terms of any
strategic alliance will be.
United States Surgical Corporation
In July 1995, the Company and US Surgical entered into the Joint
Development Agreement, pursuant to which the Company and US Surgical agreed to
collaborate to jointly develop and commercialize the Company's UniGraft
technology for organ transplantation. Pursuant to the Joint Development
Agreement, Alexion has primary responsibility for preclinical development,
clinical trials and regulatory submissions relating to the UniGraft program, and
US Surgical has primary responsibility for production, sales, marketing and
distribution of UniGraft products to the extent developed and approved for
commercialization. Further, US Surgical has committed to exclusively develop
with the Company xenotransplantation products.
US Surgical agreed to fund preclinical development of UniGraft products by
paying to Alexion up to $6.5 million allocated as follows: (i) up to $4.0
million of the cost of preclinical development in four semi-annual installments
of approximately $1.0 million (the first installment of which was paid in July
1995), and (ii) $2.5 million upon achieving certain milestones involving
development of a genetically engineered pig. Through October 1, 1996, the
Company has received approximately $3.0 million in research and development
support under its collaboration with US Surgical. In addition, US Surgical
agreed to pay $1 million upon achieving a milestone involving the
transplantation of non-primate tissue into primates (the "Primate Milestone").
There can be no assurance that the Company will achieve the agreed upon
milestones, and therefore, there can be no assurance that Alexion will receive
any particular milestone payment from US Surgical. In furtherance of the joint
collaboration, US Surgical also purchased $4.0 million of Common Stock of the
Company, at a price of $8.75 per share. US Surgical also purchased approximately
ten percent of the shares of Common Stock offered at the Company's initial
public offering. US Surgical beneficially owns an aggregate of 657,142 shares of
Common Stock or 9.0% of the outstanding shares.
If the Primate Milestone is achieved, US Surgical is to advise the Company
whether it intends to exercise its priority right to provide all clinical
funding for the UniGraft product, and the Company and US Surgical are to agree
upon milestone payments to be made by US Surgical to the Company for the first
three UniGraft products. Unless and until US Surgical determines to terminate
clinical funding for a UniGraft product, US Surgical shall have the exclusive
worldwide marketing, sales and distribution rights with respect to such UniGraft
product, including market introduction decisions and control of marketing, sales
and distribution decisions. For inventions made by the Company during the
performance of the preclinical or clinical programs outlined in the Joint
Development Agreement, the Company will own the
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inventions and US Surgical is granted (i) a worldwide exclusive license to sell
transplant products derived from the Company's xenotransplantation technology;
(ii) a worldwide exclusive license to sell products (a) in the fields related to
businesses in which US Surgical is engaged and (b) not in the fields in which
the Company is currently developing its products (i.e., anti-inflammatories and
gene therapy systems); and (iii) an option to an exclusive license to sell
products in fields outside those related to businesses which US Surgical is
engaged but excluding fields which the Company is currently developing its
products (i.e., anti-inflamatories and gene therapy systems). US Surgical has
agreed to pay to the Company royalties on net sales of products. The Company has
retained full rights to inventions in fields of gene therapy systems and
anti-inflammatories as well as to inventions in fields for which US Surgical
does not exercise its option.
The Joint Development Agreement may be terminated by US Surgical, for any
or no reason, effective on or after January 1, 1998, if notice is given by US
Surgical at least six months prior thereto. In the event of a termination by US
Surgical, all rights licensed by Alexion shall revert to Alexion.
Licenses and Other Sponsored Research
The Company has obtained licenses with respect to certain issued patents
and patent applications, to supplement the research of its own scientists. The
Company has agreed to pay to its licensors royalties on sales of certain
products based on the licensed technologies, as well as, in some instances,
minimum royalty and milestone payments, and patent filing and prosecution costs.
The Company has also agreed to indemnify its licensors and, in certain
instances, the inventors, against certain liabilities, including liabilities
arising out of product liability claims and, in certain instances, under the
securities laws. Because research leading to inventions licensed from domestic
licensors are generally supported by the United States Government, the
Government has retained certain statutory rights, including a non-exclusive,
royalty-free license to use the licensed inventions, and to manufacture and
distribute products based thereon, for Government use only. A summary of certain
of such licenses, as well as the Company's other material licenses and sponsored
research, is presented below.
Yale University/Oklahoma Medical Research Foundation
The Company has obtained exclusive, worldwide licenses to certain issued
patents and patent applications and related technology from Yale and OMRF with
respect to complement inhibitors and UniGraft technology. Since obtaining the
patent licenses, the Company has made further discoveries relating to complement
inhibitors and the UniGraft technology, resulting in the filing by the Company
of numerous additional U.S. patent applications. In addition, the Company has
provided funding for separate sponsored research by certain of these inventors
and, to the extent that an invention would not be covered by an existing license
from OMRF to the Company, the
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Company has the first and prior right to license any inventions in the field
arising from the research.
National Institutes of Health
The Company has obtained an exclusive, worldwide license from NIH for
rights to two patent applications related to the work performed at NIH on
antigen-specific elimination of disease-causing T-cells in patients with certain
inflammatory disorders.
In further support of the Company's Apogen program, the Company and the
National Institute of Allergy and Infectious Diseases ("NIAID") have entered
into a Cooperative Research and Development Agreement (the "NIH CRADA"). The
subject matter of the NIH CRADA includes preclinical and clinical development
based upon discoveries by NIAID regarding the antigen-specific elimination of
disease-causing T-cells in patients with certain inflammatory disorders. The
principal investigator of the NIH CRADA is the principal inventor of the
inventions licensed to the Company by NIH. NIAID has granted the Company the
first and prior right to an exclusive commercialization license for any and all
inventions or products developed pursuant to the NIH CRADA. Pursuant to the NIH
CRADA, the Company committed to pay $159,000 per year for a three-year period.
To date, approximately $477,000 has been paid under such agreement. The NIH is
part of the United States Department of Health and Human Services.
Biotechnology Research and Development Corporation
The Company has entered into a license agreement with the Biotechnology
Research and Development Corporation ("BRDC"), under which the Company has
become the worldwide, exclusive licensee of the porcine embryonic stem cell
technology developed at the University of Illinois and sponsored by BRDC, and
related patent applications for xenotransplantation purposes. The Company
believes that this technology may assist it in its UniGraft organ
transplantation program.
In connection with the license agreement with BRDC, the Company became a
common shareholder of BRDC, which is a research management corporation. At the
present time, the Company, American Cyanamid Company, Hewlett Packard Company,
Dow Chemical Company, Mallinckrodt Group Inc. and Agricultural Research and
Development Corporation are common shareholders of BRDC. BRDC is currently
funding numerous research projects in biotechnology, and each of the common
shareholders, including the Company, retains the right to license for commercial
development the technologies resulting from substantially all of these research
programs. The Company has paid $50,000 for the purchase of its common stock of
BRDC and has committed to an annual research contribution to the consortium for
four years. To date, the Company has paid approximately $550,000 under the
agreement.
-13-
However, minimum annual royalty payments under the license agreement with BRDC
have been waived so long as the Company remains a shareholder of BRDC.
Tufts University
In October 1995, Alexion entered into a Research Subcontract Agreement with
Tufts University funded by the ATP/NIST grant referred to below. Under the
research program governed by this one year contract, Tufts has been engaged to
undertake genetically engineered pig production on behalf of the Company, in
support of its UniGraft organ transplantation program.
Grants
Phase II SBIR Grant
In September 1995, Alexion was awarded a $750,000 Phase II SBIR (Small
Business Innovation Research Program) grant from the National Heart, Lung, and
Blood Institute of the NIH. The award was made in support of the research and
clinical development of the Company's C5 Inhibitor to treat complications of
cardiovascular surgery.
Phase I SBIR Grant
In July 1995, Alexion was awarded a $100,000 Phase I SBIR grant from the
NIAID of the NIH. The award was made in support of the research and development
of the Company's gene transfer technology.
ATP/NIST
In August 1995, the Company was awarded cost-shared funding from the
Commerce Department's National Institute of Standards and Technology ("NIST")
under its Advanced Technology Program ("ATP"). Through the ATP, the Company may
receive up to approximately $2.0 million over three years to support the
Company's UniGraft program in universal donor organs for transplantation.
Medical Research Council License
In March 1996, the Company entered into a license agreement with the
Medical Research Council under which the Company has become the worldwide
non-exclusive
-14-
licensee of certain patents related to the humanization and production of
monoclonal antibodies.
Enzon License
In May 1996, the Company licensed from Enzon, Inc. on a worldwide non-exclusive
basis certain patents related to single chain antibodies.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its technologies that are
considered important to the development of its business. The Company also relies
upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
The Company has filed several U.S. patent applications and international
(PCT) counterparts of certain of these applications. In addition, the Company
has exclusively licensed several additional United States patent applications
and issued U.S. patents. Amongst the Company's owned and licensed patents and
patent applications, approximately 25% relate to technologies or products in the
C5 Inhibitor program, 11% relate to the Apogen program, 11% relate to the Gene
Transfer program and 53% relate to the UniGraft program.
The Company's success will depend in part on its ability to obtain United
States and foreign patent protection for its products, preserve its trade
secrets and proprietary rights, and operate without infringing on the
proprietary rights of third parties or having third parties circumvent the
Company's rights. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the health care industry has traditionally placed considerable
importance on obtaining patent and trade secret protection for significant new
technologies, products and processes. There can be no assurance that any patents
will issue from any of the patent applications owned by or licensed to the
Company. Further, even if patents were to issue, there can be no assurance that
they will provide the Company with significant protection against competitive
products or otherwise be commercially valuable. In addition, patent law relating
to certain of the Company's fields of interest, particularly as to the scope of
claims in issued patents, is still developing and it is unclear how this
uncertainty will affect the Company's patent rights. Litigation, which could be
costly and time consuming, may be necessary to enforce patents issued to the
Company and/or to determine the scope and validity of others' proprietary
rights, in either case in judicial or administrative proceedings. The Company's
competitive position is also dependent upon unpatented trade secrets which
generally are difficult to protect. There can be no assurance that others will
not
-15-
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets, that the
Company's trade secrets will not be disclosed or that the Company can
effectively protect its rights to unpatented trade secrets. As the biotechnology
industry expands and more patents are issued, the risk increases that the
Company's potential products may give rise to claims that they infringe the
patents of others. Any such infringement litigation would be costly and time
consuming to the Company.
The Company is aware of broad patents owned by third parties relating to
the manufacture, use, and sale of recombinant humanized antibodies, recombinant
humanized single chain antibodies and genetically engineered animals. The
Company has received notice from certain of these parties regarding the
existence of certain of these patents which the owners claim may be relevant to
the development and commercialization of certain of the Company's proposed
products. With respect to certain of these patents, the Company has acquired
certain licenses which it believes are relevant for the expeditious development
and commercialization of certain of its products as currently contemplated. With
regard to another of these patents, the Company has identified and is testing
various approaches which it believes should not infringe this patent and which
should permit commercialization of its products. There can be no assurance that
the owner of this patent will not seek to enforce the patent against the
Company's so-modified commercial products or against the development activities
related to the non-modified products. Although the Company believes that it can
obtain licenses to the patents necessary for its contemplated commercial
products, there can be no assurance that the Company will be able to obtain
licenses on commercially reasonable terms. If the Company does not obtain
necessary licenses, it could encounter delays in product market introductions
while it attempts to design around such patents, or could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed. Further, there can be no assurance that owners of patents that the
Company does not believe are relevant to the Company's product development and
commercialization will not seek to enforce their patents against the Company.
Such action could result in litigation which would be costly and time consuming.
There can be no assurance that the Company would be successful in such
litigations. The Company is currently unaware of any such threatened action.
Certain of the licenses by which the Company obtained its rights in and to
certain technologies require the Company to diligently commercialize or attempt
to commercialize such technologies. There can be no assurance that the Company
will meet such requirements, and failure to do so for a particular technology
could result in the Company losing its rights to that technology.
Currently, the Company has not sought to register its potential trademarks
and there can be no assurance that the Company will be able to obtain
registration for such trademarks.
-16-
It is the Company's policy to require its employees, consultants, members
of its scientific advisory board, and parties to collaborative agreements to
execute confidentiality agreements upon the commencement of employment or
consulting relationships or a collaboration with the Company. These agreements
provide that all confidential information developed or made known during the
course of relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees, the agreements provide that all inventions resulting from work
performed for the Company, utilizing property of the Company or relating to the
Company's business and conceived or completed by the individual during
employment shall be the exclusive property of the Company to the extent
permitted by applicable law. There can be no assurance, however, that these
agreements will provide meaningful protection of the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information.
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacture, labeling, storage,
record keeping, advertising, promotion, export, and marketing, among other
things, of the Company's proposed products are subject to extensive regulation
by governmental authorities in the United States and other countries. In the
United States, pharmaceutical products are regulated by the FDA under the
Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. At the present time, the Company
believes that its products will be regulated by the FDA as biologics.
The steps required before a novel biologic may be approved for marketing in
the United States generally include (i) preclinical laboratory tests and in vivo
preclinical studies, (ii) the submission to the FDA of an IND for human clinical
testing, which must become effective before human clinical trials may commence,
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product, (iv) the submission to the FDA of a Product License
Application ("PLA") and Establishment License Application ("ELA"), and (v) FDA
review of the PLA and the ELA. The testing and approval process requires
substantial time, effort and financial resources and there can be no assurance
that any approval will be granted on a timely basis, if at all. Following
approval, if granted, the establishment or establishments where the product is
manufactured are subject to inspection by the FDA and must comply with current
good manufacturing practice ("GMP") regulations, enforced by the FDA though its
facilities inspection program. Manufacturers of biologics also may be subject to
state regulation.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product.
Compounds must be produced according to applicable GMP regulations and
preclinical safety tests must be conducted in compliance with FDA regulations
regarding Good Laboratory Practices. The results of the preclinical tests,
together with manufacturing information and
-17-
analytical data, are submitted to the FDA as part of an IND, which must become
effective before human clinical trials may be commenced. The IND will
automatically become effective 30 days after receipt by the FDA, unless the FDA
before that time raises concerns or questions about the conduct of the trials as
outlined in the IND. In such a case, the IND sponsor and the FDA must resolve
any outstanding concerns before clinical trials can proceed. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials.
Clinical trials involve the administration of the investigational product
to healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with
protocols that detail, inter alia, the objectives of the study, the parameters
to be used to monitor safety and the efficacy criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND. Further, each clinical
study must be reviewed and approved by an independent Institutional Review
Board.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is tested for safety (adverse effects), dosage tolerance,
absorption, metabolism, distribution, excretion and pharmacodynamics. Phase II
usually involves studies in a limited patient population to (i) evaluate
preliminarily the efficacy of the drug for specific, targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. Phase III trials are undertaken to further
evaluate clinical efficacy and to test further for safety within an expanded
patient population at geographically dispersed clinical study sites. There can
be no assurance that Phase I, Phase II, or Phase III testing will be completed
successfully within any specific time period, if at all, with respect to any of
the Company's product candidates. Furthermore, the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The results of the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a PLA/ELA requesting approval for the
manufacture, marketing and commercial shipment of the product. The FDA may deny
a PLA/ELA if applicable regulatory criteria are not satisfied, require
additional testing or information, or require postmarketing testing and
surveillance to monitor the safety or efficacy of a product. There can be no
assurance that FDA approval of any PLA/ELA submitted by the Company will be
granted on a timely basis or at all. Moreover, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. Finally, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. Among the conditions for PLA/ELA approval is the
requirement that the prospective manufacturers quality control and manufacturing
procedures conform to GMP regulations, which must be followed at all times in
the manufacture of the approved product. In complying with standards set forth
in these regulations,
-18-
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to ensure full compliance.
Both before and after approval is obtained, a product, its manufacturer,
and the holder or the holders of the PLA/ELA for the product are subject to
comprehensive regulatory oversight. Violations of regulatory requirements at any
stage, including the preclinical and clinical testing process, the review
process, or thereafter (including after approval) may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or PLA/ELA holder.
In addition, later discovery of previously unknown problems may result in
restrictions on a product, manufacturer, or PLA/ELA holder, including withdrawal
of the product from the market. Also, new government requirements may be
established that could delay or prevent regulatory approval of the Company's
products under development.
For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The foreign regulatory
approval process includes all of the risks associated with FDA approval set
forth above.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical and chemical companies, as well as specialized
biotechnology companies, are engaged in activities similar to those of the
Company. Certain of these companies have substantially greater financial and
other resources, larger research and development staffs, and more extensive
marketing and manufacturing organizations than the Company. Many of these
companies have significant experience in preclinical testing, human clinical
trials, product manufacturing, marketing and distribution and other regulatory
approval procedures. In addition, colleges, universities, governmental agencies
and other public and private research organizations conduct research and may
market commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. These institutions also compete with the Company in recruiting and
retaining highly qualified scientific personnel.
The Company competes with large pharmaceutical companies that produce and
market synthetic compounds and with specialized biotechnology firms in the
United States, Europe and elsewhere, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Many biotechnology companies have focused their developmental efforts in the
human therapeutics area, and many major pharmaceutical companies have developed
or acquired internal
-19-
biotechnology capabilities or have made commercial arrangements with other
biotechnology companies. A number of biotechnology and pharmaceutical companies
are developing new products for the treatment of the same diseases being
targeted by the Company; in some instances such products have already entered
clinical trials. Other companies are engaged in research and development based
on complement proteins, T-cell therapeutics, gene therapy and
xenotransplantation.
T-Cell Sciences ("T-Cell Sciences") and Chiron Corporation have both
publicly announced intentions to develop complement inhibitors to treat diseases
related to trauma and inflammation indications and the Company is aware that
SmithKline Beecham PLC, Merck & Co., Inc. and CytoMed Inc. are attempting to
develop similar therapies. T-Cell Sciences has initiated clinical trials for a
proposed complement inhibitor to treat acute respiratory distress syndrome
(ARDS) and myocardial infarction. The Company believes that its potential C5
Inhibitors differ substantially from those of its competitors due to the
Company's compounds' demonstrated ability to intervene in the complement cascade
at what the Company believes to be the optimal point so that the disease-causing
actions of complement proteins generally are inhibited while the normal
disease-preventing functions of complement proteins generally remain intact. The
Company further believes that, under conditions of inflammation, a complement
inhibitor compound which only indirectly addresses the harmful activity of
complement may be bypassed by pathologic mechanisms present in the inflamed
tissue. Each of Bayer, Immunex Corporation, Pharmacia & Upjohn and Rhone-Poulenc
Rorer Inc. sells a product which is used clinically to reduce surgical bleeding
during CPB, but have little effect on other significant inflammatory morbidities
associated with CPB. The Company believes that each of these drugs does not
significantly prevent complement activation and subsequent inflammation that
lead to blood loss during CPB surgery but instead each drug attempts to reduce
blood loss by shifting the normal blood thinning/blood clotting balance in the
blood towards enhanced blood clotting. While Trasylol (Bayer) has been
demonstrated to reduce perioperative blood loss in a subset of high risk
patients, administration of each of these three drugs to patients with heart
disease has been associated with clinical complications of enhanced blood
clotting, including myocardial infarction. The Company is also aware of
announced and ongoing clinical trials of certain companies, including
Autoimmune, Inc., ImmuLogic Pharmaceutical Corporation, Neurocrine Biosciences,
Inc., and Anergen, Inc. employing T-cell specific tolerance technologies and
addressing patients with multiple sclerosis or diabetes mellitus. Baxter
Healthcare Corporation and Sandoz, Inc., in collaboration with Biotransplant
Inc., have publicly announced intentions to commercially develop xenograft
organs and the Company is aware that Diacrin Inc. is also working in this field.
MANUFACTURING, MARKETING, SALES, CLINICAL TESTING AND REGULATORY COMPLIANCE
Alexion manufactures its requirements for preclinical and clinical
development using both internal and contract manufacturing resources. The
Company, with financial assistance from the State of Connecticut, has
established pilot manufacturing
-20-
facilities suitable for the fermentation and purification of certain of its
recombinant compounds for initial clinical studies. The Company's pilot plant
has the capacity to manufacture under GMP specifications. The Company intends to
secure the production of initial clinical supplies of certain other recombinant
products through third party manufacturers. In each case, the Company
anticipates that vial filing, quality assurance and packaging will be contracted
through third parties.
In the longer term, the Company may develop large-scale manufacturing
capabilities for the commercialization of some of its products. The key factors
which will be given consideration when making the determination of which
products will be manufactured internally and which through contractual
arrangements will include the availability and expense of contracting this
activity, control issues and the expertise and level of resources required for
Alexion to manufacture products.
The Company has not invested in the development of commercial
manufacturing, marketing, distribution or sales capabilities. Although the
Company has established a pilot manufacturing facility for the production of
material for clinical trials for certain of its potential products, it has
insufficient capacity to manufacture more than one product candidate at a time
or to manufacture its product candidates for later stage clinical development or
commercialization. If the Company is unable to develop or contract for
additional manufacturing capabilities on acceptable terms, the Company's ability
to conduct human clinical testing will be materially adversely affected,
resulting in delays in the submission of products for regulatory approval and in
the initiation of new development programs, which could have a material adverse
effect on the Company's competitive position and the Company's prospects for
achieving profitability. In addition, as the Company's product development
efforts progress, the Company will need to hire additional personnel skilled in
clinical testing, regulatory compliance, and, if the Company develops products
with commercial potential, marketing and sales. There can be no assurance that
the Company will be able to acquire, or establish third-party relationships to
provide, any or all of these resources or be able to obtain required personnel
and resources to manufacture, or perform testing or engage in marketing,
distribution and sales on its own.
HUMAN RESOURCES
As of October 1, 1996, the Company had 47 full-time employees, of whom 40
were engaged in research, development, and manufacturing, and seven in
administration and finance. Doctorates are held by 16 of the Company's
employees. Each of the Company's employees has signed a confidentiality
agreement.
-21-
ITEM 2. PROPERTIES
The Company's headquarters, research and development facility and pilot
manufacturing facility are located in New Haven, Connecticut, within close
proximity to Yale University. At this facility, the Company leases and occupies
a total of 28,400 square feet of space, which includes approximately 14,900
square feet of research laboratories and 5,200 square feet of space dedicated to
the pilot manufacturing facility. The Company leases its facilities under three
operating leases expiring in June 1998, December 1997, and March 1999,
respectively, each with an option for up to an additional three years. Current
monthly rental on the facilities is approximately $29,000. The Company believes
the laboratory space will be adequate for its existing research and development
activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-22-
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market System
under the symbol ALXN. The following table sets forth the range of high and low
sales prices for the Common Stock on the Nasdaq National Market Sytem for the
periods indicated since February 29, 1996 when the Company's Common Stock
commenced trading.
Fiscal 1996 High Low
- ----------- ---- ---
Third Quarter (February 28 - April 30, 1996) $ 9.50 $8.38
Fourth Quarter (May 1 - July 31, 1996) $ 11.75 $6.00
As of October 21, 1996, the number of stockholders of record of the
Company's Common Stock was approximately 170. The closing sale price of the
Company's Common Stock on October 21, 1996 was $10.00 per share. The Company has
never paid cash dividends and does not anticipate paying any cash dividends in
the foreseeable future.
DIVIDEND POLICY
The Company does not expect to declare or pay any cash or stock dividends
in the foreseeable future, but instead intends to retain all earnings, if any,
to invest in the Company's operations. The payment of future dividends is within
the discretion of the Board of Directors and will depend upon the Company's
future earnings, if any, its capital requirements, financial condition and other
relevant factors.
-23-
ITEM 6. SELECTED FINANCIAL DATA
For the Period
from Inception
--------------------------------------------------------- (January 31,
Statements of For the Fiscal Years Ended 1992) to
Operations Data: --------------------------------------------------------- July 31,
1996 1995 1994 1993 1992
- ---------------- ----------- ----------- ----------- ----------- ------------
Contract research revenues $ 2,640,239 $ 136,091 $ - $ - $ -
----------- ----------- ----------- ---------- ----------
Operating expenses:
Research and development 6,629,157 5,637,431 5,519,035 2,969,327 399,878
General and administrative 1,843,093 1,591,886 1,860,887 1,131,114 263,886
----------- ----------- ----------- ----------- ---------
Total operating expenses 8,472,250 7,229,317 7,379,922 4,100,441 663,764
----------- ----------- ----------- ----------- ---------
Operating loss (5,832,011) (7,093,226) (7,739,922) (4,100,441) (663,764)
Other income (expense), net 397,495 (29,195) 93,770 32,613 -
----------- ----------- ----------- ----------- ---------
Net loss $(5,434,516) $(7,122,421) $(7,286,152) $(4,067,828) $(663,764)
=========== =========== =========== =========== =========
Net loss per common share(1) $(.95) $(1.76) $(1.89) $(1.77) $(.38)
===== ====== ====== ====== =====
Shares used in computing
net loss per common share(1)5,746,697 4,055,966 3,857,044 2,301,179 1,728,093
========= ========= ========= =========
July 31, July 31, July 31, July 31, July 31,
Balance Sheet Data: 1996 1995 1994 1993 1992
- ------------------- -------------- ------------- ------------- ------------- -------------
Cash, cash equivalents,
and marketable securities $18,597,751 $ 5,701,465 $ 4,209,200 $ 6,859,947 $ 41,248
Working capital 17,031,891 3,558,788 3,014,418 6,388,533 (1,055,692)
Total assets 20,453,980 7,927,276 6,983,361 8,334,274 491,340
Deficit accumulated during
the development stage (24,574,681) (19,140,165) (12,017,744) (4,731,592) (663,764)
Stockholders' equity (deficit) 18,284,925 5,119,217 4,699,846 7,224,900 (729,177)
- ------
(1) Computed as described in Note 2 of Notes to Financial Statements.
-24-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since its inception in January 1992, Alexion has devoted substantially all
of its resources to its drug discovery, research and product development
programs. To date, Alexion has not received any revenues from the sale of
products. The Company has been unprofitable since inception, and expects to
incur substantial and increasing operating losses for the next several years due
to expenses associated with product research and development, preclinical and
clinical testing, regulatory activities and manufacturing development and
scale-up. As of July 31, 1996, the Company has incurred a cumulative net loss of
$24.6 million.
The Company's plan is to develop and commercialize on its own those product
candidates for which the clinical trial and marketing requirements can be funded
by the Company. For certain of the Company's C5 Inhibitor and Apogen products
for which greater resources will be required, Alexion's strategy is to form
corporate partnerships with major pharmaceutical companies for product
development and commercialization. While there can be no assurance as to the
terms of future corporate partnerships, if any, for licensed applications, a
corporate partner would likely be expected to bear the substantial cost and much
of the manpower-intensive effort of clinical development, scale-up production,
seeking FDA approval and marketing. Alexion has entered into a strategic
alliance with US Surgical with respect to the Company's UniGraft program, and
intends to seek additional strategic alliances with major pharmaceutical
companies.
The Company recognizes research and development revenues when the
development expenses are incurred and the related work is performed under the
terms of the contracts. Any revenue contingent upon future expenditures by the
Company is deferred and recognized as the expenditures are incurred. Any
revenues contingent upon the achievement of milestones will be recognized when
the milestones are achieved.
RESULTS OF OPERATIONS
Years Ended July 31, 1996, 1995, and 1994
The Company earned contract research revenues of $2.6 million and $136,000
for the fiscal years ended July 31, 1996 and 1995, respectively, with no
comparable revenue in the fiscal year ended July 31, 1994. The increase in
fiscal 1996 was primarily due to revenues from the Company's collaborative
research and development agreement with US Surgical, the Company's two SBIR
grants from the NIH, and funding received from the NIST's ATP. The revenues in
fiscal 1995 resulted from the receipt of funds from two SBIR grants from the
NIH. See Item 1. "Business--Strategic Alliances, Collaborations and Licenses."
-25-
During the fiscal years ended July 31, 1996, 1995 and 1994, the Company
expended $6.6 million, $5.6 million and $5.5 million, respectively, on research
and development activities. Increases in research and development spending are
attributable to expanded preclinical development of the Company's research
programs, manufacturing process development for the Company's C5 Inhibitor
product candidates, and the initiation of clinical trials following
authorization by the FDA of the Company's IND for its lead C5 Inhibitor product
candidate.
General and administrative expenses increased to $1.8 million in fiscal
1996 from $1.6 million in fiscal 1995, and were $1.9 million in fiscal 1994. The
increase in fiscal 1996 over 1995 resulted primarily from increased outside
professional services related to business development, recruiting, patent and
legal activities. The decline in fiscal 1995 as compared to 1994 was due
primarily to a reduction in costs for outside professional services.
Other income, net was $397,000 for fiscal 1996 as compared to other
expense, net of $29,000 for the same period a year ago. In fiscal 1994, other
income, net was $94,000. This fluctuation over the past three years was due
primarily to greater interest income from higher cash balances available for
investment and to a more favorable investment market during fiscal 1996 as
compared to the prior two fiscal years .
As a result of the above factors, the Company incurred net losses of $5.4
million, $7.1 million and $7.3 million for the fiscal years ended July 31, 1996,
1995, and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and capital
expenditures primarily through its initial public offering and private
placements of equity securities resulting in aggregate approximately $41.5
million of net proceeds. The Company has financed the purchase of certain
equipment through $1.2 million of secured notes payable to a financing
institution and $378,000 of capital lease obligations. The Company has also
received $3.0 million in research and development support under its
collaboration with US Surgical and has received $582,000 from its SBIR grants
from the NIH and $246,000 under the ATP from NIST.
The proceeds of the Company's initial public offering, private placements,
notes payable and capital leases and the cash generated from the corporate
collaboration and SBIR and ATP grants have been used to fund operating
activities of approximately $20.8 million and investments of approximately $2.2
million in equipment and approximately $952,000 in licensed technology rights
and patents through July 31, 1996. During the fiscal year ended July 31, 1996,
the Company's capital expenditures totalled $332,000, primarily for the
acquisition of laboratory equipment. As of July 31, 1996, the Company had
working capital of approximately $17.0 million and total cash,
-26-
cash equivalents, and marketable securities amounted to approximately $18.6
million.
The Company leases its administrative and research and development
facilities under three operating leases expiring in June 1998, December 1997 and
March 1999, respectively, each with an option for up to an additional three
years.
The Company is obligated to make payments pursuant to certain of its
licensing and research and development agreements. The Company is scheduled to
pay (assuming non-termination of these agreements) $453,000, $228,000 and
$228,000 pursuant to its licensing and research and development agreements
during the fiscal years ending July 31, 1997, 1998 and 1999, respectively. See
Item 1. "Business--Strategic Alliances, Collaborations and Licenses."
The Company anticipates that its existing available capital resources and
interest earned on available cash and marketable securities should be sufficient
to fund its operating expenses and capital requirements as currently planned at
least through calendar year 1997. The Company's future capital requirements will
depend on many factors, the progress of the Company's research and development
programs, progress in clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in obtaining and enforcing patents and
any necessary licenses, the ability of the Company to establish development and
commercialization relationships, and the costs of manufacturing scale-up. See
Item 1. "Business--Alexion's Drug Development Strategy."
The Company expects to incur substantial additional costs, including costs
associated with research, preclinical and clinical testing, manufacturing
process development, and additional capital expenditures associated with
facility expansion and manufacturing requirements in order to commercialize its
products currently under development. The Company will need to raise substantial
additional funds through additional financings including public or private
equity offerings and collaborative research and development arrangements with
corporate partners. There can be no assurance that funds will be available on
terms acceptable to the Company, if at all, or that discussions with potential
collaborative partners will result in any agreements. The unavailability of
additional financing could require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise undertake itself, any of which could have a material adverse effect on
the Company.
As of July 31, 1996, the Company had approximately $23.0 million and
$1,190,000 of net operating loss and tax credit carryforwards, respectively,
which expire at various dates between fiscal 2008 and 2011. The Tax Reform Act
of 1986 (the "Tax Act") contains certain provisions that may limit the Company's
ability to utilize net operating loss and tax credit carryforwards in any given
year if certain events occur, including cumulative changes in ownership
interests in excess of 50% over a three-year period. There can be no assurance
that ownership changes in future periods will not
-27-
significantly limit the Company's use of its existing net operating loss and tax
credit carryforwards.
-28-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINACIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND KEY EMPLOYEES
Name Age Position
- ---- --- --------
John H. Fried, Ph.D. 67 Chairman of the Board of Directors
Leonard Bell, M.D. 38 President, Chief Executive Officer, Secretary,
Treasurer, Director
David W. Keiser 45 Executive Vice President, Chief
Operating Officer
Timothy F. Howe 38 Director
Max Link, Ph.D. 56 Director
Joseph A. Madri, Ph.D., M.D. 50 Chairman of the Scientific Advisory Board, Director
Leonard Marks, Jr., Ph.D. 75 Director
Eileen M. More 50 Director
Stephen P. Squinto, Ph.D. 40 Vice President of Research, Molecular Sciences
Louis A. Matis, M.D. 46 Vice President of Research, Immunobiology
Bernadette L. Alford, Ph.D. 47 Vice President of Regulatory Affairs & Project Management
James A. Wilkins, Ph.D. 44 Senior Director of Process Development
Barry P. Luke 38 Senior Director of Finance and Administration
John H. Fried, Ph.D. has been the Chairman of the Board of Directors of the
Company since April 1992. Since 1992, Dr. Fried has been President of Fried &
Co., Inc., a health technology venture firm. Dr. Fried was a director of Syntex
Corp. ("Syntex"), a life sciences and health care company, from 1982 to 1994 and
he served as Vice Chairman of Syntex from 1985 to January 1993 and President of
the Syntex Research Division from 1976 to 1992. Dr. Fried has originated more
than 200 U.S. Patents and has authored more than 80 scientific publications. Dr.
Fried is also a director of Corvas International Incorporated, a development
stage company principally engaged in research in the field of cardiovascular
therapeutics. Dr. Fried received his B.S. in Chemistry and Ph.D. in Organic
Chemistry from Cornell University.
Leonard Bell, M.D., is the principal founder of the Company, and has been a
Director of the Company since February 1992; the Company's President and Chief
Executive Officer, Secretary and Treasurer since January 1992. From 1991 to
1992, Dr. Bell was an Assistant Professor of Medicine and Pathology and
co-Director of the Program in Vascular Biology at the Yale University School of
Medicine. From 1990 to 1992, Dr. Bell was an attending physician at the Yale-New
Haven Hospital and an Assistant Professor in the Department of Internal Medicine
at the Yale University School of Medicine. Dr. Bell was the recipient of the
Physician Scientist Award from the National Institutes of Health and
Grant-in-Aid from the American Heart
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Association as well as various honors and awards from academic and professional
organizations. His work has resulted in more than 20 scientific publications and
three patent applications. Dr. Bell also serves as a Director of the
Biotechnology Research and Development Corporation. Dr. Bell received his A.B.
from Brown University and M.D. from Yale University School of Medicine. Dr. Bell
is currently an Adjunct Assistant Professor of Medicine and Pathology at Yale
University School of Medicine.
David W. Keiser has been Executive Vice-President and Chief Operating
Officer of the Company since July 1992. From 1990 to 1992, Mr. Keiser was Senior
Director of Asia Pacific Operations for G.D. Searle & Company Limited
("Searle"), a manufacturer of pharmaceutical products. From 1986 to 1990, Mr.
Keiser was successively Licensing Manager, Director of Product Licensing and
Senior Director of Product Licensing for Searle. From 1984 to 1985, Mr. Keiser
was New Business Opportunities Manager for Mundipharma AG, a manufacturer of
pharmaceutical products, in Basel, Switzerland where he headed pharmaceutical
licensing and business development activities in Europe and the Far East. From
1978 to 1983, he was Area Manager for F. Hoffmann La Roche Ltd., a manufacturer
of pharmaceutical products, in Basel, Switzerland. Mr. Keiser received his B.A.
from Gettysburg College.
Timothy F. Howe has been a Director of the Company since April 1995. Mr.
Howe is a principal of Collinson Howe Venture Partners, Inc. ("CHVP") where he
has been a Vice President since 1990. CHVP is a venture capital management firm
specializing in life sciences investments and as a result of the stock ownership
of certain funds advised by it, CHVP is a principal stockholder of the Company.
From 1985 to 1990, Mr. Howe was employed by Schroders Incorporated specializing
in venture capital investing. Mr. Howe received his B.A. from Columbia College
and M.B.A. from Columbia Graduate School of Business.
Max Link, Ph.D. has been a Director of the Company since April 1992. From
May 1993 to June 1994, Dr. Link was Chief Executive Officer of Corange U.S.
Holdings, Inc., the parent company of Boehringer Mannheim Therapeutics,
Boehringer Mannheim Diagnostics and DePuy Orthopedics. From 1992 to 1993, Dr.
Link was Chairman of the Board of Sandoz Pharma, Ltd. ("Sandoz"), a manufacturer
of pharmaceutical products. From 1990 to 1992, Dr. Link was the Chief Executive
Officer of Sandoz and from 1987 to 1989, he was head of the Pharmaceutical
Division and a member of the Executive Board of Sandoz, Ltd., Basel. Prior to
1987, Dr. Link served in various capacities with the United States operations of
Sandoz, including as President and Chief Executive Officer. Dr. Link is also a
director of Protein Design Labs, Inc. and Procept, Inc., each a publicly held
pharmaceutical company, and Human Genome Sciences Inc., a gene discovery
company.
Joseph A. Madri, Ph.D., M.D. is a founder of the Company and has been
Chairman of the Company's Scientific Advisory Board since March 1992 and a
Director of the Company since February 1992. Since 1980, Dr. Madri has been on
the faculty of the Yale University School of Medicine and is currently a
Professor of Pathology and Biology. Dr. Madri serves on the editorial boards of
numerous scientific journals and
-31-
he is the author of over 150 scientific publications. Dr. Madri works in the
areas of regulation of angiogenesis, vascular cell-matrix interactions,
cell-cell interactions, lymphocyte-endothelial cell interactions and endothelial
and smooth muscle cell biology. Dr. Madri received his B.S. and M.S. in Biology
from St. John's University and M.D. and Ph.D. in Biological Chemistry from
Indiana University.
Leonard Marks, Jr., Ph.D. has been a Director of the Company since April
1992. Since 1985 Dr. Marks has served as an independent corporate director and
management consultant. Dr. Marks currently serves as a director of Airlease
Management Services, an aircraft leasing company (a subsidiary of Ford Motor
Company) and Northern Trust Bank of Arizona, a commercial and trust bank
subsidiary of Northern Trust of Chicago. Prior to 1985, Dr. Marks held various
positions in academia and in the corporate sector including Executive Vice
President, Castle & Cooke, Inc. from 1972 to 1985. Dr. Marks received his B.A.
in Economics from Drew University and an M.B.A. and Doctorate in Business
Administration from Harvard University.
Eileen M. More has been a Director of the Company since December 1993. Ms.
More has been associated since 1978 with Oak Investment Partners ("Oak") and has
been a General Partner of Oak since 1980. Oak is a venture capital firm and a
principal stockholder of the Company. Ms. More is Chairman Emeritus of the
Connecticut Venture Group. Ms. More is currently a director of several private
high technology and biotechnology firms including Pharmacopeia, Inc., Trophix
Pharmaceuticals, Inc., Instream Corporation, Teloquent Communication
Corporation, and Coral Therapeutics, Inc. Ms. More studied mathematics at the
University of Bridgeport and is a Chartered Financial Analyst.
Stephen P. Squinto, Ph.D. is a founder of the Company and has held the
positions of Vice President of Research, Molecular Sciences since August 1994,
Senior Director of Molecular Sciences from July 1993 to July 1994 and Director
of Molecular Development from April 1992 to July 1993. From 1989 to 1992, Dr.
Squinto held various positions at Regeneron Pharmaceuticals, Inc., most recently
serving as Senior Scientist and Assistant Head of the Discovery Group. From 1986
to 1989, Dr. Squinto was an Assistant Professor of Biochemistry and Molecular
Biology at Louisiana State University Medical Center. Dr. Squinto's work has led
to over 40 scientific papers in the fields of gene regulation, growth factor
biology and gene transfer. Dr. Squinto's work is primarily in the fields of
regulation of eukaryotic gene expression, mammalian gene expression systems and
growth receptor and signal transduction biology. Dr. Squinto received his B.A.
in Chemistry and Ph.D. in Biochemistry and Biophysics from Loyola University of
Chicago.
Louis A. Matis, M.D. has been the Vice President of Research, Immunobiology
of the Company since August 1994. From January 1993 to July 1994, Dr. Matis
served as the Director of the Company's Program in Immunobiology. Prior to
joining the Company, from 1977 to 1992, Dr. Matis held various appointments at
the NIH and the FDA. From 1990 to 1992, Dr. Matis was a Senior Investigator in
the Laboratory of Immunoregulation at the National Cancer Institute and from
1987 to 1990 he was a
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Senior Staff Fellow in the Molecular Immunology Laboratory at the Center for
Biologics Evaluation and Research associated with the FDA. Dr. Matis is the
author of more than 75 scientific papers in the fields of T-cell biology. Dr.
Matis has received numerous awards including the NIH Award of Merit. Dr. Matis
received his B.A. from Amherst College and M.D. from the University of
Pennsylvania Medical School.
Bernadette L. Alford, Ph.D. has been the Vice President of Regulatory
Affairs and Project Management since joining the Company in September 1994. From
1989 to July 1994, Dr. Alford was a corporate officer and Vice President of
Regulatory and Quality Affairs at Repligen Corporation ("Repligen"), a publicly
held biotechnology company, where she was responsible for the filing of all INDs
with the FDA. From 1987 to 1989, Dr. Alford was Director of Quality Assurance
and Regulatory Affairs at Repligen. From 1978 to 1987, Dr. Alford held various
scientific and management positions at Collaborative Research Inc. Dr. Alford
received a B.S. in Biology from Marywood College and an M.S. in Biology and
Ph.D. in Molecular Biology from Texas University.
James A. Wilkins, Ph.D. has been Senior Director of Process Development of
the Company since August 1995 and prior thereto was Director of Process
Development from September 1993. From 1989 to 1993, Dr. Wilkins was Group Leader
of the Protein Chemistry Department at Otsuka America Pharmaceutical, Inc. From
1987 to 1989, Dr. Wilkins was a Scientist in Recovery Process Development at
Genentech, Inc. and from 1982 to 1987, he was an Associate Research Scientist in
the Thomas C. Jenkins Department of Biophysics at Johns Hopkins University. He
is the author of more than 25 presentations and scientific articles in the
fields of protein refolding and protein biochemistry. Dr. Wilkins received a
B.A. in Biology from University of Texas and a Ph.D. in Biochemistry from
University of Tennessee.
Barry P. Luke has been Senior Director of Finance and Administration since
August 1995 and prior thereto was Director of Finance and Administration from
May 1993. From 1989 to 1993, Mr. Luke was Chief Financial Officer, Secretary and
Vice President--Finance and Administration at Comtex Scientific Corporation, a
publicly held distributor of electronic news and business information. From 1985
to 1989, he was Controller and Treasurer of Softstrip, Inc., a manufacturer of
computer peripherals and software. From 1982 to 1985, Mr. Luke was a member of
the Corporate Audit Staff at the General Electric Company. Mr. Luke received a
B.A. in Economics from Yale University and an M.B.A. in management and marketing
from the University of Connecticut.
The executive officers are appointed and serve at the pleasure of the Board
of Directors.
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the captions "Compensation of Executive Officers and
Directors" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 1,
1996 (except as otherwise noted in the footnotes) regarding the beneficial
ownership (as defined by the Securities and Exchange Commission (the "SEC")) of
the Company's Common Stock of: (i) each person known by the Company to own
beneficially more than five percent of the Company's outstanding Common Stock;
(ii) each director and each named executive officer; and (iii) all directors and
named executive officers as a group.
Number of Percentage of
Shares Outstanding
Name and Address Beneficially Shares of
of Beneficial Owner(1) Owned(2) Common Stock
---------------------- ------------ -------------
Collinson Howe Venture Partners
1055 Washington Boulevard, 5th Floor
Stamford, Connecticut 06901(3).......................... 991,897 13.5%
Biotechnology Investment Group, L.L.C.
c/o Collinson Howe Venture Partners
1055 Washington Boulevard, 5th Floor
Stamford, Connecticut 06901(4)(5)........................ 697,575 9.5%
United States Surgical Corporation
150 Glover Avenue
Norwalk, Connecticut 06856............................... 657,142 9.0%
Oak Investment Partners
c/o Oak Investment Partners V
One Gorham Island
Westport, Connecticut 06880(6)........................... 495,884 6.7%
INVESCO Global Health Sciences Fund
c/o INVESCO Trust Company
attn: Health Care Group
7800 E. Union Avenue, Ste. 800
Denver, Colorado 80237(7)................................. 366,776 5.0%
Timothy F. Howe(8)............................................. 993,597 13.6%
Eileen M. More(9).............................................. 517,584 7.0%
Leonard Bell, M.D.(10)......................................... 271,100 3.6%
John H. Fried, Ph.D.(11)....................................... 85,236 1.2%
Stephen P. Squinto, Ph.D(12)................................... 85,450 1.2%
David W. Keiser(13)............................................ 59,800 *
Joseph Madri, Ph.D., M.D(14)................................... 50,700 *
Louis A. Matis, M.D.(15)....................................... 57,400 *
Max Link, Ph.D(16)............................................. 19,723 *
Leonard Marks, Jr., Ph.D(17)................................... 10,200 *
Bernadette L. Alford, Ph.D.(18)................................ 8,850 *
Directors and Executive Officers as a group (11 persons)(19)... 2,158,840 28.1%
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- ----------
* Less than one percent
(1) Unless otherwise indicated, the address of all persons is 25 Science Park,
Suite 360, New Haven, CT 06511.
(2) To the Company's knowledge, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes in this table.
(3) Collinson Howe Venture Partners, Inc. ("CHVP") is a venture capital
investment management firm which is the managing member of Biotechnology
Investment Group, L.L.C. ("Biotechnology Group"), and is the investment
advisor to Schroders, Inc., Schroder Ventures Limited Partnership
("Schroder Partnership") and Schroder Ventures U.S. Trust ("Schroder
Trust"). As such, CHVP shares beneficial ownership of the shares listed
above which include (i) 697,575 shares, 133,880 shares, 122,105 and 30,525
shares of Common Stock owned by Biotechnology Group, Schroders, Inc.,
Schroder Partnership and Schroder Trust, respectively, and (ii) 7,812
shares issuable upon the exercise of warrants owned by Schroders, Inc.
Timothy Howe, a director of the Company, is the Vice President and a
stockholder of CHVP. As such he has shared investment and voting power over
the shares beneficially owned by CHVP.
(4) Biotechnology Group is a limited liability company which invests in and
otherwise deals with securities of biotechnology and other companies. The
members of Biotechnology Group are (i) the managing member, CHVP, an
investment management firm of which Jeffrey J. Collinson is President, sole
director and majority stockholder and Timothy F. Howe, a director of the
Company, is a Vice President and a stockholder, (ii) The Edward Blech Trust
("EBT"), a trust for the benefit of the minor child of David Blech, a
principal stockholder of the Company, and (iii) Wilmington Trust Company
("WTC"), as voting trustee under a voting trust agreement (the "Voting
Trust Agreement"), among WTC, Biotechnology Group and BIO Holdings L.L.C.
("Holdings"). The managing member of Biotechnology Group is CHVP. Each of
Citibank, N.A. ("Citibank") and Holdings has the right pursuant to the
Voting Trust Agreement to direct the actions of WTC as a member of
Biotechnology Group. WTC, as the member holding a majority interest in
Holdings, has the right to direct the actions of Holdings under the Voting
Trust Agreement. Citibank, pursuant to a separate voting trust agreement
among WTC, David Blech and Holdings, has the right to direct the actions of
WTC as a member of Holdings with respect to the rights of Holdings under
the Voting Trust Agreement.
(5) By virtue of their status as members of the Biotechnology Group, each of
CHVP and EBT may be deemed the beneficial owner of all shares held of
record by Biotechnology Group (the "Biotechnology Group Shares"). By virtue
of his status as the majority owner and controlling person of CHVP, Jeffrey
J. Collinson may also be deemed the beneficial owner of the Biotechnology
Group Shares. Each of CHVP, EBT and Jeffrey J. Collinson disclaims
beneficial ownership of any Biotechnology Group Shares except to the
extent, if any, of such person's actual pecuniary interest therein.
(6) Includes 408,571 shares owned by Oak Investment V Partners and 9,189 shares
owned by Oak Investment V Affiliates, two affiliated limited partnerships
(collectively, "Oak Investments"). In addition, Oak Investments' beneficial
ownership includes 78,124 shares which may be acquired upon the exercise of
warrants.
(7) Includes 31,250 shares which may be acquired upon the exercise of warrants.
(8) Consists of shares beneficially owned by CHVP (See footnote 3 above).
Includes 1,700 shares which may be acquired upon the exercise of options
within 60 days of October 1, 1996. Excludes 5,100 shares obtainable through
the exercise of options granted to Mr. Howe which are not exercisable
within 60 days of October 1, 1996. Mr. Howe disclaims beneficial ownership
of shares held or beneficially owned by funds managed by CHVP.
(9) Includes 21,700 shares of Common Stock which may be acquired upon the
exercise of options granted to Eileen More and 495,844 shares owned by Oak
Investments. Excludes 5,100 shares obtainable through the exercise of
options granted to Ms. More which are not exercisable within 60 days of
October 1, 1996. Ms. More is a General Partner at Oak Investments.
(10) Includes 112,500 shares of Common Stock that may be acquired upon the
exercise of options within 60 days of October 1, 1996 and 300 shares, in
aggregate, held in the names of Dr. Bell's three minor children. Excludes
222,500 shares obtainable through the exercise of options which are not
exercisable within 60 days of October 1, 1996 and 90,000 shares held in
trust for Dr. Bell's children of which Dr. Bell
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disclaims beneficial ownership. Dr. Bell disclaims beneficial ownership of
the shares held in the name of his minor children.
(11) Includes 4,686 shares that may be acquired upon the exercise of warrants
and 9,200 shares that may be acquired on the exercise of options that are
exercisable within 60 days of October 1, 1996. Excludes 5,100 shares
obtainable through the exercise of options which are not exercisable within
60 days of October 1, 1996.
(12) Includes 28,750 shares of Common Stock which may be acquired upon the
exercise of options granted to Dr. Squinto within 60 days of October 1,
1996 and 4,200 shares, in aggregate, held in the names of Dr. Squinto's two
minor children of which 4,000 shares are in two trusts managed by Dr.
Squinto's wife. Excludes 88,750 shares obtainable through the exercise of
options granted to Dr. Squinto which are not exercisable within 60 days of
October 1, 1996. Dr. Squinto disclaims beneficial ownership of the shares
held in the name of his minor children and the foregoing trusts.
(13) Includes 17,500 shares which may be acquired upon the exercise of options
within 60 days of October 1, 1996 and 300 shares, in aggregate, held in the
names of Mr. Keiser's three minor children. Excludes 107,500 shares
obtainable through the exercise of options granted to Mr. Keiser, which are
not exercisable within 60 days of October 1, 1996. Mr. Keiser disclaims
beneficial ownership of the shares held in the name of his minor children.
(14) Includes 5,700 shares that may be acquired upon the exercise of options
within 60 days of October 1, 1996. Excludes 6,100 shares obtainable through
the exercise of options which are not exercisable within 60 days of October
1, 1996.
(15) Includes 38,750 shares of Common Stock which may be acquired upon the
exercise of options granted to Dr. Matis within 60 days of October 1, 1996
and 150 shares, in aggregate, held in the names of Dr. Matis' three minor
children. Excludes 88,750 shares obtainable through the exercise of
options, granted to Dr. Matis, which are not exercisable within 60 days of
October 1, 1996. Dr. Matis disclaims beneficial ownership of the shares
held in the name of his minor children.
(16) Excludes 5,100 shares obtainable through the exercise of options, granted
to Dr. Link, which are not exercisable within 60 days of October 1, 1996.
(17) Includes 9,200 shares which may be acquired upon the exercise of options
within 60 days of October 1, 1996. Excludes 5,100 shares obtainable through
the exercise of options granted to Dr. Marks, which are not exercisable
within 60 days of October 1, 1996.
(18) Consists of 8,750 shares of Common Stock which may be acquired upon the
exercise of options granted to Dr. Alford within 60 days of October 1, 1996
and 100 shares held in the name of Dr. Alford's minor child. Excludes
71,250 shares obtainable through the exercise of options, granted to Dr.
Alford, which are not exercisable within 60 days of October 1, 1996.
(19) Consists of shares beneficially owned by Drs. Alford, Bell, Fried, Link,
Madri, Marks, Matis and Squinto and Mr. Keiser, Mr. Howe and Ms. More.
Includes 90,622 shares of Common Stock which may be acquired upon the
exercise of warrants within 60 days of October 1, 1996 and 253,750 shares
of Common Stock which may be acquired upon the exercise of options within
60 days of October 1, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1995, the Company entered into a series of agreements with US
Surgical relating to a collaboration for the development of non-human UniGraft
organ products designed for transplantation into humans. In furtherance of the
joint collaboration, US Surgical also purchased $4.0 million of the Company's
Common Stock, at a price of $8.75 per share and agreed to fund up to $7.5
million for the completion of preclinical research and development of the
UniGraft program, a portion of which is dependent on the achievement of
development milestones. US Surgical, a principal stockholder of the Company,
purchased approximately ten percent of the shares of Common Stock offered at the
Company's initial public offering. US Surgical beneficially owns an aggregate of
657,142 shares of Common Stock or 9.0% of the outstanding shares. Through
October 1, 1996, the
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Company has received approximately $3.0 million in research and development
support under its collaboration with US Surgical.
Between December 1994 and March 1995, the Company consummated the sale of
an aggregate of 1,986,409 shares of Series A Preferred Stock for an aggregate
consideration of $3,774,177. Each two and one-half shares of Series A Preferred
Stock were converted into one share of Common Stock. Certain of the Company's
principal stockholders, directors and relatives of directors purchased shares of
Series A Preferred Stock on the same terms as all of the other purchasers of
Series A Preferred Stock.
In June and October 1992, the Company entered into certain patent licensing
agreements with Oklahoma Medical Research Foundation ("OMRF") and Yale
University ("Yale"). The agreements provide that the Company agreed to pay such
institutions royalties based on sales of products incorporating technology
licensed thereunder and also license initiation fees, including annual minimum
royalties that increase in amount based on the status of product development and
the passage of time. Under policies of OMRF and Yale, the individual inventors
of patents are entitled to receive a percentage of the royalties and other
license fees received by the licensing institution. Certain founders of and
scientific advisors to the Company are inventors under such patent and patent
applications (including Drs. Bell and Madri, directors of the Company, and Dr.
Squinto, the Vice President of Research, Molecular Sciences of the Company, with
respect to patent applications licensed from Yale) and, therefore, entitled to
receive a portion of such royalties and other fees payable by the Company.
In June 1992, the Company and OMRF entered into a research agreement with
respect to the development of complement inhibitors, pursuant to which Drs.
Peter Sims and Theresa Wiedmer, scientific advisors to the Company, serve as
principal investigators. Per the research agreement, the Company has paid an
aggregate of $1,000,000 over a four-year period through October 1, 1996. There
can be no assurance that the research agreement will result in discoveries
useful to the Company. As the principal investigators under the sponsored
research programs under the research agreement, Drs. Sims and Wiedmer will
directly benefit from the payments. Dr. Sims is currently the Associate Director
for Research of The Blood Center of Southeastern Wisconsin and the research
operations of Dr. Sims and Dr. Wiedmer are conducted at The Blood Center. OMRF
has assigned to The Blood Center, and The Blood Center has accepted, all rights,
responsibilities and obligations of OMRF under the research and development
agreement. Drs. Sims and Wiedmer are married to each other.
-37-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements requried by this item are submitted in a separate
section beginning on page F-1 of this report.
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements or the notes thereto.
(3) Exhibits with each management contract or compensatory plan or arrangement
required to be identified. See paragraph (c) below.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of the fiscal year ended July 31, 1996.
(c) Exhibits
3.1 Certificate of Incorporation, as amended.*
3.2 Bylaws.*
4.1 Specimen Common Stock Certificate.*
4.2 Form of Representative's Warrant Agreement including Form of Warrant.*
10.1 Employment Agreement, dated April 1992, between the Company and Dr.
Leonard Bell, as amended.*
10.2 Employment Agreement, dated June 1992, between the Company and David
Keiser, as amended.*
10.3 Employment Agreement, dated March 1992, between the Company and Dr.
Stephen P. Squinto, as amended.*
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10.4 Employment Agreement, dated September 1992, between the Company and Dr.
Louis A. Matis, as amended.*
10.5 Employment Agreement, dated July 1993, between the Company and Dr.
James A. Wilkins, as amended.*
10.6 Employment Agreement, dated July 1994, between the Company and Dr.
Bernadette Alford, as amended.*
10.7 Administrative Facility Lease, dated August 23, 1995, between the
Company and Science Park Development Corporation.*
10.8 Research and Development Facility Lease, dated August 23, 1995, between
the Company and Science Park Development Corporation.*
10.9 Option Agreement, dated April 1, 1992 between the Company and Dr.
Leonard Bell.*
10.10 Company's 1992 Stock Option Plan, as amended.*
10.11 Company's 1992 Outside Directors Stock Option Plan, as amended.*
10.12 Registration Agreement, dated December 4, 1992, by the Company for the
benefit of certain individuals listed on schedules thereto, as
amended.*
10.13 Amendment to Registration Agreement, dated July 31, 1995, between the
Company and United States Surgical Corporation.*
10.14 Agreement, dated June 15, 1993, by the Company for the benefit of
certain individuals listed on schedules thereto, as amended.*
10.15 Form of Investor Rights Agreement, dated December 23, 1994, between the
Company and the purchasers of the Company's Series A Preferred Stock,
as amended.*
10.16 Stock Purchase Agreement, dated July 31, 1995, between the Company and
United States Surgical Corporation.*
10.17 Form of Warrant to purchase shares of the Company's Common Stock issued
pursuant to certain of the Company's private placements.*
10.18 Form of Warrant to purchase shares of the Company's Common Stock issued
to the Placement Agent of certain of the Company's private placements.*
10.19 Form of Warrant to purchase shares of the Company's Common Stock issued
to certain warrantholders of the Company in connection with a Warrant
Exchange.*
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10.20 License Agreement dated as of May 27, 1992 between the Company and Yale
University, as amended September 23, 1992.*+
10.21 Exclusive License Agreement dated as of June 19, 1992 among the
Company, Yale University and Oklahoma Medical Research Foundation.**
10.22 Research & Development Agreement dated as of June 19, 1992 between the
Company and Oklahoma Medical Research Foundation.*+
10.23 License Agreement dated as of September 30, 1992 between the Company
and Yale University, as amended July 2, 1993.*+
10.24 License Agreement dated as of August 1, 1993 between the Company and
Biotechnology Research and Development Corporation ("BRDC"), as amended
as of July 1, 1995.*+
10.25 Cooperative Research and Development Agreement dated December 10, 1993
between the Company and the National Institutes of Health.*+
10.26 License Agreement dated January 25, 1994 between the Company and The
Austin Research Institute.*+
10.27 Exclusive Patent License Agreement dated April 21, 1994 between the
Company and the National Institutes of Health.*+
10.28 License Agreement dated July 22, 1994 between the Company and The
Austin Research Institute.*+
10.29 License Agreement dated as of January 10, 1995 between the Company and
Yale University.*+
10.30 Joint Development Agreement dated as of July 31, 1995 between the
Company and United States Surgical Corporation.*+
10.31 Advanced Technology Program ("ATP"), Cooperative Agreement 70NANB5H,
National Institute of Standards and Technology, entitled "Universal
Donor Organs for Transplantation," dated September 15, 1995.*+
10.32 U.S. Department of Health and Human Services, National Heart, Lung and
Book Institute, Small Business Research Program, Phase II Grant
Application, entitled "Role of Complement Activation in Cardiopulmonary
Bypass," dated December 14, 1994; and Notice of Grant Award dated
September 21, 1995.*+
10.33 Research Subcontract Agreement dated as of October 1, 1995 between the
Company and Tufts University.*+
-40-
10.34 Agreement to be Bound by Shareholders Agreement dated as of August 1,
1993 between the Company and BRDC.*
10.35 Agreement to be Bound by Master Agreement dated as of August 1, 1993
between the Company and BRDC.*
10.36 Research and Development Facility Lease, dated April 1, 1996, between
the Company and Science Park Development Corporation.
10.37 License Agreement dated March 27, 1996 between the Company and Medical
Research Council.++
10.38 License Agreement dated May 8, 1996 between the Company and Enzon,
Inc.++
- ------
* Incorporated by reference to the Company's Registration Statement on
Form S-1, (Reg. No. 333-00202).
+ Confidential treatment was granted for portions of such document.
++ A request for confidential treatment has been made for portions of such
document, Confidential Portions, have been omitted and filed separately
with the Commission as required by Rule 24b-2.
(b) Financial Statement Schedules
-41-
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.
ALEXION PHARMACEUTICALS, INC.
/S/ LEONARD BELL, M.D.
-----------------------------------------
By: LEONARD BELL, M.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER,
SECRETARY AND TREASURER
/S/ DAVID W. KEISER
-----------------------------------------
By: DAVID W. KEISER
EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER
Pursuant to the requirements of the Securities 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/ LEONARD BELL, M.D. LEONARD BELL, M.D. October 28, 1996
- ----------------------- President, Chief Executive Officer, Secretary
and Treasurer (principal executive officer)
/S/ DAVID W. KEISER DAVID W. KEISER October 28, 1996
- ----------------------- Executive Vice President and Chief Operating
Officer (principal financial and accounting
officer)
/S/ JOHN H. FRIED JOHN H. FRIED, PH.D. October 28, 1996
- ----------------------- Chairman of the Board of Directors
/S/ TIMOTHY F. HOWE TIMOTHY F. HOWE October 28, 1996
- ----------------------- Director
/S/ MAX LINK MAX LINK, PH.D. October 28, 1996
- ----------------------- Director
/S/ JOSEPH A. MADRI JOSEPH A. MADRI, PH.D., M.D. October 28, 1996
- ----------------------- Director
/S/ LEONARD MARKS, JR. LEONARD MARKS, JR., PH.D. October 28, 1996
- ----------------------- Director
/S/ EILEEN M. MORE EILEEN M. MORE October 28, 1996
- ----------------------- Director
-42-
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Balance Sheets as of July 31, 1995 and 1996 F-3
Statements of Operations for the Years Ended July 31, 1994, 1995, 1996, and for
the Period from Inception (January 28, 1992) Through July 31, 1996 F-4
Statements of Stockholders' Equity for the Period from
Inception (January 28, 1992) Through July 31, 1996 F-5
Statements of Cash Flows for the Years Ended July 31, 1994, 1995, 1996, and for
the Period from Inception (January 28, 1992) Through July 31, 1996 F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Alexion Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Alexion Pharmaceuticals, Inc.
(a Delaware corporation in the development stage) as of July 31, 1995 and 1996,
and the related statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended July 31, 1996, and for the
period from inception (January 28, 1992) through July 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alexion Pharmaceuticals, Inc.
as of July 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended July 31, 1996, and for the
period from inception (January 28, 1992) through July 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
August 30, 1996
F-2
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
BALANCE SHEETS
July 31,
------------------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,079,212 $ 9,491,217
Marketable securities 622,253 9,106,534
Prepaid expenses 172,462 466,731
------------ ------------
Total current assets 5,873,927 19,064,482
------------ ------------
EQUIPMENT, net 970,938 592,271
------------ ------------
OTHER ASSETS:
Licensed technology rights, net 418,363 330,365
Patent application costs, net 198,246 194,004
Organization costs, net 17,986 5,280
Security deposits and other assets 447,816 267,578
------------ ------------
1,082,411 797,227
------------ ------------
Total assets $ 7,927,276 $ 20,453,980
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 316,978 $ 322,508
Current obligations under capital leases 103,447 28,593
Accounts payable 318,517 280,913
Accrued expenses 576,197 400,577
Deferred revenue 1,000,000 1,000,000
------------ ------------
Total current liabilities 2,315,139 2,032,591
------------ ------------
NOTES PAYABLE, less current portion
included above 456,127 128,264
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion included above 36,793 8,200
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 9 and 11)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock
$.0001 par value; 5,000,000 shares
authorized; 1,986,409 shares
issued and outstanding at July 31, 1995 199 -
Common stock $.0001 par value; 25,000,000
shares authorized; 3,996,913 and 7,334,909
issued at July 31, 1995 and 1996, respectively 400 733
Additional paid-in capital 24,258,885 42,858,975
Deficit accumulated during the
development stage (19,140,165) (24,574,681)
Treasury stock, at cost, 11,875 shares (102) (102)
------------ ------------
Total stockholders' equity 5,119,217 18,284,925
------------ ------------
Total liabilities and
stockholders' equity $ 7,927,276 $ 20,453,980
============ ============
The accompanying notes are an integral
part of these financial statements.
F-3
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period
For the Years Ended July 31, From Inception
-------------------------------------------------------- (January 28, 1992)
1994 1995 1996 Through July 31, 1996
---- ---- ---- ---------------------
CONTRACT RESEARCH REVENUES $ - $ 136,091 $ 2,640,239 $ 2,776,330
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Research and development 5,519,035 5,637,431 6,629,157 21,154,828
General and administrative 1,860,887 1,591,886 1,843,093 6,690,866
----------- ----------- ----------- ------------
Total operating
expenses 7,379,922 7,229,317 8,472,250 27,845,694
----------- ----------- ----------- ------------
OPERATING LOSS (7,379,922) (7,093,226) (5,832,011) (25,069,364)
OTHER INCOME (EXPENSE), net 93,770 (29,195) 397,495 494,683
----------- ----------- ----------- ------------
Net loss $(7,286,152) $(7,122,421) $(5,434,516) $(24,574,681)
=========== =========== =========== ============
NET LOSS PER COMMON SHARE (Note 2) $(1.89) $(1.76) $(.95)
====== ====== =====
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 3,857,044 4,055,966 5,746,697
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-4
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock Additional
------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Initial issuance of common stock - $ - 1,200,000 $120 $ 1,080
Deferred offering costs - - - - -
Net loss - - - - -
---------- ---- --------- ---- -----------
BALANCE, July 31, 1992 - - 1,200,000 120 1,080
Issuance of common stock and
warrants, net of issuance costs
of $1,230,362 - - 1,531,399 153 10,755,239
Conversion of advances from
stockholder into common stock
and warrants - - 160,000 16 1,199,984
Repurchase of common stock and
warrants - - - - -
Net loss - - - - -
---------- ---- --------- ---- -----------
BALANCE, July 31, 1993 - - 2,891,399 289 11,956,303
Issuance of common stock and warrants,
net of issuance costs of $296,017 - - 646,872 65 4,878,918
Repurchase of common stock - - - - -
Deferred offering costs - - - - -
Net change in unrealized
losses on marketable securities - - - - (62,883)
Net loss - - - - -
---------- ---- --------- ---- -----------
BALANCE, July 31, 1994 - - 3,538,271 354 16,772,338
Issuance of common stock
from exercise of stock options - - 1,500 - 11,250
Issuance of Series A convertible
preferred stock, net of
issuance costs of $195,241 1,986,409 199 - - 3,578,737
Issuance of common stock, net
of issuance costs of $150,000 - - 457,142 46 3,849,954
Net change in unrealized losses on
marketable securities - - - - 46,606
Net loss - - - - -
---------- ---- --------- ---- -----------
BALANCE, July 31, 1995 1,986,409 199 3,996,913 400 24,258,885
Issuance of common stock in
initial public offering, net
of issuance costs of $2,468,940 - - 2,530,000 253 18,403,307
Conversion of Series A convertible
preferred stock into common stock (1,986,409) (199) 794,554 79 120
Issuance of common stock from
exercise of stock options - - 13,442 1 70,361
Net change in unrealized losses
on marketable securities - - - - 3,802
Compensation expense related
to grant of stock options - - - - 122,500
Net loss - - - - -
---------- ---- ---------- ---- -----------
BALANCE, July 31, 1996 - $ - 7,334,909 $733 $42,858,975
========== ==== ========== ==== ===========
Deficit
Accumulated Treasury Stock Total
During the Deferred at cost Stockholders'
Development Offering -------------------- Equity
Stage Costs Shares Amount (Deficiency)
----- ------- ------ ------ ------------
Initial issuance of common stock $ - $ - - $ - $ 1,200
Deferred offering costs - (66,613) - - (66,613)
Net loss (663,764) - - - (663,764)
------------ -------- ------ ----- -----------
BALANCE, July 31, 1992 (663,764) (66,613) - - (729,177)
Issuance of common stock and
warrants, net of issuance costs
of $1,230,362 - 66,613 - - 10,822,005
Conversion of advances from
stockholder into common stock
and warrants - - - - 1,200,000
Repurchase of common stock and
warrants - - 10,000 (100) (100)
Net loss (4,067,828) - - - (4,067,828)
------------ -------- ------ ----- -----------
BALANCE, July 31, 1993 (4,731,592) - 10,000 (100) 7,224,900
Issuance of common stock and warrants,
net of issuance costs of $296,017 - - - - 4,878,983
Repurchase of common stock - - 1,875 (2) (2)
Deferred offering costs - (55,000) - - (55,000)
Net change in unrealized
losses on marketable securities - - - - (62,883)
Net loss (7,286,152) - - - (7,286,152)
------------ -------- ------ ----- -----------
BALANCE, July 31, 1994 (12,017,744) (55,000) 11,875 (102) 4,699,846
Issuance of common stock
from exercise of stock options - - - - 11,250
Issuance of Series A convertible
preferred stock, net of
issuance costs of $195,241 - 55,000 - - 3,633,936
Issuance of common stock, net
of issuance costs of $150,000 - - - - 3,850,000
Net change in unrealized losses on
marketable securities - - - - 46,606
Net loss (7,122,421) - - - (7,122,421)
------------ -------- ------ ----- -----------
BALANCE, July 31, 1995 (19,140,165) - 11,875 (102) 5,119,217
Issuance of common stock in
initial public offering, net
of issuance costs of $2,468,940 - - - - 18,403,560
Conversion of Series A convertible
preferred stock into common stock - - - - -
Issuance of common stock from
exercise of stock options - - - - 70,362
Net change in unrealized losses
on marketable securities - - - - 3,802
Compensation expense related
to grant of stock options - - - - 122,500
Net loss (5,434,516) - - - (5,434,516)
------------ -------- ------- ----- -----------
BALANCE, July 31, 1996 $(24,574,681) $ - 11,875 $(102) $18,284,925
============ ======== ======= ===== ===========
The accompanying notes are an integral part of these financial statements.
F-5
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Years Ended July 31,
----------------------------------------------------------
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,286,152) $(7,122,421) $(5,434,516)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 530,495 786,628 811,120
Compensation expense related to grant of
stock options - - 122,500
Net realized loss on marketable securities 7,278 28,956 9,156
Change in assets and liabilities -
Prepaid expenses 89,312 (14,361) (294,269)
Accounts payable 73,996 (99,483) (37,604)
Accrued expenses 344,639 (15,411) (175,620)
Deferred revenue - 1,000,000 -
----------- ----------- -----------
Net cash used in operating activities (6,240,432) (5,436,092) (4,999,233)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases of) proceeds from marketable securities, net (2,470,339) 1,795,575 (8,443,001)
Purchases of equipment (1,007,530) (356,710) (332,427)
Licensed technology costs (191,000) (32,500) -
Patent application costs (130,309) (53,746) (41,714)
Organization costs - - -
----------- ----------- -----------
Net cash (used in) provided by investing
activities (3,799,178) 1,352,619 (8,817,142)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred and
common stock 4,878,983 7,440,186 18,473,922
Deferred offering costs (55,000) 55,000 -
Advances from stockholder - - -
Repayments of capital lease obligations (80,995) (87,034) (103,447)
Borrowings under notes payable 917,220 - -
Repayments of notes payable (110,049) (273,528) (322,333)
Security deposits and other assets (561,472) 219,039 180,238
Repurchase of common stock (2) - -
----------- ----------- -----------
Net cash provided by financing activities 4,988,685 7,353,663 18,228,380
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (5,050,925) 3,270,190 4,412,005
CASH, beginning of period 6,859,947 1,809,022 5,079,212
----------- ----------- -----------
CASH, end of period $ 1,809,022 $ 5,079,212 $ 9,491,217
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 15,838 $ 6,554 $ -
=========== =========== ===========
Cash paid for interest expense $ 89,796 $ 176,716 $ 108,593
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of advances from stockholder into common
stock $ - $ - $ -
=========== =========== ===========
Equipment acquired pursuant to capital lease obligations $ 29,330 $ - $ -
=========== =========== ===========
For the Period
From Inception
(January 28, 1992)
Through July 31, 1996
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,574,681)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,397,576
Compensation expense related to grant of
stock options 122,500
Net realized loss on marketable securities 45,390
Change in assets and liabilities -
Prepaid expenses (466,731)
Accounts payable 280,913
Accrued expenses 400,577
Deferred revenue 1,000,000
------------
Net cash used in operating activities (20,794,456)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases of) proceeds from marketable securities, net (9,117,765)
Purchases of equipment (2,172,743)
Licensed technology costs (615,989)
Patent application costs (335,804)
Organization costs (63,530)
------------
Net cash (used in) provided by investing
activities (12,305,831)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred and
common stock 41,549,683
Deferred offering costs -
Advances from stockholder 1,200,000
Repayments of capital lease obligations (341,271)
Borrowings under notes payable 1,179,135
Repayments of notes payable (728,363)
Security deposits and other assets (267,578)
Repurchase of common stock (102)
------------
Net cash provided by financing activities 42,591,504
------------
NET INCREASE (DECREASE) IN CASH 9,491,217
CASH, beginning of period -
------------
CASH, end of period $ 9,491,217
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 30,684
============
Cash paid for interest expense $ 405,965
============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of advances from stockholder into common
stock $ 1,200,000
============
Equipment acquired pursuant to capital lease obligations $ 378,064
============
The accompanying notes are an integral part of these financial statements.
F-6
ALEXION PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Operations:
----------------------------
Alexion Pharmaceuticals, Inc. (the "Company") was organized in January
1992 and is engaged in the research and development of proprietary
immunoregulatory compounds for the treatment of cardiovascular disorders
(perioperative bleeding associated with cardiopulmonary bypass,
myocardial infarction, and stroke) and autoimmune diseases (lupus
nephritis, rheumatoid arthritis, and multiple sclerosis). As an outgrowth
of its core technologies, the Company is developing, in collaboration
with a third party (see Note 10), non-human organ ("xenograft" organs)
products designed for transplantation into humans without clinical
rejection.
The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development. The Company has
incurred losses since inception and has cumulative net losses of $24.6
million through July 31, 1996. The Company has made no product sales to
date and has recognized cumulative revenue from research grants and
funding of $2.8 million through July 31, 1996. During 1996, the Company
completed an initial public offering (IPO) of 2,530,000 shares, of common
stock resulting in net proceeds of approximately $18.4 million (see Note
12). In addition, the Company has received various grants to fund certain
research activities (see Note 10).
The Company will need additional financing to obtain regulatory
approvals, fund early operating losses, and, if deemed appropriate,
establish a manufacturing, sales and marketing capability. In addition to
the normal risks associated with development stage companies, there can
be no assurance that the Company's research and development will be
successfully completed, that adequate patent protection for the Company's
technology will be obtained, that any products developed will obtain
necessary government regulatory approval or that any approved products
will be commercially viable. In addition, the Company operates in an
environment of rapid change in technology, substantial competition from
pharmaceutical and biotechnology companies and is dependent upon the
services of its employees and its consultants.
The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its
products. The Company's management believes that, based upon its current
business plans, the cash and marketable securities aggregating $18.6
million as of July 31, 1996 will be sufficient to fund operations of the
Company through at least calendar 1997.
F-7
The Company will require funds in addition to those previously described,
which it will seek to raise through public or private equity or debt
financings, collaborative or other arrangements with corporate sources,
or through other sources of financing. The Company has no banking or
other capital sources and no arrangements or commitments with regard to
obtaining any further funds.
2. Summary of Significant Accounting Policies:
-------------------------------------------
Cash and cash equivalents -
Cash and cash equivalents are stated at cost, which approximates market,
and include short-term highly liquid investments with original maturities
of less than three months.
Marketable securities -
The Company invests in marketable securities of highly rated financial
institutions and investment-grade debt instruments and limits the amount
of credit exposure with any one entity.
The Company follows Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Pursuant to this Statement, the Company has classified its
marketable securities as "available for sale" and, accordingly, carries
such securities at aggregate fair value. Unrealized gains or losses are
included in stockholders' equity as a component of additional paid-in
capital. At July 31, 1996, the Company's marketable securities had a
maximum maturity of approximately one year and consisted of U.S.
government obligations, municipal obligations, and corporate bonds.
Unrealized losses on the Company's marketable securities aggregated
approximately $16,000 and $12,000 at July 31, 1995 and 1996,
respectively.
The following is a summary of marketable securities at July 31, 1995 and
1996:
Amortized Unrealized Fair
Cost Losses Value
--------- --------- ---------
U.S. government obligations $ 450,171 $ (7,893) $ 442,278
Municipal obligations 80,000 (1,873) 78,127
Corporate bonds 108,359 (6,511) 101,848
--------- -------- ---------
Total marketable
securities at
July 31, 1995 $ 638,530 $(16,277) $ 622,253
========= ======== =========
F-8
Amortized Unrealized Fair
Cost Losses Value
---------- ---------- ----------
U.S. government obligations $5,268,177 $ (481) $5,267,696
Municipal obligations 80,000 (390) 79,610
Corporate bonds 3,770,832 (11,604) 3,759,228
---------- -------- ----------
Total marketable
securities at
July 31, 1996 $9,119,009 $(12,475) $9,106,534
========== ======== ==========
Equipment -
Equipment is recorded at cost and is depreciated over estimated useful
lives of the assets involved. Depreciation commences at the time the
assets are placed in service and is computed using the straight-line
method over the useful lives of the equipment of three to four years.
Maintenance and repairs are charged to expense when incurred.
Equipment under capital leases is depreciated over the lesser of the
lease term or the estimated useful life.
Licensed technology rights -
Licensed technology rights are amortized over the shorter of the license
term or seven years, using the straight-line method. The Company reviews
licensed technology rights on a periodic basis and capitalized costs
which provide no future benefit are expensed. Accumulated amortization as
of July 31, 1995 and 1996 amounted to $197,626 and $285,624, respectively
(see Note 9).
Patent application costs -
Costs incurred in filing for patents are capitalized. Capitalized costs
related to unsuccessful patent applications are expensed when it becomes
determinable that such applications will not be successful. Capitalized
costs related to successful patent applications are amortized over a
seven year period or the remaining life of the patent, whichever is
shorter, using the straight-line method. Accumulated amortization as of
July 31, 1995 and 1996 amounted to $95,845 and $141,801, respectively.
Organization costs -
Costs incurred in connection with the organization of the Company are
amortized over a five year period using the straight-line method.
Accumulated amortization as of July 31, 1995 and 1996 amounted to $45,544
and $58,250, respectively.
F-9
Revenue recognition -
Contract research revenues are recognized as the related work is
performed under the terms of the contracts and expenses for development
activities are incurred. Any revenue contingent upon future funding by
the Company is deferred and recognized as the future funding is expended.
Any revenues resulting from the achievement of milestones would be
recognized when the milestone is achieved.
Research and development expenses -
Research and development costs are expensed in the period incurred.
Reverse stock split -
In December 1995, the Company effected a two and one-half-for-one reverse
stock split of its common stock and decreased the authorized number of
common stock and preferred stock shares. In addition, the Board
authorized a decrease in the number of authorized shares of common stock
from 60,000,000 to 25,000,000 shares and preferred stock from 20,000,000
to 5,000,000 shares, respectively. The accompanying financial statements
have been restated to reflect this reverse stock split and change in
authorized shares.
Use of estimates in the preparation of financial statements -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Effect of recent accounting pronouncement -
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," which established criteria for the recognition and
measurement of impairment loss associated with long-lived assets. The
Company will be required to adopt this standard in fiscal 1997. Based on
the Company's initial evaluation, adoption is not expected to have a
material impact on the Company's financial position or results of
operations.
F-10
The Company plans to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" in fiscal 1997. SFAS No. 123 was issued by the Financial
Accounting Standards Board in October 1995 and allows companies to choose
whether to account for stock-based compensation on a fair value method or
to continue to account for stock-based compensation under the current
intrinsic value method as prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the
accounting in APB Opinion No. 25 must make proforma disclosures of net
income, as if the fair value based method of accounting defined in the
statement had been applied. The Company plans to continue to follow the
provisions of APB Opinion No. 25. Management of the Company believes that
the impact of adoption will not have a significant effect on the
Company's financial position or results of operations.
Net loss per common share -
Net loss per common share is computed using the weighted average number
of common shares outstanding during the period. Common equivalent shares
from stock options and warrants are excluded from the computation as
their effect is antidulitive, except pursuant to the requirements of the
SEC. Pursuant to these requirements, common stock issued by the Company
during the 12 months immediately preceding the initial public offering,
plus shares of common stock which became issuable during the same period
pursuant to the grant of common stock options and warrants, have been
included in the calculation of weighted average number of common shares
outstanding for the period from August 1, 1993 to April 30, 1996 using
the treasury stock method. The inclusion of additional shares assuming
the conversion of Series A convertible preferred stock into common stock
would have been antidilutive for all periods presented and, accordingly,
has been excluded from the computation of net loss per common share.
3. Equipment:
----------
A summary of equipment as of July 31, 1995 and 1996 is as follows:
July 31,
-----------------------------
1995 1996
---------- ----------
Laboratory equipment $1,732,840 $2,038,304
Office equipment 91,367 112,351
Furniture 16,109 22,088
Equipment under capital leases 378,064 378,064
---------- ----------
2,218,380 2,550,807
Less - Accumulated depreciation
and amortization 1,247,442 1,958,536
---------- ----------
$ 970,938 $ 592,271
========== ==========
F-11
4. Security Deposits and Other Assets:
-----------------------------------
A summary of security deposits and other assets as of July 31, 1995 and
1996, is as follows:
July 31,
----------------------------
1995 1996
-------- --------
Amounts held in deposit as
collateral for notes payable
(see Note 7) $379,932 $183,444
Other 67,884 84,134
-------- --------
$447,816 $267,578
======== ========
5. Accrued Expenses:
-----------------
A summary of accrued expenses as of July 31, 1995 and 1996, is as
follows:
July 31,
----------------------------
1995 1996
-------- --------
Professional fees $320,914 $225,990
Research and development
agreements 106,914 86,369
Other 148,369 88,218
-------- --------
$576,197 $400,577
======== ========
6. Deferred Revenue:
-----------------
Deferred revenue results from cash received in advance of revenue
recognition under research and development contracts (see Notes 1 and
10).
7. Notes Payable:
--------------
Notes payable consist of borrowings under a lease financing arrangement
with a financing company for the purchase of certain laboratory
equipment. Borrowings against this line of credit are secured by the
laboratory equipment and related security deposits (cash collateral equal
to 30%-40% of equipment cost) (see Note 4). The Company has no additional
borrowing capacity under these agreements as of July 31, 1996. Upon
certain conditions, the amounts
F-12
held as security deposits can be reduced and the funds released to the
Company. After completion of the Company's IPO, security deposits
aggregating $180,238, were returned to the Company, including earned
interest. Under the terms of the financing, the Company is required to
make monthly payments of principal and interest through fiscal 1998,
based upon an average interest rate of approximately 15% per annum.
Payments of principal (as of July 31, 1996) for the next two fiscal years
are as follows:
Year Ending July 31,
--------------------
1997 $322,508
1998 128,264
--------
$450,772
========
8. Obligations Under Capital Leases:
---------------------------------
Obligations under capital leases principally represent leases of
laboratory equipment. Under the terms of the leases the Company is
required to make monthly payments of principal and interest through
fiscal 1999, at interest rates ranging from approximately 10%-12% per
annum.
The future annual minimum required payments as of July 31, 1996 are as
follows:
Year Ending
July 31,
-----------
1997 $30,778
1998 8,359
1999 135
-------
Total minimum lease payments 39,272
Less - Amounts representing interest 2,479
-------
Present value of net minimum
lease payments 36,793
Less - Current portion 28,593
-------
$ 8,200
=======
F-13
9. License and Research & Development Agreements:
----------------------------------------------
The Company has entered into a number of license and research &
development agreements since its inception. These agreements have been
made with various research institutions, universities, and government
agencies in order to advance and obtain technologies management believes
important to the Company's overall business strategy.
License agreements generally call for an initial fee followed by annual
minimum royalty payments. Additionally, certain agreements call for
future payments upon the attainment of agreed to milestones, such as, but
not limited to, Investigational New Drug (IND) application or Product
License Approval (PLA). These agreements require minimum royalty payments
based upon sales developed from the applicable technologies, if any. The
Company's policy is to amortize capitalized licensed technology over a
seven year period or under the license term, whichever is shorter, using
the straight-line method.
Research & development agreements generally call for the Company to fund
future project research for one to four years. Based upon these
agreements, the Company may obtain exclusive and non-exclusive rights and
options to the applicable technologies developed as a result of the
applicable research. The Company's policy is to expense research and
development payments as incurred.
The minimum payments (assuming non-termination of the above agreements)
as of July 31, 1996, for each of the next four years are as follows:
Year Research &
Ending License Development
July 31, Agreements Agreements
------- ---------- ----------
1997 $ 77,500 $375,000
1998 177,500 50,000
1999 177,500 50,000
2000 177,500 50,000
Should the Company achieve certain milestones related to product
development and product license applications and approvals, additional
payments would be required if the Company elects to continue and maintain
its licenses. The agreements also require the Company to fund certain
costs associated with the filing of patent applications.
F-14
10. Contract Research Revenues:
---------------------------
Contract research revenues recorded by the Company during the year ended
July 31, 1995 consist of Small Business Innovation Research ("SBIR")
grants from the National Institutes of Health ("NIH") and research and
development support under a collaboration with a third party.
In July 1995, the Company entered into a research and development
agreement with a third party. This third party agreed to fund
pre-clinical development of the Company's xenotransplant products in
return for exclusive worldwide manufacturing, marketing and distribution
rights of such products by paying the Company up to $7.5 million
allocated as follows: (1) up to $4.0 million of the cost of pre-clinical
development in four semi-annual installments of up to $1.0 million (the
first installment of which was paid on July 31, 1995), and (2) $3.5
million upon achieving certain milestones. In furtherance of this joint
collaboration, the third party also purchased $4.0 million of the
Company's common stock (see Note 12). No revenue was recognized related
to this agreement as of July 31, 1995. For the year ended July 31, 1996,
the Company recognized $1.98 million of revenue related to this
agreement. During fiscal 1996 the third party purchased an additional
$1.8 million of common stock offered in the Company's IPO.
In July 1995, the Company was awarded a $100,000 Phase I SBIR grant from
the NIH. The award was made in support of the research and development of
the Company's gene transfer technology. For the year ended July 31, 1996,
the Company recognized $100,000 of revenue related to this agreement.
In August 1995, the Company was awarded funding from the Commerce
Department's National Institute of Standards and Technology under its
Advanced Technology Program ("ATP"). Through the ATP, the Company may
receive up to approximately $2 million over three years to support the
Company's UniGraft(TM) program in universal donor organs for
transplantation. For the year ended July 31, 1996, the Company recognized
$246,000 of revenue related to this agreement.
In September 1995, the Company was awarded a Phase II SBIR grant for
approximately $750,000 over two years from the NIH to support the
research and clinical development of the Company's product to treat
complications of cardiovascular surgery. For the year ended July 31,
1996, the Company recognized $315,000 of revenue related to this
agreement.
F-15
11. Commitments:
------------
The Company has entered into five-year employment agreements with five
executives. These agreements provide that these individuals will receive
aggregate annual base salaries of approximately $710,000 as of July 31,
1996. These individuals may also receive discretionary bonus awards, as
determined by the Board of Directors.
As of July 31, 1996, the Company leases its administrative and research
and development facilities under three operating leases expiring in June
1998, December 1997, and March 1999 respectively, each with an option for
up to an additional three years.
Future minimum annual rental payments as of July 31, 1996, under these
leases and other noncancellable operating leases (primarily for
equipment) are as follows:
Year ending
July 31,
------------
1997 $365,372
1998 297,883
1999 33,333
--------
$696,588
========
12. Common Stock and Series A Preferred Stock:
------------------------------------------
Fiscal 1993 Bridge Financing and Private Placements -
In December 1992, the Company obtained approximately $5.2 million of
equity financing (the "Bridge Financing") through the issuance of common
stock and warrants to purchase shares of common stock and the conversion
of advances from a stockholder. The Company sold Bridge Units (consisting
of 531,424 shares of common stock and warrants to purchase shares of
common stock - see Note 13) for gross proceeds of approximately $4.0
million. In connection with the sale of the Bridge Units by the Company,
$1.2 million of advances from a stockholder were converted into Bridge
Units consisting of 160,000 shares of common stock and warrants to
purchase shares of common stock.
In June 1993, the Company raised $8 million in a private placement
through the issuance of Placement Units consisting of an aggregate of
999,975 shares of common stock and warrants to purchase shares of common
stock (see Note 13).
F-16
Fiscal 1994 Private Placements -
In October and December 1993, the Company raised $5.2 million in a
private placement through the sale of Placement Units consisting of an
aggregate of 646,872 shares of common stock and warrants to purchase
shares of common stock.
Fiscal 1995 Private Placements -
From December 1994 to March 1995, the Company raised approximately $3.8
million through the sale of 1,986,409 shares of Series A convertible
preferred stock. Each share of Series A preferred stock had equal voting
rights with the Company's common stock.
On July 31, 1995, the Company received gross proceeds of $4.0 million
through the sale of 457,142 shares of common stock to a corporate partner
(see Notes 1 and 10). The Company granted exclusive worldwide rights to
market its xenotransplantation products to this shareholder in an
exchange for a commitment by this shareholder to contribute to subsequent
research and development and to pay royalties on any future product
sales.
Fiscal 1996 Initial Public Offering -
During fiscal 1996, the Company completed an IPO of 2,530,000 shares of
common stock at a price of $8.25 per share of common stock, resulting in
net proceeds of approximately $18.4 million. In connection with the
Company's IPO the preferred stockholders converted all of their shares
into 794,554 shares of common stock.
13. Stock Options and Warrants:
---------------------------
Stock Options -
Under the Company's 1992 Stock Option Plan and 1992 Stock Option Plan for
Directors (the Plans), incentive and nonqualified stock options may be
granted for up to a maximum of 480,000 shares of common stock to
directors, officers, key employees and consultants of the Company at no
less than fair market value on the date of grant. Fair market value is
determined by the Board of Directors based on an examination of
comparable companies, consultation with financial advisors and
consultation with certain large investors in the Company. In March 1995,
the Plans were amended by shareholders' majority consent to increase the
number of shares covered by the Plans to 1,320,000. Options generally
become exercisable in equal proportions over three to four years and
remain exercisable for up to ten years after the grant date, subject to
certain conditions.
F-17
A summary of stock option activity is as follows:
Number Price
of Shares per Share
---------- ----------------
Outstanding at January 28, 1992 - -
Granted 80,000 $7.50
---------- -----------------
Outstanding at July 31, 1992 80,000 $7.50
Granted 176,795 $7.50
Cancelled (10,000) $7.50
---------- ---------------
Outstanding at July 31, 1993 246,795 $7.50
Granted 220,074 $8.00 - $ 8.25
Cancelled (18,200) $7.50 - $ 8.00
---------- ---------------
Outstanding at July 31, 1994 448,669 $7.50 - $ 8.25
Cancelled (276,129) $2.375 - $ 8.25
Granted/reissued 671,284 $2.375
Exercised (1,500) $7.50
---------- ---------------
Outstanding at July 31, 1995 842,324 $2.375 - $ 8.00
Granted 405,800 $2.50 - $10.00
Cancelled (27,348) $2.375 - $ 8.00
Exercised (13,442) $2.375 - $ 7.50
---------- ---------------
Outstanding at July 31, 1996 1,207,334 $2.375 - $10.00
========== ===============
Exercisable at July 31, 1996 363,492 $2.375 - $ 8.00
========== ===============
In December 1994, the Company offered certain holders of outstanding
stock options the opportunity to tender these options in exchange for
stock options at an exercise price of $2.375 per share which represented
the then current fair market value at such date, as determined by the
Board of Directors. As such, these outstanding stock options were
cancelled and reissued at an exercise price of $2.375 per share.
The Company recorded compensation expense of $122,500 on certain
nonqualified stock options which were granted during fiscal 1996 and
immediately vested. This charge was based on the difference between the
fair value of the Company's common stock on the date of grant and the
option exercise price.
F-18
Warrants -
In connection with private placements in fiscal 1993 and 1994, the
Company had issued warrants to purchase 1,295,363 shares of common stock
at an exercise price of $15.00 per share ($12.50 in the case of the
placement agent, comprising 131,249 shares of common stock). In February
1995, the Company offered warrantholders the opportunity to exchange
existing warrants for new warrants that could purchase fewer shares at a
reduced exercise price. Warrantholders were entitled to receive new
warrants representing the right to purchase one-half the number of shares
of common stock that the warrantholder was entitled to originally
purchase at a reduced exercise price of $7.50. In connection with this
offer, warrantholders with existing warrants to purchase 1,101,028 shares
of common stock at $15.00 and $12.50 per share exchanged these warrants
for new warrants to purchase 550,501 shares of common stock at $7.50 per
share. The remaining original warrants continue to entitle the
warrantholders to purchase 194,334 shares of common stock at $12.50 to
$15.00 per share. As of July 31, 1996, no warrants have been exercised.
All warrants may be redeemed by the Company for $.05 per common share
following an initial public offering when a share of the Company's common
stock equals or exceeds 200% of the exercise price. The warrants expire
on December 4, 1997. No value has been assigned to the warrants in the
accompanying balance sheets.
In connection with the Company's public offering, the Company sold to its
underwriter for nominal consideration, warrants to purchase 220,000
shares of common stock. These warrants are initially exercisable at a
price of $9.90 per share for a period of forty-two (42) months commencing
on August 27, 1997.
14. 401(k) Plan:
------------
The Company has a 401(k) plan. Under the plan, employees may contribute
up to 12 percent of their compensation with a maximum of $9,500 per
employee in calendar year 1996. Effective May 1996 Company matching
contributions of $.25 for each dollar deferred (up to the first 6%
deferred) have been authorized by the Board of Directors. The Company had
matching contributions of approximately $6,000 for the year ended July
31, 1996.
15. Federal Income Taxes:
---------------------
At July 31, 1996, the Company has available for tax reporting purposes,
net operating loss carryforwards of approximately $23,000,000 which
expire commencing in fiscal 2008. The Company also has research and
development credit carryovers of approximately $1,190,000 which expire
commencing in fiscal 2008.
F-19
The Company follows SFAS No. 109, "Accounting for Income Taxes". This
statement requires that deferred income tax assets and liabilities
reflect the impact of "temporary differences" between the amount of
assets and liabilities for financial reporting purposes and such amounts
as measured by tax laws and regulations.
The components of deferred income taxes as of July 31, 1996 are as
follows:
Deferred tax assets:
Net operating loss carryforwards $ 10,400,000
Tax credit carryforwards 1,190,000
Other 160,000
------------
Total deferred tax assets 11,750,000
Valuation allowance for deferred tax assets (11,750,000)
------------
Net deferred tax assets $ -
============
The Company has not yet achieved profitable operations. Accordingly,
management believes the tax benefits as of July 31, 1996 do not satisfy
the realization criteria set forth in SFAS No. 109 and has recorded a
valuation allowance for the entire deferred tax asset.
F-20