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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2001
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: 0-28386
CELL THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1533912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
501 Elliott Avenue West, Suite 400
Seattle, WA 98119 98119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 282-7100
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Classes)
Indicate by check mark whether the Registrant: (1) has filed all reports
required 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.
On February 28, 2002, Cell Therapeutics, Inc. had 34,990,992 outstanding
shares of Common Stock. Of those, 26,493,979 shares of Common Stock were held by
nonaffiliates. The aggregate market value of such Common Stock held by
nonaffiliates, based on the closing price of such shares on the Nasdaq National
Market on February 28, 2002, was approximately $585,251,996. Shares of Common
Stock held by each executive officer and director and by each person known to
the Company who beneficially owns more than 5% of the outstanding Common Stock
have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III incorporate by reference information
from the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Registrant's 2002 Annual Meeting of Shareholders.
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PART I
This Form 10-K contains, in addition to historical information,
forward-looking statements. These statements relate to our future plans,
objectives, expectations, intentions and financial performance, and assumptions
that underlie these statements. When used in this Form 10-K, terms such as
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "predicts," "should," or "will" or the
negative of those terms or other comparable terms are intended to identify
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause industry trends or our actual
results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include
those listed under "Factors Affecting Our Operating Results," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business" and elsewhere in this Form 10-K.
Although we believe that expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We will not update any of the
forward-looking statements after the date of this Form 10-K to conform these
statements to actual results or changes in our expectations. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
apply only as of the date of this Form 10-K.
Item 1. Business
Overview
We develop, acquire and commercialize novel treatments for cancer. Our
goal is to build a leading, vertically-integrated biopharmaceutical company with
a diversified portfolio of proprietary oncology drugs. Our research and
in-licensing activities are concentrated on identifying new, less toxic and more
effective ways to treat cancer.
We were incorporated in Washington in 1991. Our principal executive
offices are located at 501 Elliott Avenue West, Seattle, Washington 98119. Our
telephone number is (206) 282-7100. Our website can be found at
www.cticseattle.com.
"CTI," "CT-2584" and "TRISENOX" are our trademarks. All other product
names, trademarks and trade names referred to in this Form 10-K are the property
of their respective owners.
Our Products
We acquired our lead product called arsenic trioxide, or TRISENOX(R), in January
2000. We received Food and Drug Administration, or FDA, approval to market
TRISENOX in the U.S. in September 2000, and the European Agency for the
Evaluation of Medicinal Products, or EMEA, approval to market in the European
Community, or EU, in March 2002. TRISENOX is marketed for patients with a type
of blood cell cancer called acute promyelocytic leukemia, or APL, who have
relapsed or failed standard therapies. In its pivotal trial in patients with
relapsed or refractory APL, 70% of the 40 patients experienced complete
remission following treatment with TRISENOX with 82% achieving a molecular
remission. We have received orphan drug designation for TRISENOX from the FDA
for APL, multiple myeloma, Myelodysplastic syndromes, or MDS, chronic myeloid
leukemia, or CML, and acute myeloid leukemia, or AML. In addition, TRISENOX is
currently listed in the U.S. Pharmacopeia Oncology Drug Information, or USP DI,
under Orphan Product Designation and Approvals in multiple myeloma and MDS. We
have also received designation as an orphan medicinal product by the EMEA under
its
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recently enacted orphan drug legislation for APL, MDS, and multiple myeloma.
Forty-two TRISENOX clinical trials studying the drug alone and in combination
with other therapies are ongoing, are planned to begin in the near future, or
were recently completed. Twelve of these 42 trials are being done under the
sponsorship of the National Cancer Institute, or NCI, in the United States,
under a Cooperative Research and Development Agreement, or CRADA, with us.
Preliminary data from ongoing clinical trials have shown encouraging responses
in patients with multiple myeloma, MDS, CML, lymphoma, prostate cancer, and
neuroblastoma. Ten of these studies are being conducted in patients with various
solid tumors for which preclinical studies have shown potential activity of
TRISENOX. In addition to the 42 current trials, 4 trials in various solid tumors
have been approved in concept by the NCI for inclusion in the CRADA program, and
13 trials are planned by independent investigators for the coming year.
We are also developing a new way to deliver cancer drugs more selectively
to tumor tissue in order to reduce the toxic side effects and improve the
anti-tumor activity of existing chemotherapy agents. Our technology links, or
conjugates, chemotherapy drugs to biodegradable polymers, including
polyglutamate. We believe this technology works by taking advantage of the
characteristics of tumor blood vessels to increase the percentage of the drug
administered that actually reaches the tumor, which may increase the potency and
reduce the side effects of a given dose compared to giving the drug alone. In
addition, the conjugates appear to be inactive while circulating in the
bloodstream, which may also lower toxicity relative to the drug alone.
Our first application of the polymer technology is PG-TXL, or CT-2103,
which is paclitaxel linked to polyglutamate. Paclitaxel is the active ingredient
in Taxol, the world's best selling cancer drug. In animal studies, PG-TXL
demonstrated fewer side effects and improved tumor killing-activity when
compared to Taxol alone. The Cancer Research Campaign, or CRC, sponsored a phase
I clinical trial of PG-TXL in the United Kingdom for which patient enrollment is
complete. Two phase I clinical trials and three phase II clinical trials are
currently underway in the U.S. By the end of the second quarter, 4 additional
phase I studies investigating various dosing intervals, 5 additional phase II
studies in various tumor types, and 2 randomized phase III trials, in
non-small-cell lung and first-line ovarian cancer will begin enrolling patients.
We also initiated development of a novel polyglutamate-camptothecin molecule, or
PG-CPT, and filed a U.S. investigational new drug application, or IND, in
December 2001. We initiated a phase I clinical trial with PG-CPT in the first
quarter of 2002, and plan to initiate another trial in the second half of 2002.
During 2001, we discontinued clinical development of CT-2584, and are
investigating the development of a polymer conjugate of this drug candidate,
which may make it easier to administer, and potentially more effective.
The Oncology Market
Overview. According to the American Cancer Society, or ACS, cancer is the
second leading cause of death in the United States, resulting in over 550,000
deaths annually. The National Cancer Advisory Board reports that more than 8
million people in the United States have cancer, and it is estimated that one in
three American women, and one in two American men will develop cancer in their
lifetime. Approximately 1.3 million new cases of cancer are diagnosed each year
in the United States. The most commonly used methods for treating patients with
cancer are surgery, radiation and chemotherapy. Patients usually receive a
combination of these treatments depending upon the type and extent of their
disease. At the time of diagnosis, 70% of patients have tumors that have already
spread to other parts of the body. Therefore, almost all receive systemic
therapy such as chemotherapy during the course of their disease.
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Unfortunately, there are significant limitations and complications
associated with radiation and chemotherapy that result in a high rate of
treatment failure. The principal limitations of chemotherapy include:
. treatment related toxicities
. inability to selectively target tumor tissue
. the development of resistance to the cancer-killing effects of
chemotherapy
Treatment related toxicities. The majority of current chemotherapy agents
kill cancer cells by disrupting the cell division process. Chemotherapy drugs
disrupt the process by killing cells once they begin to undergo division and
replication. Although this mechanism often works in cancer cells, which grow
rapidly through cell division, non-cancerous cells are also killed because they
too undergo routine cell division. This is especially true for cells that line
the mouth, stomach and intestines, hair follicles, blood cells and reproductive
cells (sperm and ovum). Because the mechanism by which conventional cancer drugs
work is not limited to cancer cells, their use is often accompanied by
toxicities. These toxicities limit the effectiveness of cancer drugs and
seriously impact patients' quality of life.
Inability to selectively target tumor tissue. When administered,
chemotherapy drugs circulate through the bloodstream, reaching both tumor and
normal tissues. Normal dividing tissues are generally as sensitive as tumor
cells to the killing effects of chemotherapy. These toxic effects on normal
tissues prevent use of higher, potentially more effective, doses of
chemotherapy.
Chemotherapy resistance. Resistance to the cancer killing effects of
conventional chemotherapy drugs is a major impediment to effective treatment of
cancer. Approximately 90% of all cancer patients undergoing chemotherapy
ultimately develop resistance to chemotherapy and die from their disease.
Because many chemotherapy drugs share similar properties, when a tumor develops
resistance to a single drug, it may become resistant to many other drugs as
well. Drugs that work differently from existing chemotherapies, and are not
susceptible to the same mechanisms of resistance, could play a very important
role in treating resistant tumors.
Strategy
Our goal is to become a leading cancer drug company. The following are the
key elements of our business strategy:
. We initially develop our cancer drug candidates to treat life
threatening types or stages of cancer for which current treatments are
inadequate, and that qualify for fast-track designation from the FDA
and EMEA. We will also seek to expand the market potential of our
products by seeking further approval for other indications in larger
cancer patient populations.
. We plan to devote a substantial portion of our efforts to develop
PG-TXL and to further develop and commercialize TRISENOX for
additional indications.
. We have developed our own sales and marketing capabilities in the
United States and select European territories and may establish
collaborations to commercialize our products.
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. We are applying our patented polymer drug delivery technology to
develop a portfolio of improved versions of currently marketed
anti-cancer drugs and novel cancer fighting agents to improve their
ease of administration, side effect profile and effectiveness.
. We plan to continue to in-license or acquire complementary products,
technologies, or companies.
Products in Development
The following table lists the currently active trials (indicated by a
status of "open") and the trials that will be opened to enrollment during the
second quarter of 2002 (status "2Q2002") for our products in development. Also
listed are the trials that have recently closed to enrollment but for which
clinical trial reports are in progress (status "closed").
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Product Candidate Indication/Intended Use Phase/ Status
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TRISENOX(R) HEMATOLOGIC MALIGNANCIES
(arsenic trioxide), Multiple Myeloma
ATO injection ATO single agent (2 trials, US and Europe) II / open
ATO single agent, twice weekly dosing schedule II / open
ATO in combination with dexamethasone II / open
ATO in combination with ascorbic acid (2 trials, one NCI) I/II / open
ATO in combination with dexamethasone and ascorbic acid II / open
ATO in combination with thalidomide II / open
ATO in combination with dexamethasone and ascorbic acid II / 2Q2002
ATO in combination with dexamethasone and ascorbic acid after SCT II / 2Q2002
Myelodysplastic Syndromes (MDS)
ATO single agent (2 trials, US and Europe) II / open
ATO in combination with thalidomide II / open
ATO single agent II / 2Q2002
ATO in combination with cytarabine II / 2Q2002
ATO in combination with growth factors II / 2Q2002
Acute Promyelocytic Leukemia (APL)
ATO in combination with Mylotarg, salvage treatment II / open
ATO single agent, APL in molecular relapse (2 trials) II / open
ATO in combination with ATRA, de novo APL II / open
ATO as consolidation in de novo APL following standard induction (NCI) III / open
Chronic Myeloid Leukemia (CML)
ATO in combination with ascorbic acid II / open
ATO single agent in patients with rel/ref Ph+ ALL or blast crisis CML (NCI) II / open
ATO in combination with STI-571 (Gleevec) II / open
ATO in combination with STI-571 (Gleevec) II / 2Q2002
Non-Hodgkin's Lymphoma (NHL)
ATO in combination with Rituxan II / 2Q2002
ATO single agent, relapsed/refractory intermediate or high grade NHL (NCI) II / closed
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5
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Product Candidate Indication/Intended Use Phase/ Status
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Acute Myeloid Leukemia (AML)
Relapsed/refractory AML, secondary leukemia, or pts > 65 yrs of age (NCI) II / open
-
ATO in combination with ascorbic acid II / 2Q2002
Other Leukemia/Lymphoma
Pediatric patients with refractory leukemia/lymphoma (NCI) I / open
Rel/ref acute lymphoblastic leukemia (NCI) II / open
Rel/ref lymphoproliferative disorders (NCI) II / open
SOLID TUMORS
Neuroblastomas and other solid tumors in pediatric patients II / open
Advanced cervical carcinoma (NCI) II / open
Hormone-refractory prostate cancer (NCI) II / open
Urothelial cancer (NCI) II / open
Hepatocellular carcinoma I / 2Q2002
Advanced cancer patients with renal dysfunction I / 2Q2002
Malignant melanoma II / 2Q2002
Germ cell tumors II / 2Q2002
Hormone-refractory prostate cancer, in combination with docetaxel II / 2Q2002
Renal cell carcinoma (NCI) II / closed
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PG-TXL Advanced solid tumors - Dosing every 3 weeks (UK) I / closed
(CT-2103) Advanced solid tumors in combination with cisplatin I / open
Advanced solid tumors in combination with carboplatin I / open
Advanced solid tumors, single agent - dosing every week (US) I / 2Q2002
Advanced solid tumors, single agent - dosing every 2 weeks (UK) I / 2Q2002
Advanced solid tumors, single agent - dosing every 3 weeks (US) I / 2Q2002
Non-small-cell lung cancer salvage, single agent I / 2Q2002
Ovarian front-line dose escalation (GOG) I/II / 2Q2002
Ovarian, fallopian tube, peritoneal carcinoma - salvage II / open
Colorectal cancer salvage II / open
Non-small-cell lung cancer (high risk patients) II / open
Ovarian salvage (GOG) II / 2Q2002
Lung cancer, in combination with radiation I / 2Q2002
Breast cancer (UK - CRC) II / 2Q2002
Kaposi sarcoma, single agent II / 2Q2002
Non-small-cell lung cancer (second line; multinational) III / 2Q2002
Ovarian cancer (front line; multinational) III / 2Q2002
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PG-CPT Advanced solid tumors I / open
(CT-2106)
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6
TRISENOX (arsenic trioxide injection)
We are marketing TRISENOX for the treatment of patients with chemotherapy
resistant or relapsed APL. We received FDA approval in this indication in
September 2000, and in March 2002, we received marketing authorization in the
EU, in the same indication. We anticipate launching TRISENOX in the EU by mid
2002. TRISENOX is a highly purified version of arsenic, a natural element.
TRISENOX appears to have multiple targets and mechanisms of antileukemic
activity: it degrades a protein that causes abnormal levels of immature white
blood cells while simultaneously forcing immature cancer cells to self destruct
through a process called programmed cell death or apoptosis. Apoptosis is a
normal part of a cell's life cycle. Because cancer is often associated with a
malfunction of the normal process of apoptosis, drugs that can induce apoptosis
offer the hope of affecting cancer cells more selectively without the typical
toxic side effects of conventional treatments. Direct induction of apoptosis
represents a new method of killing tumor cells that is different from that of
the majority of conventional cancer drugs. As a result, in addition to its use
as single agent therapy, TRISENOX may work well when administered in combination
with other cancer therapies to produce more durable cancer response rates.
We intend to protect TRISENOX by obtaining orphan drug marketing
exclusivity in the U.S. and Europe. When granted orphan drug status, products
usually receive seven years of marketing exclusivity in the U.S. and ten years
in the EU. If a product with an orphan drug designation subsequently receives
the first FDA or EMEA approval for the indication for which it has such
designation, the product is entitled to orphan drug marketing exclusivity,
meaning that the regulatory agency may not approve any other applications to
market the same drug for the same indication, except in certain very limited
circumstances, for a period of seven or ten years. We have received U.S. orphan
drug marketing exclusivity for TRISENOX(R) in APL and have received U.S. orphan
drug designation for TRISENOX for the treatment of multiple myeloma, MDS, CML,
and AML. In addition, TRISENOX has received orphan drug designation for the
treatment of APL, multiple myeloma, and MDS under the recently enacted European
orphan drug regulation. We also plan to pursue orphan designation for other
indications. In addition, we have exclusive rights to several patent
applications filed by PolaRx Biopharmaceuticals, Inc., or PolaRx, Memorial
Sloan-Kettering Cancer Center and the Sam Waxman Cancer Foundation that cover
methods of treating a variety of cancers and conditions with TRISENOX.
TRISENOX for Acute Promyelocytic Leukemia. APL is a malignant disorder of
the white blood cells that can occur across all age groups. Based on ACS data,
approximately 1,500 to 2,000 patients are diagnosed with APL each year in the
United States, with a similar incidence in the EU. Current treatment for newly
diagnosed APL patients includes the use of all-trans retinoic acid, commonly
called ATRA, in combination with anthracycline chemotherapy. Up to 10% of
patients die during front line therapy, some patients will have long-term
toxicity due to anthracycline treatment, and up to 30% of patients who achieve
initial remission will eventually relapse. After relapse, the long-term outlook
for these patients is poor.
TRISENOX has been investigated in relapsed and refractory APL patients,
previously treated with an anthracycline and retinoid regimen in two open label
studies. One was a single investigator clinical, or pilot, trial involving 12
patients and the other was a multicenter, 9-institution study, or pivotal trial,
of 40 patients. The pilot trial results and accompanying editorial describing
the use of TRISENOX to treat patients with relapsed APL were published in the
November 5, 1998 issue of The New England Journal of Medicine. The results of
this study were confirmed by the pivotal trial that was published in September
2001 in The Journal of Clinical Oncology. Long term follow up data from
multicenter study were presented at the 8th International Symposium on APL in
Rome, Italy. The results demonstrated that among the 85% of patients who
achieved a complete remission, an unprecedented 82% were confirmed to
7
have a molecular remission using a highly sensitive molecular test. With a
median follow up of 30 months, the overall survival estimate for the 52 patients
in these two studies is 66%.
Side effects of TRISENOX noted in these studies were generally manageable,
and most patients were treated as outpatients once the serious symptoms of their
APL were resolved. The most common side effects included nausea, cough, fatigue,
headache, vomiting, abdominal pain, diarrhea, shortness of breath, leukocytosis
(an increase in the number of white blood cells in circulation), hyperglycemia
(increased blood sugar), rash, prolongation of the QT interval (an asymptomatic
change in electrocardiogram, or EKG), edema (water retention), and dizziness.
TRISENOX for Multiple Myeloma. Multiple myeloma is a malignant disease of
the bone marrow that is invariably fatal. According to the Multiple Myeloma
Research Foundation, multiple myeloma is the second most common blood cell
malignancy, affecting between 40,000 and 50,000 people in the United States with
over 14,000 new cases reported annually. The disease is initially treated with
oral chemotherapy drugs. Once the disease can no longer be controlled with oral
drugs, treatments include high dose corticosteroids, high dose chemotherapy, a
combination of high dose chemotherapy and stem cell transplants and recently
thalidomide. Fewer than 50% of patients respond to these treatments.
Preclinical studies have suggested that TRISENOX may be able to kill
multiple myeloma cells taken from chemotherapy-resistant patients and that the
killing may be enhanced when TRISENOX is combined with vitamin C (ascorbic
acid), corticosteroids, or other agents used to treat myeloma. Preliminary
reports from three clinical studies using TRISENOX in patients with myeloma who
had failed multiple prior therapies showed encouraging responses as reported at
ASH in December 2000 and 2001, and during a 2001 symposium at the International
Myeloma Meeting in Banff. We are sponsoring several multicenter trials with
TRISENOX used either as a single agent or in combination with corticosteroids,
ascorbic acid, or thalidomide for advanced stages of multiple myeloma. TRISENOX
has received orphan drug designation from the FDA and the EMEA for this
indication.
TRISENOX for Myelodysplastic Syndrome, or MDS. MDS is a preleukemic
condition affecting about 50,000 individuals a year with an annual incidence of
10,000 to 20,000 patients a year. Many patients who develop MDS progress to
develop acute leukemia. All patients have a progressive decline in their ability
to make blood cells, ultimately resulting in anemia requiring red blood cell
transfusions, a low white blood cell count placing them at risk for infections,
and a low platelet count making them prone to bleeding. There is no specific
approved therapy for this disorder except supportive care and the use of growth
factors such as Procrit and Leukine. Data from phase I studies suggested that
some patients improved after receiving TRISENOX. Several trials to explore the
activity of TRISENOX in MDS have been initiated and the early data have shown
that some patients had apparent clinical benefit. Orphan drug designation has
been received from both the FDA and the EMEA.
TRISENOX for Chronic Myeloid Leukemia, or CML. CML is a form of leukemia
affecting approximately 15,000 individuals in the U.S. and has an annual
incidence of 5,000 patients per year. It is caused by a highly specific
chromosomal rearrangement that produces an abnormal fusion gene called the
bcr-abl (this is similar to the cause of APL, which results from a different
chromosomal rearrangement). A dramatic advance was recently made in the
treatment of CML with the approval of Gleevec, a new drug that specifically
targets and inactivates the bcr-abl gene product. Gleevec can induce durable
clinical remissions in a very high percentage of patients with early stage CML.
Although it is active in patients with later stages of the disease termed
accelerated phase or blast crisis, the remissions are short-lived as resistance
to Gleevec develops. There is a major need to identify drugs that will enhance
the efficacy of Gleevec in advanced stages of CML and in particular, prevent the
emergence of resistance.
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Two recent publications indicate that TRISENOX may be the ideal agent to use
with Gleevec for the following reasons:
. It is active in CML by itself producing complete remissions in 74%
of newly diagnosed CML patients in a study from China
. It causes degradation of the bcr-abl and therefore works in concert
with Gleevec against the direct cause of the disease and prevents
the emergence of resistance to Gleevec
. CML cells are far more sensitive to TRISENOX than are normal blood
cells
Trials exploring the use of TRISENOX in conjunction with Gleevec in both early
and later stages of CML are in progress or are about to begin.
TRISENOX for Other Hematologic Malignancies. A number of other cancers of
blood and lymphatic organs are under study including lymphomas and leukemias.
Non-Hodgkin's lymphoma affects 180,000 people in the U.S. and there are 55,000
new cases per year according to the American Cancer Society. Despite new
effective therapies, relatively few patients are cured and additional treatments
are needed. Data from phase I and phase II studies indicate that TRISENOX can
induce remissions in patients with advanced lymphomas. Studies are currently in
progress to evaluate the activity of TRISENOX as a single agent and in
combination with standard therapies for lymphoma.
TRISENOX for Solid Tumors. Solid tumors include malignancies that develop
in various tissues throughout the body, as opposed to hematologic cancers
described above. Genitourinary cancers, such as cervical, renal cell, bladder
and prostate cancer, affect approximately 850,000 patients in the United States,
with over 300,000 new cases diagnosed annually. Preclinical tests and
preliminary clinical trials results have suggested that TRISENOX may have
significant anti-tumor activity in a number of solid tumors including cancers of
the ovary, prostate, bladder, liver, lung and melanoma. Early data from phase I
and II studies show evidence for clinical activity in prostate cancer and
neuroblastoma. A number of other studies of TRISENOX as a single agent and in
combination with standard therapy in patients with solid tumors will begin
shortly. Ten trials in various solid tumors are currently underway or are soon
to begin.
Polyglutamate Drug Delivery Technology
We are also developing a new way to deliver cancer drugs more selectively
to tumor tissue with the goal of reducing the toxic side effects and improving
the anti-tumor activity of existing chemotherapy agents. Our technology links
cancer drugs to proprietary polymers, such as polyglutamate. Polyglutamate,
which we call PG, is a biodegradable polymer of glutamic acid, a naturally
occurring amino acid. To build PG we link glutamic acid molecules together to an
optimal size. We believe the polymer technology takes advantage of a
well-described difference between tumor blood vessels and blood vessels in
normal tissues. The blood vessels in tumor tissues are more porous than those in
normal tissues, and they are therefore more permeable to large molecules, such
as our polymers, that are within a specific size range. As the polymer, carrying
its tumor-killing drug, circulates in the bloodstream and passes through the
tumor blood vessels, it becomes trapped in the tumor tissue allowing a
significantly greater percentage of the anti-cancer drug to accumulate in tumor
tissue compared to normal tissue. The toxicity of the chemotherapy drug to
normal tissues also may be reduced because the drug appears to be inactive as
long as it is bound to the polymer. Once the polymer backbone is digested in the
tumor, the cancer-killing drug is released directly into the cancer tissues.
9
Based on preclinical animal studies and phase I and preliminary phase II
clinical trial data, we believe that our polymer-chemotherapy drug conjugates
may be able to achieve a number of benefits over existing chemotherapy drugs:
. more drug reaches the tumor
. increased efficacy using the same amount of active drug
. ability to use higher doses of the active drug
. less toxicity at the same or higher doses of active drug
. broader applicability due to differentiated tumor uptake mechanism
. potential to overcome resistance to the underlying chemotherapy drug
In addition, we believe that linking our polymers to existing drugs will
yield patentable subject matter and that our polymer-drug conjugates will not
infringe any third party patents covering the underlying drug. However, there
can be no assurance that we will receive a patent for our polymer conjugates or
that we will not be challenged by the holder of a patent covering the underlying
drug.
We licensed the worldwide exclusive rights to PG and related polymers and
their applications from PG-TXL Company in 1998. The technology was originally
developed at the M.D. Anderson Cancer Center. The initial patent, which issued
in November 1999, covers PG and related polymers coupled with commonly used
cancer drugs such as paclitaxel, docetaxel, etoposide, teniposide, or
camptothecins. The patented technology covers formulations of PG-conjugated
paclitaxel that also include the use of human serum albumin and conjugation to
epothilones.
Our strategy is to use this novel polymer technology to build a portfolio
of potentially safer and more effective versions of well-known anti-cancer
agents. We believe that our polymer drug development program may lower the risks
inherent in developing new drugs because we are linking polymers to well defined
and widely used chemotherapy drugs. We are initially focusing our development
efforts on applying PG to two of the fastest growing classes of anticancer
drugs, taxanes and camptothecins.
PG-TXL (polyglutamate paclitaxel). PG-TXL, or CT-2103, is PG linked to
paclitaxel, the active ingredient in Taxol, the world's best selling cancer
drug. Taxol is difficult to administer because it must be mixed in castor oil
and ethanol, which is extremely irritating to blood vessels and requires
surgical placement of a large catheter for administration. It also may cause
allergic reactions, and requires a minimum of three hours of intravenous
infusion. PG-TXL is 80,000 times more water-soluble than paclitaxel, allowing it
to be dissolved in 100 mL of dextrose in water and infused over ten minutes.
Also, because PG-TXL is water soluble, its administration does not require
routine premedication with steroids and antihistamines to prevent severe
allergic reactions; such premedication can be reserved for those patients who
show signs of sensitivity during treatment. PG-TXL may also allow delivery of
higher doses than can be achieved with the currently marketed version of
paclitaxel.
It is estimated that more than 2 million people have breast, ovarian, lung
and colon cancer, with more than 500,000 new cases diagnosed each year in the
United States. IMS Health reported taxane U.S. sales of approximately $800
million, and worldwide sales of roughly $1.3 billion for the year ended
September 2001, despite the difficulties associated with their administration
and their serious dose-limiting toxicities.
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The majority of taxane use has been in breast, ovarian and lung cancer
indications. Most recently, Taxol received approval as a first-line treatment in
node-positive breast cancer, which is expected to add up to an additional 75,000
patients annually eligible for treatment in the U.S.
PG-TXL has been compared to paclitaxel in numerous studies in animals with
a variety of different tumors. These studies indicate that PG-TXL has a unique
profile resulting in better tolerability and efficacy, both when used by itself
as a single agent or in combination with other chemotherapy, radiation therapy,
or therapeutic monoclonal antibodies. Specifically:
. The maximum tolerated dose (MTD) for PG-TXL is approximately twice
that for the approved formulation of paclitaxel.
. When the MTD of PG-TXL is compared to the MTD of paclitaxel, in over
20 different animal tumor models, PG-TXL was invariably more
effective and in a number of models was curative. Cures were never
observed with paclitaxel in these models.
. Examination of the distribution of PG-TXL to tumor tissue in mice
and comparing it to tumors in mice who received the same dose of the
approved preparation of paclitaxel showed that 12-fold more
paclitaxel was delivered with PG-TXL. Strikingly, more paclitaxel
was present in the tumors at the end of one week following PG-TXL
administration than was present one day after administration of
standard paclitaxel.
. Because in PG-TXL, paclitaxel is tightly bound to PG backbone, it is
both highly water soluble and inactive until released. Therefore, it
can be delivered without toxic solubilizing agents such as Cremaphor
(used in Taxol), which abolishes the requirement for premedications
to prevent infusional toxicity. Moreover, little free paclitaxel is
present in circulation reducing side effects to normal tissues such
as the bone marrow, nervous tissue, and hair follicles.
. PG-TXL is engulfed by tumor cells instead of passively diffusing
into them. Because of this, it bypasses a common mechanism of
paclitaxel resistance associated with a cell membrane pump known as
the multi-drug resistance pump, or MDR; PG-TXL in preclinical
studies is effective in tumors that are resistant to standard
paclitaxel.
Lastly, PG-TXL is more effective than standard paclitaxel at enhancing the
effectiveness of other cancer therapies including chemotherapy and radiation. A
recent report shows that in a curative, standard radiation model, PG-TXL was
more than 4 times as effective as paclitaxel at enhancing radiation curability.
Most importantly, unlike standard paclitaxel, PG-TXL did not sensitize normal
organs such as skin, hair follicles, or the GI tract to radiation. A recently
approved grant from the National Cancer Institute to the MD Anderson Cancer
Center and us will support a clinical trial using PG-TXL in sensitive patients
undergoing potentially curative radiation for lung cancer.
We chose to initiate human trials of PG-TXL in the U.K. because of the
CRC's experience with polymer drug conjugates and because of the ability to
perform trials in patients who had not received a taxane. The phase I clinical
trial of PG-TXL sponsored by the CRC has completed patient enrollment.
Preliminary data presented by the investigator showed that PG-TXL may have a
more favorable toxicity profile than expected from equivalent doses of Taxol,
while demonstrating evidence of anti-tumor activity, supporting the preclinical
evidence that PG-TXL may have applications across a broader variety of types of
cancer.
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Based on the preliminary data generated in the phase I CRC trial, and
following discussions with a number of opinion leaders and cooperative groups,
we initiated an aggressive development program for PG-TXL. Two phase I clinical
trials (one in combination with cisplatin and one with carboplatin) and 3 phase
II clinical trials are currently underway in the U.S. By the end of the second
quarter of 2002, 4 additional phase I studies investigating various dosing
intervals, 5 additional phase II studies in various tumor types (non-small-cell
lung, ovarian, breast cancers and Kaposi sarcoma), and 2 randomized phase III
trials, in non-small-cell lung and first-line ovarian cancer, will begin
enrolling patients. Some of these ongoing studies use PG-TXL at doses in excess
of the approved dose for Taxol and all use a convenient 10-minute infusion time.
Our registration strategy for PG-TXL is to examine its potential safety and
efficacy as single agent therapy or in combination with other chemotherapy drugs
in solid tumors.
PG-CPT (polyglutamate camptothecin). PG-CPT is a camptothecin linked to
PG. Camptothecins are an important and rapidly growing class of anti-cancer
drugs. However, like taxanes, their full clinical benefit is limited by poor
solubility and significant toxicity. To avert solubility limitations, oral
analogs such as Hycamtin and Camptosar were developed. However, conversion to
oral dosage forms has been accompanied by a reduction in anti-tumor potency.
Despite these limitations, camptothecins are becoming standard drugs in the
treatment of advanced colon, lung and ovarian cancer. Worldwide sales for
camptothecins exceeded $700 million in 2001.
Linking a camptothecin to PG renders it water soluble, and animal studies
suggest that it permits up to 400% more drug to be administered without an
increase in toxicity. PG-CPT showed significantly enhanced anti-tumor activity
in animal models of lung, colon and breast cancer, with up to 500% improvement
over the free drug. We have optimized a polyglutamate camptothecin for clinical
development and filed an IND in December 2001. A phase I clinical trial of
PG-CPT in patients with advanced cancers was initiated in the first quarter of
2002 and we plan to initiate another trial in the second half of 2002.
Collaboration and Licensing Arrangements
PG-TXL Company, L.P. On June 30, 1998, we entered into an agreement with
PG-TXL Company, L.P. granting us an exclusive worldwide license for the rights
to PG-TXL and to all potential uses of PG-TXL Company's polymer technology.
Under the terms of the agreement, we acquired the rights to fund the research,
development, manufacture, marketing and sale of anti-cancer drugs developed
using this polymer technology. We are obligated to make payments upon the
attainment of significant development milestones, as defined in the agreement.
We also granted warrants to purchase 350,000 shares of our common stock to
PG-TXL Company, L.P., which became exercisable upon our entering a licensing
agreement for PG-TXL with Chugai Pharmaceutical Co. Ltd. The aggregate amount of
milestone payments we may be required to pay pursuant to the PG-TXL agreement is
$20.5 million, of which $2.0 million was paid in 2000. These are payable upon
future milestones, such as trial commencements and completions, filings and
regulatory approvals.
Chugai Pharmaceutical Co., Ltd. In October 2001, we entered into a
licensing agreement with Chugai Pharmaceutical Co., Ltd. for the development and
commercialization of PG-TXL. This agreement grants an exclusive license to
Chugai to develop and commercialize PG-TXL in several Asian markets. Upon
execution of the agreement, Chugai paid us a $3.0 million initial payment. Under
the agreement, we may also receive milestone payments totaling up to $16.0
million upon Chugai's achievement of certain product development milestones, and
we are entitled to receive royalties on product sales in the territories covered
under the agreement. Chugai has also committed up to $54 million in development
expenditures over the course of the licensing agreement. The agreement will
terminate on a country-by-country basis upon the earlier to occur of the
expiration of the applicable patent rights, if any, in a given country or
fifteen years from the date of the first commercial sale of PG-TXL in such
country.
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Patents and Proprietary Rights
We dedicate significant resources to protecting our intellectual property.
Through our acquisition of PolaRx, we obtained rights to four pending patent
applications that, in the aggregate, cover dosage formulations, methods of
administration and methods of use for various forms of arsenic trioxide and
related compounds. We have exclusive rights to two issued patents and 21 U.S.
and foreign pending patent applications relating to our polymer drug delivery
technology. Nine issued U.S. patents cover the chemical entity, pharmaceutical
compositions and methods of use of CT-2584 and related compounds. We intend to
file additional patent applications when appropriate, with respect to
improvements in our core technology and to specific products and processes that
we develop. Patents may not issue from any present or future applications or, if
patents do issue, such patents may not be issued on a timely basis or claims
allowed on issued patents may not be sufficient to protect our technology. In
addition, the patents issued to us may be challenged, invalidated or
circumvented or the rights granted thereunder may not provide proprietary
protection or commercial advantage to us. With respect to such issued U.S.
patents or any patents that may issue in the future, they may not effectively
protect the technology involved, foreclose the development of competitive
products by others or otherwise be commercially valuable.
We have sought and intend to aggressively seek patent protection in the
United States, Canada, Mexico, Europe and Japan to protect any products that we
may develop. We also intend to seek patent protection or rely upon trade secrets
to protect certain of our enabling technologies that will be used in discovering
and evaluating new drugs that could become marketable products. However, such
steps may not effectively protect the technology involved. To protect any such
trade secrets and other proprietary information, we rely on confidentiality and
material transfer agreements with our corporate partners, employees,
consultants, outside scientific collaborators and sponsored researchers and
other advisors. These agreements may be breached, we may not have adequate
remedies for breach or our trade secrets may otherwise become known or
independently discovered by competitors. We also have members of our Scientific
Advisory Board, our clinical advisors, our consultants and, in most cases, our
employees enter into agreements requiring disclosure to us of ideas,
developments, discoveries or inventions conceived during employment or
consulting and assignment to us of proprietary rights to such matters related to
our business and technology.
Manufacturing
We currently use, and expect to continue to be dependent upon, contract
manufacturers to manufacture each of our product candidates. We have established
a quality control and quality assurance program, including a set of standard
operating procedures and specifications, designed to ensure that our products
are manufactured in accordance with current Good Manufacturing Procedures, or
cGMPs, and other applicable domestic and foreign regulations. These
manufacturers may not meet our requirements for quality, quantity or timeliness.
We will need to develop additional manufacturing resources, and may seek
to enter into additional collaborative arrangements with other parties that have
established manufacturing capabilities or may elect to have a third party
manufacture our products on a contract basis. We have agreements with third
party vendors to furnish TRISENOX, PG-TXL and PG-CPT drug supply for clinical
studies and in the case of TRISENOX, for commercial market demand. In September
2001, we entered into a supply agreement with Natural Pharmaceuticals, Inc. for
paclitaxel, a key starting material for PG-TXL. Under the supply agreement, we
purchased paclitaxel at a pre-determined price and will receive supply over a
multi-year term. We will be dependent upon these third parties to supply us in a
timely manner with products manufactured in compliance with cGMPs or similar
standards imposed by foreign regulatory authorities where our products are
tested and/or marketed. Contract manufacturers may violate cGMPs, and the FDA
has recently intensified its oversight of drug manufacturers. The FDA may take
action
13
against a contract manufacturer who violates cGMPs. Such actions may include
requiring the contract manufacturer to cease its manufacturing activities.
Sales and Marketing
We have developed an experienced sales and marketing infrastructure in the
United States to commercialize our portfolio of oncology products. The oncology
market is highly concentrated. It is comprised primarily of the approximately
8,500 physicians who order the vast majority of cancer therapeutics, but we sell
TRISENOX primarily to pharmaceutical wholesalers and oncology distributors, who
in turn sell TRISENOX primarily to hospitals and clinics. We currently are
marketing TRISENOX with our direct sales force in the U.S. consisting of 3
regional business directors, 29 field based oncology account managers and 3
medical science liaisons and expect to have a total of 51 field based sales
personnel by the end of 2002. We plan to use a combination of our own sales
personnel and contract sales personnel to support the commercialization outside
of the U.S.
Competition
Competition in the pharmaceutical and biotechnology industries is intense.
We face competition from a variety of companies focused on developing oncology
drugs. We compete with large pharmaceutical companies and with other specialized
biotechnology companies. Many of our existing or potential competitors have
substantially greater financial, technical and human resources than us and may
be better equipped to develop, manufacture and market products. Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large pharmaceutical and established
biotechnology companies. Many of these competitors have significant products
that have been approved or are in development and operate large, well-funded
research and development programs.
We expect to encounter significant competition for the principal
pharmaceutical products we plan to develop. Companies that complete clinical
trials, obtain required regulatory approvals and commence commercial sales of
their products before their competitors may achieve a significant competitive
advantage if their products work through a similar mechanism as our products.
Accordingly, we do not believe competition is as intense among products that
treat cancer through novel delivery or therapeutic mechanisms. A number of
biotechnology and pharmaceutical companies are developing new products for the
treatment of the same diseases being targeted by us. In some instances, such
products have already entered late-stage clinical trials or received FDA
approval. However, cancer drugs with distinctly different mechanisms of action
are often used together in combination for treating cancer, allowing several
different products to target the same cancer indication or disease type.
We believe that our ability to compete successfully will be based on our
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for our products, obtain required regulatory approvals and
manufacture and successfully market our products either alone or through outside
parties. We will continue to seek licenses with respect to technology related to
our field of interest and may face competition with respect to such efforts.
Government Regulation
The research, development, testing, manufacture, labeling, promotion,
advertising, distribution, and marketing, among other things, of our products
are extensively regulated by governmental authorities in the United States and
other countries. In the United States, the FDA regulates drugs under the Federal
Food, Drug, and Cosmetic Act, or the FDCA, and its implementing regulations.
Failure to comply with the applicable U.S. requirements may subject us to
administrative or judicial sanctions, such as FDA
14
refusal to approve pending new drug applications, warning letters, product
recalls, product seizures, total or partial suspension of production or
distribution, injunctions, and/or criminal prosecution.
Drug Approval Process. None of our drugs may be marketed in the U.S. until
the drug has received FDA approval. The steps required before a drug may be
marketed in the U.S. include:
. preclinical laboratory tests, animal studies, and formulation studies
. submission to the FDA of an investigational new drug application, or
IND, for human clinical testing, which must become effective before
human clinical trials may begin
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for each indication
. submission to the FDA of an NDA
. satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess
compliance with cGMPs, and
. FDA review and approval of the NDA.
Preclinical tests include laboratory evaluation of product chemistry,
toxicity, and formulation, as well as animal studies. The conduct of the
preclinical tests and formulation of the compounds for testing must comply with
federal regulations and requirements. The results of the preclinical tests,
together with manufacturing information and analytical data, are submitted to
the FDA as part of an IND, which must become effective before human clinical
trials may begin. An IND will automatically become effective 30 days after
receipt by the FDA, unless before that time the FDA raises concerns or questions
about issues such as the conduct of the trials as outlined in the IND. In such a
case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or
questions before clinical trials can proceed. We cannot be sure that submission
of an IND will result in the FDA allowing clinical trials to begin.
Clinical trials involve the administration of the investigational drug to
human subjects under the supervision of qualified investigators. Clinical trials
are conducted under protocols detailing the objectives of the study, the
parameters to be used in monitoring safety, and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Clinical trials typically are conducted in three sequential phases, but
the phases may overlap or be combined. The study protocol and informed consent
information for study subjects in clinical trials must also be approved by the
Institutional Review Board at each institution where the trials will be
conducted. Study subjects must sign an informed consent form before
participating in a clinical trial. Phase I usually involves the initial
introduction of the investigational drug into people to evaluate its short-term
safety, dosage tolerance, metabolism, pharmacokinetics and pharmacologic
actions, and, if possible, to gain an early indication of its effectiveness.
Phase II usually involves trials in a limited patient population to (i) evaluate
dosage tolerance and appropriate dosage; (ii) identify possible adverse effects
and safety risks; and (iii) evaluate preliminarily the efficacy of the drug for
specific indications. Phase III trials usually further evaluate clinical
efficacy and test further for safety by using the drug in its final form in an
expanded patient population. There can be no assurance that phase I, phase II,
or phase III testing will be completed successfully within any specified period
of time, if at all. Furthermore, the Company or the
15
FDA may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk.
Assuming successful completion of the required clinical testing, the
results of the preclinical studies and of the clinical studies, together with
other detailed information, including information on the manufacture and
composition of the drug, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more indications. The
testing and approval process requires substantial time, effort, and financial
resources. The agencies review the application and may deem it to be inadequate
to support the registration and we cannot be sure that any approval will be
granted on a timely basis, if at all. The FDA may also refer the application to
the appropriate advisory committee, typically a panel of clinicians, for review,
evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendations of the advisory committee.
Before approving an NDA, the FDA usually will inspect the facility or the
facilities at which the drug is manufactured, and will not approve the product
unless cGMP compliance is satisfactory. If the FDA evaluates the NDA and the
manufacturing facilities as acceptable, the FDA may issue an approval letter, or
in some cases, an approvable letter followed by an approval letter. Both letters
usually contain a number of conditions that must be met in order to secure final
approval of the NDA. When and if those conditions have been met to the FDA's
satisfaction, the FDA will issue an approval letter. The approval letter
authorizes commercial marketing of the drug for specific indications. As a
condition of NDA approval, the FDA may require postmarketing testing and
surveillance to monitor the drug's safety or efficacy, or impose other
conditions. After approval, certain changes to the approved product, such as
adding new indications, manufacturing changes, or additional labeling claims are
subject to further FDA review and approval.
Post-Approval Requirements. Once the FDA approves a drug product, we are
required to comply with a number of post-approval requirements. For example,
holders of an approved NDA are required to report certain adverse reactions to
the FDA, and to comply with certain requirements concerning advertising and
promotional labeling for their products. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval, and the FDA
periodically inspects manufacturing facilities to assess compliance with cGMP.
Accordingly, manufacturers must continue to expend time, money, and effort in
the area of production and quality control to maintain cGMP compliance. We use
and will continue to use third party manufacturers to produce our products in
clinical and commercial quantities, and future FDA inspections may identify
compliance issues at our facilities or at the facilities of our contract
manufacturers that may disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of problems with a
product after approval may result in restrictions on a product, manufacturer, or
holder of an approved NDA, including withdrawal of the product from the market.
Orphan Drug. The FDA may grant orphan drug designation to drugs intended
to treat a "rare disease or condition," which generally is a disease or
condition that affects fewer than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting an NDA. After the
FDA grants orphan drug designation, the identity of the therapeutic agent and
its potential orphan use are publicly disclosed by the FDA. Orphan drug
designation does not convey an advantage in, or shorten the duration of, the
review and approval process. If a product which has an orphan drug designation
subsequently receives the first FDA approval for the indication for which it has
such designation, the product is entitled to orphan exclusivity, meaning that
the FDA may not approve any other applications to market the same drug for the
same indication, except in certain very limited circumstances, for a period of
seven years. Orphan drug designation does not prevent competitors from
developing or marketing different drugs for an indication.
16
We have obtained orphan drug market exclusivity from the FDA for TRISENOX
to treat patients with drug resistant or relapsed APL. We have also received
orphan drug designation for TRISENOX for the treatment of patients with
refractory multiple myeloma and MDS, CML, and AML. However, TRISENOX may not
receive an orphan drug marketing exclusivity for any of these indications, or
any of our other drug products may not receive orphan drug exclusivity for any
indication. Also, it is possible that our competitors could obtain approval, and
attendant orphan drug exclusivity, for products that would preclude us from
marketing our products for specified indications for some time.
Non-United States Regulation. Before our products can be marketed outside
of the United States, they are subject to regulatory approval similar to that
required in the United States, although the requirements governing the conduct
of clinical trials, including additional clinical trials that may be required,
product licensing, pricing and reimbursement vary widely from country to
country. No action can be taken to market any product in a country until an
appropriate application has been approved by the regulatory authorities in that
country. The current approval process varies from country to country, and the
time spent in gaining approval varies from that required for FDA approval. In
certain countries, the sales price of a product must also be approved. The
pricing review period often begins after market approval is granted. Even if a
product is approved by a regulatory authority, satisfactory prices, may not be
approved for such product.
In Europe, marketing authorizations may be submitted at a centralized, a
decentralized or national level. The centralized procedure is mandatory for the
approval of biotechnology products and provides for the grant of a single
marketing authorization that is valid in all European Union members states. As
of January 1995, a mutual recognition procedure is available at the request of
the applicant for all medicinal products that are not subject to the centralized
procedure. There can be no assurance that the chosen regulatory strategy will
secure regulatory approvals on a timely basis or at all.
Environmental Regulation
In connection with our research and development activities, we are subject
to federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, air emission, effluent discharge,
handling and disposal of certain materials, biological specimens and wastes.
Although we believe that we have complied with these laws, regulations and
policies in all material respects and have not been required to take any
significant action to correct any noncompliance, we may be required to incur
significant costs to comply with environmental and health and safety regulations
in the future. Our research and development involves the controlled use of
hazardous materials, including, but not limited to, certain hazardous chemicals
and radioactive materials. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident, we
could be held liable for any damages that result and any such liability could
exceed our resources.
Employees
As of February 28, 2002, we employed 238 individuals, including 69 holding
doctoral or other advanced degrees. Our employees do not have a collective
bargaining agreement. We consider our relations with our employees to be good.
17
Scientific Advisory Board and Clinical Advisors
We have a Scientific Advisory Board that consists of recognized scientists
with expertise in the fields of immunology, cell and molecular biology, and
synthetic and medical chemistry. Our Scientific Advisory Board meets with our
management and key scientific employees on a semi-annual basis and in smaller
groups or individually from time to time on an informal basis. The members
assist us in identifying scientific and product development opportunities,
reviewing with management the progress of our specific projects and recruiting
and evaluating our scientific staff. We also have clinical advisors that assist
us from time to time on clinical matters.
The following are members of our Scientific Advisory Board:
Lewis Cantley, Ph.D., is a noted authority in cellular biochemical
signaling pathways that employ phosphatidyl inositol and its metabolites and is
the discoverer of one of the most critical enzymes in those pathways, the PI3
Kinase. He is currently Professor of Cell Biology at Harvard Medical School and
Chief of the Division of Signal Transduction in the Department of Medicine, Beth
Israel Hospital, Boston and the author of over 180 publications.
Edward A. Dennis, Ph.D., is the Vice Chair of Medical Biochemistry at the
University of California, San Diego. He is a noted authority on phospholipases,
cell signaling and phospholipid metabolism. Dr. Dennis serves on the Scientific
Advisory Board and Management Committee of, and chairs the Management Executive
Board of, the Keystone Symposia. He sits on the Editorial Board of the Journal
of Cellular Biochemistry and on the Publications Committee of the American
Society for Biochemistry and Molecular Biology. He has authored over 185
manuscripts.
Edwin Krebs, M.D., is a Professor Emeritus, Department of Pharmacology and
Biochemistry, at the University of Washington in Seattle and a Senior
Investigator Emeritus at the Howard Hughes Medical Institute. He is a recognized
authority on mechanisms of action of second messengers, including protein
kinases and phosphorylation reactions. He is the recipient of numerous awards
and honors and has authored 297 manuscripts. In 1992, Dr. Krebs was awarded the
Nobel Prize in Physiology of Medicine for his work on second messenger pathways.
L. Jackson Roberts, II, M.D., is an internationally recognized authority
on the oxidative metabolism of polyunsaturated fatty acids. He is known for
having identified PGD2 on the major mast cell lipid mediator and, more recently,
for having originated the field of studying non enzymatically- generated
prostanoids, including the isprostanes and neuroprostanes. He is currently
Professor of Pharmacology and Medicine at Vanderbilt University and is the
author of over 170 publications.
The following are our retained Clinical Advisors:
E. Donnall Thomas, M.D., is the former Associate Director of Clinical
Research and presently a Professor Emeritus at the Fred Hutchinson Cancer
Research Center, of which he was a founding member. His research has spanned a
wide array of fields from radiation biology to developmental immunology, and
from cancer causing genes to gene transfer therapies. For his pioneering work in
bone marrow transplant, Dr. Thomas was awarded the Nobel Prize for Medicine in
1990. Among the other honors awarded to Dr. Thomas in recognition of his medical
research are the American Cancer Society Award for Distinguished Service in
Basic Research and the Kettering Prize of the General Motors Cancer Research
Foundation. He is a member of the U.S. Academy of Sciences.
18
Karen H. Antman, M.D., is the Chief of the Division of Medical Oncology,
College of Physicians & Surgeons of Columbia University. Dr. Antman is an expert
in emerging treatment strategies for solid tumors, notably breast cancer and
sarcomas. From 1994 to 1995 she served as President of the American Society of
Clinical Oncology. Since 1993, Dr. Antman has served on the Sarcoma Committee of
the Southwest Oncology Groups, and has been its chairperson since 1995. From
1993 to 1994 she was program committee chair of the American Association for
Cancer Research. She is on the editorial board of several prestigious journals,
including Associate Editor of The New England Journal of Medicine.
Steven Soignet, M.D., is the Vice President and co-founder of the Arcus
Group, a healthcare information consulting company. He held a faculty
appointment in the Developmental Chemotherapy Service, Memorial Sloan-Kettering
Cancer Center, and in the Department of Medicine, Cornell University Medical
Center. Dr. Soignet's research primarily has focused on early phase clinical
drug development in both hematologic and solid tumors. He is a member of the
American College of Physicians, the American Association of Cancer Research, the
American Society of Hematology, and the American Society of Clinical Oncology.
In addition to selected retained experts, an Ad Hoc advisory board
approach has been taken by us to avail ourselves to the broadest expertise in a
given oncologic disease. We have convened disease specific advisory boards in
the U.S. as well as in Europe to take advantage of the differences in clinical
practice as well as regulatory requirements between these different territories.
This allows us to plan for registration of our drugs in multiple markets.
Factors Affecting Our Operating Results
This annual report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below and elsewhere in this
annual report on Form 10-K.
We may continue to incur net losses, and we may never achieve profitability.
We were incorporated in 1991 and have incurred a net operating loss every
year. As of December 31, 2001, we had an accumulated deficit of approximately
$290.6 million. We may never become profitable, even if we are able to
commercialize additional products. We will need to conduct significant research,
development, testing and regulatory compliance activities that, together with
projected general and administrative expenses, we expect will result in
substantial increasing operating losses for at least the next several years.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
If we do not successfully develop additional products, we may be unable to
generate additional revenue.
We have only one product, TRISENOX, for relapsed or refractory APL, that
has received marketing approval to date. Our leading drug candidates, TRISENOX
for other indications, PG-TXL and PG-CPT, are currently in clinical trials.
These clinical trials of the drug candidates involve the testing of potential
therapeutic agents, or effective treatments, in humans in three phases to
determine the safety and efficacy of the drug candidates necessary for an
approved drug. Many drugs in human clinical trials fail to demonstrate the
desired safety and efficacy characteristics. Even if our drugs progress
successfully through initial human testing, they may fail in later stages of
development. A number of companies in the pharmaceutical industry, including us,
have suffered significant setbacks in advanced clinical trials, even after
reporting promising results in earlier trials. For example, in our first phase
III human trial for lisofylline, completed in March 1998, we failed to meet our
two primary endpoints, or goals, even though
19
we met our endpoints in two earlier phase II trials for lisofylline. As a
result, we are no longer developing lisofylline as a potential product. In
addition, data obtained from clinical trials are susceptible to varying
interpretations. Government regulators and our collaborators may not agree with
our interpretation of our future clinical trial results. The clinical trials of
TRISENOX, PG-TXL and PG-CPT or any of our future drug candidates may not be
successful.
Many of our drug candidates are still in research and preclinical
development, which means that they have not yet been tested on humans. We will
need to commit significant time and resources to develop these and additional
product candidates. We are dependent on the successful completion of clinical
trials and obtaining regulatory approval in order to generate revenues. The
failure to generate such revenues may preclude us from continuing our research
and development of these and other product candidates.
Even if our drug candidates are successful in clinical trials, we may not be
able to successfully commercialize them.
Since our inception in 1991, we have dedicated substantially all of our
resources to the research and development of our technologies and related
compounds. With the exception of TRISENOX for relapsed or refractory APL, all of
our compounds currently are in research or development, and none has been
submitted for marketing approval. Our other compounds may not enter human
clinical trials on a timely basis, if at all, and we may not develop any product
candidates suitable for commercialization. Prior to commercialization, each
product candidate will require significant additional research, development and
preclinical testing and extensive clinical investigation before submission of
any regulatory application for marketing approval. Potential products that
appear to be promising at early stages of development may not reach the market
for a number of reasons. Potential products may:
. be found ineffective or cause harmful side effects during preclinical
testing or clinical trials,
. fail to receive necessary regulatory approvals,
. be difficult to manufacture on a large scale,
. be uneconomical to produce,
. fail to achieve market acceptance, or
. be precluded from commercialization by proprietary rights of third parties.
Our product development efforts or our collaborative partners' efforts may
not be successfully completed and we may not obtain required regulatory
approvals. Any products, if introduced, may not be successfully marketed nor
achieve customer acceptance.
Because we based several of our drug candidates on unproven novel technologies,
we may never develop them into commercial products.
We base many of our product candidates upon novel delivery technologies
that we are using to discover and develop drugs for the treatment of cancer.
This technology has not been proven. Furthermore, preclinical results in animal
studies may not predict outcome in human clinical trials. Our product candidates
may not be proven safe or effective. If this technology does not work, our drug
candidates may not develop into commercial products.
20
We may not complete our clinical trials in the time expected, which could delay
or prevent the commercialization of our products.
Although for planning purposes we forecast the commencement and completion
of clinical trials, the actual timing of these events can vary dramatically due
to factors such as delays, scheduling conflicts with participating clinicians
and clinical institutions and the rate of patient enrollment. Clinical trials
involving our product candidates may not commence nor be completed as
forecasted. We have limited experience in conducting clinical trials. In certain
circumstances we rely on academic institutions or clinical research
organizations to conduct, supervise or monitor some or all aspects of clinical
trials involving our products. In addition, certain clinical trials for our
products will be conducted by government-sponsored agencies and consequently
will be dependent on governmental participation and funding. We will have less
control over the timing and other aspects of these clinical trials than if we
conducted them entirely on our own. These trials may not commence or be
completed as we expect. They may not be conducted successfully. Failure to
commence or complete, or delays in, any of our planned clinical trials could
delay or prevent the commercialization of our products and harm our business.
If we fail to adequately protect our intellectual property, our competitive
position could be harmed.
Development and protection of our intellectual property are critical to
our business. If we do not adequately protect our intellectual property,
competitors may be able to practice our technologies. Our success depends in
part on our ability to:
. obtain patent protection for our products or processes both in the United
States and other countries,
. protect trade secrets, and
. prevent others from infringing on our proprietary rights.
In particular we believe that linking our polymers to existing drugs may
yield patentable subject matter. We do not believe that our polymer-drug
conjugates will infringe any third-party patents covering the underlying drug.
However, we may not receive a patent for our polymer conjugates and we may be
challenged by the holder of a patent covering the underlying drug.
The patent position of biopharmaceutical firms generally is highly
uncertain and involves complex legal and factual questions. The U.S. Patent and
Trademark Office has not established a consistent policy regarding the breadth
of claims that it will allow in biotech patents. If it allows broad claims, the
number and cost of patent interference proceedings in the U.S. and the risk of
infringement litigation may increase. If it allows narrow claims, the risk of
infringement may decrease, but the value of our rights under our patents,
licenses and patent applications may also decrease.
Patent applications in which we have rights may never issue as patents and
the claims of any issued patents may not afford meaningful protection for our
technologies or products. In addition, patents issued to us or our licensors may
be challenged and subsequently narrowed, invalidated or circumvented.
Litigation, interference proceedings or other governmental proceedings that we
may become involved in with respect to our proprietary technologies or the
proprietary technology of others could result in substantial cost to us. Patent
litigation is widespread in the biotechnology industry, and any patent
litigation could harm our business. Costly litigation might be necessary to
protect our orphan drug designations or patent position or to determine the
scope and validity of third party proprietary rights, and we may not have the
required resources to pursue such litigation or to protect our patent rights. An
21
adverse outcome in litigation with respect to the validity of any of our patents
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease using a product
or technology.
We also rely upon trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. Third parties may independently
develop such know-how or otherwise obtain access to our technology. While we
require our employees, consultants and corporate partners with access to
proprietary information to enter into confidentiality agreements, these
agreements may not be honored.
If any of our license agreements for intellectual property underlying TRISENOX,
PG-TXL or any other product are terminated, we may lose our rights to develop or
market that product.
Patents issued to third parties may cover our products as ultimately
developed. We may need to acquire licenses to these patents or challenge the
validity of these patents. We may not be able to license any patent rights on
acceptable terms or successfully challenge such patents. The need to do so will
depend on the scope and validity of these patents and ultimately on the final
design or formulation of the products and services that we develop.
We have licensed intellectual property, including patent applications from
Memorial Sloan Kettering Cancer Institute, Samuel Waxman Cancer Research
Foundation, Beijing Medical University and others, including the intellectual
property underlying TRISENOX. We have also in-licensed the intellectual property
relating to our polymer drug delivery technology, including PG-TXL. Some of our
product development programs depend on our ability to maintain rights under
these licenses. Each licensor has the power to terminate its agreement with us
if we fail to meet our obligations under that license. We may not be able to
meet our obligations under these licenses. If we default under any of these
license agreements, we may lose our right to market and sell any products based
on the licensed technology.
Our products could infringe on the intellectual property rights of others, which
may cause us to engage in costly litigation and, if we are not successful, could
cause us to pay substantial damages and prohibit us from selling our products.
Although we attempt to monitor the patent filings of our competitors in an
effort to guide the design and development of our products to avoid
infringement, third parties may challenge the patents that have been issued or
licensed to us. We may have to pay substantial damages, possibly including
treble damages, for past infringement if it is ultimately determined that our
products infringe a third party's patents. Further, we may be prohibited from
selling our products before we obtain a license, which, if available at all, may
require us to pay substantial royalties. Even if infringement claims against us
are without merit, defending a lawsuit takes significant time, may be expensive
and may divert management attention from other business concerns.
Our limited operating experience may cause us difficulty in managing our growth
and could seriously harm our business.
As a result of additional trials for TRISENOX for indications other than
relapsed or refractory APL and clinical trials currently underway for PG-TXL and
our other products in development, we will need to expand our operations in
various areas, including our management, regulatory, clinical, financial and
information systems and other elements of our business process infrastructure.
We expect to add additional key personnel in these areas in the near future. In
addition, if rapid growth occurs, it may strain our operational, managerial and
financial resources. We will not be able to increase revenues or control
22
costs unless we continue to improve our operational, financial, regulatory and
managerial systems and processes, and expand, train and manage our work force.
If we fail to keep pace with rapid technological change in the biotechnology and
pharmaceutical industries, our products could become obsolete.
Biotechnology and related pharmaceutical technology have undergone and are
subject to rapid and significant change. We expect that the technologies
associated with biotechnology research and development will continue to develop
rapidly. Our future will depend in large part on our ability to maintain a
competitive position with respect to these technologies. Any compounds, products
or processes that we develop may become obsolete before we recover any expenses
incurred in connection with developing these products.
We face direct and intense competition from our rivals in the biotechnology and
pharmaceutical industries and we may not compete successfully against them.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Our competitors
include major, multinational pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions. Many of
these competitors have greater financial and other resources, larger research
and development staffs and more effective marketing and manufacturing
organizations, than we do. In addition, academic and government institutions
have become increasingly aware of the commercial value of their research
findings. These institutions are now more likely to enter into exclusive
licensing agreements with commercial enterprises, including our competitors, to
market commercial products.
Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for drug
candidates before we do. In particular, we face direct competition from many
companies focusing on delivery technologies. Drugs resulting from our research
and development efforts, if approved for sale, may not compete successfully with
our competitors' existing products or products under development.
We may need to raise additional funds in the future, and they may not be
available on acceptable terms, or at all.
We expect that our existing capital resources and the interest earned
thereon will enable us to maintain our current and planned operations until
2004. Beyond that time, if our capital resources are insufficient to meet future
capital requirements, we will have to raise additional funds to continue the
development of our technologies and complete the commercialization of products,
if any, resulting from our technologies. We will require substantial funds to:
(1) continue our research and development programs, (2) in-license or acquire
additional technologies and (3) conduct preclinical studies and clinical trials.
We may need to raise additional capital to fund our operations repeatedly. We
may raise such capital through public or private equity financings,
partnerships, debt financings, bank borrowings, or other sources. Our capital
requirements will depend upon numerous factors, including the following:
. the establishment of additional collaborations,
. the development of competing technologies or products,
. changing market conditions,
23
. the cost of protecting our intellectual property rights,
. the purchase of capital equipment,
. the progress of our drug discovery and development programs, the progress of
our collaborations and receipt of any option/license, milestone and royalty
payment resulting from those collaborations, and
. in-licensing and acquisition opportunities.
Additional funding may not be available on favorable terms or at all. If
adequate funds are not otherwise available, we may curtail operations
significantly. To obtain additional funding, we may need to enter into
arrangements that require us to relinquish rights to certain technologies, drug
candidates, products and/or potential markets. To the extent that additional
capital is raised through the sale of equity, or securities convertible into
equity, you may experience dilution of your proportionate ownership of the
company.
Our stock price is extremely volatile, which may affect our ability to raise
capital in the future.
The market price for securities of biopharmaceutical and biotechnology
companies, including that of ours, historically has been highly volatile, and
the market from time to time has experienced significant price and volume
fluctuations that are unrelated to the operating performance of such companies.
For example, during the twelve months ended December 31, 2001, our stock price
has ranged from a low of $12.50 to a high of $49.00. Fluctuations in the trading
price or liquidity of our common stock may adversely affect our ability to raise
capital through future equity financings.
Factors that may have a significant impact on the market price and
marketability of our common stock include:
. announcements of technological innovations or new commercial therapeutic
products by us, our collaborative partners or our present or potential
competitors,
. our quarterly operating results,
. announcements by us or others of results of preclinical testing and clinical
trials,
. developments or disputes concerning patent or other proprietary rights,
. developments in our relationships with collaborative partners,
. acquisitions,
. litigation,
. adverse legislation, including changes in governmental regulation and the
status of our regulatory approvals or applications,
. third-party reimbursement policies,
. changes in securities analysts' recommendations,
24
. changes in health care policies and practices,
. economic and other external factors, and
. general market conditions.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
We may be unable to attain the raw materials necessary to produce our PG-TXL
product candidate in sufficient quantity to meet demand when and if such product
is approved.
Paclitaxel is derived from certain varieties of yew trees. Supply of yew
trees is tightly controlled by a limited number of companies. We cannot be sure
that we will be able to continue to purchase the materials necessary to produce
PG-TXL in adequate volume and quality. We purchase the majority of the
paclitaxel we need from a single vendor. Should the paclitaxel purchased from
this source prove to be insufficient in quantity or quality, or should this
relationship terminate, there can be no assurance that we will be able to enter
into a similar agreement with an alternate source.
Our dependence on third party manufacturers means that we may not have
sufficient control over the manufacture of our products.
We currently do not have internal facilities for the manufacture of any of
our products for clinical evaluation or commercial production. In addition,
TRISENOX, our first commercial product, is currently manufactured by a single
vendor. We will need to develop additional manufacturing resources, enter into
collaborative arrangements with other parties that have established
manufacturing capabilities or elect to have other third parties manufacture our
products on a contract basis. We are dependent on such collaborators or third
parties to supply us in a timely way with products manufactured in compliance
with standards imposed by the FDA and foreign regulatory authorities. The
manufacturing facilities of contract manufacturers may not comply with
applicable manufacturing regulations of the FDA nor meet our requirements for
quality, quantity or timeliness. Another of our products under development,
PG-TXL, is complex to manufacture, which may prevent us from obtaining a
sufficient supply for the increased clinical trials that are currently planned
or underway.
We may face difficulties in achieving acceptance of our products in the market
if we do not continue to expand our sales and marketing infrastructure.
We currently are marketing TRISENOX with our direct sales force. Because
the oncology market is highly concentrated and many prospective clients are
unfamiliar with TRISENOX, we will need to continue to expand our sales and
marketing infrastructure in order to increase market awareness of this product.
We are in the process of expanding our direct sales force, and currently require
additional qualified sales personnel. Competition for these individuals is
intense, and we may not be able to hire the experience required and number of
sales personnel we need. In addition, if we market and sell products other than
TRISENOX, we would need to further expand our marketing and sales force with
sufficient technical expertise and distribution capacity. If we are unable to
continue to expand our direct sales operations and train new sales personnel as
rapidly as necessary, we may not be able to increase market awareness and sales
of our products, which may prevent us from growing our revenues and achieving
and maintaining profitability.
25
If we lose our key personnel or are unable to attract and retain additional
personnel, we may be unable to pursue collaborations or develop our own
products.
We are highly dependent on Dr. James A. Bianco, our Chief Executive
Officer, and Dr. Jack Singer, our Executive Vice President, Research Program
Chairman. The loss of these principal members of our scientific or management
staff, or failure to attract or retain other key scientific personnel employees,
could prevent us from pursuing collaborations or developing our products and
core technologies. Recruiting and retaining qualified scientific personnel to
perform research and development work are critical to our success. There is
intense competition for qualified scientists and managerial personnel from
numerous pharmaceutical and biotechnology companies, as well as from academic
and government organizations, research institutions and other entities. In
addition, we rely on consultants and advisors, including our scientific and
clinical advisors, to assist us in formulating our research and development
strategy. All of our consultants and advisors are employed by other employers or
are self-employed, and have commitments to or consulting or advisory contracts
with other entities that may limit their availability to us.
We are subject to extensive government regulation, including the requirement of
approval before our products may be marketed.
The FDA has approved only one of our products, TRISENOX, for sale in the
United States, for relapsed or refractory APL. Before we can market TRISENOX for
other indications, we must obtain FDA approval. Our other products are in
development, and will have to be approved by the FDA before they can be marketed
in the United States. If the FDA does not approve our products and any
additional indications for marketed products in a timely fashion, or does not
approve them at all, our business and financial condition may be adversely
affected.
In addition, we and our products are subject to comprehensive regulation
by the FDA both before and after products are approved for marketing. The FDA
regulates, for example, research and development, including preclinical and
clinical testing, safety, effectiveness, manufacturing, labeling, advertising,
promotion, export, and marketing of our products. Our failure to comply with
regulatory requirements may result in various adverse consequences including FDA
delay in approving or refusal to approve a product, recalls, withdrawal of an
approved product from the market, and/or the imposition of civil or criminal
sanctions.
Because there is a risk of product liability associated with our products, we
face potential difficulties in obtaining insurance.
Our business exposes us to potential product liability risks inherent in
the testing, manufacturing and marketing of human pharmaceutical products, and
we may not be able to avoid significant product liability exposure. While we
have insurance covering product use in our clinical trials, and currently have
product liability insurance for TRISENOX, it is possible that we will not be
able to maintain such insurance on acceptable terms or that any insurance
obtained will provide adequate coverage against potential liabilities. Our
inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
limit the commercialization of any products we develop. A successful product
liability claim in excess of our insurance coverage could exceed our net worth.
26
Uncertainty regarding third party reimbursement and health care cost containment
initiatives may limit our returns.
The ongoing efforts of governmental and third party payors to contain or
reduce the cost of health care will affect our ability to commercialize our
products successfully. Governmental and other third party payors are
increasingly attempting to contain health care costs by:
. challenging the prices charged for health care products and services,
. limiting both coverage and the amount of reimbursement for new therapeutic
products,
. denying or limiting coverage for products that are approved by the FDA but
are considered experimental or investigational by third-party payors, and
. refusing in some cases to provide coverage when an approved product is used
for disease indications in a way that has not received FDA marketing
approval.
In addition, the trend toward managed health care in the United States,
the growth of organizations such as health maintenance organizations, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products.
Even if we succeed in bringing any of our proposed products to the market,
they may not be considered cost-effective and third party reimbursement might
not be available or sufficient. If adequate third party coverage is not
available, we may not be able to maintain price levels sufficient to realize an
appropriate return on our investment in research and product development. In
addition, legislation and regulations affecting the pricing of pharmaceuticals
may change in ways adverse to us before or after any of our proposed products
are approved for marketing. While we cannot predict whether any such legislative
or regulatory proposals will be adopted, the adoption of such proposals could
make it difficult or impossible to sell our products. TRISENOX has been
reimbursed by third party payors, but there is no guarantee this reimbursement
will continue.
Since we use hazardous materials in our business, we may be subject to claims
relating to improper handling, storage or disposal of these materials.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. We are subject
to federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated completely. In the event of such an accident, we could be
held liable for any damages that result and any such liability not covered by
insurance could exceed our resources. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development or production efforts.
We may not be able to conduct animal testing in the future which could harm our
research and development activities.
Certain of our research and development activities involve animal testing.
Such activities have been the subject of controversy and adverse publicity.
Animal rights groups and other organizations and
27
individuals have attempted to stop animal testing activities by pressing for
legislation and regulation in these areas. To the extent the activities of these
groups are successful, our business could be materially harmed by delaying or
interrupting our research and development activities.
Because our charter documents contain certain anti-takeover provisions and we
have a rights plan, it may be more difficult for a third party to acquire us,
and the rights of some shareholders could be adversely affected.
Our Restated Articles of Incorporation and Bylaws contain provisions that
may make it more difficult for a third party to acquire or make a bid for us.
These provisions could limit the price that certain investors might be willing
to pay in the future for shares of our common stock. In addition, shares of our
preferred stock may be issued in the future without further shareholder approval
and upon such terms and conditions and having such rights, privileges and
preferences, as the board of directors may determine. The rights of the holders
of common stock will be subject to, and may be adversely affected by, the rights
of any holders of preferred stock that may be issued in the future. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting stock. We have
no present plans to issue any additional shares of preferred stock. In addition,
we have adopted a shareholder rights plan that, along with certain provisions of
our Restated Articles of Incorporation, may have the effect of discouraging
certain transactions involving a change of control of the company.
Item 2. Properties
We lease approximately 66,000 square feet of space at 201 Elliott Avenue
West in Seattle, Washington for our laboratory and administrative operations.
The lease expires in January 2003, with two consecutive five-year renewal
options at the then prevailing market rent. We also lease approximately 110,000
square feet of space at 501 Elliott Avenue West in Seattle, Washington for
executive offices and administrative operations. The lease expires July 2012. To
accommodate the operational requirements of Cell Therapeutics (UK) Limited, our
wholly-owned, London-based subsidiary, we leased space at 100 Fetter Lane in
London, UK and have additional offices at 100 Pall Mall, St. James in London,
UK. We believe our existing and planned facilities are adequate to meet our
present requirements. We currently anticipate that additional space will be
available to us, when needed, on commercially reasonable terms.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.
28
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol
"CTIC." The following table sets forth, for the periods indicated, the high and
low reported sales prices per share of the common stock as reported on the
Nasdaq National Market.
High Low
------- --------
2000
First Quarter................................... $ 52.00 $ 5.31
Second Quarter.................................. 33.50 10.50
Third Quarter................................... 68.25 26.38
Fourth Quarter.................................. 77.25 30.50
2001
First Quarter................................... 49.00 12.50
Second Quarter.................................. 34.81 14.50
Third Quarter................................... 32.63 20.18
Fourth Quarter.................................. 34.70 22.50
2002
First Quarter (through March 26, 2002).......... 27.45 19.31
On March 26, 2002, the last reported sale price of our common stock on the
Nasdaq Market was $25.05 per share. As of March 26, 2002, there were
approximately 278 shareholders of record of our common stock.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock since
our inception. We currently intend to retain all of our cash and any future
earnings to finance the growth and development of our business and therefore do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon our financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
29
Item 6. Selected Consolidated Financial Data
The data set forth below should be read in conjunction with Item 7. "--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
appearing at Item 8 of this report.
Year ended December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated Statements of
Operations Data:
Revenues:
Product sales $ 6,130 $ 502 $ -- $ -- $ --
Collaboration agreements -- -- -- 13,200 11,831
License revenue 106 -- -- -- --
-------- -------- -------- -------- --------
Total revenues 6,236 502 -- 13,200 11,831
-------- -------- -------- -------- --------
Operating expenses:
Cost of product sold 394 19 -- -- --
Research and development (1) 44,669 26,574 27,682 29,942 27,285
General and administrative . 21,863 14,770 9,788 10,889 10,090
Sales and marketing 13,405 5,651 -- -- --
Amortization of purchased
intangibles 9,390 9,390 -- -- --
-------- -------- -------- -------- --------
Total operating expenses . 89,721 56,404 37,470 40,831 37,375
-------- -------- -------- -------- --------
Loss from operations (83,485) (55,902) (37,470) (27,631) (25,544)
-------- -------- -------- -------- --------
Other income (expense):
Investment income 9,200 4,517 1,692 3,094 2,895
Interest expense (5,988) (544) (502) (435) (377)
-------- -------- -------- -------- --------
Net loss (80,273) (51,929) (36,280) (24,972) (23,026)
Preferred stock dividend (1,372) (508) (5,201) -- --
-------- -------- -------- -------- --------
Net loss applicable to common
shareholders $(81,645) $(52,437) $(41,481) $(24,972) $(23,026)
======== ======== ======== ======== ========
Basic and diluted net loss per
common
share (2) $ (2.41) $ (2.07) $ (2.67) $ (1.62) $ (1.98)
======== ======== ======== ======== ========
Shares used in computation of
basic and diluted net loss
per common share 33,822 25,345 15,552 15,410 11,634
======== ======== ======== ======== ========
December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents, securities available-for-
sale and interest receivable $ 259,421 $ 156,434 $ 24,248 $ 47,072 $ 70,444
Working capital 250,142 146,384 17,705 44,143 67,594
Total assets 303,750 190,111 30,848 58,156 80,433
Convertible subordinated notes 175,000 -- -- -- --
Other long-term obligations, less 3,892 1,060 2,653 3,888 2,039
Total long-term obligations, less current portion 178,892 1,060 2,653 3,888 2,039
Accumulated deficit (290,552) (210,279) (158,350) (122,070) (97,098)
Total shareholders' equity 109,557 177,943 20,904 47,165 71,760
- ---------------
(1) This includes an equity-based expense of $9.2 million related to the
issuance of 350,000 warrants for the achievement of a PG-TXL milestone in
2001.
(2) See Notes 1 and 10 of Notes to Consolidated Financial Statements for a
description of the computation of the number of shares and net loss per
common share.
30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements and the related Notes
included in Items 6 and 8 of this Form 10-K. The following discussion contains
forward-looking statements that involve risks and uncertainties. Such
statements, which include statements concerning research and development
expenses, general and administrative expenses, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed below and elsewhere in this Form 10-K, particularly
in "Factors Affecting Our Operating Results," that could cause actual results to
differ significantly from those projected.
Overview
We develop, acquire and commercialize novel treatments for cancer. Our
goal is to build a leading, vertically-integrated biopharmaceutical company with
a diversified portfolio of proprietary oncology drugs. Our research and
in-licensing activities are concentrated on identifying new, less toxic and more
effective ways to treat cancer.
In September 2000, we received approval of our New Drug Application, or
NDA, by the Food and Drug Administration, or FDA, for TRISENOX (arsenic
trioxide), and commenced initial product sales for TRISENOX of $502,000 in the
fourth quarter of 2000, and $6.1 million for the year ended December 31, 2001.
As of December 31, 2001, we had incurred aggregate net losses of approximately
$290.6 million since inception. We expect to continue to incur significant
additional operating losses over the next several years from our research and
development efforts. Operating losses may fluctuate from quarter to quarter as a
result of differences in the timing of expenses incurred and revenues
recognized.
In June 1998, we entered into an agreement with PG-TXL Company, L.P. and
scientists at the M.D. Anderson Cancer Center, granting us an exclusive
worldwide license to the rights to PG-TXL, and to all potential uses of PG-TXL's
polymer technology. Under the terms of the agreement, we will fund the research,
development, manufacture, marketing and sale of drugs developed using PG-TXL's
polymer technology.
In January 2000, we acquired TRISENOX upon our acquisition of PolaRx
Biopharmaceuticals, Inc., or PolaRx, a single product company that owned the
rights to TRISENOX. The aggregate purchase price of approximately $36.2 million
consisted primarily of 5 million shares of common stock and included assumed net
liabilities of $3.9 million from PolaRx. Two additional payouts tied to sales
thresholds of $10 million and $20 million in any four consecutive quarters, may
be payable in tranches of $4 million and $5 million at the then fair market
value of our stock, at the time such thresholds are achieved. For any calendar
year that sales of TRISENOX exceed $40 million, PolaRx shareholders will receive
a 2% royalty on total net sales for that year at the then fair market value of
our common stock or, in certain circumstances, cash. The acquisition was
accounted for as a purchase transaction.
In October 2001, we entered into a licensing agreement with Chugai
Pharmaceutical Co., Ltd. for the development and commercialization of PG-TXL.
This agreement grants an exclusive license to Chugai to develop and
commercialize PG-TXL in several Asian markets. Upon execution of the agreement,
Chugai paid us a $3.0 million initial payment, which has been recorded as
deferred revenue and is being recognized as license revenue over the development
period on a straight-line basis. Under the agreement, we may also receive
milestone payments totaling up to $16.0 million upon Chugai's achievement of
certain product development milestones, and we are entitled to receive royalties
on product sales in the territories covered
31
under the agreement. Chugai has also committed to incur up to $54 million in
development expenditures over the course of the licensing agreement.
We entered into a supply agreement with Natural Pharmaceuticals, Inc. for
paclitaxel, a key starting material for our PG-TXL drug candidate. Under the
supply agreement, we purchased paclitaxel at a pre-determined price and will
receive supply over a multi-year term.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. While
our significant accounting policies are more fully described in Note 1 to our
consolidated financial statements included in this report, we believe the
following accounting policies to be critical:
License Agreement Revenues
We may generate revenue from technology licenses, collaborative research
and development arrangements, and cost reimbursement contracts. Revenue under
technology licenses and collaborative agreements typically consists of
nonrefundable and/or guaranteed technology license fees, collaborative research
funding, and various milestone and future product royalty or profit-sharing
payments.
Revenue associated with up-front license fees, and research and
development funding payments under collaborative agreements is recognized
ratably over the relevant periods specified in the agreement, generally the
research and development period. Revenue from substantive at-risk milestones and
future product royalties is recognized as earned based on the completion of the
milestones and product sales, as defined in the respective agreements. Revenue
under cost reimbursement contracts is recognized as the related costs are
incurred. Payments received in advance of recognition as revenue are recorded as
deferred revenue.
Product Sales
We recognize revenue from product sales when there is persuasive evidence
that an arrangement exists, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured. Product sales are
recorded net of an allowance for returns and discounts. Allowances for
discounts, returns and bad debts are netted against accounts receivable.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using a weighted-average approach which approximates the first-in first-out
method. Finished goods inventory consists of our FDA-approved pharmaceutical
drug, TRISENOX. Prior to FDA approval, the raw material and production costs of
TRISENOX were recorded as research and development expense. If the cost of the
inventory exceeds the expected market value, provisions are recorded currently
for the difference between the cost and the market value. We also record an
allowance for excess inventory that may expire and become unsaleable.
32
Research and Development Expenses
Research and development expenses include related salaries, contractor
fees, occupancy costs, utilities, administrative expenses and allocation of
corporate costs. Research and development expenses consist of costs incurred for
proprietary and collaboration research and development and also include
activities such as product registries and investigator sponsored trials. All
such costs are charged to research and development expenses as incurred. Costs
of materials and other supplies are charged to research and development expense
when they have been received.
Derivative Financial Instruments
Effective at the beginning of fiscal 2001, we adopted SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. We are subject to
risks associated with fluctuations in the LIBOR interest rate from lease
payments on our aircraft. Our policy is to hedge a portion of these forecasted
transactions through an interest rate swap agreement. This swap agreement has
been designated as a cash flow hedge. The portion of the net gain or loss on the
derivative instrument that is effective as a hedge is reported as a component of
accumulated other comprehensive loss in shareholders' equity and is reclassified
into earnings in the same period during which the hedged transaction affects
earnings. The remaining net gain or loss on the derivative in excess of the
present value of the expected cash flows of the hedged transaction is recorded
in earnings immediately. If a derivative does not qualify for hedge accounting,
or a portion of the hedge is deemed ineffective, the change in fair value is
recorded in earnings. The swap was perfectly effective at December 31, 2001. We
do not enter into forward agreements for trading purposes.
Results of Operations
Years ended December 31, 2001 and 2000.
Product sales. In October 2000, we launched TRISENOX, a pharmaceutical
grade arsenic product that has been approved by the FDA to treat patients with
relapsed or refractory acute promyelocytic leukemia. We sell TRISENOX primarily
to pharmaceutical wholesalers and oncology distributors, who in turn sell
TRISENOX primarily to hospitals and clinics. We recorded net product sales of
approximately $6.1 million for TRISENOX for the year ended December 31, 2001
compared to the initial net product sales of approximately $502,000 for TRISENOX
in the fourth quarter of 2000.
License revenue. In October 2001, we entered into a licensing agreement
with Chugai Pharmaceutical Co., Ltd. for the development and commercialization
of PG-TXL. Upon execution of the agreement, Chugai paid us a $3.0 million
initial payment, which we recorded as deferred revenue and which is being
recognized as revenue over the development period on a straight-line basis. We
recognized $106,000 of revenue during 2001.
Cost of product sold. The cost of product sold for the year ended December
31, 2001 was approximately $394,000 compared to $19,000 for the fourth quarter
of 2000. This increase was primarily due to the additional product sales in
2001. Further, a reserve for obsolescence of approximately $96,000 was incurred
in 2001. Royalty costs were included in cost of product sold in 2001 and 2000.
Prior to FDA approval, the raw material and production costs of TRISENOX were
recorded as research and development expense. We expect product costs in the
future to continue to approximate a small percentage of revenue.
33
Research and development. Our research and development expenses for
compounds under development and discovery research are as follows (in
thousands):
2001 2000
---- ----
Compounds under development
PG - compounds ................................... $20,480 $ 5,247
Trisenox ......................................... 3,244 4,829
Other compounds .................................. 710 1,111
Operating expenses ............................... 10,428 6,621
Discovery research ................................. 9,807 8,766
------- -------
Total research and development expenses .......... $44,669 $26,574
======= =======
Costs for compounds under development include external direct expenses
such as principal investigator fees, clinical research organization charges and
contract manufacturing fees incurred for preclinical, clinical, manufacturing
and regulatory activities associated with preparing the compounds for
submissions of new drug applications to the FDA or similar regulatory filings
with agencies outside the U.S. Operating costs include our personnel and
occupancy expenses associated with developing these compounds. Discovery
research costs include primarily personnel, occupancy, and laboratory expenses
associated with the discovery and identification of new drug targets and lead
compounds. We do not allocate operating costs to the individual compounds.
Research and development expenses increased to approximately $44.7 million
for the year ended December 31, 2001 from approximately $26.6 million for the
year ended December 31, 2000. This increase is primarily due to an equity-based
expense of $9.2 million related to the vesting of 350,000 warrants upon the
achievement of a PG-TXL milestone, an additional $6.0 million in direct expenses
associated with the development of PG-TXL and PG-CPT, the recruitment of
additional personnel and related occupancy costs of $5.0 million to support our
expanded development plans for TRISENOX, PG-TXL and PG-CPT. This increase was
offset in part by a reduction of stock-based compensation of $1.4 million and
regulatory costs for TRISENOX of $1.1 million. We anticipate increased research
and development expenses in connection with the clinical development plans for
TRISENOX, PG-TXL, PG-CPT and our other products.
Our leading drug candidates, PG-TXL and TRISENOX for indications other
than relapsed or refractory acute promyelocytic leukemia, are currently in
clinical trials. Many drugs in human clinical trials fail to demonstrate the
desired safety and efficacy characteristics. Even if our drugs progress
successfully through initial human testing, they may fail in later stages of
development. A number of companies in the pharmaceutical industry, including us,
have suffered significant setbacks in advanced clinical trials, even after
reporting promising results in earlier trials. Many of our drug candidates are
still in research and preclinical development, which means that they have not
yet been tested on humans. We will need to commit significant time and resources
to develop these and additional product candidates. We are dependent on the
successful completion of clinical trials and obtaining regulatory approval in
order to generate revenues. The failure to generate such revenues may preclude
us from continuing our research and development of these and other product
candidates. Because of these risks and uncertainties, we cannot predict when or
whether we will successfully complete the development of our product candidates
or the ultimate product development cost.
General and administrative. General and administrative expenses increased
to approximately $21.9 million for the year ended December 31, 2001 from
approximately $14.8 million for the year ended December 31, 2000. This increase
reflects higher corporate resource development costs of approximately
34
$4.9 million and additional general operating expenses associated with
supporting our research, development and marketing activities of approximately
$4.0 million. Corporate resource development costs include our business
development activities related to our continued pursuit to in-license or acquire
complementary products or technologies, or companies, costs related to operating
our aircraft, and our corporate communication programs. Offsetting these
increases were lower stock-based compensation charges of $1.8 million. We expect
general and administrative expenses to increase in the future to support our
expected increase in research, development and commercialization efforts.
Additionally, due to the variable accounting treatment of certain stock options,
fluctuations in quoted prices for our common stock may result in unpredictable
and potentially significant charges or credits to our stock-based compensation.
Sales and marketing. We incurred approximately $13.4 million of sales and
marketing expense for the year ended December 31, 2001 compared to $5.7 million
for the year ended December 31, 2000. This increase is primarily due to higher
staffing levels and marketing costs to support the launch of TRISENOX. We expect
sales and marketing expenses to continue to increase in 2002.
Amortization of purchased intangibles. In January 2000, we acquired PolaRx
Biopharmaceuticals, Inc. which was accounted for using the purchase method of
accounting. We recorded acquired intangible assets for marketing, patents and
goodwill aggregating $36.2 million. These intangible assets are amortized over
their remaining lives, estimated to be three to five years. The amortization for
the year ended December 31, 2001 and 2000 was approximately $9.4 million.
Effective January 1, 2002, we will adopt SFAS 142 Goodwill and Other Intangible
Assets. In accordance with this statement, goodwill will no longer be amortized
and will be periodically tested for impairment.
Investment income. Investment income increased to approximately $9.2
million for the year ended December 31, 2001 from approximately $4.5 million for
the year ended December 31, 2000. This increase is attributed to higher average
cash balances on hand during 2001 because we completed a secondary offering in
September 2000, which generated net proceeds of $127.5 million and we completed
a convertible debt offering in September 2001, which generated net proceeds of
$168.0 million.
Interest expense. Interest expense increased to approximately $6.0 million
for the year ended December 31, 2001 from approximately $544,000 for the year
ended December 31, 2000. The increase is attributable to the interest associated
with the $175.0 million of 5.75% convertible subordinated notes issued in 2001.
Preferred stock dividend. We accrued approximately $1.4 million and
$508,000 for a preferred stock dividend for the years ended December 31, 2001
and 2000, respectively, in connection with preferred stock issued in November
1999. We are required to pay each Series D preferred stock investor four annual
dividend payments notwithstanding any conversion of the preferred stock. In
2001, we automatically converted any remaining preferred stock to common stock.
In connection with this conversion, we accrued all future dividend payments due
to these investors resulting in an increase of approximately $0.9 million in the
preferred stock dividend for the year ended December 31, 2001. In 2001, we
issued 20,785 shares of common stock valued at approximately $500,000 in lieu of
cash as a payment of our preferred stock dividend obligation.
Years ended December 31, 2000 and 1999.
Product sales. In October 2000, we launched TRISENOX, a pharmaceutical
grade arsenic product that has been approved by the FDA to treat patients with
relapsed or refractory acute
35
promyelocytic leukemia. We recorded initial net product sales of approximately
$502,000 for TRISENOX in the fourth quarter of 2000.
Cost of product sold. The cost of product sold during the fourth quarter
of 2000 was approximately $19,000. Prior to FDA approval, the raw material and
production costs of TRISENOX were recorded as research and development expense.
Research and development. Our research and development expenses for
compounds under development and discovery research are as follows (in
thousands):
2000 1999
---- ----
Compounds under development
PG - compounds ................................... $ 5,247 $ 4,542
Trisenox ......................................... 4,829 --
Other compounds .................................. 1,111 6,360
Operating expenses ............................... 6,621 8,488
Discovery research ................................. 8,766 8,292
------- -------
Total research and development expenses ......... $26,574 $27,682
======= =======
Research and development expenses decreased to approximately $26.6 million
for the year ended December 31, 2000 from approximately $27.7 million for the
year ended December 31, 1999. The decrease in direct expenses for other
compounds and the related decrease in operating expenses are attributed
primarily to our discontinuing the development of Lisofylline. These decreases
were offset in part by our incurring development expenses associated with
TRISENOX (a compound we purchased via the acquisition of PolaRx in January,
2000) and PG-TXL which include a $2.0 million milestone payment under our
license agreement with PG-TXL Company, L.P.
General and administrative. General and administrative expenses increased
to approximately $14.8 million for the year ended December 31, 2000 from
approximately $9.8 million for the year ended December 31, 1999. The increase
reflects approximately $3.3 million in stock-based compensation expense for our
consultants and operating expenses associated with supporting our research,
development and marketing activities of approximately $1.7 million.
Sales and marketing. We expensed approximately $5.7 million in our sales
and marketing effort for the year ended December 31, 2000 as we launched
TRISENOX in October 2000.
Amortization of purchased intangibles. In January 2000, we acquired PolaRx
Biopharmaceuticals, Inc. that was accounted for using the purchase method of
accounting. We recorded acquired intangible assets for marketing, patents and
goodwill aggregating $36.2 million. These intangible assets are amortized over
their remaining lives, estimated to be three to five years. The amortization for
the year ended December 31, 2000 was approximately $9.4 million.
Investment income. Investment income increased to approximately $4.5
million for the year ended December 31, 2000 from approximately $1.7 million for
the year ended December 31, 1999. This increase is attributed to higher average
cash balances on hand during 2000 because we completed a private placement and
secondary offering in 2000 that generated net proceeds of approximately $164.6
million.
Interest expense. Interest expense increased to approximately $544,000 for
the year ended December 31, 2000 from approximately $502,000 for the year ended
December 31, 1999. This increase
36
was due primarily to interest payments made to PolaRx shareholders on notes
payable assumed upon the PolaRx acquisition.
Preferred stock dividend. We accrued approximately $508,000 for a
preferred stock dividend for the year ended December 31, 2000 in connection with
preferred stock issued in November 1999. In 2000, we issued 6,366 shares of
common stock valued at approximately $425,000 in lieu of cash as a payment of
our preferred stock dividend obligation.
Liquidity and Capital Resources
As of December 31, 2001, we had $259.4 million in cash, cash equivalents,
securities available-for-sale and interest receivable.
Net cash used in operating activities increased to $61.9 million in 2001,
compared to $36.0 million in 2000 and $30.0 million in 1999. The increase in net
cash used in operating activities in 2001, as compared to 2000, was primarily
due to the increase in our net loss, offset in part by an increase in
equity-based compensation. The increase in net cash used in operating activities
in 2000, as compared to 1999, was primarily due to the increase in our net loss.
We expect net cash used in operating activities to increase in 2002. The
extent of cash flow used in operating activities will be significantly affected
by our expanded development plans for TRISENOX, PG-TXL, and PG-CPT.
Net cash used in investing activities totaled $92.7 million in 2001,
compared to $113.9 million in 2000 and net cash provided of $22.9 million in
1999. The decrease in net cash used in investing activities in 2001, as compared
to 2000, was primarily due to a lower level of net additional investments in
securities available for sale during 2001. The increase in net cash used in
investing activities in 2000, as compared to net cash provided by investing
activities in 1999, was primarily due to a net increase in purchases of
securities available-for-sale.
Net cash provided by financing activities increased to approximately
$169.6 million in 2001, compared to $168.0 million in 2000 and $8.4 million in
1999. In 2001, we received net proceeds of $168.0 million from the issuance of
5.75% convertible subordinated notes as compared to two equity offerings in 2000
that provided $164.6 million in net proceeds. These notes are due June 15, 2008
with interest payable semi-annually in June and December. Financing activities
in 1999 included $9.3 million from the sale of Series D preferred stock.
We expect to generate losses from operations for several years due to
substantial additional research and development costs, including costs related
to clinical trials, and increased sales and marketing expenditures. We expect
that our existing capital resources will enable us to maintain our current and
planned operations through at least mid 2004. Our future capital requirements
will depend on many factors, including:
. success of our sales and marketing efforts
. progress in and scope of our research and development activities
. competitive market developments
. success in acquiring complementary products, technologies or
businesses
37
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. If we should require
additional financing due to unanticipated developments, additional financing may
not be available when needed or, if available, we may not be able to obtain this
financing on terms favorable to us or to our shareholders. Insufficient funds
may require us to delay, scale back or eliminate some or all of our research and
development programs, or may adversely affect our ability to operate as a going
concern. If additional funds are raised by issuing equity securities,
substantial dilution to existing shareholders may result.
The following table includes information relating to our contractual
obligations as of December 31, 2001 (in thousands):
Contractual Obligations Payments Due by Period
- ------------------------------------------ --------------------------------------------------------
2-3 4-5 After
Total 1 Year Years Years 5 Years
--------- ------- -------- -------- --------
Long Term Debt ........................... $ 3,572 $ 2,051 $ 1,521 $ -- $ --
Operating Leases:
Aircraft ............................... 18,630 1,927 3,854 3,854 8,995
Facilities ............................. 47,450 4,653 7,851 8,167 26,779
Convertible
Subordinated Notes ....................... 175,000 -- -- -- 175,000
Interest on
Convertible Subordinated Notes ........... 55,344 10,063 20,125 20,125 5,031
--------- ------- -------- -------- --------
299,996 18,694 33,351 32,146 215,805
Preferred Stock Dividends
payable in cash or stock ............... 1,000 500 500 -- --
--------- ------- -------- -------- --------
$ 300,996 $19,194 $ 33,851 $ 32,146 $215,805
========= ======= ======== ======== ========
The remaining amount of milestone payments we may be required to pay
pursuant to the PG-TXL agreement is $18.5 million.
Income Taxes
As of December 31, 2001, we had available for Federal income tax purposes
net operating loss carryforwards of approximately $302.5 million, of which $41.7
million relates to stock option deductions, and research and development credit
carryforwards of approximately $9.8 million. These carryforwards begin to expire
in 2007. Our ability to utilize these net operating loss and research and
development credit carryforwards is subject to annual limitations of $6.7
million for losses incurred prior to March 26, 1997 and may be subject to
additional limitations thereafter pursuant to the "change in ownership" rules
under Section 382 of the Internal Revenue Code of 1986.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141 Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to an annual impairment test in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives. We will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. We had previously expected to record
amortization expense of $2.7 million during 2002 related to goodwill that will
not be amortized due to the adoption of the new statement. We are evaluating the
impact of the impairment rules, if any, on our earnings and financial position.
38
In October 2001, FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, effective
for fiscal years beginning after December 15, 2001, with transition provisions
for certain matters. The FASB's new rules on asset impairment supersedes FASB
Statement No. 121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and provides a single accounting model for
long-lived assets to be disposed of. We will evaluate the effect of the
implementation of the impairment rules, if any, on our earnings and financial
position.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Market Risk
We are exposed to market risk related to changes in interest rates that
could adversely affect the value of our investments. We maintain a short-term
investment portfolio consisting of interest bearing securities with an average
maturity of less than one year. These securities are classified as
"available-for-sale". These securities are interest bearing and thus subject to
interest rate risk and will fall in value if market interest rates increase.
Because we have the ability to hold our fixed income investments until maturity,
we do not expect our operating results or cash flows to be affected to any
significant degree by a sudden change in market interest rates related to our
securities portfolio. The fair value of our securities available-for-sale at
December 31, 2001 was $217.3 million. For each one percent change in interest
rates, the fair value of our securities available-for-sale would change by
approximately $217,000.
We may manage our interest rate market risk, when deemed appropriate,
through the use of derivative financial instruments. Derivative financial
instruments are viewed as risk management tools and are not used for speculative
or trading purposes. In 2001, we entered into a long-term operating lease that
had a variable rent component that was based on LIBOR. In connection with this
lease, we entered into an interest rate swap agreement to limit our interest
rate exposure. This swap agreement has been designated as a cash flow hedge. The
portion of the net gain or loss on the derivative instrument that is effective
as a hedge is reported as a component of accumulated other comprehensive loss in
shareholders' equity. As of December 31, 2001, the fair value of the interest
rate swap was $301,000.
Foreign Exchange Market Risk
We have operated primarily in the United States and all revenues to date
have been primarily in U.S. dollars. Accordingly, we do not have material
exposure to foreign currency rate fluctuations. We have not entered into any
foreign exchange contracts to hedge any exposure to foreign currency rate
fluctuations because such exposure is immaterial.
39
Item 8. Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors........................ 41
Consolidated Balance Sheets.............................................. 42
Consolidated Statements of Operations.................................... 43
Consolidated Statements of Shareholders' Equity.......................... 44
Consolidated Statements of Cash Flows.................................... 45
Notes to Consolidated Financial Statements............................... 46
40
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cell Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Cell
Therapeutics, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cell
Therapeutics, Inc. at December 31, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Seattle, Washington
February 8, 2002
41
CELL THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 38,688 $ 23,735
Securities available-for-sale ................................... 217,255 131,172
Interest receivable ............................................. 3,478 1,527
Accounts receivable, net of allowance of $389 and $67
at December 31, 2001 and December 31, 2000, respectively ...... 1,453 109
Inventory ....................................................... 973 167
Prepaid expenses and other current assets ....................... 3,596 782
--------- ---------
Total current assets .......................................... 265,443 157,492
Property and equipment, net ....................................... 8,395 4,263
Goodwill, net ..................................................... 8,064 10,135
Other intangibles, net ............................................ 9,371 16,690
Other assets and deferred charges ................................. 12,477 1,531
--------- ---------
Total assets .................................................. $ 303,750 $ 190,111
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,206 $ 1,113
Accrued expenses ................................................ 11,521 8,367
Current portion of deferred revenue ............................. 523 -
Current portion of long-term obligations ........................ 2,051 1,628
--------- ---------
Total current liabilities ..................................... 15,301 11,108
Convertible subordinated notes .................................... 175,000 -
Deferred revenue, less current portion ............................ 2,371 -
Other long-term obligations, less current portion ................. 1,521 1,060
Commitments
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 10,000,000
Series A and B, 161,118.645 shares designated,
none issued or outstanding ............................... - -
Series D, designated, issued and outstanding shares
- none at December 31, 2001 (2,425 at December 31, 2000) . - 1,510
Common Stock, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 34,981,763 and 33,562,627
at December 31, 2001 and December 31,
2000, respectively ....................................... 399,649 386,895
Notes receivable from officers .................................. (225) (255)
Accumulated other comprehensive income .......................... 685 72
Accumulated deficit ............................................. (290,552) (210,279)
--------- ---------
Total shareholders' equity .................................... 109,557 177,943
--------- ---------
Total liabilities and shareholders' equity .................... $ 303,750 $ 190,111
========= =========
See accompanying notes.
42
CELL THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Product sales ............................... $ 6,130 $ 502 $ -
License revenue ............................. 106 - -
-------- -------- --------
Total revenues ............................ 6,236 502 -
-------- -------- --------
Operating expenses:
Cost of product sold ........................ 394 19 -
Research and development .................... 44,669 26,574 27,682
General and administrative .................. 21,863 14,770 9,788
Sales and marketing ......................... 13,405 5,651 -
Amortization of purchased intangibles ....... 9,390 9,390 -
-------- -------- --------
Total operating expenses .................. 89,721 56,404 37,470
-------- -------- --------
Loss from operations .......................... (83,485) (55,902) (37,470)
Other income (expense):
Investment income ........................... 9,200 4,517 1,692
Interest expense ............................ (5,988) (544) (502)
-------- -------- --------
Net other income (expense) ................ 3,212 3,973 1,190
-------- -------- --------
Net loss ...................................... (80,273) (51,929) (36,280)
Preferred stock dividend .................... (1,372) (508) (5,201)
-------- -------- --------
Net loss applicable to common shareholders .... $(81,645) $(52,437) $(41,481)
======== ======== ========
Basic and diluted net loss per common share ... $ (2.41) $ (2.07) $ (2.67)
======== ======== ========
Shares used in calculation of basic and diluted
net loss per common share ................... 33,822 25,345 15,552
======== ======== ========
See accompanying notes.
43
CELL THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Preferred Stock Notes
Series D Common Stock Receivable
------------------ -------------------- from Accumulated
Shares Amount Shares Amount Officers Deficit
------- ------- ------- --------- ---------- -----------
Balance at January 1, 1999 ................ - $ - 15,535 $ 169,619 $ (380) $(122,070)
Net proceeds from the issuance of
Series D convertible preferred stock
and warrants to acquire common stock
net of offering costs of $755
(including warrants issued to placement
agent valued at $100) ................... 10 6,228 - 3,117 - -
Preferred stock dividend .................. - - - (44) - -
Proceeds from stock options exercised
and stock awards, and stock sold via
employee stock purchase plan ............ - - 61 131 - -
Equity-based compensation expense ......... - - - 569 - -
Reclass to current asset for former officer - - - - 50 -
Comprehensive loss:
Unrealized losses on securities
available-for-sale .................... - - - - - -
Net loss for the year ended
December 31, 1999 ..................... - - - - - (36,280)
Comprehensive loss ........................ - - - - - -
------- ------- ------- --------- --------- ---------
Balance at December 31, 1999 .............. 10 6,228 15,596 173,392 (330) (158,350)
PolaRx acquisition ........................ - - 5,000 31,401 - -
Conversion of preferred stock to common
stock ................................... (8) (4,718) 3,503 4,718 - -
Net proceeds from the issuance of
common stock, net of offering costs
of $4,461 (including warrants
issued to placement agent valued
at $1,581)............................... - - 3,333 37,120 - -
Net proceeds from the issuance of
common stock via follow-on public
offering, net of offering
costs of $9,302 ......................... - - 3,600 127,498 - -
Preferred stock dividend .................. - - 6 (83) - -
Proceeds from stock warrants exercised .... - - 1,291 2,876 - -
Proceeds from stock options exercised
and stock awards, and stock sold via
employee stock purchase plan ............ - - 1,234 4,257 - -
Equity-based compensation expense ......... - - - 5,716 - -
Reclass to current asset for former officer - - - - 75 -
Comprehensive loss:
Unrealized gains on securities
available-for-sale .................... - - - - - -
Net loss for the year ended
December 31, 2000 ..................... - - - - - (51,929)
Comprehensive loss ........................ - - - - - -
------- ------- ------- --------- --------- ---------
Balance at December 31, 2000 .............. 2 1,510 33,563 386,895 (255) (210,279)
Conversion of preferred stock to
common stock ............................ (2) (1,510) 1,121 1,510 -
Preferred stock dividend .................. - - 21 (872) - -
Proceeds from stock warrants exercised .... - - 20 264 - -
Proceeds from stock options exercised
and stock awards, and stock sold via
employee stock purchase plan ............ - - 347 1,489 - -
Rescission of option exercises ............ - - (91) (266) - -
Equity-based expense related to
warrants vesting ........................ - - - 9,212 - -
Equity-based compensation expense ......... - - - 1,400 - -
Reclass to current asset for former
officer ................................. - - - - 30 -
Donation of common stock .................. - - 1 17 - -
Comprehensive loss:
Unrealized gains on securities
available-for-sale .................... - - - - - -
Unrealized gains on interest
rate swap .............................
Net loss for the year ended
December 31, 2001 ..................... - - - - - (80,273)
Comprehensive loss ........................
------- ------- ------- --------- --------- ---------
Balance at December 31, 2001 .............. - $ - 34,982 $ 399,649 $ (225) $(290,552)
Accumulated
Other Total
Comprehesive Shareholders'
Income/(Loss) Equity
------------- -------------
Balance at January 1, 1999 ................ $ (4) $ 47,165
Net proceeds from the issuance of
Series D convertible preferred stock
and warrants to acquire common stock
net of offering costs of $755
(including warrants issued to placement
agent valued at $100) ................... - 9,345
Preferred stock dividend .................. - (44)
Proceeds from stock options exercised
and stock awards, and stock sold via
employee stock purchase plan ............ - 131
Equity-based compensation expense ......... 569
Reclass to current asset for former officer - 50
Comprehensive loss:
Unrealized losses on securities
available-for-sale .................... (32) (32)
Net loss for the year ended
December 31, 1999 ..................... - (36,280)
------------
Comprehensive loss ........................ - (36,312)
------- ------------
Balance at December 31, 1999 .............. (36) 20,904
PolaRx acquisition ........................ - 31,401
Conversion of preferred stock to common
stock ................................... - -
Net proceeds from the issuance of
common stock, net of offering costs
of $4,461 (including warrants
issued to placement agent valued at
$1,581) ................................. - 37,120
Net proceeds from the issuance of
common stock via follow-on public
offering, net of offering costs of
$9,302 .................................. - 127,498
Preferred stock dividend .................. - (83)
Proceeds from stock warrants exercised .... - 2,876
Proceeds from stock options exercised
and stock awards, and stock sold via
employee stock purchase plan ............ - 4,257
Equity-based compensation expense ......... - 5,716
Reclass to current asset for former officer - 75
Comprehensive loss:
Unrealized gains on securities
available-for-sale .................... 108 108
Net loss for the year ended
December 31, 2000 ..................... - (51,929)
------------
Comprehensive loss ........................ - (51,821)
--------- ------------
Balance at December 31, 2000 .............. 72 177,943
Conversion of preferred stock to
common stock ............................
Preferred stock dividend .................. - (872)
Proceeds from stock warrants exercised .... - 264
Proceeds from stock options exercised
and stock awards, and stock sold via
employee stock purchase plan ............ - 1,489
Rescission of option exercises ............ - (266)
Equity-based expense related to
warrants vesting ........................ - 9,212
Equity-based compensation expense ......... - 1,400
Reclass to current asset for former
officer ................................. - 30
Donation of common stock .................. - 17
Comprehensive loss:
Unrealized gains on securities
available-for-sale .................... 312 312
Unrealized gains on interest
rate swap ............................. 301 301
Net loss for the year ended
December 31, 2001 ..................... - (80,273)
------------
Comprehensive loss ........................ (79,660)
--------- ------------
Balance at December 31, 2001 .............. $ 685 $ 109,557
========= ============
See accompanying notes.
44
CELL THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------
2001 2000 1999
--------- --------- --------
Operating activities
Net loss applicable to common shareholders ......................... $ (81,645) $ (52,437) $(41,481)
Adjustments to reconcile net loss applicable to common shareholders
to net cash used in operating activities:
Preferred stock dividend ....................................... 1,372 508 5,200
Depreciation and amortization .................................. 11,197 11,115 1,822
Noncash rent benefit ........................................... (115) (115) (171)
Equity-based expense related to warrants vesting ............... 9,212 - -
Equity-based compensation expense .............................. 1,417 5,716 569
Loss on disposition of property and equipment .................. - - 526
Amortization of investment (discount) and premium .............. 1,040 (682) 366
Loss (gain) on sale of investment securities ................... (26) 1 5
Changes in assets and liabilities:
Interest receivable .......................................... (1,952) (1,159) 270
Accounts receivables, net .................................... (1,344) (110) 3,254
Inventory .................................................... (806) (167) -
Prepaid expenses and other current assets .................... (2,537) 68 222
Other assets and deferred charges ............................ (3,599) (521) (732)
Accounts payable ............................................. 93 (112) 118
Accrued expenses ............................................. 2,907 1,893 80
Deferred revenue ............................................. 2,894 - -
--------- --------- --------
Total adjustments .................................................. 19,753 16,435 11,529
--------- --------- --------
Net cash used in operating activities .............................. (61,892) (36,002) (29,952)
--------- --------- --------
Investing activities
Purchases of securities available-for-sale ......................... (297,471) (148,415) (29,562)
Proceeds from sales of securities available-for-sale ............... 35,183 2,513 11,111
Proceeds from maturities of securities available-for-sale .......... 175,503 33,723 41,915
Purchases of property and equipment ................................ (5,938) (953) (558)
PolaRx acquisition, net of cash acquired ........................... - (781) -
--------- --------- --------
Net cash provided by (used in) investing activities ................ (92,723) (113,913) 22,906
--------- --------- --------
Financing activities
Proceeds from issuance of convertible subordinated notes, net ...... 167,954 - -
Sale of common stock, net of offering costs ........................ - 164,619 -
Sale of preferred stock via private placement, net of offering costs - - 9,345
Proceeds from common stock options exercised ....................... 977 4,034 14
Rescission of stock options exercised .............................. (266) - -
Proceeds from common stock warrants exercised ...................... 264 2,876 -
Proceeds from employee stock purchase plan ......................... 512 223 117
Repayment of notes payable ......................................... - (2,673) -
Repayment of long-term obligations ................................. (1,425) (1,103) (1,118)
Proceeds from the issuance of long-term obligations ................ 1,552 - -
--------- --------- --------
Net cash provided by financing activities .......................... 169,568 167,976 8,358
--------- --------- --------
Net increase in cash and cash equivalents .......................... 14,953 18,061 1,312
Cash and cash equivalents at beginning of year ..................... 23,735 5,674 4,362
--------- --------- --------
Cash and cash equivalents at end of year ........................... $ 38,688 $ 23,735 $ 5,674
========= ========= ========
Supplemental disclosure of cash flow information
Conversion of Series D preferred stock into common stock ........... $ 1,510 $ 4,718 $ -
========= ========= ========
Common Stock issued in PolaRx acquisition .......................... $ - $ 31,440 $ -
========= ========= ========
Cash paid during the period for interest obligations ............... $ 4,987 $ 544 $ 502
========= ========= ========
Issuance of common stock for payment of preferred stock dividend ... $ 500 $ 425 $ -
========= ========= ========
See accompanying notes.
45
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Cell Therapeutics, Inc. focuses on the discovery, development, and
commercialization of drugs for the treatment of cancer. Our principal business
strategy is to focus our activities on cancer therapeutics, an area that
represents a large market opportunity that is not adequately served by existing
therapies. We commenced operations February 1992.
We operate in a highly regulated and competitive environment. The
manufacturing and marketing of pharmaceutical products require approval from,
and are subject to, ongoing oversight by the Food and Drug Administration in the
United States and by comparable agencies in other countries. Obtaining approval
for a new therapeutic product is never certain and may take several years and
involve expenditure of substantial resources. Competition in researching,
developing, and marketing pharmaceutical products is intense. Any of the
technologies covering our existing products under development could become
obsolete or diminished in value by discoveries and developments of other
organizations. We operate in one business segment.
The market for our current pharmaceutical product is primarily the United
States. Sales are primarily to pharmaceutical wholesalers. During 2001,
approximately 92% of our product sales were made to three of these wholesalers,
and during 2000, approximately 83% of sales were made to four of these
wholesalers. We obtain our product from one supplier.
Principles of Consolidation
The consolidated financial statements include the accounts of Cell
Therapeutics, Inc., its wholly owned subsidiaries (CTI Technologies, Inc.,
PolaRx Biopharmaceuticals, Inc., CTI Corporate Development, Inc. and Cell
Therapeutics (UK) Limited), and its majority owned subsidiary (PanGenex, Inc.).
All intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid debt instruments with maturities of three
months or less at the time acquired to be cash equivalents. Cash equivalents
represent short-term investments consisting of investment-grade corporate and
government obligations, carried at market value, which approximates cost.
Securities Available-for-Sale
Management determines the appropriate classification of debt securities at
the time of purchase. Management currently classifies our investment portfolio
as available-for-sale and carries the securities at fair value based on quoted
market prices with unrealized gains and losses included in accumulated other
comprehensive income and loss. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and accretion is included in investment income.
Realized gains and losses and declines in value judged to be other than
46
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
temporary on available-for-sale securities are included in investment income.
The cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale is included in
investment income.
Certain Concentrations
We are subject to concentration of credit risk primarily from our cash
investments. Under our investment guidelines, credit risk is managed by
diversification of the investment portfolio and by the purchase of
investment-grade securities. We do not require collateral or other security to
support credit sales, but provide an allowance for bad debts when warranted.
We entered into a supply agreement with our sole supplier of paclitaxel, a
key starting material for our PG-TXL drug candidate. We also have an agreement
with a contract manufacturer for TRISENOX, our current commercial product. If we
are unable to obtain sufficient quantities from these suppliers and if we were
unable to source these materials and services from other suppliers and
manufacturers, certain research and development and sales activities may be
delayed.
License Agreement Revenues
We may generate revenue from technology licenses, collaborative research
and development arrangements, and cost reimbursement contracts. Revenue under
technology licenses and collaborative agreements typically consists of
nonrefundable and/or guaranteed technology license fees, collaborative research
funding, and various milestone and future product royalty or profit-sharing
payments.
Revenue associated with up-front license fees, and research and
development funding payments under collaborative agreements is recognized
ratably over the relevant periods specified in the agreement, generally the
research and development period. Revenue from substantive at-risk milestones and
future product royalties is recognized as earned based on the completion of the
milestones and product sales, as defined in the respective agreements. Revenue
under cost reimbursement contracts is recognized as the related costs are
incurred. Payments received in advance of recognition as revenue are recorded as
deferred revenue.
Product Sales
We recognize revenue from product sales when there is persuasive evidence
that an arrangement exists, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured. Product sales are
recorded net of an allowance for returns and discounts. Allowances for
discounts, returns and bad debts, which are netted against accounts receivable,
totaled approximately $389,000 and $67,000 for the years ended December 31, 2001
and 2000, respectively.
Cost of Product Sold
Cost of product sold consists primarily of the cost of product sold to our
customers, including allowances for excess inventory that may expire and become
unsaleable. Royalties paid on product sales, as well as shipping and handling
costs are also included.
47
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using a weighted-average approach that approximates the first-in first-out
method. Finished goods inventory consists of our FDA-approved pharmaceutical
drug, TRISENOX. Prior to FDA approval, the raw material and production costs of
TRISENOX were recorded as research and development expense. If the cost of the
inventory exceeds the expected market value, provisions are recorded currently
for the difference between the cost and the market value. We also record an
allowance for excess inventory that may expire and become unsaleable. The
components of inventories are as follows as of December 31 (in thousands):
2001 2000
---- ----
Work in process ............................ $813 $ --
Finished goods ............................. 160 167
---- ----
$973 $167
==== ====
Research and Development Expenses
Research and development expenses include related salaries, contractor
fees, occupancy costs, utilities, administrative expenses and allocation of
corporate costs. Research and development expenses consist of costs incurred for
proprietary and collaboration research and development and also include
activities such as product registries and investigator sponsored trials. All
such costs are charged to research and development expenses as incurred.
Property and Equipment
Property and equipment, including assets pledged as security in financing
agreements, are carried at cost, less accumulated depreciation and amortization.
Leasehold improvements are amortized over the lesser of the useful life or the
term of the applicable lease using the straight-line method. Depreciation
commences at the time assets are placed in service and is calculated using the
straight-line method over the estimated useful lives of the assets (three to
five years).
We perform reviews of our long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount might not be
recoverable. We do not perform a periodic assessment of assets for impairment in
the absence of such information or indicators. To date, no such impairment has
been indicated.
Intangible Assets
Intangible assets consist of goodwill and other acquisition-related
intangible assets acquired in 2000. The assets are amortized using the
straight-line method over their estimated useful lives, ranging from three to
five years. We periodically perform reviews to evaluate the recoverability of
goodwill and other intangibles and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate an impairment
exists. In the event that the sum of future undiscounted cash flows is less than
recorded book value, the carrying amount will be reduced to its fair value.
48
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets are composed of the following as of December 31 (in
thousands):
2001 2000
------- -------
Goodwill ..................................... $13,440 $13,440
Marketing intangible asset ................... 16,100 16,100
Other intangibles ............................ 6,674 6,674
------- -------
36,214 36,214
Less: accumulated amortization ............... 18,779 9,389
------- -------
$17,435 $26,825
======= =======
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), we elected to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the market price of our common
stock at the date of grant over the stock option exercise price. Any deferred
compensation is recognized on a graded vesting method. Under our plan, stock
options are generally granted at fair market value.
Stock compensation expense for options granted to non-employees has
been determined in accordance with SFAS 123 and the Emerging Issues Task Force
consensus in Issue No. 96-18, Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services (EITF 96-18), as the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measured. The fair value of options granted to non-employees is periodically
remeasured as the underlying options vest.
Advertising Costs
The costs of advertising are expensed as incurred. We incurred
advertising costs of $839,000 and $469,000 in 2001 and 2000, respectively. There
were no material advertising costs in 1999.
Net Loss per Share
Basic net loss per share is calculated based on the net loss applicable
to common shareholders divided by the weighted average number of common shares
outstanding for the period excluding any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share, if separately presented,
would assume the conversion of all dilutive convertible securities, such as
convertible subordinated debt and convertible preferred stock using the
if-converted method, and would assume the exercise of other dilutive securities,
such as option and warrants, using the treasury stock method. Due to our history
of losses, all such securities have been anti-dilutive.
Derivative Financial Instruments
Effective at the beginning of fiscal 2001, we adopted SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. We are
subject to risks associated with fluctuations in the LIBOR interest rate from
lease payments on our aircraft. Our policy is to hedge a portion of these
forecasted transactions through an interest rate swap agreement. This swap
agreement has been
49
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
designated as a cash flow hedge. The portion of the net gain or loss on the
derivative instrument that is effective as a hedge is reported as a component of
accumulated other comprehensive loss in shareholders' equity and is reclassified
into earnings in the same period during which the hedged transaction affects
earnings. The remaining net gain or loss on the derivative in excess of the
present value of the expected cash flows of the hedged transaction is recorded
in earnings immediately. If a derivative does not qualify for hedge accounting,
or a portion of the hedge is deemed ineffective, the change in fair value is
recorded in earnings. The swap was perfectly effective at December 31, 2001. We
do not enter any forward agreements for trading purposes.
Other Financial Instruments
At December 31, 2001 and 2000, the carrying value of financial
instruments such as receivables and payables, approximated their fair values
based on the short-term maturities of these instruments. Additionally, the
carrying value of long-term liabilities and convertible subordinated notes
approximated fair values because the underlying interest rates reflect market
rates at the balance sheet dates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
During July 2001, the FASB issued SFAS 141, Business Combinations, and
SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of
the pooling-of-interests method for business combinations initiated after June
30, 2001. SFAS 141, which also includes the criteria for the recognition of
intangible assets separately from goodwill, is effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001. Under SFAS 142, goodwill will no longer be amortized over its expected
useful life, but rather, will be assessed for impairment on an annual basis.
Separately identifiable intangible assets that do not have an indefinite life
will continue to be amortized. We recorded goodwill in conjunction with our
acquisition of PolaRx in 2000. We will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002. We
will perform the first of the required impairment tests of goodwill as of
January 1, 2002. We do not expect the impact of these tests to be material to
our net loss or financial position. The effect of discontinuing the amortization
of goodwill is expected to result in a decrease in our net loss of $2.7 million
in 2002.
During August 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and provides a single accounting model for
long-lived assets to be disposed of. We do not anticipate that the adoption of
this statement will have a material effect on our consolidated results of
operations or financial position.
50
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain prior year items have been reclassified to conform to the current
year presentation.
Comprehensive Loss
SFAS 130, Reporting Comprehensive Income, includes unrealized gains and
losses on our securities available-for-sale and interest rate swap agreement,
designated as a cash flow hedge, to be included in other comprehensive loss.
Information regarding the components of accumulated other comprehensive
income is as follows (in thousands):
2001 2000
---- ----
Net unrealized gains on securities available-for-sale ....... $384 $ 72
Net unrealized gains on interest rate swap .................. 301 --
---- ----
$685 $ 72
==== ====
2. Securities Available-for-Sale
Securities available-for-sale consist of the following as of December 31
(in thousands):
2001
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
U S government obligations .... $ 37,108 $ 46 $ -- $ 37,154
Municipal government ........... 24,071 17 (13) 24,075
obligations
Corporate obligations .......... 155,692 376 (42) 156,026
-------- ----- --------- --------
$216,871 $ 439 $ (55) $217,255
======== ===== ========= ========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
U S government obligations .... $ 20,078 $ 14 $ -- $ 20,092
Municipal government ........... 4,050 16 -- 4,066
obligations
Corporate obligations .......... 106,972 56 (14) 107,014
-------- ----- --------- --------
$131,100 $ 86 $ (14) $131,172
======== ===== ========= ========
As of December 31, 2001 and 2000, all securities available-for-sale had
contractual maturities of less than one year. Gross realized gains and losses to
date have not been material.
51
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment are composed of the following as of December 31 (in
thousands):
2001 2000
-------- --------
Leasehold improvements ............................. $ 6,369 $ 4,551
Lab equipment ...................................... 7,947 6,075
Furniture and office equipment ..................... 9,126 6,877
-------- --------
23,442 17,503
Less: accumulated depreciation and amortization .... (15,047) (13,240)
-------- --------
$ 8,395 $ 4,263
======== ========
Depreciation expense of $1.8 million, $1.7 million, and $1.8 million was
recognized during 2001, 2000, and 1999, respectively.
4. Accrued Liabilities
Accrued liabilities consist of the following as of December 31 (in
thousands):
2001 2000
------- ------
Employee compensation and related expenses ............ $ 3,430 $3,033
Accrued manufacturing expenses ........................ 1,675 627
Accrued clinical development .......................... 1,558 700
Insurance financing and accrued interest expense ...... 1,052 358
Accrued corporate development and
sales and marketing expenses ........................ 772 818
Accrued other research and development expenses ....... 588 719
Other ................................................. 2,446 2,112
------- ------
$11,521 $8,367
======= ======
5. Contractual Arrangements and Commitments
License Agreement
We have an agreement with the Fred Hutchinson Cancer Research Center
(FHCRC) under the terms of which we received worldwide licenses and options to
technology, or technology claimed, for five U.S. patent applications. We are
obligated to pay royalties on revenues resulting from future sales of products
employing the technology and on revenues received from sublicenses for the
technology, with minimum annual royalties of $50,000 prior to, and $100,000
after, the first commercial sale of such products. The agreements are for a term
equal to the later of March 2007 or the expiration of the last issued patent
included within the licensed technology, unless terminated earlier for certain
specified events, including our failure to take reasonable efforts to engage in
research and development with respect to the licensed technology. We recognized
research and development expense of $50,000 in 2001, 2000 and 1999 related to
this agreement.
52
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Facilities
- ----------
We have executed noncancelable operating leases for office and
laboratory space that expire in 2003, with two five-year renewal options at the
then-current market rates. The lessor provided approximately $575,000 for
leasehold improvements and rent concessions, which is being amortized over the
initial lease term. In 2001, we executed an operating lease for additional
office space expiring in July 2012. Rent expense amounted to $2.9 million, $1.2
million, and $1.4 million, for the years ended December 31, 2001, 2000, and
1999, respectively.
Aircraft
- --------
In 2001, we entered into an operating lease agreement for use of an
aircraft. Terms of the lease include current monthly rental payments of
approximately $70,000. Effective March 1, 2002, our monthly rental payments will
be the sum of $161,000 plus an incremental rent adjustment, which is based on
the value of the aircraft and will vary depending on the prevailing applicable
LIBOR rate. After one year, we may cancel this agreement if certain conditions
are met and six months notice is provided. The lease expires in August 2011 with
provision for renewal and we are responsible for all maintenance and insurance
costs for the aircraft. Rent expense amounted to $294,000 for the year ended
December 31, 2001.
In connection with this aircraft lease, we entered into an interest
rate swap agreement that effectively locks in the effect of the incremental rate
adjustment for the first 78 payments. Under the swap agreement, we will receive
a variable amount based on the monthly LIBOR rate and we will pay a fixed rate
payment based on a rate of 4.78%. The swap agreement's notional amount matches
the incremental rent value of the aircraft. The other party to the swap
agreement is an affiliate of the lessor; therefore, we do not believe we have
any counterparty risk related to the interest rate swap. At December 31, 2001,
the fair value of the swap was $301,000, which is recorded in long-term other
assets and other comprehensive income, and we believe it is 100% effective. As a
result of the above transactions, the effective interest rate on this lease is
6.49%.
Future Minimum Lease Payments
- -----------------------------
Future minimum lease commitments for operating leases at December 31,
2001 are as follows (in thousands):
2002 ............. $ 6,580
2003 ............. 5,854
2004 ............. 5,852
2005 ............. 5,955
2006 ............. 6,066
Thereafter ....... 35,773
--------
$66,080
=======
53
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supply Agreement
In September 2001, we entered into a supply agreement with Natural
Pharmaceuticals, Inc. for paclitaxel, a key starting material for our PG-TXL
drug candidate. Under the supply agreement, we purchased paclitaxel at a
pre-determined price and will receive supply over a multi-year term. At December
31, 2001, we had recorded a $5.7 million prepayment relating to this agreement,
of which $3.8 million is classified as noncurrent.
6. Convertible Subordinated Notes
In June 2001, we issued $150.0 million principal amount of 5.75%
convertible subordinated notes due June 15, 2008 with interest payable
semi-annually in June and December. In September 2001, we issued an additional
$25.0 million principal amount of these notes. This additional issuance resulted
from the exercise of an over-allotment option that we had granted to the initial
purchasers. Net proceeds to us were approximately $168.0 million, after
deducting expenses and underwriters' discounts and commissions. We recorded
issuance costs related to the notes of approximately $7.0 million. These
issuance costs are recorded in other assets and are being amortized to interest
expense over the seven-year life of the notes.
The notes are convertible, at the option of the holder, into shares of
our common stock at any time prior to maturity or redemption at a conversion
rate of 29.4118 shares per each $1,000 principal note, subject to adjustment in
certain circumstances. This is equivalent to a conversion price of approximately
$34.00 per share. Under certain conditions, we may be able to redeem the notes
by making an additional payment of $172.50 per $1,000 note, less any interest
paid on the notes before June 21, 2004. Thereafter, we can redeem the notes at
specified redemption prices ranging from 103.286% to 100% of the principal
amount. The redemption prices will vary depending on the year redeemed.
7. Other Long-Term Obligations
Long-term obligations consist of the following as of December 31 (in
thousands):
2001 2000
------- -------
Master financing agreement, due October 2004, monthly
payments of $48, including interest at 7.1% ......... $ 1,489 $ --
Master financing agreement, due September 2002, monthly
payments of $60, including interest at 12.4% ........ 680 1,273
Master financing agreement, due December 2002, monthly
payments of $18, including interest at 12.4% ........ 255 431
Master financing agreement, due December 2001, monthly
payments of $44, including interest at 12.5% ........ -- 617
Accrued preferred stock dividend ...................... 1,000 128
Deferred rent and other long-term obligations ......... 148 239
------- -------
3,572 2,688
Less current portion .................................. (2,051) (1,628)
------- -------
$ 1,521 $ 1,060
======= =======
54
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each borrowing, we granted the lender a security interest in specified
fixed assets. Maturities of the long-term obligations listed above at December
31, 2001 are as follows (in thousands):
Years Ending December 31,
- -------------------------
2002 .................................................................. $ 2,051
2003 .................................................................. 1,045
2004 .................................................................. 476
--------
$ 3,572
========
As of December 31, 2001, we drew down $1.6 million on an approximate
$6.0 million line of credit for purchases of equipment. All draw-downs will be
secured by the equipment purchased, and will be repaid monthly over a period
ranging from three to four years. The interest rate will be calculated at each
draw-down and will be based on the three or five year U.S. treasury rate,
determined by the loan term, plus approximately 4%.
8. Capital Stock
In November 1999, we completed a $10 million private placement of
10,000 shares of Series D convertible preferred stock (Series D) and warrants to
acquire 1,523,810 shares of common stock, resulting in net proceeds of $9.3
million. Each share of Series D was convertible into 462.427 shares of common
stock. The warrants were valued at $3.0 million, have exercise prices of $2.625
per share of common stock and expire in November 2004. We also issued warrants
to purchase 50,000 shares of common stock to the placement agent of the Series
D. These warrants expire in 2004, and have exercise prices of $2.38. All
warrants were valued using the Black-Scholes pricing model with input
assumptions for volatility, risk-free interest rate, dividends, and life of
1.01, 5.5%, none, and five years, respectively. During 2001 and 2000, 2,425
shares of Series D were converted into 1,121,386 shares of common stock, and
7,575 shares of Series D were converted into 3,502,890 shares of common stock,
respectively. As of December 31, 2001, all preferred stock had been converted
into common stock. No warrants were exercised during 2001, and 1,164,286
warrants were exercised and converted into 1,137,805 shares of common stock
during 2000. There were 409,524 warrants outstanding as of December 31, 2001.
Investors of the Series D are entitled to receive cumulative dividends
at a rate per share of 5% per annum payable on each September 30, commencing
September 30, 2000. At our option, subject to certain restrictions and
penalties, dividends may be paid in cash or in shares of our common stock. We
are to pay each Series D investor four annual dividends notwithstanding any
conversion. We paid dividends with 20,785 and 6,366 shares of our common stock
in 2001 and 2000, respectively. We recorded $1.0 million and $128,000 as a
preferred stock dividend payable as of December 31, 2001 and 2000, respectively.
On the date of the preferred stock issuance, the effective conversion
price of the preferred stock (after allocating the portion of the proceeds to
the common stock warrants based on the relative fair values) was at a discount
to the price of the common stock into which the preferred stock is convertible.
In accordance with EITF 98-5 Convertible Securities with Beneficial Conversion
Features, the discount was recorded as a preferred stock dividend valued at $5.2
million.
In February 2000, we completed a $40 million private placement of
3,333,334 shares of common stock at an offering price of $12 per share,
resulting in net proceeds of approximately $37.1 million. In
55
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
connection with the offering, we issued 170,000 warrants to purchase shares of
common stock to a placement agent. The warrants are exercisable at a price of
$13.20 per share and expire in February 2005. The shares of common stock issued
and issuable upon the exercise of the warrants have certain registration rights.
During 2001 and 2000, 20,000 warrants were exercised and converted into 20,000
shares of common stock, and 40,875 warrants were exercised and converted into
38,721 shares of common stock, respectively. There were 109,125 and 129,125 such
warrants outstanding as of December 31, 2001 and 2000, respectively.
In September 2000, we completed a public offering of 3.6 million shares
of our common stock at $38 per share, which generated net proceeds of $127.5
million.
Common Stock Reserved
A summary of common stock reserved for issuance is as follows as of
December 31, 2001:
Convertible subordinated notes .......................... 5,147,065
Equity incentive plan ................................... 5,020,316
Common stock warrants ................................... 868,649
Restricted share rights ................................. 103,665
Employee stock purchase plan ............................ 90,701
----------
11,230,396
==========
9. Stock Options and Warrants
Stock Options
The 1994 Equity Incentive Plan (the 1994 Plan) provides for (a) the grant
of incentive stock options (with terms not to exceed ten years), nonstatutory
stock options and stock appreciation rights, (b) the award of stock bonuses, (c)
the sale of stock, and (d) any other equity-based or equity-related awards which
the Plan Administrator determines to be consistent with the purpose of the 1994
Plan. Option-vesting schedules are specified by the Plan Administrator. The 1994
Plan also provides for the automatic grant of nonstatutory options to
non-employee directors.
56
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Weighted
Average
Exercise
Shares Under Price Per
Option Share
------------ ---------
Balance January 1, 1999 (57,477 exercisable) .... 2,508,827 $ 3.07
Granted ....................................... 1,198,459 2.96
Canceled ...................................... (517,718) 3.03
Exercised ..................................... (4,932) 2.84
---------
Balance December 31, 1999 (1,666,822 exercisable) 3,184,636 3.04
Granted
At fair value ............................... 1,179,654 36.87
At prices below fair value .................. 52,600 47.28
Canceled ...................................... (173,784) 5.37
Exercised ..................................... (1,214,001) 3.31
---------
Balance December 31, 2000 (1,097,625 exercisable) 3,029,105 16.73
Granted ....................................... 1,583,129 25.78
Canceled ...................................... (40,478) 36.08
Exercised ................................... (324,182) 2.99
Rescinded ................................... 91,384 2.91
---------
Balance December 31, 2001 (1,812,564 exercisable) 4,338,958 10.40
=========
Exercisable Options Outstanding
Options Outstanding (Without Restriction)
--------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Average
Outstanding Contractual Exercise Number Exercise
Range of Exercise Prices 12/31/01 Life Price Exercisable Price
- ------------------------ ----------- ----------- -------- ----------- ----------
$ 2.00 - $ 11.09 ....... 1,610,202 7.07 Years $ 2.98 1,418,604 $ 2.95
$14.72 - $ 24.55 ....... 664,548 9.46 Years $ 23.88 28,810 $ 21.82
$24.81 - $ 30.06 ....... 1,272,403 9.47 Years $ 27.40 100,760 $ 28.11
$39.56 - $ 47.28 ....... 791,805 8.89 Years $ 42.67 264,390 $ 42.40
----------- -----------
$ 2.00 - $ 47.28 ...... 4,338,958 8.47 Years $ 20.59 1,812,564 $ 10.40
========= ===========
The weighted average fair value of options granted during 2001 was $19.66,
during 2000 was $33.23 and $41.20 for those issued at fair value and
in-the-money, respectively, and during 1999 was $1.94. As of December 31, 2001,
479,627 shares of common stock were available for future grants.
SFAS 123 encourages, but does not require, entities to adopt the fair
value method of accounting for their stock-based compensation plans. Under this
method, compensation cost for stock-based compensation plans is measured at the
grant date based on the fair value of the award and is recognized over the
vesting period. Fair value is determined using a Black-Scholes option pricing
model that takes into account (1) the stock price at the grant date, (2) the
exercise price, (3) an assumed four and a half-year expected life in 2001 and
2000, and an assumed two-year expected life in 1999, (4) no expected dividends,
(5) a risk-free interest rate of 4.5%, 6.0%, and 5.5% in 2001, 2000, and 1999,
respectively, and (6) a volatility factor of 1.062, 1.095, and 1.006, in 2001,
2000, and 1999, respectively. In accordance
57
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the provisions of SFAS 123, we apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for our stock option plans and,
accordingly, do not recognize compensation cost for options granted with
exercise prices equal to or greater than fair value. If we elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS 123, net loss applicable to common shareholders and basic
and diluted net loss and basic and diluted net loss per share would have been
adjusted (increased) as follows for the years ended December 31 (in thousands,
except per share amounts):
2001 2000 1999
---- ---- ----
Net loss applicable to common shareholders:
As reported ............................. $ (81,645) $ (52,437) $ (41,481)
As adjusted ............................. (104,152) (56,894) (43,530)
Basic and diluted net loss per share:
As reported ............................. $ (2.41) $ (2.07) $ (2.67)
As adjusted ............................. $ (3.08) $ (2.24) $ (2.80)
During the year ended December 31, 2000, in connection with the grant of
certain options to employees, we recorded deferred stock compensation (included
in deferred charges) of $800,000, representing the difference between the
exercise price and the fair value of our common stock on the measurement date,
of which $145,000 and $366,000 was expensed during 2001 and 2000, respectively.
In accordance with EITF 96-18, we consider all equity instruments issued
to non-employees to be accounted for as fair value equity instruments. The value
of the instrument is amortized to expense over the vesting period with final
valuation measured on the vesting date. At December 31, 2001 and 2000, options
to acquire 153,674 and 224,332 shares of common stock, respectively, are
considered fair value options. We recognized non-employee equity-based
compensation related expense of $1,639,000, $2,674,000, and $569,000, during
2001, 2000, and 1999, respectively.
We also issued 103,665 restricted share rights to non-employees in 1998
for which ownership vests upon the achievement of a future event (see Note 13).
Compensation related to these rights will be measured as the event becomes
probable with final valuation on the vesting date.
In December 1999, the Compensation Committee of the Board of Directors
authorized the issuance of 243,903 restricted share rights valued at $746,000 to
executive officers and certain employees. The rights vest in December 2002.
During 2001 and 2000, 13,947 and 28,225 restricted share rights were canceled,
respectively, due to employee terminations. The share value was recorded as
deferred compensation (included in deferred charges on the balance sheet), and
is being amortized over the three year vesting period. We recognized
compensation related expense of $206,000 and $220,000 during 2001 and 2000,
respectively. In May 2001, the Compensation Committee of the Board of Directors
approved the rescission of certain stock option exercises that two officers and
a consultant had made in January 2001. In exchange for the return of 91,384
shares of our common stock, we reinstated their original option grant and
returned to them the related exercise price of $266,000. These options are now
subject to variable stock compensation accounting.
58
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
In 1998, we issued warrants to purchase 350,000 shares of our common stock
in connection with a license agreement with PG-TXL Company, L.P. These warrants
became exercisable only upon the occurrence of certain exercise events. In
October 2001, we entered into a licensing agreement with Chugai Pharmaceutical
Co, Ltd., allowing them to develop PG-TXL within certain territories. The
signing of this agreement qualified as an exercise event, and these warrants
became exercisable at an exercise price of $20. We recorded related expense of
$9.2 million as research and development expense in the fourth quarter of 2001
based upon the fair value of the warrants on the date of the event. The warrants
expire in November 2008.
In 1999, we entered into an agreement with two consulting companies to
develop and execute a communication plan. In connection with this agreement, we
granted warrants to purchase 150,000 shares of common stock to the consultants,
whereby each warrant entitled the holder to purchase one share of our common
stock at strike prices ranging from $3.00 to $18.00 per share. Except for those
warrants with a strike price of $3.00 per share which vested immediately (valued
at $37,500, in accordance with EITF 96-18), the warrants vested when the closing
price for our common stock equaled or exceeded its strike price for a specified
period of time. During 2000, all of the warrants vested and we recognized
compensation expense of $2.2 million. All the warrants were exercised by the
consultants, and converted into 114,308 shares of common stock during 2000.
Employee Stock Purchase Plan
We maintain an Employee Stock Purchase Plan (the Purchase Plan), under
which eligible employees may purchase a limited number of shares of our common
stock at 85% of the lower of the subscription date fair market value and the
purchase date fair market value. There are two six-month offerings per year.
Under the Purchase Plan, we issued 23,567 and 19,666 shares to employees in 2001
and 2000, respectively. There is a balance of 90,701 shares reserved for future
purchases at December 31, 2001.
10. Net Loss Per Share
Basic and diluted loss per share is calculated using the average number of
common shares outstanding as follows (in thousands, except per share amounts):
Year ended December 31,
---------------------------------------------------
2001 2000 1999
---- ---- ----
Net loss applicable to common shareholders (A) $ (81,645) $ (52,437) $(41,481)
========== ========== ========
Weighted average common stock
outstanding (B) ............................ 33,822 25,345 15,552
========== ========== ========
Loss per share:
Basic and diluted (A/B) .................... $ (2.41) $ (2.07) $ (2.67)
========== ========== ========
As of December 31, 2001, 2000, and 1999, options, warrants and convertible
preferred stock aggregating 5,313,003, 5,358,484, and 9,986,388 common
equivalent shares, respectively, were not included in the calculation of diluted
net loss per share as they are anti-dilutive.
59
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
As of December 31, 2001, we had net operating loss carryforwards of
approximately $302.5 million (of which $41.7 million relates to stock option
deductions) and research and development credit carryforwards of approximately
$9.8 million. The carryforwards begin to expire in the year 2007. Due to rounds
of equity financings (and other ownership changes as defined in Section 382 of
the Internal Revenue Code of 1986, as amended (the Code) see Notes 8 and 14), we
incurred "ownership changes" pursuant to the Code, as amended. Accordingly, our
use of the net operating loss carryforwards is limited to approximately $6.7
million annually for losses incurred prior to March 26, 1997 and may be subject
to additional limitations thereafter. To the extent that any single-year loss is
not utilized to the full amount of the limitation, such unused loss is carried
over to subsequent years until the earlier of its utilization or the expiration
of the relevant carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. We recognized a valuation
allowance equal to the deferred tax assets due to the uncertainty of realizing
the benefits of the assets. Our valuation allowance increased $25,406,000,
$29,900,000, and $13,609,000, during 2001, 2000, and 1999, respectively.
Significant components of our deferred tax liabilities and assets as of
December 31 are as follows (in thousands):
2001 2000
---- ----
Deferred tax assets:
Net operating loss carryforwards ..... $ 102,837 $ 80,267
Research and development tax credit
carryforwards ...................... 9,768 7,753
Accruals on financial statements in
excess of
tax returns ........................ 303 148
Charitable contributions carryforward 572 139
Depreciation in financial statements
in excess of tax ................... 649 529
Other ................................ 62 --
--------- --------
Gross deferred tax assets .............. 114,191 88,836
Less valuation allowance ............... (114,191) (88,785)
--------- --------
Gross deferred tax liability: .......... -- 51
Accruals on tax returns in excess of
financial statements ............... -- (51)
--------- --------
Net deferred tax ....................... $ -- $ --
========= ========
12. Consulting and Employment Agreements
Corporate Officers
Loans to executive officers totaling $225,000 and $255,000 were
outstanding as of December 31, 2001 and 2000, respectively. Each of the
full-recourse notes has a term of four years and bears interest at approximately
5%. The full balance of principal and accumulated interest is due at maturity.
Although
60
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
not required by the terms of these loans, the executives used the funds
to purchase shares of our common stock on the open market.
We have severance agreements with certain of our officers having terms
between twelve and eighteen months.
Advisory Boards
We have entered into consulting agreements with the members of our
Scientific and Clinical Advisory Boards ("Advisory Boards") providing for the
periodic issuance of common stock and options to purchase common stock, and
consulting fees. One agreement has an annual retainer of $10,000. The remaining
advisory board members are paid consulting fees on a per diem basis. The
consulting agreements with members of the Advisory Boards are cancelable upon 30
days notice. We issued 5,712 and 49,276 stock options to members of our Advisory
Boards in 2000 and 1999, respectively. No stock options were issued to these
members in 2001. All options held by advisory board members are accounted for at
fair value in accordance with EITF 96-18. Compensation related expense for
options issued to advisory board members recognized in 2001, 2000, and 1999 was
$8,000, $1,248,000, and $156,000, respectively.
Consultants
We issued stock options to other consultants for various services. All
options held by consultants are accounted for at fair value in accordance with
EITF 96-18. Related compensation expense recognized in 2001, 2000, and 1999 was
$1,639,000, $1,426,000, and $256,000, respectively.
Related Party Disclosure
In 1999, we entered into an agreement with a clinical medical consultant
who is the spouse of one of our executive officers. No services were rendered
during 2001. We paid the clinical medical consultant approximately $77,450 and
$107,000 during 2000 and 1999, respectively, in fees for services rendered.
13. Significant Agreements
Other Agreements
Chugai Pharmaceutical Co., Ltd.: In October 2001, we entered into a
licensing agreement with Chugai Pharmaceutical Co., Ltd. for the development and
commercialization of PG-TXL. This agreement grants an exclusive license to
Chugai to develop and commercialize PG-TXL in several Asian markets. Upon
execution of the agreement, Chugai paid us a $3.0 million initial payment, which
we recorded as deferred revenue and which is being recognized as revenue over
the development period on a straight-line basis. We recognized $106,000 of
revenue during 2001. Under the agreement, we may also receive milestone payments
totaling up to $16.0 million upon Chugai's achievement of certain product
development milestones, and we are entitled to receive royalties on product
sales in the territories covered under the agreement. Chugai has also committed
to incur up to $54 million in development expenditures over the course of the
licensing agreement. The agreement will terminate on a country-by-country basis
61
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
upon the earlier to occur of the expiration of the applicable patent rights in a
given country or fifteen years from the date of the first commercial sale of
PG-TXL in such country.
PG-TXL Company, L.P.: In 1998, we entered into an agreement with PG-TXL
Company, L.P. granting us an exclusive worldwide license for the rights to
polyglutamic acid paclitaxel (PG-TXL), a water soluble form of the cancer drug,
Taxol(R) and to all potential uses of PG-TXL Company, L.P.'s polymer technology.
Under the terms of the agreement, we acquired the rights to fund the research,
development, manufacture, marketing and sale of anti-cancer drugs developed
using this polymer technology.
We will be obligated to make future milestone payments upon the attainment
of significant achievements, as defined in the agreement of up to $20.5 million.
We made a $2 million milestone payment to PG-TXL Company L.P. in 2000. We also
granted warrants to purchase 350,000 shares of our common stock to PG-TXL
Company, L.P., which became exercisable upon our entering a licensing agreement
for PG-TXL with Chugai Pharmaceutical Co., Ltd. (see Note 9). We are obligated
to meet certain development requirements by June 30, 2002 to maintain exclusive
license rights.
We also entered into Signing Bonus and Restricted Stock and Share Grant
Agreements and Consulting Agreements with certain individuals affiliated with
PG-TXL Company, L.P. (the PG-TXL Affiliates). Under the terms of these
agreements, we issued 51,835 restricted shares of common stock. These shares
vested in November 1999 upon the issuance of a patent, whereupon we recorded an
expense of $91,000 in accordance with EITF 96-18. The Company also granted
103,665 restricted share rights to the PG-TXL Affiliates, which also vest upon
certain performance conditions. These performance conditions include
successfully completing a phase III clinical trial of a licensed product and
receiving regulatory approval of an NDA by the FDA. We will begin to record
compensation expense at the time the vesting of the share rights become
probable. We paid consulting fees to the PG-TXL Affiliates of $75,000, $111,000
and $343,000 in 2001, 2000 and 1999, respectively.
14. Acquisition of PolaRx Biopharmaceuticals, Inc.
On January 7, 2000, we acquired PolaRx Biopharmaceuticals, Inc. (PolaRx),
a biopharmaceutical company that owns the rights to TRISENOX (arsenic trioxide,
ATO), an anti-cancer compound for which we submitted and received approval for a
New Drug Application with the FDA. Under the terms of the Agreement and Plan of
Merger and Reorganization, dated January 7, 2000, (the Agreement), we assumed
PolaRx's liabilities and commitments. PolaRx's shareholders received 5 million
shares of our common stock. The aggregate consideration of $36.2 million
consisted of the 5 million shares of common stock valued at $31.4 million,
assumed net liabilities of $3.9 million and transaction costs of approximately
$0.9 million.
We are also required to make contingent payments of up to $9.0 million and
future royalties if certain milestones and target net sales specified in the
merger agreement are attained. Any additional or contingent payments made to
PolaRx shareholders will be considered additional purchase price and will be
capitalized as additional goodwill. The acquisition was accounted for as a
purchase transaction and PolaRx operating results are included in our operating
results from the date of acquisition. The aggregate purchase price of
approximately $36.2 million, which was valued by an outside independent party,
was allocated, based on the fair value on the acquisition date, to marketing
intangible assets ($16.1 million), patented technology ($6.7 million) and
goodwill ($13.4 million). The intangible assets are amortized over their
estimated useful lives of three to five years. Notes payable aggregating
$2,673,000 were
62
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assumed in connection with the PolaRx acquisition. The notes carried interest
rates of 9% to 15% and became due and were paid between March and November 2000.
We also assumed and paid a fee of $750,000 to a placement agent in connection
with the acquisition.
The marketing of a commercial product bridges the gap in our pipeline of
products and creates an opportunity to access a broader market segment with a
relatively non-controversial and accepted product. The value of this marketing
strategy is related to the acquisition of successfully completed clinical trial
studies that included bioanalytical and statistical data, analyses and reports
which have enabled the subsequent timely filing of a New Drug Application. The
timely filing of the New Drug Application greatly enhances our relative
competitive market position. The value of the preclinical and clinical research
acquired together with the Orphan Drug Designation by the FDA accelerates the
potential for regulatory approval and commercialization of a marketable product.
The fair value of the marketing intangibles was determined by the replacement
cost approach, which seeks to measure the future benefits of ownership by
quantifying the amount of money that would be required to replace the future
service capability of the subject intangible property. Replacement cost was the
total cost to create a successful marketing strategy and included an examination
of the substantial research and development cost savings we achieved through the
acquisition of PolaRx.
Through the purchase of PolaRx, we also acquired a patent for the
treatment of primary and metastic neoplastic diseases using arsenic compounds.
By forecasting the incremental revenues and net incomes expected by the
utilization of this patent in the areas of Acute Promyelocytic Leukemia (APL)
and Multiple Myeloma over an expected five year period, it is possible to
separate the value attributable to the patent by utilizing an income approach.
The fair value of the patented technology was determined by discounting the
forecasted earnings streams to each application at 30% over the anticipated
revenue life of five years, which produced net present values of $2,018,000 and
$4,594,000 for the APL and Multiple Myeloma indications, respectively.
The pro forma consolidated financial information for the year ended
December 31, 1999, determined as if the acquisition had occurred on January 1,
1999, would have resulted in no revenues, a net loss applicable to common
shareholders of $53,570,000 and basic and diluted net loss per common share of
$2.61. Pro forma information for the period ended December 31, 2000 has not been
included as the transaction was consummated on January 7, 2000, which is near
the beginning of the period. This unaudited pro forma information is presented
for illustrative purposes only and is not necessarily indicative of the results
that would have been achieved had we and PolaRx been combined during the
specified period.
15. PanGenex, Inc.
In June 2000, we founded PanGenex, Inc. (PanGenex), a majority-owned
subsidiary focused on identifying novel drug development targets using the
recently completed human genome sequence database. We provided funds and
administrative services totaling $2,457,000 and $568,000 to support PanGenex's
research and development efforts during 2001 and 2000, respectively. Minority
interests are not reflected in the balance sheet as all losses of the entity are
funded by us with no obligation of reimbursement by the minority shareholders.
63
CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Unaudited Quarterly Data
The following table presents summarized unaudited quarterly financial data
(in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
2001
Revenues ........................... $ 929 $ 1,886 $ 1,004 $ 2,417
Gross profit ....................... 879 1,803 846 2,314
Operating expenses ................. 14,777 19,257 22,493 33,194
Net loss ........................... (11,580) (15,866) (21,340) (31,487)
Net loss applicable to
common shares ...................... (11,705) (15,992) (21,461) (32,487)
Net loss per common share--basic and
diluted .......................... (0.35) (0.47) (0.64) (0.95)
2000
Revenues ........................... $ -- $ -- $ -- $ 502
Gross profit ....................... -- -- -- 483
Operating expenses ................. 11,355 12,392 14,618 18,039
Net loss ........................... (11,069) (11,832) (13,980) (15,048)
Net loss applicable to common shares (11,195) (11,958) (14,108) (15,176)
Net loss per common share--basic and
diluted .......................... (0.58) (0.49) (0.55) (0.47)
Item 9. Changes in Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
64
PART III
The information required under Part III, Items 10, 11, 12, and 13, is
included in our Proxy Statement relating to our annual meeting of shareholders,
and is incorporated herein by reference. Such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the close
of our fiscal year end, December 31, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
II--Valuation and Qualifying Accounts
All other schedules have been omitted since they are either not
required, are not applicable, or the required information is shown in the
financial statements or related notes.
(iii) Exhibits
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
2.1(12) Agreement and Plan of Reorganization between PolaRx
Biopharmaceuticals, Inc., the Registrant and PolaRx
Biopharmaceuticals Acquisition Corp., dated January 7, 2000.
3.1(1) Registrant's Restated Articles of Incorporation.
3.2(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation of Cell Therapeutics, Inc. Effecting a Reverse Stock
Split.
3.3(3) Registrant's Articles of Amendment to Restated Articles of
Incorporation of Undesignating Series A and Series B Preferred Stock.
65
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
3.4(4) Registrant's Restated Bylaws.
4.1(5) Form of Rights Agreement dated as of November 11, 1996, between the
Registrant and Harris Trust Company of California, which includes the
Form of Rights Certificate as Exhibit A, the Summary of Rights to
Purchase Preferred Stock as Exhibit B and the Form of Certificate of
Designation of the Series C Preferred Stock as Exhibit C.
10.1(6) Lease Agreement between David A. Sabey and Sandra L. Sabey and the
Registrant, dated March 27, 1992, as amended March 31, 1993 and
October 13, 1993.
10.2(2) Third Amendment to Lease Agreement between David A. Sabey and Sandra
L. Sabey and the Registrant, dated as of September 10, 1996.
10.3(1) Assignment of Lease between Manlove Travel and the Registrant, dated
April 23, 1993.
10.4(2) Letter Agreement between David A. Sabey, Sandra L. Sabey and the
Registrant, dated as of September 6, 1996, amending the Assignment of
Lease.
10.5(13)* Employment Agreement between the Registrant and James A. Bianco,
dated as of July 4, 2000.
10.6(6)* Employment Agreement between the Registrant and Louis A. Bianco,
dated as of February 1, 1992, as amended May 27, 1994.
10.7(7)* Employment Agreement between the Registrant and Jack W. Singer, dated
September 23, 1997.
10.8(2)* Form of Strategic Management Team Severance Agreement.
10.9(1)* 1994 Equity Incentive Plan, as amended.
10.10(1)* 1996 Employee Stock Purchase Plan.
66
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
10.11(6)+ Collaboration Agreement by and between BioChem Therapeutic Inc. and
the Registrant, dated March 7, 1995, as amended November 30, 1995 and
December 6, 1995.
10.12(6)+ Supply Agreement by and between BioChem Therapeutic Inc. and the
Registrant, dated March 7, 1995.
67
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
10.13(7) Master Loan and Security Agreement between the Company and the
Transamerica Business Credit Corporation, dated as of December 9,
1997.
10.14(10)+ License Agreement dated as of November 13, 1998, by and between
PG-TXL Company, L.P. and the Registrant.
10.15(10) Form of Promissory Note (executed on December 12, 1998), between the
Registrant and each of the following persons: James A. Bianco,
Jack W. Singer, and Louis A. Bianco.
10.16(14) Amended Equipment Leasing Agreement dated as of September 1, 2001,
between Citiflight, Inc. and the Registrant.
10.17(14)+ Paclitaxel Purchase Agreement dated as of September 28, 2001, between
Natural Pharmaceuticals, Inc. and the Registrant.
10.18(14)+ License Agreement dated as of October 19, 2001, between Chugai
Pharmaceutical Co., Ltd. and the Registrant.
10.19* Form of Indemnification Agreement
10.20 ISDA Master Agreement dated as of January 25, 2002, between Citibank
N.A. and the Registrant
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 70 of the Registrant's Annual report on
Form 10-K for the year ended December 31, 2001).
- ---------------
* Indicates management contract or compensatory plan or arrangement.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(1) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form S-1 (No. 33-4154).
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-20855).
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 333-36603).
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
68
(5) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 8-A.
(6) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 10.
(7) Incorporated by reference to exhibits to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(8) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(9) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
(10) Filed with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
(11) Incorporated by reference to exhibits to the Registrant's Form 10-Q for
the quarter ended September 30, 1997.
(12) Incorporated by reference to exhibits to the Registrant's Form 8-K, filed
on January 25, 2000.
(13) Incorporated by reference to exhibits to the Registrant's amended Annual
Report on Form 10-K/A for the year ended December 31, 2000.
(14) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by us during the quarter
ended December 31, 2001.
69
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, in the City of
Seattle, State of Washington, on March 29, 2002.
Cell Therapeutics, Inc.
By: /s/ James A. Bianco, M.D.
-------------------------------------
James A. Bianco, M.D.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James A. Bianco and Louis A. Bianco, and
each of them his attorney-in-fact, with the power of substitution, for him in
any and all capacities, to sign any amendment of post-effective amendment to
this Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
---------------------------- ---------------------------- --------------
/s/ Max E. Link, Ph.D. Chairman of the Board and March 29, 2002
--------------------------- Director
Max E. Link, Ph.D.
/s/ James A. Bianco, M.D. President, Chief Executive March 29, 2002
--------------------------- Officer and Director
James A. Bianco, M.D. (Principal Executive Officer)
/s/ Louis A. Bianco Executive Vice President, March 29, 2002
--------------------------- Finance and Administration
Louis A. Bianco (Principal Financial Officer
and Principal Accounting
Officer)
/s/ Jack W. Singer M.D. Director March 29, 2002
---------------------------
Jack W. Singer M.D.
/s/ Jack L. Bowman Director March 29, 2002
---------------------------
Jack L. Bowman
/s/ Vartan Gregorian Director March 29, 2002
---------------------------
Vartan Gregorian
70
Signature Title Date
---------------------------- ---------------------------- --------------
/s/ Wilfred E. Jaeger, M.D. Director March 29, 2002
---------------------------
Wilfred E. Jaeger, M.D.
/s/ Mary O. Mundinger, DrPH
---------------------------
Mary O. Mundinger, DrPH Director March 29, 2002
/s/ Phillip M. Nudelman, Ph.D.
---------------------------
Phillip M. Nudelman, Ph.D. Director March 29, 2002
71
SCHEDULE II
CELL THERAPEUTICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(in thousands)
Balance Additions
at Charged Balance at
Beginning to End of
of Period Expense Deductions Period
--------- ------- ---------- ------
Year ended December 31, 2000 Reserve
for sales returns and allowances......... $ -- $ 67 $ -- $ 67
Year ended December 31, 2001 Reserve
for sales returns and allowances......... $ 67 $ 322 $ -- $ 389
Year ended December 31, 2001 Reserve
for excess inventory that may expire
and become unsaleable.................... $ -- $ 96 $ -- $ 96
72