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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
COMMISSION FILE NO. 0-20139
DIACRIN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BUILDING 96 13TH STREET, CHARLESTOWN NAVY YARD, CHARLESTOWN, MA 02129
(Address of principal executive offices, including zip code)
(617) 242-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
Common Stock, $.01 par value
Common Stock Purchase Warrants (original date of issue: 2/12/96)
Units, each consisting of one share of Common Stock, $.01 par value and one
Common Stock Purchase Warrant*
CommonStock Purchase Warrants (original date of issue: 11/14/91)*
* A Certification and Notice of Termination of Registration under Section
12(g) of the Securities Exchange Act of 1934 has been filed with respect to
these securities but has not yet become effective.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price of the Common Stock
on March 21, 1997) was $106,387,723.
As of March 21, 1997, 13,198,170 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the Company's definitive proxy
statement for its 1997 Annual Meeting of Stockholders, which will be filed with
the Commission not later than 120 days after the end of the Company's fiscal
year end, are incorporated by reference into Part III.
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PART I
This Annual Report on Form 10-K contains forward-looking statements,
including information with respect to expected timetables for the completion of
ongoing Phase 1 clinical trials and commencement of Phase 2 clinical trials for
NeuroCell(TM)-PD and NeuroCell(TM)-HD, the expected timetables and duration of
any planned future clinical or preclinical trials for any of the Company's other
product candidates, development funding expected to be received in connection
with the Diacrin/Genzyme joint venture and the expected sources of porcine cells
used in the Company's products. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results" included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II of this Annual Report on Form 10-K.
ITEM 1. BUSINESS
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Diacrin is developing proprietary populations of transplantable porcine
(pig) cells for the treatment of human diseases which are characterized by cell
dysfunction or cell death and for which current therapies are either inadequate
or nonexistent. Candidate cell types for transplantation include: neurons for
the treatment of Parkinson's disease, Huntington's disease, focal epilepsy and
cognitive disorders; hepatocytes (liver cells) for the treatment of liver
failure and familial hypercholesterolemia; and cardiac myocytes for the
treatment of cardiac disease. In March 1995, the United States Food and Drug
Administration ("FDA") cleared the Company to conduct the first ever clinical
trial of transplanted porcine cells in humans and in April 1995 the Company
initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-PD for the
treatment of Parkinson's disease. The Company completed enrollment in this
12-patient Phase 1 clinical trial of NeuroCell(TM)-PD in October 1996. In May
1996, the Company initiated a Phase 1 clinical trial to evaluate
NeuroCell(TM)-HD for the treatment of Huntington's disease and in March 1997, it
completed enrollment of all 12 patients in the trial.
While the feasibility of cell transplantation has been demonstrated
clinically by others, widespread use in clinical applications has been hampered
by the lack of an adequate supply of human donor cells. To overcome this
constraint, Diacrin has pioneered the use of porcine cells for clinical
transplantation. The Company believes that pigs will be a reliable source of a
wide range of cell types suitable for transplantation into humans. The Company
has shown in preclinical studies and early clinical trials that, under standard
immunosuppressive regimens, transplanted porcine cells are capable of addressing
the functional deficits caused by cell damage or cell death.
In addition, Diacrin is developing a proprietary immunomodulation
technology which is exclusively licensed to the Company from the Massachusetts
General Hospital ("MGH"). This technology involves the selective treatment of
major histocompatibility complex ("MHC") class I antigens on cell populations
prior to transplantation to prevent the patient's immune system from rejecting
the transplanted cells. The Company's approach would obviate the need for
chronic immunosuppression, which may leave the patient vulnerable to a wide
range of undesirable side effects, including susceptibility to infectious agents
and cancer. Preclinical studies in animal models, including primates, have
confirmed the ability of the Company's immunomodulation technology to prevent
rejection of transplanted porcine cells without compromising the ability of the
immune system to protect the recipient in its normal fashion. Neurons,
hepatocytes and cardiac myocytes treated with Diacrin's proprietary
immunomodulation technology have been successfully transplanted into animals
without immunosuppression. This technology is presently
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being evaluated in both Parkinson's disease and Huntington's disease patients as
part of Phase 1 clinical trials of NeuroCell(TM)-PD and NeuroCell(TM)-HD,
respectively.
The FDA has granted orphan drug designation for NeuroCell(TM)-PD for
advanced Parkinson's disease and NeuroCell(TM)-HD for Huntington's disease. Each
received both a designation for use of the product with Diacrin's
immunomodulation technology to prevent rejection and a designation for use
without this technology. Under current law, the first developer to receive FDA
marketing approval for a designated orphan drug is generally entitled to a
seven-year exclusive marketing period in the United States.
In September 1996, the Company and Genzyme Corporation ("Genzyme") formed
Diacrin/Genzyme LLC (the "Joint Venture"), a joint venture to develop and
commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD (the "Joint Venture
Products"). Under the terms, and subject to certain conditions, of the Joint
Venture agreement, which was effective October 1, 1996, Genzyme has agreed to
provide 100% of the first $10 million in funding and 75% of the following $40
million in funding for the development and commercialization of the Joint
Venture Products. All costs incurred in excess of $50 million are to be shared
equally between Genzyme and the Company in accordance with the terms of the
agreement. Any profits of the Joint Venture are to be shared equally by the two
parties. The Joint Venture agreement and related development plan contemplate
that Diacrin will perform, on behalf of the Joint Venture, the substantial
portion of development activities in connection with the Joint Venture Products
and that Genzyme will market and sell the Joint Venture Products on a cost
reimbursement basis on behalf of the Joint Venture.
Diacrin has four additional products in various stages of preclinical
development: (i) NeuroCell(TM)-FE for the treatment of complex partial epileptic
seizures, a condition that currently may not be well-controlled with existing
drug therapy or surgery; (ii) NeuroCell(TM)-CD for the treatment of cognitive
disorders; (iii) HepatoCell(TM) for the treatment of acute liver failure and
familial hypercholesterolemia, a disease caused by a defective low density
lipoprotein ("LDL") receptor gene that can lead to elevated serum cholesterol
levels and coronary heart disease; and (iv) CardioCell(TM) for the treatment of
cardiac disease.
DIACRIN'S TRANSPLANTATION TECHNOLOGY
While the feasibility of cell transplantation has been demonstrated
clinically by others, widespread use in clinical applications has been hampered
by the lack of an adequate supply of human donor cells. To overcome this
constraint, Diacrin has pioneered the use of porcine cells for clinical
transplantation and in March 1995 received the first FDA clearance to transplant
porcine cells into humans. Each step of Diacrin's production process has been
carefully designed and is tightly controlled in order to obtain cells suitable
for human transplantation. The Company has developed procedures to screen pigs
thoroughly for infectious agents and then isolate donor pigs in
specially-filtered rooms. In the case of NeuroCell(TM)-PD and NeuroCell(TM)-HD,
where fetal cells are required, Diacrin harvests tissue of appropriate fetal age
and type under current good manufacturing practices ("cGMPs"). Specific cell
populations from the harvested tissue are then isolated and prepared at
Diacrin's facilities. These procedures are done in accordance with proposed FDA
guidelines covering xenotransplantation. The Company has worked closely with the
FDA to provide input in the development of these guidelines. The implementation
of these guidelines is necessary to avoid contamination of transplanted cellular
products with infectious agents. The Company has filed patent applications to
protect its proprietary donor pig qualification and cell harvesting processes
and related products.
Current transplantation technology generally requires the recipient to
be immunosuppressed in order to avoid graft rejection. T cells, the main cells
involved in directing the body's immune response, recognize and bind to MHC
class I antigens. Binding of foreign MHC class I antigens triggers a cascade of
events which results in destruction of the engrafted
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cells that display these antigens. Cyclosporine, a standard immunosuppressive
agent, prevents this rejection process. Using cyclosporine, Diacrin has
demonstrated survival of transplanted porcine cells in a variety of preclinical
animal models and has histologically documented survival of transplanted porcine
neurons in a deceased patient who had advanced Parkinson's disease.
Diacrin is also developing proprietary immunomodulation technology which
involves the treatment of isolated cell populations prior to transplantation
with antibody fragments directed against MHC class I antigens in order to
obviate the need for generalized immunosuppression using agents such as
cyclosporine. Chronic generalized immunosuppression may result in complications
such as increased susceptibility to infectious diseases and cancer. Preclinical
studies performed by Diacrin scientists and academic collaborators have shown
that neural cells, hepatocytes and cardiac myocytes that have been pretreated
using Diacrin's immunomodulation technology prior to transplantation survived in
several animal models without immunosuppression. Since the antibody fragments
would not be expected to remain permanently bound to the engrafted cells, the
long-term survival of the engrafted cells seen in these studies suggests that
the graft recipient's immune system has "learned" to accept the graft. Thus, the
Company believes that treatment of cells with antibody fragments prior to
transplantation will induce a state of graft-specific immunological tolerance,
which would allow continued survival of the transplanted cells. In connection
with its ongoing Phase 1 clinical trials, six Parkinson's disease patients and
six Huntington's disease patients have been transplanted with pre-treated
NeuroCell(TM)-PD and NeuroCell(TM)-HD using no immunosuppression. The Company
believes that, given the severity of advanced Parkinson's disease and
Huntington's disease, both NeuroCell(TM)-PD and NeuroCell(TM)-HD would be useful
products even if they require the use of chronic immunosuppression.
PRODUCT DEVELOPMENT PROGRAMS
Diacrin is focusing its research and development activities on the
production and transplantation of proprietary populations of porcine cells for
use in the treatment of intractable human diseases. The Company is developing
products to address important medical needs which represent a broad-based
application of Diacrin's technologies for cell production and transplantation.
Candidate cell types for transplantation include: neurons for treatment of
Parkinson's disease, Huntington's disease, focal epilepsy and cognitive
disorders; hepatocytes for treatment of acute liver failure and familial
hypercholesterolemia; and cardiac myocytes for treatment of cardiac disease.
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DIACRIN PRODUCT DEVELOPMENT PROGRAMS
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PRODUCT DISEASE THERAPEUTIC ACTIVITY DEVELOPMENT
CANDIDATE INDICATION DEFECT OF TRANSPLANTED CELLS STATUS
- -------------------------------------------------------------------------------------------------------------------------------
NeuroCell(TM)-PD Parkinson's disease Death of Regulated release of Phase 1 accrual
dopaminergic neurons dopamine at synapses completed
in specific brain
regions
NeuroCell(TM)-HD Huntington's disease Death of GABAergic Reconstitution of neuronal Phase 1 accrual
neurons in specific pathways and regulated completed
brain regions release of GABA at synapses
NeuroCell(TM)-FE Focal epilepsy Inappropriate Inhibition of epileptic Preclinical
neuronal firing focus
NeuroCell(TM)-CD Cognitive disorders Depletion of Regulated release of Preclinical
cholinergic neurons acetylcholine at synapses
in specific brain
regions
HepatoCell(TM) Acute liver failure Hepatocyte death Liver function Preclinical
Familial Defect in expression Liver cells with normal LDL Preclinical
hypercholesterolemia of LDL receptor on receptors metabolize
liver cells circulating cholesterol
CardioCell(TM) Cardiac disease Diseased or damaged Provide functional cardiac Preclinical
myocardium contractile tissue
- -------------------------------------------------------------------------------------------------------------------------------
NEUROCELL(TM)-PD FOR PARKINSON'S DISEASE
Parkinson's disease is a neurodegenerative disease that results from the
loss of dopamine-producing neurons within an area of the brain called the
substantia nigra, causing the loss of coordinated muscular activity. The disease
is generally characterized by progressively worsening physical conditions
including difficulty in movement, muscular rigidity, tremors and postural
instability. The majority of Parkinson's disease patients are first diagnosed
between the ages of 45 and 65. In addition to a decreased quality of life,
Parkinson's disease may also result in premature death. In the United States,
there are approximately 500,000 people afflicted with Parkinson's disease. These
patients can be classified according to the severity of their disease by Hoehn
and Yahr staging, from stage 1 early in the disease process to stage 5 when the
disease has progressed to result in the patient being bedridden or
wheelchair-bound. NeuroCell(TM)-PD will be directed to the treatment of patients
in stage 4 and stage 5, which the Company estimates to be between 115,000 and
155,000 patients in the United States. With the increasing average age of the
population, the prevalence of Parkinson's disease is expected to increase. The
Company has received orphan drug designation for NeuroCell(TM)-PD. See
"Government Regulation."
Current therapies consist of administration of levodopa ("L-dopa"), a
precursor of dopamine, and dopamine analogues. However, L-dopa is only effective
for a limited period of time, with most patients experiencing a progressive
reduction in drug efficacy over a 10 to 15 year period, due to the cumulative
loss of viable neurons and tolerance to L-dopa. In addition, L-dopa therapy can
result in severe side-effects including dyskinesias and hallucinations. No
currently available therapy prevents progression of, or addresses the
neurological deficit caused by, Parkinson's disease.
Clinical researchers have recently shown that transplantation of human
fetal neural cells into Parkinsonian patients is effective in treating the
disease. For example, Swedish researchers have demonstrated survival and
function of transplanted human fetal cells in Parkinson's disease patients in an
ongoing study commenced in 1989. This study has shown cells surviving for at
least seven years and improvements in the patients' condition. However,
widespread clinical
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application is limited by the lack of availability of human fetal neural cells
and ethical concerns regarding the use of human fetal tissue. Moreover, even
when available, the quality of human fetal cells is variable, which may limit
the clinical effectiveness of such treatment.
Diacrin's approach to the treatment of Parkinson's disease is to produce
and transplant NeuroCell(TM)-PD to replace the function of those neurons damaged
by the disease. The Company and its collaborators have shown in animal models
that these transplanted cells become integrated into the surrounding brain
tissue and correct functional defects. While NeuroCell(TM)-PD is not a cure for
Parkinson's disease, the goal of this treatment is to significantly improve the
clinical condition of patients with severe Parkinson's disease sufficiently to
allow them to function independently.
Diacrin harvests fetal porcine midbrain cells under cGMPs for
transplantation. These cells are functionally indistinguishable from human fetal
neural cells. The porcine tissue source has been developed by Diacrin in
conjunction with Tufts University School of Veterinary Medicine ("Tufts"). The
cell isolation and testing has been done in conjunction with the Company's
academic collaborators at Harvard Medical School. Company scientists, in
conjunction with academic collaborators, have shown reversal of the Parkinson's
symptoms in a rodent model of Parkinson's disease transplanted with
NeuroCell(TM)-PD. Under a Diacrin-sponsored research program, a non-human
primate model for Parkinson's disease was transplanted with NeuroCell(TM)-PD.
Results confirmed the presence of viable cells in the transplantation site at
the conclusion of this 17-month study.
In October 1996, enrollment in a Phase 1 clinical trial of NeuroCell(TM)-PD
in severe Parkinson's disease patients was completed. This trial, which was
initiated by the Company in April 1995 and, since October 1996, has been
conducted by Diacrin on behalf of the Joint Venture, was the first
FDA-authorized trial of transplantation of porcine cells into humans. Although
the study was designed to evaluate the safety of NeuroCell(TM)-PD, its effects
on the Parkinson's disease symptoms of the transplant recipients are also being
evaluated. The NeuroCell(TM)-PD clinical trial is being conducted at the Lahey
Hitchcock Clinic in Burlington, Massachusetts and at Boston University School of
Medicine under an IND application.
All twelve patients were transplanted using standard stereotactic surgical
techniques. Eleven patients continue to be evaluated as part of the clinical
trial. In January 1996, the twelfth patient, a 69-year old male who had
undergone NeuroCell(TM)-PD transplant surgery in May 1995, died of a pulmonary
embolism. An autopsy determined that this patient's death was unrelated to the
transplant. A histological study of this patient published in the March 1997
issue of Nature Medicine demonstrated that fetal pig neural cells survived and
matured in his brain. This study marked the first published documentation of
survival of cells transplanted from another species into the human brain and the
appropriate growth of the non-human neurons in a Parkinsonian brain.
It is expected that any clinical improvement of Parkinson's disease
patients after transplantation will occur gradually as the fetal pig neurons
mature. All six of the Parkinson's disease patients in the Phase 1 clinical
study who have been evaluated at least nine months post-transplantation have
shown medically significant clinical improvement as measured by the Unified
Parkinson's Disease Rating Scale. Assuming successful completion of the Phase 1
clinical trial, the Joint Venture plans to initiate a Phase 2 pivotal clinical
trial in mid-1997.
NEUROCELL(TM)-HD FOR HUNTINGTON'S DISEASE
Huntington's disease is a genetic disorder which is caused by a loss of the
specific type of neurons which produce the neurotransmitter gamma aminobutyric
acid ("GABA"). The loss of these GABAergic cells results in a progressive
deterioration marked by discordant movement, intellectual impairment and a
spectrum of psychiatric and behavioral disturbances. The majority
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of cases of Huntington's disease first present between 40 and 50 years of age.
There are approximately 25,000 people diagnosed with Huntington's disease in the
United States. Currently there is no effective therapy for Huntington's disease.
Treatment is palliative with tranquilizers and anti-psychotic drugs being the
only options. The Company has received orphan drug designation for
NeuroCell(TM)-HD. See "Government Regulation."
Diacrin's approach to treating this disease consists of producing and
transplanting NeuroCell(TM)-HD to replace the function of neurons damaged by
Huntington's disease. Fetal porcine neurons from an area of the brain called the
corpus striatum are harvested under cGMPs for transplantation into the striatum
of the graft recipient's brain. Diacrin and its scientific collaborators have
tested NeuroCell(TM)-HD in a non-human primate model of Huntington's disease.
Results indicate that NeuroCell(TM)-HD has significantly improved the behavioral
defect in this model. This study demonstrated that the transplanted neural cells
become integrated into the brain tissue and assumed the function of GABAergic
neurons which have been destroyed in this model.
The Company, on behalf of the Joint Venture has completed enrollment in an
FDA authorized 12-patient Phase 1 clinical trial with NeuroCell(TM)-HD which
began in May 1996. The Company is not aware of any other potential treatment of
Huntington's disease cleared by the FDA for clinical trials in the United
States. The Phase 1 clinical trial is being conducted at the Boston University
School of Medicine, Lahey Hitchcock Clinic, and Brigham and Women's Hospital in
Boston and at Rush-Presbyterian-St. Luke's Medical Center in Chicago. As with
neural cell transplantation for Parkinson's disease, it is expected that any
clinical improvement in the Huntington's disease patients would occur gradually
over a period of months. Assuming successful completion of the Phase 1 clinical
trial, the Joint Venture plans to initiate a Phase 2 clinical trial in early
1998.
NEUROCELL(TM)-FE FOR FOCAL EPILEPSY
Epilepsy is a chronic, recurrent disorder characterized by excessive
neuronal discharge in the brain, causing muscle spasms or convulsions. Epileptic
seizures are usually associated with some alteration of consciousness. The
seizures are of many different types and arise as a result of diverse
pathologies. Epilepsy is one of the most common neurological disorders and is
estimated to affect 1.8 million people in the United States.
Epileptic seizure classification is important clinically since it
determines the drug therapy used for seizure control. Clinical diagnosis of
seizures includes differentiation by onset and whether or not consciousness is
lost. Seizures can be classified into three broad categories based on onset:
generalized seizures, partial seizures and unclassified seizures. Generalized
seizures exhibit no focus of onset, cause loss of consciousness and may or may
not cause convulsions. They comprise approximately 40% of all epileptic
seizures. Partial seizures have a focal onset and may cause loss of
consciousness (complex partial seizures) or may not cause loss of consciousness
(simple partial seizures). Partial seizures comprise approximately 57% of all
epileptic seizures. The remaining 3% of seizures are unclassified.
The anti-epileptic drugs currently used fail to control seizure activity in
a significant number of patients and frequently cause side effects that range in
severity from minimal impairment of the central nervous system to death from
aplastic anemia or hepatic failure. In 1993, the market for anti-epileptic
agents was approximately $525 million in the United States.
Diacrin's initial therapeutic focus in this area will be in the
treatment of patients with complex partial seizures. By several estimates,
approximately 200,000 patients with complex partial epilepsy have seizures that
are not well-controlled with currently available drug therapy. The only other
therapy available to these refractory patients is surgical removal of portions
of the temporal lobe, amygdala and hippocampus. However, if the dominant side of
the brain is the
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origin of the seizures or if multiple foci originate seizure activity, then
surgical removal is not possible and there are no therapeutic alternatives. This
is believed to be the case in approximately 80% of the candidates for corrective
neurosurgery. Accordingly, the Company estimates that approximately 160,000 of
the patients with intractable focal epilepsy, including those who currently have
no available treatment options, may benefit from NeuroCell(TM)-FE
transplantation.
Because focal epilepsy is characterized by excessive electrical activity in
a localized area and the spread of this activity through the brain, Diacrin's
approach to therapy is to apply its proprietary technology to the production and
transplantation of NeuroCell(TM)-FE in order to exert an inhibitory effect on
the hyperexcitable brain region. The source of inhibitory neurons being
evaluated for NeuroCell(TM)-FE is the lateral ganglionic eminence within the
fetal porcine striatum. Diacrin has demonstrated survival and safety of
transplanted NeuroCell(TM)-FE in a preclinical animal model when transplanted
into the hippocampus. The Company intends to seek FDA approval in 1997 to
initiate a Phase 1 clinical trial.
NEUROCELL(TM)-CD FOR COGNITIVE DISORDERS
Approximately 800,000 people in the United States suffer from severe
cognitive disorders associated with neuronal loss due to aging and not
associated with recognized diseases such as Alzheimer's disease. Cognitive
impairment and dementia have been associated with the loss of cholinergic
neurons within the brain. This has led to the cholinergic hypothesis of
geriatric memory dysfunction in which the decline of this neurotransmitter
system is implicated in the cognitive deficits of aging. Attempts to improve
memory function by improving cholinergic neuron function have been largely
unsuccessful.
In contrast, transplantation of fetal cholinergic neurons has been shown by
others to effectively improve cognitive function in both rat and primate models
of aging. For fetal cell transplantation, fetal forebrain cells rich in
cholinergic neurons are isolated and then transplanted into the neocortex or
hippocampus of the recipient. With time, these transplanted neurons send out
numerous axonal projections that are then capable of releasing acetylcholine,
the neurotransmitter of the cholinergic system, via synaptic release.
Diacrin's approach to the treatment of cognitive disorders is to apply its
proprietary technology to the production and transplantation of NeuroCell(TM)-CD
(fetal porcine cholinergic neurons). Currently, NeuroCell(TM)-CD preparations
have been isolated, characterized and optimized by in vitro measures for
transplantation into aged rats. Additionally, these cells have been transplanted
into normal rats to demonstrate survival and that the grafts are composed of the
correct cell types. Additional transplants are being performed into
experimentally lesioned rats with cognitive deficits so that their function and
pattern of engraftment and neurite outgrowth can be assessed. Simultaneously,
aged rats are being tested and selected as recipients for NeuroCell(TM)-CD
transplants. These aged rat recipients will then be tested for cognitive
performance after transplantation. Assuming successful completion of these
animal studies, the Company intends to seek FDA clearance to initiate human
clinical trials.
HEPATOCELL(TM) FOR ACUTE LIVER FAILURE
Acute liver failure is a condition with high mortality and sudden onset
caused by severe liver injury. The disease is characterized by hepatic
encephalopathy and occurs in previously healthy, often young patients. This type
of acute liver failure can be caused by a variety of insults to the liver that
include hepatitis A, B and non-A, non-B viral infection, drug or toxin induced
liver disease, and metabolic liver disease. The patient is kept in intensive
care during acute hepatic failure as the disease can rapidly progress to coma
and death. Approximately 40,000 cases of acute hepatic failure are treated each
year in the United States. About 2,000 of the afflicted patients die annually
from the disorder.
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Acute liver failure is divided into four grades: in the early stages (I and
II) the patient experiences disorientation and incipient stupor. This is
followed by coma in grades III and IV. At the present time, there is no good
treatment for acute hepatic failure except for liver transplantation, an
expensive therapy available to only a low percentage of patients prior to death.
The prognosis for patients in grades III and IV coma is poor, with less than 20%
survival of patients in grade IV coma. Other therapies that have been attempted
for acute hepatic failure are the use of extra-corporeal liver assist devices.
However, hemoperfusion and dialysis devices have not shown consistent clinical
benefit, and the efficacy of liver assist devices based on hepatocytes remains
to be demonstrated.
In extensive studies of hepatocyte transplantation for the treatment of
metabolic disease in animal models, Diacrin scientists have shown that porcine
hepatocytes can be isolated and infused into the recipient liver where they
lodge and continue to function. Long-term survival and function of these cells
has been demonstrated. Hepatocytes are able to pass through the lining of the
liver capillaries and integrate into the liver where they can function alongside
the host cells. Therefore, the Company believes hepatocyte transplantation could
become a viable alternative to whole liver transplantation for the treatment of
acute hepatic failure. Liver failure becomes clinically apparent only when 90%
of liver function is lost. Therefore, if one was able to improve liver function
by 5 - 10% of normal liver mass, a marked clinical improvement might become
apparent. This is the ultimate goal of the Company's HepatoCell(TM)
transplantation therapy. This approach would be preferable to transplantation of
a whole liver due to the difficulty of obtaining livers for transplantation
(currently over 5,000 individuals await liver transplants in the United States
and about 4,000 transplants were performed in 1995) as well as the expense and
invasiveness of the procedure. HepatoCell(TM) may be delivered to humans by
interventional radiology so that a surgical procedure would not be required in
these critically ill patients. Unlike the use of an extracorporeal device that
is expected only to bridge a patient until a transplant is available, the
Company believes that HepatoCell(TM) should divide in the host and replace
sufficient function to prevent the need for a liver transplant. The ability of
HepatoCell(TM) to change the clinical course of acute hepatic failure is being
tested by Diacrin in a large animal model of acute hepatic failure. Assuming
safety of the procedure is demonstrated in these experiments, the Company plans
to seek FDA clearance to apply this therapy to humans in a Phase 1 clinical
trial.
HEPATOCELL(TM) FOR FAMILIAL HYPERCHOLESTEROLEMIA
Familial hypercholesterolemia, a disease caused by a defective LDL receptor
gene, results in elevated serum cholesterol levels and premature coronary heart
disease. Familial hypercholesterolemia afflicts approximately 500,000 patients
in the United States. Currently available drugs do not sufficiently lower
circulating LDL cholesterol levels in approximately 20% of patients and
therefore alternative therapies are needed.
The capacity of transplanted hepatocytes to grow and replace defective
liver function is evident from extensive studies on liver regeneration. The
ability of transplanted porcine hepatocytes to function normally in animal
recipients has been demonstrated by Diacrin. Thus, hepatocyte transplantation
may be a feasible method to supplement hepatocytes that express defective LDL
receptors with cells that bind LDL-carried cholesterol and process it normally.
Moreover, if the liver is otherwise normal, the use of liver cells will be less
invasive and more economical than whole liver transplantation.
After demonstrating the ability of porcine hepatocytes to bind human LDL
cholesterol, Diacrin scientists conducted studies which have demonstrated the
effectiveness of HepatoCell(TM) in lowering blood cholesterol levels in the
Watanabe rabbit hypercholesterolemia model. The Watanabe rabbit lacks functional
LDL receptors and shares the phenotype of the human disease. At Diacrin,
transplantation of HepatoCell(TM) into cyclosporin-immunosuppressed Watanabe
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rabbits lowered serum cholesterol by 50% for at least five months, the duration
of the experiments. The results of this work were published in the January 1997
issue of NATURE MEDICINE. Initial results have also shown that these responses
in Watanabe rabbits can also be observed when HepatoCell(TM) preparations that
have been treated with the Company's immunomodulation technology are infused
into non-immunosuppressed Watanabe rabbits. The Company plans to evaluate the
safety of HepatoCell(TM) transplantation initially in patients with acute liver
failure. If shown to be safe in those patients, the Company plans to initiate a
Phase 1 clinical trial in patients with familial hypercholesterolemia.
CARDIOCELL(TM) FOR CARDIAC DISEASE
Coronary artery disease is the leading cause of death in the United States,
responsible for over 500,000 deaths each year. The disease is caused by the
accumulation of atherosclerotic plaque, consisting of lipid deposits,
macrophages and fibrous tissue, on the walls of vessels supplying heart muscle.
According to the American Heart Association, more than 6 million Americans have
coronary artery disease. Rupture of unstable plaques exposes substances that
promote platelet aggregation and thrombus formation. The thrombus is composed of
platelets, blood cells and fibrin that can block one or more of the coronary
vessels, resulting in an inadequate supply of oxygen to the heart muscle. This
highly active muscle is quickly damaged and the lesions are irreversible because
cardiomyocytes, the specialized muscle cells of the heart, are not capable of
cell division. The end result is an infarct, a damaged area of heart muscle in
which necrotic cardiomyocytes are replaced by scar tissue and fibrosis,
weakening the contractility and function of the heart. Approximately 1.5 million
new and recurring heart attacks are reported each year.
Treatments to prevent ischemic damage after a myocardial infarction include
thrombolytic drugs that break down fibrin clots and open up occluded arteries.
These drugs have greatly influenced morbidity and mortality from occlusive
events, but must be administered within a short interval after a myocardial
infarction to be effective. Even with current medical management, over one third
of acute myocardial infarctions are fatal. Cardiac catheterization and
angioplasty to dislodge the thrombus and open the occluded vessel has proved
effective in restoring perfusion but cannot reverse preexisting ischemic damage.
Coronary bypass surgery is often undertaken if none of these procedures is
effective and over 300,000 bypass surgeries are performed annually in the U.S.
Congestive heart failure results from the heart's inability to pump blood
at a rate or force necessary to provide adequate nutrients to tissues. This
condition affects 2 to 3 million people in the United States, resulting in over
30,000 deaths annually. Cardiomyopathies are a leading cause of heart failure.
These conditions can be caused by a variety of myocardial insults including
infections (myocarditis), familial and genetic factors, alcohol consumption, and
immunological abnormalities. Treatment for congestive heart failure includes
attempts to reduce blood volume and increase contractile strength of the heart
muscle with drugs. As a last resort, heart transplantation can be performed for
both cardiomyopathies and ischemic heart disease.
The Company believes patients suffering from myocardial infarctions and
cardiomyopathies would benefit greatly if fully functional cardiomyocytes could
repair their damaged myocardium. The Company has isolated populations of fetal
porcine cardiomyocytes to produce CardioCell(TM). These cells fuse and beat in
unison. Preclinical studies have demonstrated that CardioCell(TM) integrates
into rodent heart muscle, both in studies using immunosuppression and studies
using the Company's immunomodulation technology. The Company has initiated
studies in large animal models of heart disease to determine whether
cardiomyocytes infused into infarcted myocardium will engraft and repair the
damage, leading to improved myocardial contractility. Assuming successful
completion of these animal studies, the Company plans to seek FDA clearance to
initiate human clinical trials.
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MANUFACTURING
The manufacture of the Company's products will require the continuous
availability of porcine tissue harvested under cGMPs from pigs tested to be free
of infectious agents. The Company's current source of pigs and pig facilities
and services is obtained under contract from Tufts. The Company has entered into
an agreement with a commercial entity as a second source of pig facilities and
services. The Company expects that these facilities and services will become
available in mid-1997. The Company is currently evaluating the capabilities of
several pig producers to provide pigs that will qualify for the Company's
production processes. The Company's current long-range plan is to establish
contractual relationships with pig producers for the supply of qualified pigs.
For the Phase 1 clinical trials of the Joint Venture Products, the Company
isolated and prepared populations of porcine tissue in its own clinical
production facilities. The Joint Venture is negotiating a long-term sublease
agreement with Genzyme's Tissue Repair Division for approximately 15,000 square
feet of clinical production and support space for the production of the Joint
Venture Products needed in conjunction with planned Phase 2 clinical trials.
This facility is also believed to be capable of satisfying projected initial
demand for commercial quantities of the Joint Venture Products. This arrangement
would enable the Company to utilize its existing clinical production facilities
for the clinical supply of its other product candidates and to postpone the need
for significant additional investment in such facilities.
The antibody fragment used in Diacrin's immunomodulation technology is
currently obtained from a contract manufacturer. The Company will evaluate on an
ongoing basis the cost effectiveness and other relevant factors necessary to
determine whether the Company should continue to obtain the antibody fragment
from contract manufacturers or produce the antibody fragment on its own.
The Company's long-range plan is to establish certain of its own internal
manufacturing capabilities, including the facilities necessary to test, isolate
and package an adequate supply of finished porcine cell products in order to
meet its long-term clinical and commercial manufacturing needs.
LICENSES, PATENTS AND SPONSORED RESEARCH
The Company intends to aggressively seek patent protection for any products
it develops. The Company also intends to seek patent protection or rely upon
trade secrets to protect certain of its technologies which will be used in
discovering and evaluating new products. The Company has 22 patent applications
pending with the United States Patent and Trademark Office. Foreign counterparts
have also been filed in a number of selected countries. These applications seek
composition-of-matter and use protection for the various products the Company
has in development. Applications are on file for neurons, hepatocytes, cardiac
myocytes and expansions of the Company's technology base.
On February 1, 1994, MGH was awarded a patent in the United States covering
the basic immunomodulation technology used by Diacrin. Foreign counterparts of
this patent have been filed. Under an agreement with MGH, the Company has an
exclusive, worldwide license to the technology and the inventions described in
the patent, and all foreign counterparts, including any continuations, reissues
or substitutions as well as any patents and equivalents which may mature from
such patent, subject to the payment of royalties. Unless sooner terminated, the
Company's rights will continue, on a country by country basis, until the last to
expire of the patents, at which time the Company will have a fully paid-up
license. Either party may terminate the agreement, upon notice, in the event the
other party defaults in its material obligations and has failed to cure such
default within 60 days of receipt of such notice.
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The Company has entered into a research and license agreement with McLean
Hospital under which Diacrin sponsors research pertaining to the transplantation
of neural cells. Pursuant to this agreement, upon the request of the Company,
McLean Hospital has agreed to grant to the Company exclusive, worldwide,
royalty-bearing licenses to any patent or patent application filed by the
investigators during the term of the agreement. The exclusive nature of the
licenses is subject to a retention by McLean Hospital of the right to use
patented inventions for internal research and patient care purposes, and certain
rights involving federally funded research, if any, and the rights of
co-inventors, if any, who may not be subject to the agreement.
In September 1996, the Company and Genzyme entered into an agreement to
form a joint venture to develop and commercialize the Joint Venture Products. In
connection with that agreement, the Company granted to the Joint Venture the
exclusive, worldwide, irrevocable (during the term of the Joint Venture
agreement), royalty-free right and license under the Company's existing patent
rights and technology to develop, make, have made, use, offer for sale, sell,
have sold, import and export the Joint Venture Products. The license granted by
the Company is limited to the treatment of Parkinson's disease or Huntington's
disease in humans using porcine fetal cells (the "Field"). In the event that
either the Company or Genzyme develops or acquires additional technology or
patent rights that are useful in the Field, the party owning such technology or
patent rights is obligated to offer a license to the Joint Venture, as described
above, to such technology or patent rights. The immunomodulation technology
licensed to the Company from MGH has been non-exclusively sublicensed to the
Joint Venture for use exclusively in the Field.
To protect its trade secrets and other proprietary information, the Company
requires all employees, consultants, advisors and collaborators to enter into
confidentiality agreements with Diacrin.
SALES AND MARKETING
Under the terms of the Joint Venture agreement, Genzyme, which has an
established sales force and experience in the sales and marketing of
biopharmaceutical products, is authorized to market and sell the Joint Venture
Products on an exclusive basis as agent for and on behalf of the Joint Venture.
With regard to the Company's other product candidates, the Company has not
yet developed sales and marketing capabilities. The Company may form strategic
alliances with established pharmaceutical or biotechnology companies in order to
finance the development of certain of its products and, assuming successful
development, to market such products. Such alliances may enable the Company to
expand or accelerate its product development efforts and also may provide the
Company with access to established marketing organizations.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of the Company's product candidates and in its ongoing research and product
development activities. All of the Company's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous testing and approval
procedures by the FDA and similar authorities in foreign countries. Various
federal statutes and regulations govern the preclinical and clinical testing,
manufacturing, labeling, distribution, advertising and sale of such products.
The process of obtaining these approvals and the subsequent compliance with
applicable federal statutes and regulations require the expenditure of
substantial time and financial and other resources.
Preclinical testing is generally conducted in the laboratory on animals to
evaluate the
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potential efficacy and the safety of a product. The results of these studies are
submitted to the FDA as part of an IND application, which must be approved
before human clinical testing can begin. Typically, clinical evaluation involves
a three-phase process. In Phase 1, clinical trials are conducted with a small
number of healthy human subjects to determine the early safety profile. In Phase
2, clinical trials are conducted with groups of patients afflicted with the
specific disease in order to determine preliminary efficacy, optimal treatment
regimens and expanded evidence of safety. In Phase 3, large scale, multi-center,
comparative clinical trials are conducted with patients afflicted with a target
disease in order to provide enough data for the statistical proof of safety and
efficacy as required by the FDA and others. In addition, the FDA may request
post-marketing (Phase 4) monitoring of the approved product, during which
clinical data are collected on selected groups of patients to monitor
longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center for
Biologic Evaluation and Research ("CBER"), the results of preclinical and
clinical testing are submitted to the FDA in the form of an Establishment
License Application ("ELA") and a Product License Application ("PLA") for
approval to manufacture and commence commercial sales. In responding to the ELA
and PLA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not satisfy
its regulatory approval criteria. The Joint Venture Products and all of the
Company's other products are expected to be regulated by CBER.
The Company will also be subject to widely varying foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that necessary for
FDA approval. The Company may rely on licensees to obtain regulatory approval
for marketing certain of its products in certain foreign countries.
The Company intends to take advantage of the regulatory pathways which may
provide accelerated marketing approval of its cell transplantation products and
allow limited cost recovery during the clinical research phase. These include:
(i) marketing exclusivity for products which qualify for orphan drug status;
(ii) approval for limited cost recovery during clinical testing under treatment
IND status; and (iii) accelerated marketing approval for more effective or
better tolerated therapies for serious diseases.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States would
be likely to receive the treatment. A drug that receives orphan drug designation
by the FDA and is the first product to receive FDA marketing approval for its
product claim is entitled to a seven-year exclusive marketing period in the
United States for that product claim. A drug that is considered by the FDA to be
different than a particular orphan drug is not barred from sale in the United
States during such seven-year exclusive marketing period. Legislation has
previously been introduced in Congress to limit the marketing exclusivity
provided for certain orphan drugs. Although the outcome of that legislation, if
reintroduced, is uncertain, there remains a possibility that future legislation
will limit the incentives currently afforded to the developers of orphan drugs.
Diacrin has assigned to the Joint Venture the orphan drug designation it
has received from the FDA for NeuroCell(TM)-PD for the treatment of Hoehn and
Yahr stage 4 and stage 5 Parkinson's disease patients and for NeuroCell(TM)-HD.
Diacrin's NeuroCell(TM)-FE and HepatoCell(TM) are also targeted to populations
of less than 200,000 and, therefore, will be pursued as orphan drugs.
Treatment IND is a mechanism established by the FDA in 1987 which allows a
company
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to distribute promising investigational therapies to patients outside of the
established clinical trials and to charge a reasonable fee for such therapy. The
disease must be serious or life- threatening and there must not be satisfactory
alternative treatments. Treatment IND status has been applied to a variety of
diseases including cancer, AIDS, Parkinson's disease, Alzheimer's disease and
multiple sclerosis and to several anti-infectives for renal transplant patients.
Diacrin intends to pursue this designation, where appropriate.
In 1988, the FDA issued a rule to expedite the testing and approval process
for therapies which can treat life-threatening and severely debilitating
diseases. Recently, the FDA published a rule which expands this concept to
patients with chronic illnesses that are generally well managed by available
therapy but may have serious outcomes in some or all phases of the disease. The
Company believes that many of its potential therapies may be covered under this
rule, which accelerates the FDA approval process by reducing or eliminating the
need to conduct large, expanded (Phase 3) clinical studies prior to applying for
a marketing license (Subpart E regulation) and allowing the use of "surrogate
endpoints" in clinical trials (Subpart H regulation).
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds, infectious disease agents and recombinant DNA materials used in
connection with the Company's research work.
COMPETITION
The Company believes that its ability to compete successfully will be based
on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain qualified scientific personnel,
obtain adequate financing, obtain patents, orphan drug designation or other
protection for its products, obtain required regulatory approvals and
manufacture and successfully market its products both independently and through
collaborators.
The biopharmaceutical and pharmaceutical industries are characterized by
intense competition. The Company competes against numerous companies, many of
which have substantially greater financial and other resources than the Company.
Private and public academic and research institutions also compete with Diacrin
in the research and development of human therapeutic products. In addition, many
of the Company's competitors have significantly greater experience than the
Company in the testing of pharmaceutical and other therapeutic products and
obtaining FDA and other regulatory approvals of products for use in healthcare.
Accordingly, the Company's competitors may succeed in obtaining FDA approval for
products more rapidly than the Company. If the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience.
The Company's products under development will compete with products and
therapies which are either currently available or currently under development.
Competition will be based, among other things, on efficacy, safety, reliability,
price, availability of reimbursement and patent position. The Company is aware
of other companies which are pursuing research and development of alternative
products or technologies addressing the same disease categories as Diacrin's
development programs.
EMPLOYEES
As of February 28, 1997, the Company had 43 full-time employees, 31 of whom
were engaged in research, development, clinical and quality assurance/quality
control activities. No Company employees are represented by a labor union or
covered by a collective bargaining agreement.
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ITEM 2. PROPERTIES
----------
The Company leases a facility which contains approximately 28,000 square
feet of space in Charlestown, Massachusetts. The lease has a ten-year term
ending in 2001, providing for a minimum rental rate of approximately $60,000 per
month, plus applicable property taxes and insurance. The Company's facilities
are equipped with laboratory and cell culture capabilities sufficient to satisfy
the Company's research and development requirements for the foreseeable future
and cell isolation capabilities sufficient to satisfy the clinical production
requirements of several of its product candidates. To the extent that additional
similar facilities may be required, the Company will be required to secure
additional facilities or seek outside contractors to provide such capabilities.
The Joint Venture is negotiating a sublease agreement with Genzyme's Tissue
Repair Division for approximately 15,000 square feet of clinical production and
support space for the production of the Joint Venture Products. The proposed
sublease agreement provides for a minimum gross rental rate of approximately
$81,000 per month to be paid by the Joint Venture. These facilities are equipped
with cell isolation facilities which the Joint Venture believes are sufficient
to satisfy the clinical and initial commercial production requirements of the
Joint Venture Products. To the extent that additional facilities are required
for commercial production of the Joint Venture Products, the Joint Venture will
be required to secure additional facilities to provide such capabilities.
ITEM 3. LEGAL PROCEEDINGS
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
fiscal year ended December 31, 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the directors,
executive officers and other key employees of the Company:
NAME AGE POSITION
- ---- --- --------
Thomas H. Fraser, Ph.D.(1) 49 President and Chief Executive Officer;
Director
E. Michael Egan 43 Senior Vice President, Corporate
Development
J. Stephen Fink, M.D., Ph.D. 46 Vice President and Clinical Research
Director
Mark J. Fitzpatrick 34 Vice President of Finance and
Administration; Chief Financial Officer
and Treasurer
Albert S. B. Edge, Ph.D. 43 Senior Director of Molecular and Cellular
Biology
Jonathan H. Dinsmore, Ph.D. 35 Director of Cell Transplantation Research
Roger J. Gay, Ph.D. 43 Director of Process Development
Abdellah Sentissi, Ph.D. 47 Director of Quality Control and Quality
Assurance
Zola P. Horovitz, Ph.D.(1) 62 Director
John W. Littlechild(2) 45 Director
Stelios Papadopoulos, Ph.D.(1)(2) 48 Director
Henri A. Termeer(2) 51 Director
- ----------------------
(1) Member of Audit and Finance Committee
(2) Member of Compensation Committee
Thomas H. Fraser, Ph.D., has been President and Chief Executive Officer and
a member of the Board of Directors of the Company since 1990. He was previously
Executive Vice President, Corporate Development, for Repligen Corporation
("Repligen"), a biopharmaceutical company. Dr. Fraser was the founding Vice
President for Research and Development at Repligen in 1981 and served as
Executive Vice President from 1982 through 1990 as well as Chief Technical
Officer from 1982 through 1988. Prior to joining Repligen, Dr. Fraser headed the
recombinant DNA research group in Pharmaceutical Research and Development at The
Upjohn Company, a pharmaceutical company. Dr. Fraser received his Ph.D. in
biochemistry from the Massachusetts Institute of Technology and was a Damon
Runyon-Walter Winchell Cancer Fund Postdoctoral Fellow at The University of
Colorado.
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E. Michael Egan has been Senior Vice President, Corporate Development, of
the Company since June 1993. Mr. Egan joined Diacrin from Repligen, where he was
employed from 1983 to 1993, and since 1989 had been Vice President of Business
Development. He was also a member of the Board of Directors of Repligen Clinical
Partners, L.P., and the Secretary/Treasurer of Repligen Sandoz Research
Corporation. Mr. Egan's previous positions at Repligen include Director of
Business Development and Manager of Business Development. Prior to joining
Repligen in 1983, Mr. Egan was a laboratory supervisor at Dana Farber Cancer
Institute, Division of Medicine. He received a B.S. in biology from Boston
College and a Certificate of Special Studies in Administration and Management
from Harvard University in 1986.
J. Stephen Fink, M.D., Ph.D., has been Vice President and Clinical
Research Director of the Company since April 1996. He has held various positions
at Massachusetts General Hospital since 1984, and, just prior to joining Diacrin
was Associate Professor of Neurology at Harvard Medical School and Associate
Neurologist at Massachusetts General Hospital. Dr. Fink received his Ph.D. in
Neurobiology and Behavior and M.D. from Cornell University Medical College in
1980. He trained in neurology and movement disorders at Massachusetts General
Hospital and he was a recipient of a Teacher Investigator Development Award from
the National Institute of Neurological Diseases and Stroke and the George C.
Cotzias Memorial Research Fellowship from the American Parkinson's Disease
Association in 1984. Dr. Fink has been a Principal Investigator on numerous
grants from the National Institutes of Health ("NIH") in the area of molecular
neuropharmacology of the basal ganglia and mechanisms of control of neuronal
gene expression. He has been an investigator in clinical trials in Parkinson's
disease, and has been a member of Neuropharmacology and Neurochemistry Review
Committee at the National Institute of Mental Health and the Parkinson's Study
Group. He is a member of the Scientific Advisory Committee of the United
Parkinson's Disease Foundation and on the Scientific Advisory Board of the
Tourette Syndrome Association. He is currently an Associate Clinical Professor
of Neurology at Harvard Medical School and Associate Neurologist and member of
the Movement Disorder Unit at Massachusetts General Hospital.
Mark J. Fitzpatrick has been Vice President of Finance and Administration
and Chief Financial Officer since November 1996, Director of Finance and
Administration from September 1992 to November 1996, Treasurer since February
1992 and joined Diacrin as Controller in July 1991. From 1987 to 1991, he was
employed at Repligen, first as Accounting Manager and then as Manager of
Financial Analysis and Planning. From 1984 to 1987, he was a member of the
professional staff of Arthur Andersen & Co. Mr. Fitzpatrick received a B.S.
degree in accounting from Boston College and was awarded a CPA certificate from
the Commonwealth of Massachusetts in 1987.
Albert S.B. Edge, Ph.D., has been Senior Director of Molecular and Cellular
Biology since October 1994. He joined Diacrin in 1992 as Director of Protein
Chemistry and in 1993 became Director of Molecular and Cellular Biology. Dr.
Edge was previously Assistant Professor of Medicine at Harvard Medical School
and Investigator at the Joslin Diabetes Center. He has been Principal
Investigator on several grants from the NIH and was the recipient of a Career
Development Award from the Juvenile Diabetes Foundation from 1987 to 1990. He
was Mary K. Iacocca Fellow of the Joslin Diabetes Center in 1984 and after
appointment to the faculty was selected as Capps Scholar in Diabetes of Harvard
Medical School from 1985 to 1987. While a Postdoctoral Fellow in the Department
of Biological Chemistry at Harvard Medical School, Dr. Edge was awarded
Fellowships from the American Cancer Society and the NIH. He received his Ph.D.
in biochemistry from Albany Medical College where he was a Predoctoral Research
Fellow of the United States Public Health Service.
Jonathan H. Dinsmore, Ph.D., has been Director of Cell Transplantation
Research since December 1994. He joined Diacrin in 1992 as a Research Scientist
and was subsequently promoted to Principal Investigator. Dr. Dinsmore was
previously a Postdoctoral Fellow of the
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American Cancer Society in the Biology department at the Massachusetts Institute
of Technology from 1988 to 1992. He received a Ph.D. in biology from Dartmouth
College, where he was a Presidential Scholar and recipient of a Kramer
Fellowship. Dr. Dinsmore has worked on National Science Foundation-sponsored
research projects at the Marine Biological Laboratories in Woods Hole,
Massachusetts and at a United States research base in Antarctica.
Roger J. Gay, Ph.D., has been Director of Process Development since
November 1993. From 1986 through 1993, he was Director of Product Development at
Organogenesis, Inc. Dr. Gay's previous positions were Manager of a Contract
Research and Cytotoxicity Testing Laboratory and Director of Product Development
at Bioassay Systems Research Corporation from 1982 to 1986. He received a B.A.
in chemistry from the College of the Holy Cross in 1975 and a Ph.D. in
biochemistry from the University of Rochester in 1981. From 1981 through 1983,
he was a postdoctoral research fellow in the Department of Microbiology and
Molecular Genetics at Harvard Medical School.
Abdellah Sentissi, Ph.D., has been Director of Quality Control and Quality
Assurance since October 1995. Prior to joining Diacrin, from 1992 to 1995, he
served as the Director of QC/QA and Technical Affairs at Endocon, Inc. From 1985
through 1992, he was the Chief of Quality Control at Massachusetts Biologics
Laboratories. He received a pharmacy degree in 1973 and a biology degree in 1976
from the University of Paul Sabatier, Toulouse, France, and a Ph.D. in
biomedical sciences from Northeastern University in 1984. From 1984 through
1985, he was a postdoctoral research fellow in the Department of Clinical
Chemistry at Northeastern University. He has been a lecturer in pharmaceutical
biotechnology at the School of Pharmacy at Northeastern University since 1990.
Zola P. Horovitz, Ph.D., has served as a Director of the Company since May
1994. He was Vice President, Business Development and Planning at Bristol-Myers
Squibb Pharmaceutical Group from August 1991 until 1994 and was Vice President,
Licensing from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years
as a member of the Squibb Institute for Medical Research, most recently as Vice
President, Research Planning. He is also director of Avigen Inc., BioCryst
Pharmaceuticals, Clinicor, Magainin Pharmaceuticals, Procept, Inc., Roberts
Pharmaceuticals and Synaptic Pharmaceuticals, Inc., biotechnology companies. Dr.
Horovitz received his Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of the Company since April 1992.
Mr. Littlechild is a general partner of HealthCare Partners II, L.P. ("HCPII"),
HealthCare Partners III, L.P. ("HCPIII") and HealthCare Partners IV, L.P.
("HCPIV"), the general partner, respectively, of HealthCare Ventures II, L.P.
("HCVII"), HealthCare Ventures III, L.P. ("HCVIII") and HealthCare Ventures IV,
L.P. ("HCVIV"), and a Vice Chairman of HealthCare Investment Corporation
("HIC"), a venture management company that, among other things, provides
management services to HCVII, HCVIII and HCVIV. HCVII, HCVIII and HCVIV are
principal stockholders of the Company. From 1984 to 1991, Mr. Littlechild was a
Senior Vice President of Advent International Corporation, a venture capital
company ("Advent") in Boston and London. Prior to working at Advent in Boston,
Mr. Littlechild was involved in establishing Advent in the United Kingdom. From
1980 to 1982, Mr. Littlechild served as Assistant Vice President for Citicorp
Venture Corporation, a venture capital company, in London, prior to which he
worked with ICI Ltd., an agro-chemical company, and Rank Xerox, an office
equipment company, in marketing and financial management. He holds a B.Sc. from
the University of Manchester and an MBA from Manchester Business School. Mr.
Littlechild serves on the boards of directors of various health care and
biotechnology companies, including Orthofix International N.V., a medical
devices company, and Virus Research Institute, Inc., a biotechnology company.
Stelios Papadopoulos, Ph.D., has been a Director of the Company since
November 1991. He is a Managing Director and Head of the Health Care Investment
Banking Group at
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PaineWebber Incorporated ("PaineWebber"), which is engaged in investment banking
and securities brokerage. From 1986 until joining PaineWebber in April 1987, Dr.
Papadopoulos was a Vice President in equity research at Drexel Burnham Lambert
Incorporated, an investment banking firm. From 1985 to 1986, Dr. Papadopoulos
was a biomedical technology analyst at Donaldson, Lufkin and Jenrette Securities
Corporation. Prior to that, Dr. Papadopoulos was a member of the faculty of the
Department of Cell Biology at New York University Medical Center. Dr.
Papadopoulos holds a Ph.D. in biophysics and an MBA in finance, both from New
York University.
Henri A. Termeer has been a Director of the Company since December 1996. He
has served as President and a Director of Genzyme since October 1983, as Chief
Executive Officer since December 1985 and as Chairman of the Board since May
1988. In May 1995, he was elected Chairman of the Biotechnology Industry
Organization, the biotechnology industry's national trade association. For ten
years prior to joining Genzyme, Mr. Termeer held various management positions at
Baxter Travenol Laboratories, Inc., a manufacturer of human health care
products. Mr. Termeer is Chairman of the Board of Directors of Genzyme
Transgenics Corporation. Mr. Termeer also serves on the boards of directors of
Abiomed, Inc., AutoImmune Inc., GelTex Pharmaceuticals Inc., and Genzyme
Transgenics Corporation, all biotechnology companies and is a trustee of
Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences
Investors.
Directors are elected annually by the stockholders of the Company and hold
office until the next annual meeting of stockholders or until their resignation
or removal. Executive officers of the Company are elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors. There are no family relationships among any of the executive officers
or directors of the Company.
SCIENTIFIC ADVISORY BOARD
The Company's scientific advisory board (the "Scientific Advisory Board")
is a multi-disciplinary assemblage of scientists and physicians in the fields of
transplantation, immunology, endocrinology, neurophysiology and neuromuscular
physiology, transplantation biology and surgery. The Scientific Advisory Board
meets regularly to review and evaluate the Company's research programs and
advise the Company with respect to technical matters. The members of the
Scientific Advisory Board are as follows:
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NAME POSITION
- ---- --------
Hugh Auchincloss, Jr., M.D. Associate Professor of Surgery, Harvard Medical School; Director,
Pancreas Transplantation and Associate Visiting Surgeon,
Massachusetts General Hospital
Jay A. Berzofsky, M.D., Ph.D. Chief, Molecular Immunogenetics and Vaccine Research Section,
Metabolism Branch, NCI
Robert H. Brown, Jr., M.D., D.Phil. Director of Cecil B. Day Laboratory for Muscular Research,
Associate in Neurology, Massachusetts General Hospital; Associate
Professor of Neurology, Harvard Medical School
George F. Cahill, Jr., M.D. Professor of Biological Sciences, Dartmouth College; Professor of
Medicine, emeritus, Harvard Medical School; Former Vice President
and Director of Research, Howard Hughes Medical Institute; Former
Director of Research, Joslin Diabetes Foundation
Laurie H. Glimcher, M.D. Professor of Immunology, Department of Cancer Biology, Harvard
School of Public Health and Professor of Medicine, Harvard Medical
School
Ole Isacson, M.D.-Ph.D. Director of Neuroregeneration Laboratory, McLean Hospital;
Associate Professor Neurology and Neuroscience, Harvard Medical
School
David H. Sachs, M.D. Director, Transplantation Biology Research Center, Massachusetts
General Hospital; Paul S. Russell/Warner-Lambert Professor of
Surgery (Immunology), Harvard Medical School
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------
The Company's Common Stock and Warrants have been traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbols DCRN and
DCRNW, respectively, since August 12, 1996. From February 13, 1996 (the date of
the Company's initial public offering) until August 12, 1996 (the date on which
the securities included in the Units, issued in the IPO, became separately
transferable), the Company's Units, which consisted of one share of Common Stock
and one Warrant to purchase one share of Common Stock traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol DCRNZ. Prior to
February 13, 1996, there was no established public trading market for any of the
Company's equity securities. The following table sets forth for the periods
indicated the high and low sale prices for the Units, Common Stock and Warrants
during 1996 as reported on the Nasdaq National Market:
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HIGH LOW
--------------------------- --------------------------
Units:
- ------
First Quarter (from February 13, 1996) 12 1/2 8
Second Quarter 14 3/4 10
Third Quarter (until August 12, 1996) 12 5/8 9 1/4
Common Stock:
- -------------
Third Quarter (from August 12, 1996) 10 1/2 7 1/4
Fourth Quarter 10 1/4 7 5/8
Warrants:
- ---------
Third Quarter (from August 12, 1996) 3 1
Fourth Quarter 2 7/8 1 3/4
As of March 4, 1997, there were approximately 985 holders of record of the
Company's Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, for use in its
business and does not anticipate declaring or paying any cash dividends in the
foreseeable future.
The Company did not sell any equity securities during the quarter ended
December 31, 1996 that were not registered under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected financial data set forth below as of December 31, 1995 and
1996 and for the three years in the period ended December 31, 1996 are derived
from the Company's financial statements which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this Annual Report on Form 10-K. The selected financial data set forth below
as of December 31, 1992, 1993 and 1994 and for the years ended December 31, 1992
and 1993 are derived from the Company's financial statements which have been
audited by Arthur Andersen LLP and are not included herein. The data set forth
below should be read in conjunction with the Company's financial statements,
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K.
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Year Ended December 31,
=========================================================
1992 1993 1994 1995 1996
------- ------- ------- ---------- ----------
(in thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
REVENUES:
Research and development $ -- $ -- $ 152 $ 45 $ 1,144
Interest income 651 371 203 245 1,100
------- ------- ---------- ---------- ----------
Total revenues 651 371 355 290 2,244
------- ------- ---------- ---------- ----------
OPERATING EXPENSES:
Research and development $ 4,137 $ 5,883 $ 4,912 $ 4,478 $ 5,767
General and administrative 950 1,041 1,281 1,128 1,304
Interest expense 21 15 12 397 158
------- ------- ---------- ---------- ----------
Total operating expenses 5,108 6,939 6,205 6,003 7,229
------- ------- ---------- ---------- ----------
Net loss $(4,457) $(6,568)$ (5,850) $ (5,713) $ (4,985)
======= ======= ========== ========== ==========
Pro forma net loss per common
share (1) $ (.58) $ (.57) $ (.40)
========== ========== ==========
Shares used in computing pro forma
net loss per common share (1) 10,036,707 10,053,677 12,500,513
========== ========== ==========
December 31,
=============================================
1992 1993 1994 1995 1996
------- ------ ------ ------- -------
BALANCE SHEET DATA:
Cash, cash equivalents
and investments $13,723 $8,204 $2,752 $ 4,115 $23,482
Working capital 12,664 7,285 1,603 2,753 12,413
Total assets 14,647 9,023 3,658 5,160 24,275
Long-term debt 111 303 493 7,550 370
Stockholders' equity (deficit) 13,381 7,687 1,840 (3,864) 22,437
==================
(1) Computed as described in Note 2 (e) of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception, the Company has principally focused its efforts and
resources on research and development of cell transplantation products to treat
neurodegenerative and other human diseases. The Company's primary source of
working capital to fund such activities has been proceeds from the sale of
equity and debt securities. In addition, commencing October 1, 1996, the Company
has received funding from the Joint Venture with Genzyme in support of the
NeuroCell(TM)-PD and NeuroCell(TM)-HD product development programs. The Company
has not received any revenues from the sale of products to date and does not
expect to generate product revenues for at least the next several years. The
Company has experienced fluctuating operating losses since its inception and
expects that the additional activities required to develop and commercialize the
Company's products will result in fluctuating operating losses for at least the
next several years. At December 31, 1996, the Company had an accumulated deficit
of $32.3 million.
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RESULTS OF OPERATIONS
Year Ended December 31, 1996 Versus Year Ended December 31, 1995
Research and development revenues were $1.1 million for the year ended
December 31, 1996 versus $45,000 for the year ended December 31, 1995. The 1996
increase was due to approximately $1.0 million of revenue earned in the fourth
quarter of 1996 under the Joint Venture with Genzyme. Interest income was $1.1
million for the year ended December 31, 1996 versus $245,000 for the year ended
December 31, 1995. The increase was primarily due to additional interest income
earned on substantially higher cash balances available for investment primarily
as a result of the Company's initial public offering.
Research and development expenses were $5.8 million for the year ended
December 31, 1996 versus $4.5 million for the year ended December 31, 1995. The
29% increase was primarily due to an increase in the external costs of
conducting Phase 1 human clinical trials of the NeuroCell(TM)-PD and
NeuroCell(TM)-HD product candidates and the additional quality control and
clinical affairs staffing necessary to support these trials.
General and administrative expenses were $1.3 million for the year ended
December 31, 1996 versus $1.1 million for the year ended December 31, 1995. The
16% increase was primarily due to increased costs of shareholder relations,
professional fees and insurance expense since the Company completed its initial
public offering in February 1996, as well as professional fees incurred in 1996
in connection with establishing the Joint Venture between the Company and
Genzyme.
Interest expense was $158,000 for the year ended December 31, 1996 versus
$397,000 for the year ended December 31, 1995. The 60% decrease was primarily
attributable to the conversion of the Company's $7.0 million of Convertible
Notes, issued in May 1995, to common stock upon the closing of the Company's
initial public offering.
The Company incurred a net loss of approximately $5.0 million for the year
ended December 31, 1996 versus a net loss of approximately $5.7 million for the
year ended December 31, 1995.
Year Ended December 31, 1995 Versus Year Ended December 31, 1994
Research and development revenues were $45,000 for the year ended December
31, 1995 versus $152,000 for the year ended December 31, 1994. The decrease was
primarily due to lower revenue realized under several research grants. Interest
income was $245,000 for the year ended December 31, 1995 versus $203,000 for the
year ended December 31, 1994.
Research and development expenses were $4.5 million for the year ended
December 31, 1995 versus $4.9 million for the year ended December 31, 1994. The
9% decrease was primarily due to a decrease in the number of research personnel
as the Company focused its resources towards advanced preclinical and clinical
programs and de-emphasized earlier stage research efforts. The personnel
decrease also contributed to a corresponding decrease in laboratory materials
and supplies expenses. These decreases were partially offset by an increase in
patent and human clinical trial related costs.
General and administrative expenses were $1.1 million for the year ended
December 31, 1995 versus $1.3 million for the year ended December 31, 1994. The
12% decrease was primarily due to a non-recurring $186,000 charge in 1994
related to legal, accounting and other costs associated with the Company's
efforts to raise equity capital during 1994.
Interest expense was $397,000 for the year ended December 31, 1995
versus $12,000 for
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the year ended December 31, 1994. The increase was primarily attributable to the
recognition of interest expense on the Company's $7.0 million of Convertible
Notes which were issued in May 1995 and converted to common stock upon the
closing of the Company's initial public offering in February 1996. In addition,
the Company has also incurred interest expense in connection with three separate
sale leaseback transactions which closed in December 1994, July 1995 and
December 1995.
The Company incurred a net loss of approximately $5.7 million for the year
ended December 31, 1995 versus a net loss of approximately $5.9 million for the
year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities primarily with the net proceeds
from private sales of preferred stock, which in the aggregate have totaled
approximately $22.6 million; with the issuance of $7.0 million of convertible
notes payable; with the net proceeds of $20.9 million from the Company's initial
public offering; with the net proceeds of approximately $3.1 million from the
exercise of warrants originally issued in 1991 in connection with a private sale
of preferred stock; and with the interest earned thereon. In addition, the
Company recorded approximately $1.0 million of revenue during the fourth quarter
of 1996 under its Joint Venture agreement with Genzyme. At December 31, 1996,
the Company had cash and cash equivalents, short-term investments and long-term
investments aggregating approximately $23.5 million.
The Company purchased approximately $1.4 million of capital equipment
through December 31, 1996. In December 1994, approximately $805,000 of capital
equipment was sold for proceeds of $600,000 and subsequently leased back over a
four-year term. In addition, approximately $227,000 was sold in 1995 for its
original cost and subsequently leased back over a four-year term. The Company
had no material commitments for capital expenditures as of December 31, 1996.
Under the Joint Venture agreement with Genzyme, the Company's two lead
product development programs, NeuroCell(TM)-PD for the treatment of Parkinson's
disease and NeuroCell(TM)-HD for the treatment of Huntington's disease, are
being funded by the Joint Venture. Both Genzyme and Diacrin are responsible for
funding the Joint Venture in accordance with the terms, and subject to the
conditions, of the Joint Venture agreement. Genzyme has agreed to fund 100% of
the first $10 million of development and commercialization costs incurred after
October 1, 1996, 75% of the next $40 million and 50% of all remaining
development and commercialization costs in excess of $50 million. Based upon the
Company's expectations for the programs, the Company believes that its
obligation to fund 25% of the program costs will not commence until late 1997.
The Company believes that its existing funds, together with expected future
funding under the Joint Venture agreement with Genzyme, will be sufficient to
fund its operating expenses and capital requirements as currently planned
through at least 1998. However, the Company's cash requirements may vary
materially from those now planned because of results of research and
development, the scope and results of preclinical and clinical testing, any
termination of the Joint Venture, relationships with strategic partners, changes
in the focus and direction of the Company's research and development programs,
competitive and technological advances, the FDA's regulatory process, the market
acceptance of any approved Company products and other factors.
The Company expects to incur substantial additional costs, including costs
related to ongoing research and development activities, preclinical studies,
clinical trials, establishing pig production capabilities and the expansion of
its laboratory and administrative activities. Therefore, in order to achieve
commercialization of its potential products, the Company will
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25
need substantial additional funds. There can be no assurance that the Company
will be able to obtain the additional funding that it will require on acceptable
terms, if at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time. Note that, except where the context otherwise requires, all references
to the Company's products are inclusive of the Joint Venture Products being
developed in the Joint Venture.
Reliance on Joint Venture with Genzyme Corporation
The Company and Genzyme are parties to a joint venture agreement relating
to the development and commercialization of NeuroCell(TM)-PD and
NeuroCell(TM)-HD, the Company's most advanced product candidates. Under the
agreement, Genzyme has agreed to provide the first $10 million of product
development and commercialization funding required after October 1, 1996 for the
Joint Venture Products, 75% of the next $40 million of funding and 50% of
funding thereafter. In addition, Genzyme has agreed to market and sell the Joint
Venture Products on behalf of the Joint Venture. Furthermore, the Joint Venture
plans to manufacture the Joint Venture Products in facilities controlled by
Genzyme's Tissue Repair Division.
Genzyme has the right, at any time after it has contributed $10 million of
funding, to terminate the joint venture agreement, without cause, upon 180 days
notice to Diacrin. In the event of such termination, the Company (i) would lose
a significant source of funding for the NeuroCell(TM)-PD and the
NeuroCell(TM)-HD product development programs, (ii) would lose access to
Genzyme's experienced sales, marketing, development and manufacturing
organizations, and (iii) would need to establish clinical production facilities
for the production of the Joint Venture Products. There can be no assurance that
the Company would be able to complete development or commercialization of
NeuroCell(TM)-PD and NeuroCell(TM)-HD if Genzyme terminated the joint venture
agreement.
In addition, under certain circumstances, Genzyme has the right to
terminate the joint venture agreement following an unremedied breach by Diacrin
of any material term of the agreement. In the event of such termination, Genzyme
has the option to obtain an exclusive, worldwide, royalty-bearing license to
certain Diacrin technology required to manufacture and market the Joint Venture
Products. If Genzyme exercised its option, the Company would be entitled to
receive a royalty on the net sales of the Joint Venture Products, which royalty
may be significantly less than amounts the Company would be entitled to receive
under the 50%/50% profit split agreed to as part of the joint venture agreement.
Any termination of the joint venture agreement, whether by Genzyme or
Diacrin, could have a material adverse effect on the Company's business, results
of operations or financial position. In addition, there can be no assurance that
the economic and other interests of the Company and Genzyme will coincide during
the term of the joint venture agreement or that disagreements will not occur
between the Company and Genzyme during the term of the agreement, either of
which could have a material adverse effect on the Company's business, results of
operations or financial position. See "Dependence on Others."
History of Operating Losses; No Assurance of Revenue or Operating Profit
The Company has generated no revenue from product sales to date. Diacrin
has accumulated net losses from its inception in 1989 through December 31, 1996
of approximately $32.3 million, and losses are continuing. The Company expects
to incur substantial operating losses for the foreseeable future. The Company
currently has no material sources of revenue
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26
from product sales or license fees, and there can be no assurance that it will
be able to develop such revenue sources or that its operations will become
profitable, even if it is able to commercialize any products.
Lack of Commercial Products; No Assurance of Successful Product Development
The Company has no products available for sale and does not expect to have
any therapeutic products commercially available for at least the next several
years, if at all. The Company's potential products will require significant
additional development, preclinical and clinical testing, regulatory approval
and additional investment prior to commercialization. The Company's potential
therapeutic products are at early stages of research and development and the
Company's growth will depend on the successful development and commercialization
of its products. There can be no assurance that any such potential products will
be successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs or be successfully marketed.
Reliance on Cell Transplantation Technology; No Currently Approved Cell Therapy
Products
Diacrin has concentrated its efforts and therapeutic product research on
its cell transplantation technology and will be dependent on the successful
development of the technology. Cell transplantation technology is an emerging
technology with, as yet, limited clinical applications. There can be no
assurance that the Company's cell transplantation technology will result in the
development of any therapeutic products. If it does not, the Company may be
required to change dramatically the scope and direction of its product
development activities.
The Company's approach involves xenotransplantation -- the transplantation
of cells from one species into another. Although several companies are focusing
on this area, xenotransplantation-based products represent a novel therapeutic
approach that has not yet been subject to extensive clinical testing. The risk
that viruses or other animal pathogens will be unintentionally transmitted to a
human patient is a risk associated with xenotransplantation. No
xenotransplantation-based therapeutic product has been approved for sale by the
FDA. The FDA has not yet established definitive regulatory guidelines for
xenotransplantation, but has proposed guidelines in an attempt to reduce the
risk of contamination of transplanted cellular products with infectious agents.
Diacrin has provided the FDA with a written response to the proposed guidelines,
however, there can be no assurance that such guidelines will be issued, or that
Diacrin will be able to comply with final guidelines that may be issued.
Furthermore, there can be no assurance that any products developed and tested by
Diacrin will be approved by the FDA or regulatory authorities in other
countries, or that xenotransplantation-based products, including the Company's
product candidates, will be accepted by the medical community or third-party
payors or that the degree of acceptance will not limit the size of the market
for such products.
Need for Substantial Additional Funds
The Company will require substantial additional funding for its research
and product development programs and operating expenses, and for pursuing
regulatory clearances and building production capabilities. Adequate funds for
these purposes, whether obtained through equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
certain of its product development programs or to license others to
commercialize products or technologies that the Company would otherwise seek to
develop and commercialize itself, any of which would have a material adverse
effect on the Company.
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27
Uncertainty Associated with Preclinical and Clinical Testing
Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. To date, the Company has administered NeuroCell(TM)-PD and
NeuroCell(TM)-HD to an aggregate of 24 patients in Phase 1 human clinical
trials. Results of initial preclinical and clinical testing of products under
development by the Company are not necessarily predictive of results that will
be obtained from subsequent or more extensive preclinical and clinical testing.
Furthermore, there can be no assurance that clinical trials of products under
development will demonstrate the safety and efficacy of such products at all or
to the extent necessary to obtain regulatory approvals. Companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development could delay or prevent regulatory approval of the product and would
have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current clinical trial or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable government agencies in foreign countries impose
substantial regulations on the manufacture and marketing of pharmaceutical
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and
varies substantially based upon the type, complexity and novelty of the proposed
product. The Company cannot yet accurately predict when it might first submit
any PLA for FDA or other regulatory approval.
The effect of government regulation may be to delay marketing of new
products for a considerable or indefinite period of time, to impose costly
procedures upon the Company's activities or to diminish or eliminate any
competitive advantage the Company may enjoy. There can be no assurance that FDA
or other regulatory approval for any products developed by the Company will be
granted on a timely basis, if at all. Any such delay in obtaining, or failure to
obtain, such approvals could adversely affect the marketing of the Company's
products and the ability to generate product revenue. The extent of potentially
adverse government regulation which might arise from future legislation or
administrative action cannot be predicted.
If regulatory approval of a drug is obtained, such approval may be
conditioned upon limitations and restrictions on the drug's use. In addition,
any marketed drug and its manufacturer are subject to continuing governmental
review and any subsequent discovery of previously unrecognized problems could
result in restrictions on the product or manufacturer, including, without
limitation, withdrawal of the product from the market. Failure of the Company to
comply with applicable regulatory requirements can, among other things, result
in fines, suspension of regulatory approvals, product recalls, seizure of
products, operating restrictions or criminal prosecution.
Additionally, the Company is or may become subject to various federal,
state and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease
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agents, used in connection with the Company's research and development work. The
Company is unable to predict the extent of restrictions that might arise from
any governmental or administrative action. There can also be no assurance that
the Company will not be required to incur significant costs to comply with
environmental laws and regulations, or any assurance that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.
Rapid Technological Changes; Competition
The Company is engaged in activities in the biopharmaceutical field, which
is characterized by extensive research efforts and rapid technological progress.
There can be no assurance that research and discoveries by other biotechnology
or pharmaceutical companies will not render the Company's programs or products
uneconomical, result in therapies superior to any therapy developed by the
Company or that any products developed by the Company will be preferred to any
existing or newly-developed technologies.
The biotechnology and pharmaceutical industries are characterized by
intense competition. The Company competes against numerous companies, many of
which have substantially greater financial and other resources than the Company.
Several such enterprises have initiated cell transplantation research programs
and/or efforts to treat the same diseases targeted by the Company through
alternate technologies. These competitive enterprises have devoted, and will
continue to devote, substantial resources to the development of cell
transplantation or other products to treat such diseases. Private and public
academic and research institutions also compete with Diacrin in the research and
development of human therapeutic products.
In addition, many of the Company's competitors have significantly greater
experience than the Company in preclinical testing and human clinical trials of
biotechnology and pharmaceutical products and in obtaining FDA and other
regulatory approvals of products. Accordingly, the Company's competitors may
succeed in obtaining FDA approval for products more rapidly or effectively than
the Company. If the Company commences significant commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which it has no experience.
Limited Regulatory, Manufacturing, Marketing and Sales Capabilities
The Company has not yet invested significantly in regulatory,
manufacturing, marketing, distribution or product sales resources. To date, the
Company has relied on others for the supply and production of pigs free of
infectious agents for its clinical programs. Although the Company intends to
develop regulatory, manufacturing, marketing, distribution and sales resources
in the future, there can be no assurance that the Company will be able to
develop such resources successfully.
Uncertain Ability to Protect Proprietary Technology; Reliance Upon Licenses
The biotechnology and pharmaceutical industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company's success will depend, in part, on its
ability to obtain patent protection for its products, preserve its trade secrets
and operate without infringing the proprietary rights of others. The Company has
ongoing research efforts and expects to seek additional patents covering this
research in the future. There can be no assurance of its success or timeliness
in obtaining any patents, or of the breadth or degree of protection that any
such patents will afford the Company.
The patent position of biotechnology products is often highly uncertain and
usually involves complex legal and factual questions. There can be no assurance
that patent applications
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relating to the Company's potential products or technology will result in
additional patents being issued or that, if issued, such patents will afford
adequate protection to the Company or not be challenged, invalidated or
infringed. Furthermore, there can be no assurance that others will not
independently develop similar products and processes, duplicate any of the
Company's products or, if patents are issued to the Company, design around such
patents. In addition, the Company could incur substantial costs in defending
itself in suits brought against it or in suits in which it may assert its
patents against others. If the outcome of any such litigation is unfavorable,
the Company's business could be adversely affected. To determine the priority of
inventions, the Company may also have to participate in interference proceedings
declared by the United States Patent and Trademark Office, which could result in
substantial cost to the Company.
Much of the Company's know-how and technology is not patentable. To protect
its rights, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements with Diacrin. There can
be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.
Uncertain Availability of Third-Party Reimbursement and Product Pricing
The Company's ability to commercialize products successfully will depend
substantially on reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting the Company's business.
Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for therapeutic
products. The cost containment measures that health care providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any health care reform, could materially adversely affect the
Company's ability to sell its products if successfully developed and approved.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future or what effect such legislation
or regulation would have on the Company's business.
Dependence on Key Personnel
Because of the specialized nature of its business, the Company is highly
dependent on its ability to attract and retain qualified scientific and
technical personnel for the research and development activities conducted or
sponsored by the Company. The loss of certain key executive officers could be
significantly detrimental to the Company. Recruiting and retaining qualified
scientific personnel to perform research and development work is critical to the
Company's success. In addition, the Company's anticipated growth and expansion
into areas and activities requiring additional expertise, such as clinical
testing, regulatory compliance, manufacturing and marketing, will require the
addition of new management personnel and the development of additional expertise
by existing management personnel. There is intense competition for qualified
personnel in the areas of the Company's activities, and there can be no
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30
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. The failure
to attract and retain such personnel or to develop such expertise would
adversely affect the Company's business.
Dependence on Others
Currently, the Company's exclusive source for the pigs from which its
porcine cells are harvested is Tufts. The Company is currently dependent upon
Tufts for its pig supply and expects to continue to depend upon Tufts for the
next several months. There can be no assurance that Tufts will continue to
provide pigs in quantities and at times required by the Company, and failure by
Tufts to provide such supply could have an adverse effect on the Company. The
Company has entered into an agreement with a commercial entity as a second
source of pig facilities and services. It is expected that porcine tissue from
this facility will become available in mid-1997. The Company is in discussion
with other vendors to secure additional sources of pigs and expects to enter
into arrangements with pig producers for the supply of qualified pigs for the
Company's production processes. There can be no assurance that these sources of
pigs and pig facilities and services will be available when needed by the
Company.
The Company's strategy for development and commercialization of its product
candidates entails entering into arrangements with corporate partners,
collaborators, licensees and others and upon the subsequent success of these
third parties in performing their obligations, including, as the case may be,
any or all of preclinical and clinical testing, obtaining regulatory approvals,
manufacturing and marketing. There can be no assurance that the Company will be
able to maintain its existing arrangements or establish additional collaborative
arrangements on favorable terms, if at all. If the Company is able to enter into
any additional arrangements, such arrangements may require the Company to
transfer certain material rights to third parties.
There can be no assurance that any such corporate partners, collaborators,
licensees or others will perform their obligations as expected or that the
Company will derive any revenue or profit from any existing or future
arrangements. While the Company believes its partners, collaborators, licensees
and others will have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
by such parties is not within the control of the Company. Furthermore, there can
be no assurance that the interest of the Company will coincide with those of
such other parties or that disagreements over rights to technology or other
proprietary information or other matters will not occur. In addition, it is
possible that such other parties will be independently involved in the
development of products that may be competitive with the products they are
developing in collaboration with the Company. If any of the Company's partners,
collaborators, licensees or others breaches or terminates its agreement with the
Company or otherwise fails to conduct its required activities in a timely
manner, the development or commercialization of the product candidate under such
collaborative agreement may be delayed, the Company may be required to undertake
unforeseen additional responsibilities or devote unforeseen additional resources
to such development or commercialization or such development or
commercialization could be terminated. Any such event could adversely effect the
Company's business, results of operations or financial position.
Potential Product Liability; Limited Product Liability Insurance
The testing, marketing and sale of human health care products entail an
inherent risk of product liability claims, and there can be no assurance that
substantial product liability claims will not be asserted against the Company.
The Company has limited product liability insurance and may need to increase its
coverage as it expands human clinical trials and if and when it begins to market
products. There can be no assurance that adequate insurance coverage will be
available on acceptable terms, if at all, or that a product liability claim
would not materially adversely affect the business or financial condition of the
Company.
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ITEM 8. FINANCIAL STATEMENTS
--------------------
All financial statements required to be filed hereunder are filed as an
exhibit hereto, are listed under item 14(a)(1) and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-------------------------------------------------------------------
There have been no disagreements on accounting and financial disclosure
matters.
PART III
ITEMS 10 - 13.
The information required for Part III of this Annual Report on Form 10-K is
hereby incorporated by reference from portions of the Company's definitive proxy
statement relating to the annual meeting of stockholders of the Company
scheduled to be held on Tuesday, June 17, 1997, which statement will be filed
with the Commission not later than 120 days after the end of the Company's 1996
fiscal year. Such information will be contained in the sections of such proxy
statement captioned "Election of Directors," "Meetings of Board of Directors and
Committees," "Executive Compensation," "Certain Relationships and Related
Transactions," "Section 16(a) Beneficial Ownership Reporting Compliance,"
"Compensation Committee Interlocks and Insider Participation," and "Principal
Stockholders." Information regarding executive officers of the Company is
furnished in Part I of this Annual Report on Form 10-K under the heading,
"Executive Officers of the Registrant."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
------------------------------------------------------
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following Financial Statements are included in this Annual Report on
Form 10-K.
Financial Statements: Page
--------------------- ----
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 1995 and 1996 F-2
3. Statements of Operations for the three years in the period ended
December 31, 1996 F-3
4. Statements of Stockholders' Equity (Deficit) for the three years in the
period ended December 31, 1996 F-4
5. Statements of Cash Flows for the three years in the period
ended December 31, 1996 F-5
6. Notes to Financial Statements F-6
31
32
(2) EXHIBITS
--------
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K:
Exhibit No. Title Page
- ----------- ----- ----
3.1 - Amended and Restated Certificate of Incorporation of the Company as
amended to date (7)
3.2 - Amended and Restated By-laws of the Company (6)
+10.1 - Research and License Agreement effective as of October 1, 1989 by and among
the Company and The General Hospital Corporation, as amended effective as of February 1, 1991 (2)
++10.2 - Employment Agreement dated February 6, 1990 by and between the Company
and Dr. Thomas H. Fraser (2)
10.3 - Rights Agreement dated July 29, 1991 by and among the Company and the
holders of the preferred stock as amended on September 27, 1991 (2)
10.3(a) - Consent and Agreement to Amend dated April 26, 1995 by and among the Registrant and certain
investors named therein (1)
10.3(b) - Consent and Agreement to Amend dated as of January 4, 1996 by and among
the Registrant and certain investors named therein (6)
10.4 - Sales Agency Agreement dated October 7, 1991 by and among Diacrin, Inc., Oncologix, Inc.,
PharmaGenics, Inc. and PaineWebber Incorporated, as
amended on November 13, 1991 (2)
10.5 - Warrant Agreement dated November 14, 1991 by and between Diacrin, Inc.
and American Stock Transfer & Trust Company, as Warrant Agent (2)
10.5(a) - Supplement No. 1 to Warrant Agreement dated November 14, 1991, dated
April 24, 1995, by and between the Registrant and American Stock Transfer &
Trust Company, as Warrant Agent (1)
10.6 - Indemnification Agreement dated November 14, 1991 by and among the
Company and PharmaGenics, Inc. and Oncologix, Inc. (2)
++10.7 - 1990 Stock Option Plan, as amended (3)
10.8 - Sublease dated January 24, 1991 by and among the Company and
Building 79 Associates Limited Partnership and Building 96
Associates Limited
Partnership (2)
+10.9 - Letter Agreement dated December 10, 1993 between the Company and The
General Hospital Corporation (4)
++10.10 - 1994 Directors' Stock Option Plan, as amended *
10.11 - Master Lease Agreement, dated December 22, 1994, between the Company
and Aberlyn Capital Management Limited Partnership (5)
10.12 - Agreement to Issue Warrant between the Company and Aberlyn Capital
Management Limited Partnership dated December 22, 1994, including
Common Stock Purchase Warrant and Registration Rights Agreement (5)
33
Exhibit No. Title Page
- ----------- ----- ----
10.12(a) - Waiver and Consent Agreement dated April 24, 1995 by and between the
Registrant and Aberlyn Capital Management Limited Partnership (1)
10.13 - Note Purchase Agreement dated as of May 31, 1995 (1)
10.14 - Form of 7.5% Convertible Note due May 31, 2000 (1)
10.15 - Registration Rights Agreements dated May 31, 1995 by and among the
Registrant and the investors listed on Schedules I and II attached thereto (1)
10.15(a) - Amendment No. 1 to Registration Rights Agreement dated as of January 4,
1996 by and among the Registrant and certain investors named therein (6)
10.16 - Letters dated November 14, 1991 from HCVII and Everest Trust with respect
to election of PaineWebber nominee to the Company's Board of Directors (2)
10.17 - Unit and Warrant Agreement dated February 12, 1996 by and between the
Registrant and American Stock Transfer & Trust Company (7)
+10.18 - Collaboration Agreement among Diacrin, Inc., Genzyme Corporation
and Diacrin/Genzyme, LLC dated as of October 1, 1996 (8)
+10.19 - Operating Agreement of Diacrin/Genzyme LLC (8)
11 - Computation of Pro Forma Net Loss per Common Share *
21 - Subsidiaries - None.
23 - Consent of Arthur Andersen LLP *
27 - Financial Data Schedule *
(b) REPORTS ON FORM 8-K.
--------------------
A report on Form 8-K was filed on October 2, 1996 in connection
with the formation of the Joint Venture with Genzyme
Corporation.
(c) DESCRIPTION OF EXHIBITS.
------------------------
See Item 14 (a)
(d) DESCRIPTION OF FINANCIAL STATEMENT SCHEDULES.
---------------------------------------------
None.
====================
* Filed herewith
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended June 30, 1995 and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Form 10, as amended (File No.
0-20139), on April 29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended September 30, 1994 and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
33
34
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139), for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-2, as
amended (Registration No. 33-80773) on December 22, 1995, and incorporated
herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1995 and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, as
amended on Form 10-Q/A (File No. 0-20139) for the quarter ended September
30, 1996 and incorporated herein by reference.
+ Confidential treatment granted as to certain portions of this exhibit.
++ Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser
-------------------------
Thomas H. Fraser
President and
Chief Executive Officer
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Date Title
--------- ---- -----
/s/ Thomas H. Fraser March 26, 1997 President, Chief Executive
- --------------------------------------- Officer and Director (Principal
Thomas H. Fraser Executive Officer)
/s/ Mark J. Fitzpatrick March 26, 1997 Vice President of Finance and
- --------------------------------------- Administration ; CFO & Treasurer
Mark J. Fitzpatrick (Principal Financial and Accounting
Officer)
/s/ Zola P. Horovitz March 26, 1997 Director
- ---------------------------------------
Zola P. Horovitz
/s/ John W. Littlechild March 26, 1997 Director
- ---------------------------------------
John W. Littlechild
/s/ Stelios Papadopoulos March 26, 1997 Director
- ---------------------------------------
Stelios Papadopoulos
/s/ Henri A. Termeer March 26, 1997 Director
- ---------------------------------------
Henri A. Termeer
35
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diacrin, Inc. as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 16, 1997
F-1
37
DIACRIN, INC.
BALANCE SHEETS
December 31,
---------------------------------
1995 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 4,114,820 $ 7,308,710
Short-term investments -- 6,255,507
Prepaid expenses and other current assets 112,007 316,107
------------ ------------
Total current assets 4,226,827 13,880,324
------------ ------------
Property and equipment, at cost:
Equipment under capital leases 675,262 675,262
Furniture and office equipment 195,363 224,920
Laboratory equipment 70,501 101,738
Leasehold improvements 51,424 51,424
------------ ------------
992,550 1,053,344
Less- Accumulated depreciation and amortization 358,823 576,725
------------ ------------
633,727 476,619
------------ ------------
Long-term investments -- 9,917,875
Deferred financing cost, net 299,730 --
------------ ------------
$ 5,160,284 $ 24,274,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 191,014 $ 162,058
Accrued expenses 1,126,477 506,949
Deferred revenue -- 618,844
Current obligations under capital leases 156,448 179,452
------------ ------------
Total current liabilities 1,473,939 1,467,303
------------ ------------
Long-term debt:
Long-term obligation under capital leases 549,883 370,431
Convertible notes payable 7,000,000 --
------------ ------------
Total long-term debt 7,549,883 370,431
------------ ------------
Commitments (Notes 7 and 11)
Stockholders' equity (deficit):
Preferred stock, $.01 par value, Authorized-- 2,990,119 and 5,000,000
shares at December 31, 1995 and 1996, respectively;
none issued and outstanding -- --
Convertible preferred stock, $.01 par value,
Series A, Authorized, issued and outstanding--
6,484,331 shares at December 31, 1995 and none
at December 31, 1996 64,843 --
Series B, Authorized-- 3,833,503 shares at
December 31, 1995 and none at December 31, 1996;
issued and outstanding-- 2,446,917 shares at
December 31, 1995 and none at December 31, 1996 24,469 --
Series C, Authorized, issued and outstanding--
4,455,000 shares at December 31, 1995 and none
at December 31, 1996 44,550 --
Series D, Authorized-- 2,009,881 shares at December 31, 1995
and none at December 31, 1996; none issued and outstanding -- --
Common stock, $.01 par value; Authorized-- 30,000,000 shares;
issued and outstanding-- 381,852 and 13,189,559 shares at
December 31, 1995 and 1996, respectively 3,819 131,896
Additional paid-in capital 23,322,306 54,613,512
Accumulated deficit (27,323,525) (32,308,324)
------------ ------------
Total stockholders' equity (deficit) (3,863,538) 22,437,084
------------ ------------
$ 5,160,284 $ 24,274,818
============ ============
See Accompanying Notes to Financial Statements
F-2
38
DIACRIN, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------------
1994 1995 1996
---------------------------------------------------
REVENUES:
Research and development $ 151,639 $ 44,832 $ 1,143,787
Interest income 202,950 245,648 1,099,828
----------- ----------- -----------
Total revenues 354,589 290,480 2,243,615
----------- ----------- -----------
OPERATING EXPENSES:
Research and development 4,912,488 4,478,114 5,766,528
General and administrative 1,280,812 1,128,359 1,303,731
Interest expense 11,696 396,724 158,155
----------- ----------- -----------
Total operating expenses 6,204,996 6,003,197 7,228,414
----------- ----------- -----------
NET LOSS $(5,850,407) $(5,712,717) $(4,984,799)
=========== =========== ===========
PRO FORMA NET LOSS
PER COMMON SHARE $ (.58) $ (.57) $ (.40)
=========== =========== ===========
SHARES USED IN COMPUTING
PRO FORMA NET LOSS
PER COMMON SHARE 10,036,707 10,053,677 12,500,513
=========== =========== ===========
See Accompanying Notes to Financial Statements
F-3
39
DIACRIN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
-------------------------------------------------------------- ----------------
NUMBER $.01 NUMBER $.01 NUMBER $.01 NUMBER $.01
OF PAR OF PAR OF PAR OF PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 6,484,331 $ 64,843 2,446,917 $ 24,469 4,455,000 $ 44,550 349,356 $ 3,494
Exercise of stock options -- -- -- -- -- -- 22,793 228
Net loss -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 6,484,331 64,843 2,446,917 24,469 4,455,000 44,550 372,149 3,722
Exercise of stock options -- -- -- -- -- -- 9,703 97
Net loss -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 6,484,331 64,843 2,446,917 24,469 4,455,000 44,550 381,852 3,819
Proceeds from initial public offering
of units, net of $2,096,640 financing costs -- -- -- -- -- -- 2,875,000 28,750
Conversion of notes payable and
accrued interest thereon into common
stock, net of financing costs -- -- -- -- -- -- 2,799,999 28,000
Conversion of preferred stock
into common stock (6,484,331) (64,843) (2,446,917) (24,469) (4,455,000) (44,550) 6,693,121 66,931
Exercise of stock options -- -- -- -- -- -- 12,146 122
Exercise of private placement warrants -- -- -- -- -- -- 427,441 4,274
Net loss -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- -- -- -- -- -- 13,189,559 $131,896
====================================================================================
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $23,310,297 $(15,760,401) $ 7,687,252
Exercise of stock options 2,835 -- 3,063
Net loss -- (5,850,407) (5,850,407)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1994 23,313,132 (21,610,808) 1,839,908
Exercise of stock options 9,174 -- 9,271
Net loss -- (5,712,717) (5,712,717)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1995 23,322,306 (27,323,525) (3,863,538)
Proceeds from initial public offering
of units, net of $2,096,640 financing costs 20,874,610 -- 20,903,360
Conversion of notes payable and
accrued interest thereon into common
stock, net of financing costs 7,268,308 -- 7,296,308
Conversion of preferred stock
into common stock 66,931 -- --
Exercise of stock options 15,037 -- 15,159
Exercise of private placement warrants 3,066,320 -- 3,070,594
Net loss -- (4,984,799) (4,984,799)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $54,613,512 $(32,308,324) $22,437,084
=========================================================
See Accompanying Notes to Financial Statements
F-4
40
DIACRIN, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,850,407) $(5,712,717) $ (4,984,799)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 204,595 214,506 220,371
Changes in current assets and liabilities-
Prepaid expenses and other current assets (25,687) 26,750 (204,100)
Accounts payable 87,724 (116,784) (28,956)
Accrued expenses 102,089 269,905 (241,643)
Deferred revenue -- -- 618,844
----------- ----------- ------------
Net cash used in operating activities (5,481,686) (5,318,340) (4,620,283)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments 5,997,723 -- (6,255,507)
Purchases of property and equipment, net (275,075) (107,988) (60,794)
Decrease in note receivable from officer 9,500 37,500 --
Increase in long-term investments -- -- (9,917,875)
----------- ----------- ------------
Net cash provided by (used in) investing activities 5,732,148 (70,488) (16,234,176)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 3,063 9,271 23,989,113
Principal payments under capital leases (57,933) (173,880) (156,448)
Proceeds from sale leaseback of equipment 600,000 226,895 --
Proceeds from sale of 7.5% convertible notes -- 7,000,000 --
(Increase) decrease in deferred financing costs -- (310,831) 215,684
Decrease in other long-term liabilities (250,000) -- --
----------- ----------- ------------
Net cash provided by financing activities 295,130 6,751,455 24,048,349
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 545,592 1,362,627 3,193,890
CASH AND CASH EQUIVALENTS, beginning of period 2,206,601 2,752,193 4,114,820
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,752,193 $ 4,114,820 $ 7,308,710
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Equipment acquired under capital lease obligations $ 600,000 $ 226,895 $ --
=========== =========== ============
Conversion of notes and accrued interest
into common stock, net of financing costs $ -- $ -- $ 7,296,308
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 11,696 $ 82,987 $ 90,885
=========== =========== ============
See Accompanying Notes to Financial Statements
F-5
41
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Operations and Basis of Presentation
- -----------------------------------------
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989 and is
developing transplantable porcine (pig) cells for the treatment of human
diseases that are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent.
In prior years, the Company was considered to be in the development stage for
financial reporting purposes. During 1996, the Company entered into a joint
venture agreement with Genzyme Corporation, as further discussed in Note 4, and
expects to recognize significant revenue from this collaboration. As such, the
Company no longer reports cumulative results from inception as required for
development stage enterprises.
(2) Summary of Significant Accounting Policies
- -----------------------------------------------
(a) Principles of Consolidation
--------------------------------
The accompanying balance sheet as of December 31, 1995 and statements of
operations and cash flows for all periods include the accounts of the Company
and its wholly-owned subsidiary, Diacrin Securities Corporation. All material
intercompany accounts and transactions have been eliminated in consolidation.
This subsidiary was dissolved on June 13, 1996.
(b) Depreciation and Amortization
----------------------------------
The Company provides for depreciation using the straight-line method by charges
to operations in amounts estimated to allocate the cost of these assets over a
five-year life. Amortization of equipment under capital leases and leasehold
improvements is computed using the straight-line method over the shorter of the
estimated useful life of the asset or the lease term.
(c) Research and Development
-----------------------------
Collaborative revenue under the joint venture agreement with Genzyme Corporation
and revenues from research grants are recognized as work is performed and costs
are incurred. Deferred revenue represents amounts received prior to recognition
of revenue. Research and development costs are expensed as incurred.
(d) Income Taxes
-----------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." At
December 31, 1996, the Company has a net operating loss carryforward for federal
income tax purposes of approximately $30,247,000. The difference from losses
reported for financial reporting purposes relates primarily to expenses
reflected in the financial statements not yet deductible for tax purposes. The
net operating loss carryforwards expire commencing in the year 2005 and are
subject to review and possible adjustment by the Internal Revenue Service. Net
operating loss and tax credit carryforwards may be limited in the event of
certain changes in the ownership interests of significant shareholders. The
Company believes issuance of the convertible notes payable, as well as the
initial public offering, caused a change in ownership, as defined by the Tax
Reform Act of 1986. The Company does not believe that such ownership changes
will significantly impact the company's ability to utilize the net operating
loss and tax credit carryforwards as of
F-6
42
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the date of such ownership changes. Ownership changes in future periods may
limit the Company's ability to utilize net operating loss and tax credit
carryforwards.
The components of the deferred tax amounts, carryforwards and the valuation
allowance are approximately as follows:
1995 1996
------------ ------------
Loss carryforwards $ 9,842,000 $ 12,099,000
Start-up costs 726,000 484,000
Credit carryforwards 1,205,000 1,896,000
Other temporary differences 27,000 7,000
------------ ------------
Total deferred tax assets 11,800,000 14,486,000
Less - valuation allowance (11,800,000) (14,486,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
A valuation allowance has been provided as it is uncertain if the Company will
realize the deferred tax assets. The change in the total valuation allowance
during the year ended December 31, 1996 was an increase of approximately
$2,686,000 and relates to the increase in the deferred tax asset as a result of
the net operating loss and tax credits generated during 1996.
(e) Pro Forma Net Loss per Common Share
----------------------------------------
Pro forma net loss per common share is based on the weighted average number of
common shares outstanding assuming the automatic conversion of all outstanding
shares of Series A, B and C convertible preferred stock into 6,693,121 shares of
common stock and the automatic conversion of the outstanding $7,000,000
convertible notes payable into 2,799,999 shares of common stock, both of which
occurred upon the closing of the Company's initial public offering. Common stock
issued after December 1, 1994 and common stock issuable pursuant to stock
options or warrants granted after December 1, 1994 have been reflected as
outstanding for the 1994 and 1995 periods and for the period from January 1,
1996 through the effective date of the Company's initial public offering using
the treasury stock method, as required by the Securities and Exchange
Commission. Other shares of stock issuable pursuant to stock options and
warrants have not been included as their effect would be antidilutive.
(f) Use of Estimates
---------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
(g) Reclassifications
----------------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(3) Initial Public Offering
- ----------------------------
On February 12, 1996, the Company completed an initial public offering of
2,500,000 units, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock for $16.00 per share,
for net proceeds of approximately $18.2 million. In addition, all outstanding
shares of Series A, B and C convertible preferred stock were automatically
converted into an aggregate of 6,693,121 shares of common stock and the
outstanding $7,000,000 of convertible notes payable were automatically converted
into an
F-7
43
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
aggregate of 2,799,999 shares of common stock upon the closing of the initial
public offering. On March 7, 1996, the underwriters of the offering exercised
their over-allotment option to purchase an additional 375,000 units, resulting
in additional net proceeds of approximately $2.8 million to the Company. On
August 12, 1996, the common stock and warrants underlying the units began to
trade separately.
(4) Joint Venture Agreement
- ----------------------------
In September 1996, the Company and Genzyme Corporation ("Genzyme") formed a
joint venture to develop and commercialize the Company's NeuroCell(TM)-PD and
NeuroCell(TM)-HD products for transplantation into people with advanced
Parkinson's disease and Huntington's disease, respectively. Under the terms of
the agreement, which was effective October 1, 1996, Genzyme has agreed to
provide 100% of the first $10 million in funding and 75% of the following $40
million in funding for the two products. All costs incurred in excess of $50
million would be shared equally between Genzyme and the Company in accordance
with the terms of the agreement. Any profits of the joint venture will be shared
equally by the two parties.
During the year ended December 31, 1996, the Company received $1,662,631 under
the agreement, of which $1,043,787 was recognized as revenue and $618,844 was
deferred until the work is performed.
(5) Cash Equivalents and Investments
- -------------------------------------
The Company's cash equivalents and investments are classified as
held-to-maturity and are carried at amortized cost, which approximates market
value. Cash equivalents, short-term investments and long-term investments have
maturities of less than three months, less than one year and greater than one
year, respectively. Cash and cash equivalents, short-term investments and
long-term investments at December 31, 1995 and 1996 consisted of the following:
1995 1996
---- ----
Cash and cash equivalents-
Cash $ -- $ 421
Money market mutual fund -- 1,898,920
Commercial paper 4,114,820 2,292,335
Corporate notes -- 3,117,034
---------- ----------
$4,114,820 $7,308,710
========== ==========
Short-term investments-
Commercial paper (wtd. avg. maturity of 4 months) $ -- $ 984,710
Corporate notes (wtd. avg. maturity of 8 months) -- 5,270,797
---------- ----------
$ -- $6,255,507
========== ==========
Long-term investments-
Corporate notes (wtd. avg. maturity of 14 months) $ -- $9,917,875
========== ==========
F-8
44
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) Accrued Expenses
- ---------------------
Accrued expenses consisted of the following at December 31, 1995 and 1996:
1995 1996
---- ----
Accrued clinical trials costs $ 91,591 $177,052
Accrued professional fees 330,916 118,445
Accrued interest 313,737 6,621
Accrued payroll 127,000 5,383
Accrued other 263,233 199,448
---------- --------
Total $1,126,477 $506,949
========== ========
(7) Leases
- -----------
(a) Capital Leases
------------------
On December 22, 1994, the Company sold certain laboratory equipment, with an
original cost of approximately $805,000, for $600,000. In connection with this
transaction, the Company entered into a capital lease under a master lease
agreement to lease the equipment back for payments of approximately $15,000 per
month for 48 months. Upon completion of the lease term, the Company is required
to purchase all of the equipment for $90,000 or extend the lease term for an
additional six months at approximately $15,000 per month, at which time title to
the equipment reverts back to the Company. The sale of the equipment generated a
gain of approximately $139,000 which has been offset against the cost of the
asset and will be amortized over the life of the lease in accordance with SFAS
No. 13 "Accounting for Leases". On July 1 and December 22, 1995, the Company
sold additional equipment at its original cost of approximately $142,000 and
$85,000, respectively, and entered into capital leases under the aforementioned
master lease to lease the equipment back for 48 monthly payments of
approximately $3,500 commencing July 1, 1995 and $2,100 commencing January 1,
1996. Upon completion of each lease term, the Company is required to purchase
all of the equipment for 15% of the amount financed or extend each lease term
for an additional six months, at which times title to the equipment reverts back
to the Company.
The future minimum payments under all capital lease agreements as of December
31, 1996 are as follows:
1997 $247,333
1998 337,333
1999 80,618
--------
Total minimum lease payments 665,284
Less-Amount representing interest 115,401
--------
Present value of minimum lease payments 549,883
Less-Current obligation under capital lease 179,452
--------
$370,431
========
F-9
45
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(b) Facility Lease
------------------
During 1991, the Company entered into a ten-year operating lease for a facility.
Minimum rental payments under the lease are as follows:
Rental
Commitment
----------
1997 $ 710,000
1998 710,000
1999 710,000
2000 710,000
2001 533,000
----------
$3,373,000
==========
Total rent expense for the periods ended December 31, 1994, 1995 and 1996 was
approximately $460,000, $639,000 and $700,000, respectively. These amounts are
net of sublease revenue of $307,000, $133,000 and $58,000 received from
subtenants in 1994, 1995 and 1996, respectively.
(8) Convertible Notes Payable
- ------------------------------
On May 31, 1995, the Company completed the sale of $7,000,000 of convertible
notes. The notes were due on May 31, 2000 and bore interest at 7.5% per annum,
compounded annually in arrears. Upon the approval of a majority of the
noteholders, each noteholder could elect to convert its outstanding note into
shares of Series D preferred stock at the rate of $5.00 per share.
Upon completion of the Company's initial public offering discussed in Note 3,
the outstanding principal amount of convertible notes automatically converted
into an aggregate of 2,799,999 shares of the Company's common stock.
(9) Stockholders' Equity (Deficit)
- ----------------------------------
(a) Reverse Stock Split and Amendment to Charter
------------------------------------------------
On January 25, 1996, the Company's stockholders approved a 1-for-2 reverse stock
split of the common stock. In connection with the approved reverse stock split,
the Company filed a Certificate of Amendment to the Company's Certificate of
Incorporation. Accordingly, all share and per share amounts of common stock for
all periods presented have been retroactively adjusted to reflect the reverse
stock split.
(b) Preferred Stock
-------------------
The outstanding Series A, Series B and Series C preferred stock automatically
converted into an aggregate of 6,693,121 shares of the Company's common stock
upon the closing of the Company's initial public offering discussed in Note 3.
In addition, all designated series of convertible preferred stock were
eliminated effective upon the closing of the Company's initial public offering.
As of December 31, 1996, the Company has an authorized class of undesignated
preferred stock consisting of 5,000,000 shares. The Company's Board of Directors
is authorized, subject to any limitations prescribed by law and without further
stockholder approval, to issue from time to time up to 5,000,000 shares of
preferred stock in one or more series. Each such series of preferred stock shall
have such number of shares, designations, preferences, voting powers,
F-10
46
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
qualifications and rights or privileges as shall be determined by the Board of
Directors.
(c) Warrants
------------
In November 1991, in connection with the sale of Series C convertible preferred
stock, the Company issued warrants to purchase 465,853 shares of common stock
exercisable at $7.20 per share. The warrants were exercisable commencing August
9, 1996 and expired on November 14, 1996. Warrants to purchase 427,441 shares of
common stock were exercised during 1996 for net proceeds to the Company of
approximately $3,071,000.
In December 1994, the Company issued a warrant for the purchase of common stock
in connection with a master lease agreement as discussed in Note 7(a). The
warrant is exercisable for 12,474 shares of common stock at an exercise price of
$7.92 per share. The warrant expires in December 1999.
As discussed in Note 3, the Company issued redeemable warrants in connection
with the Company's initial public offering to purchase 2,875,000 shares of
common stock at an exercise price of $16 per share, subject to certain
adjustments. The warrants may be exercised commencing August 12, 1996 and expire
on the earlier to occur of redemption of the warrant by the Company, which
option the Company may exercise (at a price of $.01 per warrant) if the average
closing price of the common stock for any 20 consecutive trading day period
exceeds 150% of the exercise price of the warrants, or December 31, 2000.
(10) Common Stock Options
- --------------------------
The Company has adopted the 1990 Stock Option Plan (the "Plan") under which the
Board of Directors is authorized to grant incentive stock options, non-qualified
stock options and stock appreciation rights to employees, directors and
consultants of the Company for up to 800,000 shares of the Company's common
stock. All options granted have 10-year terms, and the majority vest in equal
annual installments of 25% over four years of continued service from the date of
hire or grant. As of December 31, 1996, there were options to purchase 54,670
shares of common stock available for future grant under the Plan.
In December 1993, the Company granted non-qualified options, not included in the
Plan, to purchase 214,105 shares of common stock at a price of $2.50 per share
and 57,500 shares of common stock at a price of $4.00 per share to certain
advisors to the Company. These options have 10-year terms and were fully vested
upon the date of grant. In June 1994, the Company granted non-qualified options,
not included in the Plan, to purchase 45,000 shares of common stock at a price
of $8.50 per share to certain advisors to the Company. In April 1996, the
Company granted non-qualified options, not included in the Plan, to purchase
25,000 shares of common stock at a price of $9.50 per share to an executive of
the Company as an inducement to his employment. The options granted in 1994 and
1996 have 10-year terms and vest in equal annual installments of 25% over four
years of continued service from the date of grant.
In July 1994, the stockholders approved the 1994 Directors' Stock Option Plan
(the "Director Plan") which automatically grants an option to each eligible
outside director of the Company for the purchase of 7,500 shares of common stock
at an exercise price of the then fair market value. Each option granted under
the Director Plan has a 10-year term and may be exercised on a cumulative basis
as to 25% of the shares on the first anniversary of the date of grant and an
additional 25% at the end of each one-year period thereafter. In December 1996,
the Board of Directors amended the Director Plan to automatically grant 15,000
options to each new eligible outside director. The Company has reserved 30,000
shares for issuance under this plan. As of December 31, 1996, there were 16,875
options outstanding under the Director Plan at a weighted average exercise price
of $8.60 per share.
F-11
47
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes incentive and non-qualified stock option
activity, exclusive of the warrants discussed in Note 9(c):
Number of Weighted average
options exercise price
------- --------------
Balance, December 31, 1993 781,904 $1.92
Options granted 275,618 3.39
Options exercised (22,793) .13
Options canceled (276,571) 3.61
--------
Balance, December 31, 1994 758,158 1.90
Options granted 153,000 1.50
Options exercised (9,703) .96
Options canceled (107,125) 1.41
--------
Balance, December 31, 1995 794,330 1.90
Options granted 208,000 9.11
Options exercised (12,146) 1.25
Options canceled (15,689) 1.85
--------
Balance, December 31, 1996 974,495 3.44
========
Exercisable, December 31, 1996 602,590 2.03
========
Exercise prices for options outstanding as of December 31, 1996 ranged from $.02
to $9.50.
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The
fair-value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1995 and
1996, respectively: risk-free interest rates of 6.5% and 6.5%; dividend yields
of 0% and 0%; volatility factors of the expected market price of the Company's
common stock of 70% and 70%; and a weighted-average expected life of the options
of 7.5 and 7.5 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The aggregate fair
value of options granted in 1995 and 1996 was approximately $170,000 and
$1,400,000, respectively. The Company's pro forma information follows:
1995 1996
---- ----
Net loss: As reported $(5,712,717) $(4,984,799)
Pro forma (5,712,717) (5,071,094)
Net loss per share: As reported (.57) (.40)
Pro forma (.57) (.41)
F-12
48
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) Company Sponsored Research and License Agreements
- -------------------------------------------------------
The Company has been a party to several research and license agreements whereby
the Company has the right to receive exclusive worldwide licenses to develop,
manufacture and sell any products developed pursuant to licensed technologies in
exchange for agreed upon payments to fund research and specified royalties on
any sales of licensed products. Funding for research performed under these
agreements was approximately $407,000, $364,000 and $272,000 during the years
ended December 31, 1994, 1995 and 1996, respectively. The minimum future amount
payable for research under two actively funded agreements is $119,000, payable
in 1997.
The Company has also obtained from a hospital an exclusive worldwide license to
commercially develop, manufacture, use and distribute products incorporating
licensed technology in exchange for specified royalties on any future sales of
such products.
F-13