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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-14732
ADVANCED MAGNETICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2742593
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
725 CONCORD AVENUE 02138
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (617) 354-3929
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01
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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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 8, 1997, there were 6,729,526 shares of the registrant's Common
Stock, $.01 par value, outstanding. The aggregate market value of the
registrant's voting stock held by nonaffiliates as of December 8, 1997 was
approximately $55,883,912.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, scheduled to be held on February 3, 1998, are incorporated by
reference in Part III hereof.
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PART I
ITEM 1. BUSINESS:
COMPANY OVERVIEW
Advanced Magnetics, Inc., a Delaware corporation ("Advanced Magnetics" or
the "Company"), develops, manufactures and markets organ-specific contrast
agents to improve the diagnostic capabilities of soft tissue magnetic resonance
imaging ("MRI") scans and is developing targeted drug delivery platforms that
deliver therapeutics directly to the liver and other organs including lymph
nodes. Sales of the Company's liver contrast agent, Feridex I.V., have commenced
in Europe and the United States. In September 1997, sales of Feridex I.V.
commenced in Japan. GastroMARK, used for marking of the bowel in MRI procedures,
has been approved for marketing in several European countries and Canada, and
sales commenced in the United States in April 1997. With respect to Combidex,
the Company's contrast agent for the liver, spleen, and lymphatic system, the
Company has completed Phase III trials for Combidex in the United States for
imaging liver lesions and is currently in Phase III trials for lymph node
imaging. The Company hopes to submit a New Drug Application ("NDA") to the
United States Food and Drug Administration "FDA" for both indications in late
1998 or early 1999. Advanced Magnetics is also applying its liver-targeting
technology and expertise to the delivery of therapeutics to the liver.
MRI is a diagnostic imaging technique that is used to identify internal
abnormalities and changes in structure. Contrast agents increase the usefulness
of MRI by allowing radiologists to differentiate structures and organs with
greater diagnostic confidence. The Company believes that MRI studies of the
liver and lymph nodes produced with contrast agents are clearer and permit the
identification of smaller abnormalities than images produced by MRI studies
without contrast agents or imaging using contrast enhanced computed tomography
("CECT"). MRI contrast agents frequently allow for more accurate diagnosis and
monitoring of treatment results and may be a cost-effective way to assess
medical treatments and to improve patient outcomes. Currently, the primary use
of MRI is for studies of the central nervous system. The Company believes that
the development of effective contrast agents should increase the use of MRI as a
diagnostic imaging technique and allow MRI to be used for a wider range of
applications, in turn generating additional demand for MRI contrast agents.
However, in an era of increasing cost containment pressures, adoption of new
imaging techniques may be slow or may not occur.
Feridex I.V. is the first organ-specific MRI contrast agent designed
specifically for the liver and is marketed in the United States, Europe and
Japan. The liver and the lymphatic system are among the principal sites for
metastasis of many common cancers (including colon, prostate and breast cancer).
CECT is currently the primary imaging technique used to confirm a preliminary or
suspected diagnosis of liver cancer. With respect to the lymphatic system, there
currently are no effective imaging techniques. An MRI contrast agent that
localizes to and causes contrast enhancement of the lymph nodes, such as the
Combidex product the Company has under development, could allow for more
accurate disease diagnosis and monitoring of treatment results. GastroMARK
enhances the contrast between the bowel and other abdominal structures, and
could ultimately increase the use of MRI as an imaging technology for the
abdomen.
To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These relationships, both in the United States and
abroad, include: (i) Guerbet S.A. ("Guerbet"), a leading European producer of
contrast agents, in Western Europe and Brazil; (ii) Eiken Chemical Co., Ltd.
("Eiken"), one of Japan's leading medical diagnostics manufacturers, in Japan;
(iii) Berlex Laboratories, Inc. ("Berlex"), the leading marketer of MRI contrast
agents, in the United States; and (iv) Mallinckrodt Inc. ("Mallinckrodt"), a
leading manufacturer of contrast agents, in the United States, Canada and
Mexico.
The Company's expertise in organ-specific technology provides it with
biopharmaceutical opportunities beyond its core MRI contrast agent products.
Advanced Magnetics is developing targeted therapeutics technology for the
treatment of liver diseases. The Company believes that arabinogalactan, a
naturally-occurring polysaccharide that binds to the asialoglycoprotein ("ASG")
receptor found in abundance on hepatocytes, the principal cells comprising the
liver, has commercial promise in drug delivery. Advanced
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Magnetics hopes to study the efficacy of therapeutic agents combined with
arabinogalactan for the treatment of liver diseases through strategic alliances
with other pharmaceutical companies that the Company may establish.
Advanced Magnetics' knowledge and experience in diagnostics, combined with
the experience of senior management in the diagnostic testing area led to the
acquisition of 81% of the capital stock of Kalisto Biologicals, Inc. ("Kalisto")
in October 1997. Kalisto is an early-stage food testing and veterinary
diagnostics company.
In addition, in September 1997 the Company entered into an option agreement
with Cavitation Control Technology, Inc. ("CAV-CON") to purchase the worldwide
technology rights to CAV-CON's lipid micro-bubble technology.
The Company was incorporated in Delaware in 1981. The Company's principal
offices are located at 61 Mooney Street, Cambridge, Massachusetts 02138, and its
telephone number is (617) 497-2070.
MRI CONTRAST AGENTS
OVERVIEW
Diagnostic Imaging. Diagnostic imaging is generally a non-invasive method
to visualize internal structures, abnormalities or anatomical changes in order
to diagnose disease and injury. Today, the most widely accepted imaging
techniques include x-rays, ultrasound, nuclear medicine, Computerized Tomography
("CT") and MRI. Since the introduction of x-rays, the need for increasingly
accurate and detailed non-invasive visualization of soft tissue has increased.
For example, diagnostic imaging frequently is used to determine whether a cancer
has metastasized and to assist physicians in determining whether a treated
cancer has recurred and the location of metastatic tumors. In addition,
diagnostic imaging is used in the diagnosis of disease and injury conditions
affecting the cardiovascular and central nervous systems and certain joints,
such as the knee and shoulder. In 1994, over 76 million soft tissue and organ
imaging procedures were performed in the United States. The choice of diagnostic
imaging technique to be used in any particular circumstance depends upon a
variety of factors, including the particular disease or condition to be studied,
image quality, availability of imaging machines, availability of contrast agents
and cost. There is no imaging technique that is considered superior to all
others for most or all applications.
Contrast agents play a significant role in improving the quality of
diagnostic images by increasing contrast between different internal structures
or types of tissues in various disease states and medical conditions of
interest. The availability of an effective contrast agent often determines the
choice of imaging technique for a particular procedure. Consequently, contrast
agents, which are administered intravenously or orally, are widely used when
available. Currently available imaging techniques can be of limited usefulness
in visualizing certain soft-tissue structures. For example, clinically useful
diagnostic imaging of small lesions in lymph nodes, a common site of metastasis
for some frequently occurring cancers such as breast cancer, is not currently
available because, the Company believes, there are no effective contrast agents
for differentiating cancerous lymph nodes from other nodes.
Magnetic Resonance Imaging. Introduced in the 1980's, MRI is the
diagnostic imaging technique of choice for the central nervous system and is
widely used for the imaging of ligaments and tendons. MRI, which represents the
first major advance in imaging since the advent of CT scanning, provides
high-quality spatial resolution and does not use radiation. In MRI procedures,
the patient is placed within the core of a large magnet where radio frequency
signals are transmitted into the patient's body. The interaction of the radio
frequency signal with the patient's body produces signals that are processed by
a computer to create cross-sectional images. MRI contrast agents currently
marketed in the United States are used primarily in imaging the central nervous
system.
TECHNOLOGY
Advanced Magnetics' core imaging agent technology is based on the design
and manufacture of extremely small, polysaccharide-coated superparamagnetic iron
oxide particles of controlled sizes. The
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superparamagnetic particles range in size from approximately one-thousandth to
one-twentieth the size of a normal red blood cell. When placed in a magnetic
field, superparamagnetic iron oxide particles become strongly magnetic, but do
not retain their magnetism once the field is removed. The powerful magnetic
properties of the Company's iron oxide particles result in images that show
greater soft tissue contrast to increase the information available to the
reviewing radiologist. The Company's technology and expertise enable it to
synthesize, sterilize and stabilize superparamagnetic particles in a manner
necessary for their use in pharmaceutical products as MRI contrast agents to aid
in the diagnosis of cancer and other diseases. The Company's rights to its
contrast agent technology are derived from and protected by license agreements,
patents, patent applications and trade secrets. See "Patents and Trade Secrets."
TARGETED DRUG DELIVERY PLATFORM
OVERVIEW
Effective treatment of organ-specific diseases is often limited by the
inability to deliver sufficient quantities of therapeutic pharmaceuticals to the
affected organ without creating unacceptable levels of toxicity in the rest of
the body. The Company believes the treatment of liver diseases and other
organ-specific diseases would be significantly improved by delivering
therapeutics to the organ while limiting the exposure of the rest of the body to
the drug. The Company discovered that arabinogalactan, a compound it studied to
target contrast agents to the liver, could also be useful in delivering
therapeutic agents to hepatocytes through the asialoglycoprotein ("ASG")
receptor. Hepatocytes are cells which generally comprise approximately 95% of
the total cells of the liver but do not exist in the rest of the body. The
Company has developed several drug conjugates that are in the pre-clinical stage
for the treatment of liver diseases, including hepatitis B.
TECHNOLOGY
The Company's drug delivery technology includes joining a therapeutic agent
to a targeting agent, which binds specifically with certain receptors on the
surface of cells. Receptors are specialized protein structures that will only
bind with specific molecules. Certain receptors are prevalent only or primarily
on specific kinds of cells. For example, the ASG receptor exists primarily on
hepatocytes. After binding with the receptor, the targeting agent and an
attached pharmaceutical are transported into the cell, where the pharmaceutical
causes a therapeutic effect. The Company believes that targeted drug delivery
based on the binding action of targeting agents to receptors offers the
possibility of delivering effective therapeutic doses to affected cells without
general distribution of toxic agents throughout the body.
In its first targeted drug delivery proof of principle project, the Company
has completed animal testing of a potential therapeutic product for hepatitis B
composed of arabinogalactan and vidarabine monophosphate ("AraAMP"). Vidarabine
("AraA"), an antiviral agent which is used in the United States and abroad for
the treatment of herpes simplex, has not been approved for treatment of
hepatitis B in the United States because, although it is an effective agent
against the hepatitis virus, when administered systemically in an unconjugated
form, it is often toxic to the bone marrow, blood cells and peripheral nervous
system in the dosage regimen necessary to treat the hepatitis B virus. AraA and
other nucleoside products must be phosphorylated with three phosphate ions in
order to have a therapeutic effect. When AraA is injected directly, however,
many molecules of AraA do not become phosphorylated. The Company believes that
much of the toxicity associated with AraA results from toxic compounds created
when the drug breaks down in the body. The Company has discovered that AraA,
when phosphorylated with one phosphate (monophosphate) and chemically linked
with arabinogalactan prior to injection, shows far greater therapeutic effect in
animals and reduced toxicity. Toxicity is reduced because (i) less therapeutic
compound is needed since AraAMP is directed by the arabinogalactan to
hepatocytes through the ASG receptor, (ii) the probability of successful
triphosphorylation is increased by the targeted delivery of the monophosphate to
the cell and (iii) the arabinogalactan AraAMP conjugate does not, the Company
believes, metabolize into any toxic product during its short blood half-life.
The Company believes that the delivery and use enhancements seen when
AraAMP is attached to arabinogalactan may be obtained with other therapeutic
agents. The attachment of a variety of therapeutic
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agents to arabinogalactan, such as ribavirin and acyclovir, is an active area of
research for Advanced Magnetics and may lead to a series of
arabinogalactan-delivered pharmaceuticals for the treatment of such liver
diseases as hepatitis B, hepatitis C, hepatitis D and liver cancer. The Company
is attempting to establish strategic alliances with other pharmaceutical
companies to exploit the advantages of its drug delivery platform and
polysaccharide conjugation technology.
The Company holds three United States patents and a notice of allowance for
a European patent covering the delivery of therapeutic agents with
arabinogalactan. A fourth patent covering the use of arabinogalactan with
radiotherapy has issued in the United States. The Company has also developed a
proprietary purification scheme for purifying arabinogalactan that enables it to
manufacture a pharmaceutical grade of arabinogalactan suitable for use in
therapeutic products. See "Patents and Trade Secrets."
PRODUCTS UNDER DEVELOPMENT
The following table summarizes potential applications, marketing partners
and the current United States and foreign status for each of the Company's
products.
ADVANCED MAGNETICS PRODUCTS UNDER DEVELOPMENT
MARKETING
PRODUCT APPLICATIONS PARTNERS UNITED STATES STATUS FOREIGN STATUS
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CONTRAST AGENTS
Feridex I.V. Diagnosis of liver Berlex (United Marketing of product Approved and marketed
lesions States), Eiken began in October 1996. in most EU countries.
(Japan), Guerbet Launched in Japan in
(Western Europe September 1997.
and Brazil)
Combidex Diagnosis of Guerbet (Western Phase III liver/spleen Phase III clinical
lesions of the Europe and trials completed. Phase trials for lymphatic
liver, spleen and Brazil), Eiken III clinical trials for imaging, currently
lymphatic system (Japan) lymph nodes, currently underway, to be
underway, to be completed in 1998. CPMP
completed in early 1998. filing anticipated in
NDA anticipated late 1999.
1998/early 1999.
GastroMARK Marking of the Guerbet (Western Marketing of product Approved and marketed
bowel in abdominal Europe and began in April 1997. in many European
imaging Brazil), countries, including
Mallinckrodt France. Approved in
(United States, Canada.
Canada and
Mexico)
TARGETED DRUG DELIVERY PRODUCTS
AraAMP- Therapeutic for -- Pre-clinical research --
arabinogalactan hepatitis B completed. Strategic
conjugate partner being sought.
Ribavirin- Therapeutic for -- Pre-clinical research in --
arabinogalactan hepatitis C progress.
conjugate
"Phase I clinical trials" refers to the first phase of human pharmaceutical
clinical trials in which testing for the safety and tolerance of the product is
conducted on a small group of normal subjects. "Phase II clinical trials" and
"Phase III clinical trials" refer to the second and third phases of human
clinical trials, where preliminary dosing and efficacy studies are conducted and
where additional testing for efficacy and safety is conducted on an expanded
patient group. For a further description of the substantial regulatory
requirements subsequent to the completion of preclinical testing, see
"Government Regulation and Reimbursement."
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CONTRAST AGENTS
Feridex I.V. The liver is a principal site for metastasis of primary
cancer originating in other parts of the body, particularly cancer of the colon,
a common cancer in the United States. Diagnosis of metastasis at an early stage
can be difficult because small tumors are frequently not accompanied by
detectable physical symptoms. Identification of metastatic tumors in the liver
has a significant impact on physicians' treatment plans for cancer. The Company
believes that Feridex I.V. will allow for MRI scans of liver tumors that may not
be visible with CT scanning or ultrasound, the most widely used techniques for
liver imaging, and that a substantial number of liver scans will now be done
using MRI instead of, or in addition to, CT scanning and ultrasound.
Marketing of Feridex I.V. began in October 1996 by Berlex Laboratories in
the United States. Feridex I.V. was approved in August 1994 by the European
Union's (the "EU") Committee for Proprietary Medicinal Products and most of the
member states of the EU have since issued local approvals to market the product.
Guerbet has begun marketing the product in Europe. Eiken received approval for
marketing the product in Japan in July 1997 and received pricing approval in
September 1997. Feridex I.V. was launched in Japan in September 1997 through
Eiken's affiliate, Tanabe Seiyaku, Ltd. Berlex Laboratories is the Company's
exclusive marketing partner for Feridex I.V. in the United States. See
"Licensing and Marketing Arrangements."
Combidex. The Company believes that Combidex will be useful in diagnostic
imaging of the liver, spleen and lymph nodes. Lymph nodes are frequently sites
for metastases of different types of cancer, particularly breast cancer and
prostate cancer, and efficient imaging of lymph nodes could play a major role in
determining appropriate courses of treatment. There are currently no available
noninvasive methods for distinguishing between lymph nodes enlarged by tumorous
infiltration as opposed to inflammation. Since CT, the only imaging modality
currently used for imaging lymph nodes, cannot distinguish between inflamed
nodes and cancerous nodes, the current practice is to assume that enlarged nodes
are cancerous and to perform a biopsy to establish their true status. Nodes less
than one centimeter in size are assumed to be normal. The Company believes that
Combidex will enable doctors using MRI to distinguish between cancerous and non-
cancerous enlarged lymph nodes because its accumulation in normal lymph node
tissue permits differentiation between normal and tumor-infiltrated nodes. The
Company also believes that Combidex can be used to identify tumors in the liver
and spleen because tumors generally are hypovascular when compared to
surrounding tissues.
The Company has completed Phase III studies using Combidex to image the
liver. Phase III trials using Combidex to image lymph nodes are currently
underway. The Company expects the lymph node trials to be completed in 1998. The
Company expects to file an NDA for both indications in late 1998 or early 1999.
Of the approximately 576 patients and subjects who were administered
Combidex during its product development, one suffered an allergic reaction and
died in January 1996. There can be no assurance that this death or any
subsequent death that may occur during the clinical trials for this product
would not have an adverse effect on the Company's ability to continue clinical
trials or obtain regulatory approvals for Combidex or otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factor-Potential Product Liability; Uncertainties Related
to Insurance."
The Company has granted exclusive rights to market and sell Combidex in
Western Europe and Brazil to Guerbet. See "Licensing and Marketing
Arrangements."
GastroMARK. MRI imaging of organs and tissues in the abdomen without
contrast agents is difficult because these organs and tissues cannot be easily
distinguished from the loops of the bowel. GastroMARK, the Company's oral
contrast agent for marking of the bowel, when ingested, flows through and
darkens the bowel. By more clearly identifying the intestinal loops, GastroMARK
improves visualization of adjacent abdominal tissues, including the pancreas and
pelvis.
In April 1997, the Company's marketing partner, Mallinckrodt, launched
GastroMARK in the United States. The Company has licensed the manufacturing and
marketing rights to GastroMARK on an exclusive
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basis to Guerbet in Western Europe and Brazil. During fiscal 1993, Guerbet
received marketing approval for the product in several European countries
including France, and marketing of the product in Europe has begun. See
"Licensing and Marketing Arrangements."
TARGETED DRUG-DELIVERY PRODUCTS
The Company believes that arabinogalactan will prove useful in delivering
therapeutic pharmaceuticals to the liver because of its lack of toxicity and
high specificity for hepatocytes. The Company believes that the delivery and use
enhancements seen in pre-clinical research using araAMP may be obtainable with
other therapeutic agents. The attachment of a variety of therapeutic agents to
arabinogalactan, such as ribavirin and acyclovir, is an active area of research
for Advanced Magnetics and may lead to a series of arabinogalactan-based
pharmaceuticals for the treatment of such liver diseases as hepatitis B,
hepatitis C, hepatitis D and liver cancer. The Company is seeking strategic
partners in this area.
LICENSING AND MARKETING ARRANGEMENTS
BERLEX. In February 1995, the Company entered into a license and marketing
agreement and supply agreement with Berlex, granting Berlex exclusive marketing
rights to Feridex I.V. in the United States. Under the terms of the agreements,
Berlex paid a $5,000,000 license fee upon execution of the agreements and paid
an additional $5,000,000 license fee in October 1996 upon the Company's delivery
of FDA-approved product to Berlex. In addition, the Company receives payments
for manufacturing the agent and royalties on sales of the agent. These
agreements expire in 2010 but can be terminated earlier upon the occurrence of
certain specified events.
GUERBET. In 1987, the Company entered into a supply and distribution
agreement with Guerbet. Under this agreement, Guerbet has been appointed the
exclusive distributor of Feridex I.V. in Western Europe (under the tradename
Endorem) and Brazil. Guerbet is responsible for conducting clinical trials and
securing the necessary regulatory approvals in the countries in its territory.
Guerbet paid the Company license fees and is required to pay royalties based on
sales. The Company is entitled to receive an additional percentage of Guerbet's
sales in return for selling to Guerbet its requirements for the active
ingredient used in Endorem. The agreement terminates on the later of (i) the
expiration of the last to expire technology patent or (ii) ten years after the
date all necessary approvals are obtained in France.
In 1989, the Company entered into a second supply and distribution
agreement with Guerbet granting Guerbet an exclusive right in Western Europe
(under the tradename Lumirem) and Brazil to manufacture and sell GastroMARK and
any future Advanced Magnetics MRI contrast agents that Guerbet decides to
market, including Combidex. Under the terms of this second distribution
agreement, Guerbet paid the Company a license fee in 1989. In addition, Guerbet
will pay the Company both royalties and a percentage of net sales as the
purchase price for the active ingredient. The Company is required to sell to
Guerbet its requirements for the active ingredient used in the contrast agents.
The agreement is perpetual but terminable upon specified events such as
nonperformance, insolvency or assignment without consent.
MALLINCKRODT. In 1990, the Company entered into a manufacturing and
distribution agreement for GastroMARK with Mallinckrodt Medical, Inc. Under this
agreement, Mallinckrodt received the exclusive right to manufacture and
co-market GastroMARK in the United States, Canada and Mexico. The Company may
also sell the product through its own direct sales personnel. Mallinckrodt has
paid $1,850,000 under the contract, including $500,000 during fiscal year 1997
upon FDA approval of the NDA. Additionally, the Company will receive royalties
based on Mallinckrodt's GastroMARK sales and a percentage of sales for supplying
the active ingredient. The agreement is perpetual but terminable upon specified
events such as nonperformance, insolvency or assignment without consent.
EIKEN. In 1988, the Company entered into a manufacturing and distribution
agreement with Eiken, granting Eiken the exclusive right to manufacture and
distribute Feridex I.V. in Japan. Eiken is responsible for conducting clinical
trials and securing the necessary regulatory approval in Japan. Under the terms
of the agreement, Eiken paid the Company a license fee of $1,500,000. In
addition, Eiken is required to pay royalties
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based upon sales. The agreement terminates on the later of (i) the expiration of
the last to expire technology patent or (ii) ten years after the date all
necessary approvals are obtained.
In 1990, the Company entered into a manufacturing and distribution
agreement with Eiken, granting Eiken the exclusive right in Japan to manufacture
and distribute GastroMARK and Combidex. In addition, for a period of 180 days
after the Company files an NDA for any future Advanced Magnetics MRI contrast
agents Eiken has the right of first refusal to manufacture and distribute such
product in Japan. Upon execution of this agreement, Eiken paid the Company a
license fee of $1,000,000. Additionally, Eiken agreed to pay the Company
royalties on sales of all products sold by Eiken under the agreement. The
agreement is perpetual but terminable upon specified events such as
nonperformance, insolvency or assignment without consent. Due to market
conditions in Japan, Eiken has decided not to market GastroMARK.
SQUIBB DIAGNOSTICS. In 1991, the Company entered into agreements with
Squibb Diagnostics, a division of Bristol-Myers Squibb Co. ("Squibb
Diagnostics") covering certain technology and the manufacturing and marketing of
certain contrast agents including Combidex, which agreements have since been
terminated. Under agreements returning the products and technology rights to
Advanced Magnetics, the Company is obligated to pay Squibb Diagnostics up to a
maximum of $2,750,000 in royalties in connection with product sales of Combidex.
MANUFACTURING AND SUPPLY ARRANGEMENTS
The Company's Cambridge, Massachusetts facility is registered with the FDA
and is subject to "Good Manufacturing Practices" ("GMP") as prescribed by the
FDA. The Company currently manufactures Feridex I.V. bulk product for sale to
Guerbet, manufactures Feridex I.V. finished product for sale to Berlex and
GastroMARK bulk product for sale to Guerbet and Mallinckrodt. The Company also
manufactures Combidex for pre-clinical and clinical testing. The Company expects
to utilize contract manufacturers from time to time if appropriate.
The manufacture of the Company's therapeutic products currently in research
and development would require the continuous availability of commercial grade
arabinogalactan, a naturally occurring polysaccharide that is commercially
available, which the Company purifies at its Cambridge facility into a
pharmaceutical grade material.
PATENTS AND TRADE SECRETS
The Company considers the protection of its technology to be material to
its business. The Company's policy is to aggressively protect its competitive
technological position by a variety of means, including applying for patents in
the United States and in appropriate foreign countries. The Company has been
granted 26 United States patents and has pending several patent applications.
The Company has filed counterpart patent applications in several foreign
countries. In addition, the Company is a party to various license agreements,
including nonexclusive cross-licensing arrangements covering MRI imaging
technology with Nycomed Imaging A.S. of Oslo, Norway ("Nycomed") and Schering AG
("Schering"). The Company's proprietary position depends in part on these
licenses, and termination of the licenses for any reason could have a material
adverse effect on the Company by limiting or prohibiting the commercial sale of
its products. Although the Company believes that further patents will issue on
pending applications, no assurance to this effect can be given.
The patent positions of pharmaceuticals and biopharmaceutical firms,
including Advanced Magnetics, are generally uncertain and involve complex legal
and factual questions. There can be no assurance that any claims which are
included in pending or future patent applications will issue, that any issued
patents will provide the Company with competitive advantages or will not be
challenged by others, or that the existing or future patents of third parties
will not have an adverse effect on the ability of the Company to commercialize
its products.
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The Company believes it has a strong intellectual property position
regarding arabinogalactan for use in targeting therapeutic compounds. It has
three U.S. patents and a notice of allowance for a European patent covering the
delivery of therapeutic agents with arabinogalactan. A fourth patent covering
the use of arabinogalactan with radiotherapy has issued in the United States.
Additional therapeutic applications are pending, but there is no assurance that
any additional patents will issue to the Company.
The Company also intends to rely on its trade secrets, know-how, continuing
technological innovations and licensing opportunities to maintain and develop
its competitive position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not independently
develop the same or similar information, design around the patents, obtain
unauthorized access to the Company's proprietary information or misuse
information to which the Company has granted access. Litigation may be necessary
to enforce any patents issued to the Company or to determine the scope of other
person's proprietary rights in court or administrative proceedings. Any
litigation or administrative proceeding could result in substantial costs to the
Company and distraction of the Company's management. An adverse ruling in any
litigation or administrative proceeding could have a material adverse effect on
the Company's business, financial condition and results of operations.
COMPETITION
The pharmaceutical and biopharmaceutical industries are subject to intense
competition and rapid technological change. The Company expects competition in
the development of new MRI contrast agents to increase substantially. Certain
companies, including the Company's collaborators, which have greater human and
financial resources dedicated to product development and clinical testing than
the Company, are developing MRI contrast agents. The Company's collaborators are
not restricted from developing and marketing competing products and as a result
of certain cross license agreements among the Company and certain of its
competitors (including one of its collaborators), the Company's competitors will
be able to utilize certain of the Company's technology in the development of
competing products. There can be no assurance that the Company will be able to
compete successfully with these companies.
The Company believes that its ability to compete successfully in the MRI
contrast agent market will depend on a number of factors including the
development of efficacious products, timely receipt of regulatory approvals and
product manufacturing at commercially acceptable costs. In addition, the
Company's MRI contrast agents represent a new approach to imaging certain organs
and market acceptance of both MRI as an appropriate technique for such organs,
and the Company's products as part of such imaging is critical to the success of
its contrast agent products. Although the Company believes that its contrast
agents will offer advantages over competing MRI, CT or X-ray contrast agents,
there can be no assurance that there will be greater acceptance of its products
over other contrast agents. In addition, to the extent that other diagnostic
techniques such as CT and X-ray may be perceived as providing greater value than
MRI, any corresponding decrease in the use of MRI could have an adverse effect
on the demand for the Company's contrast agent products. There can be no
assurance that the Company will be able to successfully develop efficacious
products, obtain timely regulatory approvals, manufacture products at
commercially acceptable costs, gain satisfactory market acceptance or otherwise
successfully compete in the future.
There are several MRI contrast agents for imaging lesions of the liver in
various phases of human testing in the United States and abroad. Schering has
two products in development, Resovist, a carboxydextran superparamagnetic iron
oxide formulation, and Eovist, a chelated gadolinium compound. The Company
believes that Resovist is nearing approval in Europe and that Eovist has
completed Phase II trials in Europe. The Company does not know the status of
Resovist or Eovist in Japan. On December 1, 1997 the FDA approved Teslascan,
Nycomed's MnDPDP product for MRI of liver lesions. The Company believes that
Bracco S.p.A. is conducting clinical trials in Europe and the United States for
Gadolinium BOPTA, a chelated gadolinium compound for MR imaging of liver
lesions. The Company does not know the status of this product.
In the area of oral contrast agents, Pharmacyclics, Inc. filed an NDA in
late 1995 for GADOLITE, its gadolinium-based product candidate. Bracco S.p.A.
has filed an NDA in the United States for Lumenhance,
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its liposomal encapsulated oral manganese compound. In October 1997, the FDA
approved Ferriselz(R), an oral MRI agent from Oncomenbrane Inc. The Company
believes that GastroMARK, being first to market with a safe and effective
product should have a competitive advantage. There can be no assurance, however,
that these competitive products or other products developed by the Company's
competitors will not be more effective than any products developed by the
Company or render the Company's technology obsolete.
Many of the Company's competitors have substantially greater capital,
research and development, manufacturing and marketing resources and experience
than the Company. Such companies may succeed in developing technologies and
products that are more effective or less costly than any that may be developed
by the Company and may also prove to be more successful than the Company in
production and marketing. There can be no assurance that Advanced Magnetics will
successfully develop any proposed drug delivery products, obtain required
regulatory approvals or gain satisfactory market acceptance for such products.
Furthermore, there can be no assurance that products developed by the Company's
competitors will not be more effective than any products developed by the
Company, render the Company's technology obsolete or gain greater market
acceptance.
GOVERNMENT REGULATION AND REIMBURSEMENT
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. Pharmaceutical products intended for therapeutic use in
humans are principally governed by FDA regulations in the United States and by
comparable government regulations in foreign countries. Various federal, state
and local statutes and regulations also govern or influence the research and
development, manufacturing, safety, labeling, storage, record-keeping,
distribution and marketing of such products. The process of completing
pre-clinical and clinical testing and obtaining the approval of the FDA and
similar health authorities in foreign countries to market a new drug product
requires a significant number of years and the expenditure of substantial
resources. Failure to obtain requisite governmental approvals or failure to
obtain approvals of the scope requested will delay or preclude the Company or
its licensees or collaborators from marketing the Company's products or limit
the commercial use of the products and will have a material adverse effect on
the Company's business, financial condition and results of operations.
The steps required by the FDA before a new human pharmaceutical product,
including a contrast agent or therapeutic drug, may be marketed in the United
States include: (a) pre-clinical laboratory tests, in vivo pre-clinical studies
and formulation studies; (b) the submission to the FDA of a request for
authorization to conduct clinical trials subject to an Investigational New Drug
("IND") exemption, to which the FDA must not object, before human clinical
trials may commence; (c) adequate and well-controlled human-clinical trials to
establish the safety and efficacy of the drug for its intended use; (d)
submission to the FDA of an NDA; (e) approval and validation of manufacturing
facilities and production uses of the pharmaceutical; and (f) review and
approval of the NDA by the FDA before the drug product may be shipped or sold
commercially.
Pre-clinical tests include the laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Pre-clinical test results are submitted to the FDA as a
part of the IND. Clinical trials are typically conducted in three sequential
phases, although the phases may overlap. Phase I involves the initial
administration of the drug to a small group of human beings, either healthy
volunteers or patients, to test for safety, dosage tolerance, absorption,
distribution, metabolism, excretion and clinical pharmacology and, if possible,
early indications of effectiveness. Phase II involves studies in a small sample
of the actual intended patient population to assess the preliminary efficacy of
the investigational drug for a specific clinical indication, to ascertain dose
tolerance and the optimal dose range and to collect additional clinical
information relating to safety and potential adverse effects. Once an
investigational drug is found to have some efficacy and an acceptable clinical
safety profile in the targeted patient population, Phase III studies can be
initiated to further establish safety and efficacy of the investigational drug
in a broader sample of the target patient population. The results of the
clinical trials together with the results of the pre-clinical tests and complete
manufacturing information are submitted in an
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NDA to the FDA for approval. The FDA may suspend clinical trials at any point in
this process if it concludes that patients are being exposed to an unacceptable
health risk.
Both before and after approval is obtained, a product, its manufacturer,
and the holder of the NDA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the preclinical and clinical testing process, the approval process, or
thereafter (including after approval) may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or NDA holder. In
addition, later discovery of previously unknown problems may result in
restrictions on such product, manufacturer, or NDA holder, including withdrawal
of the product from the market. Also, new government requirements may be
established that could delay or prevent regulatory approval of the Company's
products under development.
If an NDA is submitted to the FDA, there can be no assurance that such
application will be reviewed and approved by the FDA in a timely manner, if at
all. Among the conditions for NDA approval is the requirement that a prospective
manufacturer's manufacturing procedures conform to GMP requirements, which must
be followed at all times. In complying with those requirements, manufacturers
(including a drug sponsor's third-party contract manufacturers) must continue to
expend time, money and effort in the area of production and quality control to
ensure compliance. Even after initial FDA approval has been obtained, further
studies, including post-market studies, may be required to provide additional
information. Results of such post-market programs may limit or expand the
further marketing of the product. Even if initial marketing approval is granted,
such approval may entail limitations on the indicated uses for which a product
may be used and impose labeling requirements which may adversely impact the
Company's ability to market its products. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
Among the conditions for NDA approval is the requirement that a prospective
manufacturer's manufacturing procedures conform to GMP requirements, which must
be followed at all times. In complying with those requirements, manufacturers
(including a drug sponsor's third-party contract manufacturers) must continue to
expend time, money and effort in the area of production and quality control to
ensure compliance. Domestic manufacturing establishments are subject to periodic
inspections by the FDA in order to assess, among other things, GMP compliance.
To supply product for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in certain of such countries under
reciprocal agreements with the FDA. Failure to maintain compliance with GMP
regulations and other applicable manufacturing requirements of various
regulatory agencies could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is also subject to foreign regulatory requirements governing
development, manufacturing and sales of pharmaceutical products that vary widely
from country to country. Approval of a drug by applicable regulatory agencies of
foreign countries must be secured prior to the marketing of such drug in those
countries. The regulatory approval process may be more or less rigorous from
country to country and the time required for approval may be longer or shorter
than that required in the United States.
The Company is subject to regulation under local, state and Federal law
regarding occupational safety, laboratory practices, handling of chemicals,
environmental protection and hazardous substances control. The Company possesses
a Byproduct Materials License from the Nuclear Regulatory Commission ("NRC") for
receipt, possession, manufacturing and distribution of radioactive materials.
The Company holds Registration Certificates from the United States Drug
Enforcement Administration and the Commonwealth of Massachusetts Department of
Public Health for handling controlled substances. The Company is registered with
the United States Environmental Protection Agency ("EPA") as a generator of
hazardous waste. All hazardous waste disposal must be made in accordance with
EPA and NRC requirements. The Company is subject to the regulations of the
Occupational Safety and Health Act and has in effect a safety program to assure
compliance with these regulations.
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In both the United States and foreign markets, the Company's ability to
commercialize its products successfully also depends in part on the extent to
which reimbursement for the costs of such products and related treatments will
be available from government health administration authorities, private health
insurers and other third-party payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and products used
for indications not approved by the FDA. If adequate reimbursement levels are
not maintained by government and other third-party payors for the Company's
products and related treatments, the Company's business, financial condition and
results of operations may be materially adversely affected.
MAJOR CUSTOMERS
One customer accounted for approximately 54% of the Company's revenues in
fiscal 1997. Revenues in fiscal 1997, 1996 and 1995, from customers and
licensees outside of the United States, principally in Europe, accounted for 6%,
3% and 23%, respectively, of the Company's total revenues.
YEAR 2000 COMPLIANCE
The Company does not expect that Year 2000 issues will have a material
effect on the Company's results of operations or financial condition.
EMPLOYEES
As of December 8, 1997, the Company had approximately 59 full-time
employees, 49 of whom were engaged in research and development. The Company's
success depends in part on its ability to recruit and retain talented and
trained scientific personnel. The Company has been successful to date in
obtaining such personnel, but there can be no assurance that such success will
continue.
None of the Company's employees is represented by a labor union, and the
Company considers its relations with its employees to be excellent.
PRODUCT LIABILITY INSURANCE
The use of any of the Company's potential products in clinical trials and
the sale of any approved products may expose the Company to liability claims
resulting from the use of products or product candidates. These claims might be
made by customers (including corporate partners), clinical trial subjects,
patients, pharmaceutical companies or others. At this time, the Company is a
defendant in a lawsuit arising from the death of a clinical trial subject who
was administered Combidex and suffered an allergic reaction. The Company
maintains product liability insurance coverage for claims such as this arising
from the use of its products in clinical trials, as well as claims arising from
FDA-approved commercial usage. However, coverage is becoming increasingly
expensive and no assurance can be given that the Company will be able to
maintain insurance at a reasonable cost. There can be no assurance that the
Company's insurance will provide sufficient amounts to protect the Company
against losses due to liability that could have a material adverse effect on the
Company's business, financial conditions and results of operations. The Company
maintains product liability insurance covering the sale of its products approved
for commercial marketing but there can be no assurance that the Company will be
able to obtain commercially reasonable product liability insurance for any
product approved for marketing in the future or that insurance coverage and the
resources of the Company would be sufficient to satisfy any liability resulting
from product liability claims. A product liability claim or series of claims
brought against the Company could have a material adverse effect on its
business, financial condition and results of operations, whether or not the
plaintiffs in such claims ultimately prevail.
ITEM 2. PROPERTIES:
The Company's principal pharmaceutical manufacturing and research and
development operations are located in a modern Company-owned building of
approximately 25,000 square feet in Cambridge, Massachusetts. The Company has
leased two additional premises in Cambridge of approximately 18,000 total square
feet to be used for manufacturing, warehousing and executive office space. One
lease expires on October 31, 2000 and the other lease expires on November 30,
2000. In addition, the Company has leased premises of approximately 5,200 square
feet in Princeton, New Jersey used by the Company's clinical development group
as a general business and administrative office. This lease expires on September
5, 1998. Kalisto Biologicals, Inc. has leased approximately 12,000 square feet
of space through October 31, 2001. The
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Company believes these facilities are adequate for its current and anticipated
short-term needs and that it will be able to enter into lease extensions or to
lease comparable space, if necessary. However, the acquisition and required
regulatory approvals for additional pharmaceutical manufacturing space can be
time consuming and expensive. There is no assurance that if the Company desired
to expand its manufacturing capacity it would be able to do so on a timely
basis, if at all.
ITEM 3. LEGAL PROCEEDINGS:
The Company and certain of its officers were sued in an action entitled
David D. Stark, M.D. v. Advanced Magnetics. Inc., Jerome Goldstein, Ernest V.
Groman, and Lee Josephson, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. While the
outcome of the action cannot be determined, the Company believes the action is
without merit and intends to defend the action vigorously. There can be no
assurance, however, that the Company will be able to defend successfully this
action and the failure by the Company to prevail for any reason could have an
adverse effect on the Company's future business, financial condition and results
of operations.
The Company and certain of its officers were sued in David D. Stark v.
Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson,
Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were originally
dismissed by, but later remanded to, the Federal Court in the above-mentioned
action, as well as a new count alleging tortious interference with contractual
or advantageous relations. The Superior Court granted partial summary judgment
in the Company's favor and dismissed the unfair trade practices and tort counts.
The Superior Court has stayed the action. While the outcome of the action cannot
be determined, the Company believes the action is without merit and intends to
defend the action vigorously. There can be no assurance, however, that the
Company will be able to defend successfully this action and the failure by the
Company to prevail for any reason could have an adverse effect on the Company's
future business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the Company's security holders
during the quarter ended September 30, 1997.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Company's common stock is listed on the American Stock Exchange under
the symbol AVM.
The table below sets forth the high and low sales price of the Company's
common stock on the American Stock Exchange for the fiscal quarters of 1997 and
1996.
FISCAL QUARTER
-------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
1997 High............ $17 5/8 $19 1/2 $13 3/4 $12 5/16
Low............. $14 1/2 $12 3/4 $10 1/2 $10
1996 High............ $29 1/2 $30 $23 $19 7/8
Low............. $24 $19 1/2 $16 1/8 $16 1/4
On December 8, 1997 there were approximately 302 shareholders of record.
The Company believes that the number of beneficial holders of Common Stock
exceeds 2,145. The last reported sale price of the Common Stock on December 8,
1997 was $9.25 per share. The Company has never declared or paid a cash dividend
on its capital stock.
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ITEM 6. SELECTED FINANCIAL DATA:
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Revenues:
License fees................................... $5,500,000 $ -- $5,000,000 $5,505,000 $1,010,000
Royalties...................................... 363,445 50,000 189,493 15,924 906,138
Product sales.................................. 1,580,357 12,762 2,120,457 280,975 3,836,300
Contract research and development.............. 62,920 6,810 -- -- 402,911
Interest, dividends and net gains and losses on
sales of securities.......................... 3,495,049 1,761,450 2,287,311 1,845,005 2,823,102
---------- ---------- ---------- ---------- ----------
Total revenues............................... 11,001,771 1,831,022 9,597,261 7,646,904 8,978,451
Costs and Expenses:
Cost of product sales.......................... 311,678 2,550 425,187 54,983 1,525,564
Contract research and development expenses..... 8,815 -- -- -- 193,391
Company-sponsored research and development
expenses..................................... 9,304,327 9,671,897 8,601,791 6,621,929 6,863,229
Charge (credit) for purchase of in-process
research and development*.................... -- -- (380,000) 760,000 --
Selling, general and administrative
expenses..................................... 1,437,599 1,871,568 1,759,348 1,963,480 2,777,840
---------- ---------- ---------- ---------- ----------
Total cost and expenses...................... 11,062,419 11,546,015 10,406,326 9,400,392 11,360,024
Other Income:
Other income................................... 264,800 -- -- -- --
Gain on sale of in vitro product line**........ -- -- 3,404,527 2,649,580 --
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income
taxes.......................................... 204,152 (9,714,993) 2,595,462 896,092 (2,381,573)
Income tax (benefit) provision................... (379,022) -- 400,000 8,000 --
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change.............................. 583,174 (9,714,993) 2,195,462 888,092 (2,381,573)
Cumulative effect of accounting change........... -- -- 117,540 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ $ 583,174 $(9,714,993) $2,313,002 $ 888,092 $(2,381,573)
========== ========== ========== ========== ==========
Net income (loss) per share before cumulative
effect of accounting change.................... $ 0.09 $ (1.44) $ 0.32 $ 0.13 $ (0.36)
Cumulative effect of accounting change........... -- -- 0.02 -- --
---------- ---------- ---------- ---------- ----------
Income (loss) per share.......................... $ 0.09 $ (1.44) $ 0.34 $ 0.13 $ (0.36)
---------- ---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares.............................. 6,805,232 6,762,748 6,870,839 6,806,525 6,651,061
---------- ---------- ---------- ---------- ----------
* In August 1994, the Company reacquired the development and marketing rights
to the MRI contrast agent Combidex previously licensed to Squibb Diagnostics,
a Division of Bristol Myers Squibb Company, Inc., and recorded a related
$760,000 charge for the purchase of in-process research and development. In
the first fiscal quarter of 1995, a credit for $380,000 was recorded to the
purchase of in-process research and development.
** On October 15, 1993, the Company sold its in vitro product line to PerSeptive
Biosystems, Inc.
AT SEPTEMBER 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Balance sheet data:
Working capital.................................. $37,422,235 $33,605,818 $41,985,100 $38,891,406 $37,547,326
---------- ---------- ---------- ---------- ----------
Total assets..................................... $44,976,181 $41,066,373 $50,843,222 $46,672,700 $45,877,548
---------- ---------- ---------- ---------- ----------
Stockholders' equity............................. $43,423,058 $40,132,545 $49,071,072 $45,451,475 $44,654,428
---------- ---------- ---------- ---------- ----------
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
Since its inception in November 1981, Advanced Magnetics, Inc., (the
"Company") has focused its efforts on developing its core superparamagnetic iron
oxide particle technology to develop magnetic resonance imaging ("MRI") contrast
agents and its core polysaccharide technology for targeted delivery of
therapeutics. The Company has funded its operations with cash from license fees
from corporate partners, royalties, sales of its products, fees from contract
research performed for third parties, the proceeds of financings and income
earned on invested cash. The Company's success in the market for diagnostic and
therapeutic products will depend, in part, on the Company's ability to
successfully develop, test, produce and market its products; obtain necessary
governmental approvals in a timely manner; attract and retain key employees; and
successfully respond to technological and other changes in the marketplace.
The Company's operating results may continue to vary significantly from
quarter to quarter or from year to year depending on a number of factors,
including: the timing of payments from corporate partners and research grants;
the introduction of new products by the Company; the timing and size of orders
from the Company's customers; and the acceptance of the Company's products. The
Company's current planned expense levels are based in part upon expectations as
to future revenue. Consequently, profits may vary significantly from quarter to
quarter or year to year based on the timing of revenue. Revenue or profits in
any period will not necessarily be indicative of results in subsequent periods
and there can be no assurance that the Company will maintain profitability or
that revenue growth can be sustained in the future.
A substantial portion of the Company's expenses consists of research and
development expenses. The Company expects its research and development expenses
to remain the same as it completes Combidex clinical trials and associated
toxicology and pharmacology studies and devotes resources to developing
additional contrast agents and its targeted drug delivery programs.
SALE OF IN VITRO PRODUCT LINE
On October 15, 1993 the Company sold its in vitro product line to
PerSeptive Biosystems, Inc. ("PerSeptive") for 151,759 shares of PerSeptive
common stock which was worth $4,156,674 as of that date, plus an additional
earn-out amount based on PerSeptive's fiscal 1995 revenues. The amount of the
earn-out at September 30, 1995 was $3,404,527 which PerSeptive satisfied by
issuing 373,080 shares of PerSeptive common stock. The Company recognized
pre-tax gains on this sale of $3,404,527 and $2,649,580 in fiscal 1995 and 1994,
respectively. As of the end of fiscal 1996, the Company had sold all of its
holdings of PerSeptive common stock.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues
Total revenues for the fiscal year ended September 30, 1997 were
$11,001,771 compared to $1,831,022 for the fiscal year ended September 30, 1996.
There were license fee revenues for the fiscal year ended September 30,
1997 of $5,500,000 and none for the fiscal year ended September 30, 1996. The
Company received a non-refundable milestone payment of $5,000,000 in October
1996 from Berlex Laboratories, Inc. ("Berlex"), as a result of Berlex's market
launch of Feridex I.V. in the United States, under an agreement (the "Berlex
Agreement") granting Berlex a product license and exclusive marketing rights to
the Company's Feridex I.V. MRI contrast agent in the United States. The Company
received a non-refundable milestone payment of $500,000 in December 1996 from
Mallinckrodt Inc. ("Mallinckrodt") as a result of the FDA's marketing approval
of GastroMARK under an agreement (the "Mallinckrodt Agreement") granting
Mallinckrodt a product license and co-marketing rights to the Company's
GastroMARK MRI contrast agent in North America.
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Royalties for the fiscal year ended September 30, 1997 were $363,445 as
compared to $50,000 in fiscal 1996. Royalties in fiscal 1997 reflect product
sales in the United States of the Company's Feridex I.V. liver MRI contrast
agent by Berlex and product sales in North America of GastroMARK oral MRI
contrast agent by Mallinckrodt as well as increased product sales in Europe by
Guerbet S.A. ("Guerbet") of Feridex I.V. (under the trade name Endorem) and
GastroMARK (under the trade name Lumirem) as compared to fiscal 1996.
Product sales for the fiscal year ended September 30, 1997 were $1,580,357
compared to $12,762 for the fiscal year ended September 30, 1996 which resulted
primarily from the initial product launch by Berlex in the United States of
Feridex I.V. and by Mallinckrodt in North America of GastroMARK in the 1997
fiscal year.
Interest, dividends and net gains and losses on sales of securities
resulted in revenues of $3,495,049 for the fiscal year ended September 30, 1997
compared to $1,761,450 for the fiscal year ended September 30, 1996.
Interest income for the fiscal year ended September 30, 1997 was $1,385,670
compared to $1,400,597 for the fiscal year ended September 30, 1996. Dividend
income of $242,029 for the year ended September 30, 1997 was $112,471 less than
the $354,500 for the fiscal year ended September 30, 1996. There was a net gain
on sales of securities of $1,867,350 for the fiscal year ended September 30,
1997 compared to a net gain of $6,353 for the fiscal year ended September 30,
1996. The increase was primarily attributable to gains realized on the sale of a
certain security.
Costs and Expenses
The cost of product sales for the fiscal year ended September 30, 1997 was
$311,678 compared to $2,550 for the fiscal year ended September 30, 1996. The
cost of product sales for the fiscal year ended September 30, 1997 related
primarily to the introduction in the United States of Feridex I.V. and
GastroMARK. The cost of product sales for both fiscal years was 20% of product
sales.
Research and development expenses for the fiscal year ended September 30,
1997 were $9,304,327, a decrease of 4% compared to $9,671,897 for the fiscal
year ended September 30, 1996. The decrease was primarily attributable to
reduced staffing. The Company expects that expenditures for research and
development for fiscal 1998 will continue at present levels. In addition, the
Company made payments of $800,000 in accordance with its agreements to license
technology from a third party based on the achievement of certain milestones.
Selling, general and administrative expenses for the fiscal year ended
September 30, 1997 were $1,437,599, a decrease of 23% from $1,871,568 for the
fiscal year ended September 30, 1996. The decrease was primarily attributable to
expenses associated with a proposed, but later terminated, public offering of
the Company's common stock during fiscal 1996.
Other
Other income of $264,800 was recognized during the fiscal year ended
September 30, 1997 as the result of an insurance settlement for flood damages in
the research and development laboratory in October 1996.
Income Taxes
The income tax benefit resulted from payments from the Internal Revenue
Service for contingent refunds. There was no income tax provision for the fiscal
year ended September 30, 1997 due to the applicable net operating loss
carry-forwards. There was no income tax provision for the fiscal year ended
September 30, 1996 due to a net operating loss.
Earnings
In the fiscal year ended September 30, 1997, the Company recorded a net
profit of $583,174 or $0.09 per share. In the fiscal year ended September 30,
1996, the Company recorded a net loss of ($9,714,993) or ($1.44) per share.
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RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues
Total revenues for the fiscal year ended September 30, 1996 were $1,831,022
compared to $9,597,261 for the fiscal year ended September 30, 1995.
There were no license fee revenues for the fiscal year ended September 30,
1996 compared to $5,000,000 for the fiscal year ended September 30, 1995. The
Company received a non-refundable $5,000,000 license fee on February 1, 1995
from Berlex under the Berlex Agreement granting Berlex a product license and
exclusive marketing rights to the Company's Feridex I.V. MRI contrast agent in
the United States.
Royalties for the fiscal year ended September 30, 1996 were $50,000
relating to product sales in Europe by Guerbet of the Company's Feridex I.V.
(marketed in Europe under the trade name Endorem) and GastroMARK (marketed in
Europe under the trade name Lumirem) MRI contrast agents. Royalties of $50,000
in the fiscal year ended September 30, 1996 as compared with $189,493 in fiscal
1995 reflect lower sales in Europe of Feridex I.V. in fiscal 1996.
Product sales for the fiscal year ended September 30, 1996 were $12,762
compared to $2,120,457 for the fiscal year ended September 30, 1995 which
resulted primarily from the initial product launch by Guerbet in Europe of
Feridex I.V. in fiscal 1995. Although Guerbet marketed and sold the Company's
product during fiscal 1996, a sufficient level of inventory from 1995 existed to
satisfy 1996 customer needs.
Interest, dividends and net gains and losses on sales of securities
resulted in revenues of $1,761,450 for the fiscal year ended September 30, 1996
compared to $2,287,311 for the fiscal year ended September 30, 1995.
Interest income for the fiscal year ended September 30, 1996 was $1,400,597
compared to $1,644,328 for the fiscal year ended September 30, 1995. The
decrease was primarily due to the maturity of United States Treasury Notes and
lower interest rates earned on money market accounts in fiscal 1996. Dividend
income of $354,500 for the year ended September 30, 1996 was $233,516 less than
the $588,016 for the fiscal year ended September 30, 1995. The decrease was
primarily due to a reduction in funds invested in dividend paying preferred
stock. There was a net gain on sales of securities of $6,353 for the fiscal year
ended September 30, 1996 compared to a net gain of $54,967 for the fiscal year
ended September 30, 1995.
Costs and Expenses
The cost of product sales for the fiscal year ended September 30, 1996 was
$2,550 compared to $425,187 for the fiscal year ended September 30, 1995. The
cost of product sales for the fiscal year ended September 30, 1995 related
primarily to the introduction in Europe of Feridex I.V. The cost of product
sales for both fiscal years was 20% of product sales.
Research and development expenses for the fiscal year ended September 30,
1996 were $9,671,897, an increase of 12% compared to $8,601,791 for the fiscal
year ended September 30, 1995. The increase was primarily a result of costs
associated with Phase III human clinical trials for the Company's Combidex
contrast agent used in imaging lymph nodes, liver, spleen and blood perfusion
and preclinical developments of the Company's targeted drug delivery programs.
In addition, the Company made payments of $725,000 in accordance with its
agreements to license technology from third parties, of which $400,000 was based
on the achievement of certain milestones.
Selling, general and administrative expenses for the fiscal year ended
September 30, 1996 were $1,871,568, an increase of 6% from $1,759,348 for the
fiscal year ended September 30, 1995. The increase was primarily attributable to
expenses associated with a proposed, but later terminated, public offering of
the Company's common stock.
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Other
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in the
fiscal year ended September 30, 1995. As a result, the Company recorded a
cumulative effect of accounting change of $117,540 during the year ended
September 30, 1995.
Income Taxes
There was no income tax provision for the fiscal year ended September 30,
1996 due to an operating loss. The income tax provision for the fiscal year
ended September 30, 1995 was $400,000. The tax rate was lower than the 34%
statutory rate as a result of the tax benefit of temporary differences and
dividend income exclusions.
Earnings
In the fiscal year ended September 30, 1996, the Company recorded a net
loss of $9,714,993 or ($1.44) per share. In the fiscal year ended September 30,
1995, the Company recorded a net profit of $2,195,462 or $0.32 per share before
the cumulative effect of accounting change. Including the cumulative effect of
accounting change of $117,540 or $0.02 per share, net income was $2,313,002 or
$0.34 per share for the fiscal year ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's cash and cash equivalents totaled
$10,724,740, compared with $10,805,842 at September 30, 1996. In addition, the
Company had marketable securities of $27,365,765 at September 30, 1997 as
compared to $23,271,169 on September 30, 1996. Net cash used in operating
activities was $202,281 in the fiscal year ended September 30, 1997 compared to
net cash used in operating activities of $7,430,470 in the fiscal year ended
September 30, 1996, a decrease of $7,228,189. The decrease in cash used in
operating activities was due primarily to a net profit of $583,174 for the year
ended September 30, 1997, compared with a net loss of $9,714,993 in the fiscal
year ended September 30, 1996. Cash provided by investing activities was
$803,333 for the fiscal year ended September 30, 1997 compared to $17,337,281
provided by investing activities in the fiscal year ended September 30, 1996.
Cash provided by investing activities in the fiscal year ended September 30,
1997 included the investment of $20,380,048 in marketable securities which was
mostly offset by $12,500,000 from maturing United States Treasury notes and
$9,270,016 from the sale of marketable securities. Cash provided by investing
activities in the fiscal year ended September 30, 1996 included the purchase of
marketable securities of $2,378,934. Proceeds from United States Treasury notes
maturing was $9,499,911 and proceeds from the sale of marketable securities was
$10,733,541 in the fiscal year ended September 30, 1996. Cash used in financing
activities was $682,154 for the fiscal year ended September 30, 1997 and
included proceeds of $179,445 from the issuances of common stock offset by the
purchase of 61,300 shares of the Company's common stock on the open market for
$861,599. In May 1996, the Board of Directors authorized the purchase of up to
250,000 shares of the Company's common stock on the open market at prevailing
market prices.
Capital expenditures in the fiscal year ended September 30, 1997 were
$533,590 compared to $466,452 in the fiscal year ended September 30, 1996.
Capital expenditures of $533,590 in the fiscal year ended September 30, 1997
continued the Company's efforts to upgrade laboratory and production equipment.
The Company has no current commitment for any significant expenditures on
property, plant and equipment. The Company expects that expenditures for
research and development for fiscal 1998 will continue at present levels.
Management believes that funds for future needs can be generated from
existing cash balances, cash generated from investing activities and cash
generated from operations. In addition, the Company will consider from time to
time various financing alternatives and may seek to raise additional capital
through equity or debt financing or to enter into corporate partnering
arrangements. There can be no assurance, however, that funding will be available
on terms acceptable to the Company, if at all.
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IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share." This
statement modifies the way in which earnings per share ("EPS") is calculated and
disclosed. Currently, the Company discloses primary EPS. Upon adoption of this
standard for the fiscal period ending December 31, 1997, the Company will
disclose basic and diluted EPS. Basic EPS excludes common stock equivalents and
is computed by dividing income available to common shareholders by the weighted
average number of Common Shares outstanding for the period. The Company believes
the implementation of SFAS 128 will not have a material impact on the earnings
per share calculation.
The FASB recently issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. While not mandating a specific financial
statement format, the statement requires that an amount representing total
comprehensive income be reported. The statement will become effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods is required for comparative purposes. The Company
believes the implementation of SFAS 130 may have a material impact on results of
operations.
The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." This statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about segments.
The statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company is currently evaluating this statement and its
effect on financial statement disclosures.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including, but not limited to statements
contained in this Item 7 relating to liquidity and capital resources) constitute
forward looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
of operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, without limitation, the risks, uncertainties
and other information discussed below and within this Form 10-K, as well as the
accuracy of the Company's internal estimates of revenue and operating expense
levels. The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Early Stage of Product Commercialization; Uncertainty of Product
Development. The Company has not generated significant revenues from the sale
of its products. Feridex I.V. and GastroMARK have only recently been approved
for sale in the United States, Feridex I.V. has only recently been approved for
sale in Japan, and the sale of Feridex I.V. and GastroMARK has only recently
begun in certain European countries. While the Company is conducting human
clinical testing of Combidex, this product and the Company's other product
candidates, in particular its targeted therapeutic products, may require
significant additional research and development efforts, including extensive
human clinical testing, prior to submission of any regulatory application for
commercial sale of such products. Such products are not expected to be
commercially available for several years, if at all. The development of new
pharmaceutical products is highly uncertain and no assurance can be given that
any of the Company's development programs will be completed successfully, that
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20
required regulatory approvals will be obtained on a timely basis, if at all, or
that any product, including Feridex I.V., will be commercially successful.
The Company's long term viability and growth will depend on the successful
commercialization of products resulting from its research activities. If any of
the Company's development programs are not completed successfully, required
regulatory approvals are not obtained or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations could be materially adversely affected.
Need for Future Funding; Uncertainty of Access to Capital. The Company has
expended and will continue to expend substantial funds to complete the research,
development, clinical trials, regulatory approvals and other activities through
final commercialization of its products. It is possible that the Company may
need additional financing to satisfy its capital and operating requirements
relating to the development, manufacturing and marketing of its products. The
Company may seek such financing through arrangements with collaborative partners
and through public or private sales of the Company's securities, including
equity securities. No assurance can be given that such financing will be
available to the Company on acceptable terms, if at all. Any additional equity
financings could be dilutive to the Company's stockholders. If adequate
additional funds are not available, the Company may be required to curtail
significantly one or more of its research and development programs or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its products and product
candidates on terms that it might otherwise find unacceptable.
Government Regulation; No Assurance of Regulatory Approval. Prior to
marketing, every product candidate must undergo an extensive regulatory approval
process in the United States and in every country in which the Company intends
to test and market its product candidates and products. This regulatory process
includes testing and clinical trials of such product candidate to demonstrate
safety and efficacy and can require many years and the expenditure of
substantial resources in the United States and in foreign countries in which
approval is sought. Data obtained from preclinical testing and clinical trials
are subject to varying interpretations, which can delay, limit or prevent FDA
approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated which may result in delay or failure
to receive FDA approval. Similar delays or failures may be encountered in
foreign countries. Delays and related costs in obtaining regulatory approvals
could have a material adverse effect on the Company's business, financial
condition and results of operation. Although the Company has received approval
in the United States and in certain foreign countries to market Feridex I.V. and
GastroMARK, there can be no assurance that further regulatory approvals will be
obtained for any products developed by the Company. Failure to obtain requisite
governmental approvals or failure to obtain approvals of the scope requested
could delay and may preclude the Company or its licensees or other collaborators
from marketing the Company's products or limit the commercial use of the
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Regulatory approvals may entail limitations on the indicated uses of such
products and impose labeling requirements which may adversely impact the
Company's ability to market its products. Even if regulatory approval is
obtained, a marketed product and its manufacturer are subject to continuing
regulatory review. Noncompliance with regulatory requirements at any stage of
the approval process may result in various adverse consequences, including the
FDA's delay in approving or its refusal to approve a product, withdrawal of an
approved product from the market or, under certain circumstances, the imposition
of criminal penalties. Any such adverse consequences could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Uncertainties Relating to Clinical Trials; Technological
Uncertainty. Before obtaining regulatory approvals for the commercial sale of
any of its contrast agents or other product candidates, the Company must
demonstrate through extensive preclinical testing and human clinical trials that
the product is safe and efficacious. The results from preclinical testing and
early clinical trials of products under development by the Company may not be
predictive of results obtained in subsequent clinical trials. Clinical trials
are often conducted with patients in the most advanced stages of disease. During
the course of treatment, these patients
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can die or suffer adverse medical effects for reasons that may not be related to
the product being tested, but which can nevertheless adversely affect clinical
trial results or approvals by the FDA. Clinical testing of pharmaceutical
product is itself subject to approvals by various governmental regulatory
authorities. There can be no assurance that Advanced Magnetics will be permitted
by regulatory authorities to commence or continue clinical trials. Any delays in
or termination of the Company's clinical trial efforts could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Many of the Company's products are subject to technological uncertainty.
Only two of the Company's products, Feridex I.V. and GastroMARK, have been
approved for sale in the United States. Obtaining regulatory approval for
products consisting of arabinogalactan connected to any other therapeutic
compound may be more difficult than obtaining approval for a single compound
because it could be more difficult to determine the safety and efficacy of the
two compounds together. The Company's MRI contrast agents may cause adverse
reactions, including death, in certain persons under certain conditions. There
can be no assurances that these factors will not adversely affect the
development or commercialization of the Company's products.
Dependence on Collaborative Relationships. The Company's strategy for the
development and commercialization of its contrast agent product candidates has
been to enter into strategic alliances with various corporate partners,
licensees, and other collaborators. In some cases, the Company is dependent upon
these collaborators to conduct preclinical and clinical testing, to obtain
regulatory approvals and to manufacture and market products. There can be no
assurance that any revenues or profits will continue or that the Company will be
able to enter into future collaborative relationships even if it desires to do
so. If any of the Company's collaborators breaches its agreement with the
Company or otherwise fails to perform, such event could have a material adverse
effect on the Company's business, financial condition and results of operations.
Competition and Risk of Technological Obsolescence. The pharmaceutical and
biopharmaceutical industries are subject to intense competition and rapid
technological change. The Company has many competitors, many of which have
substantially greater capital and other resources than the Company and represent
significant competition for Advanced Magnetics. Such companies may succeed in
developing technologies and products that are more effective or less costly than
any that may be developed by the Company, and such companies may be more
successful than the Company in developing, manufacturing and marketing products.
In addition, the Company's MRI contrast agents represent a new approach to
imaging certain organs, and market acceptance of both MRI as an appropriate
imaging technique for such organs and the Company's products is critical to the
Company's ability to compete successfully. There can be no assurance that the
Company will be able to compete successfully in the future or that developments
by others will not render the Company's products or product candidates or
technologies obsolete or noncompetitive or that the Company's collaborators or
customers will not choose to use competing technologies or products.
Uncertainty Regarding Patents and Proprietary Rights. The patent positions
of pharmaceutical and biopharmaceutical companies, including Advanced Magnetics,
are generally uncertain and involve complex legal and factual questions. Because
of the substantial length of time and expense associated with bringing new
products through development and regulatory approval to the marketplace, the
pharmaceutical and biopharmaceutical industries place considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. There can be no assurance as to the success or timeliness in
obtaining any such patents, that the breadth of the claims obtained will provide
any significant protection of the Company's technology, or that the degree of
protection afforded by patents for licensed technologies or for future
discoveries will be adequate to protect the Company's proprietary technology.
Moreover, no assurance can be given that patents issued to Advanced Magnetics
will not be contested, invalidated or circumvented. There can be no assurance
that future patent interferences involving patents of either the Company or its
licensors will not have a material adverse effect on the Company's business.
Moreover, there can be no assurance that claims of infringement or violation of
the proprietary rights of others will not be asserted against the Company. If
Advanced Magnetics is required to defend against such claims or to protect its
own proprietary rights against others, the Company may incur substantial costs
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
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22
In the future, Advanced Magnetics may be required to obtain additional
licenses to patents or other proprietary rights of others. There can be no
assurance that any such licenses will be available on acceptable terms, if at
all. The failure to obtain such licenses could result in delays in marketing the
Company's products or the inability to proceed with the development,
manufacturing or sale of product candidates requiring such licenses. In
addition, the termination of any of the Company's existing licensing
arrangements could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any such breach or
that the Company's trade secrets will not otherwise become known or be
independently discovered by its competitors. In addition, the Company cannot be
certain that others will not independently develop substantially equivalent or
superseding proprietary technology, or that an equivalent product will not be
marketed in competition with the Company's products, thereby substantially
reducing the value of the Company's proprietary rights.
Uncertainty of Third-Party Reimbursement. In both the United States and
foreign markets, the Company's ability to commercialize its products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. In the United
States, there has been, and the Company expects that there will continue to be,
a number of federal and state proposals to reform the health care system.
Significant uncertainty exists as to the reimbursement status of both
newly-approved health care products and products used for indications not
approved by the FDA. If adequate reimbursement levels are not maintained by
government and other third-party payors for the Company's products and related
treatments, the Company's business, financial condition and results of
operations may be materially adversely affected.
Limited Manufacturing Experience and Capacity. Advanced Magnetics has no
experience in manufacturing targeted therapeutic products and limited experience
in manufacturing contrast agents in commercial quantities. Currently, the
Company manufactures bulk Feridex I.V. product for sale by Guerbet, Feridex I.V.
finished product and GastroMARK bulk product in its Massachusetts facilities.
These facilities are subject to current Good Manufacturing Practices ("GMP")
regulations prescribed by the FDA. There can be no assurance that the Company
will be able to continue to operate at commercial scale in compliance with the
GMP regulations. Failure to operate in compliance with such GMP regulations and
other applicable manufacturing requirements of various regulatory agencies could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company is dependent on contract
manufacturers for the production of certain of its product candidates. In the
event that the Company is unable to obtain or retain manufacturing for its
product candidates, it will not be able to develop and commercialize its
products as planned. There can be no assurance that the Company will be able to
enter into agreements for the manufacture of future products with manufacturers
whose facilities and procedures comply with GMP and other regulatory
requirements or that such manufacturer will be able to deliver required
quantities of product that conform to specifications in a timely manner.
Lack of Marketing and Sales History. Advanced Magnetics has limited
experience in marketing and selling its current products and product candidates
and relies on its corporate partners to market and sell currently approved and
commercially available products. In order to achieve commercial success for any
product candidate approved by the FDA for which the Company does not have a
marketing partner, Advanced Magnetics may have to establish a marketing and
sales force or enter into arrangements with others to market and sell its
products. There can be no assurance that Advanced Magnetics will be successful
in attracting and retaining qualified marketing and sales personnel or that it
will be able to enter into marketing and sales agreements with others on
acceptable terms, if at all. Furthermore, there can be no assurance that
Advanced Magnetics or its corporate partners will be successful in marketing and
selling the Company's products.
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Potential Product Liability; Uncertainties Related to Insurance. The use
of any of the Company's product candidates in clinical trials and the sale of
any approved products may expose the Company to liability claims resulting from
the use of products or product candidates. At this time, the Company is a
defendant in a lawsuit arising from the death of a clinical trial subject who
was administered Combidex and suffered an allergic reaction. The Company
maintains product liability insurance coverage for claims arising from the use
of its products in clinical trials. However, coverage is becoming increasingly
expensive and no assurance can be given that the Company will be able to
maintain insurance at a reasonable cost. Furthermore, there can be no assurance
that the Company's insurance will provide sufficient coverage amounts to protect
the Company against losses due to liability that could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company presently maintains product liability insurance covering the sale of
Feridex I.V., but there can be no assurance that the Company will be able to
obtain commercially reasonable product liability insurance for any product
presently being marketed or for any product approved for marketing in the future
or that insurance coverage and the resources of the Company would be sufficient
to satisfy any liability resulting from product liability claims. A product
liability claim or series of claims brought against the Company could have a
material adverse effect on its business, financial condition and results of
operations, whether or not the plaintiffs in such claims ultimately prevail.
Attraction and Retention of Key Employees. Because of the specialized
nature of its business, Advanced Magnetics 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. In addition,
the Company is substantially dependent upon Jerome Goldstein, its Chairman of
the Board and Chief Executive Officer, and upon Leonard Baum, President and
Chief Operating Officer. The loss of Mr. Goldstein, Mr. Baum or other certain
key executive officers could be detrimental to the Company. Furthermore, the
Company's anticipated growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, regulatory compliance,
manufacturing and marketing, may 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 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 could adversely affect the Company's business,
financial condition and results of operations.
Volatility of Common Stock Price. The market prices for securities of
biopharmaceutical and pharmaceutical companies, including the Company, have
historically been highly volatile. Such fluctuations in operating results may
cause the market price of the Company's Common Stock to be volatile. In
addition, the market prices for securities of biopharmaceutical and
pharmaceutical companies have from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of such
companies. Various factors and events, including announcements by the Company or
its competitors concerning technological innovations, new products, clinical
trial results, agreements with collaborators, governmental regulations,
developments in patent or other proprietary rights, public concern regarding the
safety of drugs developed by the Company or others, may have a significant
impact on the market price of the Company's Common Stock and dividend policy.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The Company's Financial Statements and related Report of Independent
Accountants are presented in the following pages. The financial statements filed
in this Item 8 are as follows:
Report of Independent Accountants
Financial Statements:
Balance Sheets -- September 30, 1997 and 1996
Statements of Operations -- for the years ended September 30, 1997, 1996
and 1995
Statements of Stockholders' Equity -- for the years ended September 30,
1997, 1996 and 1995
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24
Statements of Cash Flow -- for the years ended September 30, 1997, 1996
and 1995
Reconciliation of Net Income (Loss) to Net Cash Used in Operating
Activities -- for the years ended September 30, 1997, 1996 and 1995
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
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ADVANCED MAGNETICS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants...................................................... 26
Balance Sheets......................................................................... 27
Statements of Operations............................................................... 28
Statements of Stockholders' Equity..................................................... 29
Statements of Cash Flows............................................................... 30
Reconciliation of Net Income (Loss) to Net Cash Provided by (Used in) Operating
Activities........................................................................... 31
Notes to Financial Statements.......................................................... 32
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of Advanced Magnetics, Inc.:
We have audited the accompanying balance sheets of Advanced Magnetics, Inc.
as of September 30, 1997 and 1996 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1997. 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 Advanced Magnetics, Inc. as
of September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 6, 1997
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ADVANCED MAGNETICS, INC.
BALANCE SHEETS
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents....................................... $10,724,740 $10,805,842
Marketable securities........................................... 27,365,765 23,271,169
Accounts receivable............................................. 546,807 149,235
Inventories..................................................... 113,178 182,166
Prepaid expenses................................................ 224,868 131,234
---------- ----------
Total current assets.......................................... 38,975,358 34,539,646
Property, plant and equipment:
Land............................................................ 360,000 360,000
Buildings....................................................... 4,356,295 4,320,766
Laboratory equipment............................................ 7,722,445 7,316,534
Furniture and fixtures.......................................... 645,299 553,149
---------- ----------
13,084,039 12,550,449
Less -- accumulated depreciation and amortization............... (7,332,118) (6,219,579)
---------- ----------
Net property, plant and equipment............................... 5,751,921 6,330,870
Other assets.................................................... 248,902 195,857
---------- ----------
Total assets.................................................. $44,976,181 $41,066,373
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 443,925 $ 383,335
Accrued expenses................................................ 1,059,070 500,365
Income taxes payable............................................ 50,128 50,128
---------- ----------
Total current liabilities..................................... 1,553,123 933,828
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized 2,000,000
shares; none issued........................................... -- --
Common stock, par value $.01 per share, authorized 15,000,000
shares; issued and outstanding 6,740,626 shares as of
September 30, 1997 and 6,761,612 shares as of September 30,
1996.......................................................... 67,406 67,616
Additional paid-in capital...................................... 44,244,558 44,926,502
Retained earnings (deficit)..................................... (6,095,302) (6,678,476)
Net unrealized gains on marketable securities................... 5,206,396 1,816,903
---------- ----------
Total stockholders' equity.................................... 43,423,058 40,132,545
---------- ----------
Total liabilities and stockholders' equity................. $44,976,181 $41,066,373
========== ==========
The accompanying notes are an integral part of the financial statements.
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ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
License fees...................................... $ 5,500,000 $ -- $ 5,000,000
Royalties......................................... 363,445 50,000 189,493
Product sales..................................... 1,580,357 12,762 2,120,457
Contract research and development................. 62,920 6,810 --
Interest, dividends and net gains and losses on
sales of securities............................. 3,495,049 1,761,450 2,287,311
---------- ---------- ----------
Total revenues............................... 11,001,771 1,831,022 9,597,261
Costs and expenses:
Cost of product sales............................. 311,678 2,550 425,187
Contract research and development expenses........ 8,815 -- --
Company-sponsored research and development
expenses........................................ 9,304,327 9,671,897 8,601,791
Credit for purchase of in-process research and
development..................................... -- -- (380,000)
Selling, general and administrative expenses...... 1,437,599 1,871,568 1,759,348
---------- ---------- ----------
Total cost and expenses...................... 11,062,419 11,546,015 10,406,326
Other income:
Other income.................................... 264,800 -- --
Gain on sale of in vitro product line........... -- -- 3,404,527
---------- ---------- ----------
Income (loss) before provision for income taxes
and cumulative effect of accounting change...... 204,152 (9,714,993) 2,595,462
Income tax (benefit) provision.................... (379,022) -- 400,000
---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change............................... 583,174 (9,714,993) 2,195,462
Cumulative effect of accounting change............ -- -- 117,540
---------- ---------- ----------
Net income (loss)................................. $ 583,174 $(9,714,993) $ 2,313,002
========== ========== ==========
Net income (loss) per share before cumulative
effect of accounting change..................... $ 0.09 $ (1.44) $ 0.32
Cumulative effect of accounting change............ -- -- 0.02
---------- ---------- ----------
Net income (loss) per share....................... $ 0.09 $ (1.44) $ 0.34
========== ========== ==========
Weighted average number of common and common
equivalent shares............................... 6,805,232 6,762,748 6,870,839
---------- ---------- ----------
The accompanying notes are an integral part of the financial statements.
28
29
ADVANCED MAGNETICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1995, 1996, 1997
NET
UNREALIZED
COMMON STOCK ADDITIONAL RETAINED GAINS ON TOTAL
-------------------- PAID-IN EARNINGS MARKETABLE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES EQUITY
--------- ------- ----------- ----------- ---------- -----------
Balance at September 30, 1994............... 6,712,572 $67,126 $44,660,834 $ 723,515 -- $45,451,475
Shares issued in connection with the
exercise of stock options................. 29,494 295 207,060 -- -- 207,355
Shares surrendered in connection with the
exercise of stock options................. (1,476) (15) (24,588) -- -- (24,603)
Shares issued in connection with employee
stock purchase plan....................... 12,823 128 130,666 -- -- 130,794
Repurchase of warrants...................... -- -- 120,000 -- -- 120,000
Net change in unrealized gains on marketable
securities................................ -- -- -- -- $ 873,049 873,049
Net income.................................. -- -- -- 2,313,002 -- 2,313,002
--------- ------- ----------- ------------ ---------- -----------
Balance at September 30, 1995............... 6,753,413 67,534 45,093,972 3,036,517 873,049 49,071,072
Shares issued in connection with the
exercise of stock options................. 26,445 264 185,697 -- -- 185,961
Shares surrendered in connection with the
exercise of stock options................. (921) (9) (18,463) -- -- (18,472)
Shares issued in connection with employee
stock purchase plan....................... 8,875 89 141,379 -- -- 141,468
Common shares repurchased................... (26,200) (262) (476,083) -- -- (476,345)
Net change in unrealized gains on marketable
securities................................ -- -- -- -- 943,854 943,854
Net loss.................................... -- -- -- (9,714,993) -- (9,714,993)
--------- ------- ----------- ------------ ---------- -----------
Balance at September 30, 1996............... 6,761,612 67,616 44,926,502 (6,678,476) 1,816,903 40,132,545
Shares issued in connection with the
exercise of stock options................. 42,450 425 271,148 -- -- 271,573
Shares surrendered in connection with the
exercise of stock options................. (13,757) (138) (209,289) -- -- (209,427)
Shares issued in connection with employee
stock purchase plan....................... 11,621 116 117,183 -- -- 117,299
Common shares repurchased................... (61,300) (613) (860,986) -- -- (861,599)
Net change in unrealized gains on marketable
securities................................ -- -- -- -- 3,389,493 3,389,493
Net income.................................. -- -- -- 583,174 -- 583,174
--------- ------- ----------- ------------ ---------- -----------
Balance at September 30, 1997............... 6,740,626 $67,406 $44,244,558 $(6,095,302) $5,206,396 $43,423,058
========= ======= =========== ============ ========== ===========
The accompanying notes are an integral part of the financial statements.
29
30
ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Cash received from customers...................... $ 7,043,429 $ 1,330,567 $ 5,380,513
Cash paid to suppliers and employees.............. (9,330,973) (10,850,727) (8,920,459)
Dividends and interest received................... 1,441,441 2,099,445 1,876,214
Net proceeds from insurance settlement............ 264,800 -- --
Income taxes paid................................. -- (20,000) (250,000)
Income tax refund................................. 379,022 10,245 --
---------- ---------- ----------
Net cash used in operating activities............. (202,281) (7,430,470) (1,913,732)
Cash flows from investing activities:
Proceeds from sales of marketable securities...... 9,270,016 10,733,541 1,440,796
Proceeds from notes and bonds maturing............ 12,500,000 9,499,911 3,000,000
Purchase of marketable securities................. (20,380,048) (2,378,934) (6,703,475)
Capital expenditures.............................. (533,590) (466,452) (1,484,382)
(Increase) decrease in other assets............... (53,045) (50,785) (48,526)
---------- ---------- ----------
Net cash provided by (used in) investing
activities...................................... 803,333 17,337,281 (3,795,587)
Cash flows from financing activities:
Proceeds from issuances of common stock, net...... 179,445 308,957 313,545
Purchase of treasury stock........................ (861,599) (476,345) --
---------- ---------- ----------
Net cash (used in) provided by financing
activities...................................... (682,154) (167,388) 313,545
---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents..................................... (81,102) 9,739,423 (5,395,774)
Cash and cash equivalents at beginning of year.... 10,805,842 1,066,419 6,462,193
---------- ---------- ----------
Cash and cash equivalents at end of year.......... $10,724,740 $10,805,842 $ 1,066,419
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
30
31
ADVANCED MAGNETICS, INC.
Reconciliation of Net Income (Loss)
to Net Cash Provided by (Used in) Operating Activities
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Net income (loss)................................. $ 583,174 $(9,714,993) $ 2,313,002
---------- ------------ ------------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization..................... 1,112,539 1,076,482 1,007,005
Cumulative effect of accounting change............ -- -- (117,540)
Accretion of U.S. Treasury Notes discount......... (227,721) (32,217) (53,943)
(Increase) decrease in accounts receivable........ (397,572) 1,637,558 (2,231,625)
(Increase) decrease in inventories................ 68,988 (126,599) (55,567)
(Increase) decrease in prepaid expenses........... (93,634) (31,892) 13,504
(Increase) decrease in recoverable income taxes... -- 90,117 --
Increase (decrease) in accounts payable and
accrued expenses................................ 619,295 (222,701) 900,925
Increase (decrease) in income taxes payable....... -- (99,872) 150,000
Net realized (gains) on sales of marketable
securities...................................... (1,867,350) (6,353) (54,966)
Gain on sale of in vitro product line............. -- -- (3,404,527)
(Credit) for the purchase of in-process research
and development................................. -- -- (380,000)
---------- ------------ ------------
Total adjustments............................ (785,455) 2,284,523 (4,226,734)
---------- ------------ ------------
Net cash (used in) operating activities........... $ (202,281) $(7,430,470) $(1,913,732)
========== ============ ============
The accompanying notes are an integral part of the financial statements.
31
32
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF ACCOUNTING POLICIES:
Business
Founded in November 1981, Advanced Magnetics, Inc., a Delaware Corporation
(the "Company") is a biopharmaceutical company engaged in the development and
manufacture of compounds utilizing the Company's core proprietary colloidal
superparamagnetic particle technology and core polysaccharide technology for
magnetic resonance imaging ("MRI") and for polysaccharide directed,
receptor-medicated drug delivery systems. The initial products developed by the
Company are diagnostic imaging agents for use in conjunction with MRI to aid in
the diagnosis of cancer and other diseases. In therapeutics, the Company is
developing targeted drug delivery platforms for the treatment of organ specific
diseases.
The Company is subject to risks common to companies in the industry
including, but not limited to, development by the Company or its competitors of
new technological innovations, uncertainty of product development and
commmercialization, lack of marketing and sales history, dependence on key
personnel, market acceptance of products, product liability, protection of
proprietary technology, and compliance with FDA government regulations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, money market funds and
marketable securities having a maturity of less than three months at the date
acquired. Substantially all of the cash and cash equivalents at September 30,
1997 and 1996 were held in a money market account.
Marketable Securities
The Company's current portfolio consists of securities classified as
available-for-sale which are recorded at fair market value. The fair values of
marketable securities are based on quoted market prices. Net unrealized gains
and losses on marketable securities are recorded as a separate component of
stockholders' equity. Interest income is accrued as earned. Dividend income is
accrued on the ex-dividend date, and net realized gains and losses are computed
on the basis of average cost and are recognized when realized.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of additions and
improvements is charged to the property accounts while maintenance and repairs
are expensed as incurred. Upon sale or other disposition of property and
equipment, the cost and related depreciation are removed from the accounts and
any resulting gain or loss is reflected in income.
32
33
Depreciation and Amortization
Depreciation and amortization are recorded on the straight line method
based on rates sufficient to provide for retirement over estimated useful lives
as follows: buildings -- 40 years; laboratory equipment and furniture and
fixtures -- 5 years; and leasehold improvements -- over the life of the lease.
Revenue Recognition
Revenue is recognized when products are shipped, when contract objectives
are achieved or when research activities are performed. License and royalty
revenues are accrued as earned.
Other Income
Other income of $264,800 was recognized during the fiscal year ended
September 30, 1997 as the result of an insurance settlement for flood damages in
the research and development laboratory in October 1996.
Income Taxes
The provision (benefit) for income taxes includes federal and state income
taxes currently payable and deferred income taxes arising from the recognition
of certain income and expenses in different periods for financial and tax
reporting purposes.
Income (Loss) per Share
Income per share is computed on the basis of the weighted average number of
common and common share equivalents outstanding during each period. Loss per
share is computed on the weighted average number of shares outstanding during
the period.
Reclassifications
Certain amounts from the prior year have been reclassified to conform to
the current year's presentation.
B. SALE OF IN VITRO PRODUCT LINE:
On October 15, 1993, the Company sold its in vitro product line to
PerSeptive Biosystems, Inc. ("PerSeptive") for 151,759 shares of PerSeptive
common stock worth $4,156,674 as of that date, plus an additional earn-out
amount based on PerSeptive's fiscal 1995 revenues. The amount of the earn-out at
September 30, 1995 was $3,404,527, which PerSeptive satisfied by issuing 373,080
shares of PerSeptive common stock The Company recognized pre-tax gains on this
sale of $3,404,527 in fiscal 1995. All shares owned of PerSeptive common stock
were sold by the end of fiscal 1996.
C. MARKETABLE SECURITIES:
The cost and fair value of the marketable securities portfolio at September
30 are as follows:
1997 1997 1996 1996
----------- ----------- ----------- -----------
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
U.S. government securities
Due in one year or less....... $ 5,000,000 $ 4,998,900 $ 7,510,203 $ 7,481,250
Due after one through five
years...................... 7,438,569 7,429,650 7,392,785 7,312,500
Preferred stock................. 2,604,711 3,092,335 3,062,404 3,145,029
Common stock.................... 7,116,089 11,844,880 3,488,874 5,332,390
----------- ----------- ----------- -----------
$22,159,369 $27,365,765 $21,454,266 $23,271,169
=========== =========== =========== ===========
33
34
At September 30, 1997, gross unrealized holding gains and gross unrealized
holding losses were $5,344,117 and $137,721 respectively, resulting in a net
unrealized holding gain of $5,206,396. At September 30, 1996, gross unrealized
holding gains and gross unrealized holding losses were $2,020,876 and $203,973
respectively, resulting in a net unrealized holding gain of $1,816,903. For the
fiscal years ended September 30, 1997 and 1996, the net unrealized holding gains
have been recorded as a separate component of stockholders' equity.
At September 30, 1994, the Company recorded a $117,540 unrealized net loss
on the fair value of securities. In the first fiscal quarter ended December 31,
1994, the Company recorded a cumulative effect of the accounting change of
$117,540 including the reversal of a reserve for the carrying value of the
marketable securities.
During the year ended September 30, 1997, gross realized gains and gross
realized losses on the sale of marketable securities were $1,932,504 and
$65,154, respectively, resulting in a net realized gain of $1,867,350. During
the year ended September 30, 1996, gross realized gains and gross realized
losses on the sale of marketable securities were $660,126 and $653,773,
respectively, resulting in a net realized gain of $6,353. During the year ended
September 30, 1995, gross realized gains and gross realized losses on the sale
of marketable securities were $57,394 and $2,428, respectively, resulting in a
net realized gain of $54,966. Proceeds from U.S. treasury notes maturing were
$12,500,000 and $9,499,911 and $3,000,000 in 1997, 1996 and 1995 respectively.
Interest, dividends and net gains (losses) on sales of securities consist
of the following:
FOR THE YEARS ENDED SEPTEMBER 30
----------------------------------------
1997 1996 1995
---------- ---------- ----------
Interest income.................................. $1,385,670 $1,400,597 $1,644,329
Dividend income.................................. 242,029 354,500 588,016
Net gains on sales of securities................. 1,867,350 6,353 54,966
--------- --------- ---------
Totals........................................... $3,495,049 $1,761,450 $2,287,311
========= ========= =========
D. INVENTORIES:
As of September 30, 1997, the Company's inventory balance consisted of
$113,178 in raw materials. As of September 30, 1996, the Company's inventory
balance consisted of $125,144 in raw materials and $57,022 in finished goods.
E. COMMITMENTS:
The Company leases laboratory, office and warehouse space under various
agreements. Rental expense for the years ended September 30, 1997, 1996 and 1995
amounted to $339,311, $340,848, and $320,920, respectively. Future minimum lease
payments for fiscal 1998, 1999, 2000, 2001 and 2002 amount to $469,751,
$417,661, $417,661, $148,800 and $153,600, respectively.
F. ACCRUED EXPENSES:
Accrued expenses consist of the following at September 30:
1997 1996
---------- ----------
Salaries and other compensation............................... $ 183,000 $ 195,889
License and royalty fees...................................... 497,307 --
Clinical trials............................................... 188,288 --
Professional fees............................................. 56,500 75,638
Other......................................................... 133,975 228,838
--------- ---------
Totals........................................................ $1,059,070 $ 500,365
========= =========
34
35
G. INCOME TAXES:
Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using statutory rates. A valuation allowance is recorded against
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.
The income tax (benefit) provision consisted of the following:
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
--------- -------- ---------
Currently payable:
Federal.............................................. $(379,022) $ -- $ 385,000
State................................................ -- -- 15,000
---------- ---------- ----------
(379,022) -- 400,000
========== ========== ==========
Deferred:
Federal.............................................. -- -- --
---------- ---------- ----------
State................................................ $(379,022) $ -- $ 400,000
========== ========== ==========
The provisions for income taxes were at different rates than the U.S.
statutory rates for the following reasons:
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1997 1996 1995
------ ----- -----
U.S. federal statutory tax (benefit) rate........................ 34.0% (34.0%) 34.0%
Dividends received deductions.................................... (31.0) (0.9) (5.2)
Prior years income tax refund.................................... (186.1) -- --
Other, including a prior year tax adjustment..................... (2.6) 0.1 1.0
Losses without tax benefit....................................... -- 38.2 --
Tax benefit of temporary differences............................. (--) (3.4) (14.4)
------- ------ ------
--- ---- ----
(185.7%) -- 15.4%
------- ------ ------
--- ---- ----
The $379,022 tax benefit recorded in fiscal 1997 is due to refunds of
alternative minimum taxes paid in prior years.
The components of the deferred tax assets and liabilities at September 30,
were as follows:
1997 1996
----------- -----------
Assets
Net operating loss carryforwards.............................. $ 5,133,259 $ 4,834,262
Research and experimentation tax credit carryforward.......... 2,146,627 1,779,972
Deductible intangibles........................................ 121,571 481,360
Other......................................................... 226,013 539,140
Liabilities
Property, plant and equipment depreciation.................... (329,162) (380,212)
Other......................................................... (55,206) (34,283)
---------- ----------
7,243,102 7,220,239
Valuation allowance........................................... (7,243,102) (7,220,239)
---------- ----------
Net deferred taxes.............................................. $ -- $ --
========== ==========
35
36
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. Realization of
favorable tax attributes is, therefore, reflected as a tax benefit in the
provision for income taxes.
At September 30, 1997, the Company had unused net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $12,560,000 which
expire in fiscal 2012. The Company also has federal research and experimentation
credits of approximately $1,880,000 which expire in fiscal 2012.
H. STOCK PLANS:
The Company's 1993 Stock Option Plan (the "1993 Stock Plan") provides for
the grant of options to the Company's directors, officers, employees and
consultants to purchase up to an aggregate of 500,000 shares of common stock at
a price equal to the fair market value of the stock at the date of the grant.
The maximum term of the options under the 1993 Stock Plan is ten years. The
number of shares available for future grants at September 30, 1997 was 76,925.
The Company's 1983 Stock Option Plan (the "Plan") does not allow for option
grants after June 1993. The Plan provided for the grant of options to purchase
up to 900,000 shares of common stock at a price equal to the fair market value
of the stock at the date of grant to the Company's employees and mandatory
grants to outside directors upon initial election to the Board of Directors. The
maximum terms of incentive stock options and non-statutory options under the
Plan are ten years and ten years plus thirty days, respectively.
The Company has also granted to certain scientific advisors non-statutory
options to purchase a total of 32,625 shares of common stock at a price equal to
fair market value at the date of grant. As of September 30,1997, 29,625 options
have been exercised.
On November 5, 1991, the Company's Board of Directors adopted the 1992
Non-Employee Director Stock Option Plan (the "1992 Plan") which the shareholders
approved. This plan provides for the grant to each non-employee director on
November 5, 1991, and each fifth anniversary thereafter, of an option to
purchase 5,000 shares of common stock up to an aggregate of 100,000 shares at a
price equal to the fair market value of the stock at the date of the grant,
vesting over a five year period. Under this plan, options to purchase 30,000
shares of common stock at a price of $21.00 per share and an additional 30,000
shares of common stock at a price of $15.25 per share were granted on November
5, 1991 and 1996, respectively. The 1992 Plan also provided for the grant of
options for 5,000 shares to new members of the Board of Directors. A total of
10,000 stock options were granted to new directors during fiscal year 1997 under
the 1992 Plan. No grants may be made under this plan after November 4, 2001.
On November 10, 1992, the Company's Board of Directors adopted the 1993
Non-Employee Director Stock Option Plan (the "1993 Plan") which the shareholders
approved. This plan provides for the grant to each non-employee director on
November 10, 1992, and each sixth anniversary thereafter an option to purchase
5,000 shares of common stock up to an aggregate of 100,000 shares at a price
equal to the fair market value of the stock at the date of the grant, vesting
over a five year period. Under this plan, options to purchase 30,000 shares of
common stock at a price of $14.50 per share were granted on November 10, 1992.
The 1993 Plan also provided for the grant of options for 5,000 shares to new
members of the Board of Directors. A total of 10,000 stock options were granted
to new directors during fiscal year 1997 under the 1993 Plan. No grants may be
made under this plan after November 10, 2002.
During the fiscal year ended September 30, 1997, the Company's Board of
Directors approved the exchange of stock options by the Company's employees and
directors at the fair market value of the stock at the effective date of the
exchange. This provided for the cancellation of any unexercised stock options
and the reissuance of an equal number of stock options at the new price, with
50% of any previously vested options vesting immediately. The stock options
cancelled were originally issued under the 1983 and 1993 Stock Option Plans and
the 1992 and 1993 Non-Employee Director Stock Option Plans and were reissued
under the 1993 Stock Option Plan. 236,825 options under the 1983 and 1993 Stock
Option Plans were exchanged effective on July 3, 1997 at an exercise price of
$11.50. 110,000 options under the 1992 and 1993 Non-Employee Director Stock
Option Plans were exchanged effective on August 5, 1997 at an exercise price of
$11.125.
36
37
Stock option activity for the years ended September 30, 1997, 1996 and 1995
is as follows:
1997 1996 1995
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------- -------- ------- --------
Outstanding at beginning of
year............................ 407,645 $13.86 426,315 $13.29 374,384 $11.46
Granted........................... 475,825 $12.17 14,500 $21.37 86,200 $19.12
Exercised......................... (42,450) $ 6.40 (26,445) $ 7.03 (29,494) $ 7.03
Canceled.......................... (380,825) $16.45 (6,725) $20.56 (4,775) $13.28
-------- ------ ------- ------ ------- ------
Outstanding at end of year........ 460,195 $10.66 407,645 $13.86 426,315 $13.29
-------- ------ ------- ------ ------- ------
Options exercisable at year-end... 98,070 $ 8.01 252,626 $11.82 201,434 $ 9.40
======== ====== ======= ====== ======= ======
Weighted average fair value of
options granted during the
year............................ $ 5.63 $ 9.84
======== =======
The fair value of each option granted during 1997 and 1996 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) expected life of 6.0 years (2)
expected volatility of 36% (3) risk-free interest rate of 6.2% and (4) no
dividend yield.
The following table summarizes information about stock options outstanding
and exercisable at September 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER REMAINING
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE CONTRACTUAL LIFE
-------------------------------- ----------- ---------------- -------- ----------- ----------------
$ 3.33 -- $ 5.00................ 34,675 0.4 $ 3.56 34,675 $ 3.56
$ 5.01 -- $ 7.49................ 3,906 3.1 $ 6.50 3,906 $ 6.50
$ 7.50 -- $11.24................ 198,414 8.8 $10.81 28,414 $ 8.93
$11.25 -- $16.86................ 221,650 9.1 $11.63 30,300 $12.06
$16.87 -- $22.00................ 1,550 9.2 $22.00 775 $22.00
------- --- ------ ------ ------
$ 3.33 -- $22.00................ 460,195 8.3 $10.66 98,070 $ 8.01
======= === ====== ====== ======
Employee Stock Purchase Plan:
The Company's 1992 Employee Stock Purchase Plan (the "Purchase Plan")
provides for the issuance of up to 150,000 shares of common stock to employees
of the Company. Under the terms of the Purchase Plan, eligible employees may
purchase shares in five annual offerings ending in 1997, through payroll
deductions of up to a maximum of 10% of the employee's earnings, at a price
equal to the lower of 85% of the fair market value of the stock on the
applicable annual offering commencement date of June 1 or termination date of
May 31. The fifth offering under the Purchase Plan ended on May 31, 1997 and
11,621 shares of common stock were purchased by eligible employees at a price of
approximately $10.10 per share. As of September 30, 1997, 56,972 shares have
been issued under this plan.
Had the Company adopted SFAS 123, the weighted average for each purchase
right granted during fiscal 1997 and 1996 would have been $3.68 and $5.72,
respectively.
On December 13, 1996 the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Plan"). The Plan is essentially the same as the Company's
1992 Employee Stock Purchase Plan, and provides for the issuance of 150,000
shares. The Plan was approved by the shareholders of the Company at the annual
meeting of February 4, 1997.
37
38
Pro Forma Disclosures
Had compensation cost for the Company's 1997 and 1996 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income (loss) and net income (loss) per share for 1997 and 1996
would approximate the pro forma amounts below:
1997 1996
-------- -----------
Net income (loss)....................... As reported $583,174 $(9,714,993)
Pro forma $276,163 $(9,748,848)
Net income (loss) per share............. As reported $0.09 $(1.44)
Pro forma $0.04 $(1.44)
The effects of applying SFAS 123 in this pro-forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to fiscal
1996, and additional awards in future years are anticipated.
I. EMPLOYEE'S SAVING PLAN:
The Company provides a 401(k) Plan to employees of the Company by which
they may defer compensation for income tax purposes under Section 401(k) of the
Internal Revenue Code. Each employee may elect to defer a percentage of his or
her salary on a pre-tax basis up to a specified maximum percentage. The Company
matches every dollar each employee contributes to the 401(k) Plan up to six
percent of each employee's salary to a maximum of $2,000 annually per employee.
Salary deferred by employees and contributions by the Company to the 401(k) Plan
are not taxable to employees until withdrawn from the 401 k) Plan and
contributions are deductible by the Company when made. The amount of the
Company's matching contribution for the 401 (k) Plan was $104,943, $110,542, and
$99,751 for 1997, 1996, and 1995, respectively.
J. COMMON STOCK TRANSACTIONS:
On February 11, 1991, Squibb Diagnostics, a division of Bristol-Myers
Squibb Co. purchased a warrant for $950,000 to purchase 600,000 shares of common
stock at $10.92 per share. On August 30, 1994, the Company signed an agreement
to reacquire the development and marketing rights to the MRI contrast agent,
(the Bristol-Myers Agreement) Combidex (AMI-227). As part of the transaction,
Bristol-Myers Squibb, Inc. returned the warrant which was valued at $240,000 to
the Company. In the first quarter of fiscal 1995, the Company and Bristol-Myers
Squibb Co. agreed to modify the agreement. As a result, payments to be made
under the agreement were modified (See Note O). Accordingly, the Company
adjusted the value of the warrant to purchase 600,000 shares of the Company's
common stock by $120,000 in the first quarter of fiscal 1995.
In May 1996, the Board of Directors authorized the purchase of 250,000
shares of the Company's common stock on the open market. Through September 30,
1997, the Company purchased 87,500 shares for $1,337,944 and the shares have
been retired. The Board had previously authorized the purchase of 350,000 shares
of which 24,700 shares were retired through fiscal 1995.
K. PREFERRED STOCK:
The preferred stock may be issued from time to time in one or more series.
The rights, preferences, restrictions, qualifications and limitations of such
stock shall be determined by the Board of Directors.
L. BUSINESS SEGMENTS AND CUSTOMERS:
The Company's operations are located solely within the United States. The
Company is focused principally on developing and manufacturing MRI contrast
agents and drug delivery systems. Accordingly, its revenues are attributable to
one principal business segment. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. One customer
accounted for 54% of the
38
39
Company's revenues in fiscal 1997, while no customer accounted for more than 10%
of the Company's revenues in fiscal 1996. Two customers accounted for 52% and
23% respectively, of the Company's revenues in fiscal 1995.
Revenues from customers and licensees outside the United States were not
significant in fiscal 1997 and 1996. Revenues in fiscal 1995, from customers and
licensees outside of the United States, principally in Europe and Japan,
amounted to 23% of the Company's total revenues.
M. LEGAL PROCEEDINGS:
The Company and certain of its officers were sued in an action in the
United States District Court for the District of Massachusetts on September 3,
1992. The plaintiff, a former consultant to the Company, claims that he was
incorrectly omitted as an inventor or joint inventor on six of the Company's
patents and on pending applications, and seeks injunctive relief and unspecified
monetary damages. In October 1995, the plaintiff appealed an interlocutory order
of the United States District Court to the United States Court of Appeals for
the Federal Circuit. The plaintiff's appeal is pending and the United States
District Court has administratively closed the case. The plaintiff filed a
related case in the Superior Court of the Commonwealth of Massachusetts. The
Superior Court has dismissed most of the related tort claims on summary
judgment. While the final outcome of these actions cannot be determined, the
Company believes that the plaintiff's claims are without merit and intends to
defend the actions vigorously.
N. AGREEMENTS:
To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These relationships, both in the United States and
abroad, include: (i) Guerbet S.A. ("Guerbet"), a leading European producer of
contrast agents, in Western Europe and Brazil; (ii) Eiken Chemical Co., Ltd.
("Eiken"), one of Japan's leading medical diagnostics manufacturers, in Japan;
(iii) Berlex Laboratories, Inc. ("Berlex") , the leading marketer of MRI
contrast agents, in the United States; and (iv) Mallinckrodt Inc.
("Mallinckrodt") a leading manufacturer of contrast agents, in the United
States, Canada and Mexico.
On February 1, 1995, the Company entered into an agreement with Berlex
granting Berlex a product license and exclusive marketing rights to Feridex I.V.
in the United States and Canada. Under the terms of the agreement, Berlex paid a
$5,000,000 non-refundable license fee in fiscal 1995. An additional $5,000,000
license fee was received in October 1996 as a result of the FDA's marketing
approval and Berlex's market launch of Feridex I.V. in the United States. In
addition, the company receives payments for manufacturing the product and
royalties on sales.
In fiscal 1991, the Company entered into agreements with Squibb
Diagnostics, granting exclusive world-wide rights (except for Japan, Western
Europe and Brazil) to manufacture and sell two MRI products, AMI-HS and
Combidex. In addition, Squibb Diagnostics received the right to use the
Company's core technology in its own development of other MRI contrast agents.
In fiscal 1994, the Company and Squibb Diagnostics terminated their agreement
with respect to the AMI-HS product. The Company signed an agreement to reacquire
the development and marketing rights to Combidex previously licensed to Squibb
Diagnostics. The Company agreed to pay Bristol-Myers Squibb, Co. $1,000,000 in
two cash payments, of which $500,000 was paid on August 30, 1994 and $500,000
was to be paid upon acceptance of the 1,200 vials of the Combidex product
suitable for worldwide preclinical and clinical studies. Furthermore, the
Company is required to pay up to $2,750,000 in future royalties based on the
Company's sale of Combidex. As part of the transaction, Bristol-Myers Squibb,
Co. returned to the Company a warrant to purchase 600,000 shares of the
Company's common stock, valued at $240,000. The Company recorded a $760,000
expense which represented the value of in-process research and development
reacquired in fiscal 1994. In the first quarter of fiscal 1995, the Company and
Bristol-Myers Squibb Co. agreed that the 1,200 vials of Combidex delivered to
the Company were not acceptable. In addition, they agreed that any future
delivery of Combidex under the agreement will not be required and that the
Company will not be required to make the $500,000 payment.
39
40
Accordingly, the Company recorded a credit for $380,000 to the purchase of
in-process research and development and adjusted the value of the warrant by
$120,000 in the first quarter of fiscal 1995.
In 1990, the Company entered into a manufactureing and distribution
agreement with Mallinckrodt granting Mallinckrodt a product license and
co-marketing rights to GastroMARK(R) in the United States, Canada and Mexico.
Under the terms of the agreement, Mallinckrodt paid a $500,000 non-refundable
license fee in fiscal 1997 as a result of the FDA's marketing approval of
Feridex I.V. in the United States. In addition, the company received payments
for manufacturing the product and royalties on sales.
The Company is the licensee of certain technologies under agreements with
third parties which require the Company to make payments in accordance with
these license agreements and upon the attainment of particular milestones. The
Company is also required to pay royalties on a percentage of certain product
sales, if any. During fiscal year 1997, 1996 and 1995, the Company made
milestone payments of $800,000, $725,000, and $350,000 in relation to these
agreements. Future milestone payments are not to exceed $400,000.
O. RELATED PARTY TRANSACTIONS:
During the fiscal years ended September 30, 1997, 1996 and 1995, the
Company paid approximately $58,910, $26,573 and $7,050, respectively, to
Fahnestock & Co. Inc. as commissions on transactions involving its investments
in securities. Mr. Leslie Goldstein, a shareholder and member of the Company's
Board of Directors and the brother of Jerome Goldstein, Chairman of the Board
and CEO of the Company, is employed by SRG Associates, a division of Fahnestock
& Co. Inc., as an investment analyst and advisor.
P. QUARTERLY FINANCIAL DATA -- UNAUDITED:
The following table provides quarterly data for the fiscal years ended
September 30, 1997, and 1996.
FISCAL 1997 QUARTERS ENDED
--------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DEC. 31, 1996
------------ ----------- ----------- -------------
License fees............................ $ -- $ -- $ -- $ 5,500,000
Royalties............................... 57,541 85,000 95,904 125,000
Product sales........................... 372,366 394,656 209,793 603,542
Research and development services....... -- -- -- 62,920
Interest, dividends and net gains and
losses on sales of securities......... 984,385 705,323 1,058,895 746,446
----------- ----------- ----------- -----------
Total revenues........................ 1,414,292 1,184,979 1,364,592 7,037,908
Cost of product sales................... 60,722 83,436 33,139 143,196
Operating expenses...................... 3,386,242 2,312,148 2,425,778 2,617,758
Other (income).......................... -- (264,749) (51) --
Income tax benefit...................... -- (379,022) -- --
----------- ----------- ----------- -----------
Net income (loss)....................... $ (2,032,672) $ (566,834) $(1,094,274) $ 4,276,954
=========== =========== =========== ===========
Net income (loss) per share............. $ (0.30) $ (0.08) $ (0.16) $ 0.63
=========== =========== =========== ===========
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41
FISCAL 1996 QUARTERS ENDED
--------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DEC. 31, 1995
------------ ----------- ----------- -------------
License fees............................ $ -- $ -- $ -- $ --
Royalties............................... (75,000) (25,000) 75,000 75,000
Product sales........................... -- -- 12,762 --
Research and development services....... 6,810 -- -- --
Interest, dividends and net gains and
losses on sales of securities......... 450,911 470,373 388,307 451,859
----------- ----------- ----------- -----------
Total revenues........................ 382,721 445,373 476,069 526,859
Cost of product sales................... -- -- 2,550 --
Operating expenses...................... 2,871,713 3,308,476 2,911,732 2,451,544
----------- ----------- ----------- -----------
Net income (loss)....................... $ (2,488,992) $(2,863,103) $(2,438,213) $ (1,924,685)
=========== =========== =========== ===========
Net income (loss) per share............. $ (0.37) $ (0.42) $ (0.36) $ (0.28)
=========== =========== =========== ===========
Q. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share", which
modifies the way in which earnings per share ("EPS") is calculated and
disclosed. Currently, the Company discloses primary EPS. Upon adoption of this
standard for the first fiscal period ending December 31, 1997, the Company will
disclose basic and diluted EPS. Basic EPS excludes dilution and common stock
equivalents and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period. The
Company believes the implementation of SFAS 128 will not have a material impact
on the earnings per share calculation.
The FASB recently issued Statement No 130 ("SFAS 130"), "Reporting
Comprehensive Income". This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. While not mandating a specific financial
statement format, the Statement requires that an amount representing total
comprehensive income be reported. The Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods is required for comparative purposes. The Company believes the
implementation of SFAS 130 may have a material impact on results of operations.
The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information". This Statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about segments.
The Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year,
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company is currently evaluating this Statement and its
effect on financial statement disclosures.
R. SUBSEQUENT EVENT:
On October 24, 1997, the Company acquired an 80.7% interest in Kalisto
Biologicals, Inc. ("Kalisto"), an early-stage company that intends to develop,
manufacture and market veterinary and food testing systems and products. Kalisto
has formed a technology and support relationship with Precise Animal
Diagnostics, Inc. of Madison, Wisconsin ("PAD") to manufacture and market PAD's
veterinary testing systems worldwide.
41
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item, with respect to the directors of the
registrant, is incorporated by reference from the Company's definitive proxy
statement in connection with its Annual Meeting of Stockholders to be held on
February 3, 1998, filed with the Commission on December 19, 1997, in the table
under the caption "Election of Directors."
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
Jerome Goldstein, 58, is a founder of the Company and has been Chief
Executive Officer, Chairman of the Board of Directors and Treasurer since the
Company's organization in November 1981. Mr. Goldstein was President of the
Company from the Company's organization until May 1997. Mr. Goldstein was a
cofounder of Clinical Assays, Inc., serving from 1972 to 1980 as Vice President
and then as President. Mr. Goldstein is the brother of Leslie Goldstein, a
director of the Company, and husband of Marlene Kaplan Goldstein, Secretary of
the Company.
Leonard M. Baum, 44, joined the Company in October 1994 as Senior Vice
President and has been President and Chief Operating Officer since May 1997.
From 1986 to 1994, Mr. Baum was employed as Senior Director, Worldwide
Regulatory Affairs/Drug Safety by Squibb Diagnostics. Mr. Baum is also a member
of the Board of Directors.
Ernest Groman, 52, is a co-founder of the Company and has been Senior Vice
President -- Research since June 1997. From 1994 to 1997, he was Director of
Exploratory Research and from 1981 to 1994 he was a Senior Scientist of the
Company.
Dennis Lawler, 43, joined the Company in February 1989 as Director of
Quality Control and has been Vice President -- Quality Control since January
1997. Prior to February 1989, Mr. Lawler was employed at CIS-US, first as Senior
Quality Control Analyst, then as a Production Manager and then as a Plant
Manager.
Jerome M. Lewis, 48, joined the Company in April 1986 as a Senior Scientist
and has been Vice President -- Scientific Operations since February 1991. Prior
to April 1986, Dr. Lewis was employed as a senior scientist by Petroferm Ltd., a
biotechnology company.
James A. Matheson, 53, joined the Company in May 1996 as Vice President --
Finance. Prior to May 1996, Mr. Matheson was Controller of Diatech Diagnostics,
Inc.
Paula M. Jacobs, 53, joined the Company in January 1986 as Vice President
- -- Development. From 1981 to 1986, Dr. Jacobs was employed at Seragen, Inc.,
first as Production Manager and later as General Manager of the Research
Products Division.
Mark C. Roessel, 47, joined the Company in January 1982 as Director of
Regulatory Affairs and has been Vice President -- Regulatory Affairs since
January 1995. Prior to January 1982, Mr. Roessel was Compliance Manager of the
Clinical Assay Division of Baxter International, Inc.
Marlene Kaplan Goldstein is a founder of the Company and has been Secretary
of the Company since the Company's organization in November 1981.
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 3, 1998, filed with the Commission on
December 19, 1997, under the captions "Compensation of Directors" and
"Compensation and Other Information Concerning Directors and Officers."
42
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 3, 1998, filed with the Commission on
December 19, 1997, in the table under the caption "Principal Stockholders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Not applicable.
43
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements. The following financial statements of the
Company and Independent Auditors' Report are incorporated in Item 8 of
this report.
Report of Independent Accountants
Balance Sheets at September 30, 1997 and 1996
Statements of Operations for the Years Ended September 30, 1997, 1996 and
1995
Statements of Stockholders' Equity for the Years Ended September 30, 1997,
1996 and 1995>
Statements of Cash Flow for the Years Ended September 30, 1997, 1996 and 1995
Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities
for the Years Ended September 30, 1997, 1996 and 1995
Notes to Financial Statements
2. Financial Statement Schedules. Financial statement schedules have
been omitted because the required information is not present or not
present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements
or the notes thereto.
3. The exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fiscal quarter
ended September 30, 1997.
44
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADVANCED MAGNETICS, INC.
By: /s/ JERMONE GOLDSTEIN
------------------------------------
Jerome Goldstein, Chief Executive
Officer,
Chairman of the Board of Directors
and Treasurer
December 22, 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.
NAME TITLE
- ------------------------------------- -----------------------------------
/s/ JEROME GOLDSTEIN Chief Executive Officer, Chairman December 22, 1997
- ------------------------------------- of the Board of Directors and
Jerome Goldstein Treasurer (principal executive and
financial officer)
/s/ JAMES MATHESON Vice President-Finance (principal December 22, 1997
- ------------------------------------- accounting officer)
James Matheson
/s/ LEONARD M. BAUM Director December 22, 1997
- -------------------------------------
Leonard M. Baum
/s/ THOMAS COOR Director December 22, 1997
- -------------------------------------
Thomas Coor
/s/ LESLIE GOLDSTEIN Director December 22, 1997
- -------------------------------------
Leslie Goldstein
/s/ JOSEPH LASSITER Director December 22, 1997
- -------------------------------------
Joseph Lassiter
/s/ MICHAEL LOBERG Director December 22, 1997
- -------------------------------------
Michael Loberg
/s/ RICHARD L. MCINTIRE Director December 22, 1997
- -------------------------------------
Richard L. McIntire
/s/ EDWARD B. ROBERTS Director December 22, 1997
- -------------------------------------
Edward B. Roberts
/s/ ROGER E. TRAVIS Director December 22, 1997
- -------------------------------------
Roger E. Travis
/s/ GEORGE M. WHITESIDES Director December 22, 1997
- -------------------------------------
George M. Whitesides
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46
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
---------- ---------------------------------------------------------------------
3.1(1) Certificate of Incorporation of the Company, as amended.
3.2(2) By-Laws of the Company, as amended.
10.1(6) 1983 Stock Option Plan of the Company, as amended on November 13,
1990.
10.2(7) 1987 Employee Stock Purchase Plan.
10.3(7) 1992 Employee Stock Purchase Plan.
10.4(7) 1992 Non-Employee Director Stock Option Plan.
10.5(9) 1993 Stock Plan.
10.6(9) 1993 Non-Employee Director Stock Option Plan.
10.7(13) 1997 Employee Stock Purchase Plan.
10.8(3) Technology Agreement dated January 21, 1983 between the Company and
Corning Glass Works (now Ciba Corning Diagnostics Corp.)
(confidential treatment previously granted).
10.9(2) Agreements between the Company and ML Technology Ventures, L.P. dated
as of March 23, 1987 (confidential treatment previously granted).
10.10(2) Clinical Testing, Supply and Marketing Agreement between the Company
and Guerbet, S.A. dated May 22, 1987 (confidential treatment
previously granted).
10.11(4) Clinical Testing, Supply and Marketing Agreement between the Company
and Eiken Chemical Co., Ltd., dated August 30, 1988 (confidential
treatment previously granted).
10.12(5) Contrast Agent Agreement dated between the Company and Guerbet, S.A.
dated September 29, 1989 (confidential treatment previously granted).
10.13(6) Contrast Agent Agreement between the Company and Eiken Chemical Co.,
Ltd. dated March 27, 1990 (confidential treatment previously
granted).
10.14(6) Amendment to Clinical Testing, Supply and Marketing Agreement between
the Company and Eiken Chemical Co., Ltd., dated September 29, 1990
(confidential treatment previously granted).
10.15(6) License, Supply and Marketing Agreement between the Company and
Mallinckrodt Medical, Inc., dated June 28, 1990 (confidential
treatment previously granted).
10.16(6) Agreement of Amendment between the Company and ML Technology
Ventures, L.P. dated as of June 28, 1990.
10.17(7) Technology License Agreement between the Company and Squibb
Diagnostics, dated February 5, 1991 (confidential treatment
previously granted).
10.18(7) AMI-227 License Agreement between the Company and Squibb Diagnostics,
dated February 5, 1991 (confidential treatment previously granted).
10.19(7) AMI-HS License Agreement between the Company and Squibb Diagnostics,
dated February 5, 1991 (confidential treatment previously granted).
10.20(7) Warrant Purchase Agreement between the Company and Squibb
Diagnostics, dated February 11, 1991.
10.21(7) Purchase Agreement between the Company and ML Technology.
10.22(7) Agreement of Amendment to Clinical Testing, Supply and Marketing
Agreement between the Company and Guerbet, S.A., dated August 13,
1990.
10.23(8) Asset Purchase Agreement dated as of October 15, 1993 by and between
the Company and PerSeptive Biosystems, Inc.
10.24(10) License, Supply and Marketing Agreement dated September 27, 1993
between the Company and Sterling (confidential treatment previously
granted).
10.25(10) Termination Agreement dated November 8, 1993 between the Company and
Squibb Diagnostics (confidential treatment previously granted).
10.26(10) Amendment to License Agreement dated November 8, 1993 between the
Company and Squibb Diagnostics (confidential treatment previously
granted).
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EXHIBIT
NUMBER DESCRIPTION
---------- ---------------------------------------------------------------------
10.27(11) Termination Agreement dated August 30, 1994 between the Company and
Bristol-Myers Squibb Co.
10.28(12) License and marketing agreement between the Company and Berlex
Laboratories, Inc. dated as of February 1, 1995.
10.29(12) Supply Agreement between the Company and Berlex Laboratories, Inc.
dated as of February 1, 1995.
10.30 Lease and Lease Agreement between the Company and Carnegie Center
Associates dated September 6, 1994.
10.31 Lease between Silver Lake Realty Trust and Kalisto Biologicals, Inc.
dated October 24, 1997.
11.1 Computation of earnings per share.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
27 Financial Data Schedule.
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No. 33-13953).
(2) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1987.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-5312).
(4) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1988.
(5) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1989.
(6) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1990.
(7) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1991.
(8) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated October 15, 1993.
(9) Incorporated herein by reference to the exhibits to the Company's
definitive proxy statement for the fiscal year ended September 30, 1992.
(10) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, as amended, for the fiscal year ended September 30,
1993.
(11) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, for the fiscal year ended September 30, 1994.
(12) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, for the fiscal quarter ended December 31, 1994.
(13) Incorporated herein by reference to the exhibits to the Company's
definitive Proxy Statement for the fiscal year ended September 30, 1996.
47