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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C., 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-20713
ENTREMED, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-1959440
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(State of Incorporation) (I.R.S. Employer Identification No.)
9640 Medical Center Drive, Rockville, MD 20850
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 217-9858
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Securities registered pursuant to Section 12 (g) of the Act:
Title Name of Exchange
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Common Stock, Par Value $.01 Per Share Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K [ ]
As of March 26, 2001, 18,690,436 shares of common stock were outstanding and the
aggregate market value of the shares of common stock held by non-affiliates was
approximately $323,578,173.
DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with respect to incorporation by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the Exhibit Index hereto.
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ENTREMED, INC. AND SUBSIDIARIES
FORM 10-K - FISCAL YEAR ENDED DECEMBER 31, 2000
Contents and Cross Reference Sheet
Form 10-K Form 10-K Form 10-K
Part No. Item No. Description Page No.
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I 1 Business................................................3
2 Properties ............................................28
3 Legal Proceedings .....................................28
4 Submission of Matters to a Vote of Security Holders....29
II 5 Market for Registrant's Common Equity and
Related Stockholder Matters............................29
6 Selected Financial Data ...............................30
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation...........31
7(A) Quantitative and Qualitative Disclosures
About Market Risk......................................34
7 Financial Statements and Supplementary Data............34
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................34
III 10 - 13 Incorporated by reference from the Company's Proxy
Statement .............................................34
IV 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................34
Signatures............................................................................II - 1
Financial Statements..................................................................F-1
This document contains and incorporates by reference certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements may be identified by forward-looking words such as
"may," "will," "expect," "anticipate," "believe" or similar words. These
forward-looking statements include, among others, statements regarding the
timing of clinical trials; the advantages of our product candidates; the
applicability of our antiangiogenic product candidates to various diseases; the
availability of sufficient quantities of material for clinical trials; and
expected increases in our expenses.
Our forward-looking statements are based on information available to us
today, and we will not update these statements. Our actual results may differ
significantly from those discussed in our forward-looking statements due to,
among other factors, our history of operating losses and anticipation of future
losses; the value of our common stock; uncertainties relating to our
technological approach; uncertainty of our product candidate development; our
need for additional capital and uncertainty of additional funding; our
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dependence on collaborators and licensees; intense competition and rapid
technological change in the biopharmaceutical industry; uncertainties relating
to our patent and proprietary rights; uncertainties relating to clinical trials;
government regulation and uncertainties of obtaining regulatory approval on a
timely basis or at all; our dependence on key personnel, research collaborators
and scientific advisors; uncertainties relating to health care reform measures
and third-party reimbursement; risks associated with product liability; and
other factors discussed in our filings with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a clinical-stage biopharmaceutical company developing and testing
product candidates that address the role of blood and blood vessels in health
and disease. Angiogenesis is the biological process by which new blood vessels
are formed. As "The Angiogenesis Company," we are primarily focused on
developing antiangiogenic drugs designed to inhibit the abnormal new blood
vessel growth associated with cancer, as well as a broad range of diseases
including certain types of blindness and atherosclerosis. We believe we are a
leader in the field of angiogenesis inhibition in oncology because we have more
antiangiogenic molecules in human clinical trials than any other company. Our
current portfolio of antiangiogenic product candidates includes Endostatin,
Panzem and Angiostatin, the patent rights for all of which are exclusively
licensed to us by Children's Hospital, Boston.
THE CURRENT TREATMENT OF CANCER
Cancer is the second leading cause of death in the United States. Recently,
the American Cancer Society estimated that approximately 1,200,000 new cases of
cancer are diagnosed annually. Traditional cancer treatments include surgery,
radiation therapy and chemotherapy. Surgery is an invasive method of removing
tumors, and some tumors currently are inoperable due to their location, extent
of organ infiltration or size. Radiation therapy produces ionized molecules
within the body that attack cancer cells but may also damage surrounding healthy
cells. Chemotherapy involves the administration of toxic substances (cytotoxins)
designed to kill cancer cells, and usually produces severe side effects. Due to
their lack of specificity, chemotherapeutics do not differentiate between
rapidly growing healthy cells and cancer cells. In addition, resistance to
chemotherapy occurs over time.
We believe that our antiangiogenic product candidates, which are intended to
inhibit the growth of tumor-feeding blood vessels, may prove effective in
treating certain cancers, and may also prove to have significant advantages over
traditional cancer therapies. These advantages may include a reduced likelihood
of resistance, fewer side effects and the potential to be administered in
combination with other antiangiogenic and/or traditional therapies.
ANGIOGENESIS IN HEALTH AND DISEASE
Within the human body, a network of arteries, capillaries and veins, known as
the vasculature, functions to transport blood throughout the tissues. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed.
Mounting evidence indicates that the abnormal growth of new blood vessels
plays a key role in many diseases such as cancer, arthritis, blindness caused by
diabetes or macular degeneration, and more recently, atherosclerotic disease.
Over the last year, the critical role of angiogenesis in these diseases has been
significantly reinforced by an increasing number of scientific publications
reporting a direct link between the abnormal growth of blood vessels and disease
progression. Typically, angiogenesis involves the growth of tiny blood vessels,
called capillaries, which extend from an existing blood vessel into the body's
tissues to provide nutrients and to remove waste products. In humans,
angiogenesis is essential during the first three months of embryonic
development, where cytokines and growth factors, which are normally suppressed
in adults, are activated to stimulate the growth of new blood vessels required
to form organs and
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limbs in the developing fetus. In addition, during adulthood, angiogenesis
occurs as a normal physiological process in menstrual cycling, fetal development
and wound healing.
Angiogenesis also occurs during disease states, as is the case with cancer
(where the growth of new blood vessels is necessary to sustain tumor growth),
certain types of blindness (where the newly formed blood vessels block vision)
and atherosclerosis (where plaque formation appears to involve angiogenesis). As
described below, we believe that antiangiogenic products, which inhibit this
abnormal growth of blood vessels in these diseases, may have significant
advantages over traditional therapies for these indications.
Angiogenesis in Cancer: An Emerging Therapy
Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may destroy surrounding organs,
impair physiological function, and often lead to patient death. In order for
cancer cells to survive, they require blood vessels to supply the nutrients and
oxygen carried by the body's blood supply. To initiate the growth of these blood
vessels and thus feed the rapidly proliferating cancer cells, the tumor
stimulates angiogenesis by recruiting the production of a variety of angiogenic
factors including basic Fibroblast Growth Factor (bFGF) and Vascular Endothelial
Growth Factor (VEGF). This series of events results in an increased supply of
blood from the sprouting of hundreds of newly formed blood vessels and provides
the tumor with the constant supply of nutrients and growth factors that it needs
to grow.
Angiogenesis is also involved in the spread, or metastasis, of tumor cells.
Metastasis is the process by which tumor cells escape from the tumor and enter
the body's circulation where they reach a new site and begin to grow, thereby
affecting other organs in the body. As cancer cells metastasize, they require
continuous angiogenesis if secondary tumors are to grow. These tumor cells may
either be released by a growing primary tumor or be released into circulation
during surgical removal of the tumor. Although surgeons generally remove
significant amounts of healthy tissue surrounding a tumor, in many cases "seed
cancer cells" have already escaped the primary tumor, circulated through the
body and become embedded elsewhere. It has been observed that in certain cases,
these seed cells, or metastases, do not vascularize or grow while the primary
tumor is in place. However, after the primary tumor is removed, metastatic
tumors often grow rapidly. This observation prompted Drs. Judah Folkman and
Michael O'Reilly of Children's Hospital, Boston, to investigate whether the
primary tumor produces proteins that inhibit angiogenesis. As a result of these
efforts, Angiostatin and Endostatin were discovered at Children's Hospital.
Angiogenesis in Blindness
Angiogenesis within the eye, which is often a condition associated with
diabetes and age-related macular degeneration, is a major cause of blindness.
Both macular degeneration and diabetic retinopathy (a secondary effect of
diabetes) involve the formation of new blood vessels that grow behind, or in
front of, the retina, respectively. These newly formed blood vessels often
hemorrhage or cause the detachment of the retina, which, in both cases,
eventually leads to blindness. It is further estimated that approximately eight
million people in the United States have diabetic retinopathy, and that
twenty-five thousand of these cases result in blindness each year. Prevent
Blindness America(R) estimates that approximately thirteen million people in the
United States suffer from macular degeneration, and that nearly two million of
these people will develop vision impairment, of which one hundred thousand will
develop blindness each year. Current treatments for diabetic retinopathy and, to
a more limited extent, macular degeneration involve laser-based photocoagulation
therapy, which often causes additional damage to the retina and surrounding
cells.
Angiogenesis and Other Disease Indications
Angiogenesis also appears to play a role in a variety of other diseases,
including psoriasis, endometriosis, rheumatoid arthritis and atherosclerosis. We
believe that our antiangiogenic technologies may be applicable to these
diseases. To date, however, we have not conducted clinical research using
antiangiogenic therapy in diseases outside of cancer or macular degeneration.
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STRATEGY
EntreMed was incorporated in Delaware in 1991 to create a link between
scientists and institutions developing promising technologies and large
companies that could provide the resources necessary to carry these technologies
through clinical trials to the marketplace. Our business objective and strategy
is to accelerate the development of our antiangiogenic product candidates and
future technologies with clinical and commercial potential by:
- focusing our resources on the clinical development of our current core
technologies;
- broadening our product and technology portfolio through internal discovery
and sponsored research collaborations with academic institutions, federal
agencies and private enterprises;
- developing marketing and sales capabilities; and
- leveraging our resources through strategic partnerships and collaborations
with government agencies and others to minimize clinical trial and
manufacturing costs and accelerate product commercialization.
Our Antiangiogenesis Program
We believe that certain drugs, genes or proteins that exhibit antiangiogenic
effects may be used as treatments for diseases involving angiogenesis. In the
case of cancer, we believe that our antiangiogenic product candidates may have
significant advantages over traditional cancer therapies, including a reduced
likelihood of resistance, fewer side effects and the ability to be administered
in conjunction with other therapies. Currently, we are primarily focused on
angiogenesis inhibition as a treatment for cancer, blindness and cardiovascular
disease. We have the following product candidates in research, development and
preclinical and clinical testing as set forth below.
COMMERCIALIZATION
PRODUCT CANDIDATE DEVELOPMENT STATUS RIGHTS
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Endostatin............. US single agent Phase I to EntreMed
test iv bolus administration
commenced October 1999
(Oncology) European Phase I
to test subcutaneous
injection and continuous
infusion commenced September
2000 (Oncology) US Phase II
trials planned for 2Q 2001
(Oncology)
Panzem (also known as US Phase I single agent EntreMed
2ME2)................ commenced March 2000 (Oncology)
US Phase I combination study with
Taxotere commenced September 2000
(Oncology)
Angiostatin............ US Phase II commenced EntreMed
February 2001 (Oncology) US
single-agent Phase I trials
commenced April 2000 (Oncology)
European Phase I single agent to
test subcutaneous injection
commenced December 2000 (Oncology)
US Phase I combination study with
radiation therapy commenced July
2000 (Oncology)
FGF-2 Vaccines......... Preclinical EntreMed
Thalidomide analogs.... Preclinical EntreMed
Metastatin............. Discovery EntreMed
Prostate Specific
Antigen (PSA).......... Discovery EntreMed
Tissue Factor Pathway
Inhibitor (TFPI)..... Discovery EntreMed
Panzem analogs......... Discovery EntreMed
Thalidomide............ Phase II/III. FDA approval for Celgene
Erythema Nodosum Leprosum (ENL)
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Endostatin
In 1996, Drs. Judah Folkman and Michael O'Reilly, researchers at Children's
Hospital, Boston, isolated and identified Endostatin. In preclinical studies,
Endostatin has been shown to reduce the size of primary rodent carcinomas,
including mouse models of Lewis lung, melanoma and rat glioma, as well as human
prostate, breast and colon cancer grown in immunodeficient mice. Additional
preclinical studies demonstrated that mouse and human sequences of Endostatin
inhibited the growth of metastatic tumors. We emphasize, however, that mouse
versions of Endostatin are not the same as human versions of this protein.
In November 1997, Drs. Folkman and O'Reilly published results showing that
treatment with mouse Endostatin did not lead to acquired resistance in
preclinical models of lung cancer, fibrosarcoma and melanoma. These studies also
showed that after six, four or two treatment cycles with mouse Endostatin in
these models, respectively, no tumors recurred even when therapy was suspended.
We believe that this distinction may make human Endostatin unique among
conventional cancer drugs, which normally become less effective as drug
resistance occurs with each treatment. By the end of 2000, over 160 published
abstracts and peer reviewed articles had highlighted the antiangiogenic effects
of Endostatin in various preclinical experiments and interim Phase I data, most
of which were conducted by researchers independent of us.
Our scientists have recently discovered that tropomyosin plays a role in the
mechanism of action of Endostatin. Endostatin binds and interferes with
tropomyosin, an endothelial cell motility protein. We believe that this
discovery is a significant step in understanding Endostatin's full mechanism of
action and its effects on the angiogenesis process.
In April 1999, we presented data at the American Association for Cancer
Research, or AACR, in which human Endostatin was seen to inhibit the metastases
of early stage melanoma in mice by 90% and late stage melanoma by 70-90%. In
July 1999, the FDA allowed our Investigational New Drug (IND) application for
the human testing of recombinant human Endostatin, and shortly thereafter we
began Phase I clinical trials in humans -- taking Endostatin from first
publication to clinical trials in less than three years.
Four separate Phase I trials of Endostatin are presently underway. In
September 1999, the first patients received Endostatin at Dana-Farber/Partners
CancerCare, the joint venture between Dana-Farber Cancer Institute, Brigham and
Women's Hospital, Massachusetts General Hospital and Beth Israel Deaconess
Medical Center. Two other Phase I studies are being performed in collaboration
with the National Cancer Institute (NCI) at the University of Texas M.D.
Anderson Medical Center and the University of Wisconsin Comprehensive Cancer
Center. These Phase I studies, designed to test the drug's safety, are conducted
by administering escalating doses of Endostatin to groups of patients who have
failed conventional therapy and have advanced, progressive cancer.
The first public presentation of data from Phase I studies was made at the
NCI-European Organization for Research and Treatment of Cancer Annual Symposium
in November 2000. The combined data from the first three studies have shown that
Endostatin is very well tolerated by the patients. Interim data from these
studies have also shown that levels of Endostatin in blood are predictable based
on doses that are given, and that a single administration can still be measured
longer than a day later in the bloodstream. Additional Phase I data have been
submitted for presentation at this year's American Society of Clinical Oncology
(ASCO) meeting in May 2001.
Preclinical (mouse) studies have shown that the continuous infusion of
Endostatin greatly increases its effectiveness in mice. An additional Phase I
clinical (human) study was announced in September 2000 to explore the safety of
continuous infusion and subcutaneous (beneath the skin) injection of Endostatin
in progressive cancer patients. This study is being performed at the Free
University Academic Hospital in Amsterdam, the Netherlands. We plan to begin
Phase II clinical trials of Endostatin in the second quarter of 2001.
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Our scientists initiated the production of recombinant human Endostatin using
the Pichia pastoris yeast expression system, and developed a purification
process. In order to meet the increasing requirements for clinical testing and
trials of Endostatin, we have entered into an agreement with Chiron Corporation
for manufacturing of recombinant human Endostatin under Good Manufacturing
Practices, or GMP. Chiron continues to manufacture biologically active
Endostatin in its 10,000 liter fermenters. Chiron's manufacturing efforts will
augment those initially undertaken by Covance and help to ensure that a
sufficient quantity of bulk Endostatin is produced in support of our Phase II
clinical trials.
Panzem
Panzem is an orally active, small molecular weight inhibitor of angiogenesis
that is also an antiproliferative agent. Dr. Robert D'Amato first recognized the
antiangiogenic properties of Panzem (2ME2) while working in Dr. Judah Folkman's
laboratory at Children's Hospital, Boston. We licensed this natural estrogen
metabolite from Children's Hospital in January 1997 as part of our sponsored
research agreement with them. By the end of 2000, over 157 published abstracts
and peer reviewed articles had highlighted the antiangiogenic effects of Panzem
in various preclinical experiments, most of which were conducted by researchers
independent of us.
In preclinical studies of Panzem, we and others have demonstrated its dual
mechanism of action -- antiangiogenic by inhibiting endothelial cells and
antiproliferative by directly killing cancer cells. The antiangiogenic activity
of Panzem appears to prevent the growth of new blood vessels by inhibiting
several stages of the angiogenic process. The antiproliferative activity of the
drug has been extensively studied by our scientists and involves the induction
of "apoptosis," or programmed cell death.
Other preclinical studies have demonstrated that breast cancer cells are
extremely sensitive to Panzem, even those cells that already have developed
resistance to established drugs like Tamoxifen and Taxol. Panzem also has been
shown to inhibit the growth of human breast tumor cells in animal models and to
produce a sharp decrease in the blood vessel density associated with tumors
while exhibiting minimal toxicity.
We signed a collaborative agreement with the NCI for the preclinical and
clinical development of Panzem in August 1997. We expanded this relationship in
April 1999 when we signed a four-year Cooperative Research and Development
Agreement with the NCI for collaborative studies in preclinical pharmacology and
toxicology in anticipation of our clinical trials. Our scientists have invented
a synthetic process to yield an ultrapure form of Panzem. A clinical-grade GMP
form of that product, manufactured for us by Tetrionics, has completed
preclinical safety studies without remarkable side effects.
Two Phase I and one Phase II clinical trials of Panzem are presently
underway. The Phase I studies are being conducted at Indiana University. The
first study, begun in March 2000, is designed to assess the safety of Panzem as
a single agent in patients with advanced breast cancer. Results from the single
agent Phase I study in patients with advanced breast cancer have been submitted
for presentation to ASCO's May 2001 meeting. The second study, begun in
September 2000, is designed to assess the safety of Panzem combined with
Taxotere, a cytotoxic, or cell-killing, chemotherapy agent. Both studies use a
dose escalation method to determine safety. In February 2001, a Phase II
clinical trial of Panzem enrolled its first patients at the Mayo Clinic to test
the safety and efficacy of Panzem in patients with multiple myeloma that failed
to respond to other therapies.
Angiostatin
In research we sponsored at Children's Hospital, Boston, Drs. Michael
O'Reilly and Judah Folkman first identified a substance associated with primary
tumors which appeared to prevent vascularization and the growth of metastatic
tumors. Based upon this research and subsequent studies, we believe that primary
tumors secrete an enzyme that cleaves the parent molecule, plasminogen, a known
protein associated with blood clotting, into a smaller, previously undiscovered
protein that keeps other metastatic tumors from developing elsewhere in the
body. The Children's Hospital team isolated and identified this protein in 1995,
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which they named Angiostatin. By the end of 2000, over 208 published abstracts
and peer reviewed articles had highlighted the antiangiogenic effects of
Angiostatin in various preclinical experiments, most of which were conducted by
researchers independent of us.
In preclinical studies, mouse Angiostatin inhibited the growth of human
breast cancer by 95%, colon cancer by 97%, and prostate cancer by almost 100% in
immunodeficient mice. We believe that Angiostatin regressed cancerous tumors in
mice to a dormant state through the inhibition of angiogenesis. In other
preclinical studies, mice with melanoma were treated with recombinant human
Angiostatin produced from the yeast, Pichia pastoris, for a total of eleven days
and then examined for metastases in the lungs. In these experiments, the number
of lung metastases decreased by 60-80% in the mice. In addition, we conducted
subacute (28-day) safety studies in monkeys using doses of recombinant human
Angiostatin that were multiples of anticipated human doses, with no adverse
effects observed. Covance has manufactured GMP recombinant human Angiostatin
protein using the Pichia pastoris yeast expression system and purification
process that we developed. Covance has completed scale-up production of
Angiostatin and manufactured a sufficient quantity for our Phase I clinical
studies.
Three separate Phase I studies of Angiostatin are presently underway. The
first Phase I clinical trial to assess the safety of Angiostatin as a single
agent began at the Thomas Jefferson University Hospital in Philadelphia,
Pennsylvania in April 2000. Data from our single agent Phase I trial have been
submitted for presentation at ASCO's May 2001 meeting. Preclinical (animal)
studies with Angiostatin in combination with radiation have shown a greater
effect on tumor growth in mice than either Angiostatin or radiation alone. A
second Phase I study, also at the Thomas Jefferson University Hospital, began in
July 2000 to assess the safety of simultaneous administration of Angiostatin and
radiotherapy in cancer patients. The latest Phase I trial commenced in December
2000 at the University Medical Center at Utrecht, the Netherlands, to assess the
safety of administering Angiostatin by subcutaneous (under the skin) injection.
As with the Phase I clinical trials of Endostatin, the Phase I trials of
Angiostatin use a dose escalation method to determine safety.
Further Phase I and Phase II studies will be based upon pharmacologic and
biologic data obtained in the initial Phase I studies. They will include new
formulations, dose scheduling, routes of administration and combination studies
with currently used chemotherapeutic agents and radiotherapy.
Combination studies using Endostatin and Angiostatin in mice. In addition to
the stand-alone preclinical results of Endostatin and Angiostatin, researchers
from Children's Hospital and elsewhere have presented data from other studies
that show potentially synergistic effects when mouse Endostatin and mouse
Angiostatin are combined to treat tumors. The results of these studies
demonstrated the complete eradication of lung tumors in mice, and the tumors did
not recur several months after treatment stopped. Furthermore, preclinical
studies have shown that combinations of Endostatin or Angiostatin with
conventional chemotherapy and/or radiation produce greater effects. We believe
that there may be benefits in using these two proteins in combination with each
other or in combination with conventional chemotherapy and radiation.
Gene expression of Endostatin and Angiostatin. Several investigators have
reported that the genes that code Endostatin and Angiostatin, when introduced
into mice, effectively produce sufficient quantities of these antiangiogenic
proteins to decrease tumor growth. We have entered into a research collaboration
with Cell Genesys, Inc. to evaluate gene transfer viral vectors and are
continuing to evaluate the best strategies for a gene therapy using our
antiangiogenic proteins. Further, we have established collaborative preclinical
studies with our subsidiary, TheraMed, to demonstrate the feasability of using
flow-electroporation to introduce the Endostatin gene into white blood cells
that are then given back to animals to produce circulating Endostatin and
potentially affect tumor growth.
Thalidomide
Thalidomide originally was introduced in the 1950s as a sedative and became
the third largest prescription drug in Europe. Although the drug never was
approved for use in the United States, it was widely used in other countries
until it was found to cause birth defects in children born to expectant
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mothers who took thalidomide for morning sickness. This discovery resulted in
the withdrawal of thalidomide as a drug in the early 1960s. Dr. Robert D'Amato
at Children's Hospital later reasoned that thalidomide caused these birth
defects by blocking the growth of new blood vessels in human embryos. Drs.
D'Amato and Folkman further hypothesized that thalidomide could be safely used
to block angiogenesis in adults and potentially to improve the treatment of
cancer and blindness.
In April 1996, in collaboration with the NCI, we initiated Phase II clinical
trials of thalidomide in patients with primary brain tumors, breast cancer,
prostate cancer, and Kaposi's sarcoma, and shortly thereafter, initiated Phase
II trials of thalidomide in patients with blindness due to macular degeneration.
In July 1998, Celgene received approval from the FDA for the use of
thalidomide in erythema nodosum leprosum, an inflammatory skin condition in
leprosy patients. Later that year, we signed a collaborative sublicensing
agreement for thalidomide with Celgene. Under the terms of that agreement,
Celgene acquired exclusive worldwide rights to our patents and technology for
thalidomide, as well as to the orphan drug designations we had already received
for its use in primary brain cancer and Kaposi's sarcoma. In exchange for those
rights, Celgene is required to pay us a royalty on all sales of thalidomide
(THALOMID(R)), regardless of indication, and also has assumed responsibility for
all clinical trials of thalidomide. We recognized net royalty revenues from
Celgene's sales of THALOMID(R) of approximately $3,151,000 through September 30,
2000. We are negotiating a possible assignment of some or all of our rights to
receive future THALOMID(R) royalties. We cannot predict whether our efforts will
be successful.
Ongoing clinical trials of thalidomide are further investigating its effect
on a variety of cancers (brain cancer, multiple myeloma, prostate cancer, breast
cancer, non-small cell lung cancer, head and neck cancer) and chronic
inflammatory diseases such as Crohn's Disease. In May 2000, Celgene reported
clinical trial results for THALOMID(R) at the ASCO annual meeting. These results
supported the potential use of THALOMID(R) in the treatment of multiple myeloma
and other cancers.
Since 1993, we have also had an aggressive research program to test a wide
variety of thalidomide analogs (molecular cousins of thalidomide). Our work
related to thalidomide analogs is not covered by our agreement with Celgene, and
we are independently developing such analogs as therapeutic agents. In August
2000, patents issued to us covering the use of several thalidomide analogs,
including amino-thalidomide derivatives and EM-138, for the treatment of cancer,
blindness and chronic inflammatory disorders such as Crohn's disease. We are
conducting preclinical studies examining the efficacy of these analogs in a
variety of angiogenesis-mediated diseases, and anticipate future clinical
trials.
Preclinical and Discovery Program
We continue to develop a leading role in the field of angiogenesis research.
Our scientists are exploring the complex events associated with angiogenesis at
both the cellular and molecular levels. This research, as well as research
performed through our collaborations with investigators at prestigious
institutions, has resulted in the identification of a number of new molecules
that are currently under evaluation as potential product candidates. These
include small molecular weight inhibitors of angiogenesis such as analogs of
thalidomide and Panzem. In addition, other proteins such as Metastatin and PSA
have demonstrated potent antiangiogenic activity. Our scientists also are
working with Tissue Factor Pathway Inhibitor, or TFPI, a natural inhibitor of
clotting that also has antitumor activity. We have identified a mechanism
underlying these effects and will seek additional compounds with similar
activity. Research efforts with vaccines directed against peptides of angiogenic
growth factor FGF-2 also have shown inhibition of metastatic disease in animal
models. Other research initiatives include the development of a novel malaria
vaccine that is presently in preclinical development (in our role as a
subcontractor for a federal malaria vaccine initiative) and the cell permeation
technology for blood cell delivery of therapeutic agents under development by
our subsidiary, TheraMed, Inc.
COLLABORATIVE RELATIONSHIPS
A key strength of our business strategy is the ongoing relationships we have
developed with, among others, the following institutions, agencies, and
corporations:
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Children's Hospital, Boston
Through our sponsored research agreement with Children's Hospital, Boston, an
affiliate of Harvard Medical School, we have sustained a strong, valuable
scientific collaboration with Dr. Judah Folkman, a pioneer in the field of
angiogenesis. Under the sponsored research agreement with Children's Hospital,
we cxonhave an option to obtain a license under patents covering projects being
developed in Dr. Folkman's laboratory. Through our licensing agreements with
Children's Hospital, we obtained exclusive worldwide rights to novel
angiogenesis inhibitors, including Endostatin, Panzem, Angiostatin and
thalidomide. The sponsored research agreement was extended for an additional
year until September 2002. Any license obtained under the sponsored research
agreement survives after the sponsored research agreement ends.
In October 1999, we entered into a three-year sponsored research agreement
with Dr. Robert D'Amato of Children's Hospital. Dr. D'Amato will continue
research on thalidomide analogs, Panzem analogs and new compounds that may have
antiangiogenic activity.
In January 2000, we extended the scope of our relationship with Children's
Hospital by entering into a two-year sponsored research collaboration with Dr.
Karen Moulton, also of Dr. Folkman's Surgical Research Laboratory. Dr. Moulton
will study the relationship between angiogenesis inhibitors, such as Endostatin,
and the reduction of coronary artery plaques. Based on Dr. Moulton's early work
in this area, it is hypothesized that coronary artery plaques may also be
angiogenesis-dependent. When ruptured, these plaques can trigger heart attack,
stroke or hemorrhage. We believe that our antiangiogenic product candidates may
play an important role in the future treatment and prevention of heart disease,
in addition to their effects in treating cancer.
National Cancer Institute
We also have a relationship with the National Cancer Institute (NCI) of the
National Institutes of Health, or NIH. In 1997, the NCI signed a collaborative
research and development agreement (CRADA) with us to assist us with clinical
trials of thalidomide. This agreement was transferred to Celgene Corporation
along with four Phase II clinical trials. Subsequently, the NCI signed
additional agreements with us for the collaborative preclinical and clinical
development of Endostatin and Panzem, and a letter of intent for the development
of Angiostatin.
Celgene Corporation
We licensed our rights to thalidomide as an angiogenesis inhibitor to
Celgene, along with four Phase II clinical trials underway at the NCI and two
orphan drug designations (primary brain cancer and Kaposi's sarcoma). Effective
as of the date of that transaction, December 10, 1998, we began receiving
royalty payments from Celgene on all worldwide sales of thalidomide, regardless
of indication. Thalidomide is currently marketed by Celgene under the trade name
THALOMID(R) for the treatment of erythema nodosum leprosum (ENL) and is being
studied in a broad range of cancers in Phase II and III trials.
CONTRACT MANUFACTURING
Three United States contract manufacturers supply all of our product
candidates for use in clinical trials. We expect to continue to outsource
manufacturing in the near term. We believe our current suppliers will be able to
manufacture our needs for our current clinical trials and for Phase II
Endostatin trials in sufficient quantities and on a timely basis, while
maintaining product quality. We seek to maintain quality control over
manufacturing through ongoing inspections, rigorous review, control over
documented operating procedures and thorough analytical testing by our own and
outside laboratories. We believe that our current strategy of outsourcing
manufacturing is cost-effective since we avoid the high fixed costs of plant,
equipment and large manufacturing staffs and conserve our resources.
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Covance Biotechnology Services, Inc.
In November 1998 and March 1999, we entered into manufacturing agreements
with Covance under which Covance assumed responsibility for the scale-up
production of recombinant human Endostatin and Angiostatin under GMP conditions
and the maximization of product yields necessary to begin clinical trials and
testing.
Chiron Corporation
We completed negotiations with Chiron Corporation for technology transfer,
scale-up and contract manufacture of GMP recombinant human Endostatin in 2000.
These efforts produced significant quantities of biologically active Endostatin
for use in our clinical trials. The manufacturing services agreement between
EntreMed and Chiron was amended to launch a major production campaign in the
first quarter of 2001. Materials produced during this period will be used in
future clinical trials. Chiron's manufacturing efforts will significantly
augment those initially undertaken by Covance and will help to ensure that a
sufficient quantity of Endostatin is available for our expanding clinical
trials.
Tetrionics, Inc.
Tetrionics, Inc. currently manufactures Panzem for us under GMP. This
compound was encapsulated for oral use at the University of Iowa.
MARKETING AND SALES
We continue to explore opportunities for corporate alliances and partners to
help us develop, commercialize and market our product candidates, although we
are prepared to pursue, develop and commercialize each product candidate
independently, if necessary. Our strategy is to enter into collaborative
arrangements with pharmaceutical and other companies for the development,
manufacturing, marketing and sales of our products that will require broad
marketing capabilities. These collaborators are generally expected to be
responsible for funding or reimbursing all or a portion of the development
costs, including the costs of clinical testing necessary to obtain regulatory
clearances and for commercial scale manufacturing, in exchange for exclusive or
semi-exclusive rights to market specific products in particular geographic
territories. We licensed our rights for the development and commercialization of
thalidomide to Celgene in December 1998.
We presently have an exclusive license to Endostatin, Panzem, Angiostatin and
thalidomide analogs. Additionally, we have entered into an agreement with the
NCI for the preclinical and clinical development of Endostatin and Panzem, and a
letter of intent for the development of Angiostatin. This agreement provides
useful support for these programs while preserving our opportunities for
commercialization, either alone or with a corporate partner. We may, in the
future, consider manufacturing or marketing certain products directly and
co-promoting certain products if we believe it is appropriate under the
circumstances.
OTHER TECHNOLOGIES
In addition to our core antiangiogenic technologies, we are developing blood
cell permeation technology to add drugs and genes to blood cells. We also are
conducting research into an antimalaria vaccine.
Cell Permeation Technology
We formed a subsidiary, TheraMed, Inc., to pursue the research, development
and commercialization of our blood cell permeation technology. This technology
allows us to deliver drugs, genes or other therapeutic agents that otherwise
would not readily permeate the cell membrane into blood cells while retaining
the blood cell's natural functions.
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Human blood is made up of cellular components and plasma. The cellular
components are red blood cells, white blood cells and platelets. Red blood cells
transport oxygen to the body's tissues and organs. White blood cells are a
heterogeneous group and include cells that support the immune function by
migrating to sites of infection and cancer and propagating into mature cell
lines. The platelets, with specialized markers on their membranes, are attracted
to sites of hemorrhage, infection, inflammation and metastasis, where they
participate in complex biological functions.
The oxygen transport function is principally carried out by hemoglobin in the
red blood cells. Hemoglobin is a protein-iron based molecule that carries oxygen
from the lungs to the tissues. The body's tissues require oxygen in order to
function properly, and several diseases such as heart attacks, strokes,
infections and peripheral vascular disease are a direct result of inadequate
oxygen supply to the tissues. In human blood, each hemoglobin molecule carries
four molecules of oxygen. However, when oxygenated blood reaches the tissues,
hemoglobin typically releases only one of these four molecules of oxygen.
Extensive evidence indicates that a naturally occurring plant chemical called
inositol hexaphosphate, or IHP, enhances the oxygen releasing capabilities of
human hemoglobin by allowing the release to oxygen-starved peripheral tissue of
two to three oxygen molecules instead of only one. In this way, the efficiency
of hemoglobin could be increased and diseased tissues that result from oxygen
depletion could receive additional oxygen therapeutically.
IHP cannot be administered as a drug since it cannot get into red blood cells
and bind to hemoglobin by itself. Previous techniques to introduce IHP into red
blood cells have resulted in damage to the cells. However, using TheraMed's cell
permeation technology, the red blood cell membrane can be made permeable to IHP,
allowing IHP to bind with hemoglobin and potentially enhance red blood cells'
oxygen delivery to tissues.
TheraMed has designed a series of prototype instruments capable of inserting
drugs into blood cells without damaging the cells. The original concept was
licensed from investigators at the Centers for Blood Research Laboratories, or
CBRL, at Harvard University. The problem of the impermeable red blood cell
membrane is overcome by passing an electric charge across the red blood cell
membrane, rendering the membrane permeable to IHP using TheraMed's flow
electroporation technology. IHP then passes through the membrane and combines
with hemoglobin. The IHP-treated blood could then be infused into the patient.
Published studies show that IHP-treated red blood cells have a biological life
span equivalent to that shown by normal cells. No apparent toxicity has been
demonstrated with IHP-treated red blood cells in animals. TheraMed anticipates
testing the enhanced red blood cells in Phase I trials in the second half of
2001.
Perhaps an even more valuable use of TheraMed's cell permeation technology is
the possible insertion of drugs into platelets, or genes into white blood cells,
including stem cells, for targeted drug delivery. Platelets migrate to sites of
internal bleeding, neoplasia and inflammation. TheraMed is seeking to use this
natural function to deliver compounds such as a thrombolytic, antiproliferative,
or pharmaceutical, at levels that are therapeutically beneficial while
minimizing toxicity. The function of white blood cells as a group is to protect
against systemic disease by recruiting and producing cytokines and therapeutic
proteins. TheraMed is inserting genes into white blood cells to produce a
protein or enzyme on a sustained basis. For example, TheraMed is pursuing
gene-based therapies in order to produce Endostatin and Angiostatin through
sustained release from white blood cells or stem cells.
Malaria Vaccine
We have been developing a vaccine against the Erythrocyte Binding Antigen 175
(EBA175), a protein that is expressed by the malaria parasite to enable its
invasion of the red blood cell. Dr. Kim Lee Sim, our Vice President for
Preclinical Research and Development, first discovered EBA175 and its role in
malaria infection while working at the NIH. In 1998, we obtained an exclusive,
worldwide license for this technology from the NIH. We receive financial support
for development of this vaccine through the SBIR grant program, which provides
most of the funding for this program. At present, a naked DNA vaccine and a
protein boost vaccine are being tested in monkeys in Peru and Panama in
collaboration with the United States Navy. In November 2000, we were selected as
a subcontractor to assist with a federal government
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contract to develop promising candidates for a malaria vaccine. We will use our
expertise in the recombinant production of malaria vaccine candidates to attempt
to develop malaria vaccine candidates for possible future use in human clinical
trials.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Our success will depend in part on our ability to obtain patent protection
for our products, both in the United States and abroad. The patent position of
biotechnology and pharmaceutical companies, in general, is highly uncertain and
involves complex legal and factual questions.
To date, we own or have licensed on an exclusive basis a total of 113 patent
applications and issued patents in the United States for our product candidates
of which we own 38 and we license on an exclusive basis 75. We have a total of
309 patent applications pending in the United States and other countries.
We have exclusively licensed from Children's Hospital, Boston, 17 pending
United States patent applications and two issued patents covering Endostatin,
fragments of Endostatin, nucleic acid coding for Endostatin, the use of
Endostatin as a therapeutic agent, and the use of Endostatin as a diagnostic
agent. The patent applications also cover the combination of Endostatin and
other chemotherapeutic agents, such as Angiostatin, as a therapeutic
composition. We have a United States patent application directed to the
production of Endostatin.
We have licensed exclusively from Children's Hospital, Boston, 13 pending
United States patent applications and 5 issued patents covering Angiostatin,
nucleic acid coding for Angiostatin, the use of Angiostatin as a therapeutic
agent and the use of Angiostatin as a diagnostic agent. We also have two United
States patent applications directed to peptides and proteins that bind
specifically to Angiostatin. We have a United States patent application directed
to the production of Angiostatin.
In addition, we have exclusively licensed technology from Children's
Hospital, Boston, which covers the use of steroid-derived small molecular weight
compounds such as Panzem that are antimitotic agents and antiangiogenic
compounds. A patent application has been filed covering purified Panzem as a
composition of matter. There are eight pending United States patent applications
and three issued United States patents covering this technology. Patent
applications also cover estrogen-related compounds with anti-fungal activity and
antiplaque activities in atherosclerosis.
We also have an exclusive, worldwide license from Children's Hospital,
Boston, which includes eight pending United States patent applications and three
issued patents covering the thalidomide molecule and thalidomide analogs as
antiangiogenic agents for the treatment of a wide variety of diseases that are
caused by abnormal angiogenesis. These patent applications also include
composition of matter coverage for certain thalidomide analogs. Composition of
matter patent protection is not available for the molecule thalidomide. We are
aware of several other issued patents covering certain non-antiangiogenic uses
of thalidomide. Although we believe that the claims in such patents will not
interfere with our proposed uses of thalidomide, there can be no assurance that
the holders of such patents will not be able to exclude us from using
thalidomide for other non-antiangiogenic uses of thalidomide. We have entered
into a license agreement with Celgene under which we licensed to Celgene the use
of thalidomide for treatment of antiangiogenic-mediated diseases.
The terms of the licenses for Panzem, Angiostatin, Endostatin and Thalidomide
extend until the underlying patents expire.
Our subsidiary, TheraMed, has five United States patent applications pending
and three issued patents covering our cell permeation technology. One of these
patents has been licensed from the CBRL. These patent applications and patents
cover the overall electroporation device, the electroporation chamber in the
device and the treatment of a wide variety of diseases using cells that have
been treated in the electroporation device.
Patent applications corresponding to the above-described United States patent
applications have been filed in Europe, Japan, Canada and other selected
countries.
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We have registered the trademark ENTREMED in the U.S. Patent and Trademark
Office and have applied for registration of the mark in selected foreign
countries. We have filed for registration of the marks VASCULOSTATIN, THE
ANGIOGENESIS COMPANY, ENTREVEST, METASTATIN, METHOXOL, METHOXIN, APOTONIN,
APOTOPIN, SPECIREX, PANZEM, VAREXI and MERISIS in the U.S. Patent and Trademark
Office.
GOVERNMENT REGULATION
Our development, manufacture, and potential sale of therapeutics are subject
to extensive regulation by United States and foreign governmental authorities.
Regulation of Pharmaceutical Products
Our product candidates currently being developed may be regulated by the FDA
as drugs or biologics or, in some cases, as medical devices. New drugs and
medical devices are subject to regulation under the Federal Food, Drug, and
Cosmetic Act, and biological products, in addition to being subject to certain
provisions of that Act, are regulated under the Public Health Service Act. We
believe that drug products developed by us or our collaborators will be
regulated either as biological products or as new drugs. Both statutes and the
regulations promulgated thereunder govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing of biologics, drugs and devices.
Obtaining FDA approval has historically been a costly and time-consuming
process. Generally, in order to gain FDA premarket approval, a developer first
must conduct preclinical studies in the laboratory and in animal model systems
to gain preliminary information on an agent's effectiveness and to identify any
safety problems. The results of these studies are submitted as a part of an
investigational new drug application, or IND, for a drug or biologic or an
investigational device exemption, or IDE, for a device, which the FDA must
review before human clinical trials of an investigational drug or device can
start. The IND or IDE includes a detailed description of the clinical
investigations to be undertaken.
In order to commercialize any products, we or our collaborators must sponsor
and file an IND (or, if applicable, IDE) and be responsible for initiating and
overseeing the clinical studies to demonstrate the safety, effectiveness, and
potency that are necessary to obtain FDA approval of any such products. For INDs
or IDEs sponsored by us or our collaborators, we or our collaborators will be
required to select qualified investigators (usually physicians within medical
institutions) to supervise the administration of the products, and ensure that
the investigations are conducted and monitored in accordance with FDA
regulations, including the general investigational plan and protocols contained
in the IND or IDE. Clinical trials of drugs or biologics are normally done in
three phases, although the phases may overlap. Phase I trials are concerned
primarily with the safety and preliminary effectiveness of the drug, involve
fewer than 100 subjects, and may take from six months to over one year to
complete. Phase II trials normally involve a few hundred patients and are
designed primarily to demonstrate effectiveness in treating or diagnosing the
disease or condition for which the drug is intended, although short-term side
effects and risks in people whose health is impaired may also be examined. Phase
III trials are expanded clinical trials with larger numbers of patients which
are intended to evaluate the overall benefit-risk relationship of the drug and
to gather additional information for proper dosage and labeling of the drug.
Clinical trials generally take two to five years to complete, but may take
longer. The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension, or termination of
clinical trials if it concludes that an unwarranted risk is presented to
patients, or, in Phase II and III, if it concludes that the study protocols are
deficient in design to meet their stated objectives.
If clinical trials of a new product are completed successfully, the sponsor
of the product may seek FDA marketing approval. If the product is regulated as a
biologic, the FDA will require the submission and approval of a Biologics
License Application (BLA) before commercial marketing of the biologic. If the
product is classified as a new drug, an applicant must file a New Drug
Application (NDA) with the FDA
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and receive approval before commercial marketing of the drug. If the product is
classified as a medical device and it is not substantially equivalent to a
device already on the market, a premarket approval application (PMA) must be
submitted before marketing. The NDA, BLA or PMA must include detailed
information about the product and its manufacture and the results of product
development, preclinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approval will be granted on a timely basis, if at all. NDAs, BLAs and PMAs
submitted to the FDA can take up to two to five years to receive approval. If
questions arise during the FDA review process, approval can take more than five
years. Notwithstanding the submission of relevant data, the FDA may ultimately
decide that the NDA, BLA or PMA does not satisfy its regulatory criteria for
approval and deny approval or require additional clinical studies. In addition,
the FDA may condition marketing approval on the conduct of specific
post-marketing studies to further evaluate safety and effectiveness. Even if FDA
regulatory clearances are obtained, a marketed product is subject to continual
regulatory requirements and review relating to GMPs, adverse event reporting,
promotion and advertising, and other matters, and later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal
sanctions.
Thalidomide is regulated by the FDA's Center for Drug Evaluation and
Research. Although only recently approved for sale in the United States for
limited indications, thalidomide has been used as an investigational agent to
treat thousands of patients for leprosy and other diseases. Pursuant to our
agreement with Celgene discussed above, all future clinical trials with
thalidomide will be the responsibility of Celgene.
Analogs of thalidomide and Panzem may be regulated as new chemical entities
by the FDA's Center for Drug Evaluation and Research. Generally, as new chemical
entities are discovered, formal IND-directed toxicology studies will be required
prior to human testing. The remainder of the developmental and regulatory
requirements will be similar to that of any new drug.
Angiostatin and Endostatin, each a naturally occurring substance, are
considered biologics and will be regulated by the FDA's Center for Biologics
Evaluation and Research. As genetically engineered and endogenous proteins,
Angiostatin and Endostatin will face unique and specific regulation hurdles,
such as those related to the manufacture of the products and the behavior of the
products in the body. The regulatory requirements for recombinant proteins have
been developed for other endogenous molecules and Angiostatin and Endostatin are
expected to follow these established guidelines. Successful preclinical studies
and Phase I, II and III clinical trials will be necessary to form the basis for
a BLA. We have assumed primary responsibility, in collaboration with the NCI,
for conducting these studies and trials.
The cell permeation technology, and specifically IHP-treated red blood cells,
will be regulated by the FDA's Center for Biologics Evaluation and Research. In
1997, the FDA responded to a letter from us requesting a product jurisdiction
determination, designating the Center for Biologics Evaluation and Research as
the agency with primary jurisdiction for the premarket review and regulation of
the product. The product will be reviewed as a medical device under the
Premarket Application (PMA) provisions of the Federal Food, Drug and Cosmetic
Act. Historically, the Office of Blood Research and Review in the Center for
Biologics Evaluation and Research has had the most expertise and experience in
regulating blood apheresis equipment and disposables associated with the
processing of human blood. Further development for TheraMed's products is
expected to follow a similar path to that of any therapeutic biologic, with
successful completion of Phase I, Phase II and Phase III trials required to
precede the filing of a PMA. The collection of blood from patients, the handling
of blood cells and the reinfusion of cells is required to be done in compliance
with procedures used for blood component collection. That regulation is designed
to protect both donors and recipients of blood products and involves significant
record-keeping and other burdens.
Regulation of Devices
Any additional device products which we may develop are likely to be
regulated by the FDA as medical devices rather than drugs. In addition, the
device used to insert drugs and genes in blood cells will be
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regulated as a medical device. The nature of the FDA requirements applicable to
such products depends on their classification by the FDA. A device developed by
us would be automatically classified as a Class III device, requiring premarket
approval, unless the device was substantially equivalent to an existing device
that has been classified in Class I or Class II or to a pre-1976 device that has
not yet been classified or we could convince the FDA to reclassify the device as
Class I or Class II. If we were unable to demonstrate such substantial
equivalence and unable to obtain reclassification, we would be required to
undertake the costly and time-consuming process, comparable to that for new
drugs, of conducting preclinical studies, obtaining an IDE to conduct clinical
tests, filing a PMA, and obtaining FDA approval.
If the device were a Class I product, the "general controls" of the Federal
Food, Drug, and Cosmetic Act, chiefly adulteration, misbranding, and GMP
requirements, would nevertheless apply. If substantial equivalence to a Class II
device could be shown, the general controls plus "special controls" such as
performance standards, guidelines for safety and effectiveness, and post-market
surveillance would apply. While demonstrating substantial equivalence to a Class
I or Class II product is not as costly or time-consuming as the premarket
approval process for Class III devices, it can in some cases also involve
conducting clinical tests to demonstrate that any differences between the new
device and devices already on the market do not affect safety or effectiveness.
If substantial equivalence to a pre-1976 device that has not yet been classified
has been shown, it is possible that the FDA would subsequently classify the
device as a Class III device and call for the filing of premarket approval
applications at that time. If the FDA took that step, then filing an application
acceptable to the FDA would be a prerequisite to remaining on the market.
It is likely that the review process for additional devices that we may
develop will occur in the Center for Biologics Evaluation and Research. It is
possible, however, that the Center would consult with relevant officials in the
FDA's Center for Devices and Radiological Health and Center for Drug Evaluation
and Research. Such a consultation might further delay approval of the device and
thus of this technology.
Other
In addition to the foregoing, our business is and will be subject to
regulation under various state and federal environmental laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act
and the Toxic Substance Control Act. These and other laws govern our use,
handling and disposal of various biological, chemical and radioactive substances
used in and wastes generated by our operations. We cannot predict whether new
regulatory restrictions on the marketing of biotechnology products will be
imposed by state or federal regulators and agencies.
Competition
Competition in the pharmaceutical, biotechnology and biopharmaceutical
industries is intense and based significantly on scientific and technological
factors, the availability of patent and other protection for technology and
products, the ability and length of time required to obtain governmental
approval for testing, manufacturing and marketing and the ability to
commercialize products in a timely fashion. Moreover, the biopharmaceutical
industry is characterized by rapidly evolving technology that could result in
the technological obsolescence of any products that we develop. We compete with
many specialized biopharmaceutical firms, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Many biopharmaceutical companies have focused their development efforts in the
human therapeutics area, and many major pharmaceutical companies have developed
or acquired internal biotechnology capabilities or made commercial arrangements
with other biopharmaceutical companies. These companies, as well as academic
institutions, governmental agencies and private research organizations, also
compete with us in recruiting and retaining highly qualified scientific
personnel and consultants.
Our competition will be determined in part by the potential indications for
which our compounds may be developed and ultimately approved by regulatory
authorities. We may rely on third parties to commercialize our products, and
accordingly, the success of these products will depend in significant part on
these third parties' efforts and ability to compete in these markets. The
success of any collaboration will depend in part upon our collaborative
partners' own competitive, marketing and strategic considerations,
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including the relative advantages of alternative products being developed and
marketed by our collaborative partners and our competitors.
Many other companies and research institutions are investigating the role of
angiogenesis generally and specifically as it may be useful in developing
therapeutics to treat various diseases associated with abnormal blood vessel
growth. In studies available to date, these angiogenic inhibitors have shown
varying effectiveness in inhibiting angiogenesis and differing degrees of
bioavailability and toxicity. Significant further preclinical and clinical
development of these products is needed prior to an assessment of the more
significant competitive product candidates in the antiangiogenic disease
indications targeted by us.
We are aware of other companies developing thalidomide and certain of its
chemical analogs for various disease indications, including our collaborative
partner, Celgene, for the treatment of ENL, AIDS-related cachexia (or wasting)
and mouth ulcers. Celgene has received approval from the FDA for the use of
thalidomide in ENL. In 1997, two patents licensed to us were issued to
Children's Hospital by the United States Patent and Trademark Office covering
the use of thalidomide to treat angiogenic-mediated diseases including cancer,
macular degeneration and rheumatoid arthritis. These patents have, in turn, been
sublicensed by us to Celgene. Although we believe that these patent rights would
preclude any company other than Celgene from marketing thalidomide for
antiangiogenic indications, there can be no assurance that any patent will issue
or afford meaningful protection. If a competitor of Celgene or us receives
approval to market thalidomide for a particular disease indication, "off-label"
use of thalidomide could adversely affect our business and operations. Although
the FDA does not permit a manufacturer or distributor to market or promote an
approved drug for an unapproved off-label use or dosage level, under its
"practice of medicine" policy, the FDA generally does not prohibit a physician
from prescribing an approved drug product for an unapproved use or dosage. In
addition, pharmaceutical companies may provide certain information concerning
off-label uses of their drug in compliance with statutory provisions or as
permitted by court orders in a pending court challenge to the FDA's authority to
regulate the dissemination of such information.
Although one of our focuses is on blood cell permeation research, a number of
companies utilize or are developing cell permeation or drug delivery
technologies and competition for the development of gene and drug delivery
products is intense. We also anticipate that IHP-treated blood will compete for
use in blood transfusions with readily available products, including whole human
blood or packed red blood cells, and products under development, such as blood
substitutes or allosteric effectors of hemoglobin function.
Many of our existing or potential competitors have substantially greater
financial, technical and human resources than us and may be better equipped to
develop, manufacture and market products. In addition, many of these competitors
have extensive experience in preclinical testing and human clinical trials and
in obtaining regulatory approvals. The existence of competitive products,
including products or treatments of which we are not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of products which we may develop.
EMPLOYEES
As of December 31, 2000, we had 101 full-time employees, of which 71 were
employed in research and development positions and 30 were employed in general
and administrative positions. In addition, our subsidiary, TheraMed, had 11
full-time employees. We intend to hire additional personnel in addition to
utilizing part-time or temporary consultants on an as-needed basis. None of our
employees is represented by a labor union and we believe our relations with our
employees are satisfactory.
RISK FACTORS
The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected.
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We have a history of losses and anticipate future losses
To date, we have been engaged primarily in research and development
activities. Although we have received license fees and research and development
funding from our former collaboration with Bristol- Myers Squibb Company,
limited revenues from Celgene as royalties on the sale of THALOMID(R), and
certain research grants, we have not derived significant revenues from
operations.
At December 31, 2000, we had an accumulated deficit of approximately
$132,412,000. Significant losses have continued since December 31, 2000. We also
will be required to conduct substantial research and development and clinical
testing activities for all of our proposed products. We expect that these
activities will result in operating losses for the foreseeable future,
particularly due to the extended time period before we expect to commercialize
any products, if ever. In addition, to the extent we rely upon others for
development and commercialization of our products, our ability to achieve
profitability will depend upon the success of these other parties. To support
our research and development of certain product candidates, we also rely to a
significant extent on grants and cooperative agreements from governmental and
other organizations as a source of revenues and clinical support. If our grant
revenue or cooperative agreements were to be reduced to any substantial extent,
it may impair our ability to continue our research and development efforts. We
cannot assure you that we will be able to generate revenues from operations or
achieve profitability on a sustained basis, if at all.
Development of our products is at an early stage and is uncertain
Our proposed products and research programs are in the early stage of
clinical development and require significant, time-consuming and costly research
and development, testing and regulatory clearances. In developing our products,
we are subject to risks of failure that are inherent in the development of
products and therapeutic procedures based on innovative technologies. For
example, it is possible that any or all of these proposed products or procedures
will be ineffective or toxic, or otherwise will fail to receive necessary FDA
clearances. There is a risk that the proposed products or procedures will be
uneconomical to manufacture or market or will not achieve broad market
acceptance. There also is a risk that third parties may hold proprietary rights
that preclude us from marketing our proposed products or that others will market
a superior or equivalent product. The failure of our research and development
activities to result in any commercially viable products would materially
adversely affect our business.
Angiostatin and Endostatin, Panzem (2ME2) and thalidomide analogs are at the
clinical and preclinical stages of development. Until very recently, these
product candidates had only been tested on animals and not on humans. Although
these product candidates have demonstrated some success in preclinical studies
in combating tumors in mice, there is absolutely no assurance that the agents
will prove to be similarly effective in combating tumors in humans during
clinical trials and testing. Mice are not people, and although the scientific
community considers the study of mice useful, we cannot say whether agents that
are successful in treating tumors in mice will be non-toxic to humans, let alone
beneficial. In the cancer context, testing on mice may occur under different
conditions than testing in people, including the manner in which tumors are
introduced into mice, the genetic make-up of laboratory mice populations
(homogeneity as opposed to diversity), tumor type or location or other
unidentified factors. There are many regulatory steps that must be taken before
any of these product candidates will be eligible for FDA approval and subsequent
sale, including the completion of preclinical (animal) and clinical (human)
trials. We do not expect that these product candidates will be commercially
available for several years, if ever.
We must subject potential products to clinical trials, the results of which are
uncertain
Before obtaining regulatory approvals for the commercial sale of our
products, we or our collaborative partners will be required to demonstrate
through preclinical studies (animal testing) and clinical trials (human testing)
that our proposed products are safe and effective for use in each target
indication. The results from preclinical studies on animals may not be
predictive of results that will be obtained in clinical trials and large-scale
testing on humans.
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Our product candidate Endostatin entered Phase I clinical trials on humans.
Patient recruitment is also underway for Phase I clinical trials of Angiostatin
and Panzem (2ME2), and we begandrug administration in April 2000. Phase II
trials for Panzem (2ME2) began in 2001. Thalidomide, which we licensed to
Celgene, is currently being tested in Phase II and III clinical trials on humans
for a variety of types of cancer. In the future, we will be required to conduct
clinical trials on humans for thalidomide analogs and other new molecules
developed by our scientists. We have only limited experience in conducting
clinical trials on humans and intend to rely on pharmaceutical companies, the
National Cancer Institute, and contract research organizations with which we
collaborate for clinical development and regulatory approval of our product
candidates. We cannot guarantee that the clinical trials conducted by our
partners or us will demonstrate sufficient safety and efficacy to obtain the
required regulatory approvals or will result in marketable products.
The results of initial preclinical studies and clinical trials of products
under development are not necessarily indicative of results that will be
obtained from subsequent or more extensive preclinical studies and clinical
testing. In advanced clinical development, numerous factors may be involved that
may lead to different results in larger, later-stage trials from those obtained
in earlier-stage trials. Early stage trials usually involve a small number of
patients and thus may not accurately predict the actual results regarding safety
and efficacy that may be demonstrated with a large number of patients in a
later-stage trial. Also, differences in the clinical trial design between an
early-stage and late-stage trial may cause different results regarding the
safety and efficacy of a product to be obtained. In addition, many early stage
trials are unblinded and based on qualitative evaluations by clinicians involved
in the performance of the trial whereas later-stage trials generally are
required to be blinded in order to provide more objective data for assessing the
safety and efficacy of the product. The failure to adequately demonstrate the
safety and efficacy of a product under development could delay or prevent
regulatory clearance of the potential product and would have a significant
adverse effect on us.
Clinical trials involving cancer patients are often conducted with terminally
ill patients having the most advanced stages of a disease. During the course of
treatment, these patients can die or suffer other adverse events due to the
advanced stage of their disease despite the efficacy of the agents being tested.
These deaths and/or adverse events, though unrelated to the agent being tested,
can nevertheless adversely affect clinical trial results. Various companies in
the pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after attaining promising
results in earlier trials. Clinical trials for the product candidates being
developed by us and our collaborators may be delayed by many factors, including
that potential candidates for testing are limited in number. Any delays in, or
termination of, the clinical trials of any of our product candidates, or the
failure of any clinical trials to meet applicable regulatory standards, could
have a material adverse effect on our business.
In addition, we hope eventually to market our products outside of the United
States. This will entail foreign regulatory approvals from governments in other
countries that may have different requirements from the regulatory process in
the United States, subjecting our products to additional clinical trials and
approvals, as well as licensing, manufacturing and labeling standards, even
though the products are fully approved for manufacture, marketing and
distribution in the United States. In order to meet any additional requirements
that might be imposed by foreign governments, we may incur additional costs that
will inhibit our profitability. If the relevant approvals cannot be obtained or
will be too expensive to obtain, foreign distribution may not be feasible, which
could have a material adverse impact on our business.
We are uncertain whether additional funding will be available for our future
capital needs and commitments
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We will require substantial funds in addition to our existing working capital
to develop our product candidates and otherwise to meet our business objectives.
We have never generated enough cash during any period since our inception to
cover our expenses and have spent, and expect to continue to spend, substantial
funds to continue our research and development programs. Any one of the
following factors, among others, could cause us to require additional funds or
otherwise cause our cash requirements in the future to materially increase:
- results of research and development activities;
- progress of our preclinical studies or clinical trials;
- changes in or terminations of our relationships with strategic partners;
- changes in the focus, direction, or costs of our research and development
programs;
- competitive and technological advances;
- establishment of marketing and sales capabilities;
- the regulatory approval process; or
- product launch.
Also, we are a party to sponsored research agreements pursuant to which we
have agreed to fund an aggregate of approximately $3,981,0002,853,000 through
2003 (including $1,433,000 to Children's Hospital), and materials production
costs of up to $9,300,000 for clinical trials. In addition, under the terms of
certain license agreements, we must be diligent in bringing potential products
to market and must make future milestone payments of up to $3,435,000 and
additional payments upon attainment of regulatory milestones. If we fail to
comply with the milestones or fail to make any required sponsored research or
milestone payment, we could face the termination of the relevant sponsored
research or license agreement, which could have a material adverse effect on our
business.
We may seek additional funding through collaborative arrangements and public
or private financing, including equity financing. We cannot guarantee that
collaborative arrangements or additional financing will be available on
acceptable terms to us or at all. If we issue more common stock to raise funds
in the future, your ownership in us may be diluted. If adequate funds are not
available, we may be required to take one or more of the following actions:
- delay, reduce the scope of, or eliminate one or more of our research and
development programs;
- forfeit our rights to future technologies;
- obtain funds through arrangements with collaborative partners or others
that may require us to relinquish rights to certain of our technologies,
product candidates or products that we would otherwise seek to develop
or commercialize on our own; or
- license the rights to such products on terms that are not favorable to
us.
We may need new collaborative partners to develop and commercialize products
We plan to develop and commercialize our product portfolio with or without
corporate alliances and partners. Nonetheless, we intend to explore
opportunities for new corporate alliances and partners to help us develop,
commercialize and market our products. We expect to grant to our partners
certain rights to commercialize any products developed under these agreements,
and we may rely on our partners to conduct research and development efforts and
clinical trials on, obtain regulatory approvals for, and manufacture and market
any products licensed to them. Each individual partner will seek to control the
amount and
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timing of resources devoted to these activities generally. Our revenues will be
obtained from strategic partners as research and development payments and upon
achievement of certain milestones. Since we generally expect to obtain a royalty
for sales or a percentage of profits of products licensed to third parties, our
revenues may be less than if we retained all commercialization rights and
marketed products directly. In addition, there is a risk that our corporate
partners will pursue alternative technologies or develop competitive products as
a means for developing treatments for the diseases targeted by our programs.
We also may elect to collaborate with another partner to replace
Bristol-Myers Squibb. Even if we find such a partner to assist us with the
research, development and eventual commercialization of Angiostatin, our work on
the product may not be successful. We will depend, in part, on our partner's own
competitive, marketing and strategic considerations, including the relative
advantages of other products being developed and marketed.
We cannot guarantee that we will be successful in establishing any additional
collaborative arrangements, that products will be successfully commercialized
under any collaborative arrangement or that we will derive any revenues from our
arrangements. Our strategy also involves entering into multiple, concurrent
strategic alliances to pursue commercialization of our core technologies. There
is a risk that we will not be able to manage simultaneous programs successfully.
With respect to existing and potential future strategic alliances and
collaborative arrangements, we will depend on the expertise and dedication of
sufficient resources by these outside parties to develop, manufacture, or market
products. If a strategic alliance or collaborative partner fails to develop or
commercialize a product to which it has rights, our business could be materially
and adversely affected.
We have no current marketing capacity
To the extent that we undertake to market our products, or are unable to
enter into co-promotion agreements or to arrange for third-party distribution of
our products, additional expenditures and management resources will be required
to develop an effective sales force. There can be no assurance that we will be
able to establish a sales force or to enter into co-promotion or distribution
agreements on favorable terms or on a timely basis. Other companies offering
similar or substitute products may have well-established sales forces or
agreements in place that will allow them to market their products more
successfully. Failure to establish sufficient marketing capabilities may have a
material adverse impact on our business.
We have no current manufacturing capacity
We are currently manufacturing products for clinical trials on a contract
basis. We do not expect to manufacture or market products in the near term, but
we may try to do so in certain cases. We do not currently have the capacity to
manufacture or market products and limited experience in these activities. If we
elect to perform these functions, we will be required to either develop these
capacities, or contract with others to perform some or all of these tasks. We
may be dependent to a significant extent on corporate partners, licensees, or
other entities for manufacturing and marketing of products. If we engage
directly in manufacturing or marketing, we will require substantial additional
funds and personnel and will be required to comply with extensive regulations.
We cannot guarantee that we will be able to develop or contract for these
capacities when required in connection with our business.
The manufacture of pharmaceutical products can be an expensive, time consuming,
and complex process. Manufacturers often encounter difficulties in scaling-up
production of new products, including problems involving production yields,
quality control and assurance, and shortages of personnel. Delays in formulation
and scale-up to commercial quantities could result in additional expense, delays
in our clinical trials, regulatory submissions, and commercialization. The
manufacturing processes for several of the small molecules and proteins we are
developing as product candidates have not yet been tested at commercial levels,
and we cannot guarantee that it will be possible to manufacture these materials
in a cost-effective manner.
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In addition, we will depend on all such third-party manufacturers to perform
their obligations effectively and on a timely basis. There can be no assurance
that such parties will perform such obligations and any such non-performance may
delay clinical development or submission of products for regulatory approval, or
otherwise impair our competitive position, which would have a material adverse
affect on our business. Any manufacturer of our product candidates will be
subject to applicable Good Manufacturing Practices (GMP) prescribed by the FDA
or other rules and regulations prescribed by foreign regulatory authorities. We
cannot guarantee that we or any of our collaborators will be able to enter into
or maintain relationships either domestically or abroad with manufacturers whose
facilities and procedures comply or will continue to comply with GMP and who are
able to produce our small molecules and proteins. Should manufacturing
agreements be entered into, our collaborators and we will be dependent upon such
manufacturers for continued compliance with GMP. Failure by a manufacturer of
our products to comply with GMP could result in significant time delays or our
inability to commercialize or continue to market a product. Changes in our
manufacturers could require new product testing and facility compliance
inspections. In the United States, failure to comply with GMP or other
applicable legal requirements can lead to federal seizure of violative products,
injunctive actions brought by the federal government, and potential criminal and
civil liability on the part of a company and its officers and employees. Because
of these and other factors, we may not be able to replace our manufacturing
capacity quickly or efficiently, in the event that our current or future
manufacturers are unable to manufacture our products at one of more of their
facilities. For certain of our potential products, we will need to substantially
increase the capacity of our production facilities (or those of our
manufacturers) in order to conduct human clinical trials and to produce such
products for commercial sale at an acceptable cost.
We cannot guarantee that it will be commercially feasible to manufacture
Endostatin and Angiostatin
We have entered into agreements with Covance Biotechnology Services Inc.
under which Covance is responsible for producing sufficient amounts of the
Endostatin and Angiostatin for preclinical toxicology studies and for scale-up
production of these proteins under GMP conditions for clinical trials. We also
have entered into a letter of understanding with Chiron Corporation for the
large-scale production of GMP Endostatin. We have spent significant time and
funds to transfer the technology underlying the production of the Endostatin and
Angiostatin to Covance and Chiron. As such, we are reliant on Covance and Chiron
for the production of sufficient quantities of the Endostatin and Angiostatin to
complete our clinical studies, and if they fail to produce such quantities, then
we would have to delay our clinical studies. If we are required to change to a
new manufacturer, and if any suitable manufacturer can be found, significant
additional time and funds would be required for technology transfer and testing.
Indeed, the production of protein-based therapeutics using recombinant DNA
techniques and fermentation is a difficult, expensive process. There is,
therefore, no assurance that it will be possible to manufacture commercial
quantities of Endostatin and Angiostatin in a cost-effective manner.
We depend on Celgene to commercialize thalidomide
We have sublicensed to Celgene Corporation all of our rights to commercialize
and sell thalidomide worldwide. We have received and will continue to receive
royalties on all sales of thalidomide (THALOMID(R)) by Celgene. The success of
our relationship with Celgene and the marketing of thalidomide will depend, in
part, on Celgene's own competitive, marketing, and strategic considerations,
including the relative advantages of alternative products being developed and
marketed by its competitors. In addition, if Celgene is not successful in
marketing thalidomide, we would be materially adversely affected.
Thalidomide is currently in Phase II/III human clinical trials for a variety
of cancer indications. Based upon our efforts, thalidomide has received orphan
drug designation from the FDA as a treatment for Kaposi's sarcoma, a form of
skin cancer most frequently associated with AIDS, and for primary brain
malignancies. Celgene, to whom we have licensed the rights to commercialize
thalidomide, has received approval from the FDA to market thalidomide for the
treatment of erythema nodosum leprosum, an inflammatory skin condition of some
leprosy patients. The FDA, however, has not yet approved the
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marketing and sale of thalidomide for cancer. Celgene still must pass
significant regulatory hurdles before thalidomide will be commercially available
for approved use for treatment of cancer, if ever.
There are risks related to the history of thalidomide
Thalidomide has caused serious birth defects in children whose mothers used
it during pregnancy. Therefore, physicians prescribing the drug to women of
childbearing age must take strict precautions, and there can be no assurance
that such precautions will be observed in all cases or, if observed, will be
effective. Use of thalidomide has also been associated, in a limited number of
cases, with other side effects, including nerve damage. We believe that the
characteristics of thalidomide that may have affected fetal development and
caused birth defects by blocking new blood vessel growth are the same
characteristics that may make thalidomide useful in the prevention and treatment
of angiogenic disorders such as cancer. However, we cannot guarantee that
clinical trials with the drug will demonstrate its safety and efficacy or that
the drug will not be associated with other characteristics that prevent or limit
its commercial use.
Even if thalidomide is demonstrated to be safe and effective for use in
treating angiogenic-mediated disease, we may face difficulties in gaining public
acceptance of the drug based on its history of causing birth defects. This may
adversely affect the marketing efforts of our collaborator Celgene Corporation.
In addition, although Celgene has agreed to indemnify us from any liability that
may arise from its sales of thalidomide, we cannot guarantee that we will be
protected from such liability and the possible related losses.
We cannot guarantee that our products will achieve market acceptance
Our success will be dependent on market acceptance of our products in the
United States and, later, in international markets. Since we have not received
the necessary approvals to sell our products in the United States or elsewhere,
we cannot predict whether any of our products will achieve market acceptance,
either in the United States or abroad. A number of factors may limit the market
acceptance of our products, including the timing of regulatory approval and
market entry relative to competitive products, the availability of alternative
therapies or treatments, the price of our products relative to any alternatives,
the availability of third-party reimbursement to pay for them, and the extent of
the marketing efforts by competitors. Other risk factors identified in this
section also may affect market acceptance.
We depend on patents and other proprietary rights, some of which are uncertain
Our success will depend in part on our ability to obtain patents for our
products, both in the United States and abroad. The patent position of
biotechnology and pharmaceutical companies in general is highly uncertain and
involves complex legal and factual questions. Risks related to patenting our
products include the following:
- our failure to obtain additional patents;
- challenge, invalidation, or circumvention of patents already issued to
us;
- failure of the rights granted under our patents to provide sufficient
protection;
- independent development of similar products by third parties; or
- ability of third parties to design around patents issued to us or our
collaborators.
For several of the products that we are developing, including thalidomide and
Panzem(2ME2), composition of matter patents are not available because the
compounds are in the public domain. In these cases, only patents covering the
"use" of the product are available. In general, patents covering a new use for a
known compound can be more difficult to enforce against infringers of the use
claims in the patent. We have secured use patents covering the use of
thalidomide for the treatment of angiogenic diseases. We
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are aware of at least two other issued patents covering certain
non-antiangiogenic uses of thalidomide. Although we believe that the claims in
such patents will not interfere with our proposed use of thalidomide, we cannot
guarantee that the holders of such patents will not be able to exclude us from
marketing thalidomide for other uses. We have also secured use patents covering
Panzem (2ME2).
The enactment of the legislation implementing the General Agreement on
Tariffs and Trade caused certain changes to United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of a United States patent
will commence on the date of issuance and terminate twenty years from the
earliest effective filing date of the application. Since the time from filing to
issuance of biotechnology patents is often more than three years, a twenty-year
term from the effective date of filing may result in a term of patent protection
that is substantially shorter than seventeen years. This may adversely impact
our patent position. Often, the duration and level of the royalties we are
entitled to receive from a collaborative partner is based on the existence of a
valid patent. Thus, the shorter period of patent protection may adversely affect
our future operating results and financial condition.
Our potential products may conflict with patents that have been or may be
granted to competitors, universities or others. As the biotechnology industry
expands and more patents are issued, the risk increases that our potential
products may give rise to claims that they infringe the patents of others. Such
other persons could bring legal actions against us claiming damages and seeking
to enjoin clinical testing, manufacturing and marketing of the affected
products. Any such litigation could result in substantial cost to us and
diversion of effort by our management and technical personnel. If any of these
actions are successful, in addition to any potential liability for damages, we
could be required to obtain a license in order to continue to manufacture or
market the affected products. We cannot guarantee that we would prevail in any
action or that any license required under any needed patent would be made
available on acceptable terms, if at all. Failure to obtain needed patents,
licenses, or proprietary information held by others may have a material adverse
effect on our business.
We are a party to sponsored research agreements and license agreements that
require us to make milestone payments upon attainment of certain regulatory
milestones. Failure to meet such milestones could result in the loss of certain
rights to compounds covered under such license agreements.
We also rely on trade secret protection for our confidential and proprietary
information. However, trade secrets are difficult to protect and we cannot
guarantee that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets or disclose our technology, or that we can meaningfully protect our
rights to unpatented trade secrets. We require our employees, consultants, and
advisors to execute a confidentiality agreement when beginning an employment or
a consulting relationship with us. The agreements generally provide that all
trade secrets and inventions conceived by the individual and all confidential
information developed or made known to the individual during the term of the
relationship automatically become our exclusive property. Employees and
consultants must keep such information confidential and may not disclose such
information to third parties except in specified circumstances. We cannot
guarantee, however, that these agreements will provide meaningful protection for
our proprietary information in the event of unauthorized use or disclosure of
such information.
To the extent that consultants, key employees, or other third parties apply
technological information independently developed by them or by others to our
proposed projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in our favor. Certain of our consultants
are employed by or have consulting agreements with others and any inventions
discovered by them generally will not become our property.
The expiration of our relationship with Children's Hospital, Boston, could
adversely impact our ability to acquire future product candidates and could
subject us to increased competition
We have relationships with collaborators at academic and other institutions
who conduct research either on our behalf or whose research we have the right to
license and use. Our primary research collaboration
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has been with Children's Hospital, Boston. Pursuant to our agreement with
Children's Hospital, Boston, we agreed to provide funding for some of their
antiangiogenesis research projects and granted them options to acquire an
ownership interest in us. In return, they gave us the right to fund additional
research projects and obtain licenses to any discoveries arising from that
research. Children's Hospital, Boston, originally discovered Endostatin,
Angiostatin, Panzem (2ME2), and the antiangiogenic properties of thalidomide and
certain thalidomide analogs. To date, we have received licenses from Children's
Hospital, Boston, for these products.
Researchers at Children's Hospital, Boston, also may be working on other
products that may be used to treat cancer in a variety of ways, including by
antiangiogenesis. Although we believe that, pursuant to our agreement, we are
entitled to license and use a wide variety of products related to
antiangiogenesis, Children's Hospital, Boston, may take a different position.
Children's Hospital, Boston, has licensed, and may in the future license,
products to our existing and potential competitors.
Early last year, we extended our agreement with Children's Hospital, Boston
for another year. However, while this agreement has been renewed before, we do
not know whether this agreement will be renewed again this year. Because
Children's Hospital, Boston, has, in the past, been an important source of
product candidates for us, the expiration of this collaboration may adversely
impact our ability to acquire future product candidates. We cannot be sure that
we will be able to negotiate research collaborations with new institutions or
that any new collaboration will be successful. The expiration of the
collaboration with Children's Hospital, Boston, may subject us to increased
competition. It also is possible that, after the expiration of our agreement,
Children's Hospital, Boston, may develop other products that have antiangiogenic
qualities similar to those contained in the products that we currently license
and could license those products to our competitors.
Our potential products are subject to government regulatory requirements and a
lengthy approval process
Our research, development, preclinical and clinical trials, manufacturing,
and marketing of most of our product candidates are subject to an extensive
regulatory approval process by the FDA and other regulatory agencies in the
United States and abroad. The process of obtaining FDA and other required
regulatory approvals for drug and biologic products, including required
preclinical and clinical testing, is lengthy, expensive and uncertain. Even
after spending time and money, we may not receive regulatory approvals for
clinical testing or for the manufacturing or marketing of any products. Our
collaborators or we may encounter significant delays or excessive costs in the
effort to secure necessary approvals or licenses. Even if we obtain regulatory
clearance for a product, that product will be subject to continual review. Later
discovery of previously unknown defects or failure to comply with the applicable
regulatory requirements may result in restrictions on a product's marketing or
withdrawal of the product from the market, as well as possible civil or criminal
penalties.
We operate in a highly competitive industry
The pharmaceutical and biotechnology industries are intensely competitive and
we expect competition from other companies and other research and academic
institutions to increase. In addition to competing with universities and other
research institutions to develop products, technologies, and processes, we may
compete with other companies to acquire the rights to products, technologies,
and processes developed by universities and other research institutions. Many of
these companies have substantially greater financial and research and
development capabilities than we have and have substantially greater experience
in undertaking preclinical and clinical testing of products, obtaining
regulatory approvals and manufacturing and marketing pharmaceutical products. We
are aware of a number of other companies and academic institutions that are
pursuing angiogenesis research and are testing other angiogenesis inhibitors.
These other companies and academic institutions may be larger than we are and
may have significantly greater financial resources, or be supported by large
entities with greater financial resources than are currently available to us.
They may also have established marketing and distribution channels. The drug
industry is characterized by intense price competition, and we anticipate that
we will face this and other
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forms of competition. There can be no assurance that developments by others will
not render our products or technologies obsolete or noncompetitive or that we
will be able to keep pace with technological developments. Competitors may
develop products that use an entirely different approach or means of
accomplishing the desired therapeutic effect that our products seek to achieve
and may be more effective or less costly, or both. In addition, other
competitors may have significantly greater experience than we do in undertaking
preclinical testing and human clinical trials and obtaining regulatory approvals
of pharmaceutical products. Accordingly, our competitors may succeed in
commercializing products more rapidly than we do. Were these competitors to
develop their products more rapidly and complete the regulatory process sooner,
it could have a material adverse effect on our business.
If other companies were to get FDA approval to market thalidomide for other
disease indications, "off-label" use of thalidomide could adversely affect our
business and operations. We are aware of other companies engaged in the
development of thalidomide for various disease indications. Although the FDA
does not permit a manufacturer or distributor to market or promote an approved
drug for an unapproved off-label use or dosage level, under its "practice of
medicine" policy, the FDA generally does not prohibit a physician from
prescribing an approved drug product for an unapproved use or dosage. In
addition, the FDA has from time to time proposed to liberalize its restrictions
on the dissemination of off-label information.
The pharmaceutical and biotechnology industries are rapidly evolving. We may
not be able to develop products that are more effective or achieve greater
market acceptance than our competitors' products. Our competitors may succeed in
developing products and technologies that are more effective than those being
developed by us or that render our products and technologies less competitive or
obsolete. One competitor in particular is working on the development for
clinical trials of an antiangiogenic developed by the same researcher at
Children's Hospital, Boston, who developed Angiostatin and Endostatin. While we
do not know the potential effectiveness of this product in comparison to
Angiostatin, Endostatin or our other products, it is possible that this product
will be more effective than our products, will be easier to manufacture, will
come to market before any of our products or will achieve market acceptance over
our products.
Loss of key personnel and consultants could adversely affect our business
We are dependent on certain of our executive officers and scientific
personnel, including John W. Holaday, Ph.D., our co-founder, Chairman, President
and Chief Executive Officer. We have a three-year employment agreement with Dr.
Holaday through December 31, 2001. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense, and the loss of certain
of our personnel, or an inability to attract, retain, and motivate additional
highly skilled scientific, technical, and management personnel, could materially
adversely affect our business and prospects. We cannot guarantee that we will be
able to retain our existing personnel or attract and retain additional qualified
employees.
We may also be dependent, in part, upon the continued contributions of the
lead investigators of our sponsored research programs. Our scientific
consultants and collaborators may have commitments to or consulting or advisory
agreements with other entities that may affect their ability to contribute to us
or may be competitive with us. Inventions or processes discovered by them will
not necessarily become our property, but may remain the property of these
persons or of these persons' full-time employers.
Potential products may subject us to product liability for which insurance may
not be available
The use of our potential products in clinical trials and the marketing of any
pharmaceutical products may expose us to product liability claims. We have
obtained a level of liability insurance coverage that we believe is appropriate
for our current stage of development. However, there is a risk that our present
insurance coverage is not adequate. Such existing coverage will not be adequate
as we further develop products, and there is a risk that in the future adequate
insurance coverage and indemnification by collaborative partners will not be
available in sufficient amounts or at a reasonable cost. A successful product
liability claim could have a material adverse effect on our business and
financial condition.
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The marketability of our potential pharmaceutical products may depend on
reimbursement and reform measures in the health care industry
Our success may depend, in part, on the extent to which reimbursement for the
costs of therapeutic products and related treatments will be available from
third-party payors such as government health administration authorities, private
health insurers, managed care programs, and other organizations. Over the past
decade, the cost of health care has risen significantly, and there have been
numerous proposals by legislators, regulators, and third-party health care
payors to curb these costs. Some of these proposals have involved limitations on
the amount of reimbursement for certain products. We cannot guarantee that
similar federal or state health care legislation will not be adopted in the
future or that any products sought to be commercialized by us or our
collaborators will be considered cost-effective or that adequate third-party
insurance coverage will be available for us to establish and maintain price
levels sufficient for realization of an appropriate return on our investment in
product development. Moreover, the existence or threat of cost control measures
could have an adverse effect on the willingness or ability of our corporate
collaborators to pursue research and development programs related to our product
candidates.
We are subject to risk due to our use of hazardous materials
Our research and development involves the controlled use of hazardous
biological, chemical, and radioactive materials. We are subject to federal,
state, and local laws and regulations governing the use, manufacture, storage,
handling, and disposal of such materials and certain waste products. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any such liability could have a material adverse effect
on us.
The price of our stock is highly volatile
The market price of our common stock, like that of the common stock of many
other biopharmaceutical companies, has at times been, and again may be, highly
volatile. Factors that may have a significant impact on the market price of our
common stock include:
- the results of preclinical studies and clinical trials by us or our
competitors;
- FDA actions with respect to our product candidates;
- other evidence of the safety or efficacy of our product candidates or
those of our competitors;
- announcements of technological innovations or new commercial products by
us or our competitors;
- changes in reimbursement policies;
- health care legislation;
- developments in patent or other proprietary rights;
- developments in our relationships with collaborative partners;
- public concern as to the safety and efficacy of drugs we develop;
- fluctuations in our operating results;
- actions by traders and shortsellers;
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- articles in the public press;
- general market conditions; and
- sales of substantial numbers of shares of common stock.
ITEM 2. PROPERTIES
We currently lease approximately 46,000 square feet of space (approximately
32,000 square feet of which is laboratory space) in Rockville, Maryland. The
lease expires in October 2008. We believe that our existing facilities will be
adequate to accommodate the implementation of our current business plan.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in a lawsuit initiated in August 1995 in the United
States District Court for the Eastern District of Tennessee by Bolling, McCool &
Twist ("BMT"), a consulting firm. In the suit, BMT asserts that we breached an
agreement between BMT and us by failing to pay BMT certain fees it asserts are
owed under the agreement. More specifically, BMT has asserted a claim for the
payment of services rendered in the approximate amount of $50,000 and seeks a
success fee in an unspecified amount in connection with the BMS Collaboration.
The judge in the case bifurcated the proceeding into two phases: an adjudication
of whether we breached our agreement with BMT and then a damage phase. After a
trial on the merits the jury found in favor of BMT on the breach of contract
claim. A trial to determine damages had been scheduled for April 14, 1998.
However, on April 6, 1998, the court issued an Order pursuant to which damages
were limited to those arising during the term of the Agreement, which terminated
on November 1, 1995. On May 6, 1999, the court confirmed its decision by
granting our motion for summary judgement and limiting our damages to
approximately $50,000 plus interest. Thus, this litigation at the trial level
has been concluded. BMT has filed an appeal and we have cross-appealed. On
February 27, 2001, the United States Court of appeals handed down a decision in
the aforementioned appeal. The Court of Appeals has effectively remanded the
case back to the district court for a trial on what were the basic issues,
whether or not Bolling, McCool and Twist was entitled to any percentage of
anything of value received by EntreMed from the Bristol-Myers Squibb agreement
with EntreMed. On March 13, 2001, EntreMed filed for a Court of Appeals panel
rehearing. We cannot predict the outcome of such appeal. However, we intend to
continue to contest any further action vigorously and believe that this
proceeding will not have a material adverse effect on us or on our financial
condition, although there can be no assurance that this will be the case.
On May 30, 2000, Abbott Laboratories filed a law suit against Children's
Medical Center Corporation and us in the Federal District Court in Massachusetts
requesting, among other things, that the court substitute Dr. Donald Davidson as
inventor on Children's U.S. Patent No. 4,854,221 which covers use of the Kringle
5 region of the plasminogen molecule as an anti-angiogenic agent and a
declaratory judgement from the court to invalidate any agreement between
Children's Hospital and EntreMed regarding this patent. Abbott also filed a
claim for misappropriation of trade secrets related to the Kringle 5 molecule
seeking actual and punitive damages from the defendants. On July 18, 2000, we
filed counterclaims against Abbott Laboratories including tortuous interference
with contract and a declaratory judgement that Abbott's patent covering Kringle
5 is invalid and that Children's patent covering Kringle 5 is valid. Although we
do not currently believe that the Abbott lawsuit will have a material impact on
the operations of the company, and we intend to vigorously contest the
allegations raised in the lawsuit, there is a risk that Children's patent or any
agreement with Children's with respect to the use of the patent could be
invalidated or found not to exist.
The Abbott lawsuit is not directed to nor does the suit affect our
Angiostatin molecule, Kringles 1-3 of the plasminogen molecule, that is
currently in Phase I clinical trial.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock began trading publicly on the Nasdaq National Market under
the symbol "ENMD" on June 12, 1996. The following table sets forth the high and
low closing price for our common stock by quarter, as reported by the Nasdaq
National Market, for the periods indicated:
HIGH LOW
---- ---
1999:
First Quarter................ $ 33 $ 12 7/8
Second Quarter............... 28 1/8 20
Third Quarter................ 25 1/4 20 1/4
Fourth Quarter............... 31 11/16 22
2000:
First Quarter................ $ 98 1/2 $ 27
Second Quarter............... 56 7/16 21 3/4
Third Quarter................ 37 23 3/4
Fourth Quarter............... 38 17 1/4
2001:
First Quarter (through March
26, 2001).................. $ 27 5/1 $15 11/64
On March 26, 2001, the closing price of our common stock, as reported by the
Nasdaq National Market, was $17.3125 per share. As of March 26, 2001 there were
approximately 800 holders of record of our common stock.
Since our initial public offering in 1996, we have not paid cash dividends on
our common stock. We currently anticipate that any earnings will be retained for
the continued development of our business and we do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2000, and for
each of the five years in the period ended December 31, 2000, are from the
financial statements of EntreMed, Inc. The data should be read in conjunction
with the financial statements, related notes and other financial information
included herein.
Year Ended December 31,
STATEMENTS OF OPERATIONS DATA: 2000 1999 1998 1997 1996
---------------------------------------------------------------------
Revenues
Collaborative research
and development $ - $3,099,166 $4,473,131 $4,342,369 $4,425,000
License fees - 403,333 200,000 200,000 200,000
Grant revenues 401,477 339,087 472,667 215,119 -
Royalty revenues 3,117,282 1,123,111 - - -
Other 153,016 52,853 15,675 - -
Total revenues 3,671,775 5,017,550 5,161,483 4,757,488 4,625,000
Expenses:
Research and development 41,715,598 35,529,435 15,084,993 8,998,705 7,553,793
General and administrative 12,673,851 8,028,922 5,760,215 4,915,724 3,435,501
Interest expense 241,451 22,270 - 1,418 27,267
Investment income (2,164,747) (1,677,361) (2,169,955) (2,621,630) (1,621,729)
Net loss $(48,794,378) $(36,885,716) $(13,513,770) $(6,536,729) $(4,769,832)
Net loss per share $(3.04) $(2.67) $(1.07) $(0.54) $(0.50)
Weighted average number of
shares outstanding 16,057,047 13,801,220 12,681,824 12,158,372 9,532,671
Pro forma net loss per
share(1) $ (0.46)
Pro forma weighted average
number of shares
outstanding (1) 10,422,781
BALANCE SHEET DATA:
Cash and cash equivalents
and short-term
investments $ 24,503,886 $ 26,027,235 $ 35,171,060 $45,245,071 $52,720,829
Working capital 15,129,183 19,242,907 29,269,715 41,454,371 49,049,124
Total assets 31,410,412 31,843,625 39,574,003 47,838,663 54,146,339
Deferred revenue, less
current portion - - - 1,341,666 2,236,666
Accumulated deficit (130,987,395) (82,193,018) (45,307,302) (31,793,532) (25,256,803)
Total stockholders' equity 19,039,945 21,984,801 33,188,064 41,953,094 47,694,191
- ---------
(1) Pro forma net loss per share and weighted average shares outstanding for the
years ended December 31, 1996 give effect to the automatic conversion of
3,000,000 outstanding shares of Preferred Stock into 2,000,000 shares of Common
Stock on June 19, 1996, the effective date of the Company's initial public
offering. See Notes 1 and 8 of Notes to Financial Statements.
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31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. See
"Risk Factors".
OVERVIEW
Since our inception in September 1991, we have devoted substantially all of
our efforts and resources to sponsoring and conducting research and development
on our own behalf and through collaborations. Through December 31, 2000, with
the exception of license fees, research and development funding, royalty
payments, and certain research grants, we have not generated any revenue from
operations. We anticipate our primary revenue sources for the next few years to
include royalty revenues, research grants and collaboration payments under
current or future arrangements. The timing and amounts of such revenues, if any,
will likely fluctuate and depend upon the achievement of specified research and
development milestones, and results of operations for any period may be
unrelated to the results of operations for any other period.
RESULTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998.
Revenues. Revenues decreased approximately 27% in 2000 to approximately
$3,672,000 from $5,018,000 in 1999 and decreased approximately 3% in 1999 from
approximately $5,161,000 in 1998. The 2000 decrease results from the absence of
Bristol-Myers Squibb Company (BMS) collaborative research and development fees
and license fees. Revenues under collaborative research and development
agreements were approximately $3,099,000 and $4,473,000 and license fees were
approximately $403,000 and $200,000 in the years ended December 31, 1999 and
1998, respectively. Revenues in 1999 consisted of the balance of the BMS
collaborative research and development fees, license fees and related deferred
revenue. These amounts declined in comparison to 1998 due to the modification of
the research agreement with BMS in February 1999 whereby we assumed all
responsibility for preclinical and clinical work on the Angiostatin protein
effective August 1999. Deferred revenue from the collaborative research and
development fees related to the amortization over a five-year term of a one-time
payment from BMS received in December 1995 of $2,500,000 ($958,000 and $500,000
recognized in 1999 and 1998, respectively) and the amortization of semi-annual
payments of $1,835,000 ($2,141,000 and $3,670,000 recognized in 1999 and 1998,
respectively) under the BMS collaboration agreement, both of which were fully
amortized in August 1999. The license fee represented the amortization over five
years of a one-time $1,000,000 license fee received in December 1995 under the
BMS collaboration agreement, a portion of which was paid to Children's Hospital,
Boston, which also was fully amortized in August 1999. In 1998 we also
recognized revenues of $303,000 as reimbursement for clinical studies called for
under the original BMS collaboration agreement. Included in grant revenues are
funds received from a Small Business Innovative Research, or SBIR, program of
the National Institutes of Health of approximately $401,000, $264,000 and
$455,000 in 2000, 1999 and 1998, respectively. In accordance with our 1998
collaborative sublicensing agreement for thalidomide with Celgene, we recognized
net royalty revenues from Celgene's sales of thalidomide (THALOMID(R)) of
approximately $3,115,000 for the year ended December 31, 2000 an increase of
approximately 177% from approximately $1,123,000 in 1999.
Research and development expenses. Research and development expenses
increased approximately 17% in 2000 to approximately $41,715,000 from
$35,529,000 in 1999, and increased by approximately 136% in 1999 from
approximately $15,085,000 in 1998. These increases resulted primarily from
scale-up in manufacturing of our three product candidates, Endostatin, Panzem
and Angiostatin, to support our clinical trial program, and our internal and
sponsored research and product development programs related to our
antiangiogenesis and blood cell permeation technologies. Research and
development expenditures included sponsored research and clinical trial payments
of approximately $4,636,000, $4,138,000 and $5,677,000 and internal research and
development expenses of approximately $37,0820,000, $31,391,000 and $9,408,000
in 2000, 1999 and 1998, respectively. Sponsored research payments to academic
31
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collaborators include payments to Children's Hospital, Boston of $2,517,000 in
2000, $2,650,000 in 1999, $2,525,000 in 1998. Overall, research and development
personnel increased to 80 as of December 31, 2000 from 55 as of December 31,
1999. Research and development expenses are expected to continue to increase as
we manufacture product candidates for expanded clinical trials and expand our
research and development efforts.
General and administrative expenses. General and administrative expenses
increased by 58% in 2000 to approximately $12,674,000 from $8,029,000 in 1999
and increased by 39% in 1999 from $5,760,000 in 1998. The increases resulted
primarily from increases in administrative costs associated with adding
administrative staff to support the research and collaborative efforts we are
conducting, investigating potential strategic relationships and obtaining
professional services.
Interest expense. Interest expense increased by approximately 995% in 2000 to
approximately $241,000 from approximately $22,000. The 2000 increase resulted
from amortized payments pursuant to a December 1999 borrowing secured by our
equipment.
Investment income. Investment income increased by approximately 29.1% in 2000
to approximately $2,165,000 from approximately $1,677,000 a 22.7% decrease from
$2,170,000 in 1998. The 2000 increase resulted from an increase in our invested
cash resulting from the sale of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash and cash equivalents of approximately
$24,504,000 with working capital of approximately $15,129,000, primarily
representing the net proceeds of our private placements of equity securities and
our public offerings, payments from BMS which include equity investments,
royalties received from Celgene, proceeds from secured borrowing and various
grants.
We anticipate incurring substantial additional losses over at least the next
several years due to, among other factors, the need to expend substantial
amounts on our ongoing and planned clinical trials, additional research and
development activities, and related business development and general corporate
expenses. From inception through December 31, 2000, we have financed our
operations primarily from:
- the net proceeds of approximately $17,000,000 from private placements of
equity securities;
- payments from BMS of approximately $29,200,000 (of which $11,500,000 was
an equity investment);
- various grants of approximately $1,578,000 from the World Health
Organization and SBIR;
- net royalty revenues of approximately $4,232,000 recognized from Celgene's
sales of THALOMID(R);
- net proceeds of approximately $43,541,000 from our initial public
offering;
- net proceeds of approximately $28,400,000 from a private offering
completed on July 27, 1999 of 1,478,118 shares of our common stock, Series
1 Warrants to purchase a total of 739,059 shares of common stock at an
exercise price of $33.02 and Series 2 Warrants to purchase a total of
739,059 shares of common stock at an exercise price of $25.45;
- net proceeds of $17,818,000 from exercise of Series 2 Warrants and
$6,402,000 from exercise of Series 1 Warrants issued in connection with
the July 27, 1999 private offering;
- proceeds of $3,000,000 from a borrowing in December 1999 secured by our
equipment; and
- net proceeds of approximately $20,680,000 from a public offering completed
on June 19, 2000 of 1,000,000 shares of our common stock.
32
33
- net proceeds of approximately $24,534,000 from a public offering completed
on March 2, 2001 of 1,450,000 shares of our common stock.
The Series 1 Warrants issued in connection with the private offering
completed on July 27, 1999 are terminable by us at any time after January 27,
2002 if our common stock trades at a per share price greater than $61.91 for ten
consecutive trading days and such Warrants are not exercised within a specified
period after our delivery of a written notice. If the remaining Series 1
Warrants were fully exercised, they would result in us receiving $18,001,000 in
aggregate exercise proceeds. We terminated the remaining Series 2 Warrants under
a similar provision on June 1, 2000.
Our cash resources have been used to finance research and development,
including sponsored research, drug manufacturing for clinical trials, stock
repurchases, capital expenditures, including leasehold improvements to our new
facility, and general and administrative expenses. Over the next several years,
we expect to incur substantial additional research and development costs,
including costs related to early-stage research, preclinical and clinical
trials, product candidate manufacturing, increased administrative expenses to
support our research and development operations and increased capital
expenditures for expanded research capacity, various equipment needs and
facility improvements.
At December 31, 2000, we were a party to the following agreements requiring
our funding: sponsored research in an aggregate of approximately $2,308,000
through 2001 (including $1,433,000 to Children's Hospital, Boston); clinical
trials of approximately $1,424,000; manufacturing of product candidates for
clinical trials of an estimated $9,300,000; future milestone payments of up to
$3,435,000 and additional payments upon attainment of regulatory milestones.
In December 2000 and 1999, we exercised our option to repurchase shares of
our common stock from BMS for $13.143 per share. Shares repurchased totaled
291,666 and 291,667 for repurchase prices of $3,833,367 and $3,833,379 in 2000
and 1999 respectively. Shares repurchased from BMS are accounted for as treasury
stock. BMS' remaining 291,666 shares held in connection with the collaborative
research and development agreement are subject to certain restrictions and we
may exercise our right to repurchase these remaining shares for $13.143 per
share (approximately BMS' cost per share) at any time prior to November 30,
2001.
We believe that our existing resources will be sufficient to meet our planned
expenditures over the next twelve months, although there can be no assurance we
will not require additional funds. Our working capital requirements will depend
upon numerous factors including:
- the progress of our research and development programs;
- our ability to contain our manufacturing costs;
- preclinical testing and clinical trials;
- achievement of regulatory milestones;
- the timing and cost of seeking regulatory approvals;
- the level of resources that we devote to the development of
manufacturing, marketing and sales capabilities, if any;
- technological advances;
- the status of competing products; and
- our ability to maintain existing and establish new collaborative
arrangements with other companies to provide us with funding to support
these activities.
33
34
We will require substantial funds in addition to the present existing working
capital to develop our product candidates and to fully meet our business
objectives. In addition to additional equity offerings, we are exploring other
opportunities to raise funds. We are negotiating a possible assignment of some
or all of our rights to receive future THALOMID(R) royalties. We cannot predict
whether our efforts will be successful.
INFLATION AND INTEREST RATE CHANGES
Management does not believe that our working capital needs are sensitive to
inflation and changes in interest rates.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital
until it is required to fund operations while at the same time maximizing the
income we receive from our investments without significantly increasing the
risk. Our investment income is sensitive to the general level of U.S. interest
rates. In this regard, changes in the U.S. interest rates affect the interest
earned our cash and cash equivalents. Due to the short term nature of our cash
and cash equivalent holdings, a 10% movement in market interest rates would not
materially impact on the total fair market value of our portfolio as of December
31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report. See Index to Consolidated Financial Statements on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information called for by Item 10: Directors and Executive Officers
of the Registrant; Item 11: Executive Compensation; Item 12: Security Ownership
of Certain Beneficial Owners and Management; and Item 13: Certain Relationships
and Related Transactions will be included in and is incorporated by reference
from the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the
close of its fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS - See index to Consolidated Financial Statements.
2. Schedules
All financial statement schedules are omitted because they are
not applicable, not required under the instructions or all the information
required is set forth in the financial statements or notes thereto.
34
35
3. Exhibits
3.1(1) Amended and Restated Certificate of Incorporation of EntreMed, Inc.
3.1(a) (3) Amendment to the Certificate of Incorporation
3.1(b) (4) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of EntreMed, Inc.
3.2(1) Form of Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of EntreMed, Inc.
3.3(1) By-laws of EntreMed, Inc.
4.1(8) Form of Series 1 Warrant
4.2(8) Form of Series 2 Warrant
10.1(1) Research Collaboration and License Agreement, dated December 7,
1995, between EntreMed, Inc. and Bristol-Myers Squibb Company
("BMS")
10.2(1) Restricted Stock Purchase Agreement, dated December 7, 1995,
between EntreMed, Inc. and BMS
10.3(1) Registration Rights Agreement, dated December 7, 1995, between
EntreMed, Inc. and BMS
10.4(1) Research Agreement, dated September 29, 1993, between EntreMed,
Inc. and Children's Hospital
10.5(1) Amendment to Research Agreement, dated August 23, 1995, between
EntreMed, Inc. and Children's Hospital
10.6(1) License Agreement, dated May 26, 1994, between Children's Medical
Center Corporation ("CMCC") and EntreMed, Inc.
10.7(1) Amendment to License Agreement, dated August 23, 1995, between CMCC
and EntreMed, Inc.
10.8(1) License Agreement, dated May 26, 1994, between CMCC and EntreMed,
Inc.
10.9(1) Amendment to License Agreement, dated August 23, 1995, between CMCC
and EntreMed, Inc.
10.10(1) Licensing Agreement, dated November 5, 1992, between EntreMed, Inc.
and CBRL
10.11(1) 1992 Stock Incentive Plan*
10.12(1) Amended and Restated 1996 Stock Option Plan*
10.13(1) Form of Stock Option Agreement*
10.14(2) License Agreement between Children's Hospital Medical Center
Corporation and EntreMed, Inc. signed December 5, 1996 regarding
Endostatin protein, An Inhibitor of Angiogenesis
35
36
10.15(2) License Agreement between Children's Hospital Medical Center
Corporation and EntreMed, Inc. signed December 20, 1996 regarding
Estrogenic Compounds as Anti-Mitotic Agents
10.16(3) Agreement between Bristol-Myers Squibb and EntreMed, Inc. signed
August 5, 1997 regarding Termination of Collaborative Research and
License Agreement with Respect to Thalidomide Products
10.17(3) Amendment to the 1996 Stock Option Plan*
10.18(5) License Agreement between Celgene Corporation and EntreMed, Inc.
signed December 9, 1998 regarding thalidomide intellectual property
10.19(5) Contract Manufacturing Agreement between Covance Biotechnology
Services, Inc. and EntreMed, Inc. signed October 16, 1998 regarding
Endostatin protein
10.20(5) Employment Agreement dated as of January 1, 1999, between EntreMed,
Inc. and John W. Holaday, Ph.D. *
10.21(5) Lease Agreement between EntreMed, Inc. and Red Gate III Limited
Partnership, dated June 10, 1998*
10.22(6) 1999 Long-Term Incentive Plan*
10.23(6) Research Agreement, as amended and restated as of June 24, 1999,
between EntreMed, Inc. and Children's Hospital
10.24(7) Bioprocessing Services Agreement between Covance Biotechnology
Services, Inc. and EntreMed, Inc., signed July 7,1999 regarding
Angiostatin protein
10.25(7) Letter of Intent between Covance Biotechnology Services, Inc. and
EntreMed, Inc., dated August 30, 1999 regarding Endostatin protein
10.26(8) Form of Securities Purchase Agreement, dated as of July 22, 1999,
by and among EntreMed, Inc. and the purchasers in the offering
10.27(8) Form of Registration Rights Agreement, dated as of July 27, 1999,
by and among EntreMed, Inc. and the purchasers in the offering
10.28(9) Research Agreement, dated October 1, 1999, between EntreMed, Inc.
and Children's Hospital
10.29(10) Manufacturing Services Agreement between the Company and Chiron
Corporation, dated April 13, 2000
10.30* First Amendment to Research Agreement, dated December 6, 2000,
between EntreMed, Inc. and Children's Hospital
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- ---------------------
* Compensatory Plan, Contract or Arrangement.
36
37
(1) Incorporated by reference to our Registration Statement on Form S-1
(File No. 333-3536) declared effective by the Securities and Exchange
Commission on June 11, 1996.
(2) Incorporated by reference to our Form 10-K for the year ended December
31, 1996 previously filed with the Securities and Exchange Commission.
(3) Incorporated by reference to our Form 10-K for the year ended December
31, 1997 previously filed with the Securities and Exchange Commission.
(4) Incorporated by reference to our Form 10-Q for the quarter ended
September 30, 1998 previously filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to our Form 10-K for the year ended December
31, 1998 previously filed with the Securities and Exchange Commission.
(6) Incorporated by reference to our Form 10-Q for the quarter ended June
30, 1999 previously filed with the Securities and Exchange Commission.
(7) Incorporated by reference our Form 10-Q for the quarter ended September
30, 1999 previously filed with the Securities and Exchange Commission.
(8) Incorporated by reference our Form 8-K dated July 27,1999 previously
filed with the Securities and Exchange Commission.
(9) Incorporated by reference to our Form 10-K for the year ended December
31, 1999 previously filed with the Securities and Exchange Commission.
(10) Incorporated by reference to our Form 10-Q for the quarter ended June
30, 2000 previously filed with the Securities and Exchange Commission.
(b) No reports on Form 8-K were filed during the last quarter of 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENTREMED, INC.
By: /s/ John W. Holaday, Ph.D.
----------------------------------------------
John W. Holaday, Ph.D., Chairman of the
Board, President and Chief Executive Officer
March 30, 2001
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby appoint John
W. Holaday, Ph.D. as attorney-in-fact with full power of substitution to execute
in the name and on behalf of the registrant and each such person, individually
and in each capacity stated below, one or more amendments to the annual report,
which amendments may make such changes in the report at the attorney-in-fact
acting in the premises deems appropriate and to file any such amendment to the
report with the Securities and Exchange Commission.
37
38
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John W. Holaday, Ph.D. Chairman of the Board and 3/30/01
- --------------------------- Chief Executive Officer
John W. Holaday, Ph.D. (principal executive officer)
/s/ Thomas P. Russo Chief Financial Officer 3/30/01
- ---------------------- (principal financial and
Thomas P. Russo accounting officer)
/s/ Donald S. Brooks Director 3/30/01
- --------------------
Donald S. Brooks
/s/ Jerry Finkelstein Director 3/30/01
- ---------------------
Jerry Finkelstein
/s/ Lee F. Meier Director 3/30/01
- ----------------
Lee F. Meier
/s/ Mark C. M. Randall Director 3/30/01
- ----------------------
Mark C. M. Randall
/s/ Wendell M. Starke Director 3/30/01
- ---------------------
Wendell M. Starke
/s/ Peter S. Knight Director 3/30/01
- ----------------------
Peter S. Knight
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39
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2000
ENTREMED, INC.
ROCKVILLE, MARYLAND
Form 10-K - Item 14(a)(1) and (2)
40
ENTREMED, INC. AND SUBSIDIARIES
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of EntreMed, Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors.....................................................F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999.......................F-2
Consolidated Statements of Operations for the years ended December 31, 2000, 1999
and 1998.........................................................................F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2000, 1999 and 1998..............................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998.........................................................................F-5
Notes to Consolidated Financial Statements.........................................F-6
The following consolidated financial statement schedules of EntreMed, Inc. and
subsidiaries are included in Item 14(d):
None
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
41
Report of Independent Auditors
Board of Directors and Shareholders
EntreMed, Inc.
We have audited the accompanying consolidated balance sheets of EntreMed, Inc.
as of December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EntreMed, Inc. at December 31, 2000 and 1999 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
McLean, Virginia Ernst & Young LLP
March 2, 2001
F-1
42
EntreMed, Inc.
Consolidated Balance Sheets
DECEMBER 31,
2000 1999
------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $24,503,886 $26,027,235
Accounts receivable 1,473,383 618,598
Interest receivable 5,086 105,482
Prepaid expenses and other 494,011 336,443
------------------------------------
Total current assets 26,476,366 27,087,758
Furniture and equipment, net 4,576,483 4,013,785
Other assets 357,563 742,082
------------------------------------
Total assets $31,410,412 $31,843,625
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,562,671 $ 4,887,693
Accrued liabilities 1,787,416 1,756,538
Current portion of notes payable 997,096 1,125,620
Deferred revenue - 75,000
------------------------------------
Total current liabilities 11,347,183 7,844,851
Notes payable, less current portion 1,005,728 1,995,327
Minority interest 17,556 18,646
Stockholders' equity:
Convertible preferred stock, $1.00 par and $1.50
liquidation value:
5,000,000 shares authorized, none issued and
outstanding at December 31, 2000 and 1999 - -
Common stock, $.01 par value:
35,000,000 shares authorized, 17,237,155 and
14,755,998 shares issued and outstanding at
December 31, 2000 and 1999, respectively 172,371 147,560
Treasury stock, at cost: 583,333 and 291,667 shares
held at December 31, 2000 and 1999, respectively (7,666,746) (3,833,379)
Additional paid-in capital 157,521,715 107,863,638
Accumulated deficit (130,987,395) (82,193,018)
------------------------------------
Total stockholders' equity 19,039,945 21,984,801
------------------------------------
Total liabilities and stockholders' equity $31,410,412 $31,843,625
====================================
See accompanying notes.
F-2
43
EntreMed, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31,
2000 1999 1998
---------------------------------------------
Revenues:
Collaborative research and development
(Note 5) $ - $ 3,099,166 $ 4,473,131
Licensing (Note 5) - 403,333 200,000
Grants 401,477 339,087 472,677
Royalties 3,117,282 1,123,111 -
Other 153,016 52,853 15,675
---------------------------------------------
3,671,775 5,017,550 5,161,483
Costs and expenses:
Research and development 41,715,598 35,529,435 15,084,993
General and administrative 12,673,851 8,028,922 5,760,215
---------------------------------------------
54,389,449 43,558,357 20,845,208
Interest expense (241,451) (22,270) -
Investment income 2,164,748 1,677,361 2,169,955
---------------------------------------------
Net loss $(48,794,377) $(36,885,716) $(13,513,770)
=============================================
Net loss per share (basic and diluted) $ (3.04) $ (2.67) $ (1.07)
=============================================
Weighted average number of shares
outstanding (basic and diluted) 16,057,047 13,801,220 12,681,824
=============================================
See accompanying notes.
F-3
44
ENTREMED, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Common Stock Additional
------------------------------------ Treasury Paid-in Accumulated
Shares Amount Stock Capital Deficit
----------------------------------------------------------------------------------------
Balance at December 31,1997 12,253,768 $ 122,538 - $73,624,088 $(31,793,532)
Issuance of common stock for options
and warrants exercised 869,263 8,692 - 4,740,048 -
Net loss - - - - (13,513,770)
----------------------------------------------------------------------------------------
Balance at December 31,1998 13,123,031 131,230 - 78,364,136 (45,307,302)
Issuance of common stock for options
and warrants exercised 154,849 1,549 - 1,091,987 -
Sale of common stock at $20.362 per
share, net of offering costs of
approximately $1,675,143 1,478,118 14,781 - 28,407,515 -
Purchase of treasury shares at $13.143
per share (291,667) - (3,833,379) - -
Net loss - - - - (36,885,716)
----------------------------------------------------------------------------------------
Balance at December 31,1999 14,464,331 147,560 (3,833,379) $107,863,638 (82,193,018)
Issuance of common stock for options
and warrants exercised 1,481,157 14,811 - 28,973,732 -
Sale of common stock at $22.00 per
share, net of offering costs of
approximately $1,673,000 1,000,000 10,000 - 20,317,284 -
Non cash stock compensation - - - 367,061 -
Purchase of treasury shares at $13.143
per share (291,666) - (3,833,367) - -
Net loss - - - - (48,794,377)
----------------------------------------------------------------------------------------
Balance at December 31,2000 16,653,822 $ 172,371 $ (7,666,746) $157,521,715 $(130,987,395)
========================================================================================
Total
------------------
Balance at December 31,1997 $ 41,953,094
Issuance of common stock for options
and warrants exercised 4,748,740
Net loss (13,513,770)
------------------
Balance at December 31,1998 33,188,064
Issuance of common stock for options
and warrants exercised 1,093,536
Sale of common stock at $20.362 per
share, net of offering costs of
approximately $1,675,143 28,422,296
Purchase of treasury shares at $13.143
per share (3,833,379)
Net loss (36,885,716)
------------------
Balance at December 31,1999 21,984,801
Issuance of common stock for options
and warrants exercised 28,988,543
Sale of common stock at $22.00 per
share, net of offering costs of
approximately $1,673,000 20,327,284
Non cash stock compensation 367,061
Purchase of treasury shares at $13.143
per share (3,833,367)
Net loss (48,794,377)
------------------
Balance at December 31,2000 $ 19,039,945
==================
F-4
45
EntreMed, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
2000 1999 1998
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(48,794,377) $(36,863,446) $(13,513,770)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,077,667 902,131 740,847
Loss on equity investment 366,790 232,000 100,000
Stock and warrants issued for compensation
and consulting services 367,061 - -
Minority interest (1,090) 4,239 (48,093)
Changes in operating assets and liabilities:
Accounts receivable (854,785) (506,215) (28,232)
Interest receivable 100,396 81,445 333,530
Prepaid expenses and other (139,840) 29,653 (234,193)
Accounts payable 3,674,979 2,794,676 998,059
Accrued liabilities 30,878 401,586 66,777
Deferred revenue (Note 5) (75,000) (2,870,833) (928,130)
---------------------------------------
Net cash used by operating activities (44,247,321) (35,794,764) (12,513,205)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments - - (12,257,054)
Maturities of short-term investments - 4,352,371 34,917,263
Other investments - - (500,000)
Purchases of furniture and equipment (1,640,365) (1,936,679) (1,809,546)
---------------------------------------
Net cash provided (used) by investing activities (1,640,365) 2,415,692 20,350,663
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of common stock 49,315,827 29,515,832 4,748,740
Proceeds from note payable - 3,000,000 -
Purchase of treasury stock (3,833,367) (3,833,379) -
Payment on note payable (1,118,123) (94,835)
---------------------------------------
Net cash provided by financing activities 44,364,337 28,587,618 4,748,740
---------------------------------------
Net increase (decrease) in cash and cash
equivalents (1,523,349) (4,791,454) 12,586,198
Cash and cash equivalents at beginning of year 26,027,235 30,818,689 18,232,491
---------------------------------------
Cash and cash equivalents at end of year $24,503,886 $ 26,027,235 $ 30,818,689
=======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 263,721 $ - $ -
=======================================
See accompanying notes.
F-5
46
EntreMed, Inc.
Notes to Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
EntreMed, Inc. (the "Company") operates in a single segment and is engaged
primarily in the research and development of biopharmaceutical products that
address the role of blood and blood vessels in the prevention and treatment of a
broad range of diseases. The Company's core technologies include (i) an
antiangiogenesis program focused on the development of proprietary products
intended to inhibit the abnormal growth of new blood vessels associated with
cancer and certain causes of blindness and (ii) a blood cell permeation device
designed to enhance the ability of red blood cells to deliver oxygen to organs
and tissues and which may also be used to deliver drugs, genes or other
therapeutic agents that otherwise would not readily diffuse through blood cell
membranes.
The Company's strategy is to accelerate development of its antiangiogenesis and
cell permeation technologies as well as other promising technologies which the
Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to deepen its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities and (iv) to leverage its
resources through corporate partnerships in order to minimize the cost to the
Company of late-stage clinical trials and to accelerate effective product
commercialization. All of the Company's product candidates are in the
development stage and require further research, development, testing and
regulatory clearances.
The Company's plans for financing the development of its products include public
offerings of common stock and sale of certain licensing rights. During March
2001, the Company completed a public offering of 1,550,000 shares of its common
stock resulting in gross proceeds, prior to the deduction of fees and
commissions, of approximately $28 million (net proceeds of $26.2 million). The
Company has 450,000 shares remaining on an effective shelf registration and is
currently exploring the sale of these shares with an investment bank.
Additionally, the Company is negotiating a possible assignment of some or all of
its rights to receive future THALOMID(R) royalties. The Company will use the
proceeds from the sale of common stock and its royalty revenue stream to help
fund operations in 2001 and the subsequent year.
F-6
47
EntreMed, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
The accompanying consolidated financial statements include the accounts of the
Company's 85% owned subsidiary, Cytokine Sciences, Inc. ("Cytokine") and 96.9%
owned subsidiary TheraMed Inc. ("TheraMed"). Cytokine was formed in June 1996
for the purpose of acquiring the assets of Innovative Therapeutics, Inc. in July
1996 in exchange for 15% of the common stock of Cytokine valued at approximately
$44,000. TheraMed was formed in July 1998 as a wholly owned subsidiary. On April
1, 2000 TheraMed was capitalized with $39,000 from the Company and $1,000 from a
minority investor. The Company also agreed to contribute certain technology and
to provide additional funding in exchange for preferred stock. The Company
further agreed to provide facility and administrative services for which
TheraMed Inc. is obligated to reimburse EntreMed. Inc. TheraMed Inc. will focus
on the continued development and the commercialization of blood cell permeation
technology. All intercompany balances and transactions have been eliminated in
consolidation. Minority interest expense (income) of $(1,090), $4,239 and
$(48,093) is included in general and administrative expenses for the years ended
December 31, 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of independent proprietary research
and development costs, the costs associated with work performed under
collaborative research agreements and the Company's sponsored funding of
research programs performed by others. Research and development costs are
expensed as incurred.
PATENT COSTS
Costs incurred in filing, defending and maintaining patents are expensed as
incurred. Such costs aggregated approximately $1,298,000, $1,068,000 and
$778,000 in 2000, 1999, and 1998, respectively.
F-7
48
EntreMed, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated over their
expected useful lives. Depreciation is provided on a straight-line basis.
Substantially all of the Company's furniture and equipment serves as collateral
for a note (see Note 6). Furniture and equipment are summarized as follows:
DECEMBER 31
2000 1999
----------------------------------
Furniture and equipment $ 7,967,261 $ 6,335,897
Less: accumulated depreciation (3,399,778) (2,322,112)
----------------------------------
$ 4,576,483 $ 4,013,785
==================================
CASH EQUIVALENTS
Cash equivalents include cash and short-term investments with original
maturities of less than 90 days.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
REVENUE RECOGNITION
Revenues earned under royalty agreements are recognized based upon performance
under the terms of the underlying agreements (see note 5). Revenue from the
collaborative research and development agreement with Bristol-Myers Squibb is
recorded when earned as defined under the terms of the agreement. The Company
received 0%, 68% and 92% of its revenues from Bristol-Myers Squibb in 2000, 1999
and 1998, respectively. Nonrefundable fees received upon contract signing are
recorded as deferred revenue and recognized over the term of the agreement
mentioned in Note 4. Revenues related to grants received for specific project
proposals are recognized in revenue as earned in accordance with specific
provisions, including performance requirements, in the contracts. Other periodic
research funding payments received which are related to future performance are
deferred and recognized as income when earned.
F-8
49
EntreMed, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share (basic and diluted) was computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Common stock
equivalents were anti-dilutive and therefore were not included in the
computation of weighted average shares used in computing diluted loss per share.
COMPREHENSIVE LOSS
Under Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income," the Company is required to display comprehensive loss and
its components as part of the consolidation financial statements. Comprehensive
loss is comprised of the net loss and other comprehensive income (loss), which
includes certain changes in equity that are excluded from net loss.
Comprehensive loss for the Company was the same as net loss for the years ended
December 31, 2000, 1999 and 1998.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method. Under the intrinsic value method
of accounting for stock-based compensation, when the exercise price of options
granted to employees is less than the estimated fair value of the underlying
stock on the date of grant, deferred compensation is recognized and is amortized
to compensation expense over the applicable vesting period.
F-9
50
EntreMed, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133 requires that an entity recognize all derivative as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which amends certain provisions of SFAS 133. Implementation of SFAS 133 and 138
are required as of the beginning of fiscal year 2001 and will not have a
material effect on the Company's financial position or results or operation.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The adoption of SAB 101 did
not have a material effect on the financial position or results of operations of
the Company.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44") "Accounting for
Certain Transactions Involving Stock Compensation", which addresses certain
accounting issues which arose under the previously established accounting
principles relating to stock-based compensation. The Company has implemented FIN
44 in these financial statements. The adoption of FIN 44 did not have a material
effect on the financial position or results of operations of the Company.
USE OF ESTIMATES
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 amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 consolidated financial
statements in order to conform to the 1999 and 2000 presentation.
F-10
51
EntreMed, Inc.
Notes to Consolidated Financial Statements
2. RELATED PARTY TRANSACTIONS
The Company receives legal services from two law firms with which two of the
Company's directors and officers are associated. The cost of these amounted to
$2,023,000, $1,117,000 and $363,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
As of December 31, 2000 and 1999, the Company maintained approximately 1% and
84%, respectively, of its cash and cash under the management of a registered
investment advisory firm for which a Company director served as chairman of the
board. Such assets under management are maintained by a high quality, third
party financial institution custodian.
3. SPONSORED RESEARCH PROGRAM AGREEMENTS
The Company has entered into several agreements to sponsor external research
programs. The Company's primary external research program agreement was entered
into in September 1993 with the Children's Hospital, in Boston, Massachusetts,
an entity affiliated with Harvard Medical School ("Children's Hospital,
Boston"). Under this sponsored research agreement the Company agreed to pay
Children's Hospital, Boston $11,000,000 over a six year period to support
research on the role of angiogenesis in pathological conditions. In accordance
with the terms of this sponsored research agreement, the total $11,000,000 was
fully paid in March 1999.
In June 1999, the Company signed a new agreement with Children's Hospital,
Boston. Under this sponsored research agreement, the Company agreed to pay
Children's Hospital, Boston $1,400,000 to continue the research on the role of
angiogenesis in pathological conditions. In accordance with the terms of this
sponsored research agreement, $700,000 had been paid as of December 31, 1999,
and the remaining $700,000 was fully paid on March 29, 2000. The agreement was
renewed in September 2000 with the Company agreeing to pay $1,500,000 to
Children's Hospital, Boston. As of December 31, 2000, $750,000 has been paid and
the remaining amount is due in March 2001. This sponsored research agreement
gives the Company an option to negotiate a worldwide, royalty-bearing license
for technology resulting from the research at Children's Hospital, Boston in
areas covered by the agreement. Amounts due under the
F-11
52
EntreMed, Inc.
Notes to Consolidated Financial Statements
3. SPONSORED RESEARCH PROGRAM AGREEMENTS (CONTINUED)
sponsored research agreement with Children's Hospital, Boston, which is
cancelable by the Company at any time or by Children's Hospital, Boston upon one
year prior written notice, are paid in advance every six months and are expensed
as incurred as research and development costs. See also Note 12.
In 2000, the Company entered into Several Clinical Trial agreements. Patient
enrollment commenced and continues for Phase I Clinical Trials. Phase I trials
are concerned primarily with the safety and preliminary effectiveness of the
drug being tested. As of December 31, 2000, the Company had patients enrolled in
Phase I trials for Endostatin, Panzem (2ME2) and Angiostatin. The company's
payment obligations vary between clinical trial agreements.
As of December 31, 2000, the Company's total commitments for external research
programs and clinical trials are as follows:
2001 $ 2,307,648
---------------------------------------------------------
2002 125,000
---------------------------------------------------------
2003 125,000
---------------------------------------------------------
TOTAL SPONSORED RESEARCH 2,557,648
---------------------------------------------------------
CLINICAL TRIAL COMMITMENTS 1,423,683
---------------------------------------------------------
TOTAL COMMITMENTS $ 3,981,331
---------------------------------------------------------
F-12
53
EntreMed, Inc.
Notes to Consolidated Financial Statements
4. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
In December 1995, the Company and Bristol-Myers Squibb entered into a
collaboration to develop and commercialize certain antiangiogenic therapeutics
("Original BMS Collaboration"). The Original BMS Collaboration provided for
Bristol-Myers Squibb to fund the Company's research, provided for milestone
payments to the Company, and provided for the payments to the Company of
royalties on net sales of any products developed under the Original BMS
Collaboration. In return, the Company granted Bristol-Myers Squibb exclusive
worldwide rights held by the Company, to antiangiogenic applications of
thalidomide, thalidomide analogs and the Angiostatin protein and a five-year
right of first refusal to negotiate for commercial rights with respect to the
development of any technology licensed, or to be licensed, by the Company from
Children's Hospital, Boston, in the field of antiangiogenic therapeutics. In
August 1997, the Company reacquired the commercial rights to thalidomide in
exchange for renewing Bristol-Myers Squibb's warrant to purchase an additional
$10,000,000 of the Company's common stock as described below. In October 1998,
Bristol-Myers Squibb relinquished the rights to thalidomide analogs. In February
1999, the Company assumed all responsibility for preclinical and clinical work
on the Angiostatin protein.
Bristol-Myers Squibb was obligated under the Original BMS Collaboration to fund
$18.35 million over five years for costs to be incurred by the Company related
to specified research and development. The Company was eligible to receive an
additional $32 million if the Company attained certain late-stage clinical
development and regulatory filing milestones under the Original BMS
Collaboration, a portion of which could be credited against royalties. In
addition to this funding, Bristol-Myers Squibb reimbursed the Company $730,000
for clinical studies and ophthalmological trials. Bristol-Myers Squibb could
terminate the Original BMS Collaboration for any reason with six months notice
and on February 9, 1999, the Original BMS Collaboration was modified such that
the final payment under the agreement was due on June 5, 1999 (see below). As
amended, Bristol-Myers Squibb has no further funding obligation to the Company
after August 9, 1999.
F-13
54
EntreMed, Inc.
Notes to Consolidated Financial Statements
4. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED)
The Company also received a nonrefundable, non-creditable licensing fee of $1
million in 1995 under the Original BMS Collaboration and an additional $2.5
million on March 31, 1996 in recognition of certain research and development
efforts of the Company. These amounts were recorded as deferred revenue and were
being recognized over five years, the initial term of the Original BMS
Collaboration agreement. On June 9, 1999, the due date of the final payment
under the Original BMS Collaboration, the remaining unamortized balance of such
deferred revenue was recognized as revenue.
Concurrent with the signing of the Original BMS Collaboration, the Company
issued Bristol-Myers Squibb 541,666 shares of common stock for aggregate cash
proceeds of $6,500,000. Bristol-Myers Squibb also purchased 333,333 shares of
additional common stock of the Company at the initial public offering price of
$15 per share, or a total of $5,000,000, at the time the Company completed its
initial public offering in June 1996 and was granted the right to purchase an
additional $10,000,000 of the Company's common stock at $22.50 per share, or
444,444 shares from the Company at any time up to June 19, 1997. This warrant
was renewed and expired without exercise in November 1997.
During 2000, 1999 and 1998, the Company recognized approximately $0, $3,482,000,
and $4,673,000 in revenue, respectively, and incurred costs of approximately $0,
$3,482,000 and $5,800,000 related to the Original BMS Collaboration.
On February 9, 1999, as noted above, the Company and Bristol-Myers Squibb agreed
to modify the Original BMS Collaboration as follows:
- - The Company will assume all responsibility for preclinical, pharmaceutical
development and clinical work on the Angiostatin protein. Bristol-Myers
Squibb has agreed to provide the Company with advice on structuring its
clinical program but otherwise will have no direct involvement with the
development of the Angiostatin protein.
F-14
55
EntreMed, Inc.
Notes to Consolidated Financial Statements
4. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED)
- - Upon completion of Phase II clinical trials of Angiostatin, except as
described below, Bristol-Myers Squibb will have the option to review all of
the Company's data and exercise an option to reacquire further development
and marketing rights to the product. If Bristol-Myers Squibb elects to do
so, it will pay the Company a $1 million option exercise fee and the
financial terms applicable to commercialization will remain the same as
those in the existing research agreement, except that the Company's
worldwide royalty will be substantially increased and will not be subject to
any offsetting credits.
- - If a third party wishes to license Angiostatin protein and fund and conduct
development of Angiostatin protein and commercialize it upon FDA approval on
terms satisfactory to the Company, or the Company decides to proceed with
the development and commercialization of Angiostatin protein without a
corporate partner (in either case prior to the completion of Phase II
clinical trials and Bristol-Myers Squibb's exercise of its option),
Bristol-Myers Squibb's option will be terminated effective with the signing
of the Company's collaboration with such third party or its giving of
written notice to Bristol-Myers Squibb that it intends to proceed without a
corporate partner.
- - Bristol-Myers Squibb's current rights of first offer/refusal with respect to
products or technology arising out of the Company's agreement with
Children's Hospital, Boston have terminated, including those rights with
respect to Endostatin protein.
- - Bristol-Myers Squibb is licensed, on a royalty free basis, to conduct
further internal research with regard to the Angiostatin protein and will
exchange with the Company any data it obtains on Angiostatin protein per se.
This license will continue for a minimum of one year and thereafter until
the termination of Bristol-Myers Squibb's option as described above.
- - Bristol-Myers Squibb will retain its equity interest in the Company but has
agreed to certain restrictions on its ability to sell its interest. These
restrictions will prevent Bristol-Myers Squibb from selling its full
interest in the Company until at least December 1, 2001, without the
Company's consent. See also Note 9.
F-15
56
EntreMed, Inc.
Notes to Consolidated Financial Statements
4. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED)
- - The semi-annual research support payment made on June 5, 1999 to the Company
from Bristol-Myers Squibb was prorated to cover the period from June 5 to
August 9, 1999 and was the final research payment under the agreement. All
patent and related costs incurred by the Company prior to August 9, 1999
were reimbursed to the Company by Bristol-Myers Squibb.
5. LICENSE AGREEMENTS
On December 9, 1998, the Company entered into a license agreement with Celgene
Corporation ("Celgene") whereby the Company granted Celgene an exclusive license
to certain of the Company's thalidomide patents. In exchange for this license,
Celgene agreed to pay royalties to the Company on sales of any product which
contains thalidomide. The royalties vary based on the volume of Celgene's sales.
Celgene also assumed certain milestone payment obligations to Children's
Hospital, Boston related to the license of thalidomide.
On July 1, 1999, the Company entered into two license agreements with
Calbiochem-Novabiochem Corp ("Calbiochem") whereby the Company granted
non-exclusive rights and licenses to sell Endostatin protein and Angiostatin
protein for non-commercial research purposes for two years. In exchange for
these licenses, Calbiochem agreed to pay a total of $20,000 in nonrefundable,
non-creditable fees and royalties based on net sales of the licensed products.
6. NOTES PAYABLE
In July 1999, the Company entered into a note payable with a financing company
for approximately $216,000. The note bore interest at a rate of 6.26% per annum
and was fully paid in January 2000.
In December 1999, the Company entered into a $3,000,000 note payable with a
financing company secured by substantially all of the Company's furniture and
equipment. The term of the note is three years and bears interest at a rate of
10.027% per annum. Maturities under this note are as follows: $997,096 in 2001
and $1,005,728 in 2002.
F-16
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EntreMed, Inc.
Notes to Consolidated Financial Statements
7. INCOME TAXES
The Company has net operating loss carryforwards for income tax purposes of
approximately $143,187,000 at December 31, 2000 ($94,350,000 at December 31,
1999) that expire in years 2007 through 2020. The Company also has research and
development tax credit carryforwards of approximately $6,077,000 as of December
31, 2000 that expire in years 2008 through 2015. These net operating loss
carryforwards include approximately $19,792,000 and $14,007,000 as of December
31, 2000 and 1999, respectively, related to exercises of stock options for which
the income tax benefit, if realized, would increase additional paid-in capital.
The utilization of the net operating loss and research and development
carryforwards may be limited in future years due to changes in ownership of the
Company pursuant to Internal Revenue Code Section 382. For financial reporting
purposes, a valuation allowance has been recognized to reduce the net deferred
tax assets to zero due to uncertainties with respect to the Company's ability to
generate taxable income in the future sufficient to realize the benefit of
deferred income tax assets.
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred income tax assets and liabilities as of December 31, 2000 and
1999 are as follows:
2000 1999
----------------------------------
Deferred income tax assets (liabilities):
Net operating loss carryforwards $ 53,832,000 $ 35,853,000
Research and development credit carryforward 6,077,000 4,002,000
Deferred revenues 62,000 29,000
Equity investment 50,000 126,000
Non-qualified stock options 2,198,000 663,000
Other 401,000 (267,000)
Depreciation (56,000) 73,000
Valuation allowance for deferred income tax
assets (62,564,000) (40,479,000)
----------------------------------
Net deferred income tax assets $ - $ -
==================================
F-17
58
EntreMed, Inc.
Notes to Consolidated Financial Statements
7. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the federal statutory rate
is as follows:
2000 1999 1998
------------------------------------------------
Tax benefit at statutory rate $(16,590,000) $(12,542,000) $(4,594,000)
State taxes (1,945,000) (1,475,000) (541,000)
Tax credits (2,074,000) (1,623,000) (660,000)
Permanent differences (1,474,000) 23,000 18,000
Valuation allowance 22,083,000 15,617,000 5,777,000
------------------------------------------------
$ - $ - $ -
================================================
8. STOCKHOLDERS' EQUITY
On July 27, 1999, the Company completed a private offering of 1,478,118 shares
of its common stock, Series 1 Warrants to purchase a total of 739,059 shares of
common stock at an exercise price of $33.02 and Series 2 Warrants to purchase a
total of 739,059 shares of common stock at an exercise price of $25.45,
resulting in gross proceeds, prior to the deduction of fees and commissions, of
approximately $30.1 million (net proceeds of $28.4 million). In June 2000 the
Company exercised its right to terminate Series 2 Warrants not exercised within
a specified period after delivery of written notice. In accordance with the
Warrant provisions 38,919 Series 2 Warrants were terminated and 700,123 were
exercised resulting in net proceeds of $17,818,000. Series 1 Warrants issued in
connection with the July 27, 1999 private offering contain a similar provision.
As of December 31, 2000 the Company had not terminated Series 1 Warrants and had
received $6,402,000 from the exercise of 193,902 Series 1 Warrants. As of
December 31, 2000 there were 545,157 Series 1 Warrants outstanding.
On June 19, 2000, the Company completed a public offering of 1,000,000 shares of
its common stock resulting in gross proceeds, prior to the deduction of fees and
commissions, of approximately $22 million (net proceeds of $20.7 million).
F-18
59
EntreMed, Inc.
Notes to Consolidated Financial Statements
8. STOCKHOLDERS' EQUITY (CONTINUED)
In December 2000 and 1999, the Company exercised its option to repurchase
291,666 and 291,667 of its common shares from Bristol-Myers Squibb for $13.143 a
share at a total repurchase price of $3,833,367 and $3,833,379, respectively. As
described in Note 4, Bristol-Myers Squibb's remaining shares held in connection
with the collaborative research and development agreement are subject to certain
restrictions, including future repurchase rights by the Company which terminate
in December 2001.
9. STOCK OPTIONS AND WARRANTS
In 1992, 1996 and 1999, the Company adopted incentive and nonqualified stock
option plans whereby 4,733,333 shares of the Company's common stock were
reserved for grants to various executive, scientific and administrative
personnel of the Company as well as outside directors and consultants, of which
199,337 shares remain available for grant as of December 31, 2000. These options
vest over periods varying from immediately to four years and generally expire 10
years from the date of grant. During 2000, the Company incurred compensation
expense of $367,000 due to the extension of the terms of certain granted
options.
Pro forma information regarding net income and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method subsequent to December 31,
1994. Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected prior to 1999.
The fair values for these options were estimated at the dates of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of
6.0%, 6.0% and 5.38%; no dividend yields; volatility factors of the expected
market price of the Company's common stock of 1.14, 1.04, and 1.04; and a
weighted-average expected life of an option of 6 years, 6 years and 6 years.
F-19
60
EntreMed, Inc.
Notes to Consolidated Financial Statements
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
10. Stock Options and Warrants (continued)
For purposes of pro forma disclosures, the estimated fair values of the options
and warrants granted to employees, directors and consultants are amortized to
expense over the vesting period. The weighted average fair value per option
granted in 2000, 1999 and 1998 was $21.40, $18.60 and $14.47, respectively. The
Company's pro forma information follows:
2000 1999 1998
----------------- ------------------ ----------------------
Pro forma net loss $ (59,479,716) $(45,705,251) $(19,986,293)
Pro forma loss per share $ (3.70) $ (3.31) $ (1.58)
F-20
61
EntreMed, Inc.
Notes to Consolidated Financial Statements
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the Company's stock options and warrants granted to employees,
directors and consultants and related information for the years ended December
31 follows:
Number of Weighted Average
Options Exercise Price
-------------------------------------
Outstanding at January 1, 1998 3,099,949 $7.92
Exercised (697,828) $5.20
Granted 325,250 $17.82
Canceled (76,682) $7.79
-----------------
Outstanding at December 31, 1998 2,650,689 $9.85
Exercised (80,849) $9.56
Granted 1,176,406 $22.10
Canceled (46,240) $18.76
-----------------
Outstanding at December 31, 1999 3,700,006 $13.64
Exercised (488,008) $6.26
Granted 874,075 $24.80
Canceled (41,585) $24.87
-----------------
Outstanding at December 31, 2000 4,044,488 $16.61
=================
Exercisable at December 31, 2000 2,985,477 $14.26
=================
F-21
62
EntreMed, Inc.
Notes to Consolidated Financial Statements
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following summarizes information about stock options and warrants granted to
employees outstanding at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/00 Life in Years Price at 12/31/00 Price
- ------------------ ---------------------------------------------- ----------------------------
$0.00 - $9.35 753,613 4.2 $5.85 753,613 $5.85
$9.36 - $18.70 1,887,450 7.2 $13.99 1,490,434 $13.05
$18.71 - $28.05 1,011,685 8.6 $23.82 555,368 $23.35
$28.06 - $37.40 360,040 9.2 $29.47 178,110 $29.47
$37.41 - $46.75 7,200 9.1 $44.55 1,799 $44.55
$46.76 - $56.10 22,400 9.3 $52.46 5,599 $52.46
$56.11 - $65.45 1,150 9.2 $58.31 287 $58.31
$65.46 - $93.50 950 9.2 $93.50 237 $93.50
-------------- ---------------
3,700,006 7.2 $16.61 2,985,447 $14.26
============== ===============
The Company also granted 50,000 and 83,334 options to purchase common stock at
$6.38 and $6.00 per share during 1995 and 1993, respectively, to Children's
Hospital, Boston in connection with a sponsored research agreement (see Note 4).
These options are not covered by the incentive and nonqualified stock option
plan and are included in the table below.
F-22
63
EntreMed, Inc.
Notes to Consolidated Financial Statements
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
In addition, the Company has granted warrants to consultants and certain third
parties. Warrants granted generally expire after 10 years from the date of
grant. Stock warrant activity to non-employees is as follows:
Weighted Average
Number of Shares Exercise Price
------------------------------------
Outstanding at January 1, 1998 369,002 $8.23
Exercised (171,435) $8.15
Outstanding at December 31, 1998 197,567 $8.30
Granted 1,544,425 $28.85
-----------------
Exercised (74,000) $7.34
Outstanding at December 31, 1999 1,667,992 $27.37
-----------------
Granted 23,241 $22.97
Exercised (992,946) $25.94
Cancelled (38,919) $25.45
-----------------
Outstanding at December 31, 2000 659,368 $29.39
=================
Exercisable at December 31, 2000 659,368 $29.39
=================
F-23
64
EntreMed, Inc.
Notes to Consolidated Financial Statements
10. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. As of December 31, 2000
and 1999, the Company maintained approximately 1% and 84%, respectively, of its
cash, cash equivalents and short-term investments (short-duration, high quality
debt securities) under the management of a registered investment advisory firm
for which a Company director served as chairman of the board. Such assets under
management are maintained by a high credit quality, third party financial
institution custodian (See Note 2).
As of December 31, 2000 the Company maintained approximately 92% of its cash and
cash equivalents under the management of an unrelated registered investment
advisory firm. Such assets under management are maintained by a high credit
quality, third party financial institution custodian.
The carrying amounts reported in the balance sheet for cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
notes payable approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is a defendant in a lawsuit initiated in August 1995 in the United
States District Court for the Eastern District of Tennessee by Bolling, McCool &
Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company
breached an agreement between BMT and us by failing to pay BMT certain fees it
asserts are owed under the agreement. More specifically, BMT has asserted a
claim for the payment of services rendered in the approximate amount of $50,000
and seeks a success fee in an unspecified amount in connection with the BMS
Collaboration. The judge in the case bifurcated the proceeding into two phases:
an adjudication of whether the Company breached our agreement with BMT and then
a damage phase. After a trial on the merits the jury found in favor of BMT on
the breach of contract claim. A trial to determine damages had been scheduled
for April 14, 1998. However, on April 6, 1998, the court issued an Order
pursuant to which damages were limited to those arising during the term
F-24
65
EntreMed, Inc.
Notes to Consolidated Financial Statements
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of the Agreement, which terminated on November 1, 1995. On May 6, 1999, the
court confirmed its decision by granting our motion for summary judgement and
limiting our damages to approximately $50,000 plus interest. Thus, this
litigation at the trial level has been concluded. BMT has filed an appeal and
the Company has cross-appealed. On February 27, 2001, the United States Court of
appeals handed down a decision in the aforementioned appeal. The Court of
Appeals has effectively remanded the case back to the district court for a trial
on what were the basic issues, whether or not Bolling, McCool and Twist was
entitled to any percentage of anything of value received by EntreMed from the
Bristol-Myers Squibb agreement with EntreMed. On March 13, 2001, EntreMed filed
for a Court of Appeals panel rehearing. The Company cannot predict the outcome
of such appeal. However, the Company intends to continue to contest any further
action vigorously and believe that this proceeding will not have a material
adverse effect on the Company or on its financial condition, although there can
be no assurance that this will be the case.
On May 30, 2000, Abbott Laboratories filed a law suit against Children's Medical
Center Corporation and the Company in the Federal District Court in
Massachusetts requesting, among other things, that the court substitute Dr.
Donald Davidson as inventor on Children's U.S. Patent No. 4,854,221 which covers
use of the Kringle 5 region of the plasminogen molecule as an anti-angiogenic
agent and a declaratory judgement from the court to invalidate any agreement
between Children's Hospital and EntreMed regarding this patent. Abbott also
filed a claim for misappropriation of trade secrets related to the Kringle 5
molecule seeking actual and punitive damages from the defendants. On July 18,
2000, the Company filed counterclaims against Abbott Laboratories including
tortuous interference with contract and a declaratory judgement that Abbott's
patent covering Kringle 5 is invalid and that Children's patent covering Kringle
5 is valid. Although we do not currently believe that the Abbott lawsuit will
have a material impact on the operations of the company, and the Company intends
to vigorously contest the allegations raised in the lawsuit, there is a risk
that Children's patent or any agreement with Children's with respect to the use
of the patent could be invalidated or found not to exist.
The Abbott lawsuit is not directed to nor does the suit affect the Company's
Angiostatin molecule, Kringles 1-3 of the plasminogen molecule currently in
Phase I clinical trial.
F-25
66
EntreMed, Inc.
Notes to Consolidated Financial Statements
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commitments
In May 1994, the Company entered into two license agreements, whereby the
Company acquired the exclusive, worldwide, royalty-bearing licenses to make,
use, and sell Angiostatin, thalidomide and thalidomide analogs, all inhibitors
of angiogenesis developed by Children's Hospital, Boston. In consideration for
receiving the rights, the Company must pay a royalty on any sublicensing fees,
as defined in the agreements, to Children's Hospital, Boston. The Company is
also required to pay certain amounts upon the attainment of certain milestones.
The milestone payments aggregate $2,650,000, of which $915,000 has been paid to
date, and are based upon license fees and achievement of regulatory approvals.
In addition, in 1996, the Company entered into two license agreements with
Children's Hospital, Boston for the exclusive, worldwide, royalty-bearing
licenses to make, use and sell Endostatin and 2-Methoxyestradiol, both
inhibitors of angiogenesis. In consideration for receiving the rights, the
Company must pay a royalty on any sublicensing fees, as defined in the
agreements, to Children's Hospital, Boston. Each agreement obligates the Company
to pay up to $1,000,000 "upon the attainment of certain milestones." As of
December 31, 2000, the Company has paid $300,000 under these agreements.
These license agreements require the Company to pay Children's Hospital, Boston
a specified percentage of the royalty income received on the first $100 million
in net sales of the licensed products, and an increased percentage thereafter,
with a minimum payment based on a percentage of net sales of the licensed
products by any sublicensees.
The Company has also entered into an agreement with a bioprocessing services
firm for the production of materials to be used in the Company's research
activities, including its clinical trials. As of December 31, 2000, the Company
is committed to materials production costs due in the year 2001 of an estimated
$9,300,000.
F-26
67
EntreMed, Inc.
Notes to Consolidated Financial Statements
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases its primary facilities through 2010. The lease agreement
provides for escalation of the lease payments over the term of the lease,
however, rent expense is recognized under the straight-line method.
Additionally, the Company leases office equipment under operating leases. The
future minimum payments under its facilities and equipment leases as of December
31, 2000 are as follows:
2001 $ 863,100
2002 870,000
2003 891,500
2004 918,000
2005 944,300
Thereafter 3,317,500
------------------
Total minimum payments $7,804,400
==================
Rental expense for the years ended December 31, 2000, 1999 and 1998 was
$857,000, $751,000, and $253,000, respectively.
12. EMPLOYEE RETIREMENT PLAN
The Company sponsors the EntreMed, Inc. 401(k) and Trust. The plan covers
substantially all employees and enables participants to contribute a portion of
salary and wages on a tax-deferred basis. Contributions to the plan by the
Company are discretionary. Contributions by the Company totaled $160,549 in
2000. No employer contributions were made in 1999, or 1998.
F-27
68
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for the years ended December 31, 2000
and 1999 is as follows:
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------------
2000
Revenues $ 726,699 $ 866,941 $ 854,170 $ 1,223,965
Research and development costs 9,071,204 11,226,701 9,971,223 11,446,470
General and administrative
expenses 2,697,016 3,201,378 2,873,036 3,902,421
Net loss (10,641,289) (13,134,408) (11,280,213) (13,738,468)
Net loss per share $ (0.72) $ (0.84) $ (0.66) $ (0.82)
1999
Revenues $ 1,444,039 $ 1,329,031 $1,786,317 $ 458,163
Research and development costs 7,107,455 7,619,140 6,959,576 13,843,264
General and administrative
expenses 1,895,838 2,003,069 2,223,748 1,906,267
Net loss (7,148,840) (8,008,305) (6,895,717) (14,832,854)
Net loss per share $ (0.55) $ (0.61) $ (0.48) $ (1.01)
F-28