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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
( ) Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended -----------------
Or
(X) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from February 1, 2001 to December 31, 2001
Commission File No. 0-19122
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APHTON CORPORATION
80 SW Eighth Street, Suite 2160
Miami, Florida 33130
(305) 374-7338
Incorporated in I.R.S. Employer
Delaware Identification
No. 95-3640931
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)
-------------------------
Title of Each Class
Number of shares of Common Stock ($.001 par value)
Outstanding as of March 26, 2002: 20,101,639
Aggregate market value of Common Stock ($.001 par value)
held by non-affiliates on March 26, 2002
based on the last sale price on March 26, 2002: $206,674,858
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 the 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)
Documents Incorporated by Reference
Document Part of Form 10-K
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Proxy Statement for the 2002 Annual Part III
Meeting of Stockholders
PART I
Item 1. Business
The Company
Aphton Corporation is a biopharmaceutical company in one phase III and three
phase II clinical trials. We apply our innovative technology-platform to develop
products for neutralizing, and removing from circulation, hormones and other
molecules that participate in gastrointestinal system and reproductive system
cancer and non-cancer diseases. We also are developing products to neutralize
hormones to prevent pregnancy. We have strategic alliances with Aventis Pasteur
(NYSE: AVE), GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health (NYSE:
SGP) and the World Health Organization (WHO).
Aphton is engaged in the research and development and clinical trials of its
products, both independently and through various strategic alliances. We have
financed our operations since inception through the sale of our equity
securities and, to a lesser extent, using operating revenues from R&D limited
partnerships to conduct research and development. These funds provided us with
the resources to acquire staff, construct our research and development
facilities, acquire capital equipment and finance technology and product
development, manufacturing and clinical trials. Aphton Corporation, a Delaware
corporation, was incorporated in 1981. The Common Stock of Aphton has been
trading on Nasdaq's National Market System since June 2, 1994. Aphton had been
traded in the Nasdaq Small-Cap Issues (formerly over-the-counter) market since
April 1, 1991, the date of Aphton's initial public offering. The Company's
Common Stock is traded under the symbol "APHT."
Aphton's primary development efforts to date are for products to treat
gastrointestinal system cancers and reproductive system cancers. In 1997, the
Company entered into a strategic alliance with Pasteur Merieux Connaught, now
Aventis Pasteur, for products that treat gastrointestinal cancers, in North
America, Mexico and Europe. In 1998, the Company entered into a strategic
alliance with SmithKline Beecham, now GlaxoSmithKline, for products that treat
reproductive system cancers and non-cancer diseases, worldwide.
Basis of Approach
Aphton's approach to the treatment of major diseases is to employ (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking,
targeted hormones which play a critical role in diseases of the gastrointestinal
and reproduction systems. Aphton has selected the strategy of hormone therapy
because it has proved, over many years, to be efficacious in the treatment of
major diseases, both malignant and non-malignant. In short, this risk-averse
strategy has been proven to be effective in humans. Well-documented examples of
such efficacy in humans are blocking gastrin (Proglumide) or blocking another
hormone stimulated by gastrin, namely histamine (Zantac, Tagamet), to reduce
stomach acid. These treat GERD (gastroesophageal reflux disease, or "heart
burn"), ulcerations of the esophagus and peptic ulcers. Additional examples are
blocking estrogen (Tamoxifen), for breast cancer therapy and blocking the
production of testosterone (Lupron, Zoladex) for prostate cancer therapy.
Results and Status
The status of our products under research and development is summarized in the
following table.
Product Indication(s) Product Description Status* Strategic
Alliances
------- ------------- -------------------- ------- ---------
Anti-Gastrin 17 for Advanced The vaccine, containing a portion Phase III clinical Aventis
Gastrointestinal pancreatic of the hormone gastrin 17 (G17), trial: G17DT Pasteur
Cancers cancers and diphtheria toxoid (DT), administered with
chemically bound together to form Gemcitabine, a
G17DT, neutralizes both G17 and the chemotherapy
hormone Gly-G17 to treat advanced
pancreatic cancer.
-2-
Anti-Gastrin 17 for Advanced stomach The vaccine, containing a portion Phase II clinical Aventis
Gastric and Gastro- cancer and/or of the hormone gastrin 17 (G17), trial: G17DT Pasteur
Esophageal Cancers esophagus cancers and diphtheria toxoid (DT), administered with
chemically bound together to form Cisplatin, a
G17DT, neutralizes both G17 and the chemotherapy
hormone Gly-G17 to treat
advanced stomach cancer and/or
esophagus cancer.
Anti-Gastrin 17 for Colorectal cancers The vaccine, containing a portion Phase II clinical Aventis
Chemo-refractory of the hormone gastrin 17 (G17), trial: G17DT Pasteur
Colorectial Cancers and diphtheria toxoid (DT), administered with
chemically bound together to form Irinotecan, a
G17DT, neutralizes both G17 and the chemotherapy
hormone Gly-G17 to treat
chemo-failed or chemo-resistant
patients with colorectal cancer.
GnRH Pharmaccine Reproductive A vaccine that neutralizes the GnRH Phase II clinical GlaxoSmith
system cancers hormone for hormone-failed or trial: GnRH Kline
(including hormone-resistant patients with pharmaccine
prostate cancer) prostate cancer. administered with
Taxotere, a
chemotherapy
Anti-Gastrin 17 Gastro-intestinal An anti-gastrin vaccine, that Phase II clinical None
(G17eDT) for ulcerations and neutralizes G17 to treat GERD and trial
Gastro-Esophageal GERD gastro-intestinal ulcerations.
Reflux Disease
(GERD)
Immuno- Prevent pregnancy A prophylactic (contraceptive) Phase II clinical World Health
Contraception in women vaccine that neutralizes a female trial Organization
hormone known as hCG.
*Clinical trials of a new drug are typically conducted in three sequential
phases. Phase I studies typically test the product for safety tolerance. Phase
II studies involve limited trials to determine the optimal dose and frequency of
administration and an indication of efficacy for defined indications. When the
product has been found safe and shows promise of efficacy, further trials are
undertaken in Phase III to fully evaluate clinical efficacy and to further test
for safety typically using a large number of patients at geographically diverse
medical centers.
We obtain some of the key components, including Diphtheria Toxoid (DT) and
Tetanus Toxoid (TT), through a supply contract with Aventis Pasteur, one of our
strategic collaborators. We believe that this supply of components under the
supply contract is sufficient to support the research, development and
commercialization of our anti-gastrin products. The supply contract is discussed
more fully under Strategic Alliances.
-3-
Anti-Gastrin Immunogen
Aphton's current anti-gastrin immunogen, or vaccine, clinical programs treat
several human gastrointestinal system adenocarcinomas, including those of the
esophagus, stomach, pancreas, liver, colon and rectum. These cancers of the
gastrointestinal system are stimulated to grow, proliferate and metastasize, by
the hormones gastrin 17 and glycine-extended gastrin 17. Aphton's proprietary
anti-gastrin immunogen induces antibodies in the patient that neutralize both of
them. The company knows of no other vaccine or drug that selectively blocks or
neutralizes both gastrin 17 and glycine-extended gastrin 17. Aphton believes
that its anti-gastrin vaccine can extend survival in patients suffering from
adenocarcinomas of the gastrointestinal system, without adding toxicity to a
therapy regimen.
Aphton has successfully completed Phase I/II safety and dose ranging trials and
has reported on the results through news releases and in publications with
collaborating scientists in the US and abroad, in peer-reviewed journals.
The results from two Phase II clinical trials of Aphton's anti-gastrin 17
immunogen (vaccine) were presented by the principal investigators at the annual
meeting of the American Society of Clinical Oncology (ASCO) in San Francisco, CA
in May, 2001.
In the first trial, conducted at the Royal Free Hospital, University College in
London, UK, 30 patients with histologically proven locally advanced or
metastatic pancreatic cancer were immunized with Aphton's anti-gastrin 17
immunogen, at different doses. Of the patients immunized with the lower dose,
46% responded with antibodies to gastrin, while 82% responded at the higher
dose. Median survival (50%) for all patients, both lower and higher doses, was
187 days and median survival for patients responding with anti-gastrin 17
antibodies was 217 days. For comparison, median survival for patients receiving
best supportive care is approximately 130 days.
In a larger, second trial conducted at the Queens Medical Center, University of
Nottingham, UK, 37 patients immunized with anti-gastrin 17 immunogen were
compared with 37 patients receiving best supportive care. In this larger study,
the patients received only the higher dose. Median survival was 297 days, or 9.9
months, as compared to the control group, which had a median survival of 109
days, or 3.6 months. This represents a factor of 2.75, or a 175% increase in
median survival. Moreover, more than a third of the immunized patients gained
weight, which is highly unusual for patients with advanced pancreatic cancer.
For further comparison, the patients receiving Aphton's anti-gastrin 17
immunogen had a median survival of 9.9 months, whereas the chemotherapeutic
gemcitabine, the only approved drug for pancreatic cancer in the US, had a
median survival of approximately 5.5 months, in the pivotal trial upon which its
approval was based.
In addition, it was reported that Aphton's anti-gastrin therapy was well
tolerated with no systemic toxicity, consistent with all previous Aphton
clinical trials.
In a special symposium on gastrin at the same annual meeting of the ASCO,
investigators presented highlights from several clinical trials and studies with
Aphton's anti-gastrin 17 immunogen. These included: A) impressive interim
results from a Phase II clinical trial with patients with metastatic stomach
cancer; and B) results from trials with colorectal and pancreatic cancer
patients, in addition to the molecular and cell biology studies and preclinical
trials, which together establish the scientific foundation for gastrin as the
central growth factor fueling gastrointestinal cancers.
The first results from a Phase II clinical trial at the MD Anderson Cancer
Center in Houston, Texas, in treating patients with advanced, metastatic stomach
cancer with Aphton's anti-gastrin 17 immunogen, were presented by the principal
investigator, Jaffer Ajani, MD. Dr. Ajani, a leading authority on
gastrointestinal cancers, began the discussion by describing the worldwide
incidence, stage of disease and expected (short) survival time at detection, and
very high death rate statistics for stomach cancer (the highest annual number of
deaths worldwide of all cancers after lung cancer). He noted that there is no
approved therapy currently available; chemotherapy is considered palliative,
only. Dr. Ajani then proceeded directly to provide the interim results of the
trial with patients with metastatic stomach cancer who were treated with
Aphton's anti-gastrin 17 immunogen and chemotherapy with cisplatin and 5FU.
-4-
Of the six reported evaluable patients:
1) The first patient had six large liver metastases. After treatment with
Aphton's immunogen and the chemos, all of the metastases disappeared
completely (unexpectedly), as shown by repeated CAT scans. The
"before" and "after" photos were dramatic. This is termed a "complete
response."
2) Two of the patients had tumor volume shrinkage of greater than 50%.
This is termed a "partial response."
3) Three of the patients had tumor volume shrinkage less than 50%. This
is a "moderate response."
Thus, 50% of the patients were partial or greater responses, including a
complete response. Since the remaining 50% were moderate responses, none even
had to be termed "stable" (as yet), which is the cytostatic state hoped for and
to be expected from depriving cells of the growth factor gastrin 17.
In June, 2001, scientists in collaboration with Aphton published a peer-reviewed
article with the new findings that the genes for both the gastrointestinal
hormone gastrin and its receptor are "switched on" at the earliest stages of
pre-malignancy in stomach cells, helping to fuel their progression to cancer.
Thus, gastrin is now established as an important growth factor in pushing the
progression of the pre-malignant stomach cells from the earliest stage,
metaplasia, through dysplasia and on to adenocarcinomas. The article titled:
"Expression of Gastrin in Developing gastric Adenocarcinoma" appeared in the
recent issue of British Journal of Surgery, 2001 Volume 88.
The progression leading to cancer in stomach cells can be seen through their
morphological changes, from normal to metaplasia to dysplasia and then to
carcinoma. The progression leading to cancer in colon cells can be seen from the
development of polyps and their morphological changes. The very early role of
gastrin in fueling the progression to cancer has now been established by Aphton
and its collaborating scientists, for both the stomach and the colon.
In February, 2001, Aphton's scientific collaborator, Dr. J. Ajani, announced
interim results of the gastric cancer Phase II clinical trial with Aphton's
immunogen, G17DT, in a symposium titled "G17DT: A NEW APPROACH TO GROWTH FACTOR
NEUTRALIZATION" at the 12th International Congress on Anti-Cancer Treatment held
in Paris, France. The symposium was chaired by Professor J. Ajani of the MD
Anderson Cancer Center in Houston TX.
Dr. Ajani, the principal investigator of Aphton's Phase II clinical trial for
patients with metastatic gastric cancer, in which G17DT in combination with
chemotherapy (cisplatin plus 5FU/Leucovorin), presented an interim analysis of
the first 30 patients on whom results where available. No side effects were
attributed to the immunogen. When administered with G17DT the patients completed
on average 5.5 cycles of chemotherapy, compared to a normal average of 2.5
cycles completion before side effects force discontinuation. Of the 30 patients,
15 had a partial tumor response (tumor shrinkage by 50% or more) for an overall
response rate of 50%. One patient had a complete response (no detectable
residual tumor) and 14 had a partial response. These results compare favorably
with reported response rates of chemotherapy with cisplatin plus 5 FU/Leucovorin
in large, controlled clinical trials for patients with metastatic gastric
cancer.
Aphton is currently in late-stage clinical trials in both the US and in Europe
to treat patients with advanced pancreatic, colorectal and gastric
(stomach)/esophageal adenocarcinomas.
These include:
a) a Phase III clinical trial in the US and Europe for the treatment of
metastatic pancreatic cancer, with a combination immuno-chemo therapy
regimen of Aphton's anti-gastrin 17 immunogen and gemcitabine
(Gemzar), versus gemcitabine. Gemcitabine, a chemotherapeutic, is the
current standard of care for treatment of pancreatic cancer in the US;
b) a phase II clinical trial in the US and on the continent of Europe,
with patients who have failed the approved chemotherapy regimen of
5-FU and irinotecan, for the treatment of colorectal cancer, stage
Dukes' D. These "chemo-refractive" patients are being treated with a
combination regimen of Aphton's anti-G17 immunogen and irinotecan;
-5-
c) a phase II clinical trial in the US and on the continent of Europe,
for the treatment of metastatic gastric (stomach) cancer, with a
combination immuno-chemo therapy regimen of Aphton's anti-gastrin 17
immunogen and 5-FU plus cisplatin.
Anti-Gastrin Immunogen Alliance
In 1997 Aphton signed an agreement with Pasteur Merieux Connaught (now called
Aventis Pasteur), for a strategic alliance for all human cancer applications of
its anti-gastrin immunogen product, including stomach/esophageal, colorectal,
and pancreatic cancers. Under the terms of the twenty-year agreement, Aphton is
responsible for product development, clinical trials and regulatory agency
approvals, and Aventis Pasteur is responsible for and will fund the promotion,
advertising, marketing, distribution and sales of Aphton's anti-gastrin vaccine
in North America, Mexico and Europe. In addition, Aphton and Aventis Pasteur
have entered into agreements providing for the supply of certain components of
the anti-gastrin immunogen (as well as other Aphton products) from Aventis
Pasteur to Aphton. See our full discussion of the Aventis Pasteur agreements
under Strategic Alliances in this Section.
GnRH pharmaccine
Overview
Aphton has developed a second anti-hormone immunogen, GnRH pharmaccine, for
human cancer indications, one that targets the reproductive hormone Gonadotropin
Releasing Hormone (GnRH). By successfully neutralizing (blocking) GnRH, the
immunogen shuts down the production of estrogen and progesterone (in females)
and testosterone (in males), which are normally produced in their respective
gonadal organs. Estrogen fuels breast cancer and testosterone fuels prostate
cancer. It has been known for decades that biological blockage, like physical
castration, is efficacious in the treatment of prostate and breast cancers.
Aphton's anti-GnRH immunogen induces biological blockage.
Aphton successfully completed a pilot Phase I/II safety and dose ranging trial
and has reported on the results through a news release and in a publication with
collaborating scientists in the UK, in a peer-reviewed journal.
The primary purpose of the safety and dose ranging trial was to demonstrate
safety; the secondary purpose was to gather data using various doses of
immunogen and to show that a biological castration could be induced with
Aphton's immunogen.
Aphton's GnRH pharmaccine reduced, in some patients at the lowest dose level,
gonadal testosterone to levels achieved by surgical castration. This biological
castration demonstrated "proof of concept' in man. In addition, the prostate
cancer "progression" marker, Prostate Specific Antigen (PSA), was reduced
markedly in these patients to very low levels, in some cases from triple-digit
to single-digit.
Aphton is now in a Phase II clinical trial in the US to treat prostate cancer
patients who have failed hormone therapy (called hormone refractory patients),
with a combination immuno-chemo therapy regimen comprised of Aphton's immunogen,
called GnRH pharmaccine, and the chemotherapeutic taxotere. Such patients will
likely have been treated with a GnRH agonist drug (to achieve a chemical
castration) or an orchiectomy (a surgical castration), following therapy for the
primary tumor, but will have metastases, relapsed and have a rising PSA.
Strategic Alliance
In June 1998, Aphton and GlaxoSmithKline signed a Collaboration and License
agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's
GnRH-related patents and proprietary technology. The agreement covers the
diagnosis, treatment and prevention of GnRH-related cancers and other diseases
in humans. Human cancer indications for the anti-GnRH product are prostate,
breast, ovarian and endometrial cancer. Additional medical indications for the
anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids,
contraception, infertility and precocious puberty. Under terms of the agreement,
Aphton and GlaxoSmithKline are collaborating in a joint product development
program, with GlaxoSmithKline responsible for phase III clinical trials and
regulatory approvals, and for worldwide marketing and distribution of approved
products. The agreement uses a royalty mechanism based on product sales, in
dollars, worldwide to determine Aphton's revenues. See our full discussion of
the GlaxoSmithKline license agreement under Strategic Alliances in this Section.
-6-
GERD
Aphton is also in late-stage product development with its anti-Gastrin immunogen
approach for the treatment of gastroesophageal reflux disease (GERD), also known
as "severe heartburn." GERD affects more than 20% of the adult population.
Prescription drugs to treat this problem have annual revenues of over $13
billion. Aphton believes its therapy for GERD, which is not yet partnered with
any drug company, will obviate major risks associated with current therapies
while still providing their benefits. As a preliminary to conducting a Phase III
trial for GERD, Aphton has conducted a limited Phase II trial in Europe to
optimize the product, given the different performance-profile desired for this
major, non-cancer application.
Immunocontraceptive
Aphton's anti-hCG immunocontraceptive product, which prevents pregnancy, has
been in a Phase II trial, funded by the World Health Organization (WHO). See our
discussion of the WHO strategic alliance under Strategic Alliances in this
Section.
Equine Anti-Gastrin Immunogen
A product development and analysis study is being conducted using Aphton's
Equine (horse) anti-gastrin immunogen to reduce stomach acid and heal peptic
ulcers in horses. In 1997, the Company entered into a strategic alliance with
Schering-Plough Animal Health covering all animal health applications of our
anti-gastrin immunogen. See our discussion of the Schering-Plough Animal Health
agreement under Strategic Alliances in this Section.
Technology
Aphton's approach to the treatment of major diseases is to employ (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking,
certain hormones that play a critical role in these diseases. This is
accomplished by immunizing the patients with a product called, appropriately, an
"immunogen," that induces in them a directed antibody response which
neutralizes, and removes from circulation, the targeted hormone.
Aphton has developed an innovative and proprietary active immunization
technology platform to create effective immunogens, which are products
administered like vaccines. They harness and direct the body's immune system to
generate antibodies, which bind to specific peptide portions of the administered
immunogen. These antibodies cross-react (bind) with targeted "self" molecules,
such as hormones, when they encounter that portion of the hormone, which is
similar to the peptide portion of the administered immunogen. Because diseases
involving hormones are not pathogen (microorganism) driven, they have not been
viewed traditionally as being susceptible to treatment with immunogens to
activate the body's immune system against targeted hormones. Instead, the
traditional pharmaceutical industry approach to controlling these diseases has
been to treat them with synthetic drugs. Unfortunately, these drugs typically
must be administered in relatively large quantities and on a daily or more
frequent basis, giving rise to patient compliance problems, and often have
adverse side effects.
More recently, drugs based on passive immunization using monoclonal antibodies,
derived from mouse antibodies, have been introduced to treat certain cancers.
Aphton's active immunization technology platform can be targeted to give rise to
a polyclonal antibody response, derived from the patient's own immune system,
against any hormone, molecule, cell receptor or surface antigen to which a
monoclonal antibody can be targeted. Moreover, Aphton's technology platform has
significant advantages over passive immunization with monoclonal antibodies
(humanized or human). These include: a) the patient needs only a booster shot at
approximately six month intervals after the initial immunization protocol with
Aphton's immunogens, rather than having to infuse the patient with monoclonal
antibodies on a weekly basis, for one to two hours each time; b) passive
immunization with monoclonal antibodies requires thousands of fold more material
to be administered, at much higher costs, than Aphton's active immunization; c)
Aphton's immunogens are formulated and composed of ingredients that are
manufactured using low-cost, proven, organic chemistry and classical vaccine
technology, while monoclonal antibody manufacturing plants are limited, more
complex, more expensive and of limited production capacity for years to come; d)
active immunization and the ensuing polyclonal antibodies induced by Aphton's
immunogens avoid or greatly mitigate the problems of mutation and changes in
receptor or other antigen configurations, as the cancer progresses; e) the
binding affinity of monoclonal antibodies is normally lower than the mouse
antibody from which they had been derived, and lower than polyclonal antibodies
resulting from Aphton's active immunization. Furthermore, while
-7-
monoclonal antibodies' affinity remains static, the binding affinity of
polyclonal antibodies progressively rises through a dynamic process called
clonal selection.
In contrast to either drugs or monoclonal antibodies, Aphton's immunogens create
a strong antibody response from the patient's own immune system (which
effectively becomes a "drug factory") and have a more potent and longer-lasting
therapeutic effect. Aphton's technology enables it to specifically target a
small sequence within the hormone to be neutralized, in order to achieve a
specific desired biological and physiological response. This approach directs
all of the immunogen-induced antibodies to the targeted hormone sequence. At the
same time it minimizes the possibility of undesired physiological consequences
through cross-reactivity of the immunogen with any self molecule or portion
thereof, other than the specifically-targeted hormone sequence. This avoids the
possibility of autoimmune disease where the antibody production is not "turned
off." This is because the antibody production can only be "turned on and kept
on" in the presence of the foreign, "carrier" portion of the immunogen (see
below). Indeed, without a "booster shot" of the immunogen, the antibodies wane
(diminish) and are cleared by the body, over time. Aphton"s products may be
administered in much smaller dosages and on a much less frequent basis than
pharmaceutical drugs; typically twice a year. This virtually eliminates the
problem of patient compliance, which is associated with pharmaceutical drugs.
Aphton's anti-gastrin immunogen product, for example, consists of:
(a) A synthetic peptide, which is similar to a portion of the hormone
gastrin 17 which is targeted to be neutralized (i.e., blocked or
prevented from reaching and binding to its receptor).
(b) A "carrier," Diphtheria Toxoid (DT), foreign to the body, to which a
number of the synthetic peptides in (a) are chemically bound
(conjugated). This makes them available to be both bound to and,
together with the DT, internalized by "B-cells." DT contains the
structures (epitopes) which, when internalized and "presented" on
B-cells and Macrophages, are bound to by "T-cells." By binding to
these foreign epitopes, these T-cells in turn, proliferate and signal
the B-cells, which bind to the peptides (a) to proliferate and to
"mass produce" the desired antibodies (all of which bind to the
peptide (a)).
(c) A proprietary, slow-release "suspender" which contains (a) and (b).
This "delivery vehicle" is designed to enable the achievement of four
objectives, concurrently: i) a high antibody response; ii) a long
antibody response; iii) no systemic toxicity; and iv) long-term
stability, or "shelf-life."
The anti-gastrin product, which is administered by injection, with booster shots
at approximately six-month intervals, thus induces antibodies in the patient
which bind with peptide (a) and which also bind (cross-react) with and
neutralize gastrin 17 (when they encounter that portion on gastrin 17 which is
similar to peptide (a)). Gastrin 17 is known to drive (or fuel) colorectal,
stomach, liver and pancreatic cancer. Neutralizing gastrin 17 inhibits both the
growth and metastasis (spread) of these gastrointestinal cancers. In addition,
the anti-gastrin product uniquely neutralizes glycine-extended gastrin 17, which
has also been shown recently to be secreted by and to fuel these
gastrointestinal system cancers.
Gastrin 17 is also responsible for the production of the bulk of stomach acid
(approximately 90% in humans), the reduction of which is therapeutic for
gastroesophageal reflux disease (GERD) and for both peptic ulcers and NSAID
- -induced ulcers (NSAID examples include aspirin and ibuprofen).
Aphton's anti-GnRH product is similarly constructed. In this case, the synthetic
peptide sequence in (a) represents the hormone GnRH, which is targeted to be
neutralized. Neutralizing GnRH inhibits the production of estrogen, progesterone
and testosterone. Inhibiting estrogen (and progesterone) is therapeutic for
women with breast cancer, endometrial cancer, ovarian cancer and endometriosis.
Inhibiting testosterone is therapeutic for men with prostate cancer.
Aphton's immunocontraceptive product, which prevents pregnancy in humans, is
also similarly constructed. In this case, the so-called "C-terminal" peptide
portion of the hormone hCG (which is targeted to be neutralized) is synthesized.
A second, unique epitope (peptide), located on the hormone hCG, is also
conjugated to the immunogen, which enhances efficacy. By not using a larger
portion of the hCG molecule, Aphton avoids inducing
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unwanted antibodies against other hormones in the woman (LH and FSH), which
share domains with some portions of the hormone hCG. Pregnancy is prevented by
immunizing the woman; this induces antibodies which bind to and neutralize hCG.
Strategic Alliances
Aventis Pasteur
In February 1997, we signed an agreement with Pasteur Merieux Connaught (now
called Aventis Pasteur), a leader in medical science and research and the
world's largest vaccine manufacturer and marketer, for a strategic alliance for
all human cancer applications of our anti-gastrin immunogen product including
stomach, colorectal, liver and pancreatic cancer applications. Under the terms
of the twenty-year license and co-promotion agreement, we are responsible for
product development, clinical trials and regulatory approvals. Aventis Pasteur
was granted an exclusive license to promote, market, distribute and sell the
anti-gastrin immunogen product in the United States, Canada, Europe (including
the Commonwealth of Independent States countries) and Mexico, subject to our
right to co-promote the product either independently or in collaboration with
Aventis Pasteur.
In addition to the license and co-promotion agreement, we entered into
agreements with Aventis Pasteur providing for the supply of the anti-gastrin
immunogen product from us to Aventis Pasteur for distribution and sale by
Aventis Pasteur pursuant to the license and co-promotion agreement, as well as
the supply of Diphtheria Toxoid and/or Tetanus Toxoid from Aventis Pasteur to us
for use in the anti-gastrin immunogen product (as well as other Aphton
products). Aventis Pasteur will fund the costs associated with product
introduction, promotion, advertising and marketing throughout the territory
covered by the agreement. Under the terms of the agreement, in addition to
upfront consideration aggregating $10 million, including $1 million cash and a
supply commitment (of Diphtheria Toxoid and/or Tetanus Toxoid suitable for human
use) of $9 million, we will receive the majority of the profits from sales of
the anti-gastrin immunogen product. Diphtheria Toxoid and/or Tetanus Toxoid
suitable for human use is not readily obtained on the open market in such large
quantities as will be supplied to us as part of the upfront consideration. The
$10 million upfront consideration has been classified as a license payment and
has been deferred and will be recognized for financial statement (accounting)
purposes as revenue within the twenty-year period of the agreement. The revenue
recognition will begin once regulatory agency approval to market the product has
been received and will be recognized ratably over the remaining period of the
contract, which ends February 13, 2017. We do not speculate on the timing of
regulatory approvals.
Either party may terminate the agreement for, among other things, uncured
material breach or certain events of bankruptcy or insolvency. Aventis Pasteur
has the right to terminate the agreement, following completion of Phase III
clinical trials in the event that it determines that for safety and efficacy
reasons it does not wish to co-promote, market or sell the product. In the event
that the agreement is terminated due to a material breach by Aventis Pasteur,
all rights of Aventis Pasteur granted by the agreement will be terminated.
However, Aventis Pasteur's obligations with regard to the $10 million upfront
consideration, both the cash and our rights to the full $9 million in
unconditional supply commitment, survive termination of the agreement. There is
no provision under the agreement for the unconditional supply commitment to be
satisfied by Aventis Pasteur with a cash payment. In the event that the
agreement is terminated due to a material breach by us, we will, among other
things, grant Aventis Pasteur a co-exclusive license, under our patents and
know-how in North America and Europe and the product trademarks, to make and
sell the anti-gastrin immunogen product in exchange for royalty payments to the
other party at a royalty rate based on a percentage of net sales.
GlaxoSmithKline
In June 1998, we signed a collaboration and license agreement with SmithKline
Beecham, now called GlaxoSmithKline, granting it exclusive rights worldwide to
our GnRH-related patents and proprietary technology. The twenty-year agreement
covers the diagnosis, treatment and prevention of gonadotropin, gonadal steroid
hormone and GnRH-related cancers and other diseases in humans. Human cancer
indications for the anti-GnRH product include prostate, breast, ovarian and
endometrial cancer, in each case, either alone or in combination with
chemotherapy. Additional medical indications for the anti-GnRH product include
endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility
and precocious puberty. The agreement uses a royalty mechanism based on net
sales of the product, worldwide, to determine our revenues.
-9-
Under terms of the agreement, we are collaborating with GlaxoSmithKline in a
joint product development program, with GlaxoSmithKline responsible for
worldwide marketing and distribution of approved products. Under the agreement
as amended, we are responsible for the initial cost of product development prior
to the acceptance of the anti-GnRH product by both parties. Our product
development work is reviewed on an ongoing basis with GlaxoSmithKline and after
the acceptance of the product by both parties for development, GlaxoSmithKline
is responsible for the funding of the development costs of the accepted product,
clinical trials and approvals for worldwide marketing and distribution up to an
agreed amount. We believe that this product will be accepted in 2002, although
there can be no assurance that we will achieve our goal.
As part of the agreement, GlaxoSmithKline made an equity investment in 1998 of
$5,000,000 for 237,867 shares of newly issued Aphton common stock. Either party
may terminate the agreement for, among other things, uncured material breach or
certain events of bankruptcy or insolvency. Under the agreement as amended, if
the anti-GnRH product has not been formally accepted by both parties, either
party may terminate the agreement in 2002. Once the product has been accepted
for further development, GlaxoSmithKline may only terminate the agreement for
safety, efficacy or economical reasons and Aphton may terminate for the reasons
stated above. During the term of the agreement, GlaxoSmithKline will have full
access to all matters encompassed within our patents and know-how relating to
the anti-GnRH product. Upon termination or expiration of the agreement,
GlaxoSmithKline will cease to have the right to use or sell the anti-GnRH
product, and all registrations and intellectual property rights in the anti-GnRH
product will be fully transferred to us. Until the agreement is terminated or
otherwise expires, any invention or discovery made jointly by GlaxoSmithKline
and us during the development program will be jointly owned, and the product
trademarks and any intellectual property developed by GlaxoSmithKline will be
owned by them.
The Schering-Plough Animal Health agreement and the World Health Organization
(WHO) agreement described below together account for less than 1% of our recent
research and development efforts and expenditures.
Schering-Plough Animal Health
In August 1997, we completed a strategic alliance with Schering-Plough Animal
Health covering all animal health applications of our anti-gastrin immunogen.
Schering-Plough, in terms of annual sales, is one of the largest animal
healthcare companies in the world. Equine (horse) ulcers was selected as the
first indication to be pursued under the alliance. Under the terms of the
ten-year agreement, we have granted Schering-Plough an exclusive license in the
US to promote, distribute and sell the anti-gastrin immunogen product under our
patents and know-how. Schering-Plough will work closely with our scientists and
management to bring the anti-gastrin immunogen product to market. We are
currently responsible for developing the costs of the product and for the
manufacture and supply of the product. Schering-Plough is responsible for
certain current and future capital costs and financial requirements, product
development costs and clinical trial costs, and product introduction, promotion
and marketing.
The agreement provides that we will share equally all net profits with
Schering-Plough, initially taking into account certain research and development
costs of Schering-Plough in determining net profits. Either party may terminate
the agreement for, among other things, uncured material breach or certain events
of bankruptcy or insolvency. Upon prior notice to us, Schering-Plough may
terminate the agreement for safety or efficacy reasons. Upon termination or
expiration of the agreement, Schering-Plough will cease to have the right to use
or sell the anti-gastrin immunogen product and all registrations and
intellectual property rights in the anti-gastrin immunogen product will be fully
transferred to us. Until the agreement is terminated or otherwise expires, any
intellectual property developed jointly by Schering-Plough and us will be
jointly owned, and the product trademarks and any intellectual property
developed by Schering-Plough will be owned by them.
World Health Organization
In January 1995, we announced a relationship with WHO and another research
party, for the development and testing of an immunocontraceptive product (which
prevents pregnancy), under which we received exclusive rights for the
manufacture, distribution and supply of the immunocontraceptive product
worldwide, for the term of the applicable patents on a patent-by-patent basis.
In exchange for these rights, we make payments to support certain research by
the research party.
In the event that a safe and effective product is developed, we have undertaken
to WHO to dedicate a portion of our production capacity for the product to
produce and supply the product to public sector agencies in developing countries
only, according to a cost-related pricing structure. Either party may terminate
the agreement for uncured
-10-
material breach by the other party. In the event that we have ceased and
continue to cease to perform our obligations under the contract, WHO may
terminate the agreement and we will grant WHO an exclusive, royalty-free license
to our technology to develop, manufacture and supply immunocontraceptive
products to public sector agencies in developing countries only, as well as a
non-exclusive, royalty-bearing license to develop, manufacture and supply
immunocontraceptive products in developed countries and to the private sector
generally. Once the immunocontraceptive product has reached a certain
development stage and subject to certain consequences, WHO may be released from
its obligations under the agreement for lack of funds or after an assessment of
safety and efficacy of the product and the Company will be released from its
obligations.
Manufacturing and Marketing
Absent or together with a strategic alliance or corporate partnering
relationship (such as those with Aventis Pasteur and GlaxoSmithKline) which may
impact on the following, Aphton plans to commercialize its products by executing
long-term contracts with third parties, including major pharmaceutical
companies, to manufacture its products and by contracting with similar drug
companies to market, sell and distribute its products.
The contract (outsourcing) manufacturing approach leverages on the large and
available manufacturing resources of pharmaceutical industry companies. Aphton
has contracted with drug manufacturing sources which are providing Aphton's
immunogens for toxicology studies and clinical trials. Aphton's outsourcing of
marketing, distribution and sales, as exemplified by the Aventis Pasteur,
GlaxoSmithKline and Schering-Plough Animal Health agreements, similarly
leverages on the large and effective sales forces of the major pharmaceutical
companies. Aphton's capital formation, personnel and plant and equipment
requirements, together with associated risks, are clearly greatly reduced by
such a commercialization strategy, which Aphton pioneered. In fact, the
outsourcing of non-core functions has now been adopted by major drug companies.
This strategy significantly enhances Aphton's ability to achieve rapid market
penetration and growth and to exploit the benefits of the patent life of its
products.
Strategy and Earnings
It should be noted that Aphton's product development and commercialization
strategy differs significantly from the normal "licensing" of products to third
parties. In the former, Aphton can retain a significantly larger degree of
control, share of profits and thus earnings. Under typical licensing (with
royalty payments which are generally a small percentage of sales), the opposite
would be the case. By avoiding the industry norm of "corporate partnering" with
drug companies in its earlier development stages, and by both undertaking and
overcoming the associated risks during product development, Aphton has earned
and retained its options and the ability to optimally carry out its
commercialization approach. This strategy was successfully validated with
Aphton's agreements with Aventis Pasteur, GlaxoSmithKline and Schering-Plough
Animal Health.
Patents and Trade Secrets
Proprietary protection for Aphton's products is central to the Company's
business. Aphton's policy is to protect its technology by, among other things,
filing patent applications in worldwide markets of interest for products which
it considers important and intends to market. In that regard, Aphton has filed
patent applications and has continued to receive patents for its products, both
domestic and foreign. As of December 31, 2001 we held 24 issued patents and
approximately 5 licenses. Additional patent applications are in preparation or
being filed or are pending in the US and in other countries. Aphton intends to
continue filing additional patent applications relating to its products and,
when appropriate, improvements in its technology and other specific products
that it develops.
Competition
The biotechnology and pharmaceutical industries are subject to rapid and intense
technological change. Our competitors include major pharmaceutical companies and
specialized biotechnology firms supported by universities and research
institutions. Our current competitive position with respect to each of our
products is summarized in the following table.
-11-
Product Indication(s) Competition
------- ------------ -----------
Anti-Gastrin 17 for Advanced The only FDA-approved drug currently available for pancreatic cancer
Gastrointestinal Cancers pancreatic is Gemcitabine manufactured by Eli Lily. Our anti-Gastrin 17 product
cancers is intended to be an additive or complementary therapy administered
with Gemcitabine. We believe two other pharmaceutical companies,
Pharmacia & Upjohn and AstraZeneca, are also developing pancreatic
cancer therapy.
Anti-Gastrin 17 for Advanced stomach There is currently no FDA-approved drug available for gastric cancer
Gastric and cancer and/or or gastro-esophageal cancer. FDA-approved chemotherapies used to
Gastro-Esophageal esophagus cancers treat cancer in other indications, as well as experimental cancer
Cancers drugs in clinical trials, are currently being tried on patients with
advanced gastric cancer or gastro-esophageal cancer. Roche
Laboratories and Bristol-Myers Squibb are among our competitors in
this market.
Anti-Gastrin 17 for Colorectal There is currently no FDA-approved drug available for this stage of
Chemo-refractory cancers disease. Imclone, a biotechnology company, is developing a
Colorectal Cancers monoclonal antibody therapy for chemo-refractory colorectal cancer.
This potentially competitive and/or complementary therapy employs a
different mechanism of action on and within the cancer cell.
GnRH Pharmaccine Reproductive There is currently no FDA-approved drug for advanced prostate cancer
system cancers patients who have failed the GnRH agonists, Leuprolide or Goserelin.
We believe several other pharmaceutical companies, including
Pharmacia Upjohn, Immunex and AstraZeneca, are conducting clinical
trials for this class of patients.
Anti-Gastrin 17 Gastro-intestinal Unlike G17eDT, none of the products currently available a) inhibits
(G17eDT) for ulcerations and the effects of gastrin on the lower esophageal sphincter causing
Gastro-Esophageal GERD abnormal transient LES relaxations typically associated with GERD,"
Reflux Disease (GERD) or b) treats hyper-gastrinemia, which results from standard of care
therapy using Proton Pump Inhibitors (PPIs).
Immuno-Contraception Prevent The use of a contraceptive vaccine eliminates patient compliance
pregnancy in problems that are inherent with oral medications and intrusive
humans devices made by our competitors in the current birth control market.
Our competitive position depends on the safety and efficacy of products, the
timing of regulatory approval and commercial introduction, and the effectiveness
of marketing and sales efforts. Our success also depends on our ability to form
strategic alliance relationships with other companies with greater marketing
resources than ours, attract and retain qualified personnel, and secure
sufficient capital resources for the often substantial period between
technological conception and commercial sales.
Some of our competitors have far greater financial resources, larger research
staffs and more extensive physical facilities. These competitors may develop
products that are more effective than ours and may be more successful than us at
producing and marketing their products. In addition, many specialized
biotechnology firms have formed collaborations with large, established companies
to support the research, development and commercialization of products that may
be competitive with ours.
-12-
Regulation
Government regulation in the US and other countries is a significant factor in
the development and marketing of all of the Company's products and in the
Company's ongoing research and development activities. Clinical trials,
manufacture and marketing of the Company's products are expected to undergo
extensive testing and approval processes by the Food and Drug Administration
(FDA) and equivalent foreign regulatory authorities, including the Medicines
Control Agency (MCA) in the United Kingdom.
Aphton conducts human clinical trials with the objective of obtaining regulatory
approvals in the key markets, worldwide. The regulatory requirements and status
of each of our products are summarized in the following table.
Product Trial Stage Regulatory Requirements Regulatory Status
------- ----------- ----------------------- -----------------
Anti-Gastrin 17 for Clinical Trial - FDA, MCA and other Amended Investigational New Drug
Gastrointestinal Cancers Phase III countries' approvals. application (IND) filed with FDA and
European countries; received permission
to proceed with clinical trials in the
US and in Europe.
Anti-Gastrin 17 for Clinical Trial - FDA, MCA and other Investigational New Drug application
Gastric and Phase II countries' approvals. (IND) filed with FDA and European
Gastro-Esophageal countries; received permission to
Cancers proceed with clinical trials in the US
and in Europe.
Anti-Gastrin 17 for Clinical Trial - FDA, MCA and other Amended Investigational New Drug
Chemo-refractory Phase II countries' approvals. application (IND) filed with FDA;
Colorectal Cancers received permission from FDA to proceed
with clinical trials in the US.
GnRH Pharmaccine Clinical Trial - FDA, MCA and other Investigational New Drug application
Phase II countries' approvals. (IND) filed with FDA; received
permission to proceed with clinical
trials in the US and Europe.
Anti-Gastrin 17 Clinical Trial - FDA, MCA and other Amended Investigational New Drug
(G17eDT) for Phase II countries' approvals. application (IND) filed in Europe;
Gastro-esophageal Reflux received permission to proceed with
Disease (GERD) clinical trial.
Immuno-Contraception Clinical Trial - FDA, MCA and other Investigational New Drug application
Phase II countries' approvals. (IND) filed in Europe; received
permission to proceed with clinical
trial.
Directors and Executive Officers
The directors and executive officers of the Company are set forth below:
Name: Position(s):
- ---- ------------
Philip C. Gevas Chairman of the Board of Directors, President and Chief Executive Officer
William A. Hasler Vice Chairman of the Board, Director and Co-Chief Executive Officer
Robert S. Basso Chairman of Compensation and Audit Committees and Director
Georges Hibon Director
Nicholas John Stathis, Esq. Director
-13-
Philip C. Gevas - 68, Chairman of the Board of Directors, President and Chief
Executive Officer. Mr. Gevas has served as Director, President and Chief
Executive Officer since co-founding Aphton in 1981. Mr. Gevas conceived and
directed the development of Aphton's inventions which have resulted in numerous
patents for Aphton for the treatment of colorectal, pancreatic, liver,
esophageal and stomach cancers, and GERD. After serving as an officer in the
United States Air Force, Mr. Gevas had experience in the defense industry in
management, science and engineering. Mr. Gevas has the degrees of M.E., and M.S.
Mathematics (Stevens Institute of Technology) and M.S.E.E. (Ohio State
University).
William A. Hasler - 60, Vice Chairman of the Board, Director and Co-Chief
Executive Officer. Mr. Hasler has served as Director of the Company since 1991.
Mr. Hasler's expertise and experience in management are focused both on strategy
and on the execution of plans and programs. Prior to his appointment as Aphton's
Co-Chief Executive Officer in July 1998, Mr. Hasler was Dean of both the
Graduate School and Undergraduate School of Business at the University of
California, Berkeley for more than five years. Earlier, Mr. Hasler was Vice
Chairman of KPMG Peat Marwick, responsible for management consulting worldwide.
He is currently also a director of Solectron Corporation, Walker Interactive
Systems, Tenera, Inc., TCSI Corporation and is Public Governor of the Pacific
Exchange.
Robert S. Basso - 57, Director. Mr. Basso is Chairman of Correspondent Services
Corporation (CSC) and a Managing Director of UBS PaineWebber Inc. Previously,
Mr. Basso was President of Broadcort Capital Corporation and a Managing Director
of Merrill Lynch, Pierce, Fenner & Smith.
Georges Hibon - 64, Director. For the past ten years, Mr. Hibon has served as
Chairman and Chief Executive Officer of Pasteur Merieux Connaught, NA and a
member of its Board of Directors. Previously, Mr. Hibon was President of Merck
France. The French Government awarded Mr. Hibon the honor of "Chevalier de la
Legion d'Honor," created in 1802 by Napoleon Bonaparte to recognize outstanding
military and civilian accomplishments.
Nicholas John Stathis, Esq. - 78, Director. Mr. Stathis was counsel at White &
Case LLP. Prior to that, Mr. Stathis was a partner at Botein, Hays & Sklar;
Watson, Leavenworth, Kelton & Taggart; and Hopgood, Calimafde, Kalil, Blaustein
& Judlowe. Mr. Stathis practiced in all phases of patent, trademark, copyright
and unfair competition law.
The Company's Bylaws authorize the Board of Directors to fix the number of
directors from time to time by vote. All directors currently hold office until
the next annual meeting of shareholders and until their successors have been
elected. Officers are elected to serve, subject to the discretion of the Board
of Directors, until their successors are appointed. Directors do not receive any
fees for service on the Board. Board members are reimbursed for their expenses
for each meeting attended. There are no family relationships among executive
officers or directors of the Company.
The Company's Audit Committee is composed of Messrs. Basso, Hibon and Stathis.
The Compensation Committee is composed of Messrs. Basso and Stathis. Messrs.
Basso, Hibon and Stathis are non-executive Board Members.
Executive and Principal Scientific Officers
In addition to the Company's executive officers Philip C. Gevas and William A.
Hasler, Aphton's principal scientific officers are:
Dov Michaeli, M.D. (University of California, San Francisco), Ph.D. (University
of California, Berkeley) - 66, Senior Vice President, Director of Medical
Science and Chief Medical Officer. Dr. Michaeli is a senior member of Aphton's
management team with extensive experience in clinical medicine and scientific
research. Previously, Dr. Michaeli was a professor at the University of
California, San Francisco (Departments of Biochemistry and Surgery). Dr.
Michaeli has numerous patents and over fifty published articles and book
chapters.
Paul Broome, MB., Ch.B., MFPM (University of Sheffield Medical School, UK) - 52,
Vice President and Medical Director for Clinical Trials and Regulatory Affairs,
Europe - Asia. Dr Broome has been with the Company for more than five years. His
years of clinical experience includes the responsibility at Glaxo for clinical
trials which provided data for US (FDA) and UK (MCA) registration of the
indication for ranitidine (Zantac) as maintenance
-14-
therapy, which became the world's largest-selling drug. Later, Dr. Broome was
Medical Director of a leading company in the UK which provides services ranging
from consulting and R&D through clinical trials, regulatory affairs and the
registration of drugs for marketing approval from government regulatory
agencies.
William D. Perkins, Ph.D. - 64, Vice President, Director for Clinical Trials and
Regulatory Affairs, North America. Prior to joining Aphton Corporation in 2000,
Dr. Perkins had years of experience in the medical field. He has been actively
involved in oncology/immunology clinical trials, including directing all phases
of clinical trial development, from Phase I through post-marketing approval
(Phase IV). Dr. Perkins has been a major contributor to the formulation and
writing of both investigational new drug (IND) applications and of new drug
application (NDA) submissions to the FDA. Previous senior professional
responsibilities in clinical trials and medical affairs include affiliations
with ILEX Oncology (NASDAQ: ILXO), Elan Corporation PLC (NYSE: ELN) and Novartis
(NYSE: NVS).
Richard Ascione, Ph.D. (Princeton University) - 65, Vice President, Director of
Aphton's Laboratory of Molecular Medicine. Dr. Ascione has been with the Company
for more than five years. Dr. Ascione directs R&D in the area of Molecular
Biology and works closely with Aphton's Laboratory of Immunobiology in research
and product development. Previously, Dr. Ascione was a professor in the
Department of Experimental Oncology and Associate Director of the Center for
Molecular and Structural Biology at the Hollings Cancer Center and the Medical
University of South Carolina, respectively, in Charleston, South Carolina.
Earlier, Dr. Ascione was with the National Cancer Institute (NCI) of the
National Institutes of Health (NIH), where he served as Deputy Chief of NCI's
Laboratory of Molecular Oncology. Dr. Ascione has published over sixty-five
peer-reviewed papers, several book chapters and articles related to the
molecular biology and gene regulation of cancer, human retroviruses and
HIV/AIDS.
Theo de Roij, Ph.D., D.V.M. - 52, Vice President, Business and Product
Development. Prior to joining the Company in 1998, Dr. de Roij served for more
than one year as Director of Business Development at GlaxoSmithKline Biologicals
S.A., responsible for its worldwide business development activities. Previously,
Dr. de Roij was employed by the Animal Health Division of Solvay, S.A., where he
held several senior positions, including responsibility for worldwide business
development and strategic planning.
Peter Blackburn, Ph.D. - 52, Vice President, Program Development and
Manufacturing. Dr. Blackburn has been with the Company since 1997. Previously,
Dr. Blackburn was Executive Vice President and Chief Operating Officer of
Applied Microbiology, Inc. Earlier, he was involved in academic research in
protein chemistry at Rockefeller University, New York, working in the laboratory
of two recipients of the Nobel Prize for Chemistry. Dr. Blackburn has published
numerous papers in peer-reviewed journals and is the inventor on numerous US and
foreign patents.
Administrative and Scientific Staff
Frederick W. Jacobs - Vice President, Treasurer, Chief Accounting Officer and
Principal Financial Officer. Previously, Mr. Jacobs, a CPA, was Chief Financial
Officer of a Health Maintenance Organization and before that served on the staff
of PricewaterhouseCoopers (then Coopers & Lybrand), providing audit and tax
services.
Donald Henderson - Vice President and Managing Director, Finance and
Administration, Europe. Previously, Mr. Henderson, a chartered accountant, held
financial management positions at a number of pharmaceutical companies.
Jeannette L. Whitmore - Vice President, Director, Investor and Media Relations,
Corporate Communications. Previously, Ms. Whitmore held positions in business
administration in the medical and healthcare fields.
Stephen L. Karr, Jr., Ph.D., University of California, Davis, Dr. Karr joined
the Company soon after its founding in 1981 and serves as Vice President and
General Manager of the Laboratory of Immunobiology. He is responsible for the
Laboratory's daily operations, including program planning, budgeting and
control. As Project Manager, Dr. Karr is responsible for the experimental design
and implementation of special projects. Dr. Karr, who is also an
immunoparasitologist, is an inventor of numerous Aphton patents. Dr. Karr has
sixteen publications and had presented twenty papers prior to joining the
Company.
-15-
Stephen Grimes, Ph.D., University of California - Vice President of the
Laboratory of Immunology. Dr. Grimes joined the Company immediately after its
founding and is responsible for research and development in immunology and for
the experimental design and implementation of immunology-based projects. He also
serves as the principal scientific deputy for Aphton's clinical trials. Dr.
Grimes is a co-inventor of numerous issued patents of the Company and additional
patents in preparation and pending. Dr. Grimes joined the Company upon finishing
his doctoral dissertation at the University of California, Davis.
None of our directors or officers is involved, or has ever been involved, in any
litigation, administrative or governmental proceeding in the past five years
that are material to an evaluation of their ability and their integrity. The
Company has approximately 50 employees, of which 40 work primarily in Research
and Development.
Scientific Advisory Board
The members of the company's Scientific Advisory Board, which functions
primarily as a review board for research projects and for product development
programs, in addition to its senior staff members, are:
Robert J. Scibienski, Ph.D., University of California, Los Angeles. A
co-founder of the Company, Dr. Scibienski focuses on immunology-related
basic technology at the Company, currently addressing immune system
regulation, antigen presentation and gene interactions. Dr. Scibienski is a
co-inventor of issued Aphton patents and a number of patent applications of
the Company. Dr. Scibienski is Associate Professor, Department of Medical
Microbiology and Immunology and Director of the campus-wide Central
Hybridoma Facility at the University of California, Davis. Dr. Scibienski
has over thirty publications.
Demosthenes Pappagianis, M.D. (Stanford School of Medicine), Ph.D.
(University of California, Berkeley). A co-founder of the Company, Dr.
Pappagianis is its principal resource on the mechanisms of infection of
pathogens and of host defenses. Professor and Chairman (1967-1985) in the
Department of Medical Microbiology and Immunology at the University of
California, Davis, Dr. Pappagianis is widely recognized in the field of
infectious diseases. He is a Diplomate of the National Board of Medical
Examiners and Diplomate of the American Board of Medical Microbiology. In
addition, he is a Fellow of the Infectious Diseases Society of America and
an Associate Member of the Armed Forces Epidemiological Board. Dr.
Pappagianis has over one hundred publications.
Vernon C. Stevens, Ph.D. Professor of Reproductive Biology, Ohio State
University. Dr. Stevens is recognized worldwide as one of the pre-eminent
authorities on vaccines, contraception and synthetic peptide based
immunogen formulations. He pioneered the development of synthetic peptide
immunogens for human use, particularly for Aphton's immunocontraceptive
product, which prevents pregnancy, under development with the World Health
Organization (WHO).
Richard L. Littenberg, M.D. A co-founder of the Company, Dr. Littenberg is
an emeritus member of Aphton's Scientific Advisory Board and is a
co-inventor of three Aphton patent filings. Dr. Littenberg is Board
Certified in both Internal Medicine and Nuclear Medicine and a Diplomate of
the National Board of Medical Examiners and is President and Chief
Executive Officer of HMG. Dr. Littenberg received his M.D. degree from the
State University of New York. He has practiced internal and nuclear
medicine for over twenty years. He has participated in clinical trials for
major pharmaceutical companies and has engaged in gastrointestinal, cancer
and cardiovascular research.
Eliezer Benjamini, Ph.D., University of California, Berkeley. A co-founder
of the Company, Dr. Benjamini is an emeritus member of the Scientific
Advisory Board and is a co-inventor of two Aphton patents. Dr. Benjamini
retired as a full Professor in the Department of Medical Microbiology and
Immunology at the University of California, Davis, where he holds the title
of Professor Emeritus. Dr. Benjamini is widely recognized in the field of
immunology. He has received awards from industry and academia, including
the Distinguished Scientists Award in Virology and Immunology (1984) which
was given for his pioneering work in the development of synthetic peptide
vaccines. Dr. Benjamini has over one hundred publications and is co-author,
with Dr. Sidney Leskowitz, of Immunology: A Short Course, a textbook for
medical students.
Other scientists (consultants) participate when their expertise is needed
on a specific project.
-16-
Glossary of Selected Terms
Adenocarcinoma:cancer that originates in glandular epithelial cells that line certain internal
organs.
Adjuvant Treatment:an ancillary treatment that is given to patients in addition to a primary treatment
to enhance the effectiveness of the primary treatment. For example, in colon
cancer, chemotherapy often is given as an adjuvant treatment following surgery to
remove the primary cancer from the colon.
Antibody:a protein produced by certain white blood cells as part of an immune response.
These proteins, called antibodies, bind in a specific manner to a separate molecule
and neutralize or inhibit its biological activity.
Antigen:any substance that can induce antibodies (B-cells) or activate T-cells, which bind
to it.
Cancer Vaccine:technically a misnomer: a large weakly-antigenic molecule derived from the surface
of cancer cells, which when combined with a foreign molecule (e.g., virus) induces
a stronger immune response against it and, then, where located on the surface of
the cancer cells.
Control Group:the patient group (or arm) of a clinical trial that receives the placebo or a
standard treatment for a disease, against which the experimental drug is compared.
Gastrin:a hormone produced in the stomach that regulates stomach acid secretion and
stimulates the proliferation of gastrointestinal cells and adenocarcinomas of the
gastrointestinal tract. It occurs in the body in several forms, including gastrin
17 (a 17 amino acid peptide) and gastrin 34 (a 34 amino acid peptide).
Gonadotropin Releasing Hormone (GnRH):a hormone secreted in the hypothalmus that stimulates the release of other
reproductive hormones (including ultimately, testosterone, estrogen and
progesterone).
Hapten: a small molecule (peptide), not antigenic by itself, that can be bound to by
antibodies. It can be made antigenic and elicit such antibodies when joined to a
foreign molecule (carrier).
Hormone:a chemical substance produced by an organ or cells of an organ in one part of the
body, and carried in the blood to another organ or part of the body; and which has
a specific regulatory effect on the activity of the body including growth,
metabolism and reproduction.
human Chorionic Gonadotropin (hCG):a female hormone secreted by a fertilized egg necessary to start pregnancy.
Immune System:the complex group of organs and cells which has the ability to fight infection and
disease.
Immunogen:any molecule capable of inducing the immune system to produce an antibody response
against it.
Metastasis:a process by which cancer cells spread from the primary tumor to distant sites such
as the lung, liver, bone, or brain. A cancer that has spread is said to be
metastatic, and the distant tumors are called metastases.
Peptide:a molecule composed of amino acids that are linked to each other in a sequence.
Placebo:an inert non-drug substance that is given to the control group for comparison to a
new experimental drug, usually in a randomized clinical trial.
Randomized Clinical Trial:a clinical trial with at least two arms, in which the decision as to which arm a
new patient is assigned is, by design, made by chance.
Standard Treatment:a currently accepted treatment for a given disease. The drug treatment often given
to one group (or arm) of patients in a clinical trial. The standard treatment can
serve as the control arm, in place of a placebo, for comparison to a new
experimental drug treatment.
Treatment Group:the patient group, or arm, of a clinical trial that receives the new experimental
drug treatment.
Vaccine:an immunogen consisting of an attenuated or killed microorganism, administered to
induce the immune system to produce antibodies to fight an infectious disease.
Vaccine - Like:an immunogen consisting of a synthetic hapten (peptide) joined together with a
foreign molecule, administered to induce the immune system to produce antibodies
against the peptide.
-17-
Item 2. Properties
The Company does not own any real property. The Company presently leases
research and development facilities in Yolo County, California and in
Leicestershire County, United Kingdom. The Company leases its corporate
headquarters in Miami, Florida. The Company believes that these facilities are
suitable for its operations for the foreseeable future. These leases expire at
various dates through December 31, 2002. The minimum rental commitments for the
year ending December 31, 2002 is $22,000 and none thereafter. The leases provide
various options to renew, but the Company may or may not choose to renew any of
the leases. The Company may or may not relocate one or more of the Company
facilities based on strategic planning.
Item 3. Legal Proceedings
The Company is not involved, and has never been involved, in any litigation,
administrative or governmental proceeding and none is believed by the Company's
management to be threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-18-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of Aphton has been trading on Nasdaq's National Market System
since June 2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues
(formerly over-the-counter) market since April 1, 1991, the date of Aphton's
initial public offering. The following table sets forth high and low price
information, provided by Nasdaq Historical Research Department, for each full
quarter beginning after January 31, 1999. The Company's Common Stock is traded
under the symbol "APHT."
For The Year Ended January 31, 2001:
1st Quarter $45.00 $21.50
2nd Quarter $34.00 $16.00
3rd Quarter $31.91 $22.00
4th Quarter $30.00 $15.75
For The Eleven Months Ended December 31, 2001:
Two Months Ended March 31, 2001 $22.56 $12.13
2nd Quarter $24.81 $14.41
3rd Quarter $21.98 $ 6.95
4th Quarter $18.59 $ 9.02
We have never paid any cash dividends on our common stock. Although there are no
restrictions that currently limit our ability to pay cash dividends, we intend
to retain all future earnings, if any, until the Company generates sufficient
revenues to allow for the payment of dividends. We do not expect to pay any cash
dividends in the foreseeable future.
In August 2001, we closed a $14.25 million financing of unregistered equity
securities with several institutional investors. Aphton sold approximately 1.2
million shares of common stock at $12.00 per share. These shares were
subsequently registered in September, 2001. UBS Warburg acted as the placement
agent on the transaction and Miller Johnson Steichen Kinnard assisted in the
transaction.
Subsequent to year end, on March 21, 2002, the Company sold 1,200,000 shares of
registered common stock at $10.50 per share and received net proceeds of $11.8
million. Subsequent to year end, on February 7, 2002, the Company sold 1,345,000
shares of registered common stock at $12.70 per share and received net proceeds
of $16.1 million.
As of December 31, 2001, Aphton had approximately 300 shareholders of record and
approximately 5,000 beneficial holders of its Common Stock.
Item 6. Selected Financial Data
SELECTED FINANCIAL INFORMATION
The selected financial data set forth below with respect to the Company's
statements of operations and balance sheets for the eleven months ended December
31, 2001, the years ended January 31, 2001, 2000 and 1999, the nine months ended
January 31, 1998 and the year ended April 30, 1997, are derived from audited
financial statements and should be read together with the financial statements
and related notes included in this Annual Report. All selected financial data
are not covered by the independent accountants' report. The data presented below
should be read together with the financial statements, related notes, and other
financial information included herein.
-19-
Statement of Operations Eleven Months Nine Months
Data: Ended Ended Year Ended
(In thousands, December 31, Year Ended January 31, January 31, April 30,
except per share data) 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Research & development
expenditures $28,676 $15,302 $10,821 $9,454 $4,963 $5,206
Net loss $(31,264) $(16,397) $(11,193) $(9,757) $(6,605) $(5,629)
Net loss per share $(1.87) $(1.02) $(0.76) $(0.68) $(0.48) $(0.44)
Weighted average shares
outstanding 16,739 16,100 14,731 14,431 13,733 12,913
Balance Sheet Data: December 31, January 31, April 30,
2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Cash and current
investments $ 6,323 $18,664 $19,179 $10,555 $14,226 $8,846
Total assets $13,983 $27,364 $28,192 $19,891 $23,580 $18,362
Total liabilities $20,715 $16,208 $16,132 $13,339 $12,273 $15,851
Accumulated deficit $(100,615) $(69,351) $(52,954) $(41,760) $(32,004) $(25,399)
Total stockholders' $(6,733) $11,157 $12,060 $ 6,552 $11,307 $ 2,511
(deficit) equity
In 1998, we changed our fiscal year-end from April 30 to January 31. In May
2000, we changed accountants from PricewaterhouseCoopers LLP to Ernst &
Young LLP. The change is discussed in Item 9 of this Report. In March 2001,
we changed our fiscal year-end from January 31 to December 31.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Eleven Months Ended December 31, 2001 and the Years Ended
January 31, 2001 and 2000
During the eleven months ended December 31, 2001, the Company reported a net
loss of $31,264,455. During this period the Company had no contract revenues.
The investment earnings on cash and current investments for the eleven months
ended December 31, 2001 was $393,768, compared to $1,554,661 for the year ended
January 31, 2001. This significant decrease was due to lower average cash
balances and interest rates. Total research and development expenditures
increased $13,374,272 in the eleven months ended December 31, 2001 over the year
ended January 31, 2001. This 87% increase was a result of the increased clinical
trial costs associated with the development of the Company's products. These
costs included the costs of establishing centers where patients are treated and
monitored. Research and development expenses were reduced by approximately
$660,000. This reduction corresponds with an adjustment of the same amount for
unrealized loss on investment securities. The Company allows certain employees
to defer a portion of compensation, and the Company transfers this amount into
an investment account that the employee then directs the investment of the
funds. The related investment securities are held by the Company, and are
subject to the general creditors of the Company. These employees direct the
investment of the funds, and the changes in value in these investments are
recognized as unrealized gains and losses in the statement of operations with a
corresponding increase or decrease to the carrying value of the investment
account. The same amount is used to adjust research and development expense and
the corresponding liability for employees' wages and benefits payable.
Unrealized holding losses on trading securities and the corresponding decrease
in research and development expense totaled approximately $660,000 in the eleven
month period ending December 31, 2001 and approximately $1,000,000 for the year
ended January 31, 2001. Unrealized holding gains on trading securities and the
corresponding increase in research and development expense totaled approximately
$1,000,000 in the year ended January 31, 2000.
-20-
The Company does not accumulate cost information by major development product.
Many costs are applicable to more than one product. We receive reimbursements
from our strategic partners for some of our research and development expenses
and these expenses are not included in our costs. We estimate that 93% of our
research and development costs are spent on gastrointestinal and reproductive
system cancers. There are no payment or penalty milestones associated with any
of the projects, all of which are in Phase II or III clinical trials. The
Company does not speculate on the timing of approvals by regulatory authorities.
During the year ended January 31, 2001, the Company reported a net loss of
$16,397,139. During this period the Company had no contract revenues. The
investment earnings on cash and current investments for the year was $1,554,611.
This significant increase was due to higher average cash balances. Total
research and development expenditures increased $4,480,822. Research and
development cash expenditures were approximately $5,468,000 greater in the year
ended January 31, 2001 than in the year ended January 31, 2000. This increase
was a result of the increased clinical trial costs associated with the
development of the Company's products.
During the year ended January 31, 2000, the Company reported a net loss of
$11,193,296. During this period the Company had no contract revenues. Investment
earnings on cash and current investments for twelve months was less than the
$547,000 earned in the year ended January 31, 1999 due to lower average cash
balances. Although ending cash and investments were approximately $9,000,000
greater than at January 31, 1999, most of the funds were received during the
period from October, 1999 to January, 2000. Total research and development
expenditures increased approximately $1,400,000. Research and development cash
expenditures were approximately $800,000 greater than in the year ended January
31, 1999. Non-cash research and development expenses increased approximately
$600,000 and were related to a Company plan whereby individuals may forego
immediate receipt of wages, as described above.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities and the measurement of derivative instruments at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
The original effective date for SFAS No. 133 was for all fiscal years beginning
after June 15, 1999. As a result of the issuance of SFAS No. 137, the effective
date for SFAS No. 133 is for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133, as amended and interpreted,
did not have an impact on the financial statements.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company
believes the adoption of these statements will have no impact on its financial
position or results from operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 superseded Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. SFAS No.
144 also amended Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company believes the adoption of
this statement will have no impact on its financial position or results from
operations.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any material effect in the foreseeable
future. Dividend, interest and other income were primarily derived from
money-market accounts.
-21-
Liquidity and Capital Resources
The Company has financed its operations since inception through the sale of its
equity securities and, to a lesser extent, operating revenues from R&D limited
partnerships to conduct research and development. These funds provided the
Company with the resources to acquire staff, construct its research and
development facility, acquire capital equipment and to finance technology and
product development, manufacturing and clinical trials.
Subsequent to year end, on March 21, 2002, the Company sold 1,200,000 shares of
registered common stock at $10.50 per share and received net proceeds of $11.8
million. Subsequent to year end, on February 7, 2002, the Company sold 1,345,000
shares of registered common stock at $12.70 per share and received net proceeds
of $16.1 million.
The selected pro forma financial information summarized below shows the effect
of the net proceeds from equity financing transactions received on February 7,
2002 and March 21, 2002 as if the closing of those transactions had occurred,
and the net proceeds from those transactions had taken place, on December 31,
2001.
Balance Sheet Data: Pro Forma December 31 December 31,
2001 2001
---- ----
Cash and current investments $ 34,223 $ 6,323
Total assets $ 41,883 $ 13,983
Total stockholders' equity (deficit) $ 21,167 $ (6,733)
Weighted average shares outstanding 17,045 16,739
The unaudited pro forma financial information is not necessarily indicative of
the Company's future results of operations. The unaudited pro forma financial
information should be read in conjunction with this section captioned
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and with our financial statements and related notes included in this
report.
During the eleven months ended December 31, 2001, the Company received proceeds
of approximately $13.3 million net of approximately $1.0 million offering costs
from the closing of a private financing with several funds. The Company issued
1,187,503 shares of common stock and there were no warrants or options included
with this private placement. Approximately 170,000 additional shares will be
issued subsequent to December 31, 2001 due to an anti-dilution provision for the
sale of securities less than $12.00 per share prior to October, 2002.
During the year ended January 31, 2001, the Company received net proceeds of
$15.5 million from the closing of a private financing with several international
biotechnology/healthcare funds. The Company issued 491,509 shares of common
stock and there were no warrants or options included with this private
placement. The Company has not performed any research for third parties and has
no sources of income from operations. Cash flows from investing activities are
not anticipated to be significant. The Company has no short or long term debt or
lines of credit established. The Company anticipates that the sale of its equity
securities will continue to finance operations for the foreseeable future.
During the year ended January 31, 2000, in a private placement the Company sold
800,000 shares of common stock for $11,200,000, net of expenses. The Company
also issued 359,000 shares through the exercise of outstanding purchase
warrants, resulting in net proceeds of $5,502,250.
The Company anticipates that its existing capital resources which are composed
primarily of cash and short-term cash investments, including the proceeds of its
private placements and interest thereon, would enable it to maintain its
currently planned operations through the year ending December 31, 2002. The
Company's working capital and capital requirements will depend upon numerous
factors, including the following: the progress of the Company's research and
development program, preclinical testing and clinical trials; the timing and
cost of obtaining regulatory approvals; the levels of resources that the Company
devotes to product development, manufacturing and marketing capabilities;
technological advances; competition; and collaborative arrangements or strategic
alliances with other drug companies, including the further development,
manufacturing and marketing of certain of the Company's products and the ability
of the Company to obtain funds from such strategic alliances or from other
sources.
-22-
Critical Accounting Policies
The SEC has recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" (FRR 60),
suggesting companies to provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to the Company's financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. Aphton believes the following represent the
critical accounting policies of the Company as contemplated by FRR 60. For a
summary of all the Company's significant accounting policies, including the
critical accounting policies discussed below, see Note 2 to the accompanying
financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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, however
management believes such differences are unlikely to be significant.
Research and Development Expenses
Research and development costs are expensed as incurred. These costs include
internal research and development costs, the salaries of dedicated personnel,
the allocated salaries of personnel who also perform general and administrative
tasks, the costs of the dedicated research and development facilities and the
costs of contracted researchers. There is no allocation of administrative
expense or corporate costs to research and development costs.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes. Under
this method, the amount of deferred tax asset or liability is calculated by
applying the provisions of enacted tax laws to the differences in the bases of
assets and liabilities for financial and income tax purposes. Income tax expense
is the tax payable for the period and the change during the period in deferred
tax assets and liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences. As a result of this review, the
Company has established a full valuation allowance against its deferred tax
assets.
Investment Securities
Investment securities consist principally of debt securities issued by the US
Treasury and other US Government agencies and corporations and investment in
other securities, including mutual funds.
Investment securities are classified into three categories and accounted for as
follows: (1) Held-to-maturity securities are debt securities that the Company
has the positive intent and ability to hold to maturity. These securities are
reported at amortized cost. (2) Trading securities are securities which are
bought and held principally for the purpose of selling them in the near term.
These securities are reported at fair value, with unrealized gains and losses
included in current earnings. (3) Available-for-sale securities are debt and
equity securities not classified as either held-to-maturity or trading
securities. The Company does not have available-for-sale securities. Gains and
losses realized on the sales of investment securities are determined using the
specific identification method.
The Company's trading securities consist of mutual funds and relate to a Company
plan whereby certain individuals may forego immediate receipt of wages. In
connection therewith, the Company establishes a liability for accrued wages and
records the related compensation expense as services are performed. Further, the
Company segregates an amount of funds in investment accounts equal to the
liability for accrued wages. The investment accounts (trading securities) remain
assets of the Company, and are subject to the general creditors of the Company.
Upon transfer of the funds to the investment accounts, the employees direct the
specific investment of the funds. The changes in value in the investment
accounts (trading securities) are recognized as unrealized gains and losses in
the statements of operations, with a corresponding increase or decrease to
research and development expense and the liability for employees' wages and
benefits.
-23-
Unconditional Supply Commitment
The Company has the unconditional right to receive supplies originally
aggregating $9 million from Aventis Pasteur. The Company's policy is to review
the current market prices of available supplies, if any, to assure that they
remain above the stated Aventis Pasteur contract price of the materials and that
the right to receive the supplies remains unimpaired. Aventis Pasteur is one of
the largest pharmaceutical vaccine manufacturers in the world. The Company
monitors the financial performance of Aventis Pasteur to assure that they will
continue to be able to perform under the contract, wherein the special order
supplies are to be provided from supplies manufactured by Aventis Pasteur in
large quantities and sold to many customers, including the U.S. Government, as
part of Aventis Pasteur's basic franchise (business). The contract allows for
inflation based increases in the per unit costs of the supplies which the
Company and Aventis Pasteur believe are sufficient to assure that there will be
no future financial hardship incurred by Aventis Pasteur in the execution of the
agreement.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Aphton's market risks are all immaterial. Investment securities consist
principally of debt securities issued by the US Treasury and other US Government
agencies and corporations and investment in other securities, including mutual
funds.
Item 8. Financial Statements and Supplementary Data.
Financial Statements are set forth in this report beginning at page 17.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The registrant changed accountants from PricewaterhouseCoopers LLP to Ernst &
Young LLP, effective May 19, 2000, for the year ended January 31, 2001.
PricewaterhouseCoopers LLP was dismissed effective May 19, 2000. The reports of
PricewaterhouseCoopers LLP on the financial statements of the registrant for the
past two years contained no adverse opinion or other disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principle.
-24-
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required for this item is incorporated by reference to the
section captioned "Election of Directors" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required for this item is incorporated by reference to the
section captioned "Executive Compensation" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated by reference to the
section captioned "Election of Directors" of the Company's Proxy Statement for
the Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
(i) Financial Statements:
Reports of Independent Certified Public Accountants
Balance Sheets as of December 31, 2001 and January 31, 2001
Statements of Operations for the eleven months ended December 31, 2001 and
for the years ended January 31, 2001 and 2000
Statements of Stockholders' (Deficit) Equity for the eleven months ended
December 31, 2001 and for the years ended January 31, 2001 and 2000
Statements of Cash Flows for the eleven months ended December 31, 2001 and
for the years ended January 31, 2001 and 2000
Notes to the Financial Statements
(ii) Financial Statements Schedules:
Financial Statement Schedules are omitted because they are either not
required, not applicable, or the information is included in the Financial
Statements or Notes thereto.
(b) Exhibits
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit B of the Registrant's Definitive Proxy Statement filed
October 8, 1997)
3.3 By-Laws (Incorporated by reference to Exhibit C of the
Registrant's Definitive Proxy Statement filed October 8, 1997)
-25-
23.1 Consent of Ernst & Young LLP, Independent Certified Public
Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Certified
Public Accountants.
(c) Reports on Form 8-K
During the three-month period ending December 31, 2001, the Company did not
file any reports on Form 8-K.
Subsequent to year end, the Company filed the following current reports on
Form 8-K:
- on January 23, 2002, announcing the completion of patient
recruitment for the Company's gastric cancer clinical trial;
- on January 31, 2002, announcing the effectiveness of a
registration statement on Form S-3 to sell 1,500,000 shares of
the Company's common stock;
- on February 5, 2002, disclosing the existence of an underwriting
agreement among the Company, UBS Warburg LLC and Morgan Keegan &
Co., Inc.;
- on February 5, 2002, announcing the sale of 1,345,000 shares of
the Company's common stock;
- on February 7, 2002, announcing the closing of the offer and sale
of 1,345,000 shares of the Company's common stock;
- on February 11, 2002, disclosing that a scientific collaborator
of the Company had announced interim results of a gastric cancer
Phase II clinical trial at the 12th International Congress in
Paris on anti-cancer treatment;
- on March 18, 2002, disclosing certain preliminary unaudited
summary financial information of the Company for the period ended
December 31, 2001;
- on March 18, 2002, disclosing the existence of an underwriting
agreement between the Company and Morgan Keegan & Co., Inc.;
- on March 21, 2002, announcing the closing of the offer and sale
of 1,200,000 shares of the Company's common stock.
-26-
Dated: March 29, 2002 APHTON CORPORATION
By: PHILIP C. GEVAS
Chairman of the Board, Chief
Executive Officer,
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Philip C. Gevas
- --------------------------- Chairman of the Board, Chief Executive March 29, 2002
PHILIP C. GEVAS Officer and President
/s/ William A. Hasler
- --------------------------- Vice Chairman of the Board, Director and March 29, 2002
WILLIAM A. HASLER Co-Chief Executive Officer
/s/ Nicholas John Stathis
- --------------------------- Director March 29, 2002
NICHOLAS JOHN STATHIS
/s/ Frederick W. Jacobs
--------------------------- Vice President, Treasurer, Chief March 29, 2002
FREDERICK W. JACOBS Accounting Officer and Principal
Financial Officer
-27-
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Page
----
Reports of Independent Certified Public Accountants 29
Balance Sheets - December 31, and January 31, 2001 30
Statements of Operations - 31
for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000
Statements of Stockholders' (Deficit) Equity - 31
for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000
Statements of Cash Flows - 32
for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000
Notes to the Financial Statements 33
-28-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Aphton Corporation
We have audited the accompanying balance sheets of Aphton Corporation as of
December 31, 2001 and January 31, 2001 and the related statements of operations,
stockholders' (deficit) equity and cash flows for the eleven months ended
December 31, 2001 and the year ended January 31, 2001. 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 auditing standards generally accepted
in the United States. 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 Aphton Corporation as of
December 31, 2001 and January 31, 2001, and the results of its operations and
its cash flows for the eleven months ended December 31, 2001 and the year ended
January 31, 2001, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Miami, Florida
March 21, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Aphton Corporation
In our opinion, the statements of operations, stockholders' equity and cash
flows for the year ended January 31, 2000 present fairly, in all material
respects, the results of operations and cash flows of Aphton Corporation (the
"Company") for the year ended January 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 24, 2000
-29-
APHTON CORPORATION
Balance Sheets - December 31, and January 31, 2001
Assets December 31, January 31,
2001 2001
Current Assets:
Cash and current investments:
Cash and short-term cash investments $3,176,717 $3,508,577
Investment securities-trading 1,147,417 1,653,180
Investment securities-held-to-maturity 1,999,006 13,502,695
---------- -----------
Total cash and current investments 6,323,140 18,664,452
Other assets (including current portion of
unconditional supply commitment) 595,390 733,323
---------- -----------
Total current assets 6,918,530 19,397,775
Equipment and improvements, at cost,
net of accumulated depreciation and amortization 188,597 166,437
Unconditional supply commitment 6,875,515 7,800,000
---------- -----------
Total assets $13,982,642 $27,364,212
=========== ===========
Liabilities and Stockholders' (Deficit) Equity
Liabilities:
Current liabilities:
Accounts payable and other $10,715,430 $6,207,569
----------- -----------
Total current liabilities 10,715,430 6,207,569
Deferred revenue 10,000,000 10,000,000
----------- -----------
Total liabilities 20,715,430 16,207,569
----------- -----------
Commitments
Stockholders' (Deficit) Equity:
Preferred stock, $0.001 par value -
Authorized: 2,000,000 shares
Issued and outstanding: none - -
Common stock, $0.001 par value -
Authorized: 30,000,000 shares
Issued and outstanding:17,386,996 shares at
December 31, 2001 and 16,199,493 shares
at January 31, 2001 17,387 16,199
Additional paid in capital 93,566,314 80,292,478
Purchase warrants 298,900 198,900
Accumulated deficit (100,615,389) (69,350,934)
-------------- -------------
Total stockholders' (deficit) equity (6,732,788) 11,156,643
-------------- -------------
Total liabilities and stockholders'(deficit) equity $13,982,642 $27,364,212
============== =============
The accompanying notes are an integral part of the financial statements.
-30-
APHTON CORPORATION
Statements of Operations
for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000
December 31, January 31, January 31,
2001 2001 2000
Revenue: $ - $ - $ -
------------ ----------- ---------
Costs and Expenses:
General and administrative 2,319,539 1,661,910 1,775,652
Research and development 28,676,455 15,302,183 10,821,361
------------ ------------ ------------
Total costs and expenses 30,995,994 16,964,093 12,597,013
------------ ------------ ------------
Loss from operations 30,995,994 16,964,093 12,597,013
Other Income (expense): ------------ ------------ ------------
Dividend and interest income 393,768 1,554,611 444,980
Unrealized (losses) gains from investments (662,229) (987,657) 958,737
------------ ------------ ------------
Net loss $(31,264,455) $(16,397,139) $(11,193,296)
Per share data ------------ -------------- --------------
Basic and diluted loss per common share $(1.87) $(1.02) $(0.76)
Weighted average number of ------------- -------------- --------------
common shares outstanding 16,739,267 16,100,108 14,731,301
============= ============== ==============
The accompanying notes are an integral part of the financial statements.
APHTON CORPORATION
Statements of Stockholders' (Deficit) Equity
for the eleven months ended December 31, 2001
and the years ended January 31, 2001 and 2000
Additional
Common Stock Paid in Purchase Accumulated
Shares Amount Capital Warrants Deficit Total
Balance, January 31, 1999 14,433,984 $14,434 $47,960,689 $336,904 $(41,760,499) $6,551,528
---------- ------- ---------- -------- ------------- ----------
Exercise of purchase
warrants 359,000 359 5,639,895 (138,004) - 5,502,250
Sale of stock, net 800,000 800 11,199,200 - - 11,200,000
Net loss - - - - (11,193,296) (11,193,296)
------------ ------ ---------- -------- -------------- ------------
Balance, January 31, 2000 15,592,984 15,593 64,799,784 198,900 (52,953,795) 12,060,482
------------ ------ ---------- -------- -------------- ------------
Exercise of purchase
warrants 115,000 115 246,385 - 246,500
Sale of stock, net 491,509 491 15,246,309 - - 15,246,800
Net loss - - - - (16,397,139) (16,397,139)
----------- ------ ---------- ------- ------------ ------------
Balance, January 31, 2001 16,199,493 16,199 80,292,478 198,900 (69,350,934) 11,156,643
----------- ------ ---------- ------- ------------ -----------
Sale of stock, net 1,187,503 1,188 13,273,836 - - 13,275,024
Issuance of warrants - - - 100,000 - 100,000
Net loss - - - - (31,264,455) (31,264,455)
----------- ------- ----------- -------- -------------- ------------
Balance, December 31, 2001 17,386,996 $17,387 $93,566,314 $298,900 $(100,615,389) $(6,732,788)
=========== ======= =========== ======== ============= ============
The accompanying notes are an integral part of the financial statements.
-31-
APHTON CORPORATION
Statements of Cash Flows
for the eleven months ended December 31, 2001 and for the years ended January 31, 2001 and 2000
December 31, January 31, January 31,
2001 2001 2000
Cash flows from operating activities:
Cash paid to suppliers and employees $(24,593,507) $(15,467,013) $(9,446,861)
Purchase of trading securities (156,467) (259,957) (2,201,968)
Proceeds (losses) from trading securities (662,229) (987,657) 1,987,611
Interest and dividends received 393,768 1,554,611 444,980
--------------- --------------- ---------------
Net cash used in operating activities (25,018,435) (15,160,016) (9,216,238)
Cash flows from investing activities: --------------- --------------- ---------------
Purchase of held to maturity securities (15,311,311) (59,471,854) (10,438,097)
Proceeds from maturity of held to
maturity securities 26,815,000 52,788,000 3,560,000
Capital expenditures (92,138) (61,116) (34,986)
--------------- --------------- ---------------
Net cash used in investing activities 11,411,551 (6,744,970) (6,913,083)
Cash flows from financing activities: --------------- --------------- ---------------
Sales of stock 13,275,024 15,493,300 16,702,250
--------------- --------------- ---------------
Cash received from financing activities 13,275,024 15,493,300 16,702,250
--------------- --------------- ---------------
Net (decrease) increase in cash and
short-term cash investments (331,860) (6,411,686) 572,929
Cash and short-term cash investments:
Beginning of period 3,508,577 9,920,263 9,347,334
--------------- --------------- ---------------
End of period $3,176,717 $3,508,577 $9,920,263
=============== =============== ===============
Reconciliation of net loss to net cash
used in operating activities
Net loss $(31,264,455) $(16,397,139) $(11,193,296)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock purchase warrants 100,000 - -
Depreciation and amortization 69,978 68,029 77,236
Net (increase) decrease in investment
securities-trading (156,466) 379,581 (214,357)
Unrealized (gains) losses from investments 662,229 987,657 (958,737)
(Decrease) increase in accrued employee benefits (662,229) (987,657) 958,737
Changes in -
Other assets 188,269 45,311 75,148
Unconditional supply commitment 874,149 820,000 205,000
Accounts payable and other 5,170,090 (75,798) 1,834,031
--------------- --------------- ---------------
Net cash used in operating activities: $(25,018,435) $(15,160,016) $(9,216,238)
=============== =============== ================
The accompanying notes are an integral part of the financial statements.
-32-
APHTON CORPORATION
Notes to the Financial Statements
1. Organization and Operations
Aphton Corporation is a biopharmaceutical company in late-stage clinical trials
for four cancer indications. Aphton is developing products using its innovative
vaccine-like technology for neutralizing hormones that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases;
and for the prevention of pregnancy. Aphton has strategic alliances with Aventis
Pasteur (NYSE: AVE), GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health
(NYSE: SGP), and the World Health Organization (WHO).
Aphton's fiscal year end was changed in March, 2001 from January 31 to December
31, effective for the 11 month period ending December 31, 2001.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (U.S.) requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures 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, however management believes such
differences are unlikely to be significant.
Research and Development Expenses
Research and development costs are expensed as incurred. These costs
include internal research and development costs, the salaries of dedicated
personnel, the allocated salaries of personnel who also perform general and
administrative tasks, the costs of the dedicated research and development
facilities and the costs of contracted researchers. There is no allocation
of administrative expense or corporate costs to research and development
costs.
General and Administrative Expenses
General and administrative expenses represent expenses not clearly related
to research and development expense. A significant portion of these
expenses are related to intellectual property/patent legal costs and
salaries, which are typically excluded from research and development
according to Statement of Financial Accounting Standards No. 2 "Accounting
for Research and Development Costs."
Equipment and Improvements
Equipment and improvements are depreciated using accelerated methods over
the estimated economic lives (5-7 years) of the assets. Improvements are
amortized over the term of the lease, or the life of the asset, whichever
is shorter, using the straight-line method. Betterments that substantially
extend the useful life of equipment and furniture generally reduce the
accumulated depreciation of the respective asset.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes.
Under this method, the amount of deferred tax asset or liability is
calculated by applying the provisions of enacted tax laws to the
differences in the bases of assets and liabilities for financial and income
tax purposes. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
-33-
Per Share Data
The Company complies with SFAS No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for
earnings per share. The Company's basic loss per common share was calculated
by dividing net loss by the weighted average number of common shares
outstanding. The Company's potential common shares are anti-dilutive, and
accordingly, basic and diluted loss per share are the same. Such potential
common shares consist of purchase warrants (See Note 7) and could
potentially dilute basic earnings per share in the future.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments, including short-term cash investments with
initial or remaining maturity from date of purchase of three months or less,
to be cash equivalents.
Investment Securities
Investment securities consist principally of debt securities issued by the
U.S. Treasury and other U.S. Government agencies and corporations and
investment in other securities, including mutual funds.
Investment securities are classified into three categories and accounted for
as follows: (1) Held-to-maturity securities are debt securities that the
Company has the positive intent and ability to hold to maturity. These
securities are reported at amortized cost. (2) Trading securities are
securities which are bought and held principally for the purpose of selling
them in the near term. These securities are reported at fair value, with
unrealized gains and losses included in current earnings. (3)
Available-for-sale securities are debt and equity securities not classified
as either held-to-maturity or trading securities. The Company does not have
available-for-sale securities. Gains and losses realized on the sales of
investment securities are determined using the specific identification
method.
Concentrations of Credit Risk
The Company's short-term cash investments are held in several financial
institutions and consist principally of insured money market accounts and
cash management accounts that are collateralized by or invested in U.S.
Government and U.S. Government agency securities.
The Companys held-to-maturity securities consist of marketable debt
securities. These securities are issued by a diversified selection of
corporate and U.S. government agencies with strong credit ratings. The
Company's investment policy limits the amount of credit exposure with any
one institution. Other than asset-backed securities, these debt securities
are generally not collateralized. The Company has not experienced any
material losses due to credit impairment on investments in marketable debt
securities in any year.
Impairment of the Unconditional Supply Commitment
As discussed in Note 3, the Company has the unconditional right to receive
supplies originally aggregating $9 million from Aventis Pasteur. The
Company's policy is to review the current market prices of available
supplies, if any, to assure that they remain above the stated Aventis
Pasteur contract price of the materials and that the right to receive the
supplies remains unimpaired. Aventis Pasteur is one of the largest
pharmaceutical vaccine manufacturers in the world. The Company monitors the
financial performance of Aventis Pasteur to assure that they will continue
to be able to perform under the contract, wherein the special order supplies
are to be provided from supplies manufactured by Aventis Pasteur in large
quantities and sold to many customers, including the U.S. Government, as
part of Aventis Pasteur's basic franchise (business). The contract allows
for inflation based increases in the per unit costs of the supplies which
the Company and Aventis Pasteur believe are sufficient to assure that there
will be no future financial hardship incurred by Aventis Pasteur in the
execution of the agreement.
New Accounting Pronouncements
On February 1, 2002 the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted, which had
no impact on the Company's financial condition or its results of operations.
-34-
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company
believes the adoption of these statements will have no impact on its financial
position or results from operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 superseded Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. SFAS No.
144 also amended Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company believes the adoption of
this statement will have no impact on its financial position or results from
operations.
Comprehensive Income
The Company complies with SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting comprehensive income (defined to
include net income, unrealized gains and losses on available-for-sale
investment securities, foreign currency adjustments and certain other items
not included in the income statement). The Company does not have elements of
other comprehensive income other than net loss.
3. License and Co-Promotion Agreements
In June 1998, Aphton and SmithKline Beecham (now GlaxoSmithKline) signed a
Collaboration and License agreement, granting GlaxoSmithKline exclusive rights
worldwide to Aphton's GnRH-related patents and proprietary technology. The
agreement covers the diagnosis, treatment and prevention of GnRH-related cancers
and other diseases in humans. Human cancer indications for the anti-GnRH product
are prostate, breast, ovarian and endometrial cancer. Additional medical
indications for the anti-GnRH product are endometriosis, polycystic ovaries,
uterine fibroids, contraception, infertility and precocious puberty. Under terms
of the agreement, Aphton and GlaxoSmithKline are collaborating in a joint
product development program, with GlaxoSmithKline responsible for clinical
trials and regulatory approvals, and for worldwide marketing and distribution of
approved products. The agreement uses a royalty mechanism based on product
sales, in dollars, worldwide to determine Aphton's revenues. As part of the
Agreement, GlaxoSmithKline made an equity investment of $5,000,000 for 237,867
shares of newly issued Aphton common stock.
On February 14, 1997 Aphton signed an agreement with Pasteur Merieux Connaught
(Rhone-Poulenc Group) which is now known as Aventis Pasteur, a leader in medical
science and research and one of the world's largest vaccine manufacturers and
marketers, for a strategic alliance for all human cancer applications of the
Company's anti-gastrin immunogen product including stomach, colorectal, liver
and pancreatic cancers. Under the terms of the twenty-year license and
co-promotion agreement, Aphton will be responsible for product development,
clinical trials and regulatory agency approvals, and Aventis Pasteur will be
responsible for promotion, advertising, marketing, distribution and sales of the
anti-gastrin immunogen product in the United States, Canada, Europe (including
the C.I.S. countries) and Mexico. In addition, Aphton and Aventis Pasteur
entered into agreements providing for: (a) the supply of the anti-gastrin
immunogen product from Aphton to Aventis Pasteur; and (b) the supply of certain
components of the anti-gastrin immunogen product (as well as other Aphton
products) from Aventis Pasteur to Aphton. Aventis Pasteur will fund the costs
associated with product introduction, promotion, advertising and marketing
throughout the territory covered by the agreement. Under the terms of the
agreement, in addition to upfront consideration aggregating $10 million
including $1 million cash and the supply commitment (of material suitable for
human use) of $9 million, Aphton will receive the majority of the profits from
sales of the anti-gastrin immunogen product with the balance of profits to be
retained by Aventis Pasteur.
-35-
The supply commitment of materials suitable for human use consists of Diphtheria
Toxoid and/or Tetanus Toxoid. Aphton may use some or all of the unconditional
supply commitment in the product under development with Aventis Pasteur or
Aphton may use some or all of the supply commitment on other current product
lines or on research and development. The supply commitment of material suitable
for human use is not readily obtained on the open market in such large
quantities. By comparison to lower quality material available in smaller
quantities management estimates that the market value of the supplies is
substantially greater than the carrying value of $9 million, if they could be
obtained. The carrying value of the supplies is based on the negotiated License
Fee. The amount of material to be received is based on negotiated per unit
costs, which are well below the per unit costs of lower quality materials
available in smaller quantities.
The $10 million upfront consideration has been classified as a license payment
and has been deferred and will be recognized for financial statement
(accounting) purposes as revenue within the twenty-year period of the agreement.
The revenue recognition will begin once regulatory agency approval to market the
product has been received and will be recognized ratably over the remaining
period of the contract, which ends February 13, 2017. The Company does not
speculate on the timing of regulatory approvals.
Under the agreement, Aventis Pasteur shall have the right to terminate upon one
hundred eighty (180) days prior notice to Aphton, in the event that it
determines, following completion of Phase III clinical trials of the
gastrointestinal cancer product (and receipt by Aventis Pasteur of the results
and supporting data obtained in such trials), that for safety and efficacy
reasons it does not wish to co-promote, market or sell the Product. In addition,
either party may terminate the agreement by (a) mutual agreement, (b) for
uncured material breach and (c) due to liquidation, insolvency, etc. Further,
under the agreement, none of the aggregate $10 million consideration, either the
cash or the Company's rights to the full $9 million in unconditional supply
commitment, is refundable to Aventis Pasteur under any conditions. There is no
provision under the agreement for the unconditional supply commitment to be
satisfied by Aventis Pasteur with a cash payment. (The $10 million license
payment was recognized for tax purposes in the year ended April 30, 1997.)
4. Equipment and Improvements
At December 31, 2001 and January 31, 2001, equipment and improvements consisted
of the following:
December 31, January 31,
2001 2001
------------ -----------
Laboratory equipment $546,158 $502,607
Leasehold improvements 398,232 349,646
Office and laboratory furniture and fixtures 232,980 232,980
------------ ------------
1,177,370 1,085,233
Less accumulated depreciation and amortization (988,773) (918,796)
------------ -----------
$188,597 $166,437
============ ============
5. Accounts Payable and Other
At December 31, 2001 and January 31, 2001, accounts payable and other was
composed of:
December 31, January 31,
2001 2001
------------- -------------
Trade accounts payable $9,316,764 $4,276,270
Accrued wages payable 1,147,417 1,653,180
Employee benefits payable 251,249 278,119
------------- -------------
$10,715,430 $6,207,569
See related Note 6.
-36-
6. Investment Securities
Securities classified as trading and held-to-maturity at December 31, 2001 and
January 31, 2001 are summarized below. Estimated fair value is based on quoted
market prices for these or similar investments.
December 31, Unrealized Unrealized
2001 Cost Gains Losses Fair Value
------------- ---- ----------- ----------- -----------
Trading securities (carried at fair value): $1,809,646 $662,229 $1,147,417
$--
Securities held to maturity (carried at amortized cost): $1,999,006 $-- $- $1,999,006
January 31,
2001
-------------
Trading securities (carried at fair value): $2,640,837 $-- $987,657 $1,653,180
Securities held to maturity (carried at amortized cost): $13,502,695 $13,270 $-- $13,515,965
The Company held no available-for-sale investment securities at December 31,
2001 and January 31, 2001.
The carrying values of all investment securities held at December 31, and
January 31, 2001 are summarized below:
Security December 31, January 31,
- -------- 2001 2001
------------ -----------
Trading securities $1,147,417 $1,653,180
Securities held-to-maturity maturing within one year 1,999,006 13,502,695
------------- -----------
Total short-term investments $3,146,423 $15,155,875
============= =============
The Company's trading securities consist of mutual funds and relate to a Company
plan whereby certain individuals may forego immediate receipt of wages. In
connection therewith, the Company establishes a liability for accrued wages and
records the related compensation expense as services are performed. Further, the
Company segregates an amount of funds in investment accounts equal to the
liability for accrued wages. The investment accounts (trading securities) remain
assets of the Company, and are subject to the general creditors of the Company.
Upon transfer of the funds to the investment accounts, the employees direct the
specific investment of the funds. The changes in value in the investment
accounts (trading securities) are recognized as unrealized gains and losses in
the statements of operations, with a corresponding increase or decrease to
research and development expense and the liability for employees' wages and
benefits. Unrealized holding losses on trading securities and the corresponding
decrease in research and development expense totaled approximately $.6 million
in the eleven month period ended December 31, 2001. Unrealized holding losses on
trading securities and the corresponding decrease in research and development
expense totaled approximately $1.0 million in the year ended January 31, 2001.
Unrealized holding gains on trading securities and the corresponding increase in
research and development expense totaled approximately $1.0 million in 2000.
7. Common Stock, Preferred Stock and Purchase Warrants
Common Stock -
During the eleven month period ended December 31, 2001, the Company received
proceeds of approximately $13.3 million net of approximately $1.0 million
offering costs from the closing of a private financing with several funds.
The Company issued 1,187,503 shares of common stock and there were no
warrants or options included with this private placement.
During the year ended January 31, 2001, the Company received proceeds of
approximately $15.5 million net of approximately $1.0 million offering costs
from the closing of a private financing with several international
-37-
biotechnology/healthcare funds. The Company issued 491,509 shares of common
stock and there were no warrants or options included with this private
placement.
Preferred Stock -
The Company has 2,000,000 shares of authorized preferred stock, none of
which has ever been issued.
Purchase Warrants -
Each warrant described below is exercisable for one share of common stock
and is subject to the restrictive holding requirements of SEC Rule 144. The
term of the warrants ranges from 8 to 23 years. In December, 1999 there were
1,000,000 warrants with an exercise price of $14.75 reserved for future use.
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," as amended and
interpreted. Accordingly, no compensation expense is recorded for warrants
issued to employees in fixed amounts and with fixed exercise prices at least
equal to the fair market value of the Company's common stock at the date of
grant. The Company has adopted the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," through disclosure only. All stock-based
awards to nonemployees are accounted for at their fair value in accordance
with EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". There were 800,360 employee stock purchase warrants granted in
the eleven month period ended December 31, 2001, which expire October 1,
2021. Based on Black-Scholes values, for the eleven month period ended
December 31, 2001, the pro forma net loss would be approximately $34 million
and the pro forma loss per common share would be approximately $2.05. There
were 10,000 stock purchase warrants granted in the eleven month period ended
December 31, 2001, which expire October 1, 2021, to a non-employee. Based on
Black-Scholes values, for the period ended December 31, 2001, the net loss
was increased by approximately $100,000.
There were 36,000 employee stock purchase warrants granted in the year ended
January 31, 2001. Based on Black-Scholes values, for the year ended January
31, 2001, the pro forma net loss would be $16,908,699 and the pro forma loss
per common share would be $1.05. There were 150,000 employee stock purchase
warrants granted in 2000. Based on Black-Scholes values, for the year ended
January 31, 2000, the pro forma net loss would be $13,231,796 and the pro
forma loss per common share would be $.90.
The following assumptions were used in the Black-Scholes option pricing
model for the 800,360 and 10,000 purchase warrants granted in the eleven
month period ended December 31, 2001 to employees and non-employees,
respectively. The stock price and exercise price of these twenty-year
warrants were set at $14.75 on the date of grant, which was October 1, 2001.
The risk-free rate of return used was 7.0%. The expected dividend yield used
was 0%. The expected time to exercise used was 19.75 years. The expected
volatility used was 100%.
The following assumptions were used in the Black-Scholes option pricing
model for the 36,000 and 150,000 purchase warrants granted to employees in
the years ended January 31, 2001 and 2000, respectively. The stock price and
exercise price were set at $14.75 on the date of grant, which was May 2000
and 1999, respectively. The risk-free rate of return used was 7.0%. The
expected dividend yield used was 0%. The expected time to exercise used was
10 years. The expected volatility used was 100%.
-38-
The following table summarizes purchase warrant activity over the past three
fiscal periods:
Weighted-Average
Number of Shares Exercise Price
---------------- -----------------
Outstanding at January 31, 1999 2,013,400 $13.76
Granted 150,000 $14.75
Exercised (359,000) $15.33
-------------
Outstanding at January 31, 2000 1,804,400 $13.58
-------------
Granted 36,000 $14.75
Exercised (115,000) $2.14
-------------
Outstanding at January 31, 2001 1,725,400 $14.37
Granted 810,360 $14.75
Exercised - N/A
-------------
Outstanding at December 31, 2001 2,535,760 $14.49
=============
Exercisable at January 31, 2000 1,804,400 $13.58
Exercisable at January 31, 2001 1,725,400 $14.37
Exercisable at December 31, 2001 2,029,400 $14.43
For warrants outstanding and warrants outstanding and exercisable at December
31, 2001, the exercise price ranges and average remaining lives were:
Warrants Outstanding and Warrants Outstanding and Exercisable
Number
Range of Exercise Number Average Average Outstanding and Average Average
Prices Outstanding Period (1) Price (2) Exercisable Period (1) Price (2)
----------------- ----------- ---------- --------- --------------- ---------- ---------
$.25 to $14.00 532,400 13.9 $11.38 532,400 13.9 $11.38
$14.01 to $14.99 1,580,360 16.9 $14.75 1,074,000 15.6 $14.75
$15.00 to $24.00 423,000 13.9 $17.42 423,000 13.9 $17.42
----------- -----------
2,535,760 14.9 $14.49 2,029,400 14.8 $14.43
=========== ===========
(1) Weighted average remaining years
(2) Weighted average exercise price
8. Income Taxes
Gross deferred tax assets result from net operating loss and income tax credit
carryforwards. Realization of these assets is dependent on the Company's ability
to generate sufficient future taxable income, prior to the expiration of the
carryforwards, which is dependent on the completion of research and development
activities and successful marketing of the Company's various products. Due to
the uncertainties related to the above and in accordance with guidance contained
in SFAS No. 109, a valuation allowance has been provided for these deferred tax
assets. Accordingly, these assets do not appear in the Company's balance sheet
at December 31, 2001 and January 31, 2001. The changes in the valuation
allowance in the eleven month period ended December 31, 2001 and the year ended
January 31, 2001 were $13,611,000 and $5,553,000, respectively.
Deferred tax assets consisted of: December 31, 2001 January 31, 2001
----------------- -----------------
Net operating losses 31,990,000 18,292,000
Deferred license payment revenues 3,800,000 3,800,000
Expenses deductible in future periods 531,000 1,017,000
Federal and State tax credits 3,124,000 2,725,000
----------------- -----------------
Total deferred tax assets 39,445,000 25,834,000
Valuation allowance (39,445,000) (25,834,000)
----------------- -----------------
Net deferred tax assets $ -- $ --
================= =================
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At December 31, 2001, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $84,186,000 and various income tax
credit carryforwards, primarily research and experimentation, aggregating
$2,570,000, which expire at various dates through 2022.
At December 31, 2001, for California income tax purposes, the Company had
various income tax credit carryforwards, primarily research and experimentation,
aggregating $554,000, which expire at various dates through 2014.
For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to these carryforwards.
The reconciliation of income tax computed at the U.S. federal statutory rate
applied to the Company's net loss is as follows:
Eleven months ended Year ended Year ended
December 31, 2001 January 31, 2001 January 31, 2000
-------------------- ---------------- ----------------
Tax at U.S. statutory rate (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit ( 4.00)% ( 4.00)% ( 4.00)%
Non-deductible items and other 0.65% 1.09% 1.47%
Change in valuation allowance 37.35% 36.91% 36.53%
---------- ---------- ---------
- % - % - %
========== ========== =========
9. Commitments
The Company has noncancelable facilities leases expiring at various dates
through December 31, 2002. The leases provide various options to renew. The
minimum rental commitment for the year ending December 31, 2002 is $22,000 and
none thereafter. Rental expense for these leases for the eleven month period
ended December 31, 2001 was approximately $73,000 and for the years ended
January 31, 2001 and 2000 were approximately $103,000 and $101,000,
respectively. Rental expense is allocated between research and development
expense and general and administrative expense, based on use, in the
accompanying statements of operations.
10. Selected Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for the eleven months ended December
31, 2001 and the year ended January 31, 2001 are summarized below.
Statement of Operations Data: For the Two Months
eleven months ended December 31, 2001 Ended March Second Third Fourth
31, 2001 Quarter Quarter Quarter
------------ -------- -------- --------
Research and development expenditures $3,306,175 $5,648,381 $7,550,430 $ 12,171,469
Dividend and interest income $ 136,561 $ 123,611 $ 79,620 $ 53,976
Net loss $(3,475,187) $(6,453,059) $(8,139,156) $(13,197,053)
Basic and diluted net loss per share $(0.21) $(0.40) $(0.48) $(0.76)
Weighted average shares outstanding 16,199,493 16,199,493 16,991,161 17,386,996
Statement of Operations Data: First Second Third Fourth
For the year ended January 31, 2001 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Research and development expenditures $2,949,508 $3,647,340 $3,790,199 $4,915,136
Dividend and interest income $ 329,904 $ 546,612 372,125 $ 305,970
Net loss $(3,237,514) $ (3,705,035) $(4,088,111) $(5,366,479)
Basic and diluted net loss per share $(0.20) $(0.23) $(0.25) $(0.33)
Weighted average shares outstanding 15,804,954 16,199,493 16,199,493 16,199,493
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The sum of the quarterly basic and diluted net loss per share does not equal the
basic and diluted net loss per share for the eleven months ended December 31,
2001 and year ended January 31, 2001 as a result of rounding.
11. Subsequent Events
On March 21, 2002, the Company sold 1,200,000 shares of registered common stock
at $10.50 per share and received net proceeds of $11.8 million. As a result of
this transaction, approximately 170,000 additional shares will be issued
subsequent to December 31, 2001 due to an anti-dilution provision for the sale
of securities less than $12.00 per share prior to October, 2002 granted to
purchasers of the Company's common stock in August, 2001.
On February 7, 2002, the Company sold 1,345,000 shares of registered common
stock at $12.70 per share and received net proceeds of $16.1 million.
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